<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 4, 1994
REGISTRATION STATEMENT NO. 033-51909
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
MESA INC.
MESA OPERATING CO.
MESA CAPITAL CORPORATION
(Exact name of registrants as specified in their charters)
<TABLE>
<S> <C> <C>
TEXAS 1311 75-2394500
DELAWARE 1311 75-2516853
DELAWARE 9999 75-2115388
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
2001 ROSS AVENUE, SUITE 2600
DALLAS, TEXAS 75201
(214) 969-2200
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
WILLIAM D. BALLEW
301 SOUTH POLK
AMARILLO, TEXAS 79101
(806) 378-1000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
STEPHEN A. MASSAD
BAKER & BOTTS, L.L.P.
ONE SHELL PLAZA, 910 LOUISIANA
HOUSTON, TEXAS 77002
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
------------------------
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED ON
A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF
1933, CHECK THE FOLLOWING BOX. /X/
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH 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 SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
CROSS REFERENCE SHEET
PURSUANT TO RULE 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING LOCATION OR CAPTION IN PROSPECTUS
------------------------------------------------------ ---------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus........................ Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus............................................ Inside Front and Outside Back
Cover Pages of Prospectus;
Available Information
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges............................. Prospectus Summary; Risk Factors;
The Company; Selected Financial
Data
4. Use of Proceeds....................................... Prospectus Summary; Use of
Proceeds
5. Determination of Offering Price....................... Not Applicable
6. Dilution.............................................. Not Applicable
7. Selling Security Holders.............................. Not Applicable
8. Plan of Distribution.................................. Outside Front Cover Page of
Prospectus; Plan of
Distribution
9. Description of Securities to be Registered............ Outside Front Cover Page of
Prospectus; Description of the
Secured Notes
10. Interests of Named Experts and Counsel................ Legal Opinions
11. Information with Respect to the Registrant............ Outside Front Cover Page of
Prospectus; Additional
Information; Prospectus
Summary; Risk Factors; The
Company; Unocal Litigation and
Settlement; Market Prices of
Secured Notes; Historical and
Pro Forma Capitalization;
Selected Financial Data;
Management's Discussion and
Analysis of Financial Condition
and Results of Operations;
Business; Management; Executive
Compensation; Security
Ownership of Principal Owners
and Management; Description of
the Secured Notes; Financial
Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities........................ Not Applicable
</TABLE>
<PAGE> 3
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may
not be sold nor may offers to buy be accepted prior to the time the
registration statement becomes effective. This prospectus shall not
constitute an offer to sell or the solicitation of an offer
to buy nor shall there be any sale of these securities in any State in
which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED FEBRUARY 4, 1994
PROSPECTUS
{MESA LOGO}
$51,000,000
12 3/4% SECURED DISCOUNT NOTES DUE JUNE 30, 1998
The 12 3/4% Secured Discount Notes due June 30, 1998 (the "Secured Notes")
are the joint and several obligations of MESA Inc. (the "Company"), Mesa
Operating Co. ("MOC") and Mesa Capital Corporation ("Capital" and, together with
the Company and MOC, the "Obligors"). The Secured Notes do not bear interest
through June 30, 1995. At December 31, 1993, the Accreted Value (as specified in
the terms of the Secured Notes) of each Secured Note was $830.77 and the
aggregate Accreted Value for all Secured Notes offered hereby was approximately
$42.4 million. Such Accreted Value will increase at a rate of 12 3/4% per annum,
compounded semiannually on each June 30 and December 31, through and including
June 30, 1995. From and after July 1, 1995, the Secured Notes will accrue
interest at a rate of 12 3/4% per annum, payable only in cash. Interest will be
payable semiannually in arrears on June 30 and December 31 of each year,
beginning December 31, 1995. See "Description of the Secured Notes -- Yield and
Interest."
The obligations of the Obligors under the Secured Notes are secured by
liens on the Collateral (as defined) described herein. Such liens are
subordinate to prior liens securing the $69.5 million of obligations under the
revolving credit agreement of the Company and MOC outstanding as of December 31,
1993 and any future first lien debt of the Obligors, subject to the limitations
described herein ("First Lien Debt"). See "Description of the Secured
Notes -- Security." The Secured Notes are senior in right of payment to the
Obligors' outstanding Subordinated Notes (as defined) and subordinate to all
existing and future First Lien Debt of the Obligors. The Secured Notes rank pari
passu with respect to the Obligors' Unsecured Notes (as defined). See
"Description of the Secured Notes -- Ranking." The Secured Notes may be redeemed
at the option of the Obligors, in whole at any time or in part from time to
time, at the redemption prices set forth herein. In addition, the Obligors will
be required to redeem or make an offer to purchase Secured Notes under certain
circumstances. See "Description of Secured Notes -- Mandatory Retirement" and
"-- Change in Control."
The Secured Notes offered hereby will be issued pursuant to the same
indenture under which the Obligors currently have outstanding $569,277,000 face
amount (at maturity) of Secured Notes, which Secured Notes were issued in
connection with the Obligors' recently completed debt exchange offer. The
Secured Notes offered hereby will be fungible with the currently outstanding
Secured Notes. The Secured Notes are not listed for trading on any national
securities exchange, but are traded in the over-the-counter market by certain
dealers who from time to time are willing to make a market in the Secured Notes.
The proceeds of the sale of the Secured Notes offered hereby will be used
to fund all or a portion of the Company's $42.75 million share of the payment to
be made to Unocal Corporation ("Unocal") to settle a lawsuit by Unocal against
the Company and other defendants. The settlement of the lawsuit with Unocal is
subject to court approval, and this Offering will not be consummated unless and
until such court approval is obtained. A hearing before the court is currently
scheduled for February 28, 1994 to determine the fairness, reasonableness and
adequacy of the settlement and whether it should be approved by the court. See
"Unocal Litigation and Settlement."
The consummation of this Offering is also conditioned upon the sale of an
aggregate amount of Secured Notes that would result in net proceeds of at least
$40 million, before deducting expenses of the Company estimated at $225,000,
unless a Prospectus Supplement hereto otherwise provides. The Obligors will not
issue an amount of Secured Notes pursuant to this Offering that would result in
net proceeds of more than $42.75 million, before deducting expenses of the
Company. The Secured Notes may be offered and sold at a fixed price or prices,
which may be changed, or from time to time at market prices prevailing at the
time of sale, at prices related to such prevailing market prices or at
negotiated prices. Based on discussions with certain dealers, the Obligors
believe that, as of February 4, 1994, offered prices by such dealers for Secured
Notes were higher than the Accreted Value of the Secured Notes as of that date.
Offers to purchase Secured Notes are being considered by the Obligors on a
continuing basis. The Obligors may sell Secured Notes directly or through
underwriters or agents acting on a best efforts basis or as otherwise indicated
in a Prospectus Supplement. See "Plan of Distribution." If any agents of the
Obligors or any underwriters are involved in the sale of any Secured Notes in
respect of which this Prospectus is being delivered, the names of such agents or
underwriters and any applicable commissions or discounts will be set forth in a
Prospectus Supplement. The net proceeds to the Obligors from such a sale will
also be set forth in a Prospectus Supplement.
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURED NOTES OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS FEBRUARY , 1994
<PAGE> 4
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act with respect to the Secured Notes offered
by this Prospectus. This Prospectus constitutes a part of the Registration
Statement and does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted from this Prospectus
as permitted by the rules and regulations of the Commission. Statements made in
this Prospectus regarding the contents of any contract, agreement or other
document are not necessarily complete. With respect to each contract, agreement
or other document filed with the Commission as an exhibit to the Registration
Statement, reference is made to the exhibit for further information regarding
the contents thereof, and each such statement is qualified in its entirety by
such reference. For further information regarding the Company and the Secured
Notes offered hereby, reference is made to the Registration Statement, including
the exhibits and schedules thereto.
The Registration Statement, including the exhibits and schedules thereto,
are available for inspection at, and copies of such materials may be obtained at
prescribed rates from, the public reference facilities maintained by the
Commission at its principal offices located at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at its regional offices located at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60601 and 75 Park Place, 14th Floor, New York, New York 10007.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 and in accordance with that Act files reports, proxy
statements and other information with the Commission. Such reports, proxy
statements and other information can be inspected and copied at the principal
and regional offices of the Commission set forth above. Such reports, proxy
statements and other information concerning the Company can also be inspected at
the office of the New York Stock Exchange, 20 Broad Street, New York, New York
10005, the exchange on which the Company's Common Stock and the Subordinated
Notes are listed.
2
<PAGE> 5
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Potential investors are urged to read the more detailed information set forth
elsewhere in this Prospectus. A Glossary of frequently used capitalized and
other specialized terms is attached as Annex A (located inside the back cover).
MESA
MESA Inc. is one of the largest independent natural gas producers in the
United States. Mesa owns proved natural gas, natural gas liquids and oil
reserves estimated as of December 31, 1992 at approximately 1.8 trillion cubic
feet of natural gas equivalents. Over 70% of Mesa's total equivalent proved
reserves are natural gas and almost all of its other reserves are natural gas
liquids. Substantially all of Mesa's reserves are proved developed reserves.
Mesa's principal producing properties are in the Hugoton field of southwest
Kansas and the West Panhandle field of Texas, which together account for over
95% of Mesa's equivalent proved reserves at December 31, 1992. These two fields
are in the same producing trend and contain shallow natural gas reserves that
are expected to produce beyond the year 2020. The Hugoton field is the largest
producing gas field in the continental United States. Mesa also owns and
operates natural gas processing plants located in both of these fields which are
capable of processing substantially all of Mesa's natural gas production in
these fields. Mesa considers itself one of the most efficient operators of
shallow natural gas properties in the United States.
Mesa holds all of its assets and conducts its operations through its
subsidiaries, all of which are wholly-owned following a January 1994
restructuring that converted the general partner interests in the subsidiaries
to common stock of Mesa. The Company's direct corporate subsidiaries are:
- Mesa Operating Co. ("MOC"), which owns all of Mesa's oil and gas
properties, other than Mesa's Hugoton field natural gas properties, as
well as an approximate 81% limited partnership interest in Hugoton Capital
Limited Partnership ("HCLP") and certain other assets;
- Mesa Midcontinent Co. ("MMC"), which owns principally cash and
securities, as well as an approximate 19% limited partnership interest in
HCLP; and
- Mesa Holding Co. ("MHC"), which owns principally cash, as well as the
outstanding capital stock of Mesa Environmental Ventures Co. ("Mesa
Environmental").
The Company's other significant subsidiaries, owned indirectly, are:
- HCLP, a limited partnership which owns substantially all of Mesa's
Hugoton field natural gas properties; and
- Mesa Environmental, which is engaged in promoting the use of natural gas
as a motor vehicle fuel and developing and marketing natural gas fuel
equipment for the transportation market.
Capital is a wholly owned finance subsidiary of MOC.
Mesa's business strategy includes (i) continuing its effort to strengthen
its financial condition by raising equity capital and applying the proceeds
thereof to retire debt, and issuing new lower cost debt to refinance its
existing high cost debt securities, (ii) maximizing the value of its existing
high-quality, long-life reserves through efficient operating and marketing
practices, (iii) increasing its capability to process natural gas and to extract
natural gas liquids and helium by expanding and modernizing processing
facilities, (iv) conducting selective exploratory and development activities,
principally in existing areas of operations, and (v) promoting the use of
natural gas as a motor vehicle fuel and developing and marketing natural gas
fuel equipment for the transportation market. See "Business."
3
<PAGE> 6
PURPOSE OF THE OFFERING
The proceeds of the sale of the Secured Notes offered hereby will be used
to fund all or a portion of Mesa's share of the payment to be made to Unocal
Corporation to settle a lawsuit by Unocal against Mesa and other defendants. See
"Unocal Litigation and Settlement." The Secured Notes will be issued pursuant to
the same indenture (the "Secured Indenture") under which the Obligors currently
have outstanding $569,277,000 face amount (at maturity) of Secured Notes, which
Secured Notes were issued in connection with the Obligors' recently completed
debt exchange offer. The Secured Notes offered hereby will be fungible with the
currently outstanding Secured Notes. The issuance of the additional amount of
Secured Notes offered hereby was expressly contemplated in the Secured Indenture
for the purpose of settling or compromising the Unocal lawsuit. See "Description
of the Secured Notes -- Provisions Relating to the Issuance of the Additional
Secured Notes Offered Hereby."
The Unocal lawsuit was originally filed in 1986 against Mesa Petroleum Co.,
a predecessor of the Company, certain subsidiaries of Mesa Petroleum Co. and
certain other parties. The lawsuit alleged that the defendants had purchased and
sold Unocal common shares within a six-month period in 1985 in transactions
subject to Section 16(b) of the Securities Exchange Act of 1934, resulting in
alleged short-swing profits of approximately $99 million that were recoverable
by Unocal under Section 16(b). The plaintiffs also asked the Court to grant
pre-judgment interest, which amount could currently exceed $50 million. Mesa and
the other defendants contended that none of the transactions in Unocal shares
were subject to Section 16(b) and, further, that no profit was realized.
However, in light of the significant uncertainties relating to continuing the
litigation and other relevant circumstances, Mesa determined that entering into
a settlement agreement with Unocal (the "Settlement Agreement") would be in the
best interests of Mesa and its stockholders.
Pursuant to the Settlement Agreement, the Mesa and the other defendants
have agreed to pay to Unocal an aggregate of $47.5 million, of which $42.75
million will be paid by Mesa and $4.75 million will be paid by certain other
defendants not affiliated with Mesa. The Settlement Agreement is subject to
approval of the Federal District Court for the Central District of California,
following a hearing to determine the fairness, reasonableness and adequacy of
the amounts to be paid pursuant to the Settlement Agreement and whether the
Settlement Agreement should be approved by the Court. Such hearing is currently
scheduled for February 28, 1994. The Secured Notes offered hereby will not be
issued unless and until such final approval is received. The Court preliminarily
approved the Settlement on January 18, 1994. See "Plan of Distribution."
Both the Settlement Agreement and the Exchange Offer described below have
or had as a principal goal the reduction of near term financial risk to Mesa so
as to permit Mesa to undertake, subject to market conditions, an orderly
recapitalization. Mesa will seek to deleverage its balance sheet principally
through the public or private sale of equity securities and the application of
the proceeds therefrom to repay debt, and by reducing the interest expense on
its remaining debt by refinancing such debt at lower rates. Mesa believes that
the combination of the Exchange Offer and the Settlement has removed the actual
and potential requirement for large cash outflows from Mesa until at least
December 1995, when Mesa will begin making semiannual cash interest payments on
the Discount Notes, or until June 1996, when Mesa's unsecured discount notes
mature.
EXCHANGE OFFER
On August 26, 1993, Mesa completed an exchange offer (the "Exchange Offer")
for all of the outstanding 13 1/2% Subordinated Notes due May 1, 1999 (the
"13 1/2% Subordinated Notes") and 12% Subordinated Notes due August 1, 1996 (the
"12% Subordinated Notes" and, together with the 13 1/2% Subordinated Notes, the
"Subordinated Notes") of the Obligors. Pursuant to the Exchange Offer,
approximately $586.3 million aggregate principal amount of Subordinated Notes
were tendered and accepted for exchange, and the Obligors issued approximately
$569.3 million aggregate principal amount ($472.9 million accreted value at
December 31, 1993) of Secured Notes, approximately $178.8 aggregate principal
amount ($148.6 million accreted value at December 31, 1993) of 12 3/4% Discount
Notes due June 30, 1996 (the "Unsecured Notes" and, together with the Secured
Notes, the "Discount Notes") and approximately $29.3 million aggregate principal
amount of 0% Convertible Notes due June 30, 1998 (the "Convertible
4
<PAGE> 7
Notes"). The terms and provisions of the Secured Notes and the Unsecured Notes
are substantially similar, except with respect to security, maturity and
redemption provisions. Pursuant to the terms of the indenture governing the
Convertible Notes, all of the previously outstanding Convertible Notes have been
converted into approximately 7.5 million shares of the Company's common stock
(the "Common Stock").
The Exchange Offer reduced the Obligors' cash requirements through December
1995, which enhances the Obligors' ability to service their debt obligations and
make capital expenditures from available cash and operating cash flows.
Specifically, completion of the Exchange Offer enabled the Obligors to replace
substantially all of their Subordinated Notes, which in the aggregate had cash
interest requirements of $75 million per year through August 1996, with
securities that do not require interest payments until December 1995. In
exchange for accepting the deferral of interest payments, tendering Subordinated
Noteholders obtained, among other things, second lien security interests in
certain assets to collateralize the Secured Notes received in the Exchange
Offer, improved ranking of their securities relative to non-tendering
Subordinated Noteholders, better covenant protection and debt securities
convertible into equity of the Company.
The Exchange Offer also altered the timing of required principal repayments
by the Obligors. The 12% Subordinated Notes mature in 1996 and the 13 1/2%
Subordinated Notes mature in 1999. The Exchange Offer had the effect of moving
approximately $115 million of scheduled principal payments from 1996 to 1998 and
approximately $293 million of scheduled principal payments from 1999 to 1998. In
addition, the Exchange Offer resulted in exchanging Subordinated Noteholders
receiving Convertible Notes in exchange for a portion of their Subordinated
Notes. The Convertible Notes were convertible into shares of Common Stock at the
option of the holders at any time and by Mesa at any time after November 26,
1993. In December 1993, the Obligors converted all of the outstanding
Convertible Notes into shares of Common Stock. As a result, a portion of each
exchanging Subordinated Noteholder's debt securities was converted into equity.
Concurrently with the Exchange Offer, Mesa's bank lenders agreed to amend
Mesa's Credit Agreement in order to extend the payment of a portion of the
outstanding principal, which otherwise would have matured in June 1994 (or
earlier as a result of the then current default in the payment of interest on
the Subordinated Notes, which default was cured upon completion of the Exchange
Offer), and to amend certain covenants thereunder, including a reduction of
Mesa's tangible adjusted equity requirement. In return, the banks received,
among other things, additional security, earlier payment of a portion of the
outstanding principal and an increase in the rate of interest payable on the
Credit Agreement. Pursuant to the amendments, upon the completion of the
Exchange Offer, Mesa repaid $20.6 million of borrowings under the Credit
Agreement and made additional principal payments of $18.7 million in the fourth
quarter of 1993. The Credit Agreement requires that Mesa make additional
principal payments of $19.5 million in the first half of 1994 and $50 million
(including cash collateralization of $10.4 million in letters of credit) on June
30, 1995.
THE OFFERING
Issue...................... 12 3/4% Secured Discount Notes due June 30, 1998.
Aggregate Amount........... Consummation of the Offering is conditioned upon,
among other things, the sale of an aggregate
amount of Secured Notes that would result in net
proceeds of at least $40 million, before
deducting expenses of the Company, unless a
Prospectus Supplement otherwise provides. The
Obligors will not issue an amount of Secured
Notes pursuant to this Offering that would result
in net proceeds of more than $42.75 million,
before deducting expenses of the Company.
Yield...................... The yield to maturity of a Secured Note is 12 3/4%,
based on the following terms of the Secured Notes
(expressed per $1,000 face amount): (i) the
Accreted Value of a Secured Note of approximately
$830.77 at December 31, 1993, (ii) the increase
in Accreted Value of a Secured Note to $1,000
from December 31, 1993 through and including
5
<PAGE> 8
June 30, 1995, (iii) cash interest payments at
12 3/4% per annum paid semiannually in arrears
thereafter, and (iv) the payment of $1,000
(representing the Accreted Value as of December
31, 1993 of approximately $830.77 plus the
cumulative increase in Accreted Value from
December 31, 1993 through and including June 30,
1995, totaling approximately $169.23) at
maturity. The Accreted Value of each $1,000 face
amount of Secured Notes at each June 30 and
December 31 from December 31, 1993 through and
including June 30, 1995 is shown in the table
below.
<TABLE>
<CAPTION>
ACCRETED VALUE
--------------
<S> <C>
December 31, 1993............................... $ 830.7709
June 30, 1994................................... 883.7326
December 31, 1994............................... 940.0705
June 30, 1995 and thereafter.................... 1,000.0000
</TABLE>
Interest................... The Secured Notes do not bear interest through June
30, 1995. However, the Accreted Value of the
Secured Notes will increase from December 31,
1993 through and including June 30, 1995 at a
rate of 12 3/4% per annum, compounded
semiannually on each June 30 and December 31. On
July 1, 1995, each Secured Note will have a final
Accreted Value of $1,000 (or an integral multiple
thereof). From and after July 1, 1995 the Secured
Notes will accrue interest at a rate of 12 3/4%
per annum, payable only in cash. Such interest
will be payable semiannually in arrears on June
30 and December 31 of each year, beginning
December 31, 1995.
Obligors................... The Secured Notes are the joint and several
obligations of the Company, MOC and Capital.
Security................... The obligations of the Obligors under the Secured
Notes are secured by (i) a mortgage and security
agreement granting a second lien on certain
properties and related assets and contractual
rights of MOC in the West Panhandle field of
Texas and (ii) a pledge agreement granting a
second lien and security interest in a 65%
limited partnership interest in HCLP (which will
be increased to approximately 77% upon issuance
of all Secured Notes offered hereby), which is
part of the limited partnership interest in HCLP
owned by MOC. Such liens are subordinate to prior
liens to secure the $69.5 million of First Lien
Debt (as defined) outstanding under the Credit
Agreement at December 31, 1993 and any future
First Lien Debt, subject to the limitations
described herein. In addition, the right of the
Trustee for the Secured Notes to exercise rights
with respect to the Collateral is subject to the
terms of an Intercreditor Agreement with the
collateral agent for the holders of such First
Lien Debt. See "Description of the Secured
Notes -- Security."
Mandatory Retirement....... In the event that as of August 31, 1994 or August
31, 1995, the Obligors have Mandatory Retirement
Funds (as defined), the Obligors will be required
to redeem or make an offer to purchase Secured
Notes with such funds on the terms described
herein. The indenture for the Unsecured Notes
contains a similar provision, and Mandatory
Retirement Funds will first be applied to redeem
or offer to purchase all outstanding Unsecured
Notes and then to redeem or offer to purchase
Secured Notes.
6
<PAGE> 9
Optional Redemption........ The Secured Notes may be redeemed at the option of
the Obligors, in whole at any time or in part
from time to time, at redemption prices ranging
from a current price of 110.25% of the Accreted
Value thereof at the redemption date and
declining on a semiannual basis to 100% at July
1, 1996, as set forth herein, plus accrued
interest thereon to the redemption date if such
date is on or after July 1, 1995.
Change in Control.......... In the event of a Change in Control (as defined),
the Obligors will be required to make an offer to
purchase all of the Secured Notes, (a) at a price
equal to 101% of the Accreted Value thereof on
the date of purchase if such date is on or prior
to June 30, 1995, and (b) at a price equal to
101% of the face amount thereof plus accrued
interest thereon to the date of purchase if such
date is on or after July 1, 1995. See "Risk
Factors -- Funding of Change in Control Offer."
Covenants.................. The Secured Indenture restricts, among other
things, the ability of the Obligors to acquire
Subordinated Notes, incur additional First Lien
Debt and other Debt, pay dividends or
distributions on the capital stock of the
Company, make investments and make changes in
their business. The Secured Indenture also
restricts the ability of the Obligors to dispose
of Collateral.
Ranking.................... The Secured Notes are senior in right of payment to
the Obligors' Subordinated Notes and subordinate
to all existing and future First Lien Debt of the
Obligors. The Secured Notes rank pari passu with
respect to the Unsecured Notes. As of December
31, 1993, the Obligors had $69.5 million of First
Lien Debt outstanding, consisting of $59.1
million of borrowings and $10.4 million of letter
of credit obligations under the Credit Agreement.
In addition, HCLP had outstanding $541.6 million
of secured notes at December 31, 1993, which,
because HCLP is not an obligor under the Secured
Notes, are structurally senior to the Secured
Notes with respect to the assets of HCLP. As of
December 31, 1993, $178.8 million face amount (at
maturity) of Unsecured Notes was also
outstanding.
Market for Secured Notes... The currently outstanding Secured Notes are traded
in the over-the-counter market by certain dealers
who from time to time are willing to make a
market in Secured Notes. Prices and trading
volume of the Secured Notes in the
over-the-counter market are not reported and are
difficult to monitor. See "Market Prices of
Secured Notes." The Secured Notes offered hereby
will be fungible with the currently outstanding
Secured Notes.
RISK FACTORS
Prospective investors should carefully consider all of the information
contained in this Prospectus prior to purchasing any Secured Notes. See "Risk
Factors" for a discussion of certain important factors that should be considered
in evaluating the Offering, including information regarding Mesa's adverse
financial condition and high leverage, certain litigation, certain risks
associated with the natural gas industry and certain matters relating to the
Secured Notes.
7
<PAGE> 10
SELECTED FINANCIAL INFORMATION
The following table sets forth summary selected historical financial and
operating information of Mesa as of the dates and for the periods indicated
(dollar amounts in thousands, except per share data and ratios). This table
should be read in conjunction with the Consolidated Financial Statements of the
Company and the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30 YEARS ENDED DECEMBER 31
----------------------- ---------------------------------------------------------------
1993(A) 1992(A) 1992(A) 1991(A) 1990 1989 1988
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Revenues.................. $ 157,029 $ 158,646 $ 237,112 $ 249,546 $ 329,597 $ 326,909 $ 327,310
Operating income.......... 14,426 6,866 26,221 34,128 43,389 28,225 33,984
Gains (losses) on
dispositions of
properties, net of
impairments............. 9,600 12,250 12,250 33,749 (81,029) 29,113 13,299
Net income (loss)......... (59,013) (71,723) (89,232) (79,163) (200,276) (60,414) 44,181
Net income (loss)
per share............... (1.53) (1.86) (2.31) (2.05) (5.19) (1.56) 1.12
Dividends per share....... -- -- -- -- .85 6.80 7.30
BALANCE SHEET (AT END OF
PERIOD):
Working capital........... $ 73,222 $ 91,907 $ 102,853 $ 216,875 $ 1,790 $ 144,028 $ 386,876
Property, plant and
equipment, net.......... 1,217,047 1,306,617 1,280,251 1,330,276 1,810,318 2,063,216 2,293,764
Total assets.............. 1,560,102 1,704,165 1,676,523 1,832,816 2,168,002 2,625,623 3,000,439
Long-term debt, including
current maturities...... 1,268,984(b) 1,286,155 1,286,155 1,310,705 1,521,740 1,631,490 1,581,521
Minority interest......... 5,412 8,717 7,961 11,815 15,234 24,552 40,311
Stockholders' equity...... 127,053 201,861 184,352 273,584 352,747 585,741 912,832
PRODUCTION AND RESERVES:
Production:
Natural gas (MMcf)...... 58,082 63,254 89,527 108,522 137,333 137,167 116,414
Natural gas liquids
(MBbls)............... 3,341 3,453 4,840 4,725 3,753 3,225 3,304
Oil and condensate
(MBbls)............... 496 752 984 767 1,480 2,984 2,975
Equivalent natural gas
(MMcfe)............... 81,104 88,484 124,471 141,474 168,731 174,421 154,088
Estimated proved reserves
(at end of period):(c)
Natural gas (MMcf)...... 1,276,049 1,367,968 1,920,797 2,110,219 2,251,295
Natural gas liquids
(MBbls)............... 80,124 79,269 91,787 75,714 79,235
Oil and condensate
(MBbls)............... 7,268 3,956 9,880 10,881 20,509
Equivalent natural gas
(MMcfe)............... 1,800,401(c) 1,867,318(c) 2,530,799(c) 2,629,789 2,849,759
OTHER DATA:
Ratio of earnings to fixed
charges(d).............. (e) (e) (e) (e) (e) (e) 1.44x
Fixed charges in excess of
earnings(e)............. $ 61,562 $ 74,821 $ 93,086 $ 82,582 $ 208,925 $ 49,755 --
Pro forma fixed charges
in excess of
earnings(f)............. $ 65,737 $ 78,996 $ 98,711 -- -- -- --
</TABLE>
- ---------------
(a) Financial position and results of operations as of and for the nine months
ended September 30, 1993 and 1992 and the years ended December 31, 1992 and
1991 reflect the effects of the sales of oil and gas properties and the
replacement and refinancing of long-term debt in the first half of 1991.
(b) Includes $27.6 million of Convertible Notes that were converted into Common
Stock in the fourth quarter of 1993.
(c) In addition to the proved reserves disclosed above, Mesa owned proved helium
and carbon dioxide (CO2) reserves at December 31 as follows: 1992, 5,634
MMcf of helium and 46,457 MMcf of CO2; 1991, 5,705 MMcf of helium and 44,837
MMcf of CO2; 1990, 5,658 MMcf of helium and 44,797 MMcf of CO2. See
"Business -- Reserves."
(d) For purposes of calculating the ratio of earnings to fixed charges, earnings
consist of net income (loss) after depreciation, depletion and amortization,
but before fixed charges, income taxes, minority interest and the loss of an
investment accounted for under the equity method. Fixed charges consist of
interest expense.
(e) Earnings were not adequate to cover fixed charges in the indicated periods.
(f) The computations of the pro forma ratio of earnings to fixed charges for the
year ended December 31, 1992 and for the nine month periods ended September
30, 1992 and 1993 assume that $42.8 million Accreted Value of additional
Secured Notes offered hereby was issued on January 1 of the respective
periods and assume that the general partner's minority interest in Mesa's
subsidiaries was converted to Common Stock on January 1 of the respective
periods.
8
<PAGE> 11
RISK FACTORS
Prospective investors should consider carefully the following factors
relating to the business of the Company and the Offering, together with the
information and financial data set forth elsewhere in this Prospectus, prior to
purchasing any Secured Notes.
Adverse Financial Condition and High Leverage. At September 30, 1993, Mesa
had outstanding approximately $1.2 billion of long-term debt. Mesa's primary
cash requirements, after paying operating expenses and general and
administrative expenses, are principal and interest payments on its debt and
capital expenditures. Over the next two years, Mesa will incur annual cash
interest costs of less than $5 million on the $13.7 million principal amount of
Subordinated Notes outstanding and amounts outstanding under the Credit
Agreement. There are no interest payments due under the Discount Notes until
December 31, 1995. Interest payments on the HCLP Secured Notes are expected to
total approximately $50 million to $55 million per year for the next two years.
Under the Credit Agreement, $18.7 million of principal was paid in the fourth
quarter of 1993, $19.5 million is due in the first half of 1994 and $50 million
is due on June 30, 1995 (including cash collateralization of $10.4 million of
letter of credit obligations). There are no principal payments due under the
Subordinated Notes or the Discount Notes until 1996. The scheduled amortization
of the HCLP Secured Notes is $42.9 million in 1994 and $39.3 million in 1995.
The proceeds from production of HCLP's Hugoton properties are dedicated to
service the HCLP Secured Notes before any cash may be distributed to the
Obligors. Mesa's capital expenditure requirements are estimated to be $23.5
million in 1994 and $15.4 million in 1995.
At September 30, 1993, Mesa had $73.2 million of working capital; and cash
and securities totaled $122.2 million. Working capital at that date included a
$37.4 million note receivable, which was collected in October 1993. Of the
$122.2 million of cash and securities, $23.4 million was held at HCLP.
After giving effect to this Offering and the use of proceeds therefrom as
described in "Use of Proceeds" and the conversion of the Convertible Notes into
Common Stock, the Company would have had total pro forma long-term indebtedness
of approximately $1.2 billion at September 30, 1993 (as if such events had
occurred on that date) and pro forma fixed charges in excess of earnings of
$65.7 million and $98.7 million for the nine months ended September 30, 1993 and
the year ended December 31, 1992, respectively (as if such events had occurred
at the beginning of such periods). See "Historical and Pro Forma Capitalization"
and "Selected Financial Information."
During the next two years, Mesa expects to be able to service its debt and
make capital expenditures with cash generated by operating activities and with
existing cash and securities balances. On December 31, 1995, Mesa will begin
making interest payments on the Discount Notes. Assuming no changes in Mesa's
capital structure prior to such date, Mesa will be required to make cash
interest payments related to the Discount Notes totaling approximately $48
million (approximately $51 million if all of the additional Secured Notes
offered hereby are issued) on December 31, 1995 and payments totaling
approximately $84 million (approximately $90 million if all of the additional
Secured Notes offered hereby are issued) during 1996. In addition, Unsecured
Notes in the amount of $178.8 million and 12% Subordinated Notes in the amount
of $6.3 million become due in mid-1996. Mesa's current financial forecasts
indicate that Mesa will be unable to fund such payments in 1996 with cash flows
from operating activities and existing cash and securities balances. Depending
on industry and market conditions, Mesa may generate cash by selling assets or
issuing new debt or equity securities. However, Mesa has limited ability to sell
assets since its two largest assets, its interests in the Hugoton and West
Panhandle fields, are pledged under long-term debt agreements. After the June
30, 1995 repayment of the balances outstanding under the Credit Agreement, Mesa
would have $82.5 million of first lien borrowing capacity on the West Panhandle
field properties. See "Description of the Secured Notes -- Limitation on
Incurrence of First Lien Debt." Mesa's current business strategy includes
continuing its effort to strengthen its financial condition by raising equity
capital and applying the proceeds thereof to retire debt, and issuing new
lower-cost debt to refinance its existing high cost debt securities. There can
be no assurance that Mesa will be able to raise equity capital or otherwise
refinance its debt.
As a result of the potential adverse consequences discussed above relating
to certain principal and interest payments due in 1996 on Mesa's debt, Mesa's
independent public accountants' report, as reissued for this Prospectus,
contains an "emphasis-of-a-matter" paragraph which calls attention to such
matters.
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<PAGE> 12
The amended Credit Agreement contains restrictive covenants which require
Mesa to maintain tangible adjusted equity, as defined, of at least $50 million
and a ratio of cash flow and available cash to debt service, as each is defined,
of at least 1.50 to 1. At September 30, 1993, tangible adjusted equity was $132
million and the ratio was 2.11 to 1. Mesa expects to accrue a loss of
approximately $43 million in the fourth quarter of 1993 representing its share
of the settlement of the Unocal lawsuit. In addition, Mesa expects to report a
net loss from operations in the fourth quarter of 1993. Mesa expects tangible
adjusted equity at December 31, 1993 to be in excess of $100 million, giving
effect to the loss from operations, the Unocal Settlement, the conversion of the
Convertible Notes into Common Stock and certain nonrecurring gains. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Assuming no changes in its capital structure, Mesa expects to
continue to report losses from operations in the foreseeable future.
The Unocal Settlement would not result in tangible adjusted equity falling
below the $50 million requirement, but would accelerate the point in time at
which tangible adjusted equity may fall below the $50 million requirement.
Assuming no changes in its capital structure and in existing business
conditions, Mesa's financial forecasts indicate that tangible adjusted equity is
likely to fall below the $50 million requirement in the second half of 1994. The
financial forecasts also indicate that Mesa will have adequate financial
resources, including cash on hand, to satisfy any obligations which may become
due under the Credit Agreement in the event the tangible adjusted equity
covenant is not satisfied and cannot be renegotiated or compliance therewith
waived. At December 31, 1993, Mesa had approximately $150 million of cash and
securities. In addition, payment of the settlement amount to Unocal would not
cause the ratio of cash flow and available cash to debt service to fall below
the required level.
In addition, the Secured Indenture, as well the indenture governing the
Unsecured Notes and the Credit Agreement, impose operating and financial
restrictions on Mesa. Such restrictions will affect, and in many respects limit
or prohibit, among other things, the ability of Mesa to incur additional
indebtedness, create liens, sell assets, engage in merger and acquisition
transactions and make dividend and other payments. The leveraged position of
Mesa and the restrictive covenants contained in these indentures and the Credit
Agreement could significantly limit the ability of Mesa to respond to changing
business or economic conditions or to respond to substantial declines in
operating results. See "Description of the Secured Notes" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources and Liquidity."
Additional Indebtedness Resulting from Increase in Accreted Value. The
Accreted Value of the Discount Notes will increase from December 31, 1993
through June 30, 1995 at a rate of 12 3/4% per annum, compounded semiannually.
Consequently, the overall indebtedness of Mesa will increase each year through
June 30, 1995 in an amount equal to the increase in the Accreted Value of the
Discount Notes during such year. From December 31, 1993 to June 30, 1995, and
assuming no redemptions, the Accreted Value of each Secured Note and each
Unsecured Note will increase by $169.23, or an aggregate of approximately $126.6
million for all Secured Notes and Unsecured Notes outstanding. Mesa's cash
interest requirements have been substantially reduced as a result of the
Exchange Offer, given that the Discount Notes do not currently bear interest and
will not begin to accrue interest until July 1, 1995, with interest being
payable thereafter semiannually in arrears on each June 30 and December 31,
beginning December 31, 1995.
Litigation. Mesa is involved in certain litigation, including a lawsuit
brought by and on behalf of Unocal seeking recovery of more than $150 million,
which, if decided adversely to Mesa, would have a material adverse effect on
Mesa. Mesa is offering the Secured Notes offered hereby to fund its share of the
settlement payment with respect to the Unocal litigation. See "Unocal Litigation
and Settlement" and "Business -- Legal Proceedings."
Mesa's independent public accountants have included an explanatory
paragraph in their report on Mesa's 1992 Consolidated Financial Statements,
which is included elsewhere in this Prospectus. Such paragraph describes the
Unocal case discussed in the Notes to the Consolidated Financial Statements, and
indicates that an unfavorable judgment would have a material adverse effect on
the Company's financial position and results of operations.
Uncertainty of Natural Gas Prices. Revenues generated from Mesa's
operations are highly dependent upon the sales price of, and demand for, natural
gas and natural gas liquids. As of December 31, 1992, over
10
<PAGE> 13
70% of Mesa's proved reserves, calculated on an energy-equivalent basis, were
natural gas and substantially all of its other reserves were natural gas
liquids.
In recent years, prices for natural gas have declined for a number of
reasons, including a nationwide oversupply of gas. The average sales price
received by Mesa for natural gas declined from approximately $2.92 per Mcf in
1983 to $1.84 per Mcf in 1987 to $1.46 per Mcf in 1991. Both the 1990/1991 and
1991/1992 winter periods were much warmer than normal resulting in lower heating
season natural gas prices. Aggregate demand for natural gas did, however,
increase each year. Low drilling activity in the U.S. during the past several
years resulted in a failure to replace reserves and Hurricane Andrew disrupted
natural gas supplies from the prolific Gulf Coast region during September and
October of 1992. As a result, 1992 natural gas market prices were higher than in
1991 and the average price received by Mesa for natural gas produced during 1992
was $1.66 per Mcf. The average price received by Mesa for natural gas produced
during the first nine months of 1993 was $1.77 per Mcf.
For 1992, the annual average Gulf Coast Henry Hub cash market price for
natural gas, as reported by Natural Gas Week, was $1.80 per MMBtu. For the first
nine months of 1993, the monthly average Gulf Coast Henry Hub cash market price
for natural gas ranged from $1.69 per MMBtu to $2.35 per MMBtu, and the average
of such nine monthly average prices was $2.08 per MMBtu. Mesa cannot predict
whether the recent increase in natural gas prices is likely to continue or
whether such prices will remain at current levels for the remainder of the year
or in future years.
Market prices for natural gas are volatile and are the result of a number
of factors outside of Mesa's control, including changing economic conditions,
governmental regulations, seasonal weather conditions, natural gas storage
levels and markets for alternative energy sources, among other things. Mesa
cannot predict how developments in these or related areas will affect the
markets for natural gas or how such effects will impact Mesa's operations.
Uncertainty in Estimates of Production. Revenues generated from Mesa's
operations are also highly dependent on the quantities of natural gas and
natural gas liquids sold. Mesa's producing properties in the Hugoton field and
the West Panhandle field are subject to production limitations imposed by state
regulatory authorities, by contracts or both. See "Business -- Properties" for a
discussion of, among other things, the allocation of allowables to Mesa's
properties. Consequently, Mesa's actual future production may be substantially
affected by factors outside of Mesa's control.
Declining Reserve Base. In recent years, the majority of Mesa's capital
expenditures have been dedicated to developing and upgrading its existing
long-life reserve base through infill drilling of its Hugoton reserves,
additions to its compression and gathering system and pipeline interconnects,
and the construction and expansion of gas processing plants. A relatively modest
amount of expenditures have been made to explore for or develop new reserve
positions. Assuming continuance of this capital expenditure policy and absent
substantial positive revisions to its estimated reserves, Mesa expects that its
annual production of reserves will exceed estimated reserve additions in future
years, and that Mesa's reserves will decline accordingly. Mesa expects its
annual production, expressed as a percentage of the prior year-end estimated
reserves, to increase from approximately 6% in 1992 to approximately 11% by
1999.
Estimates of Reserves and Future Net Revenues. Petroleum engineering is not
an exact science. Information relating to Mesa's oil and gas reserves is based
upon engineering estimates. Estimates of economically recoverable oil and gas
reserves and of future net revenues necessarily depend upon a number of variable
factors and assumptions, such as historical production from the area compared
with production from other producing areas, the assumed effects of regulations
by governmental agencies and assumptions concerning future oil and gas prices,
future operating costs, severance and excise taxes, development costs and
workover and remedial costs, all of which may in fact vary considerably from
actual results. For these reasons, estimates of the economically recoverable
quantities of oil and gas attributable to any particular group of properties,
classifications of such reserves based on risk of recovery and estimates of the
future net revenues expected therefrom prepared by different engineers or by the
same engineers at different times may vary substantially. Actual production,
revenues and expenditures with respect to Mesa's reserves will likely vary from
estimates, and such variances may be material.
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<PAGE> 14
The present values of future net revenues referred to in this Prospectus
should not be construed as the current market value of the estimated oil and gas
reserves attributable to Mesa's properties. In accordance with applicable
requirements of the Commission, the estimated discounted future net revenues
from proved reserves are generally based on prices and costs as of the date of
the estimate, whereas actual future prices and costs may be materially higher or
lower. Actual future net revenues also will be affected by factors such as the
amount and timing of actual production, supply and demand for oil and gas,
curtailments or increases in consumption by gas purchasers, changes in
governmental regulations or taxation, the impact of inflation on costs, general
and administrative costs and interest expense. The timing of actual future net
revenues from proved reserves, and thus their actual present value, will be
affected by the timing of both the production and the incurrence of expenses in
connection with development and production of oil and gas properties. In
addition, the 10% discount factor, which is required by the Commission to be
used to calculate discounted future net revenues for reporting purposes, is not
necessarily the most appropriate discount factor based on interest rates in
effect from time to time and risks associated with the oil and gas industry.
Operating Hazards; Limited Insurance Coverage. Mesa is subject to all of
the operating hazards and risks normally incident to drilling for or producing
oil and natural gas and processing and transporting gas, including blowouts,
cratering, pollution and fires, each of which could result in damage to or
destruction of oil and gas wells, producing formations or production, pipeline
or processing facilities or damage to persons or other property. As is common in
the industry, Mesa is not fully insured against all of these risks.
Trading Market. As of December 31, 1993, $569.3 million face value (at
maturity) of Secured Notes was outstanding. The Secured Notes are not listed for
trading on any national securities exchange, but are traded in the
over-the-counter market by certain dealers who from time to time are willing to
make a market in Secured Notes. These Secured Notes are currently traded by
appointment by certain market makers. No assurance can be given that an active
market for the Secured Notes will continue or as to the liquidity of such
market. Accordingly, no assurance can be given that a holder of the Secured
Notes will be able to sell such Secured Notes in the future or as to the price
at which such sale may occur. The liquidity of the market for the Secured Notes
and the prices at which the Secured Notes trade will depend upon the amount of
such issue outstanding, the number of holders thereof, the interest of
securities dealers in maintaining a market in the Secured Notes and other
factors beyond the Obligors' control. In addition, no assurance can be given as
to the relationship that the current market prices of Secured Notes will bear to
the market prices of the Secured Notes after the Offering.
Security for the Secured Notes. The Secured Notes will be secured by (i)
the Mortgage granting a second lien on certain properties and related assets and
contractual rights of MOC in the West Panhandle field of Texas and (ii) the
Pledge Agreement granting a second lien and security interest in an
approximately 77% (assuming all of the Secured Notes offered hereby are issued)
limited partnership interest in HCLP (which is part of the limited partnership
interest in HCLP owned by MOC). Such liens will be subordinate to a lien
securing the First Lien Debt, which currently consists of the outstanding
obligations under the Credit Agreement. There can be no assurance that,
following an acceleration after an Event of Default (as defined in the Secured
Indenture), the proceeds from the sale of such Collateral remaining after
satisfaction of all amounts owing in respect of First Lien Debt and allocable to
the Secured Notes would be sufficient, either alone or when combined with
proceeds from the sale of other assets not constituting Collateral and allocable
to the Secured Notes, to satisfy all amounts due on the Secured Notes. The
ability of the holders of Secured Notes to realize upon the Collateral will also
be subject to certain limitations in the Secured Indenture, the Mortgage, the
Pledge Agreement and the Intercreditor Agreement dated as of August 26, 1993
among the Secured Trustee and the collateral agent for the holders of First Lien
Debt and would be further restricted by applicable law in the event of a
bankruptcy proceeding involving one or more of the Obligors. See "Description of
the Secured Notes -- Security." In addition, HCLP has outstanding HCLP Secured
Notes which, because HCLP will not be an Obligor under the Secured Notes, are
effectively senior to the Secured Notes with respect to the assets of HCLP. The
incurrence of First Lien Debt and other additional indebtedness by the Obligors
and their subsidiaries will be restricted by the Secured Indenture. See
"Description of the Secured Notes."
Governmental Regulation and Environmental Matters. Mesa is subject to
various local, state and federal laws and regulations including environmental
laws and regulations. Mesa believes that it is in substantial compliance with
such laws and regulations. However, significant liability could be imposed on
Mesa for
12
<PAGE> 15
damages, clean up costs and penalties in the event of certain discharges into
the environment. See "Business -- Regulation and Prices."
Funding of Change in Control Offer. In the event of a Change in Control (as
defined in the Secured Indenture), the Obligors would be required to make an
offer to purchase all of the Secured Notes. As of September 30, 1993, after
giving effect to the Offering and the application of the net proceeds therefrom,
the Obligors would not have sufficient funds available to purchase all of the
outstanding Secured Notes were they to be tendered in response to an offer made
as a result of a Change in Control. See "Description of the Secured
Notes -- Change in Control."
THE COMPANY
Mesa Entities. The Company is a holding company and conducts its operations
through its subsidiaries. The Company's direct corporate subsidiaries are MOC,
MMC and MHC and its other significant subsidiaries, owned indirectly, are HCLP
and Mesa Environmental. Unless the context otherwise requires, the term "Mesa"
means the Company and its subsidiaries taken as a whole and includes the
Company's predecessors, Mesa Limited Partnership (the "Partnership") and Mesa
Petroleum Co. ("Original Mesa"). Mesa maintains its principal executive offices
at 2001 Ross Avenue, Suite 2600, Dallas, Texas 75201, where its telephone number
is (214) 969-2200. For additional discussion of Mesa's business and its
subsidiaries, see "Business."
HISTORY OF MESA
Overview. In 1964, Mr. Pickens founded Mesa to conduct exploration and
drilling activities in the U.S. and Canada. Mesa's reserves grew principally
through drilling until 1969, when Mesa acquired the Hugoton Production Company,
increasing gas reserves by more than 15 times. In the 1970's, exploration and
development activities were focused in Canada, the mid-continent and Permian
Basin areas of the United States, and offshore in the Gulf of Mexico. In 1976,
Mesa also discovered the 200 million barrel Beatrice oil field offshore Scotland
in the North Sea and was the operator of and a 25% owner in such field.
Anticipating changing political climates, in 1979 Mesa sold its properties in
Canada and the North Sea for substantial gains. Proceeds were used to reduce
debt and acquire additional reserves in the Hugoton field. During the early
1980's, Mesa began to consolidate its operations and to reduce its capital
expenditures and used its excess financial capacity to invest in undervalued
companies.
The Partnership was formed in 1985 as the successor to Original Mesa. In
the mid-to-late 1980's, Mesa's operations were primarily focused in the Gulf
Coast and Hugoton areas. At such time, the domestic oil and gas industry was
characterized by increased costs for finding new reserves, excess supplies of
reserves and lower prices for natural gas. Consequently, Mesa reduced
expenditures for exploratory drilling and instead focused on development
activities principally in the Hugoton field. In the process, Mesa reduced its
exploration and development expenditures from a 1981 to 1985 five year total of
$1.1 billion to a 1986 to 1991 six year total of $177 million. Mesa distributed
substantially all of its available operating cash flow to its owners from 1986
through the first quarter of 1990. Mesa suspended the payment of distributions
in 1990 and has not paid any dividends since that time.
Oil and Gas Property Acquisitions. Based on the belief at the time that
purchasing reserves was a more cost efficient method of reserve replacement than
exploratory drilling and that natural gas prices would increase or remain
stable, from 1986 to 1988 Mesa made two major acquisitions which increased its
proved reserves from 1.4 Tcfe to 2.8 Tcfe of natural gas. In 1986, Mesa acquired
the assets of Pioneer Corporation, which were principally located in the West
Panhandle field in Texas, in exchange for equity securities. In 1988, Mesa
formed Mesa Midcontinent Limited Partnership ("MMLP"), the predecessor to MMC,
to acquire the assets and liabilities of Tenneco Inc.'s mid-continent division,
which were primarily located in the Hugoton field and in the mid-continent area
of Oklahoma and Texas.
Financing Activities. Shortly after the Pioneer acquisition in June 1986,
Mesa sold approximately $400 million of additional equity securities in a public
offering, the proceeds of which were added to working capital and used for
general purposes. In August 1986, Mesa issued $300 million of the 12%
Subordinated Notes, the proceeds of which were used to repay bank debt. To fund
the Tenneco property acquisition in late 1988, Mesa Operating Limited
Partnership ("MOLP"), the predecessor to MOC, and MMLP incurred an aggregate of
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<PAGE> 16
approximately $700 million in bank debt (a portion of which was repaid
immediately through the resale of certain of the purchased properties). In 1989,
Mesa issued $300 million of the 13 1/2% Subordinated Notes, and used the net
proceeds to repay bank debt.
As the market for natural gas deteriorated during the late 1980's and 1990,
Mesa began actively considering various alternatives to reduce debt and, if
possible, to extend the maturities of the debt under its bank credit facilities.
At December 31, 1990, Mesa's debt aggregated approximately $1.5 billion
(including current maturities), approximately $914 million of which was bank
debt due to be repaid within five years.
Faced with this heavy debt burden and foreseeing little prospect for a
substantial and sustained increase in natural gas prices in the near future,
Mesa decided to sell assets and to refinance a substantial portion of the bank
debt. In the first half of 1991, Mesa sold, for $428 million in cash and the
assumption of approximately $9 million in liabilities, properties in Oklahoma,
Texas, New Mexico and Colorado that had represented about 17% of its reserves at
year-end 1990. The proceeds from the property sales were applied principally to
repay bank debt and increase cash. In June 1991, Mesa formed HCLP, to which MOLP
and MMLP transferred substantially all of their Hugoton field properties. HCLP
also assumed approximately $550 million of bank debt, due in installments
through 1995, secured by Hugoton properties. HCLP then issued $616.5 million of
the HCLP Secured Notes having maturities of up to 21 years and used the proceeds
to repay the bank debt and fund a $66 million liquidity reserve account. As a
result, Mesa was able to extend the maturities of its debt to more closely match
the anticipated production from the Hugoton field properties. At the same time,
Mesa refinanced the remaining $100 million of outstanding bank debt through the
establishment of the Credit Agreement.
As a result of the 1991 asset sales and refinancing, Mesa retired the $914
million in bank indebtedness that had been outstanding at year-end 1990. These
transactions also provided Mesa with $169 million of cash. A portion of these
funds has since been used to supplement Mesa's cash flows to make principal and
interest payments and capital expenditures.
Corporate Conversion. In December 1991, the Partnership effected a
conversion to corporate form (the "Corporate Conversion") by transferring
substantially all of its assets and liabilities to the Company in exchange for
all of the Company's outstanding Common Stock. The Partnership then distributed
the Common Stock to its unitholders and dissolved.
Exchange Offer. On August 26, 1993, Mesa consummated the Exchange Offer,
pursuant to which approximately $586.3 million aggregate principal amount of
Subordinated Notes (and related accrued interest claims) were exchanged for
Secured Notes, Unsecured Notes, Convertible Notes and cash. Mesa believes that
the Exchange Offer has decreased Mesa's near term financial risk and increased
the likelihood that Mesa will realize the benefits of expected greater cash flow
and asset value to the extent natural gas prices increase. In particular,
completion of the Exchange Offer and the related amendment to Mesa's Credit
Agreement have reduced Mesa's cash requirements through December 31, 1995. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Subsidiary Restructuring. Effective January 5, 1994, in order to simplify
Mesa's organizational and capital structure, Mesa effected a series of mergers
which resulted in the conversion of each of Mesa's subsidiary partnerships,
other than HCLP, into corporate form. Pursuant to these mergers, MOLP was merged
into MOC, MMLP was merged into MMC, Mesa Holding Limited Partnership ("MHLP"),
the predecessor of MHC, was merged into MHC, and Mesa Environmental Ventures
Limited Partnership ("MEVLP") was merged into Mesa Environmental. Pursuant to
these mergers, all of the general partner interests in the Company's subsidiary
partnerships held directly or indirectly by Boone Pickens were converted into
the number of shares of Common Stock of the Company contemplated by the
Conversion Agreement dated December 31, 1991, between the Company and Mr.
Pickens. As a result, all of Mesa's subsidiaries are now wholly owned by the
Company. Unless the context otherwise requires, the terms "MOC", "MMC", "MHC"
and Mesa Environmental include their predecessors, MOLP, MMLP, MHLP and MEVLP,
respectively.
14
<PAGE> 17
UNOCAL LITIGATION AND SETTLEMENT
THE UNOCAL LITIGATION
In 1986, Original Mesa and certain other parties were sued in the Federal
District Court for the Central District of California by David Colan ("Colan"),
a purported stockholder of Unocal, in a lawsuit styled Colan, et al. v. Mesa
Petroleum Co., et al. Unocal, originally named as a nominal defendant, was
subsequently realigned as a plaintiff in the case. Pursuant to Section 16(b) of
the Securities Exchange Act of 1934, plaintiffs allege that "short-swing
profits" allegedly realized upon disposition of certain shares of Unocal common
stock in 1985 are recoverable by Unocal from the defendants. As a result of the
reorganization of Original Mesa into the Partnership and the subsequent
reorganization of the Partnership into the Company, the Company and MOLP assumed
responsibility for this lawsuit. In 1993, the Court granted a motion by Unocal
to add certain other affiliates of the Company as additional defendants.
Under Section 16(b), any profit realized by a holder of more than 10% of a
listed equity security from any purchase and sale of such security within any
period of less than six months is recoverable by the issuer of such security,
provided the holder owned more than 10% of such security immediately prior to
both the purchase and sale in question. In 1984 and 1985, Mesa Partners II, a
general partnership in which a subsidiary of Original Mesa was a general partner
with a 90% interest, purchased 23.7 million Unocal shares, or approximately
13.6% of the total shares then outstanding. The last 6.7 million of these shares
were purchased in a single block trade from a dealer as principal in March 1985
at $48.10 per share. Prior to such purchase, Mesa Partners II owned
approximately 9.8% of the outstanding Unocal shares. In May 1985, Mesa Partners
II tendered its 23.7 million Unocal shares to a Unocal exchange offer.
Thereafter, it entered into a settlement agreement with Unocal which, among
other things, permitted Mesa Partners II to participate in the exchange. In the
exchange, Mesa Partners II received $565 million aggregate principal amount of
Unocal senior notes (equivalent to $72 per share in respect of 7.8 million
shares) and 15.9 million Unocal shares that traded immediately thereafter at per
share prices in the low $30's.
Plaintiffs allege that the 6.7 million shares purchased in March 1985 were
purchased not in a single purchase but rather in multiple purchases, with the
dealer acting as agent for Mesa Partners II. The defendants deny that
allegation. In 1989, the District Court found that there were material issues of
fact in dispute on such question and thus denied a motion by the defendants for
summary judgment on that issue.
In 1990, the District Court held that the disposition of Unocal stock by
the defendants was not a "sale" under Section 16(b) because it was an unorthodox
transaction with no potential for speculative abuse, and thus the Court granted
a motion for judgment in the case in favor of the defendants. Following an
appeal by the plaintiffs, the U.S. Court of Appeals for the Ninth Circuit
reversed that ruling in 1991 and further held that the plaintiffs were entitled
to a summary judgment to the effect that the disposition of the stock was a
Section 16(b) sale. The U.S. Supreme Court denied the defendants' petition for a
writ of certiorari in May 1992.
The case was then remanded to the District Court for disposition of the
remaining issues. In November 1992 the defendants moved for summary judgment
that a 1985 settlement agreement between the Mesa Defendants and Unocal released
the defendants from any potential liability in the case. In March 1993, the
Court denied the defendants' motion and granted the plaintiffs' cross-motion
holding that, as a matter of law, the settlement agreement did not release the
claim asserted by Unocal in the lawsuit.
Plaintiffs alleged that at least 3.7 million shares are subject to Section
16(b) and that Unocal is entitled to recover alleged profits of approximately
$99 million plus prejudgment interest (which at the Court's discretion may or
may not be granted to a successful Section 16(b) plaintiff) in an amount
currently exceeding $50 million. Mesa would have no liability in the case if it
prevailed on either of the following grounds: (i) that the 1985 acquisition of
the 6.7 million shares of Unocal was, as Mesa contends, effected in a single
purchase, or (ii) that the defendants realized no profit on the disposition of
any Unocal shares that might be deemed subject to Section 16(b).
Since remand of the case to the District Court in mid-1992, trial of the
case had been repeatedly delayed by the Court due to the Court's calendar. Most
recently, the District Court had set a trial date of February 22, 1994, but the
Court had indicated that further delay was a possibility.
15
<PAGE> 18
THE SETTLEMENT AGREEMENT
The Settlement Agreement was entered into on January 11, 1994 between (i)
Unocal and Colan, (ii) the Company and certain of its affiliates and (iii) the
other partners of Mesa Partners II and certain of their affiliates
(collectively, the "Unaffiliated Entities").
Under the terms of the Settlement Agreement, subject to court approval as
described below, Mesa and the Unaffiliated Entities will pay Unocal an aggregate
of $47,500,000, with $42,750,000 of such amount to be paid by Mesa and
$4,750,000 to be paid by the Unaffiliated Entities. In return, the lawsuit will
be dismissed with prejudice.
The Settlement Agreement provides that the Settlement amount will be paid
in cash, together with interest on such amount from a specified number of days
after the Judgment Date to the date of payment at an annual rate of 10% (or in
certain events 12%). Payment is to be made under the Settlement Agreement on the
earliest date after the Judgment Date upon which Mesa can complete the issuance
and sale of the Secured Notes referred to in the Settlement Agreement (i.e., the
Secured Notes offered hereby), but in any event not later than 60 calendar days
after the Judgment Date. The term "Judgment Date" means the day on which the
Court enters a judgment approving the Settlement.
The Settlement Agreement contemplates that Mesa will issue and sell to one
or more third parties Secured Notes in an aggregate principal amount sufficient
to generate cash proceeds equal to all or substantially all of the portion of
the Settlement amount payable by Mesa. The Settlement Agreement provides that if
Mesa is unable to effect such a sale by the 60th day after the Judgment Date,
then, unless the parties otherwise agree, the Settlement Agreement will
terminate and the parties will jointly request the Court to set the earliest
practicable trial date.
The District Court preliminarily approved the Settlement on January 18,
1994. A hearing before the District Court is currently scheduled for February
28, 1994 to determine the fairness, reasonableness and adequacy of the
Settlement and whether it should be finally approved by the Court. Unocal
security holders have been given notice of the hearing and will be entitled to
appear at the hearing and to object to the fairness, adequacy and reasonableness
of the Settlement. Any such objecting security holder may be entitled to appeal
any order of the District Court approving the Settlement. The Settlement
Agreement contemplates the Settlement would be consummated upon approval by the
District Court notwithstanding any such objection or appeal. In the event any
such appeal were to be filed and were to result in reversal of the District
Court's approval, the Settlement Agreement contemplates that the parties would
be restored to their pre-Settlement positions and the lawsuit reinstated.
This Offering will not be consummated unless and until the District Court
grants final approval of the Settlement.
USE OF PROCEEDS
Consummation of the Offering is conditioned upon, among other things, the
sale of an aggregate amount of Secured Notes that would result in net proceeds
of at least $40 million, before deducting expenses of the Company estimated at
$225,000, unless a Prospectus Supplement hereto otherwise provides. The Obligors
will not issue an amount of Secured Notes pursuant to this Offering that would
result in net proceeds of more than $42.75 million, before deducting expenses of
the Company. The net proceeds of the Offering will be used, together with cash
on hand, to fund Mesa's $42.75 million share of the settlement payment with
respect to the Unocal lawsuit. See "Unocal Litigation and Settlement."
MARKET PRICES OF SECURED NOTES
The Secured Notes are traded in the over-the-counter market by certain
dealers who from time to time are willing to make a market in such securities.
Prices and trading volume of the Secured Notes in the over-the-counter market
are not reported and are difficult to monitor. To the extent that Secured Notes
are traded, prices may fluctuate widely depending on, among other things, the
trading volume and the balance between buy and sell orders. See "Risk
Factors -- Trading Market."
16
<PAGE> 19
HISTORICAL AND PRO FORMA CAPITALIZATION
The following table sets forth the historical consolidated capitalization
of Mesa as of September 30, 1993 and the pro forma consolidated capitalization
of Mesa as adjusted to give effect to the Offering, as if the Offering and the
Unocal Settlement had been consummated on September 30, 1993. In addition, the
pro forma consolidated capitalization of Mesa is adjusted to give effect to (i)
the conversion of the Convertible Notes into Common Stock as discussed at Note
(b) below and (ii) the conversion of the General Partner's interest into Common
Stock as discussed at Note (c) below, as if such transactions had occurred on
September 30, 1993. This table should be read in conjunction with the
Consolidated Financial Statements of the Company and the related notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1993
------------------------
HISTORICAL PRO FORMA
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Current maturities on long-term debt:
HCLP Secured Notes................................................ $ 42,850 $ 42,850
Credit Agreement.................................................. 38,216 38,216
Other............................................................. 5,305 5,305
---------- ---------
86,371 86,371
---------- ---------
Long-term debt:
HCLP Secured Notes................................................ 498,750 498,750
Credit Agreement.................................................. 39,646 39,646
Secured Notes (a)................................................. 458,767 501,517
Unsecured Notes (a)............................................... 144,124 144,124
Convertible Notes (b)............................................. 27,600 --
12% Subordinated Notes............................................ 6,336 6,336
13 1/2% Subordinated Notes........................................ 7,390 7,390
---------- ---------
1,182,613 1,197,763
---------- ---------
Minority interest (c)............................................... 5,412 --
Stockholders' equity (d)............................................ 127,053 117,315
---------- ---------
$1,401,449 $1,401,449
---------- ---------
---------- ---------
</TABLE>
- ---------------
(a) Represents the Accreted Value at September 30, 1993 of (i) the $569.3
million face amount (at maturity) of Secured Notes issued in the Exchange
Offer, (ii) the $178.8 million face amount (at maturity) of Unsecured Notes
issued in the Exchange Offer and (iii) in the case of the pro forma amount,
the $51 million face amount (at maturity) of the maximum amount of Secured
Notes offered hereby. The actual amount of Secured Notes to be sold pursuant
to this Offering will depend on the sales prices received therefor. Unless
otherwise stated in a Prospectus Supplement, the minimum amount of Secured
Notes to be sold will be such amount as would result in net proceeds of $40
million and the maximum amount to be sold will be such amount as would
result in net proceeds of $42.75 million, in each case before deducting
expenses payable by the Company.
(b) Subsequent to September 30, 1993, and pursuant to the terms of the indenture
governing the Convertible Notes, the $27.6 million principal amount of
Convertible Notes outstanding at that date were converted into approximately
7.1 million shares of the Company's Common Stock.
(c) On January 5, 1994, the Company effected a series of merger transactions
which resulted in the conversion of its subsidiaries MOLP, MMLP and MHLP to
corporate form. In addition, effective January 5, 1994, all of the General
Partner's interests in such subsidiaries were converted to Common Stock of
the Company, thereby eliminating the minority interest.
(d) Pro forma stockholders' equity reflects a $42.8 million loss associated with
the performance of the Settlement Agreement, and the issuances of shares of
Common Stock as discussed at Notes (b) and (c) above. Does not reflect loss
from operations in the fourth quarter of 1993 or other fourth quarter
events.
17
<PAGE> 20
SELECTED FINANCIAL INFORMATION
The following table sets forth selected financial and operating information
of Mesa as of the dates and for the periods indicated (dollar amounts in
thousands, except per share data). This table should be read in conjunction with
the Consolidated Financial Statements of the Company and the related notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30 YEARS ENDED DECEMBER 31
------------------------- --------------------------------------------------------------------
1993(A) 1992(A) 1992(A) 1991(A) 1990 1989 1988
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Revenues.................... $ 157,029 $ 158,646 $ 237,112 $ 249,546 $ 329,597 $ 326,909 $ 327,310
Operating income............ 14,426 6,866 26,221 34,128 43,389 28,225 33,984
Gains (losses) on
dispositions of
properties, net of
impairments............... 9,600 12,250 12,250 33,749 (81,029) 29,113 13,299
Net income (loss)........... (59,013) (71,723) (89,232) (79,163) (200,276) (60,414) 44,181
Net income (loss) per
share..................... (1.53) (1.86) (2.31) (2.05) (5.19) (1.56) 1.12
Dividends per share......... -- -- -- -- .85 6.80 7.30
BALANCE SHEET (AT END OF
PERIOD):
Working capital............. $ 73,222 $ 91,907 $ 102,853 $ 216,875 $ 1,790 $ 144,028 $ 386,876
Property, plant and
equipment, net............ 1,217,047 1,306,617 1,280,251 1,330,276 1,810,318 2,063,216 2,293,764
Total assets................ 1,560,102 1,704,165 1,676,523 1,832,816 2,168,002 2,625,623 3,000,439
Long-term debt, including
current maturities........ 1,268,984(b) 1,286,155 1,286,155 1,310,705 1,521,740 1,631,490 1,581,521
Minority interest........... 5,412 8,717 7,961 11,815 15,234 24,552 40,311
Stockholders' equity........ 127,053 201,861 184,352 273,584 352,747 585,741 912,832
PRODUCTION AND RESERVES:
Production:
Natural gas (MMcf)........ 58,082 63,254 89,527 108,522 137,333 137,167 116,414
Natural gas liquids
(MBbls)................. 3,341 3,453 4,840 4,725 3,753 3,225 3,304
Oil and condensate
(MBbls)................. 496 752 984 767 1,480 2,984 2,975
Equivalent natural gas
(MMcfe)................. 81,104 88,484 124,471 141,474 168,731 174,421 154,088
Estimated proved reserves
(at end of period):(c)
Natural gas (MMcf)........ 1,276,049 1,367,968 1,920,797 2,110,219 2,251,295
Natural gas liquids
(MBbls)................. 80,124 79,269 91,787 75,714 79,235
Oil and condensate
(MBbls)................. 7,268 3,956 9,880 10,881 20,509
Equivalent natural gas
(MMcfe)................. 1,800,401(c) 1,867,318(c) 2,530,799(c) 2,629,789 2,849,759
OTHER DATA:
Ratio of earnings to fixed
charges(d)................ (e) (e) (e) (e) (e) (e) 1.44X
Fixed charges in excess of
earnings(e)............... $ 61,562 $ 74,821 $ 93,086 $ 82,582 $ 208,925 $ 49,755 --
Pro forma fixed charges
in excess of
earnings(f)............... $ 65,737 $ 78,996 $ 98,711 -- -- -- --
</TABLE>
- ---------------
(a) Financial position and results of operations as of and for the nine months
ended September 30, 1993 and 1992 and the years ended December 31, 1992 and
1991 reflect the effects of the sales of oil and gas properties and the
replacement and refinancing of long-term debt in the first half of 1991.
(b) Includes $27.6 million of Convertible Notes that were converted into Common
Stock in the fourth quarter of 1993.
(c) In addition to the proved reserves disclosed above, Mesa owned proved helium
and carbon dioxide (CO2) reserves at December 31 as follows: 1992, 5,634
MMcf of helium and 46,457 MMcf of CO2; 1991, 5,705 MMcf of helium and
44,837 MMcf of CO2; 1990, 5,658 MMcf of helium and 44,797 MMcf of CO2. See
"Business -- Reserves."
(d) For purposes of calculating the ratio of earnings to fixed charges, earnings
consist of net income (loss) after depreciation, depletion and
amortization, but before fixed charges, income taxes, minority interest and
the loss of an investment accounted for under the equity method. Fixed
charges consist of interest expense.
(e) Earnings were not adequate to cover fixed charges in the indicated periods.
(f) The computations of the pro forma ratio of earnings to fixed charges for the
year ended December 31, 1992 and for the nine month periods ended September
30, 1992 and 1993 assume that $42.8 million Accreted Value of additional
Secured Notes offered hereby was issued on January 1 of the respective
periods and assume that the general partner's minority interest in Mesa's
subsidiaries was converted to Common Stock on January 1 of the respective
periods.
18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the Consolidated
Financial Statements of the Company included elsewhere in this Prospectus.
1993 OPERATING RESULTS
Mesa expects its total revenues for the year ended December 31, 1993 to be
approximately 5% lower than the $237.1 million reported for the same period in
1992. Mesa's 1993 operating income is expected to be 20% lower than the $26.2
million reported in 1992. Mesa's 1993 net loss is expected to be between 15% and
20% greater than the $89.2 million net loss reported for 1992. Mesa's 1993 net
interest expense (interest expense net of interest income) is expected to be
slightly higher than the $129.9 million reported in 1992. Mesa expects to accrue
a fourth quarter 1993 loss of $42.8 million related to the Settlement with
Unocal (no part of which had been reserved). In the fourth quarter of 1993, Mesa
also completed a settlement with the Internal Revenue Service ("IRS") resolving
all tax issues relating to the 1984 through 1987 tax returns of Original Mesa.
Mesa had previously established contingency reserves for the IRS claims and
certain other contingent liabilities. As a result of the settlement of the IRS
claims and adjustments to certain other contingent liabilities, Mesa recorded a
fourth quarter 1993 gain of $24 million.
Natural gas production reported for 1993 is expected to be approximately
10% lower than the 89.5 Bcf reported in 1992. The primary reason for the
decrease is a decline in Gulf Coast production. Mesa's average natural gas price
for 1993 is expected to be approximately 5% higher than the $1.72 reported in
1992.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1993 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1992
Mesa incurred a net loss of $59.0 million for the nine months ended
September 30, 1993 compared with a net loss of $71.7 million for the same period
in 1992.
REVENUES. The following table presents the revenues, production and average
prices from sales of natural gas, natural gas liquids and oil and condensate for
the nine months ended September 30, 1993 and 1992.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------
1993 1992
-------- --------
<S> <C> <C>
Revenues (in thousands):
Natural gas................................................ $101,340 $102,631
Natural gas liquids........................................ 43,781 40,894
Oil and condensate......................................... 8,743 14,279
Production:
Natural gas (MMcf)......................................... 58,082 63,254
Natural gas liquids (MBbls)................................ 3,341 3,453
Oil and condensate (MBbls)................................. 496 752
Average Prices:
Natural gas (per Mcf)...................................... $ 1.76 $ 1.59
Natural gas liquids (per Bbl).............................. 13.06 11.84
Oil and condensate (per Bbl)............................... 17.49 18.83
</TABLE>
Natural gas revenues for the nine months ended September 30, 1993 and 1992
include losses of $.3 million ($.01 per Mcf) and gains of $6.2 million ($.10 per
Mcf), respectively, related to hedges of natural gas production in the natural
gas futures market.
Natural gas production has declined in 1993 primarily as a result of
decreases in Gulf Coast production. The Company's Hugoton and West Panhandle
field production have increased in 1993. These increases,
19
<PAGE> 22
however, have been substantially offset by a decrease in gas balancing volumes
in the West Panhandle field. Oil and condensate production has decreased in 1993
as a result of property sales.
Actual natural gas prices received, excluding the effects of hedging in the
futures market, increased by $.28 per Mcf, or more than 19%, for the nine months
ended September 30, 1993 compared with the same period in 1992. The increases
are attributable to higher spot market prices during each month in 1993 compared
with 1992. Natural gas liquids prices increased for the nine months ended
September 30, 1993 compared to the same period in 1992 primarily due to the
increase in demand for propane caused by the colder 1993 winter.
COSTS AND EXPENSES. Mesa's costs and expenses decreased from $151.8 million
for the nine months ended September 30, 1992 to $142.6 million for the same
period in 1993. Lease operating expenses increased from $31.5 million for the
nine months ended September 30, 1992 to $38.6 million for the same period in
1993 primarily as a result of increased costs in the West Panhandle field.
Exploration charges decreased from $9.1 million for the nine months ended
September 30, 1992 to $2.2 million for the same period in 1993 as a result of
exploratory dry hole expense in the Gulf Coast area in 1992. Depreciation,
depletion and amortization expenses decreased from $79.6 million for the nine
months ended September 30, 1992 to $70.3 million for the same period in 1993.
This decrease is due primarily to lower production.
OTHER INCOME (EXPENSE). Interest expense decreased $3.1 million for the
nine months ended September 30, 1993 from the same period in 1992 primarily as a
result of $61.4 million in debt repayments during 1993.
Mesa's results of operations for the nine months ended September 30, 1993
and 1992 were significantly affected by gains on sales of oil and gas properties
and gains and losses from securities transactions. In the nine month period
ended September 30, 1993, Mesa sold certain oil and gas properties resulting in
a net gain of $9.6 million compared with a net gain of $12.3 million on
properties sold in the same period in 1992. Proceeds from sales during the nine
month period ended September 30, 1993 and 1992 totaled $26.1 million and $11.4
million, respectively. Mesa recognized gains from securities transactions of
$5.8 million and $10.5 million for the nine months ended September 30, 1993 and
1992, respectively.
Other income (expense) for the nine months ended September 30, 1993
includes a gain of $13.8 million resulting from collection of $37.4 million from
Bicoastal Corporation ("Bicoastal") in October 1993. During 1993, Mesa expensed
approximately $9.7 million of costs associated with the completion of the
Exchange Offer.
COMPARISON OF YEARS ENDED DECEMBER 31, 1992, 1991 AND 1990
For the years ended December 31, 1992, 1991 and 1990, Mesa reported
consolidated net losses of $89.2 million, $79.2 million and $200.3 million,
respectively. Sales of oil and gas properties have had a significant effect on
the results of operations of Mesa in each of the three years. The following
table presents a summary of the results of operations for Mesa for the years
ended December 31 (in thousands).
<TABLE>
<CAPTION>
1992 1991 1990
--------- --------- ---------
<S> <C> <C> <C>
Revenues........................................ $ 237,112 $ 249,546 $ 329,597
Costs and expenses.............................. (210,891) (215,418) (286,208)
--------- --------- ---------
Operating income................................ 26,221 34,128 43,389
Interest expense, net of interest income........ (129,888) (134,258) (170,256)
Other income (expense).......................... 2,185 (12,782) 7,620
--------- --------- ---------
Loss before results of property sales........... (101,482) (112,912) (119,247)
Gains (losses) on dispositions of oil and
gas properties................................ 12,250 33,749 (81,029)
--------- --------- ---------
Net loss........................................ $ (89,232) $ (79,163) $(200,276)
--------- --------- ---------
--------- --------- ---------
</TABLE>
20
<PAGE> 23
In 1992, Mesa sold oil and gas properties located in Canada and in 1991
sold properties located primarily in Oklahoma, the Texas Panhandle and the San
Juan Basin of New Mexico. Losses associated with Oklahoma and Texas Panhandle
properties sold in 1991 were accrued in the fourth quarter of 1990. Property
sales in 1990 consisted primarily of natural gas processing plants in Oklahoma.
Proceeds from these sales were used to reduce long-term debt and increase cash.
Results of operations related to sold properties are included in Mesa's results
through the closing dates of such sales. The following table presents the
contribution made to the operating results of Mesa by the sold properties, for
each of the three years ended December 31 (dollars in thousands).
<TABLE>
<CAPTION>
1992 1991 1990
--------- --------- ---------
<S> <C> <C> <C>
Revenues.......................................... $ 1,398 $ 20,362 $ 116,366
Production costs.................................. (295) (8,127) (29,259)
--------- --------- ---------
$ 1,103 $ 12,235 $ 87,107
--------- --------- ---------
--------- --------- ---------
Proceeds from sales............................... $ 11,424 $ 428,063 $ 40,098
--------- --------- ---------
--------- --------- ---------
Production:
Natural gas (MMcf).............................. 521 7,252 39,297
Natural gas liquids (MBbls)..................... 22 176 671
Oil and condensate (MBbls)...................... 24 139 815
Reserves sold (MMcfe)............................. 19,435 414,063 12,610
</TABLE>
REVENUES. The following table presents the revenues, production and average
prices related to Mesa's sales of natural gas, natural gas liquids and oil and
condensate for the years ended December 31 (dollars in thousands, except per Mcf
and per Bbl data).
<TABLE>
<CAPTION>
1992 1991 1990
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Natural gas........................................ $157,672 $169,907 $232,220
Natural gas liquids................................ $ 59,669 $ 62,031 $ 55,507
Oil and condensate................................. $ 18,701 $ 16,111 $ 33,780
Production:
Natural gas (MMcf)................................. 89,527 108,522 137,333
Natural gas liquids (MBbls)........................ 4,840 4,725 3,753
Oil and condensate (MBbls)......................... 984 767 1,480
Average Price:
Natural gas (per Mcf).............................. $ 1.72 $ 1.54 $ 1.61
Natural gas liquids (per Bbl)...................... $ 12.32 $ 13.07 $ 14.57
Oil and condensate (per Bbl)....................... $ 18.86 $ 20.23 $ 22.28
</TABLE>
Natural gas revenues reported above include gains of $5.6 million ($.06 per
Mcf) in 1992, gains of $8.3 million ($.08 per Mcf) in 1991 and losses of $1.0
million ($.01 per Mcf) in 1990, related to hedges of natural gas production in
the natural gas futures market.
Natural gas production decreased by 21% from 1990 to 1991 and by an
additional 18% from 1991 to 1992. The aggregate two-year decrease totaled almost
48 Bcf or 35%. The decrease from 1990 to 1991 resulted primarily from sales of
oil and gas properties in early 1991. The 1991 to 1992 decrease resulted
primarily from Mesa's reduced share of allowables in the Hugoton field. West
Panhandle field production increased in each of 1991 and 1992 and partially
offset the aggregate production decreases in other areas. Effective January 1,
1991, Mesa and Colorado Interstate Gas Company ("CIG") entered into a contract
which entitles Mesa to 77% of the ultimate reserves and production from the West
Panhandle field. As a result of this contract, Mesa records its share of the
total field production as revenue, even though its actual sales volumes are
presently less than 77% of the total field production. Entitlement production in
excess of sales totaled 4.8 Bcf in 1991 and 6.8 Bcf in 1992. See additional
discussion below under "Production Allocation Agreement." The remainder of
21
<PAGE> 24
the increase in West Panhandle production in 1991 and 1992 is attributable to
additional sales to industrial customers.
Mesa's production from the Hugoton field is affected by the allowables set
for the entire field and by the portion of allowables allocated to Mesa's wells.
Allowables are assigned to individual wells and are influenced by the relative
production, testing and drilling practices of all producers in the field, as
well as the relative pressure and deliverability performance of each well.
Beginning in October 1991 and continuing through 1992, Mesa's share of field
allowables was reduced, causing production to decline nearly 30% from 1990 to
1992. Mesa expects 1993 production to increase to approximately 59 Bcfe from 55
Bcfe in 1992 and for production thereafter to increase substantially as Mesa's
share of field allowables returns to higher historical levels. However, because
Mesa has no control over the actions of other producers, it cannot predict with
certainty the extent or timing of the expected increase.
Natural gas liquids production increased by almost 29% from 1990 to 1992
primarily as a result of increased West Panhandle field production, including
entitlement production as discussed above, partially offset by the decrease in
Hugoton field production. Oil and condensate production decreased from 1990 to
1991 due to sales of oil and gas properties in early 1991. Production increased
in 1992 due to successful development drilling in the Gulf Coast and Rocky
Mountain areas.
Natural gas prices decreased in 1991 compared with 1990 as overall supplies
continued to exceed demand. Both the 1990/1991 and 1991/1992 winter periods were
much warmer than normal resulting in lower heating season natural gas prices.
Aggregate demand for natural gas did, however, increase each year. Low drilling
activity in the U.S. during the past several years resulted in a failure to
replace reserves and Hurricane Andrew disrupted natural gas supplies from the
prolific Gulf Coast region during September and October. As a result, 1992
natural gas market prices were higher than in 1991.
Oil and condensate prices decreased in 1991 and 1992 reflecting the
continuing downturn in market prices since the end of the Persian Gulf war in
early 1991. Natural gas liquids prices generally fluctuate with oil prices.
Other revenues in 1990 consisted primarily of processing income related to
certain natural gas processing plants owned by Mesa. These plants were sold in
September 1990.
COSTS AND EXPENSES. Mesa's costs and expenses declined by approximately 25%
from 1990 to 1991 primarily as a result of the early 1991 oil and gas property
sales. Costs and expenses in 1992 were slightly lower than in 1991. Exploration
charges were $5.3 million greater in 1992 than in 1991 as a result of
exploratory dry hole expense in the Gulf Coast area in 1992. Depreciation,
depletion and amortization expense was $3 million lower in 1992 than 1991 due
primarily to lower production. Certain components of lease operating expenses
and production and other taxes decreased in 1992 from 1991 as a result of the
1991 property sales. These decreases, however, were substantially offset by an
increase in ad valorem taxes in Kansas and the accrual of production and
gathering costs associated with entitlement production in the West Panhandle
field. See additional discussion below under "Production Allocation Agreement."
OTHER INCOME (EXPENSE). Interest costs decreased $36 million from 1990 to
1991 primarily as a result of $263 million in debt repayments made with proceeds
from property sales. Interest expense decreased $7 million from 1991 to 1992
primarily due to a $49 million decrease in weighted average debt outstanding.
Mesa recognized $6.5 million of expenses in 1991 and $2.1 million in 1992
associated with the conversion to corporate form.
PRODUCTION ALLOCATION AGREEMENT. Effective January 1, 1991, Mesa entered
into a Production Allocation Agreement ("PAA") with CIG which allocates 77% of
reserves and production from the West Panhandle field to Mesa and 23% to CIG.
During 1991, Mesa produced and sold 58% of total production from the field and
61% in 1992; the balance of field production was sold by CIG. Mesa records its
ownership interest in natural gas sales as revenue. The difference between the
net value of production sold by Mesa and the net value of its 77% entitlement is
accrued as a gas balancing receivable. The revenues and costs associated with
such accrued production are included in current year results of operations.
22
<PAGE> 25
The following table presents the incremental effect on production and
results of operations of entitlement sales recorded in excess of actual sales as
a result of the PAA for the years ended December 31 (dollars in thousands).
<TABLE>
<CAPTION>
1992 1991
-------- -------
<S> <C> <C>
Revenues accrued........................................ $ 23,270 $17,378
Costs and expenses accrued.............................. (6,073) (4,362)
Depreciation, depletion and amortization................ (10,764) (7,741)
-------- -------
$ 6,433 $ 5,275
-------- -------
-------- -------
Production accrued:
Natural gas (MMcf).................................... 6,772 4,834
Natural gas liquids (MBbls)........................... 972 671
</TABLE>
At December 31, 1992, the long-term gas balancing receivable, net of
accrued costs, relating to the PAA was $30.2 million, which is included in other
assets in the consolidated balance sheet. The provisions of the PAA allow for
periodic and ultimate cash balancing to occur. The PAA also provides that CIG
may not take in excess of its 23% share of ultimate production.
CAPITAL RESOURCES AND LIQUIDITY
FINANCIAL CONDITION AND CASH REQUIREMENTS
Mesa owns and operates its oil and gas properties through direct and
indirect subsidiaries. HCLP owns substantially all of Mesa's Hugoton field
natural gas properties. HCLP was established in 1991 to own these properties and
to issue the HCLP Secured Notes. The assets and cash flows of HCLP are dedicated
to service HCLP's debt and are not available to pay creditors of the Company or
its subsidiaries other than HCLP. MOC owns all of Mesa's interest in the West
Panhandle field of Texas and the Gulf Coast and the Rocky Mountain areas. MOC
also owns an approximate 81% limited partnership interest in HCLP. Other
significant subsidiaries are MMC, which owns cash and investments as well as an
approximate 19% limited partnership interest in HCLP, and MHC, which owns Mesa's
claims against Bicoastal. MHC collected its $37.4 million note receivable from
Bicoastal in October 1993 and collected an additional $4.6 million from
Bicoastal in December 1993, which additional amount represents interest. MOC,
MMC and MHC are the successors to the former subsidiary partnerships of the
Company. The subsidiary partnerships were converted to corporate form on January
5, 1994, pursuant to a series of merger transactions. See "The Company."
As of December 31, 1993, MMC and MHC had intercompany payables to MOC of
approximately $61 million each. In January 1994, MHC repaid approximately $5
million of its intercompany payable to MOC. Prior to issuing any of the Secured
Notes offered by this Prospectus, Mesa intends to cause MMC and MHC to repay
substantially all of their intercompany payables to MOC as required by the
Secured Indenture. See "Description of the Secured Notes -- Repayment of
Intercompany Debt." Such payables will be satisfied with a portion of MMC's
limited partnership interest in HCLP and cash. Mesa also intends to merge MHC
and MMC. As a result of these transactions, MOC will own substantially all of
the limited partnership interests in HCLP and substantially all of Mesa's
subsidiary intercompany debt will be eliminated.
23
<PAGE> 26
The following table summarizes certain components of Mesa's financial
position and cash flows as of and for the nine months ended September 30, 1993
(in thousands).
<TABLE>
<CAPTION>
OTHER
SUBSIDIARIES
MOLP(A) HCLP COMBINED TOTAL
-------- -------- ------------ ---------
<S> <C> <C> <C> <C>
DEBT (excluding intercompany debt)
HCLP Secured Notes.................... $ -- $541,600 $ -- $ 541,600
Credit Agreement and other............ 83,167 -- -- 83,167
Secured Notes(b)...................... 458,767 -- -- 458,767
Unsecured Notes....................... 144,124 -- -- 144,124
Convertible Notes..................... 27,600 -- -- 27,600
12% Subordinated Notes................ 6,336 -- -- 6,336
13 1/2% Subordinated Notes............ 7,390 -- -- 7,390
-------- -------- ---------- ----------
$727,384 $541,600 $ -- $1,268,984
-------- -------- ---------- ----------
-------- -------- ---------- ----------
Cash and securities(c).................. $ 17,650 $ 23,422 $ 81,098 $ 122,170
Note receivable(c)...................... -- -- 37,428 37,428
Working capital (deficit)............... (23,016) (22,393) 118,631 73,222
Restricted cash (in noncurrent
assets)............................... -- 62,543 -- 62,543
Operating cash flows before interest.... $ 35,485 $ 55,112 $ (872) $ 89,725
Interest payments, net(d)............... (27,301) (51,921) 1,425 (77,797)
-------- -------- ---------- ----------
Cash flows from operating activities.... $ 8,184 $ 3,191 $ 553 $ 11,928
-------- -------- ---------- ----------
-------- -------- ---------- ----------
</TABLE>
- ---------------
(a) MOLP was merged into MOC on January 5, 1994.
(b) Does not include the amount of Secured Notes offered hereby.
(c) Included in working capital (deficit). The note receivable was collected in
October 1993.
(d) Cash interest payments, net of interest income.
The HCLP Secured Notes, for which HCLP is the sole obligor, are secured by
the Hugoton field properties and are due in semiannual installments through
August 2012, but may be repaid earlier depending on the rate of production from
the properties. The Credit Agreement, as amended, is a $90 million credit
facility under which $77.9 million of borrowings and $10.4 million of letter of
credit obligations were outstanding at September 30, 1993. The Credit Agreement
is secured by a first lien on MOC's West Panhandle properties, the Company's
equity interest in MOC and a 65% equity interest in HCLP (to be increased to a
77% interest upon the sale of all Secured Notes offered hereby). Borrowings
under the Credit Agreement are due in various installments through June 1995.
The Company and MOC are obligors under the Credit Agreement. The Secured Notes
are due in 1998 and are secured by second liens on MOC's West Panhandle
properties and a 65% equity interest in HCLP (to be increased to a 77% interest
upon the sale of the Secured Notes offered hereby). The Convertible Notes
outstanding at September 30, 1993 were converted into 7.1 million shares of
Common Stock during the fourth quarter of 1993. The Unsecured Notes are due in
1996. The 12% Subordinated Notes (unsecured debt) have a stated maturity of
August 1996 and the 13 1/2% Subordinated Notes (unsecured debt) have a stated
maturity of May 1999. The Secured Notes, Unsecured Notes and both issues of
Subordinated Notes are obligations of MOC, Capital and the Company. The Secured
Notes and the Unsecured Notes are collectively referred to herein as the
Discount Notes.
24
<PAGE> 27
The following tables summarize Mesa's 1992 actual and 1993 through 1996
forecast cash requirements, assuming no changes in capital structure, for
interest, debt principal and capital expenditures (in thousands).
<TABLE>
<CAPTION>
ACTUAL FORECAST
-------- --------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
HCLP
Interest payments, net(a)..... $ 51,704 $ 50,000 $ 47,500 $ 43,600 $ 39,000
Principal repayments.......... 24,550 39,300 42,900 39,300 45,400
Capital expenditures(b)....... 3,180 6,800 11,200 1,700 --
-------- -------- -------- -------- --------
$ 79,434 $ 96,100 $101,600 $ 84,600 $ 84,400
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
MOC
Interest payments, net(a)..... $ 77,464 $ 27,200 $ 3,500 $ 51,000 $ 96,100
Principal repayments.......... -- 41,000 24,800 39,600 185,100
Capital expenditures(b)....... 66,021 27,100 12,300 13,700 15,000
-------- -------- -------- -------- --------
$143,485 $ 95,300 $ 40,600 $104,300 $296,200
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
- ---------------
(a) Cash interest payments, net of interest income.
(b) Forecast capital expenditures represent Mesa's best estimate of drilling and
facilities expenditures required to sustain maximum economic production
from its existing properties during the forecast period. Contractual
commitments with a major gas purchaser in the Hugoton field require
expenditures, primarily for compression, of approximately $7.1 million by
HCLP during 1993 through 1995, which amounts are included in the amounts
set forth in the table for such years. In addition, MOC had contractual
commitments during 1993 of approximately $25.2 million, primarily related
to completion of a gas processing plant, which amount is included in the
amount set forth in the table for 1993. Mesa may incur capital expenditures
in addition to those reflected in the table.
On August 26, 1993, Mesa completed the Exchange Offer whereby new debt
securities (including the Discount Notes) were issued in exchange for
substantially all of the 12% and 13 1/2% Subordinated Notes. The Discount Notes
accrue, but do not pay, interest through June 30, 1995, after which interest
will be payable semiannually in cash, commencing December 31, 1995. The Exchange
Offer results in deferrals of $75 million of annual interest payments which
would have been paid through June 30, 1995.
In connection with the Exchange Offer, Mesa and its bank lenders amended
the Credit Agreement in order to extend the payment of a portion of the
outstanding principal, which was scheduled to mature in June 1994 (or earlier as
a result of the then current default in the payment of interest on the
Subordinated Notes, which default was cured upon completion of the Exchange
Offer), and to amend certain covenants thereunder, including a reduction in
Mesa's tangible adjusted equity requirement. In return, the banks received,
among other things, additional security, earlier payment of a portion of the
outstanding principal and an increase in the rate of interest payable on the
loans.
Mesa's independent public accountants included an explanatory paragraph in
their report on Mesa's 1992 consolidated financial statements which described a
potential debt covenant default under the Credit Agreement, which raised
substantial doubt about Mesa's ability to continue as a going concern. Mesa's
consolidated financial statements were prepared assuming that Mesa will continue
as a going concern. Accordingly, no adjustments were made to the consolidated
financial statements to reflect any possible liquidation of assets which may be
required in the event of bankruptcy. As a result of the completion of the
Exchange Offer and the related amendments to the Credit Agreement, Mesa believes
it will have significantly greater cash flow and available cash balances over
the next two years whether or not production and prices increase. In conjunction
with the filing of this Prospectus, Mesa's independent public accountants
reissued their report on Mesa's 1992 consolidated financial statements. As a
result of the successful completion of the Exchange Offer and the related
amendments to the Credit Agreement, the explanatory paragraph was not included
in the reissued independent public accountants' report.
25
<PAGE> 28
DEBT COVENANTS
The amended Credit Agreement contains restrictive covenants which require
Mesa to maintain tangible adjusted equity, as defined, of at least $50 million
and a ratio of cash flow and available cash to debt service, as each is defined,
of at least 1.50 to 1. At September 30, 1993, tangible adjusted equity was $132
million and the ratio was 2.11 to 1. Mesa expects to accrue a loss of
approximately $43 million in the fourth quarter of 1993 representing its share
of the settlement of the Unocal lawsuit. In addition, Mesa expects to report a
net loss from operations in the fourth quarter of 1993. Mesa expects tangible
adjusted equity at December 31, 1993 to be in excess of $100 million, giving
effect to the loss from operations, the Unocal Settlement, the conversion of the
Convertible Notes into Common Stock and certain nonrecurring gains. Assuming no
changes in its capital structure, Mesa expects to continue to report losses from
operations in the foreseeable future.
The Unocal Settlement would not result in tangible adjusted equity falling
below the $50 million requirement, but would accelerate the point in time at
which tangible adjusted equity may fall below the $50 million requirement.
Assuming no changes in its capital structure and in existing business
conditions, Mesa's financial forecasts indicate that tangible adjusted equity is
likely to fall below the $50 million requirement in the second half of 1994. The
financial forecasts also indicate that Mesa will have adequate financial
resources, including cash on hand, to satisfy any obligations which may become
due under the Credit Agreement in the event the tangible adjusted equity
covenant is not satisfied and cannot be renegotiated or compliance therewith
waived. At December 31, 1993, Mesa had approximately $150 million of cash and
securities. In addition, payment of the settlement amount to Unocal would not
cause the ratio of cash flow and available cash to debt service to fall below
the required level.
The indentures governing the Discount Notes restrict, among other things,
Mesa's ability to incur additional indebtedness, pay dividends, acquire stock or
make investments, loans and advances. The amended Credit Agreement also
restricts, among other things, Mesa's ability to incur additional indebtedness,
create liens, pay dividends, acquire stock or make investments, loans and
advances.
LITIGATION AND CONTINGENCIES
The Company and certain other parties are defendants in a lawsuit which
relates to an investment in Unocal in 1985. This lawsuit, more fully described
under "Unocal Litigation and Settlement" and in the Notes to the Consolidated
Financial Statements of the Company, asserts that certain profits allegedly
realized by the defendants upon the disposition of Unocal common stock in 1985
are recoverable by Unocal pursuant to Section 16(b) of the Securities Exchange
Act of 1934. A trial was scheduled to begin February 22, 1994. On January 11,
1994, Mesa entered into the Settlement Agreement whereby the defendants have
agreed to pay to Unocal an aggregate of $47.5 million, of which $42.8 million
will be paid by Mesa and $4.7 million will be paid by certain other unaffiliated
third parties. The Settlement Agreement is subject to approval by the Court,
following notice by Unocal to its security holders. Mesa intends to fund
substantially all of its portion of the settlement amount with proceeds from
issuance of Secured Notes offered hereby. If the Settlement Agreement is not
approved by the Court and the case is ultimately tried, no determination can be
made at this time as to the ultimate outcome of the litigation. If the
plaintiffs were to prevail and were awarded a judgment (including interest) in
the range of their estimate of $150 million, payment of such amount would have a
material adverse effect on Mesa's financial position and results of operations.
Such a payment would remove a substantial amount of cash from Mesa at a time
when cash flows from operating activities may not be sufficient to service debt
and fund capital expenditures and other obligations. Such a payment could also
reduce tangible adjusted equity, as defined, below the Credit Agreement
requirement of $50 million. In the event of an adverse judgment, Mesa could be
required to post an appeal bond or other security in the amount of the judgment
in order to stay execution pending any appeal.
Mesa is also a defendant in various other lawsuits and legal proceedings
and, as the successor entity to the Partnership and Original Mesa, has assumed
certain other obligations from those entities. Mesa does not expect the
resolution of any of these other matters to have a material adverse effect on
its results of operations or financial position. See "Business -- Legal
Proceedings."
26
<PAGE> 29
COMPANY RESOURCES AND ALTERNATIVES
Mesa's cash flows from operating activities are substantially dependent on
the amount of oil and gas produced and the price received for such production.
Production and prices received from HCLP properties, together with cash held
within HCLP, are expected, under Mesa's current operating plan, to generate
sufficient cash flow to meet HCLP's required principal and interest obligations.
However, HCLP cash flows are not expected to be sufficient to permit HCLP to
distribute any excess cash to MOC and MMC until at least 1995. With the
consummation of the Exchange Offer, production and prices at MOC are expected to
be sufficient to cover its cash interest obligations over the next two years
with cash from operating activities. MOC and Mesa's subsidiaries other than HCLP
may also supplement cash flows from operating activities with available cash and
securities balances.
On December 31, 1995, Mesa will begin making interest payments on the
Discount Notes. Assuming no changes in Mesa's capital structure prior to such
date, Mesa will be required to make cash interest payments related to the
Discount Notes totaling approximately $48 million (approximately $51 million if
all of the additional Secured Notes offered hereby are issued) on December 31,
1995 and payments totaling approximately $84 million (approximately $90 million
if all of the additional Secured Notes offered hereby are issued) during 1996.
In addition, Unsecured Notes in the amount of $178.8 million and 12%
Subordinated Notes in the amount of $6.3 million become due in mid-1996. Mesa's
current financial forecasts indicate that Mesa will be unable to fund such
payments in 1996 with cash flows from operating activities and existing cash and
securities balances. Depending on industry and market conditions, Mesa may
generate cash by selling assets or issuing new debt or equity securities.
However, Mesa has limited ability to sell assets since its two largest assets,
its interests in the Hugoton and West Panhandle fields, are pledged under
long-term debt agreements. After the June 30, 1995 repayment of the balances
outstanding under the Credit Agreement, Mesa would have $82.5 million of first
lien borrowing capacity on the West Panhandle field properties. See "Description
of the Secured Notes -- Limitation on Incurrence of First Lien Debt." Mesa's
current business strategy includes continuing its effort to strengthen its
financial condition by raising equity capital and applying the proceeds thereof
to retire debt, and issuing new lower-cost debt to refinance its existing high
cost debt securities. There can be no assurance that Mesa will be able to raise
equity capital or otherwise refinance its debt.
In the event the Settlement of the Unocal Litigation is not approved by the
Court and a subsequent adverse outcome in the Unocal litigation, Mesa could
pursue a variety of options including sales of assets, settlement discussions to
reduce the amount of the award or to limit bond requests or negotiations to
obtain relief from certain debt obligations to banks or noteholders. Mesa could
also consider seeking protection from creditors under the Federal Bankruptcy
Code. Mesa's choice from among its alternatives would depend on numerous factors
including the amount of the judgment, bond or security requirements, Mesa's
financial condition and conditions in the oil and gas industry. This Offering
will not be consummated unless the Settlement is finally approved by the Court.
OTHER
Mesa recognizes its ownership interest in natural gas sales as revenue.
Actual production quantities sold may be different from Mesa's ownership share
in a given period. Mesa records these differences as gas balancing receivables
or as deferred revenue. Net gas balancing underproduction represented
approximately 1.5% of total equivalent production in the nine months ended
September 30, 1993 compared with 15% during the same period in 1992. The gas
balancing receivable or deferred revenue component of natural gas and natural
gas liquids sales in future periods is dependent on future rates of production,
field allowables and the amount of production taken by Mesa or by its joint
interest partners.
Mesa invests from time to time in marketable equity and other securities
and in commodity and futures contracts, primarily related to crude oil and
natural gas. Mesa also enters into natural gas futures contracts as a hedge
against natural gas price fluctuations.
Management does not anticipate that inflation will have a significant
effect on Mesa's operations.
27
<PAGE> 30
BUSINESS
Mesa is primarily engaged in the production and development of and
exploration for natural gas and oil in the United States. Mesa's principal
business strategy includes (i) continuing its effort to strengthen its financial
condition by raising equity capital and applying the proceeds thereof to retire
debt, and issuing new lower cost debt to refinance its existing high cost debt
securities, (ii) maximizing the value of its existing high-quality, long-life
reserves through efficient operating and marketing practices, (iii) increasing
its capability to process natural gas and to extract natural gas liquids and
helium by expanding and modernizing processing facilities, (iv) conducting
selective exploratory and development activities, principally in existing areas
of operations, and (v) promoting the use of natural gas as a motor vehicle fuel
and developing and marketing natural gas fuel equipment for the transportation
market.
Mesa considers itself one of the most efficient operators of shallow
natural gas properties in the United States. At December 31, 1992, Mesa owned
approximately 1.8 Tcf of equivalent proved natural gas reserves, making it one
of the largest independent oil and gas companies in the United States. Over 95%
of Mesa's reserves are located in the Hugoton field of southwest Kansas and in
the West Panhandle field of Texas. At December 31, 1992, the estimated future
net cash flows before income taxes from Mesa's proved reserves, as determined in
accordance with the regulations of the Commission, were approximately $2.4
billion and had a net present value before income taxes of approximately $1.2
billion. Over 70% of Mesa's total equivalent proved reserves are natural gas,
and substantially all such reserves are proved developed reserves. The balance
of Mesa's reserves are principally natural gas liquids, which are extracted from
its natural gas through gas processing plants. See "-- Reserves."
At December 31, 1985, Mesa owned approximately 1.4 Tcf of equivalent proved
natural gas reserves. From the end of 1985 through 1988, Mesa increased its
ownership of gas reserves by acquiring approximately 1.1 Tcf of equivalent
proved gas reserves in its 1986 acquisition of Pioneer Corporation and over 500
Bcf of equivalent proved gas reserves in its 1988 acquisition of oil and gas
properties from Tenneco Inc.
During the period from January 1, 1989 through December 31, 1992, Mesa sold
certain producing and undeveloped oil and gas properties in Oklahoma, the Texas
Panhandle, New Mexico, Colorado and Canada for a total of over $600 million. The
reserves associated with the properties sold totaled approximately 564 Bcfe of
natural gas. The substantial portion of these property sales, totaling over 426
Bcfe of natural gas and approximately $430 million, occurred in the first half
of 1991. The proceeds from the sales of oil and gas properties were used
principally to reduce bank debt and to supplement cash reserves.
Mesa conducts its operations through various direct and indirect
subsidiaries, including MOC, MMC, MHC and Mesa Environmental, each a Delaware
corporation, and HCLP, a Delaware limited partnership. HCLP owns substantially
all of Mesa's Hugoton field natural gas properties. MOC owns all of Mesa's other
oil and gas properties as well as an approximate 81% interest in HCLP. MHC and
MMC own principally cash and various investments and, in the case of MMC, an
approximate 19% interest in HCLP. Mesa Environmental is engaged in promoting the
use of natural gas as a motor vehicle fuel and developing and marketing natural
gas fuel systems for the transportation market.
At December 31, 1993, Mesa employed 383 persons (including 56 persons
employed by HCLP and 44 employed by Mesa Environmental).
MOC
MOC's properties account for approximately 677 Bcfe, or 38% of Mesa's total
equivalent proved reserves at December 31, 1992. MOC's properties are located
primarily in the West Panhandle field of Texas, but also include interests in
the Gulf of Mexico offshore Louisiana and Texas, and the Rocky Mountain area.
MOC also owns an approximate 81% limited partnership interest in HCLP. In
addition, MOC owns helium attributable to its West Panhandle field properties,
which it began extracting in early 1993, as well as helium produced from HCLP's
Hugoton properties, which it began extracting in November 1993.
28
<PAGE> 31
MOC is the Company's principal operating subsidiary. Most of Mesa's
employees are employed by MOC, and MOC is generally responsible for all of
Mesa's operations, administration and marketing, including the operations of
HCLP pursuant to the services agreement described below.
MOC has entered into a services agreement with HCLP pursuant to which MOC
operates HCLP's Hugoton field properties and provides certain services necessary
to market production therefrom, process remittances of production revenues and
perform certain other administrative functions in exchange for a services fee.
The services fee totaled approximately $11 million in 1993.
HCLP
HCLP's properties account for 1,123 Bcfe, or 62% of Mesa's total equivalent
proved reserves at December 31, 1992. All of HCLP's proved reserves are in the
Hugoton field in southwest Kansas. Substantially all of Mesa's Hugoton property
interests (including gathering systems, compression and gas processing
facilities, but excluding helium reserves and the deep Hugoton reserves beneath
those owned by HCLP) are owned by HCLP, an indirect wholly owned subsidiary of
the Company. HCLP owns the new Satanta Plant which was constructed by MOC, and
MOC operates the plant under a long-term lease. The plant, which processes
approximately 85% of HCLP's production, was completed in the third quarter of
1993.
HCLP was formed in 1991 to own substantially all of Mesa's Hugoton
properties and to issue the HCLP Secured Notes. The indenture and mortgage for
the HCLP Secured Notes contain various covenants which, among other things,
limit HCLP's ability to sell or acquire oil and gas property interests, incur
additional indebtedness, make unscheduled capital expenditures, make
distributions of property or funds subject to the mortgage, or enter into
certain types of long-term contracts or forward sales of production. The
agreements also require HCLP to maintain a separate existence from the Company.
The assets of HCLP are not available to pay creditors of the Company or its
subsidiaries other than HCLP.
OTHER SUBSIDIARIES
MMC does not own any direct interests in oil and gas properties but does
own an approximate 19% limited partnership interest in HCLP. At September 30,
1993, MMC held approximately $42.6 million of cash and securities and also had
an intercompany payable of $59.1 million to MOC.
MHC principally conducts various investment activities. At September 30,
1993, MHC held $37.7 million of cash and securities, and also had recorded
receivables aggregating $37.4 million from Bicoastal, which was collected in the
fourth quarter of 1993. At September 30, 1993, MHC had an intercompany payable
to MOC of $88.7 million.
MHC also owns the equity of Mesa Environmental.
Mesa Environmental was established to promote, expand and participate in
the development of the natural gas vehicle ("NGV") market. See "-- The NGV
Business" below.
Capital is a wholly owned finance subsidiary of MOC.
None of MMC, MHC and Mesa Environmental is an Obligor with respect to the
Secured Notes, the Unsecured Notes or the Subordinated Notes.
PROPERTIES
Mesa's principal properties are in the Hugoton field of southwest Kansas
and the West Panhandle field of Texas, which together account for over 95% of
Mesa's equivalent proved reserves at December 31, 1992. These two fields are in
the same producing trend and contain shallow gas reserves which are expected to
produce beyond the year 2020. The Hugoton field is the largest producing gas
field in the continental United States.
29
<PAGE> 32
Hugoton Field
Mesa's Hugoton field properties, substantially all of which are owned by
HCLP, accounted for 63% of Mesa's equivalent proved reserves and 67% of the
present value of estimated future net cash flows before income taxes, as of
December 31, 1992. The Hugoton field accounted for approximately 40%, 44% and
39% of Mesa's revenues from the sales of natural gas, natural gas liquids, and
oil for the years ended December 31, 1992, 1991 and 1990, respectively. The
percentage of total Mesa revenues increased in 1991 due to sales of other
properties. Such percentage declined in 1992 as a result of lower production
caused by allowable restrictions discussed below. The percentage of revenues
from the Hugoton field has been less than the percentage of equivalent proved
reserves due primarily to the longer life of the Hugoton properties compared to
Mesa's other properties.
Gas from the Hugoton field is sold in the interstate and intrastate
markets, and thus is subject to state and federal laws and regulations. The
Kansas Corporation Commission (the "KCC") is the state regulatory agency
responsible for setting field market demand (allowables) and prorating
production between wells in the field through the assignment of allowables to
each well. The sale of gas is also subject to the rules and regulations of the
Federal Energy Regulatory Commission (the "FERC").
ALLOWABLE PRODUCTION. Twice each year, the KCC sets the fieldwide allowable
necessary to meet the Hugoton market demand for the summer and winter production
periods. The fieldwide allowable for the Hugoton field increased from 487 Bcf in
1991 to 578 Bcf in 1993.
The fieldwide allowable is allocated among individual wells based on each
well's pressure, deliverability and acreage. The allowables assigned to
individual wells are influenced by the relative production, testing and drilling
practices of all producers in the field, as well as the relative pressure and
deliverability performance of each well.
Generally, fieldwide allowables have been influenced by overall gas market
supply and demand in the U.S., as well as the specific "nominations" for gas
from the parties who produce or purchase gas from the field. The following table
sets forth the fieldwide allowables from 1979 through 1993 and Mesa's
approximate percentage of the fieldwide allowables.
<TABLE>
<CAPTION>
FIELDWIDE MESA
ALLOWABLE ALLOWABLE
YEAR (BCF) PERCENTAGE(1)
---- --------- -------------
<S> <C> <C>
1979................................................. 692 13.3%
1980................................................. 517 12.8
1981................................................. 475 13.0
1982................................................. 460 12.6
1983................................................. 325 11.9
1984................................................. 372 11.5
1985................................................. 370 11.6
1986................................................. 377 11.6
1987................................................. 331 11.8
1988................................................. 422 12.6
1989................................................. 467 13.7
1990................................................. 500 13.6
1991................................................. 487 12.3
1992................................................. 516 9.5
1993................................................. 578 8.5
</TABLE>
- ---------------
(1) The Mesa Allowable Percentage represents the gross percentage assigned to
wells operated by Mesa, which approximates Mesa's overall net ownership
interest in both operated and non-operated properties.
As the table demonstrates, fieldwide allowables have generally increased
since 1987. However, as a result of the less aggressive production and drilling
practices of other operators in the field between 1989 and 1991, the pressures
and deliverability of Mesa's wells declined relative to those of other
operators, and Mesa's assigned share of field allowables was reduced beginning
in October 1991.
30
<PAGE> 33
Due to Mesa's reduced share of the field allowable, Mesa's Hugoton
production was 55 Bcfe in 1992 compared to 72 Bcfe in 1991. Mesa's 1993
production from the Hugoton field is estimated to be approximately 57 Bcfe.
Further increases are expected in future years with Mesa's allowable share
returning to higher levels as other operators in the field produce their
shortfalls relative to Mesa's past production. However, Mesa has no control over
production practices of other Hugoton operators and it cannot predict with
certainty the extent or timing of the expected increases.
The KCC held hearings from August 1992 to September 1993 to consider
regulatory changes to the manner in which fieldwide allowables are allocated
among individual wells within the Hugoton field. Specifically, the KCC
considered proposals from various producer groups to amend calculations of well
deliverability, the allocation of allowables based on acreage and infill wells,
and the makeup of underages from prior periods. On December 3, 1993, the KCC
held an administrative conference to announce its findings and recommendations,
and on February 3, 1994 the KCC issued an order implementing the changes
effective as of April 1, 1994. Under the order, the allowables assigned to
Mesa's wells will be increased, thus increasing their allowed production. Mesa
estimates that this order will permit Mesa to produce an aggregate of an
additional 15 to 20 Bcf over the three year period following implementation.
INFILL DRILLING. In 1986, the KCC approved the drilling of a second
(infill) well on each 480-acre or larger spacing unit in the Hugoton field,
beginning January 1, 1987. During each calendar year, producers were permitted
to drill up to 25% of the total number of infill wells for which they qualify.
From January 1, 1987 through December 31, 1993, Mesa participated in 382 infill
wells, essentially completing its infill drilling program related to properties
it operates. Mesa anticipates participating in approximately 19 additional
infill wells, principally on properties not operated by Mesa. Pressures and
deliverabilities measured in the infill wells exceed such amounts in the
original wells. Well performance data indicates that, as a result of infill
drilling, significant reserves will be added to those reflected as proved
reserves in the estimates of DeGolyer and MacNaughton, independent petroleum
engineering consultants ("D&M"), set forth under "-- Reserves." In addition to
the Hugoton infill drilling program, Mesa has invested approximately $26 million
in Hugoton compression and pumping unit facilities and pipeline interconnects
since 1989 to increase production capacity and marketing flexibility.
HUGOTON GAS SALES. Mesa's Hugoton production is sold at market prices. A
substantial portion of Mesa's Hugoton field production is subject to gas
purchase contracts with Western Resources, Inc. ("WRI"), formerly The Kansas
Power and Light Company, and Williams Natural Gas Company ("Williams").
Mesa entered into two gas contracts with WRI effective January 1, 1990. The
WRI contracts expire in May 1995 and provide, among other things, for seasonal
take requirements at market prices and a release for sale to other parties of
gas not nominated for purchase by WRI. The contracts provide for annual
purchases by WRI of 34.0 Bcf of gas in 1993, 37.5 Bcf in 1994 and 19.9 Bcf
during the first five months of 1995. These annual contract quantities are
subject to various seasonal requirements. Under the contracts, WRI pays market
prices as determined monthly based on a price index published by a third party.
The average price received for gas sold to WRI during the year ended December
31, 1992 was $1.56 per Mcf, on a volume of 25.3 Bcf. The average price for the
first nine months of 1993 was $1.86 per Mcf, on a volume of 22.2 Bcf.
Mesa also entered into a gas purchase contract with Williams effective as
of December 1, 1989. Under the contract, Williams has the right to purchase
certain volumes of natural gas produced during each winter season (November
through March) from that portion of the Hugoton field that is connected to the
Williams pipeline system. The Williams contract is for a term equal to the life
of the leases for the properties covered by the contract. Under the contract,
Williams has the right to purchase, during each winter season, a volume of gas
up to 50% (or after the 1994-95 winter season, 60%) of the lesser of (i) the
applicable allowable established by the KCC for the properties covered by the
contract or (ii) the deliverability of such properties. All natural gas produced
from such properties that is not nominated for purchase by Williams is released
for sale by Mesa to third parties. Williams will pay market prices for natural
gas nominated and taken by it.
31
<PAGE> 34
Williams has not exercised its right to purchase gas pursuant to this agreement
in previous years, thus releasing such volumes for sale to other parties.
Historically, approximately one-half of Mesa's Hugoton production has been
processed through the Ulysses gas processing plant (which has a capacity of 160
MMcf of natural gas per day) for the extraction of natural gas liquids.
Beginning in 1990, approximately 60% of the remaining Hugoton production was
processed at a plant owned by a third party. Mesa began construction of the new
Satanta Plant in August 1992. The Satanta Plant has the capacity to process 250
MMcf of natural gas per day, enabling Mesa to extract natural gas liquids from
up to 85% of its Hugoton field properties. The Satanta Plant also has the
ability to extract helium from the gas stream. The Satanta Plant was completed
in the third quarter of 1993 at a cost of approximately $43 million. In December
1993, the Satanta Plant averaged 225 MMcf per day of inlet gas, 11,000 Bbl per
day of natural gas liquids production and 430 Mcf per day of crude helium
production.
West Panhandle Field
Mesa, through MOC, has substantial natural gas reserves in the West
Panhandle field in Texas. As of December 31, 1992, these properties represented
approximately 32% of Mesa's total equivalent proved reserves, and approximately
29% of the present value of estimated future net revenues before income taxes.
Production from the West Panhandle field accounted for approximately 39%, 36%
and 24% of Mesa's revenue from the combined sales of natural gas, natural gas
liquids and oil for the years ended December 31, 1992, 1991 and 1990,
respectively. The increase in 1991 and 1992 is attributable to (i) higher sales
volumes, (ii) the recording of revenues for which cash has not yet been received
under a contractual gas balancing arrangement and (iii) the decline in revenues
from other areas due to property sales and reduced Hugoton production. See "Gas
Balancing Sales" below.
Mesa's West Panhandle reserves and production are owned and controlled
pursuant to a contract with CIG originally executed in 1928 by predecessors of
both companies, and which has been amended and supplemented many times,
including the PAA effective as of January 1, 1991 and an amendment to the PAA
effective as of January 1, 1993 (collectively, the "B" Contract). Under the "B"
Contract and associated agreements Mesa operates the wells and production
equipment and has the right to sell gas production from the West Panhandle field
to its customers, without any geographical restrictions. CIG performs certain
administrative functions and owns and operates the gathering system by which
Mesa's production is transported to its Fain natural gas processing plant (the
"Fain Plant"). Each party reimburses the other for certain costs and expenses
incurred for the joint account.
Pursuant to the "B" Contract, Mesa's share of wet gas production from the
field (i.e. gas produced at the wellhead before processing and before reduction
for royalties) is limited to 35 Bcf for 1993 and 32 Bcf per year for 1994
through 1996. Beginning January 1, 1997 and thereafter, Mesa will be entitled to
take all wet gas production during the winter months (November through March).
Also, beginning January 1, 1997, Mesa will be entitled to take all wet gas
production during the summer months (April through October) in excess of the
following CIG daily and seasonal entitlement: 1997-1999 (40 MMcf per day; 8.5
Bcf annually), 2000 (35 to 40 MMcf per day; 7.56 Bcf annually), 2001 and
thereafter until CIG produces its 23% share of ultimate production (35 MMcf per
day; 7 Bcf annually).
Notwithstanding the above winter and summer entitlement, Mesa is entitled
to produce and sell 77% of the ultimate wet gas production from the properties
and CIG is entitled to 23%. Mesa is further limited to a daily wet gas
production of 120 MMcf. In 1993, Mesa's production totaled approximately 35 Bcf
of wet gas.
NATURAL GAS LIQUIDS EXTRACTION. Wet gas produced from the West Panhandle
field contains an average of 1,175 MMBtu per Mcf (compared to typical content of
1,000 MMBtu per Mcf of gas). Therefore, Mesa's share of production taken is
processed through the Fain Plant to extract natural gas liquids.
Mesa has recently completed an expansion of the Fain Plant to increase its
inlet capacity from 90 MMcf per day to 120 MMcf per day. The Fain Plant now has
the daily capacity to produce 11,400 barrels per day of natural gas liquids and
is capable of extracting up to 480 Mcf per day of crude helium.
32
<PAGE> 35
Mesa, Mid-American Pipeline and MAPCO Natural Gas Liquids Inc. ("MAPCO")
have entered into a new transportation and fractionation agreement effective
December 1, 1993 with respect to the Satanta Plant and effective April 1, 1994
with respect to the Fain Plant. The agreement has a term of 7 years and reduces
the fee MAPCO charges Mesa to transport and fractionate natural gas liquids at
MAPCO's Conway, Kansas facility.
WEST PANHANDLE GAS SALES CONTRACTS. Natural gas that has been processed at
the Fain Plant (residue or dry gas) is sold to the local gas distribution
utility that serves residential and commercial customers in and around Amarillo
and to a number of industrial customers in the Amarillo area.
Approximately 10 Bcf per year of residue gas is sold to the local utility
under the terms of a long-term contract in existence since 1949, as periodically
amended and supplemented. The contract specified a pricing formula which
resulted in a price per Mcf of $2.71 in 1990, $2.76 in 1991 and $2.81 in 1992
for these volumes.
In mid-1992, Mesa and the local utility entered into a pricing amendment
for the five-year period 1993-1997. Beginning in 1993, 70% of volumes sold to
the utility under this contract are being sold at fixed prices beginning at
$2.71 per Mcf in 1993 and escalating at 5% per annum in 1994 and 1995 and then
at 7 1/2% per annum in 1996 and 1997. The other 30% of volumes under this
contract are being sold at a regional market index price based on spot prices
plus $.10 per Mcf. Prices for 1998 and beyond will be determined by
renegotiation. The average price received for the first nine months of 1993 was
$2.50 per Mcf.
Mesa's principal industrial customer of West Panhandle field gas production
is an intrastate pipeline company which serves an electric power generation
facility. In 1990, Mesa entered into a five-year contract with the pipeline to
supply gas to the electric power facility. This contract provides for minimum
annual volumes of 7 Bcf in 1993, 8.4 Bcf in 1994 and 8.4 Bcf in 1995 at fixed
prices per MMBtu of $1.64, $1.71 and $1.79 for the respective years. Mesa has
historically made sales to the pipeline for the electric power customer in
excess of the minimum volumes specified in the contract at prices negotiated
each month. In 1992, Mesa sold 7.5 Bcf to the pipeline for an average price of
$1.52 per Mcf. Sales to the pipeline in the first nine months of 1993 totaled
9.1 Bcf for an average price of $1.59 per Mcf.
Other industrial customers in the Amarillo area purchase natural gas from
Mesa under short to intermediate term contracts. These sales totaled
approximately 5.1 Bcf in 1992 and 3.7 Bcf in the first nine months of 1993. Mesa
intends to continue to seek new customers in the area for additional West
Panhandle field gas production.
GAS BALANCING SALES. The West Panhandle field's current annual production
allowable is approximately 53 Bcf of wet gas production. CIG is entitled to sell
to its customers gas not sold by Mesa, subject to the gas balancing provisions
included in the PAA. To the extent CIG currently takes production in excess of
its 23% share, Mesa retains a right to take more than its 77% share in future
years to balance.
Mesa records 77% of total "B" Contract production as revenues. The
difference between Mesa's 77% entitlement and the amount of production actually
sold by Mesa to its customers is recorded monthly as revenue from the production
and sale of hydrocarbons with corresponding accruals for operating costs,
production taxes, depreciation, depletion and amortization and gas balancing
receivables. At September 30, 1993, a long-term gas balancing receivable
relating to the "B" Contract of $32.4 million was recorded in Mesa's balance
sheet in other assets.
Other Properties
Mesa's other producing areas at December 31, 1992, which together comprised
less than 5% of Mesa's reserves at such date, were the Gulf Coast and the Rocky
Mountain area. Because of the short life and high productivity of these
properties, they accounted for approximately 15% of Mesa's 1992 total oil and
gas production.
Mesa has working interests in a number of offshore blocks on which 3-D
seismic either has been shot and with respect to which Mesa personnel are
currently evaluating reserve potential, or on which Mesa is in the process of
acquiring 3-D seismic to evaluate potential reserve addition opportunities. It
is possible that if
33
<PAGE> 36
reserves are discovered, they can be recovered through existing production
facilities, thus significantly reducing development costs and accelerating the
time at which production status can be realized.
A portion of Mesa's interests in the Hugoton field is held by its working
interest in properties subject to the Mesa Royalty Trust. A portion of Mesa's
working interests in the Gulf Coast properties is subject to the Mesa Offshore
Trust.
In the second quarter of 1993, Mesa entered into two separate agreements to
sell oil and gas properties in the Rocky Mountain and Hugoton regions (see Note
5 to Mesa's Consolidated Financial Statements for the nine months ended
September 30, 1993 included elsewhere in this Prospectus). The first sale,
totaling $6.5 million, closed on April 30, 1993. The second sale, totaling $19
million, closed on June 24, 1993. The proceeds were used to supplement available
cash.
Mesa's non-oil and gas tangible properties consist of certain buildings and
equipment located primarily in Amarillo and Dallas, Texas and certain other
items including automobiles and aircraft. Non-oil and gas tangible properties
comprise less than 5% of Mesa's net property costs.
THE NGV BUSINESS
Background of Mesa's Involvement in the Industry. Mesa believes that the
NGV market will develop and expand significantly in the 1990s, particularly in
light of (i) the provisions of the recently enacted National Energy Policy Act
of 1992, (ii) the provisions of the amendments to the 1990 Federal Clean Air Act
which require the use of alternative fuels by certain motor vehicle fleets,
(iii) the requirements of numerous state and municipal environmental
regulations, (iv) generally increased awareness of the adverse environmental and
pollution effects of crude oil based motor fuels and (v) the development of more
efficient equipment to convert gasoline and diesel burning vehicles to operate
on natural gas.
In September 1991, Mesa purchased a 70% interest in CleanFuels Inc.
("CleanFuels"), a Martinsburg, West Virginia company focused on the development
and sales of vehicle conversion equipment for NGVs and the installation of
vehicle conversion equipment. In March 1992, Mesa established Mesa Environmental
to own its investment in CleanFuels and to expand Mesa's involvement to all
aspects of the emerging NGV industry. Shortly after its inception, Mesa
Environmental purchased the remaining 30% of CleanFuels and relocated the
company to Mesa Environmental's headquarters in Fort Worth, Texas. In November
1992, Mesa Environmental acquired Garretson Equipment Co., Inc. ("Garretson") of
Mt. Pleasant, Iowa, a designer and manufacturer of natural gas and propane fuel
systems for vehicles and stationary engines.
Business Strategy. Mesa Environmental's goal is to become a leading
provider of NGV conversion equipment and fueling services. Mesa Environmental's
present strategy for reaching this goal includes (i) the development,
manufacture and sale of engine-specific, under-the-hood conversion equipment
which meets the most stringent emissions standards; (ii) pursuing opportunities
in selected foreign markets, particularly Mexico, for conversion equipment
sales, fleet conversions and administration of conversion and fueling programs;
and (iii) pursuing developing opportunities in markets for related products such
as fuel tanks, compressor and dispenser systems, as well as expanding the
marketing effort of Garretson products.
As of September 30, 1993, MHLP had invested approximately $12.5 million in
Mesa Environmental (approximately $4 million of which was used to purchase
CleanFuels and Garretson) and expects to continue to fund its overhead and
business development. Mesa Environmental is a start-up business in a newly
developing industry and the ultimate capital investment required to insure its
viability is uncertain. In addition, Mesa cannot predict when, or if, Mesa
Environmental's operations will begin to earn a profit.
RESERVES
Proved reserve estimates for the HCLP Hugoton properties and the West
Panhandle field were prepared in accordance with Commission guidelines by D&M.
The reserve estimates for Mesa's deep Hugoton (non-HCLP), Gulf Coast and Rocky
Mountain properties were prepared by Mesa's engineers, also in accordance with
Commission guidelines. The D&M estimates represent approximately 95% of the
total proved reserves.
34
<PAGE> 37
The summary report prepared by Mesa is filed as an exhibit to the Registration
Statement of which this Prospectus is a part and is incorporated by reference
herein.
The following table summarizes the estimated proved reserves and estimated
future cash flows associated with Mesa's oil and gas properties as of December
31, 1992 (dollar amounts in thousands):
<TABLE>
<S> <C>
Proved reserves:
Natural gas (MMcf)............................................. 1,276,049
Natural gas liquids, oil and condensate (MBbls)................ 87,392
Future cash inflows.............................................. $3,802,614
Operating costs.................................................. (828,505)
Production and ad valorem taxes.................................. (443,294)
Development and abandonment costs................................ (122,860)
Future income taxes.............................................. (302,492)
----------
Future net cash flows.......................................... $2,105,463
----------
----------
Present value of future net cash flows discounted at 10%
("NPV")........................................................ $1,037,181
----------
----------
NPV before income taxes.......................................... $1,167,694
----------
----------
</TABLE>
In accordance with Commission guidelines, future prices for natural gas
were based on market prices as of December 31, 1992 without future escalation
and, where applicable, contract terms (including fixed and determinable price
escalations under existing contracts). Market prices as of December 31, 1992
were used for future sales of oil, condensate and natural gas liquids. Future
operating costs, production and ad valorem taxes and capital costs were based on
current costs as of year-end 1992, with no escalation.
Over 70% of Mesa's equivalent proved reserves at December 31, 1992 are
natural gas. The natural gas prices in effect at December 31, 1992 (having a
weighted average of $1.94 per Mcf) may not be the most appropriate or
representative prices to use for estimating the value of the reserves since such
prices were influenced by the seasonal demand for natural gas. The average price
received by Mesa for sales of natural gas in 1992 was $1.66 per Mcf. Assuming
all other variables used in the calculation of reserve data are held constant,
Mesa estimates that each $.10 change in the average sales price per Mcf for
natural gas production would affect Mesa's estimated future net cash flows and
present value thereof, before income taxes, by $115 million and $54 million,
respectively.
Mesa's internal estimates of proved reserves for the Hugoton and West
Panhandle areas exceed those of D&M by approximately 25%, or about 450 Bcfe. The
difference is primarily attributable to different estimates of the reserves that
will ultimately be recovered as a result of the Hugoton infill drilling program.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting the future rates of production and timing of
development expenditures. Reserve data represent estimates only and should not
be construed as being exact. Moreover, the discounted future net cash flows
should not be construed as the current market value of the proved oil and gas
reserves or the costs that would be incurred to obtain equivalent reserves. A
market value determination would include many additional factors including (i)
anticipated future changes in oil and gas prices, production and development
costs; (ii) an allowance for return on investment; (iii) the value of additional
reserves, not considered proved at present, which may be recovered as a result
of further exploration and development activities; and (iv) other business
risks.
During 1992, Mesa filed Form EIA-23, which includes those reserve estimates
prepared by D&M and Mesa as described above, with the Energy Information
Administration of the Department of Energy ("EIA"). Such reserve estimates did
not vary from those estimates contained herein by more than five percent.
The estimated quantities of proved oil and gas reserves, the standardized
measure of future net cash flows from proved oil and gas reserves, and the
changes in the standardized measure of future net cash flows from proved oil and
gas reserves for each of the three years in the period ended December 31, 1992,
appears in Supplemental Financial Data, which is set forth as part of the
Consolidated Financial Statements of the Company and the related notes thereto
set forth elsewhere in this Prospectus.
35
<PAGE> 38
NATURAL GAS SALES
Mesa sells its natural gas production under both short (spot market) and
long-term gas sales contracts. Substantially all of Mesa's gas sales are made at
market prices, with the exception of West Panhandle field volumes that are sold
to a utility under an arrangement that provided for fixed prices in 1992 and,
beginning in 1993, fixed prices for 70% of those volumes and certain other
volumes sold to industrial customers in the Amarillo area. See
" -- Properties -- West Panhandle Field."
PRODUCTION AND PRICES
Allowable production for Mesa's properties is regulated by various state
agencies. Over 71% of Mesa's 1992 production was natural gas. Due to the
seasonal nature of the demand for natural gas, gas production from Mesa's
properties and sales price varies on a seasonal basis. Production volumes and
prices are generally higher during the first and fourth quarters of each
calendar year.
The following table summarizes Mesa's oil and gas production, average sales
prices and average production costs:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30 YEAR ENDED DECEMBER 31
--------------- ----------------------------------------------
1993 1992 1992 1991 1990 1989 1988
------ ------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Production:
Natural gas (MMcf)................ 58,082 63,254 89,527 108,522 137,333 137,167 116,414
Natural gas liquids (MBbls)....... 3,341 3,453 4,840 4,725 3,753 3,225 3,304
Oil and condensate (MBbls)........ 496 752 984 767 1,480 2,984 2,975
Average price*:
Natural gas (per Mcf)............. $ 1.76 $ 1.59 $ 1.72 $ 1.54 $ 1.61 $ 1.65 $ 1.79
Natural gas liquids (per Bbl)..... 13.06 11.84 12.32 13.07 14.57 9.71 9.28
Oil and condensate (per Bbl)...... 17.49 18.83 18.86 20.23 22.28 17.23 14.56
Average production cost per Mcfe.... $ .66 $ .50 $ .50 $ .47 $ .51 $ .53 $ .50
</TABLE>
- ---------------
* The average natural gas price for the nine months ended September 30, 1993 and
1992 and the years ended December 31, 1992, 1991 and 1990 reflects $(.01) per
Mcf, $.10 per Mcf, $.06 per Mcf, $.08 per Mcf and $(.01) per Mcf,
respectively, related to hedges of natural gas production in the natural gas
futures market.
PRODUCING ACREAGE AND WELLS; UNDEVELOPED ACREAGE
Mesa's ownership of oil and gas acreage held by production, producing wells
and undeveloped oil and gas acreage as of September 30, 1993 is set forth in the
table below.
<TABLE>
<CAPTION>
UNDEVELOPED
PRODUCING ACREAGE PRODUCING WELLS ACREAGE
------------------- ---------------- -----------------
GROSS NET GROSS NET GROSS NET
------- ------- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
ONSHORE U.S.
Kansas................. 258,994 231,239 1,294 984.1 4,800 4,800
North Dakota........... 5,760 4,258 10 3.5 3,771 2,518
Texas.................. 241,353 191,044 587 450.1 5,210 4,593
Wyoming................ 11,715 4,603 6 1.3 17,498 12,297
Other.................. 4,606 2,847 8 1.3 35,373 24,214
------- ------- ----- ------ ------ ------
Total Onshore....... 522,428 433,991 1,905 1,440.3 66,652 48,422
------- ------- ----- ------ ------ ------
OFFSHORE U.S.
Louisiana.............. 88,274 46,022 77 32.5 0 0
Texas.................. 73,808 15,233 46 7.6 0 0
------- ------- ----- ------ ------ ------
Total Offshore...... 162,082 61,255 123 40.1 66,652 48,422
------- ------- ----- ------ ------ ------
Grand Tota1............ 684,510 495,246 2,028 1,480.4 66,652 48,422
------- ------- ----- ------ ------ ------
------- ------- ----- ------ ------ ------
</TABLE>
36
<PAGE> 39
The total onshore and offshore producing wells shown above consist of 1,966
gross (1,461.9 net) gas wells and 62 gross (18.4 net) oil wells in the United
States.
In June 1992, Mesa sold its 12.5 percent gross overriding royalty interest
in approximately 290,000 undeveloped and 234,000 producing acres in Canada. At
September 30, 1993, Mesa also owned royalty interests in approximately 41,743
non-producing and 77,066 producing net acres of minerals in the United States.
DRILLING ACTIVITIES
The following table sets forth Mesa's drilling activity for each of the six
years in the six year period ended December 31, 1993, including the number of
net exploratory and development productive and dry wells drilled. At December
31, 1993, Mesa was not participating in the drilling of any wells.
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989 1988
------------ ------------ ------------ ------------- ------------ ------------
GROSS NET GROSS NET GROSS NET GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- ---- ----- ----- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EXPLORATORY WELLS
Productive..... -- -- 5 4.1 6 4.7 -- -- 5 1.6 -- --
Dry............ 1 1.0 1 .4 1 .2 5 3.1 5 2.6 -- --
DEVELOPMENT WELLS
Productive..... 43 28.9 22 16.5 26 10.9 146 120.8 151 88.6 133 91.9
Dry............ -- -- -- -- -- -- -- -- 2 .2 3 .3
----- ---- ----- ---- ----- ---- ----- ----- ----- ---- ----- ----
Total............ 44 29.9 28 21.0 33 15.8(1) 151 123.9(1) 163 93.0 136 92.2
----- ---- ----- ---- ----- ---- ----- ----- ----- ---- ----- ----
----- ---- ----- ---- ----- ---- ----- ----- ----- ---- ----- ----
</TABLE>
- ---------------
(1) The decrease in drilling activity after 1990 reflects the completion of
Mesa's infill drilling program in the Hugoton field.
INVESTMENT ACTIVITIES
Mesa invests from time to time in marketable equity and other securities of
other companies and in commodity and futures contracts, primarily related to
crude oil and natural gas. Mesa also enters into natural gas futures contracts
as a hedge against natural gas price fluctuations.
OPERATING HAZARDS AND UNINSURED RISKS
Mesa's oil and gas activities are subject to all of the risks normally
incident to exploration for and production of oil and gas, including blowouts,
cratering and fires, each of which could result in damage to life and property.
Offshore operations are subject to a variety of operating risks, such as
hurricanes and other adverse weather conditions and lack of access to existing
pipelines or other means of transporting production. Furthermore, offshore oil
and gas operations are subject to extensive governmental regulations, including
certain regulations that may, in certain circumstances, impose absolute
liability for pollution damages, and to interruption or termination by
governmental authorities based on environmental or other considerations. In
accordance with customary industry practices, Mesa carries insurance against
some, but not all, of these risks. Losses and liabilities resulting from such
events would reduce revenues and increase costs to Mesa to the extent not
covered by insurance.
COMPETITION
The oil and gas business is highly competitive in the search for,
acquisition of and sales of oil and gas. Mesa's competitors in these endeavors
include the major oil and gas companies, independent oil and gas concerns, and
individual producers and operators, as well as major pipeline companies, many of
which have financial resources greatly in excess of those of Mesa. Mesa believes
that its competitive position is affected by, among other things, price,
contract terms and quality of service.
Mesa is one of the largest owners of natural gas reserves in the United
States. Mesa's major gas sales contracts (See "Business-Properties") allow
production not sold to the contract purchaser to be sold to other
37
<PAGE> 40
purchasers in the spot market. Production from Mesa's properties has access to a
substantial portion of the major metropolitan markets in the United States
through numerous pipelines and other purchasers. Mesa is not dependent upon any
single purchaser or small group of purchasers.
Mesa believes that its competitive position is enhanced by its substantial
long life reserve holdings and related deliverabilities, its flexibility to sell
such reserves in a diverse number of markets at competitive prices and its
ability to produce its reserves at a low cost.
LEGAL PROCEEDINGS
Unocal Lawsuit
For a discussion of the Unocal lawsuit and the pending settlement thereof,
see "Unocal Litigation and Settlement" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Preference Unitholders
The Company and Mr. Pickens are defendants in lawsuits related to the
Corporate Conversion, styled Odmark, et al. v. Mesa Limited Partnership, et al.,
Gerardo, et al. v. Mesa Limited Partnership, et al., and McBride Trust, et al.
v. Mesa Limited Partnership, et al., pending in the U.S. District Court for the
Northern District of Texas-Dallas Division. The first two lawsuits have been
consolidated and certified as a class action and the third is an individual
action by or on behalf of former holders of preference units of the Partnership.
All three allege substantially the same claims under the federal securities laws
and common law. Plaintiffs allege, among other things, that (i) the proxy
materials delivered to unitholders in connection with the Corporate Conversion
contained material misstatements and omissions, (ii) the general partners of the
Partnership breached fiduciary duties to the preference unitholders in
structuring the transaction and allocating the common stock of the Company and
(iii) the Corporate Conversion was implemented in breach of the partnership
agreement of the Partnership because the defendants allegedly did not obtain the
requisite opinion of independent counsel regarding tax effects of the
transaction. The Company and the other defendants have denied the allegations
and believe they are without merit. Plaintiffs seek an order requiring payment
to the former preference unitholders of $164 million in respect of the
preferential distribution rights of their units, a declaration declaring the
Corporate Conversion void and rescinding it, unspecified compensatory and
punitive damages and other relief. In August 1993, the Company and Mr. Pickens
filed a motion for summary judgment in the individual action, and such motion is
awaiting decision by the Court. Discovery has commenced and is proceeding in the
class action.
The Company and the other defendants have denied the plaintiffs'
allegations. Several lawsuits making allegations substantially the same as those
referenced in clauses (i) and (ii) above were filed by preference unitholders in
Delaware Chancery Court in 1991 following the proposal of the Corporate
Conversion. In December 1991, the Chancery Court denied the Delaware plaintiffs'
request for a preliminary injunction to enjoin consummation of the Corporate
Conversion. In August 1992, the Chancery Court granted a motion by such
plaintiffs to dismiss the Delaware lawsuits and awarded attorneys' fees to
plaintiffs' counsel.
Masterson Lawsuit
In 1986, MOLP acquired rights in certain properties located in the West
Panhandle field of Texas when it acquired the assets of Pioneer Corporation. In
particular, MOLP acquired an interest in gas production from an oil and gas
lease (the "Gas Lease") dated April 30, 1955, between R. B. Masterson, et al.,
as lessor, and CIG, as lessee.
In February 1992, the current lessors of the Gas Lease sued CIG in Federal
District Court in Amarillo, Texas, claiming that CIG had underpaid royalties due
under the Gas Lease. The plaintiffs alleged that the underpayment was the result
of CIG's using an improper gas sales price upon which to calculate royalties,
and that the proper price should have been determined pursuant to a pricing
clause in a July 1, 1967 amendment to the Gas Lease. The complaint did not
specify the damages sought and appeared to relate only to royalties for
38
<PAGE> 41
periods after October 1, 1988. The plaintiffs also sought a declaration by the
court as to the proper price to be used for calculating future royalties.
In August 1992, CIG filed a third party complaint against MOLP for any such
royalty underpayments which may be allocable to MOLP's interest in the Gas
Lease.
On December 22, 1992, the plaintiffs filed a Second Amended Complaint,
including both CIG and MOLP as defendants, again alleging that the use of an
erroneous price in calculating royalties resulted in underpayments of royalties,
but for the first time alleging that the underpayments amounted to approximately
$250 million (including interest) and covered the period July 1, 1967 to
present. MOLP was subsequently dismissed by the plaintiffs for procedural
reasons, but remains in the case as a defendant in CIG's third party complaint.
The plaintiffs have recently filed court papers alleging royalty
underpayments of approximately $450 million (including interest at 10%) covering
the period July 1, 1967 to the present. In addition, the plaintiffs seek
exemplary damages. Management believes that MOLP has several defenses to
plaintiffs' claims, including (i) that the royalties for all periods were
properly computed and paid and (ii) that plaintiffs' claims with respect to all
periods prior to October 1, 1988 (which appear to account for the large majority
of the claims) were explicitly released by a 1988 written agreement among
plaintiffs, CIG and MOLP and are further barred by the statute of limitations.
If the plaintiffs were to prevail, the manner in which any resulting liability
would be shared between MOLP and CIG would depend on the resolution of issues
relating to the contractual agreements and the relationship between MOLP, CIG
and the lessors during the period in question. No trial date has been set.
REGULATION AND PRICES
Mesa's operations are affected from time to time in varying degrees by
political developments and federal, state and local laws and regulations. In
particular, oil and gas production operations and economics are affected by
price control, tax, conservation, environmental and other laws relating to the
petroleum industry, by changes in such laws and by constantly changing
administrative regulations.
NATURAL GAS REGULATIONS
Until January 1, 1993, Mesa was subject to direct federal regulation by the
FERC with respect to certain of its sales of natural gas. The principal impact
of these regulations historically was the regulation of prices received for
natural gas produced and sold for resale in interstate commerce in the United
States. In addition, the approval of the FERC was required for both the
commencement and the abandonment of certain interstate gas sales.
The transportation and the sale for resale of natural gas in interstate
commerce have been regulated pursuant to the Natural Gas Act of 1938 (the
"NGA"). However, beginning in late 1978, the maximum selling prices of certain
categories of gas sold by entities such as Mesa, whether sold in interstate or
intrastate commerce, were regulated as "first sales" pursuant to the Natural Gas
Policy Act of 1978 (the "NGPA"). Both of these statutes are administered by the
FERC and have had direct application to producer sales like those made by Mesa.
On July 26, 1989, the Natural Gas Wellhead Decontrol Act of 1989 (the "Decontrol
Act") was enacted. The Decontrol Act removed, as of January 1, 1993, all
remaining federal price controls from natural gas sold in "first sales" and
eliminated any requirement to secure FERC approval for the commencement and
abandonment of interstate gas sales.
Historically, interstate pipeline companies have generally acted as
wholesale merchants by purchasing natural gas from producers and reselling the
gas to other interstate pipelines, local distribution companies and large
end-users. Under the NGA and NGPA, the transportation and sale of natural gas by
interstate pipeline companies have been and continue to be subject to extensive
regulation, and the construction of new pipelines, the extension of existing
pipelines and the commencement and cessation of sales or transportation services
by pipeline companies generally require prior FERC authorization.
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<PAGE> 42
Commencing in 1985, the FERC promulgated a series of orders and regulations
adopting changes that significantly affect the transportation and marketing of
natural gas. These changes were intended to foster competition in the natural
gas industry by, among other things, inducing or mandating that interstate
pipeline companies provide nondiscriminatory transportation services to
producers, distributors and other shippers ("open access" requirements). These
changes commenced with FERC Order 436 and continued with FERC Orders 500 and
500-I.
In October 1985, FERC Order 436 allowed pipelines to apply for one-time
authorization to provide open-access transportation to anyone seeking such
service. FERC's stated goal by such action was to create and enhance competition
in natural gas markets by requiring that access to the interstate transportation
facilities necessary to reach all markets be provided on an open and
nondiscriminatory basis. Order 436 was vacated by the courts and replaced by an
interim rule, Order 500, which readopted the majority of Order 436 with changes
to respond to the problems which the court found with Order 436. One principal
problem was the resolution of liabilities incurred by open access pipelines
under existing take or pay contracts with their historic producer suppliers.
Among other things, Order 500 provided to the interstate pipelines a crediting
mechanism to assist them in dealing with these take or pay obligations. The
final rule was issued as Order 500-H on December 13, 1989. Order 500-H was
generally upheld by the United States Court of Appeals on August 24, 1990,
although certain portions were remanded to the FERC for further consideration.
These remaining issues, concerning pregranted abandonment and the use of certain
types of passthrough mechanisms by interstate pipelines to recover take-or-pay
costs, are currently being addressed by the FERC in separate proceedings and
will be subject to further appellate review. Mesa cannot predict what further
action the FERC or the federal courts may take regarding these remaining issues
or what impact, if any, such action might have on Mesa's business.
On April 8, 1992, the FERC issued Order 636 requiring further restructuring
of the sales and transportation services provided by interstate pipeline
companies. Order 636 amended certain existing regulations and adopted certain
new regulations governing all interstate pipelines that perform open access
transportation. The FERC considered the changes necessary to improve the
competitive structure of the interstate natural gas pipeline industry and to
complete the creation of a regulatory framework putting gas sellers into more
direct contractual relations with gas buyers than has historically been the
case. Order 636 reflects the FERC's finding that under the preexisting
regulatory structure, such interstate pipelines and other gas merchants,
including producers, do not compete on an equal basis. The FERC asserts that
Order 636 is designed to equalize that marketplace. This equalization process is
being implemented through negotiated settlements in individual pipeline service
restructuring proceedings, designed specifically to "unbundle" those services
(e.g. transportation, sales and storage) provided by many interstate pipelines
so that producers of natural gas may secure services from the most economical
source, whether interstate pipelines or other parties. In many instances, the
result of the FERC initiatives may be to substantially reduce or bring to an end
the interstate pipelines' traditional role as wholesalers of natural gas in
favor of providing only natural gas storage and transportation services. These
restructuring proceedings resulting from Order 636 have continued throughout
1993, with the vast majority of pipelines having already received FERC orders
approving their compliance filings, subject to various conditions. Thus, the
current 1993-94 winter heating season is the first such period during which the
FERC's Order 636 procedures will be operative.
Although Order 636 does not regulate gas producers such as Mesa, the FERC
has stated that Order 636 is intended to foster increased competition within all
phases of the natural gas industry. It is unclear what impact, if any, increased
competition within the natural gas industry under Order 636 will have on Mesa as
a producer. Furthermore, although the FERC earlier denied a stay of the
effectiveness of Order 636, thus assuring that its requirements will be
implemented, because the requirements of Order 636 are being implemented through
individual restructuring proceedings on a pipeline-by-pipeline basis, it is
impossible to predict what effect Order 636 will have on Mesa and its gas
marketing efforts. In addition, in response to numerous requests that the FERC
grant rehearing of Order 636, on August 3, 1992 and November 27, 1992 the FERC
issued its Orders 636-A and 636-B, which largely confirmed the provisions and
goals previously set forth in Order 636, and otherwise made relatively modest
changes to its prior rule. Numerous petitions seeking judicial review of Orders
636, 636-A and 636-B have been filed. In addition, numerous petitions have been
40
<PAGE> 43
filed seeking judicial review of FERC's actions in approving, modifying or
denying various proposals put forth in individual pipeline restructuring
proceedings. Because the restructuring requirements that have emerged to date in
the individual pipeline proceedings are in some instances different from those
of Orders 636, 636-A and 636-B as originally promulgated, it is not possible to
predict what effect, if any, the final rules resulting from these many orders
will have on Mesa, although open access transportation as envisioned by these
orders may further enhance Mesa's ability to market gas to a wider variety of
markets than would otherwise be the case.
STATE AND OTHER REGULATION
All of the jurisdictions in which Mesa owns producing oil and gas
properties have statutory provisions regulating the production and sale of crude
oil and natural gas. The regulations often require permits for the drilling of
wells but extend also to the spacing of wells, the prevention of waste of oil
and gas resources, the rate of production, prevention and clean-up of pollution
and other matters. In Texas, the Railroad Commission regulates the amount of oil
and gas produced within the state by assigning to each well or proration unit an
allowable rate of production. Certain other jurisdictions, including Kansas,
impose similar restrictions. See "Business -- Properties" for a discussion of
recent changes to Mesa's allowables in the Hugoton field.
Certain producing states, including Texas, Louisiana and Oklahoma, have
recently adopted or considered adopting measures that alter the methods
previously used to prorate gas production from wells located in these states.
For example, the new Texas rules provide for reliance on information filed
monthly by well operators, in addition to historical production data for the
well during comparable past periods, to arrive at an allowable. This is in
contrast to historic reliance on forecasts of upcoming takes filed monthly by
purchasers of natural gas in formulating allowables, a procedure which resulted
in substantial excess allowables over volumes actually produced. Mesa cannot
predict what ultimate effect the new prorationing regulations will have on its
production of gas or whether other states will adopt similar or other gas
prorationing procedures.
On October 24, 1992, comprehensive national energy legislation was enacted
which focused on electrical power, renewable energy sources and conservation.
The legislation guarantees equal treatment of domestic and imported natural gas
supplies, mandates expanded use of natural gas and other alternative fuels
vehicles, funds natural gas research and development, permits continued offshore
drilling and use of natural gas feedstock for electric generation, and adopts
various conservation measures designed to reduce consumption of imported oil.
Mesa cannot predict what effect, if any, this legislation will have on its
business.
FEDERAL ROYALTY MATTERS
By a letter dated May 3, 1993 directed to thousands of producers holding
interests in federal leases, the Interior Department announced its
interpretation of existing federal leases to require the payment of royalties on
past natural gas contract settlements which were entered into in the 1980s and
1990s to resolve, among other things, take-or-pay and minimum take claims by
producers against pipelines and other buyers. The Interior Department's letter
set forth various theories of liability, all founded on the Department's
interpretation of the term "gross proceeds" as used in federal leases and
pertinent federal regulations. In an effort to ascertain the amount of such
potential royalties, the Interior Department sent a letter to producers on June
18, 1993 requiring producers to provide all data on all natural gas contract
settlements, regardless of whether gas produced from federal leases was involved
in the settlement. Mesa received a copy of this information demand letter. In
response to the Interior Department's action, in July of 1993 various industry
associations and others filed suit in the United States District Court for the
Northern District of West Virginia seeking an injunction to prevent the
collection of royalties on natural gas contract settlement amounts under the
Interior Department's theories. The lawsuit has recently been transferred to the
United States District Court in Washington, D.C. Because this lawsuit is pending
and because of the complex nature of the calculations necessary to determine
potential additional royalty liability under the Interior Department's theories,
it is impossible to predict what, if any, additional or different royalty
obligation the Interior Department may assert with respect to any of Mesa's
prior natural gas contract settlements. Likewise, Mesa cannot predict what
effect, if any, the Interior Department's claims will have on it.
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<PAGE> 44
OTHER
Various federal, state and local laws and regulations regulating the
discharge of materials into the environment or otherwise specifically relating
to the protection of the environment may directly or indirectly affect Mesa's
operations. Mesa is not involved in any administrative or judicial proceedings
arising under federal, state or local environment protection laws and
regulations which would have a material adverse impact on Mesa's financial
position or results of operations.
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<PAGE> 45
MANAGEMENT
DIRECTORS AND OFFICERS
The following table sets forth the name, age and five-year employment
history of each director and officer of the Company.
<TABLE>
<CAPTION>
NAME AND AGE BUSINESS EXPERIENCE OVER PAST FIVE YEARS
- ------------------------------ -------------------------------------------------------------
<S> <C>
Boone Pickens, age 65......... January 1992-Present, Chairman of the Board of Directors and
Chief Executive Officer of the Company; October 1985-December
1991, General Partner of the Partnership; 1964-January
1987, Chairman of the Board of Directors, President and
founder of Original Mesa.
Paul W. Cain, age 55.......... January 1992-Present, Director, President and Chief Operating
Officer of the Company; August 1986-December 1991, President
and Chief Operating Officer of the Partnership; January
1986-August 1986, Executive Vice President of the
Partnership; Director of Bicoastal.
John S. Herrington, age 54.... January 1992-Present, Director of the Company; December 1991-
Present, personal investments and real estate activities;
May 1990-November 1991, Chairman of the Board of Harcourt
Brace Jovanovich, Inc. (publishing); May 1989-May 1990,
Director of Harcourt Brace Jovanovich, Inc.; February
1985-January 1989, Secretary of Energy of the United
States.
Wales H. Madden, Jr., age 66.. January 1992-Present, Director of the Company; December 1985-
December 1991, Member of the Advisory Committee of the
Partnership; 1964-January 1987, Director of Original Mesa;
Self-employed attorney and businessman for more than the
last five years; Director of Boatmen's First National Bank
of Amarillo and Uniform Printing and Supply of Boston.
Fayez S. Sarofim, age 65...... January 1992-Present, Director of the Company; Chairman of
the Board and President of Fayez Sarofim & Co. (investment
advisor) for more than the last five years; Director of
Teledyne, Inc., Unitrin, Inc., Argonaut Group, Inc. and
Imperial Holly Corporation.
Robert L. Stillwell, age 57... January 1992-Present, Director of the Company; December 1985-
December 1991, Member of the Advisory Committee of the
Partnership; 1969-January 1987, Director of Original Mesa;
Partner in the law firm of Baker & Botts, L.L.P., Houston,
Texas, for more than the last five years.
J. R. Walsh, Jr., age 69...... January 1992-Present, Director of the Company; December 1985-
December 1991, Member of the Advisory Committee of the
Partnership; 1982-January 1987, Director of Original Mesa;
President and Chairman of the Board of United Mud Service
Company (oil and gas service company) for more than the
last five years.
Dennis E. Fagerstone, age January 1992-Present, Vice President-Exploration and
45.......................... Production of the Company; May 1991-December 1991, Vice
President-Exploration and Production of the Partnership;
June 1988-May 1991, Vice President-Operations of the
Partnership; January 1986-June 1988, Manager-Operations of
the Partnership.
S. Leonard Hruzek, Jr., age January 1992-Present, Vice President-Marketing and Land of
39.......................... the Company; May 1991-December 1991, Vice President-Marketing
of the Partnership; February 1990-May 1991, Vice President
and Controller of the Partnership; June 1987-February 1990,
Controller of the Partnership.
</TABLE>
43
<PAGE> 46
<TABLE>
<CAPTION>
NAME AND AGE BUSINESS EXPERIENCE OVER PAST FIVE YEARS
- -------------------------------- -------------------------------------------------------------
<S> <C>
Andrew J. Littlefair, age 33.... January 1992-Present, Vice President-Public Affairs of the
Company; August 1987-December 1991, Assistant to the General
Partner of the Partnership; January 1984-August 1987, Staff
Assistant to the President of the United States,
Washington, D.C.
Charles L. Carpenter, age 55.... April 1992-Present, General Counsel and Secretary of the
Company; October 1988-March 1992, Chief Counsel-Marketing of
Oryx Energy; June 1983-October 1988, Chief Counsel-General
Legal Services of Oryx Energy.
William D. Ballew, age 35....... January 1992-Present, Controller of the Company; May 1991-
December 1991, Controller of the Partnership; January
1991-May 1991, Manager-Accounting of the Partnership;
December 1988-December 1990, Assistant to the Controller of
the Partnership; July 1986-December 1988, Audit Manager for
Price Waterhouse, Dallas, Texas.
</TABLE>
Each director of the Company who was not also an employee of the Company or
its subsidiaries received compensation of $20,000 in 1993. Directors who are
also employees of the Company receive no remuneration for their services as
Directors.
The Board of Directors of the Company held five meetings in 1993, each of
which was attended by all members. The Board of Directors has the following
standing committees: the Audit Committee, the Compensation Committee and the
Stock Option Committee. It does not have a Nominating Committee.
The Audit Committee is composed of Messrs. Herrington, Madden and Walsh.
Its primary functions are (i) the recommendation of independent public
accountants, (ii) the review of the independence of the independent public
accountants, audit engagement and other professional services of the independent
public accountants, and (iii) provision for the availability to the independent
public accountants of all aspects of the Company's accounting practices and
procedures. The Audit Committee held two meetings in 1993.
The Compensation Committee is composed of Messrs. Sarofim, Stillwell and
Walsh. The Compensation Committee held three meetings in 1993. The Stock Option
Committee, which administers the 1991 Stock Option Plan (the "Option Plan"), is
also composed of Messrs. Sarofim, Stillwell and Walsh. The Stock Option
Committee held three meetings in 1993.
In September 1990, the Company and Mr. Pickens entered into a consent
decree to settle allegations by the Commission that the Company and Mr. Pickens
had violated Sections 17(a)(2) and 17(a)(3) of the Securities Act in connection
with a proposal made by the Company in February 1988 to acquire Homestake Mining
Company. Under the terms of the settlement, without admitting or denying any of
the Commission's allegations, the Company and Mr. Pickens consented to the entry
of a judgment enjoining them from future violations of such sections. The
Commission's allegations related to the Company's February 1988 press release
announcing its offer to acquire Homestake and its subsequent sales of Homestake
shares. The Company deposited $2.3 million in a fund for disbursement to other
persons who purchased Homestake shares at the time of the 1988 offer.
LIMITATION OF DIRECTOR LIABILITY
The Articles of Incorporation of the Company contain a provision that
limits the liability of the Company's directors as permitted by the Texas
Business Corporation Act. The provision eliminates the personal liability of
directors to the Company and its shareholders may be unable to recover monetary
damages against directors for negligent or grossly negligent acts or omissions
in violation of their duty of care. The provision does not change the liability
of a director for breach of his duty of loyalty to the Company or to
shareholders, acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, an act or omission for which the
liability of a director is expressly provided for by an applicable statute, or
in respect of any transaction from which a director received an improper
personal benefit.
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<PAGE> 47
Pursuant to the Articles of Incorporation, the liability of directors will be
further limited or eliminated without action by shareholders if Texas law is
amended to further limit or eliminate the personal liability of directors.
INDEMNIFICATION ARRANGEMENTS
The Company's Bylaws provide for the indemnification of its executive
officers and directors, and the advancement to them of expenses in connection
with proceedings and claims, to the fullest extent permitted by the Texas
Business Corporation Act. The Company has also entered into indemnification
agreements with its executive officers and directors that contractually provide
for indemnification and expense advancement and include related provisions meant
to facilitate the indemnitees' receipt of such benefits. In addition, the
Company purchased customary directors' and officers' liability insurance
policies for its directors and officers. The Bylaws and agreements with
directors and officers also provide for indemnification for amounts (i) in
respect of the deductibles for such insurance policies, (ii) that exceed the
liability limits of such insurance policies and (iii) that would have been
covered by prior insurance policies of the Company or its predecessors. Such
indemnification may be made even though directors and officers would not
otherwise be entitled to indemnification under other provisions of the Bylaws or
such agreements.
BTC PARTNERS
The Company has entered into an agreement with BTC Partners, Inc. ("BTC"),
a Delaware corporation, pursuant to which BTC provides certain financial and
advisory services to the Company. BTC regularly functions as part of Mesa's
management team with respect to financial and other matters. Pursuant to the
agreement, BTC receives an annual retainer and may, in the discretion of the
Company, be paid additional fees for services it renders in connection with
financing transactions, debt restructuring activities, acquisitions or
dispositions of properties or assets and other transactions with respect to
which BTC assists the Company. Such amounts are payable in respect of BTC's
services to the Company in evaluating, negotiating and implementing such
transactions. The agreement also provides that the Company will provide BTC
certain other benefits and support services. The agreement may be terminated at
any time by either the Company or BTC. Employees of BTC devote a substantial
portion of their time to the affairs of the Company, but the arrangement with
BTC allows BTC and its employees to engage in unrelated business activities. The
controlling stockholder of BTC is Sidney Tassin.
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<PAGE> 48
EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The table set forth below contains certain information regarding
compensation earned by, awarded to, or paid to the Chief Executive Officer and
the other four most highly compensated executive officers of Mesa for services
rendered to Mesa during the years 1991-1993.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION OPTIONS/SARS
-------------------------------------- (NO. OF
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITIONS YEAR SALARY BONUS COMPENSATION SHARES) COMPENSATION(5)
- ---------------------------------------- ---- -------- -------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Boone Pickens........................... 1993 $675,000 $ 0 --(4) 275,000 $ 114,750(6)
Chairman of the 1992 960,000 0(2) -- 800,000 1,047,707(7)
Board of Directors 1991 --(1) --(3) -- 0 --(17)
and Chief Executive Officer
Paul W. Cain............................ 1993 400,020 225,000 --(4) 100,000 106,253(8)
President and Chief 1992 400,020 0(2) -- 150,000 273,040(9)
Operating Officer 1991 455,748 200,000 -- 0 --(17)
Dennis E. Fagerstone.................... 1993 199,980 75,000 --(4) 10,000 46,747(10)
Vice President -- Exploration 1992 199,980 106,323(2) -- 50,000 72,740(11)
and Production 1991 170,225 179,442 -- 0 --(17)
S. Leonard Hruzek, Jr................... 1993 150,000 50,000 --(4) 0 34,000(12)
Vice President-- Marketing 1992 150,000 99,089(2) -- 40,000 58,892(13)
and Land 1991 135,245 131,141 -- 0 --(17)
Andrew J. Littlefair.................... 1993 115,980 75,000 --(4) 25,000 32,467(14)
Vice President -- Public Affairs 1992 109,980 92,330(2) -- 30,000 47,583(15)
1991(16) -- -- -- -- --(17)
</TABLE>
- ---------------
(1) As General Partner of the Partnership, Mr. Pickens was not entitled to an
annual salary. The Partnership Agreement of the Partnership provided that
the General Partner was entitled to receive a management fee in an
aggregate amount equal to 1% of the cash distributions to holders of units
of the Partnership, but not to exceed 1% of the annual cash distributions
per common unit multiplied by 90,000,000. No distributions on the common
units were made in 1991. Accordingly, the General Partner did not receive a
management fee for 1991. The Partnership Agreement also provided that the
General Partner was entitled to receive an acquisition fee, payable in
cash, in connection with the acquisition of certain properties and assets
by the Partnership and a securities gain fee on certain gains realized by
the Partnership on certain investments, including the purchase and sale of
marketable securities and futures contracts. The General Partner received a
fee of $373,853 in 1991.
(2) Bonuses paid to the executive officers of Mesa in 1992 include bonus
payments with respect to performance in 1992 as well as the unpaid portion
of deferred bonuses awarded in 1990 and 1991. The following amounts were
paid to the executive officers of Mesa for services rendered during 1992:
$0 to Mr. Pickens; $0 to Mr. Cain; $28,000 to Mr. Fagerstone; $25,000 to
Mr. Hruzek; and $32,000 to Mr. Littlefair. The balance of the 1992 Bonus
column amounts represent the acceleration of the deferred portion of
bonuses for prior years that were paid to each individual in the above
table in connection with the cancellation of employee life insurance
policies on July 1, 1992 (see discussion under "Bonus Plan" and "Key
Employee Life Insurance" below.)
(3) Mr. Pickens did not participate in Mesa's bonus plan (see separate
discussion below under "Bonus Plan") while serving as General Partner of
the Partnership.
(4) Apart from the compensation set forth in the summary compensation table and
under the plans and pursuant to the transactions described below, other
compensation paid for services during the year ended December 31, 1993, to
each individual named in the summary compensation table aggregated less
than
46
<PAGE> 49
10% of the total salary and bonus reported for such individual in the
summary compensation table, or $50,000, if lower.
(5) Except as reflected in other notes, "All Other Compensation" consists
principally of three items. First, Mesa maintains an Employees Premium Plan
and a Profit Sharing Plan, both of which are retirement plans (the
"Retirement Plans"), for all employees (see separate discussion below).
Employer contributions to these Retirement Plans are limited by the
Internal Revenue Code (the "Code") to a total of $30,000 per year. Mesa
contributed 17% of each employee's total 1993 compensation to the
Retirement Plans. Second, to the extent that 17% of an employee's total
compensation exceeded $30,000 (all employees with total compensation in
excess of $176,470), Mesa, as a matter of policy, paid the excess amount in
cash to such employee. Third, prior to July 1, 1992, Mesa maintained a key
employee life insurance program (see separate discussion below) for each
executive officer and certain other key employees for which Mesa paid the
majority of the premiums.
(6) Includes the following: a $30,000 Retirement Plans contribution; an $84,750
payment for a Retirement Plans contribution in excess of the Code
contribution limitation as described in Note 5 above.
(7) Includes the following: $114,244 of life insurance premiums; a $30,000
Retirement Plans contribution; a $133,200 payment for a Retirement Plans
contribution in excess of the Code contribution limitation as described in
Note 5 above. Also includes cancellation of the previous deferred
compensation plan for which $3,590,345 had been previously expensed and
accrued and which was replaced by a split-dollar life insurance program
that was funded in 1992 at a premium cost of $4,360,608. The net amount
attributable to 1992 is reflected in the summary compensation table.
(8) Includes the following: a $30,000 Retirement Plans contribution; a $76,253
payment for a Retirement Plans contribution in excess of the Code
contribution limitation as described in Note 5 above.
(9) Includes the following: $28,266 of life insurance premiums; a $30,000
Retirement Plans contribution; a $38,003 payment for a Retirement Plans
contribution in excess of the Code contribution limitation as described in
Note 5 above. Also includes cancellation of the previous deferred
compensation plan for which $323,229 had been previously expensed and
accrued and which was replaced by a split-dollar life insurance program
that was funded in 1992 at a premium cost of $500,000. The net amount
attributable to 1992 is reflected in the summary compensation table.
(10) Includes the following: a $30,000 Retirement Plans contribution; a $16,747
payment for a Retirement Plans contribution in excess of the Code
contribution limitation as described in Note 5 above.
(11) Includes the following: $6,840 of life insurance premiums; a $30,000
Retirement Plans contribution; a $35,900 payment for a Retirement Plans
contribution in excess of the Code contribution limitation as described in
Note 5 above.
(12) Includes the following: a $30,000 Retirement Plans contribution; a $4,000
payment for a Retirement Plans contribution in excess of the Code
contribution limitation as described in Note 5 above.
(13) Includes the following: $3,280 of life insurance premiums; a $30,000
Retirement Plans contribution; a $25,612 payment for a Retirement Plans
contribution in excess of the Code contribution limitation as described in
Note 5 above.
(14) Includes the following: a $30,000 Retirement Plans contribution; a $2,467
payment for a Retirement Plans contribution in excess of the Code
contribution limitation as described in Note 5 above.
(15) Includes the following: $2,187 of life insurance premiums; a $30,000
Retirement Plans contribution; a $15,396 payment for a Retirement Plans
contribution in excess of the Code contribution limitation as described in
Note 5 above.
(16) Mr. Littlefair was not an officer of Mesa in 1991.
(17) Other compensation amounts are not required to be reported for fiscal years
ending before December 15, 1992.
47
<PAGE> 50
BONUS PLAN
The Company has a bonus plan (the "Bonus Plan") under which it may award
bonuses to employees for any calendar year. The amount of the awards to be made
from the Bonus Plan is within the discretion of the Compensation Committee. The
awards are determined by reference to achievement of certain established
objectives by such individuals for the Bonus Plan year, although awards may be
made even if all such objectives are not fully achieved.
Awards to employees other than officers and certain managers generally vest
and are paid in three annual installments. Participants' interests in the awards
vest on December 31 of each year and awards are generally paid near year-end or
in the first quarter of the following year. Deferred bonus awards are deemed
invested in a money market account earning simple interest. In the event of an
offer to acquire all of the business and assets of the Company (or any other
actual change in the control or management of the Company) that is not
previously approved or authorized by the Board of Directors, all unpaid bonus
award installments would be automatically accelerated and paid in full without
regard to the payment schedule provided for in the Bonus Plan.
In prior years, Bonus Plan awards to officers generally vested and were
paid in three installments. However, on July 1, 1992, in conjunction with the
cancellation of the key employee life insurance policies for certain of its
officers and other employees, the Company accelerated the unpaid portion of
bonuses awarded in 1990 and 1991 to such officers and employees (see discussion
under "Key Employee Life Insurance" below). In addition, bonuses for performance
in 1993 were paid to the officers in a lump sum payment in November 1993 as
reflected in the summary compensation table.
KEY EMPLOYEE LIFE INSURANCE
The Company has in the past maintained an insurance program for the benefit
of its officers and certain other key employees. The Company paid the major
portion of insurance premiums on policies covering the lives of such persons.
Death benefits were payable to the participant's beneficiaries in the amount
equal to five times the employee's final rate of compensation, and in the case
of Mr. Pickens, five times $1,200,000; the remaining balance would have been
payable to the Company. In the event of retirement or termination for reasons
other than total disability, the participant had the option to continue all or
any portion of the insurance policy at his expense. Any portion not retained by
the participant could be retained by the Company, and the Company would
reimburse the participant for premium payments made that had accrued to the
benefit of the Company.
On July 1, 1992, the Company cancelled the key employee life insurance
policies for certain of its officers, including the officers named in the
summary compensation table, and other employees and collected the aggregate cash
surrender value of $1,210,859. At the same time, the Company accelerated the
deferred portion of bonuses awarded in previous years to such officers and
employees as described in Note 2 to the summary compensation table.
DEFERRED COMPENSATION
Prior to June 29, 1992, the Company maintained a deferred compensation
program which provided for payments by the Company to Mr. Pickens and Mr. Cain
(or their surviving beneficiaries) of post-retirement deferred compensation at
the rate of one-half of the participant's final rate of compensation (subject to
minimum amounts specified in the agreements) for a period of 10 years following
the date of retirement, disability or death. As of June 29, 1992, a total of
$3,590,345 had been accrued for Mr. Pickens and $323,229 for Mr. Cain under this
program. To satisfy its accrued and future obligations so that such program
could be discontinued, the Company established the split-dollar life insurance
plan effective June 29, 1992 and executed two separate agreements with Mr.
Pickens and Mr. Cain. The Company purchased insurance policies for Mr. Pickens
and Mr. Cain for a total cost of $4,360,608 and $500,000, respectively. Upon the
purchase of such policies, the Company discontinued the deferred compensation
program without any further obligation to the participants. Both split-dollar
insurance agreements provided that they would terminate during the participant's
lifetime upon the first to occur of (a) either the Company or the participant
giving
48
<PAGE> 51
written notice to the other party that it desired to terminate the agreement, or
(b) the participant attaining age 70.
The split-dollar life insurance agreements between the Company and Messrs.
Pickens and Cain have been terminated. Mr. Pickens' agreement was terminated
January 5, 1993, and Mr. Cain's agreement was terminated November 12, 1992, and
the cash surrender value of the policies were paid to each individual. The
Company agreed to release the collateral assignment of the policy and release
the participant from any obligation to repay the Company for premium costs and
other amounts specifically set forth in the agreement. Accordingly, the Company
has no further liability under the life insurance policies or under the previous
deferred compensation plan.
EMPLOYEES PREMIUM AND PROFIT SHARING PLANS
Mesa maintains the Retirement Plans for the benefit of its employees. Each
year, the Company is required to contribute to the Employees Premium Plan 5% of
the total compensation (as defined in the plan) paid to participants and may
also contribute up to 12% of the total compensation (as defined) to the Profit
Sharing Plan. Participants become 30% vested in their account balances in the
Retirement Plans after three years of service and 40% vested after four years of
service. Participants become vested an additional 20% for each additional year
of service through year seven.
Effective December 31, 1991, all participants were fully vested in their
account balances in the Retirement Plans as a result of certain property
dispositions consummated in 1990 and 1991. Participants shall remain fully
vested in their 1991 balances, but contributions in 1992 and future years under
the Retirement Plans will be subject to the vesting schedule described above.
Prior years of service with the Company's predecessors are counted in the
vesting schedule. Amounts accumulated are distributable under certain
circumstances, including termination of the Retirement Plans.
LIMITATION ON CONTRIBUTIONS TO BENEFIT PLANS
Total employer contributions to the Retirement Plans for the account of a
participant in any calendar year are limited as specified by the Code. The Code
provides that annual additions to a participant's account not exceed the lesser
of $30,000 or 25% of the amount of the participant's annual compensation. The
Company, in its discretion, may determine to make cash payment of amounts
attributable to an employee's participation in the Retirement Plans to the
extent they exceed the Code limitations. As a matter of general policy for
employees of the Company, the Company makes annual cash payments directly to
employees to the extent that the annual additions to the account of each such
employee pursuant to the Retirement Plans would exceed the Code limitations.
CREDIT SUPPORT OF COMMON UNIT PURCHASES
The Partnership provided credit support by acting as a co-maker on certain
loans made by commercial banks in prior years to Messrs. Cain, Fagerstone,
Hruzek and Littlefair, and certain other employees (not including Mr. Pickens),
the proceeds of which were used to purchase common units of the Partnership in
open market transactions. In conjunction with the Corporate Conversion, the
Company assumed the credit support obligations. The largest aggregate amount
outstanding during 1993 totaled $300,000 to Mr. Cain, $196,244 to Mr.
Fagerstone, $0 to Mr. Hruzek and $0 to Mr. Littlefair. At December 31, 1993, the
unpaid principal balance of such loans totaled $0 to Mr. Cain and $113,731 to
Mr. Fagerstone. Principal on the loan is payable by the employee in quarterly
installments and is due and payable in full on December 1, 1994. The loan bears
interest at a rate of approximately 4.1% per annum. The note is secured by a
certificate of deposit issued to the Company by such commercial bank, bearing
interest at an amount of 2.6% per annum, and in an aggregate amount
approximately equal to the amount owed under the loan. Pursuant to an agreement
between the employee and the Company, the employee will cause the Company to be
relieved of its obligations under such loan upon the termination of employment
for any reason, including death. As between the employee and the Company, the
employee has sole responsibility and liability for repayment of all principal
and interest under his loan and has agreed to indemnify the Company from any
liability or obligation with respect to or arising
49
<PAGE> 52
out of such loan. The purpose of these arrangements was to encourage and
facilitate significant equity ownership by such key employees.
COMMON STOCK PURCHASE PLAN
The Company has established a common stock purchase program whereby
employees can buy common stock through after-tax payroll deductions. All
full-time employees of the Company and its participating affiliates are eligible
to participate.
CERTAIN TRANSACTIONS
The Company permits Mr. Pickens and his affiliates to use Mesa's properties
and assets such as equipment, computers, aircraft and other transportation
equipment for noncompany purposes on terms that are not disadvantageous to Mesa;
however, such terms may be more favorable to Mr. Pickens than those otherwise
available to him. Mr. Pickens and his affiliates were charged a total of $79,002
in 1993, $125,027 in 1992 and $157,500 in 1991 for use of these assets
(principally use of aircraft).
Mesa periodically conducts business meetings and events and hosts customers
and business associates at facilities owned by Mr. Pickens, principally a ranch
and hunting facility. Mesa pays for the use of these facilities at rates
comparable to those charged for similar facilities owned by third parties. Mesa
paid Mr. Pickens $157,000 in 1993, $149,750 in 1992 and $131,450 in 1991 for the
use of the facilities.
OPTION PLAN
The Option Plan was approved by stockholders in connection with the
Corporate Conversion in December 1991. The purpose of the Option Plan and the
options issued thereunder is to serve as an incentive to, and to retain, certain
key persons whose training, experience and ability are important to the success
of the Company. Pursuant to the Option Plan, the Option Committee is given the
authority to designate plan participants, to determine the terms and provisions
of options granted thereunder and to supervise the administration of the plan. A
total of 2,000,000 shares of common stock are subject to the plan.
Shares of common stock subject to an option are awarded at an exercise
price that is equivalent to at least 100% of the fair market value of the common
stock on the date the option is granted. The purchase price of the shares as to
which the option is exercised is payable in full at exercise in cash or in
shares of common stock previously held by the optionee for more than six months,
valued at their fair market value on the date of exercise. Subject to Option
Committee approval and to certain legal limitations, an optionee may pay all or
any portion of the purchase price by electing to have the Company withhold a
number of shares of common stock having a fair market value equal to the
purchase price. Options granted under the Option Plan include a limited right of
relinquishment which permits an optionee, in lieu of purchasing the entire
number of shares subject to purchase thereunder and subject to consent of the
Option Committee, to relinquish all or part of the unexercised portion of an
option, to the extent exercisable, for cash and/or shares of common stock in an
amount representing the appreciation in market value of the shares subject to
such options over the exercise price thereof. In its discretion, the Option
Committee may provide for the acceleration of any unvested installments of
outstanding options. The Board of Directors may amend, alter or discontinue the
Option Plan, subject in certain cases to stockholder approval.
The options granted from January 1, 1992 through December 31, 1993 have
exercise prices and vesting schedules as set forth in the following table.
<TABLE>
<CAPTION>
EXERCISE VESTING SCHEDULE
NUMBER OF PRICE PER ----------------------------------------------------------------------------------------------
OPTIONS SHARE 30% 55% 80% 100%
- --------- --------- ---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1,196,000 $ 6.8125 July 10, 1992 January 10, 1993 January 10, 1994 January 10, 1995
10,000 4.125 November 19, 1992 May 19, 1993 May 19, 1994 May 19, 1995
156,000 11.6875 April 2, 1993 October 2, 1993 October 2, 1994 October 2, 1995
120,950 5.8125 November 18, 1993 May 18, 1994 May 18, 1995 May 18, 1996
485,000 7.375 May 10, 1994 November 10, 1994 November 10, 1995 November 10, 1996
</TABLE>
50
<PAGE> 53
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Options granted to the Chief Executive Officer and the other four most
highly compensated executive officers of the Company in 1993 are as follows:
<TABLE>
<CAPTION>
POTENTIAL REALIZED
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL ANNUAL RATES OF STOCK
SHARES OPTIONS/SARS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM
OPTIONS/SARS EMPLOYEES IN OR BASE ---------------------
NAME GRANTED 1993 PRICE(1) EXPIRATION DATE 5%($) 10%($)
- ---------------------- ------------ ------------ -------- ----------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Boone Pickens......... 275,000 45.38% $7.375 November 10, 2003 1,275,477 3,232,309
Paul W. Cain.......... 100,000 16.50% 7.375 November 10, 2003 463,810 1,175,385
Dennis E.
Fagerstone.......... 10,000 1.65% 7.375 November 10, 2003 46,381 117,539
S. Leonard Hruzek,
Jr.................. -- -- -- -- -- --
Andrew J.
Littlefair.......... 25,000 4.13% 7.375 November 10, 2003 115,952 293,846
</TABLE>
- ---------------
(1) Of the options listed in the foregoing table, 30% will be vested and
exercisable beginning May 10, 1994, 55% will be vested and exercisable
beginning November 10, 1994, 80% will be vested and exercisable beginning
November 10, 1995 and 100% will be vested and exercisable beginning
November 10, 1996.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES
Options exercised in 1993, and the number and value of exercisable and
unexercisable options at December 31, 1993, for the Chief Executive Officer and
the other four most highly compensated executive officers of the Company are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED NUMBER OF SHARES
DECEMBER 31, 1993 UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
--------------------------- OPTIONS/SARS THE-MONEY OPTIONS/SARS
NUMBER OF AT DECEMBER 31, 1993 AT DECEMBER 31, 1993
SHARES ACQUIRED VALUE ---------------------------- ----------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Boone Pickens.......... -- $ -- 440,000 635,000 $ 0 $ 0
Paul W. Cain........... -- -- 82,500 167,500 0 0
Dennis E. Fagerstone... -- -- 27,500 32,500 0 0
S. Leonard Hruzek,
Jr................... -- -- 22,000 18,000 0 0
Andrew J. Littlefair... -- -- 16,500 38,500 0 0
</TABLE>
At December 31, 1993, the Company's common stock per share closed at
$5.625. The exercise price of the granted options reflected in the above table
are $6.8125 and $7.375 per share. Thus, no outstanding options were in-the-money
at such date.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Stillwell, a director and member of the Compensation and Option
Committees, is a partner in the law firm of Baker & Botts, L.L.P. The Company
retained Baker & Botts, L.L.P. and incurred legal fees for services of such firm
in 1993. Baker & Botts, L.L.P. has also been retained to provide legal services
in 1994.
Mr. Sarofim, a director and member of the Compensation and Option
Committees, is Chairman of the Board, President and owner of a majority of the
outstanding capital stock of Fayez Sarofim & Co., which acts as an investment
advisor to certain employee benefit plans of the Company. During the year ended
December 31, 1993, Fayez Sarofim & Co. earned $139,687 for such services.
51
<PAGE> 54
SECURITY OWNERSHIP OF PRINCIPAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF MANAGEMENT
The following table presents certain information as to the beneficial
ownership of the Company's Common Stock as of January 10, 1994 by the directors
and officers of the Company, individually and as a group.
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF SHARES OF OF
COMMON STOCK(1) COMMON STOCK
------------------- ------------
<S> <C> <C>
Board of Directors:
Paul W. Cain...................................... 130,139 *
John S. Herrington................................ 10,000 *
Wales H. Madden, Jr............................... 5,000 *
Boone Pickens(2).................................. 3,040,126 6.28%
Fayez S. Sarofim.................................. 400,000 *
Robert L. Stillwell............................... 26,500 *
J.R. Walsh, Jr.(3)................................ 25,520 *
Officers:
Dennis E. Fagerstone.............................. 49,084 *
S. Leonard Hruzek, Jr............................. 36,815 *
Andrew J. Littlefair.............................. 33,613 *
Charles L. Carpenter.............................. 5,500 *
William D. Ballew................................. 26,103 *
Directors and Officers as a group (12 persons)...... 3,788,400 7.53%
</TABLE>
- ---------------
* Less than 0.1%
(1) Includes shares issuable upon the exercise of options that are exercisable
within sixty days of January 10, 1994, as follows: 640,000 shares for Mr.
Pickens, 120,000 for Mr. Cain, 40,000 for Mr. Fagerstone, 32,000 for Mr.
Hruzek, 24,000 for Mr. Littlefair, 5,500 for Mr. Carpenter, 24,000 for Mr.
Ballew and 885,500 for all directors and officers as a group.
(2) The above amounts include 7,545 shares of Common Stock owned by several
trusts for Mr. Pickens' children, of which he is a trustee, and over which
shares he has sole voting and investment power, although he has no economic
interest therein. The above amounts exclude 2,798 shares of Common Stock
owned by Mrs. Pickens as her separate property, as to which Mr. Pickens
disclaims beneficial ownership and with respect to which he does not have
or share voting or investment power.
(3) Excludes 1,027 shares of Common Stock owned by Mrs. Walsh as her separate
property, as to which Mr. Walsh disclaims beneficial ownership and with
respect to which he does not have or share voting or investment power.
52
<PAGE> 55
CERTAIN BENEFICIAL OWNERS
The table below sets forth certain information as of January 10, 1994
regarding each person or "group" (as that term is used in Section 13(d)(3) of
the Securities Exchange Act of 1934) known by the Company to own beneficially
more than 5% of the Common Stock. Information is based on the most recent
Schedule 13D or 13G filed by such holder with the Commission or other
information provided by the holder to the Company.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL
OWNERSHIP
--------------------------------------
PERCENTAGE
NUMBER OF SHARES OF OF
NAME AND ADDRESS OF BENEFICIAL OWNER COMMON STOCK COMMON STOCK
- ---------------------------------------------------------- ------------------- ------------
<S> <C> <C>
Boone Pickens............................................. 3,040,026(1) 6.28%
2600 Trammell Crow Center
2001 Ross Avenue
Dallas, Texas 75201
FMR Corp. ................................................ 4,816,959(2) 11.95%
82 Devonshire Street
Boston, Massachusetts 02109
</TABLE>
- ---------------
(1) See notes (1) and (2) to the table under "Security Ownership of Management"
above.
(2) The Schedule 13G filed by FMR Corp. states that such firm has the sole
power to vote or to direct the vote of 157,855 shares, and the sole power
to dispose or to direct the disposition of 4,816,959 shares. Furthermore,
various persons have the right to receive or the power to direct the
receipt of dividends from, or the proceeds from the sale of, the Common
Stock. The interest of one person, Fidelity Magellan Fund, an investment
company, amounts to 2,047,641 shares, or 5.08% of the total outstanding
shares of Common Stock at November 30, 1993.
53
<PAGE> 56
DESCRIPTION OF THE SECURED NOTES
The Secured Notes offered hereby will be issued under the Indenture dated
as of May 1, 1993, between the Obligors and Harris Trust and Savings Bank, as
trustee (the "Secured Trustee"), as amended by the First Supplemental Indenture
dated as of January 5, 1994, between the Obligors and the Trustee (as so amended
and supplemented, the "Secured Indenture"). The following summaries of certain
provisions of each of the Secured Notes, the Secured Indenture, the related
Security Instruments and the Intercreditor Agreement do not purport to be
complete and are subject to, and qualified in their entirety by reference to,
all of the provisions of such documents, including those terms made part of the
Secured Indenture by reference to the Trust Indenture Act of 1939 as in effect
on the date of the Secured Indenture. Copies of the Secured Indenture, the
related Security Instruments and the Intercreditor Agreement have been filed as
exhibits to the Registration Statement of which this Prospectus is a part.
See "-- Certain Definitions Used in the Secured Indenture" below for the
meanings assigned to certain capitalized terms in this section.
GENERAL
The Secured Notes will be issued only in registered form, without coupons,
in denominations of $1,000 face amount (at maturity) and integral multiples of
$1,000. The Secured Notes will be limited to an aggregate face amount (at
maturity) equal to the sum of (i) $569,277,000, which was the aggregate face
amount (at maturity) of Secured Notes issued pursuant to the Exchange Offer plus
(ii) the maximum aggregate face amount (at maturity) of Secured Notes being
offered hereby, which additional Secured Notes will be issued pursuant to the
provisions of the Secured Indenture described below under the caption
"Additional Secured Notes." The Secured Notes offered hereby will be fungible
with the currently outstanding Secured Notes. The Secured Notes are the joint
and several obligations of the Company, MOC and Capital.
MATURITY DATE
The Secured Notes will mature on June 30, 1998.
YIELD AND INTEREST
The yield to maturity of a Secured Note is 12 3/4%. This yield to maturity
is based on the following terms of the Secured Notes (expressed per $1,000 face
amount): (i) the Accreted Value of a Secured Note of approximately $830.77 at
December 31, 1993, (ii) the increase in Accreted Value of a Secured Note to
$1,000 from December 31, 1993 through and including June 30, 1995, (iii) cash
interest payments at 12 3/4% per annum paid semiannually in arrears thereafter,
and (iv) the payment of $1,000 (representing the Accreted Value as of December
31, 1993 of approximately $830.77 plus the cumulative increase in Accreted Value
from December 31, 1993 through and including June 30, 1995, totalling
approximately $169.23) at maturity.
The Secured Notes do not bear any cash interest through and including June
30, 1995. However, the Accreted Value of the Secured Notes will increase from
December 31, 1993 through and including June 30, 1995, at a rate of 12 3/4% per
annum, compounded semiannually and each June 30 and December 31. On July 1,
1995, the Secured Notes will have a final Accreted Value of an integral multiple
of $1,000. From and after July 1, 1995, the Secured Notes will accrue interest
at a rate of 12 3/4% per annum, payable semiannually in arrears on each June 30
and December 31, commencing December 31, 1995, to holders of record at the close
of business on the June 15 or December 16 next preceding such June 30 or
December 31. Interest shall be payable in cash only.
Accreted Value and interest is payable, and the Secured Notes are
transferable, at the offices or agencies of the Secured Trustee in New York, New
York and Chicago, Illinois, provided that payment of interest may be made at the
Obligors' option by check mailed to the registered holders of the Secured Notes
at their addresses appearing in the Secured Note registers. No service charge
shall be made for any registration of transfer or exchange of the Secured Notes,
but the Obligors or the Secured Trustee may require payment of a sum sufficient
to cover any transfer tax or any similar governmental charge payable in
connection therewith.
54
<PAGE> 57
The Obligors shall pay interest on overdue amounts, to the extent permitted
by law, at the rate of 12 3/4% per annum, compounded semiannually.
PROVISIONS RELATING TO THE ISSUANCE OF THE ADDITIONAL SECURED NOTES OFFERED
HEREBY
The Secured Indenture provides that
(a) The Obligors may issue additional Secured Notes (i.e., in addition
to the $569,277,000 face amount (at maturity) currently outstanding) in an
aggregate face amount (at maturity) not to exceed the amount contemplated
by clause (c) below for the purpose of settling or compromising in its
entirety, or satisfying or compromising in its entirety any judgment
entered in, the Unocal lawsuit. See "Business -- Legal Proceedings."
(b) Effective upon the authentication and issuance of any additional
Secured Notes, the Company and/or MOC shall grant to the Secured Trustee
for the pro rata benefit of the holders of Secured Notes (including those
persons in whose name the additional Secured Notes being offered in the
Offering will be registered) a lien upon and security interest in a limited
partnership interest in HCLP, as further provided in clause (c) below. Such
security interest shall be subordinate, junior and inferior to the lien and
security interest granted upon and in such partnership interest in favor of
the holders of any First Lien Debt (including, without limitation, the
lending banks under the Credit Agreement) and shall be granted pursuant to
either (i) an amendment or supplement to the Pledge Agreement or (ii) an
additional pledge agreement substantially in the form of the Pledge
Agreement and granting to the Secured Trustee for the benefit of the
holders of Secured Notes a lien and security interest in such limited
partnership interest of like tenor and effect as that granted pursuant to
the Pledge Agreement. Upon the execution and delivery thereof, the limited
partnership interest pledged shall constitute "HCLP Collateral" for all
purposes under the Secured Indenture.
(c) In respect of each 1% limited partnership interest in HCLP (out of
100% of all partnership interests in HCLP) with respect to which the
Company and/or MOC grants a security interest to the Secured Trustee, the
Obligors may issue up to $4,248,036 aggregate face amount (at maturity)
($3,250,000 Accreted Value at May 1, 1993) of additional Secured Notes.
RANKING OF SECURED NOTES
The indebtedness evidenced by the Secured Notes is subordinate in right of
payment to the extent set forth in the Secured Indenture to all existing and
future First Lien Debt of any of the Obligors. The indebtedness evidenced by the
Secured Notes ranks senior in right of payment to the Obligors' 12% Subordinated
Notes and 13 1/2% Subordinated Notes. The Secured Notes rank pari passu with the
Unsecured Notes.
In the event and during the continuation of any Senior Debt Default (as
defined below) in respect of the First Lien Debt of any Obligor, no payment
shall be made by such Obligor on the Secured Notes (including any deposit
pursuant to the Secured Notes and any payment in respect of any repurchase,
redemption or other retirement of any Secured Notes) unless and until such
Senior Debt Default shall have been remedied, nor shall any such payment
(including any deposit pursuant to the Secured Notes and any payment in respect
of any repurchase, redemption or other retirement of any Secured Notes) be made
if after giving effect, as if paid, to such payment, any Senior Debt Default of
any Obligor would exist; provided that, with respect to a Senior Debt Default of
any Obligor, other than a default in any principal (including mandatory
prepayments) or interest payment with respect to First Lien Debt of such
Obligor, such Obligor will not be prevented from making any regularly scheduled
payment of principal or interest on the Secured Notes as and when the same shall
become payable in accordance with their terms by such Obligor for a period
exceeding the greater of (i) 120 days after the receipt by holders of such First
Lien Debt of notice from such Obligor of such Senior Debt Default and (ii) any
period during which the First Lien Debt in respect of which a Senior Debt
Default so exists has been declared due and payable in its entirety and (x) such
acceleration has not been rescinded or annulled or (y) such First Lien Debt has
not been paid in full. Upon any distribution of assets of any Obligor in
connection with any winding up or liquidation of such Obligor or any
reorganization, bankruptcy or other
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similar proceeding with respect to any Obligor, the holders of all First Lien
Debt of such Obligor will first be entitled to receive payment in full of all
such First Lien Debt before the holders of the Secured Notes will be entitled to
receive any payment on such Secured Notes from such Obligor. No part of the
Secured Notes shall have any claim to the assets of any Obligor on a parity with
or prior to the claim of the holders of such First Lien Debt of such Obligor.
At December 31, 1993, $69.5 million of First Lien Debt was outstanding,
consisting of $59.1 million of borrowings and $10.4 million in letter of credit
obligations under the Credit Agreement. In addition, HCLP had outstanding $541.6
million principal amount of HCLP Secured Notes at December 31, 1993. Because the
Obligors' interest in HCLP is an equity interest as partner, holders of
indebtedness of HCLP would have a priority with respect to the assets of HCLP
over the Obligors' interest in the event of a liquidation or bankruptcy of HCLP.
The Secured Indenture restricts the incurrence of additional First Lien Debt (as
defined) and other Debt by the Obligors and their Qualified Subsidiaries (as
defined). HCLP is not a Qualified Subsidiary. See "-- Limitation on Incurrence
of First Lien Debt" and "-- Limitation on Incurrence of Other Debt" below.
As a result of the above-described provisions, in the event of the
insolvency of an Obligor or any subsidiary, holders of the Secured Notes may
recover ratably less than general creditors of such Obligor or subsidiary.
SECURITY
The Obligors' obligation to pay the Secured Notes is secured by a Deed of
Trust, Assignment of Production, Security Agreement and Financing Statement (the
"Mortgage") and a Security Agreement, Pledge and Financing Statement (the
"Pledge Agreement" and, together with the Mortgage, the "Security Instruments").
The Security Instruments grant a second lien on and security interest in all
right, title and interest of MOC in (i) the "B" Contract and the leases
described or referred to therein, all hydrocarbons, helium and other minerals
in, under, upon, produced or to be produced or which may be produced therefrom,
all contractual rights related thereto, the operating equipment used thereon and
the revenues and proceeds thereof or related thereto (the "West Panhandle
Collateral"), and (ii) a 65% limited partnership interest in HCLP (which will be
increased to approximately 77% upon issuance of all Secured Notes offered
hereby), being part of the limited partnership interest in HCLP owned by MOC
(the "HCLP Collateral" and, together with the West Panhandle Collateral, the
"Collateral"), to the Secured Trustee, as trustee, as security for the Obligors'
obligations under the Secured Indenture and the Secured Notes. The lien of the
Security Instruments with respect to the Collateral is subordinated to the lien
with respect to such Collateral securing the Credit Agreement and any other
First Lien Debt created or incurred hereafter as provided herein. The Secured
Trustee's interest in the Collateral equally and ratably secures the Secured
Notes, including both the currently outstanding Secured Notes and the Secured
Notes offered hereby. Currently, the HCLP Collateral consists of only a 65%
limited partnership interest in HCLP. The additional approximately 12% HCLP
limited partnership interests are being pledged by MOC in connection with the
Offering and as contemplated by the provisions of the Secured Indenture
described above under the caption "Additional Secured Notes." The Security
Instruments provide that, in the event no First Lien Debt is outstanding, upon a
foreclosure on the Collateral, pursuant to the Security Instruments, and a
disposition of such Collateral, the proceeds from such disposition will be
applied to pay all amounts owing with respect to outstanding Secured Notes.
Intercreditor Agreement. The rights of the Secured Trustee under the
Security Instruments are, during any period in which any First Lien Debt is
outstanding, subject to the terms of an Intercreditor Agreement dated as of
August 26, 1993 among Societe Generale, Southwest Agency, as agent for the Banks
under the Credit Agreement (the "Agent Bank"), the Secured Trustee and the
trustee for the Unsecured Notes (the "Intercreditor Agreement"). In the
Intercreditor Agreement, the Secured Trustee and the Agent Bank agreed that the
lien of the Agent Bank in the Collateral is senior, superior and prior to the
lien of the Secured Trustee in the Collateral and that the lien of the Secured
Trustee in the Collateral is subordinate, junior and inferior to that of the
Agent Bank. In addition, the Secured Trustee and the trustee for the Unsecured
Notes acknowledged and agreed that the Discount Notes are subordinate, junior
and inferior to the obligations of the Company and MOC under the Credit
Agreement.
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Among other things, the Intercreditor Agreement provides that (i) upon the
occurrence of an event of default under the Credit Agreement, the Agent Bank may
exercise any of its rights under the Credit Agreement and the related security
instruments with respect to the Collateral, (ii) except as specifically provided
in the Intercreditor Agreement, the Secured Trustee may not, without the prior
written consent of the Agent Bank, exercise any of its rights with respect to
the Collateral, including seeking to foreclose upon its lien against the
Collateral or any part thereof and (iii) the Intercreditor Agreement shall not
limit the ability of the Secured Trustee and the trustee for the Unsecured Notes
or the holders of Secured Notes or Unsecured Notes to accelerate the maturity of
such Secured Notes or Unsecured Notes or to file claims in respect thereof in
any bankruptcy or insolvency proceeding involving an Obligor. The Intercreditor
Agreement also provides that if, after the occurrence of an event of default
under the Credit Agreement, the Agent Bank proposes to release its lien on any
Collateral in connection with the sale thereof (i) pursuant to the Credit
Agreement and the related security instruments or (ii) by any Obligor, then the
Secured Trustee shall execute and deliver to the Agent Bank such releases,
termination statements and other release documents as the Agent Bank may request
to release the Secured Trustee's lien on such Collateral. The Intercreditor
Agreement also provides that if, prior to the occurrence of an event of default
under the Credit Agreement, the Agent Bank consents to a sale, exchange, release
or other disposition of Collateral, the Secured Trustee and the trustee for the
Unsecured Notes shall be deemed to have consented thereto provided that any such
transaction complies with the applicable provisions of the Secured Indenture
described below under the captions "Disposition of Collateral and Other Assets"
and "Release of Collateral."
The Intercreditor Agreement provides that the proceeds of any sale or other
disposition of any Collateral and the proceeds from any casualty insurance
insuring any Collateral shall be distributed in the following order of priority:
(i) first to the Agent Bank for its reasonable costs and expenses in connection
with matters relating to the Collateral, (ii) second, to the Agent Bank in an
amount equal to the unpaid obligations under the Credit Agreement (including
cash collateral for any outstanding letters of credit), (iii) third, to the
Secured Trustee for application in accordance with the Secured Indenture and
(iv) fourth, any surplus then remaining from such proceeds shall be distributed
to the Obligors, or to whomever may be lawfully entitled to receive the same, or
as a court of competent jurisdiction may direct.
DISPOSITION OF COLLATERAL AND OTHER ASSETS
The Secured Indenture provides that MOC may not effect a Collateral Sale
unless the provisions of either clause (a) or clause (b) below are satisfied.
(a) If the Cash Proceeds from such Collateral Sale equal or exceed the
Release Price applicable to such Collateral, an amount of Cash Proceeds
equal to (x) the Release Price applicable to such Collateral less (y) an
amount equal to the aggregate amount of any payments that the Obligors are
required (pursuant to or as contemplated by the agreements governing any
First Lien Debt then outstanding) to make from such Cash Proceeds in
respect of such First Lien Debt, shall immediately become Collateral upon
receipt thereof by MOC and shall be deposited into the Collateral Account.
(b) If the Cash Proceeds from such Collateral Sale are less than the
Release Price applicable to such Collateral, an amount of Cash Proceeds
equal to (x) all of the Cash Proceeds received as a result of such
Collateral Sale(s) less (y) an amount equal to the aggregate amount of any
payments that the Obligors are required (pursuant to or as contemplated by
the agreements governing any First Lien Debt then outstanding) to make from
such Cash Proceeds in respect of such First Lien Debt, shall immediately
become Collateral upon receipt thereof by MOC and shall be deposited into
the Collateral Account. In such an event, the Cash Proceeds to be paid to
MOC pursuant to such Collateral Sale shall not be less than the fair market
value of the Collateral sold pursuant to such sale. For any Collateral Sale
or series of related Collateral Sales subject to this clause (b) in which
the aggregate purchase price exceeds $10,000,000, MOC shall deliver to the
Trustee an opinion of an Independent Financial Advisor to the effect that
the aggregate consideration received is not less than the fair market value
of the Collateral sold.
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(c) The amount of Cash Proceeds required to be deposited into the
Collateral Account with respect to a Collateral Sale pursuant to clause (a)
or (b) above is referred to herein as the "Release Amount" with respect to
such Collateral.
The Secured Indenture also provides that (a) no Obligor may sell, assign,
lease, transfer, convey or otherwise dispose of any asset that does not
constitute Collateral, including its equity interest in any subsidiary, unless
the consideration paid to such Obligor is not less than the fair market value of
such asset and (b) MOC shall not consent, in its capacity as a limited partner
of HCLP, to the sale or other disposition by HCLP, of any property pursuant to
Section 6.10 of the HCLP partnership agreement for less than fair market value
thereof.
RELEASE OF COLLATERAL
The Secured Indenture provides that upon receipt of a release request from
the Obligors, and subject to certain conditions, the Secured Trustee shall
release all or a part of the Collateral from the Security Interests. Any such
release request shall certify that one of the conditions set forth below
(together with certain other conditions), have been, or simultaneously with or
immediately following the release will be, fulfilled: (i) the Collateral will be
released in compliance with certain provisions of the Secured Indenture
regarding, among other things, disposition or replacement of machinery or
equipment and disposition of inventory or accounts receivable in the ordinary
course of business; or (ii) there is a substitution of Substitute Collateral (as
defined); or (iii) there is a deposit of Cash Collateral; or (iv) the Collateral
to be released is insurance proceeds and such Collateral is used to commence,
continue or complete the repair, restoration, replacement or rebuilding of
Property that was damaged, destroyed or injured and for which such insurance
proceeds were paid, substantially to the condition and character of such
Property immediately prior to such damage, destruction or injury; or (v) the
Obligors represent in the release request that Collateral held in the Collateral
Account that is to be released will be used, and within 60 days is used, either
to make payments of the Stated Price (without any premium) of the Secured Notes
in connection with optional redemptions of Secured Notes pursuant to the Secured
Indenture or to otherwise purchase Secured Notes; or (vi) the Obligors represent
in the release request that the Collateral is to be released in connection with
a Collateral Sale made in compliance with the covenant described under the
caption "Disposition of Collateral and Other Assets" above and that the Release
Amount with respect to such Collateral Sale will be deposited into the
Collateral Account; or (vii) all of the conditions precedent to the termination
of the Security Instrument under which the lien in the Collateral to be released
was created, or to the release of such Collateral from the lien created by such
Security Instrument, as set forth in such Security Instrument, have been
satisfied; or (viii) a Requisite Majority have consented in writing to such
release of Collateral from the Security Interests.
IMPAIRMENT OF SECURITY INTEREST
The Secured Indenture provides that the Obligors may not, and may not
permit any subsidiary to, take any action that would have the result of
impairing the Security Interests unless such action is (i) permitted by the
Security Instruments, or (ii) in the case of Collateral Sales, taken in
compliance with the requirements of the covenant described under the caption
"Disposition of Collateral and Other Assets" above.
AMENDMENTS TO B CONTRACT
The Secured Indenture provides that, after the date Secured Notes were
first issued (i.e., August 26, 1993), the Obligors may not amend, modify or
supplement the terms of the B Contract (as defined in the Mortgage) if such
amendment, modification or supplement (taken as a whole together with all other
amendments, modifications and supplements being concurrently effected) would
have a material adverse effect on the Secured Notes, the holders thereof or the
Collateral.
MANDATORY RETIREMENT
The Secured Indenture provides that on or before each Mandatory Retirement
Notice Date (as defined below) on which the amount of Mandatory Retirement Funds
(as defined below) exceeds zero, the Obligors
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shall either (a) in accordance with the redemption provisions of the Secured
Indenture, mail a notice of redemption stating that the Applicable Amount of
Secured Notes (as defined below) issued thereunder will be redeemed on the
related Mandatory Retirement Date (as defined below) or (b) make an offer to
purchase (a "Retirement Offer") the Applicable Amount of Secured Notes issued
thereunder, such purchase to be effected on the related Mandatory Retirement
Date. The purchase or redemption price for any mandatory retirement of Secured
Notes shall be equal to the Stated Price of the Secured Notes as of such
Mandatory Retirement Date.
The indenture for the Unsecured Notes has a covenant substantially similar
to the foregoing covenant. The Obligors shall be required to redeem or purchase
(pursuant to a Retirement Offer or otherwise) all of the outstanding Unsecured
Notes before any Secured Notes can be redeemed or purchased in respect of
Mandatory Retirement Funds. In connection with any such offer to purchase
Secured Notes, the Obligors would comply with all applicable tender offer rules,
including, without limitation, Section 14(e) of the Exchange Act and the rules
promulgated thereunder and any other then applicable regulatory requirements.
The Credit Agreement prohibits the Obligors from redeeming, purchasing or
otherwise acquiring any of the Secured Notes or other subordinated debt,
provided, however, that, notwithstanding the foregoing, if no default under the
Credit Agreement has occurred and is continuing immediately prior to and after
giving effect to such a redemption, purchase or other acquisition, Mesa may
redeem, or otherwise acquire, Secured Notes and subordinated debt (i) through
the application of the net proceeds from the issuance or sale of certain
refinancing debt or of equity securities of Mesa or (ii) in an amount not to
exceed $75,000,000 (in addition to amounts permitted by clause (i) above) after
the aggregate commitment of the banks is equal to or less than $50 million and
either Mesa has prevailed at trial in the Unocal lawsuit (as described herein)
or such lawsuit has otherwise been resolved, settled or terminated. See
"Business -- Legal Proceedings." Any future credit agreements or other
agreements relating to First Lien Debt to which the Company or MOC becomes a
party may contain similar restrictions and provisions. In the event the Secured
Indentures require the Obligors to apply Mandatory Retirement Funds to redeem or
purchase Secured Notes at a time when the Obligors are prohibited from doing so,
the Obligors could seek the consent of their lenders to redeem or purchase
Secured Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Obligors did not obtain such a consent or repay such
borrowings, the Obligors would remain prohibited from redeeming or purchasing
the Secured Notes. In such case, the Obligors' failure to redeem or purchase
tendered Secured Notes would constitute an Event of Default under the Secured
Indenture. In such circumstances, the subordination provisions in the Secured
Indenture would likely restrict payments to the holders of the Secured Notes.
OPTIONAL REDEMPTION
The Secured Notes may be redeemed at the option of the Obligors, in whole
at any time or in part from time to time, upon at least 30 days' but not more
than 60 days' notice, by payment of the following redemption prices (expressed
as percentages of the Accreted Value thereof as of the redemption date) if
redeemed during the six month period beginning January 1 or July 1, as the case
may be, of the years indicated below:
<TABLE>
<CAPTION>
YEAR JANUARY 1 JULY 1
------------------------------------------------------ --------- ---------
<S> <C> <C>
1994.................................................. 110.250% 107.494%
1995.................................................. 105.032% 102.867%
1996.................................................. 100.956% 100.000%
</TABLE>
and thereafter at 100% of the Accreted Value of the Secured Notes as of the
redemption date, plus, if the redemption date is after June 30, 1995, accrued
but unpaid interest on the Secured Notes to the redemption date.
If less than all of the Secured Notes are to be redeemed, the Secured Notes
shall, as nearly as is practicable without requiring the issuance of any
fractional Secured Notes and consistent with the provisions of such Secured
Indenture, be redeemed pro rata from the holders thereof. The Secured Trustee
shall select, in a manner consistent with the preceding sentence, the Secured
Notes to be redeemed; provided that if pro
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rata redemption is not then permitted by any applicable law, rule or regulation,
the Secured Trustee shall select Secured Notes to be redeemed by lot or by such
other method that complies with the requirements of any exchange on which such
Secured Notes may then be listed or that such Secured Trustee otherwise
considers appropriate. If any Secured Note is to be redeemed in part only, the
notice of redemption relating to such Secured Note shall state the portion of
the face amount (at maturity) (in integral multiples of $1,000) to be redeemed
and that a new certificate or certificates representing the Secured Notes in
face amount (at maturity) equal to the unredeemed portion thereof will be issued
in the name of the holder thereof upon surrender of the original Secured Note.
LIMITATION ON RESTRICTED PAYMENTS
The Secured Indenture provides that the Obligors may not, and may not
permit any of their subsidiaries to, directly or indirectly make any loans,
advances or capital contributions to HCLP in an amount greater than the amount
permitted by clause (iii)(1) of the covenant described under the caption
"Restrictions on Investments, Loans and Advances" below or make any loans,
advances or capital contributions to Non-Qualified Subsidiaries other than HCLP
in an aggregate amount exceeding $4,000,000 per fiscal year or declare or pay
any dividend or distribution (other than a dividend or distribution of Equity
Securities of the Company) in respect of any Equity Securities of the Company or
purchase, redeem or otherwise acquire or retire for value any Equity Securities
of the Company or purchase, redeem or otherwise acquire or retire for value
(other than at maturity or pursuant to mandatory sinking fund or redemption
provisions) any Subordinated Debt (all such loans, advances or capital
contributions (in an amount exceeding the amount permitted by clause (iii)(1) of
the covenant described under the caption "Restrictions on Investments, Loans and
Advances" below) to HCLP and all such loans, advances or capital contributions
(in an amount exceeding $4,000,000 per fiscal year) to Non-Qualified
Subsidiaries other than HCLP, and all such dividends, distributions, purchases,
redemptions or other acquisitions or retirements being collectively referred to
as "Restricted Payments"), unless (i) no Default or Event of Default shall have
occurred and be continuing at the time of such Restricted Payment and no Event
of Default shall occur as a consequence thereof, and (ii) after giving effect to
such Restricted Payment, all Restricted Payments made subsequent to June 30,
1993 (other than acquisitions and retirements of Equity Securities and
Subordinated Debt described in clause (x) or (y) below) do not exceed the sum
of: (1) 40% of Consolidated Net Income if positive, or 100% of Consolidated Net
Income if negative, in each case as earned subsequent to June 30, 1993 and (2)
the net proceeds of the issuance or sale after June 30, 1993 of (a) Equity
Securities of the Company and (b) Debt (except for the Convertible Notes) issued
after consummation of the Exchange Offer that has been converted into Equity
Securities of the Company; provided, however, that the foregoing provisions
shall not prevent (w) the payment of any dividend or distribution within 60 days
after the date of declaration thereof, if at said date of declaration the
conditions in clauses (i) and (ii) above were satisfied or (x) the acquisition
or retirement of any Equity Securities by exchange for, or out of the proceeds
of a substantially concurrent issuance or sale of, other Equity Securities or
(y) the acquisition or retirement of any Subordinated Debt by exchange for, or
out of the proceeds of a substantially concurrent issuance or sale, of Equity
Securities of the Company or Refinancing Debt permitted by the Secured Indenture
or (z) the payment of any dividend on any class or series of preferred stock
that has been issued in exchange for, or the net proceeds from the issuance or
sale of which have been used to purchase, redeem or otherwise acquire or retire
Secured Notes, Unsecured Notes or any Refinancing Debt issued in respect of
Secured Notes or Unsecured Notes, provided that the annual dividend rate on such
preferred stock does not exceed the annual interest rate on such Debt (or, if
such Debt provided for periodic accretion of principal in lieu of interest, the
annual accretion on such Debt) and that no mandatory redemption or sinking fund
payments are required on such preferred stock prior to July 1, 1998.
Notwithstanding the foregoing, the Obligors may not make any Restricted Payment
before December 31, 1995, except for any Restricted Payment described in clause
(y) or above.
LIMITATION ON INCURRENCE OF FIRST LIEN DEBT
The Secured Indenture provides that the Obligors may not, and may not
permit any subsidiaries of the Company to, create, incur, issue, assume or
otherwise become liable with respect to any First Lien Debt unless immediately
thereafter the aggregate principal amount (including reimbursement obligations
under letters of
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credit) of First Lien Debt then outstanding shall not exceed the greater of (i)
such amount of First Lien Debt outstanding immediately prior thereto or (ii)
$82,500,000 multiplied by the difference between 1 minus the quotient of (x) the
aggregate amount of net proceeds of all Collateral Sales occurring after the
date hereof and prior to the time of determination that are used to repay First
Lien Debt divided by (y) the sum of the Secured Debt Amount immediately prior to
such time plus the sum of the respective Stated Prices of all Secured Notes
retired, redeemed, repurchased or otherwise acquired by any of the Obligors
prior to such time (such Stated Prices being determined as of the respective
date of such retirement, redemption, repurchase or acquisition).
LIMITATION ON INCURRENCE OF OTHER DEBT
The Secured Indenture provides that, except for permitted First Lien Debt,
the Obligors may not, and may not permit any of their Qualified Subsidiaries to,
create, incur, issue, assume, guaranty or otherwise become liable (including,
without limitation, by merger, amalgamation or consolidation with or acquisition
of any person) with respect to (i) any Debt, other than the Secured Notes and
the Unsecured Notes, that is pari passu with the Secured Notes, or any
Subordinated Debt that has either a sinking fund obligation or principal payment
requirement on or prior to June 30, 1998, unless, immediately after giving
effect to the incurrence of such Debt and the application of the proceeds
therefrom, the Cash Flow Coverage Ratio shall be greater than or equal to 2.25
to 1.0, or (ii) any other Subordinated Debt unless, immediately after giving
effect to the incurrence of such Debt and the application of the proceeds
therefrom, the Cash Flow Coverage Ratio shall be greater than or equal to 2.0 to
1.0.
Notwithstanding the limitations imposed by the foregoing paragraph, any of
the Obligors and any of their Qualified Subsidiaries may, directly or
indirectly, create, incur, issue, assume, guaranty or otherwise become liable
with respect to any or all of the following:
(i) Debt set forth on Schedule 1 to the Secured Indenture (the
"Existing Debt"), subject to any increase thereon permitted by clause
(viii) of the covenant described under the caption "Restrictions on
Investments, Loans and Advances" below and subject to any reduction thereof
required by the covenant described under the caption "Repayment of
Intercompany Debt" below;
(ii) the Secured Notes and the Unsecured Notes, together with any
other obligations under the Indenture therefor;
(iii) obligations in respect of the Subordinated Notes and the
Indenture therefor;
(iv) additional Secured Notes, if any, issued in accordance with the
Secured Indenture as described under the caption "Additional Secured Notes"
above (i.e., the Secured Notes being offered in the Offering);
(v) Debt issued in exchange for, or to refund or refinance, all or any
portion of any Debt permitted under clauses (i) through and including this
clause (v) of this covenant (any such Debt issued in exchange or to refund
or refinance being referred to herein as "Refinancing Debt"); provided,
however, that such Refinancing Debt (a) shall be issued by no person in
addition to the issuer or issuers of the Debt being refinanced; (b) shall
not have increased the amount of Consolidated Debt (net of any cash
reserves required to be maintained for the benefit of the holders of the
Refinancing Debt and funded with proceeds of such Refinancing Debt) other
than in an amount no greater than the reasonable out-of-pocket costs and
expenses incurred by the issuer of such Refinancing Debt in connection with
the negotiation, documentation, sale and closing of the applicable
refunding or refinancing, as the case may be; (c) shall have an average
life to maturity equal to or longer than that of the Debt being refinanced
(determined as of the date of the proposed refinancing); (d) shall be at
least as junior or no more senior in right of payment to the Secured Notes,
as the case may be, as the Debt being refinanced and (e) shall have been
approved by the board of directors of the Company, taking into account the
obligations of the Obligors under the Secured Indenture and the Secured
Notes; provided, however, that such approval shall be required only if such
Refinancing Debt has an aggregate principal amount or accreted value at the
time of issuance (including all available commitments thereunder) of more
than $10,000,000;
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(vi) Permitted Purchase Money Debt;
(vii) any additional Debt issued in payment of interest on any Debt;
provided that the Debt being issued in payment of interest is of like tenor
and terms as the Debt on which it is paid;
(viii) any Margin Debt incurred in connection with investments
permitted by clause (vii) of the covenant described under the caption
"Restrictions on Investments, Loans and Advances" below; and
(ix) Debt incurred by the Obligors other than pursuant to clauses (i)
through and including (viii) of this covenant; provided that (1) the
aggregate principal amount of such Debt at any time outstanding shall not
exceed $10,000,000 and (2) such Debt shall be Subordinated Debt.
CHANGE IN CONTROL
The Secured Indenture requires the Obligors (or their successors in the
event a Change in Control occurs pursuant to a transaction permitted by the
covenant described under the caption "Merger, Consolidation and Sale of Assets"
below) to make an offer to purchase all of the Secured Notes on the 90th day
following the date on which a Change in Control occurs, at a price equal to 101%
of the Accreted Value thereof as of the payment date plus accrued but unpaid
interest thereon to the payment date, if such date is after June 30, 1995. This
provision could have the effect of deterring or delaying a change in control of
the Company. In connection with any such offer, the Obligors would comply with
all applicable tender offer rules, including without limitation, Section 14(e)
of the Exchange Act and the rules promulgated thereunder and any other then
applicable regulatory requirements.
The Credit Agreement prohibits the Obligors from redeeming, purchasing or
otherwise acquiring any of the Secured Notes or other subordinated debt,
provided, however, that, notwithstanding the foregoing, if no default under the
Credit Agreement has occurred and is continuing immediately prior to and after
giving effect to such a redemption, purchase or other acquisition, Mesa may
redeem, or otherwise acquire, such Secured Notes and subordinated debt (i)
through the application of the net proceeds from the issuance or sale of certain
refinancing debt or of equity securities of Mesa or (ii) in an amount not to
exceed $75,000,000 (in addition to amounts permitted by clause (i) above) after
the aggregate commitment of the banks is equal to or less than $50 million and
either Mesa has prevailed at trial in the Unocal lawsuit (as described herein)
or such lawsuit has otherwise been resolved, settled or terminated. See
"Business -- Legal Proceedings." The Credit Agreement also provides that certain
change of control events of the Company would constitute a default thereunder.
Any future credit agreements or other agreements relating to First Lien Debt to
which the Company or MOC becomes a party may contain similar restrictions and
provisions. In the event a Change in Control occurs at a time when the Obligors
are prohibited from purchasing the Secured Notes, the Obligors could seek the
consent of their lenders to the purchase of the Secured Notes or could attempt
to refinance the borrowings that contain such prohibition. If the Obligors did
not obtain such a consent or repay such borrowings, the Obligors would remain
prohibited from purchasing the Secured Notes. In such case, the Obligors'
failure to purchase tendered Secured Notes would constitute an Event of Default
under the Secured Indenture. In such circumstances, the subordination provisions
in the Secured Indenture would likely restrict payments to the holders of the
Secured Notes.
RESTRICTIONS ON ACTIVITIES OF CAPITAL
The Secured Indenture provides that Capital may not engage in any business
not related directly or indirectly to the incurrence of Debt outstanding on May
1, 1993 or permitted by the Secured Indenture. In addition, the Secured
Indenture provides that Capital may not create or otherwise acquire any
subsidiary.
TRANSACTIONS WITH AFFILIATES
The Secured Indenture provides that the Obligors will not, and will not
permit any subsidiary of the Company to, (i) sell, lease, exchange, swap,
transfer or otherwise dispose of any of their respective properties, assets or
securities to, (ii) purchase or lease any property, assets or securities from,
(iii) make any investment in, or (iv) enter into any contract or agreement with
or for the benefit of, an affiliate (an "Affiliate
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Transaction"), other than Affiliate Transactions which the board of directors of
the Company reasonably and in good faith determines (a) are on terms at least as
favorable to the Obligor or the subsidiary contemplating such Affiliate
Transaction as could be obtained from an unaffiliated party or (b) in the event
no comparable transaction with an unaffiliated third party is available, on
terms that are fair from a financial point of view to such Obligor or
subsidiary, as the case may be, (but in respect of any such Affiliate
Transaction or series or related Affiliate Transactions involving an amount, or
consideration having a fair value, in excess of $1,000,000, only with the
concurrence in such determination of a majority of the Disinterested Directors
who are not also employees, officers, directors, partners or otherwise
affiliated with any other party to such transaction); provided, however, that
this covenant shall not limit, or be applicable to, (A) any allocation,
reimbursement, indemnification or other payment paid or accrued to, or
transaction with, an affiliate pursuant to the agreement of limited partnership
of any subsidiary of the Company that is a partnership, (B) the use or leasing
by any affiliate of any property (including, but not limited to, office
equipment, computers, vehicles, aircraft and office space) of any Obligor or any
subsidiary of the Company if such Obligor or subsidiary is reimbursed based on
the incremental cost to such Obligor or subsidiary of such usage or (C) any
indemnification or similar payment made to any director or officer (1) in
accordance with the corporate charter or bylaws of the Company or any
subsidiary, (2) under any agreement or (3) under applicable law.
RESTRICTIONS ON INVESTMENTS, LOANS AND ADVANCES
The Secured Indenture provides that the Obligors may not, and may not
permit any of their Qualified Subsidiaries to, make or permit to exist any
loans, advances or capital contributions to, or make any investment in, or
purchase or commit to purchase any stock or other securities of (including
evidences of indebtedness of or other interests in), any person, other than (i)
as shown on Schedule 2 to the Secured Indenture ("Existing Loans and Advances"),
subject to reduction pursuant to the covenant described under the caption
"Repayment of Intercompany Debt" below; (ii) Permitted Investments; (iii) loans,
advances or capital contributions to HCLP, (1) to the extent necessary for HCLP
to avoid any default on the HCLP Secured Notes or to permit HCLP to make
payments, which if not made, would result in the imposition of any premiums or
other penalties on the HCLP Secured Notes plus (2) in an aggregate amount during
any fiscal year equal to such amount of loans, advances or capital contributions
as shall be made during such year as a Restricted Payment pursuant to and in
accordance with the covenant described under the caption "Limitation on
Restricted Payments;" (iv) loans, advances or capital contributions to
Non-Qualified Subsidiaries other than HCLP in an aggregate amount during any
fiscal year less than or equal to the sum of (1) $4,000,000 plus (2) such
amount, if any, as shall be made during such year as a Restricted Payment
pursuant to and in accordance with the covenant described under the caption
"Limitation on Restricted Payments;" (v) current trade and customer accounts
receivable that are for goods furnished or services rendered in the ordinary
course of business and are payable in accordance with customary trade terms;
(vi) Energy Futures Contracts acquired or entered into for hedging purposes;
(vii) Energy Futures Contracts acquired or entered into for purposes other than
hedging, and stocks or other securities (but not including (a) uncovered short
sales of individual securities, and (b) uncovered put or call options on
individual securities or which relate to securities indices) other than those
permitted pursuant to clauses (i) through (vi) above, provided that the sum of
the aggregate amount on deposit in respect of such Energy Futures Contracts plus
amounts on deposit to collateralize obligations to purchase securities in the
future pursuant to short sales plus the aggregate cost of such stocks or other
securities, shall not exceed, at any one time outstanding, the sum of
$25,000,000 plus 100% of the aggregate profits realized on all such investments
after June 30, 1993 minus 100% of the aggregate losses realized on all such
investments after June 30, 1993; and (viii) loans, advances or capital
contributions to Qualified Subsidiaries made in the ordinary course of business
to meet reasonable working capital requirements, provided that the principal
purpose of each of such loans, advances or capital contributions is not to favor
any person (other than such Qualified Subsidiary) over the holders of the
Secured Notes.
LIMITATIONS ON ACQUISITIONS
The Secured Indenture provides that the Obligors may not acquire, and shall
not permit any Qualified Subsidiary to acquire (whether by merger,
consolidation, purchase of assets, purchase of capital stock, or other
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business combination), any other person that is not engaged in a business (or
aspect thereof) in which the Company or any of its subsidiaries was engaged as
of May 1, 1993.
REPAYMENT OF INTERCOMPANY DEBT
The Secured Indenture provides that on or before the earlier of (i) the
date of issuance of any additional Secured Notes in accordance with the Secured
Indenture (i.e., the Secured Notes being offered hereby) and (ii) January 1,
1995, (x) MHC shall, to the extent it has assets sufficient to do so, repay its
Debt to MOC and (y) MMC shall, to the extent it has assets sufficient to do so,
repay its Debt to MOC; provided, however, that notwithstanding the foregoing,
each of MHC and MMC shall be required to repay its respective Debt to MOC
pursuant to this covenant only to the extent that its respective Debt to MOC
exceeds $5,000,000. For purposes of this covenant, each 1% limited partnership
interest in HCLP shall be valued at $5,000,000 and other non-cash assets shall
be valued at book value. Mesa intends to cause MMC and MHC to repay their
intercompany debt as required by the Secured Indenture prior to completion of
this Offering.
Prior to the date on which it has reduced the balance of its respective
Debt to MOC to an amount not in excess of $5,000,000, MHC and MMC, respectively,
shall not engage in any business activity other than (i) owning and operating
the assets it currently owns or (ii) making any investment or effecting any
transaction permitted by the covenant described under the caption "Restrictions
on Investments, Loans and Advances" above.
RESTRICTION ON CHANGES IN BUSINESS
The Secured Indenture provides that neither the Company nor MOC may engage
in the conduct of any business other than the Oil and Gas Business; provided,
however, that, nothing in this covenant shall be deemed to prohibit the Company
or MOC from acquiring, owning or controlling, at any time, any equity interest
in any other person, provided that such acquisition, ownership or control is not
prohibited by the terms hereof.
"Oil and Gas Business" means (i) the acquisition, exploration, development,
operation and disposition of interests in oil, gas and other hydrocarbon
properties, (ii) the gathering, marketing, treating, processing, selling and
transporting of any production from such interests or properties, (iii) any
business relating to or arising from exploration for or development, production,
treatment, processing, transportation or marketing of oil, gas and other
minerals and products produced in association therewith, and (iv) any activity
necessary, appropriate or incidental to the activities described in the
foregoing clauses (i) through (iii) of this definition.
LIMITATION ON COMPENSATION OF EXECUTIVE OFFICERS
The Obligors shall not, and shall not permit any subsidiary to, (a) make,
or incur or otherwise accrue any obligation to make, during any year, any
payment, in cash or other assets, of salary or bonus compensation to any
executive officer of any Obligor unless the aggregate amount of such payments
and accruals to such officer in such year (i) has been determined to be
reasonable and appropriate by the board of directors of the Company, with the
concurrence in such determination of a majority of the Disinterested Directors,
or by a committee consisting of Disinterested Directors and (ii) would not
exceed $2,000,000, if such year is 1993, 1994 or 1995, or the product of
$2,000,000 and the COLA Percentage for such year, if such year is 1996 or a
subsequent year, (b) make any payment, in cash or other assets, of salary or
bonus compensation to any such officer during any year, if the aggregate amount
of such payments to such officer in such year would exceed $980,000, if such
year is 1993, 1994 or 1995, or the product of $980,000 and the COLA Percentage
for such year if such year is 1996 or a subsequent year, or (c) make, during any
year, any payment to any such officer of any obligation accrued during any prior
year for salary or bonus compensation, unless (x) the year of such payment is
1996 or a subsequent year and (y) at the time of such payment the Obligors are
permitted by the terms of the first sentence of the covenant described under the
caption "Limitation on Restricted Payments" above to make or pay a Restricted
Payment equal to or greater than the amount of such payment; provided that
clause (a) (ii) above shall not restrict the amount of any payment or accrual,
if at the time of such payment or accrual, no Unsecured Notes are outstanding
and the Obligors are permitted by the terms of the first sentence of the
covenant described under the caption "Limitation on Restricted Payments" above
to
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make or pay a Restricted Payment equal to or greater than the amount of such
payment or accrual; and, provided further that the amount of any payment made
during any year of any obligation accrued during a prior year shall not be
subject to clause (a) or clause (b) above, if such payment is not prohibited by
clause (c) above. "COLA Percentage" for any year means the greater of (i) 100%
and (ii) the quotient (expressed as a percentage) of (i) the United States
Department of Labor's U.S. Consumer Price Index-All Items (All Urban Consumers)
at December 31 of the year immediately preceding such year divided by (ii) such
index at May 1, 1993.
RATING OF SECURITIES; LISTING
In the Secured Indenture, the Obligors agreed to use reasonable efforts to
cause (a) the Secured Notes to be rated by Standard & Poor's Corporation, (b)
Standard & Poor's Corporation to continue rating the Secured Notes at all times
and (c) the Secured Notes to be listed on a national securities exchange. Mesa
does not currently meet the listing requirements for the listing of the Secured
Notes on the New York Stock Exchange.
MERGER, CONSOLIDATION AND SALE OF ASSETS
The Secured Indenture provides that neither the Company nor MOC may
consolidate with, merge into or sell, lease or transfer all or substantially all
of its respective assets as an entirety to any person unless (a) the successor,
which may be a corporation, a partnership, a business association or a trust
organized and existing under the laws of the United States or any State thereof
or the District of Columbia, expressly assumes the obligations of the Company or
MOC under the Secured Indenture and the Secured Notes, (b) immediately before
and immediately after giving effect to such transaction, no Event of Default,
and no event which is, or after notice or passage of time or both, would become
an Event of Default, shall have occurred and be continuing and (c) if the other
party to the transaction has outstanding any Debt immediately prior to such
transaction, the successor person could, immediately after giving effect to such
transaction on a pro forma basis, incur at least $1.00 of additional Debt in
accordance with the covenant described under the caption "Limitation on
Incurrence of Other Debt;" provided, however, that the foregoing provisions
shall not prevent MOC from consolidating with, merging into, or selling, leasing
or transferring all or substantially all of its assets as an entirety to the
Company provided that the conditions in clauses (a) and (b) above are satisfied.
The Secured Indenture provides that Capital may not consolidate with, merge into
or sell, lease or transfer all or substantially all of its assets as an entirety
to any person unless (i) the resulting, surviving or transferee person is the
Company or MOC or a corporation organized and existing under the laws of the
United States or any State thereof or the District of Columbia that is a wholly
owned Qualified Subsidiary and expressly assumes the obligations of Capital
under the Secured Indenture and the Secured Notes and (ii) immediately before
and immediately after giving effect to such transaction, no Event of Default,
and no event which is, or, after notice or passage of time or both, would become
an Event of Default, shall have occurred and be continuing. Notwithstanding the
foregoing, MOC may consolidate with, merge into or transfer all or part of its
assets to the Company, and any Qualified Subsidiary other than MOC and Capital
may consolidate with, merge into or sell, lease or transfer all or part of its
assets to the Company or any other Qualified Subsidiaries.
DEFEASANCE
So long as no Senior Debt Default exists or would result therefrom, the
Obligors may terminate their obligations under the Secured Indenture at any time
by delivering all outstanding Secured Notes to the Secured Trustee for
cancellation. So long as no Senior Debt Default exists or would result
therefrom, the Obligors may, subject to certain conditions, also terminate all
of their obligations under the Secured Indenture, other than their obligations
in respect of payment of principal of and interest on the Secured Notes issued
thereunder, at any time by depositing in trust with the Secured Trustee or a
paying agent other than the Obligors money, non-callable U.S. Government
obligations or beneficial interests in one or more mutual funds which invest
solely in U.S. Government obligations and which are rated in the highest
applicable rating category by a nationally recognized statistical rating
organization, in each case in an amount sufficient to pay all remaining
indebtedness on the Secured Notes.
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MODIFICATION AND WAIVER
Amendments and supplements to the Secured Indenture may be made by the
Obligors and the Secured Trustee with the written consent of a Requisite
Majority of the outstanding Secured Notes; provided that no such amendment or
supplement may, without the consent of the holder of each Secured Note affected
thereby, (i) reduce the percentage of the aggregate face amount of the Secured
Notes necessary to modify, amend or waive any provision of the Secured Indenture
or the Secured Notes; (ii) reduce the rate or change the time for payment of
interest on any Secured Note; (iii) reduce the face amount of or change the
fixed maturity of any Secured Note or portion thereof payable on acceleration
prior to maturity or alter the redemption provisions with respect thereto; (iv)
waive a default in the payment of principal of, interest on or redemption
payment or payment upon mandatory retirement of or a Change in Control with
respect to any Secured Note; (v) impair the right to institute suit for the
enforcement of any payment on or with respect to any Secured Note; (vi) make any
Secured Note payable in a currency other than that stated therein; (vii) amend
the definition of "Accreted Value" in the Secured Indenture or the application
of such term in connection with redemptions or repurchases of Secured Notes or
(viii) modify the subordination provisions of the Secured Indenture in a manner
adverse to the holders of the Secured Notes. Subject to the foregoing, a
Requisite Majority of the outstanding Secured Notes may waive certain past
defaults and may waive compliance by any or all of the Obligors with the
covenants described above without notice to any other holder. An amendment to
the Secured Indenture may not adversely affect the rights under the
subordination provisions thereof of the holders of any issue of Senior Debt of
any Obligor without the consent of such holders. In addition, the Obligors and
the Secured Trustee may modify and amend the Secured Indenture without the
consent of any holder in order to cure ambiguities or to make certain other
changes that will not affect adversely the rights of any holder.
EVENTS OF DEFAULT AND NOTICE THEREOF
The term "Event of Default" when used in the Secured Indenture means any
one of the following: (i) failure to pay interest on the Secured Notes for 30
days, principal of Secured Notes when due or payments to redeem or purchase the
Secured Notes as described under "-- Mandatory Retirement" or "-- Change in
Control" above (in each case regardless of whether such payment is prohibited by
the subordination provisions of the Secured Indenture); (ii) failure of any
Obligor to perform any of its other covenants after notice and a grace period;
(iii) occurrence and continuation beyond any applicable grace period of any
payment default on, or any other default causing (or, in the case of the Company
or MOC, permitting) acceleration of, any indebtedness of any Obligor or a
significant subsidiary of the Company for money borrowed, including under the
Indenture for the Unsecured Notes (provided, in the case of the Company or MOC,
that the aggregate principal amount of such indebtedness shall exceed $10
million); provided that, if any such default is cured or waived and any such
acceleration rescinded, or such debt is repaid, such Event of Default under the
Secured Indenture and any consequent acceleration of the Secured Notes shall be
automatically rescinded, so long as such rescission does not conflict with any
judgment or decree; (iv) the rendering against any Obligor or any significant
subsidiary of the Company of (a) final judgments for the payment of an aggregate
amount exceeding $10 million that remain undischarged for a period (during which
execution thereof shall not be effectively stayed) of 60 days after the date on
which any period for appeal has expired or (b) final judgments, individually or
in the aggregate, in an amount of $10 million or more that shall remain
undischarged and in respect of which judgment liens shall have been perfected on
a substantial portion of the assets of the Obligors or any portion of the
Collateral; and (v) occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to any Obligor or any significant subsidiary of the
Company.
The Secured Indenture provides that the Secured Trustee shall, within 30
days after the occurrence of any default (the term "default" to include the
events specified above without grace or notice) known to it, give to the holders
of the Secured Notes notice of such default, provided that, except in the case
of a payment default with respect to any of the Secured Notes, the Secured
Trustee shall be protected in withholding such notice if it in good faith
determines that the withholding of such notice is in the interest of the holders
of the Secured Notes. The Secured Indenture requires the Obligors to certify to
the Secured Trustee quarterly as to whether any default occurred during such
quarter.
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In case an Event of Default (other than an Event of Default resulting from
the bankruptcy, insolvency or reorganization of an Obligor) shall occur and be
continuing under the Secured Indenture, the Secured Trustee or the holders of at
least 25% in aggregate face amount (at maturity) of the Secured Notes then
outstanding, by notice in writing to the Obligors (and to the Secured Trustee if
given by the holders of the Secured Notes), may declare the Stated Price of the
Secured Notes then outstanding to be due and payable immediately. In case an
Event of Default resulting from certain events of bankruptcy, insolvency or
reorganization of an Obligor shall occur, the Stated Price of the Secured Notes
then outstanding shall become due and payable immediately without any
declaration or other act on the part of the Secured Trustee or the holders of
the Secured Notes. Such acceleration may be annulled and past defaults (except,
unless theretofore cured, a default in payment of the Stated Price of or
interest on the Secured Notes) may be waived by the holders of a Requisite
Majority, upon the conditions to be provided in the Secured Indenture.
The Secured Indenture provides that no holder of a Secured Note may pursue
any remedy under the Secured Indenture unless the Secured Trustee shall have
failed to act for a period of 60 days after notice to the Secured Trustee of an
Event of Default, receipt by the Secured Trustee of a request from holders of at
least 25% in face amount (at maturity) of the Secured Notes to pursue such
remedy and the offer to the Secured Trustee of indemnity satisfactory to it;
however, such provision does not affect the right of a holder of the Secured
Notes to sue for enforcement of any overdue payment thereon.
REPORTS TO SECURITYHOLDERS
Each Obligor shall file with the Trustee copies of its annual reports and
of the information, documents and other reports which it is required to file
with the SEC under the Exchange Act. If Mesa is not a reporting company under
the Exchange Act, it shall file with the Trustee financial statements and a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," each comparable to that which Mesa would have been required to file
with the SEC if it were a reporting company under the Exchange Act. For so long
as the Secured Notes remain outstanding, Mesa will mail or cause to be mailed
copies of all such documents and reports to the holders of the Secured Notes.
THE SECURED TRUSTEE
Harris Trust and Savings Bank is the trustee and collateral agent under the
Secured Indenture and the Security Instruments. The Secured Indenture contains
certain limitations on the right of the Secured Trustee, as a creditor of the
Obligors, to obtain payment of claims in certain cases, or to realize on certain
property received in respect of any such claim as security or otherwise. The
Secured Trustee is permitted to engage in other transactions; however, if it
acquires any conflicting interest (as defined), it must eliminate such conflict
or resign.
The holders of a majority in principal amount or face amount (at maturity),
as applicable, of all outstanding Secured Notes shall have the right to direct
the time, method and place of conducting any proceeding for any remedy or
exercising any power available to the Secured Trustee under the Secured
Indenture.
GOVERNING LAW
The Secured Indenture and the Secured Notes provide that they will be
governed by the laws of the State of New York.
CERTAIN DEFINITIONS USED IN THE SECURED INDENTURE
"Accreted Value" with respect to any Secured Note means, as of May 1, 1993,
76.506% of the stated principal amount of such Secured Note, and as of any date
after May 1, 1993 and prior to July 1, 1995 as of which the Accreted Value is
being calculated (the "Calculation Date"), (a) if the Calculation Date is prior
to June 30, 1993, an amount equal to the sum of (i) the Accreted Value of such
Secured Note as of May 1, 1993 plus (ii) the accrued amortization of the
original issue discount from (but excluding) May 1, 1993 to (and including) the
Calculation Date, calculated as the product of (x) 2.0814% of the Accreted Value
of such
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Secured Note as of May 1, 1993 and (y) a fraction, the numerator of which is the
number of days from (but excluding) May 1, 1993 to (and including) the
Calculation Date (assuming a 360-day year of twelve 30-day months), and the
denominator of which is 60 or (b) if the Calculation Date is a June 30 or
December 31, the percentage of the stated principal amount of such Secured Note
as of such date as shown in the table below or (c) if the Calculation Date is
not a June 30 or December 31, an amount equal to the sum of (i) the Accreted
Value of such Secured Note as of the then most recent to have occurred of the
June 30 or December 31, as the case may be, immediately preceding the
Calculation Date plus (ii) the accrued amortization of the original issue
discount from (but excluding) such immediately preceding June 30 or December 31
to (and including) the Calculation Date, calculated as the product of (x) 6.375%
of the Accreted Value of the Secured Note as of such immediately preceding June
30 or December 31 and (y) a fraction, the numerator of which is the number of
days from (but excluding) such immediately preceding June 30 or December 31 to
(and including) the Calculation Date (assuming a 360-day year of twelve 30-day
months), and the denominator of which is 180. The Accreted Value of each Secured
Note as of each June 30 and December 31 prior to July 1, 1995 shall be an amount
in dollars equal to a percentage of the face amount (at maturity) of such
Secured Note as set forth below:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
-------- -----------
<S> <C> <C>
1993................................................. 78.098% 83.077%
1994................................................. 88.373% 94.007%
1995................................................. 100.000%
</TABLE>
On and after June 30, 1995, the Accreted Value of each Secured Note shall be
equal to 100% of the stated principal amount thereof.
"Applicable Amount of Secured Notes" means, with respect to a Mandatory
Retirement Date under the Secured Indenture, (i) if such Mandatory Retirement
Date is on or prior to June 30, 1995, Secured Notes having, as of such Mandatory
Retirement Date, an aggregate Accreted Value equal to the amount of Mandatory
Retirement Funds as of the corresponding Mandatory Retirement Notice Date, or
(ii) if such Mandatory Retirement Date is on or after July 1, 1995, Secured
Notes having an aggregate face amount (at maturity) equal to the excess of (x)
the amount of Mandatory Retirement Funds as of the corresponding Mandatory
Retirement Notice Date over (y) the aggregate amount of accrued but unpaid
interest on the Secured Notes to the applicable Mandatory Retirement Date.
"Base EBITDA" means (a) for the one-year period ending June 30, 1994, the
sum of the Quarterly Base EBITDA amounts with respect to each of the calendar
quarters comprising such period, and (b) for the two-year period ending June 30,
1995, the sum of the Quarterly Base EBITDA amounts with respect to each of the
calendar quarters comprising such period.
"Bicoastal Collections" means any distributions to the Obligors or any of
their subsidiaries pursuant to that certain Amended and Restated Plan of
Reorganization dated as of June 2, 1992, as modified by the Modification to
Amended and Restated Plan of Reorganization of Bicoastal Corporation, dated
August 27, 1992, as confirmed by an order dated September 14, 1992 entered
pursuant to 11 U.S.C. sec.1129 by the United States Bankruptcy Court, Middle
District of Florida, Tampa Division, and any amendments or modifications
thereto.
"Cash Flow" of any person means, for any period, the sum (without
duplication) for such person and its subsidiaries on a consolidated basis of the
following for such period: (i) operating income (loss) before minority interest
and extraordinary items, (ii) depreciation, depletion and amortization expense,
(iii) impairment and abandonment expense, and (iv) other non-cash items
decreasing operating income, less other non-cash items increasing operating
income.
"Cash Flow Coverage Ratio" means the ratio of (i) the sum of Designated
Cash Flow (as defined below) plus Net Interest Expense (as defined below) for
the latest period of four full fiscal quarters for which financial information
is available immediately prior to the date of the transaction giving rise to the
need to calculate the Cash Flow Coverage Ratio to (ii) Net Interest Expense for
such period of four full fiscal
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quarters, in each case determined on a pro forma basis as if such transaction
(including the incurrence of such Debt, and all other Debt incurred after the
end of such period of four full fiscal quarters and on or prior to the date of
such transaction, and the application of the proceeds therefrom) had been
consummated at the beginning of such period.
"Cash Proceeds" means, with respect to a Collateral Sale, the amount of
cash received by the Company or MOC in connection with such Collateral Sale,
less (i) all sales, transfer, income and other taxes payable as a result of such
Collateral Sale, and (ii) the out-of-pocket expenses incurred in connection with
or as a result of such sale.
"Change in Control" is defined as the acquisition by any person (together
with its affiliates), in one or more transactions, of beneficial ownership of
50% or more in voting power of the outstanding capital stock of the Company. For
purposes of the definition, "beneficial ownership" of securities includes,
without limitation, the right to vote or direct the vote of, or the right to
dispose or direct the disposition of, such securities.
"Collateral Account" means a custodial account maintained by the Secured
Trustee, as collateral agent, for the benefit of the holders of Secured Notes,
into which Release Amounts with respect to Collateral Sales are deposited
pursuant to the Secured Indenture or any of the Security Instruments and, under
certain circumstances, insurance proceeds in respect of West Panhandle
Collateral are to be transferred pursuant to the Mortgage.
"Collateral Sale" means a sale, assignment, lease, transfer, conveyance or
other disposition of any of the Collateral.
"Consolidated Debt" means, for any date, the amount of Debt of the Company
and its Qualified Subsidiaries as of such date, determined on a consolidated
basis in accordance with GAAP.
"Consolidated Net Income" of any person means, for any period, the
aggregate net income (or loss) of such person and its subsidiaries for such
period on a consolidated basis, determined in accordance with GAAP, provided
that (a) the net income or loss of any other person in which such person or any
subsidiary thereof has an interest (which interest does not cause the net income
of such other person to be consolidated with the net income of such person in
accordance with GAAP) shall be excluded and instead an amount equal to any
dividends or distributions paid to such person or its subsidiaries by such other
person in such period shall be included and (b) the net income (or loss) of any
other person acquired in a pooling of interest transaction for any period prior
to the date of such acquisition shall be excluded.
"D&M Report" means the reserve report dated December 31, 1992 prepared by
DeGolyer and MacNaughton, independent petroleum consultants, with respect to
Properties that include the West Panhandle Collateral.
"Debt" of an entity is defined as the following, whether outstanding on the
date of the Secured Indenture or thereafter created or incurred: (a) any
liability of such entity (1) for borrowed money, (2) evidenced by a note,
debenture or similar instrument (including a purchase money obligation) given in
connection with the acquisition of or exchange for any property or assets (other
than inventory or similar property acquired in the ordinary course of business),
including securities and Debt, or (3) in respect of letters of credit issued for
its account; (b) any liability of others described in clause (a) that such
entity has guaranteed or which is otherwise its legal liability or which is
secured by assets of such person; (c) any amendment, renewal, extension or
refunding of any liability of the types referred to in the preceding clauses (a)
and (b); and (d) in the case of the Company, any preferred stock of any
Qualified Subsidiary (as defined under "Mandatory Retirement" below), except for
preferred stock issued to the Company or any other Qualified Subsidiary;
provided that "Debt" of an entity shall not include any liability of such entity
for employee compensation or for inventory or similar property acquired in the
ordinary course of business or for services.
"Designated Cash Flow" means, for any period, Cash Flow of the Company and
its subsidiaries on a consolidated basis, determined in accordance with GAAP,
for such period, less (a) HCLP Required Cash Flow for such period, less (b) Cash
Flow of any other Non-Qualified Subsidiary of the Company for such period, less
(c) any equity contributions, advances or loans to any Non-Qualified Subsidiary
made during such
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<PAGE> 72
period and plus (d) cash actually distributed, advanced or loaned by a
Non-Qualified Subsidiary to the Company or to any Qualified Subsidiary during
such period.
"Disinterested Directors" of the Company means members of the board of
directors of the Company who are not employees, officers or affiliates (or
employees, officers or general partners of such affiliates) of the Company;
provided, however, that for the purposes of this definition, no person shall be
deemed to be an affiliate of the Company solely because such person is a member
of the board of directors of the Company.
"Energy Futures Contracts" means energy futures and other contracts,
options, forward pricing or sale arrangements or other energy related derivative
securities.
"Equity Securities" of the Company means capital stock or other equity
interests in the Company or warrants, options or other rights to acquire capital
stock or other equity interests in the Company (but excluding, prior to its
conversion or exchange, any debt security (excluding the Convertible Notes) that
is convertible into, or exchangeable for, capital stock).
"Excess Sale Proceeds" for any period, means the excess of (i) 50% of the
sum of (x) the aggregate net cash proceeds received during such period from the
sale by the Company or any of its Qualified Subsidiaries during such period of
any oil and gas properties (other than West Panhandle Collateral or any
partnership interest in HCLP) plus (y) Bicoastal Collections received by the
Company or any of its subsidiaries during such period over (ii) the amount of
such net cash proceeds and Bicoastal Collections applied during such period to
repay or retire Debt outstanding under the Credit Agreement.
"First Lien Debt" means any obligations (including, without limitation, any
obligations payable under the Credit Agreement) secured by a lien upon or
security interest in the Collateral, which lien or security interest is senior
or prior to the liens and security interests created by the Mortgage and the
Pledge Agreement.
"Forward Sale" means any advance payment agreement or other arrangement
pursuant to which Operating, having received full payment of the purchase price
for a specified quantity of Hydrocarbons upon entering such agreement or
arrangement, is required to deliver, in one or more installments subsequent to
the date of such agreement or arrangement, such quantity of Hydrocarbons to the
purchaser of such Hydrocarbons pursuant to and during the term of such agreement
or arrangement.
"Fractional Sale" means a sale of an undivided percentage interest in the
assets sold pursuant to such sale.
"GAAP" means generally accepted accounting principles as in effect in the
United States of America as of any date of determination.
"HCLP Required Cash Flow" means, for any period, Cash Flow of HCLP for such
period that is not permitted by the terms of the mortgage securing the HCLP
Secured Notes to be distributed by HCLP free of the lien of such mortgage.
"Helium" means any interest in helium processed at MOC's Satanta Plant, as
shown in the most recent Reserve Report that includes all such Helium.
"Helium EBITDA Reduction Percentage" means, with respect to a reduction of
Helium Quarterly Base EBITDA amounts resulting from a Forward Sale of Helium,
the quotient (stated as a percentage) of (a) the Reduction Percentage Numerator
and (b) the Reduction Percentage Denominator. For purposes of this definition
(a) "Reduction Percentage Numerator" means the volume of Helium deliverable
pursuant such sale and (b) "Reduction Percentage Denominator" means the total
volume of Helium owned by MOC.
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<PAGE> 73
"Helium Quarterly Base EBITDA" means, with respect to any calendar quarter
set forth below, the amount, in dollars, set forth below opposite such calendar
quarter; provided, that upon each Forward Sale by MOC of any Helium after June
30, 1993, Helium Quarterly Base EBITDA with respect to any calendar quarter
beginning after the date of such sale, shall be an amount equal to the product
of (a) the Helium Quarterly Base EBITDA amount in effect immediately prior to
such sale with respect to such calendar quarter and (b) the excess of (i) 100%
over (ii) the Helium EBITDA Reduction Percentage with respect to such sale.
<TABLE>
<CAPTION>
HELIUM
----------
<S> <C>
September 30, 1993................................................ 910,000
December 31, 1993................................................. 1,596,000
March 31, 1994.................................................... 2,053,000
June 30, 1994..................................................... 225,000
September 30, 1994................................................ 1,517,000
December 31, 1994................................................. 2,659,000
March 31, 1995.................................................... 2,864,000
June 30, 1995..................................................... 314,000
</TABLE>
"Hydrocarbons" has the meaning given to such term in the Mortgage.
"Independent Financial Advisor" means an accounting, appraisal or
investment banking firm of nationally recognized standing which is qualified to
perform the task for which such firm has been engaged and is independent with
respect to the Obligors.
"Interest Expense" means, for any person for any period, interest expense
of such person for such period, including the amortization of original issue
discount and the interest component of any capitalized lease obligation, less,
to the extent included in such interest expense, amortization of costs incurred
in connection with the issuance of Debt of such person and interest paid or to
be paid in capital stock of such person.
"Interest Income" means, for any person for any period, interest and
dividend income of such person for such period, and dividend income includes
distributions, to the extent of current accumulated earnings, on equity
investments (other than in subsidiaries).
"Mandatory Retirement Date" means, when used with respect to a Mandatory
Retirement Notice Date, a date selected by the Obligors that is not less than 30
nor more than 40 days after such Mandatory Retirement Notice Date.
"Mandatory Retirement Funds" means, as of any Mandatory Retirement Notice
Date, an amount equal to 90% of the excess of the sum of (a) Cash Flow of the
Company for the period beginning July 1, 1993 and ending on the June 30 prior to
such Mandatory Retirement Notice Date plus (b) if no Debt is outstanding under
the Credit Agreement on such June 30, any Excess Sale Proceeds for such period,
over the sum of (i) Senior Debt Retirement for such period, (ii) Permitted
Capital Expenditures for such period, (iii) Base EBITDA for such period, (iv)
Qualified Interest Expense for such period and (v) Cash Flow of Non-Qualified
Subsidiaries for such period; provided that Mandatory Retirement Funds as of
such Mandatory Retirement Notice Date shall not exceed the excess of (i) the
change from May 1, 1993 to such June 30 in the aggregate Accreted Value of the
Secured Notes then outstanding plus the change from May 1, 1993 to such June 30
in the aggregate Accreted Value (as defined in the Indenture for the Unsecured
Notes) of the Unsecured Notes then outstanding over (ii) the aggregate amount of
the Accreted Value of Secured Notes redeemed, repurchased or otherwise acquired
prior to such Mandatory Retirement Notice Date (such Accreted Value to be
determined as of the date of such redemption, repurchase or other acquisition),
plus the aggregate amount of the Accreted Value (as defined in the Indenture for
the Unsecured Notes) of Unsecured Notes (x) redeemed, repurchased or otherwise
acquired prior to such Mandatory Retirement Notice Date or (y) required to be
acquired on such Mandatory Retirement Date pursuant to the indenture for the
Unsecured Notes (such Accreted Value to be determined, in each case, as of the
date of such redemption, repurchase or other acquisition) plus any amounts made
available for purchases pursuant to any prior Retirement Offer to
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<PAGE> 74
purchase Secured Notes or any prior Retirement Offer (as defined in the
indenture for the Unsecured Notes) to purchase Unsecured Notes but not so
applied because such offer was undersubscribed.
"Mandatory Retirement Notice Date" means August 31, 1994 or August 31,
1995.
"Margin Debt" means Debt incurred to purchase or carry investments in
stocks or other securities permitted by the covenant described under the caption
"Restrictions on Investments, Loans and Advances" above.
"Net Interest Expense" means, for any period, the excess of (i) Designated
Interest Expense for such period over (ii) Designated Interest Income for such
period. "Designated Interest Expense" means, for any period, Interest Expense of
the Company and its subsidiaries on a consolidated basis for such period,
determined in accordance with GAAP, less Interest Expense of HCLP and all other
Non-Qualified Subsidiaries for such period. "Designated Interest Income" means,
for any period, Interest Income of the Company and its subsidiaries on a
consolidated basis for such period, determined in accordance with GAAP, less any
Interest Income of HCLP and all other Non-Qualified Subsidiaries for such
period.
"Non-Qualified Subsidiary" means HCLP and any subsidiary that at the time
of determination is designated as a Non-Qualified Subsidiary by the Company in
writing to the Secured Trustee (including each subsidiary of HCLP and of the
subsidiary so designated); provided, however, that neither MOC nor Capital may
be designated as a Non-Qualified Subsidiary and neither MHC nor MMC,
respectively, may be designated as a Non-Qualified Subsidiary prior to the date
on which it has reduced its respective Debt to MOC to an amount not in excess of
$5,000,000. Once a subsidiary has been designated a Non-Qualified Subsidiary,
the Company may not revoke such designation unless (a) immediately before and
immediately after giving effect to such revocation, no Event of Default, and no
event which is, or after notice or passage of time or both, would become an
Event of Default, shall have occurred and be continuing and (b) if such Non-
Qualified Subsidiary has outstanding any Debt immediately prior to such
revocation, the Company could, immediately after giving effect to such
revocation on a pro forma basis, incur at least $1.00 of additional Debt in
accordance with the covenant described under the caption "Limitation on
Incurrence of Debt" below. The Company has designated Mesa Environmental as a
Non-Qualified Subsidiary.
"Non West Panhandle EBITDA Reduction Percentage" means, with respect to a
reduction of Non West Panhandle Quarterly Base EBITDA amounts resulting from a
sale of Non West Panhandle Property, the quotient (stated as a percentage) of
(a) the Reduction Percentage Numerator and (b) the Reduction Percentage
Denominator. For purposes of this definition (a) "Reduction Percentage
Numerator" means (i) if such sale of Non West Panhandle Property is an Oil and
Gas Property Sale, the volume of proved reserves of natural gas equivalents
attributable to the Properties sold pursuant to such sale, as specified in the
most recent Reserve Report that includes all reserves constituting the
Properties sold pursuant to such sale, or (ii) if such sale of Non West
Panhandle Property is a Forward Sale, the volume of natural gas equivalents
deliverable pursuant to such sale on and after the first anniversary of the date
of such sale; and (b) "Reduction Percentage Denominator" means (i) if such sale
of Non West Panhandle Property is an Oil and Gas Property Sale, the total volume
of proved reserves of natural gas equivalents attributable to all of the Non
West Panhandle Property in the most recent Reserve Report that includes all of
the Non West Panhandle Property or (ii) if such sale of Non West Panhandle
Property is a Forward Sale, the total volume of proved reserves of natural gas
equivalents attributable to all of the Non West Panhandle Property in the most
recent Reserve Report that includes all of the Non West Panhandle Property.
"Non West Panhandle Property" means any interest in any oil, gas or other
Hydrocarbon Property owned by MOC, except for (a) an interest in HCLP or (b) any
property comprising a portion of the West Panhandle Collateral.
"Non West Panhandle Quarterly Base EBITDA" means, with respect to any
calendar quarter set forth below, the amount, in dollars, set forth below
opposite such calendar quarter; provided, that upon each sale by MOC of any Non
West Panhandle Property after June 30, 1993, Non West Panhandle Quarterly Base
EBITDA with respect to any calendar quarter beginning after the date of such
sale, shall be an amount equal to the product of (a) the Non West Panhandle
Quarterly Base EBITDA amount in effect immediately prior
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<PAGE> 75
to such sale with respect to such calendar quarter and (b) the excess of (i)
100% over (ii) the Non West Panhandle EBITDA Reduction Percentage with respect
to such sale.
<TABLE>
<CAPTION>
NON WEST PANHANDLE
QUARTERLY BASE EBITDA
---------------------
<S> <C>
September 30, 1993....................................... 5,840,000
December 31, 1993........................................ 8,420,000
March 31, 1994........................................... 10,393,000
June 30, 1994............................................ 1,138,000
September 30, 1994....................................... 7,677,000
December 31, 1994........................................ 13,459,000
March 31, 1995........................................... 9,053,000
June 30, 1995............................................ 992,000
</TABLE>
"Oil and Gas Property Sale" means a sale of Hydrocarbon reserves
attributable to a particular well or wells.
"Permitted Capital Expenditures" for any period shall mean the aggregate
amount of capital expenditures by the Company and its Qualified Subsidiaries for
such period, provided that Permitted Capital Expenditures shall not exceed the
sum of (i) $28,000,000 for the one-year period ending June 30, 1994 or
$53,000,000 for the two-year period ending June 30, 1995, and (ii) any
additional capital expenditures incurred for the purpose of complying with legal
or regulatory requirements, or for complying with contractual requirements in
existence on May 1, 1993, or for replacing or maintaining the productive
capacity of the Company's oil and gas properties and facilities, during such
period.
"Permitted Investments" means (a) direct obligations of, and obligations
fully guaranteed by, the United States of America or any agency or
instrumentality of the United States of America, (b) demand and time deposits
with, and certificates of deposit and bankers' acceptances issued by, any bank
or trust company organized under the laws of the United States of America or any
State thereof whose unsecured, unguaranteed long-term debt obligations are rated
not less than "A" (or the then equivalent rating) by the rating service of
Standard & Poor's Corporation or of Moody's Investors Service, Inc., or whose
unsecured, unguaranteed commercial paper obligations are rated not less than
"A-2" (or the then equivalent rating) by the rating service of Standard & Poor's
Corporation or not less than "P-2" (or the then equivalent rating) by the rating
service of Moody's Investors Service, Inc., or upon the discontinuance of both
of such services, such other nationally recognized rating service or services,
as the case may be, as shall be selected by the Obligors with the consent of the
Trustee, (c) repurchase agreements pursuant to a written agreement with respect
to any obligation described in clauses (a) and (b) above (provided that such
agreements are entered into on terms and conditions substantially similar to the
terms and conditions set forth in the form of Master Repurchase Agreement
promulgated by the Public Securities Association with a "Buyer's Margin Amount",
as defined therein, as least equal to 95%) entered into with entities whose
unsecured, unguaranteed long-term debt obligations are rated not less than "A"
(or the then equivalent rating) by the rating service of Standard & Poor's
Corporation or of Moody's Investors Service, Inc., or whose unsecured,
unguaranteed commercial paper obligations are rated not less than "A" (or the
then equivalent rating) by the rating service of Standard & Poor's Corporation
or of Moody's Investors Service, Inc., (d) commercial paper (including both
noninterest-bearing discount obligations and interest-bearing obligations
payable on demand or on a specified date not later than 270 days from the date
of acquisition thereof and having a rating of not less than "A-2" (or the then
equivalent rating) by the rating service of Standard & Poor's Corporation or not
less than "P-2" (or the then equivalent rating) by the rating service of Moody's
Investors Service, Inc., or upon the discontinuance of both of such services,
such other nationally recognized rating service or services, as the case may be,
as shall be selected by the Obligors with the consent of the Trustee, (e)
participations (purchased from any bank whose unsecured, unguaranteed long-term
debt obligations are rated not less than "A" (or the then equivalent rating) by
the rating service of Standard & Poor's Corporation or of Moody's Investors
Service, Inc., without recourse to the selling bank as a part of an established
investment program of such bank pursuant to which it regularly sells
participations to other persons for short term investment) in unsecured debt
(not to include
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<PAGE> 76
debt of any person in excess of $10,000,000) of its major corporate customers
(whose debt instruments are, without support from the joint or guaranty
liability of any other person, rated "investment grade") of such bank, bearing
interest at or below the prime rate or similar rate of such bank and having a
maturity not later than ninety (90) days from the date of purchase thereof, (f)
cash maintained in brokerage accounts, and (g) direct obligations of any money
market fund or other similar investment company all of whose investments consist
of obligations described in the foregoing clauses of this definition and that is
rated "Am" or higher by the rating service of Standard & Poor's Corporation or
of Moody's Investors Service, Inc.
"Permitted Purchase Money Debt" means Debt incurred solely for the purpose
of financing the acquisition of tangible personal Property acquired for use in
the ordinary course of business in an aggregate principal amount at any time
outstanding not to exceed $3,000,000.
"Physical Asset Sale" means a sale (other than an Oil and Gas Property Sale
or a Forward Sale) of any Property for aggregate consideration exceeding
$5,000,000.
"Qualified Interest Expense" for any period shall mean Interest Expense
paid during the period on outstanding Senior Debt of the Obligors or on any
Refinancing Debt of the Obligors to the extent the net proceeds from the
issuance or sale of such Refinancing Debt were used to redeem or retire Secured
Notes.
"Qualified Subsidiary" means a subsidiary that is not a Non-Qualified
Subsidiary.
"Quarterly Base EBITDA" means, with respect to any calendar quarter, the
sum of (a) West Panhandle Quarterly Base EBITDA with respect to such calendar
quarter, (b) Non West Panhandle Quarterly Base EBITDA with respect to such
calendar quarter and (c) Helium Quarterly Base EBITDA with respect to such
calendar quarter.
"Release Price" with respect to a Collateral Sale, means, as of any date of
determination, (a) if the Collateral sold is West Panhandle Collateral, an
amount equal to 120% of the product of (i) the West Panhandle Collateral Sale
Percentage, (ii) 60% and (iii) the Secured Debt Amount at such date less the
amount of cash or other assets on deposit in the Collateral Account at such
date; and (b) if the Collateral sold is HCLP Collateral, an amount equal to 120%
of the product of (i) the percentage interest in HCLP Collateral sold, (ii) 40%
and (iii) the Secured Debt Amount at such date less the amount of cash or other
assets on deposit in the Collateral Account at such date.
"Requisite Majority" means, with respect to any vote, action, direction,
consent or waiver by holders of Secured Notes, the holders of at least
two-thirds in aggregate face amount at stated maturity of the outstanding
Secured Notes for which responses to a solicitation of such vote, action,
consent or waiver have been received; provided, however, that a "Requisite
Majority" shall in no event be less than the holders of a majority in aggregate
face amount at stated maturity of all Secured Notes then outstanding.
"Reserve Report" means a report prepared with respect to Hydrocarbon
reserves in accordance with guidelines published by the SEC and, to the maximum
extent possible consistent with such guidelines, in substantially the form of
the D&M Report.
"Secured Debt Amount" means, as of any date of determination, the sum of
(i) the aggregate Accreted Value of the Secured Notes on such date, if such date
is on or prior to June 30, 1995, or 100% of the principal amount of the Secured
Notes plus accrued but unpaid interest thereon to such date, if such date is
after June 30, 1995 and (ii) the principal amount of First Lien Debt outstanding
on such date.
"Senior Debt Default" when used with respect to an Obligor means any
default in the payment of the principal of or sinking fund installments, if any,
due with respect to, fees in respect of or interest on, any First Lien Debt of
such Obligor or any default, or any event which, with notice or lapse of time or
both, would constitute a default, in any other agreement, term or condition
contained in any agreement under which any First Lien Debt of such Obligor is
issued or secured.
"Senior Debt Retirement" for a period shall mean (i) $60,000,000 for the
one-year period ending June 30, 1994 and (ii) $110,000,000 for the two-year
period ending June 30, 1995.
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<PAGE> 77
"Stated Price" means, with respect to any Secured Note as of any date of
determination, (i) the Accreted Value thereof on the date of determination, if
such date is on or prior to June 30, 1995 or (ii) 100% of the face amount (at
maturity) thereof plus accrued but unpaid interest thereon to the date of
determination, if such date is after June 30, 1995, and, in the cases, and only
in the cases, of an optional redemption of Secured Notes effected pursuant to
the terms of the Secured Notes, or of an offer to purchase any Secured Note made
pursuant to the Change in Control provisions of the Secured Indenture, the
premium (if any) payable pursuant to such terms of the Secured Notes or such
Change in Control provisions, as applicable.
"Subordinated Debt" means Debt that, by its terms, is junior in right of
payment to the Secured Notes.
"West Panhandle Collateral Sale Percentage" means, (a) with respect to a
Collateral Sale of all the West Panhandle Collateral, 100% and (b) with respect
to a Collateral Sale of a portion of the West Panhandle Collateral, the quotient
(stated as a percentage) of (a) the Sale Percentage Numerator and (b) the Sale
Percentage Denominator. For purposes of this definition, (a) "Sale Percentage
Numerator" means (i) if such Collateral Sale is a Fractional Sale of the West
Panhandle Collateral, the undivided percentage interest in the West Panhandle
Collateral sold pursuant to such Collateral Sale, or (ii) if such Collateral
Sale is an Oil and Gas Property Sale, the volume of proved reserves of natural
gas equivalents attributable to the portion of the West Panhandle Collateral
sold pursuant to such Collateral Sale, as specified in the D&M Report, or (iii)
if such Collateral Sale is a Forward Sale, the volume of natural gas equivalents
deliverable pursuant to such Collateral Sale on and after the first anniversary
of such date, or (iv) if the Collateral Sale is a Physical Asset Sale, the net
book value, as of the date of the most recent balance sheet of the Company prior
to the date of determination, of the assets sold pursuant to such Collateral
Sale; and (b) "Sale Percentage Denominator" means (i) if such Collateral Sale is
a Fractional Sale of the West Panhandle Collateral, 1, or (ii) if such
Collateral Sale is an Oil and Gas Property Sale, 581,790,000 Mcfe, or (iii) if
such Collateral Sale is a Forward Sale, the total volume of proved reserves of
natural gas equivalents attributable to the West Panhandle Collateral in the
most recent Reserve Report that includes all reserves constituting West
Panhandle Collateral, or (iv) if such Collateral Sale is a Physical Asset Sale,
the net book value, as of the date of the most recent balance sheet of the
Company prior to the date of determination, of all the West Panhandle
Collateral.
"West Panhandle EBITDA Reduction Percentage" means, with respect to a
reduction of West Panhandle Quarterly Base EBITDA amounts resulting from a
Collateral Sale of a portion of West Panhandle Collateral, the quotient (stated
as a percentage) of (a) the Sale Percentage Numerator and (b) the Sale
Percentage Denominator. For purposes of this definition, (a) "Sale Percentage
Numerator" means (i) if such Collateral Sale is a Fractional Sale of the West
Panhandle Collateral, the undivided percentage interest in the West Panhandle
Collateral sold pursuant to such Collateral Sale, or (ii) if such Collateral
Sale is an Oil and Gas Property Sale, the volume of proved reserves of natural
gas equivalents attributable to the portion of the West Panhandle Collateral
sold pursuant to such Collateral Sale, as specified in the D&M Report, or (iii)
if such Collateral Sale is a Forward Sale, the volume of natural gas equivalents
deliverable pursuant to such Collateral Sale on and after the first anniversary
of the date of such Forward Sale, or (iv) if the Collateral Sale is a Physical
Asset Sale, the net book value, as of the date of the most recent balance sheet
of the Company prior to the date of determination, of the assets sold pursuant
to such Collateral Sale; and (b) "Sale Percentage Denominator" means (i) if such
Collateral Sale is a Fractional Sale of the West Panhandle Collateral, 1, or
(ii) if such Collateral Sale is an Oil and Gas Property Sale, 581,790,000 Mcfe,
or (iii) if such Collateral Sale is a Forward Sale, the total volume of proved
reserves of natural gas equivalents attributable to the West Panhandle
Collateral in the most recent Reserve Report that includes all reserves
constituting West Panhandle Collateral, or (iv) if such Collateral Sale is a
Physical Asset Sale, the net book value, as of the date of the most recent
balance sheet of the Company prior to the date of determination, of all the West
Panhandle Collateral.
"West Panhandle Quarterly Base EBITDA" means, with respect to any calendar
quarter set forth below, the amount, in dollars, set forth below opposite such
calendar quarter; provided, that upon each sale by MOC of a portion of the West
Panhandle Collateral after June 30, 1993, West Panhandle Quarterly Base EBITDA
with respect to any calendar quarter beginning after the date of such sale,
shall be an amount equal to the
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<PAGE> 78
product of (a) the West Panhandle Quarterly Base EBITDA amount in effect
immediately prior to such sale with respect to such calendar quarter and (b) the
excess of (i) 100% over (ii) the West Panhandle EBITDA Reduction Percentage with
respect to such sale.
<TABLE>
<CAPTION>
WEST PANHANDLE
QUARTERLY BASE EBITDA
---------------------
<S> <C>
September 30, 1993....................................... 6,739,000
December 31, 1993........................................ 14,577,000
March 31, 1994........................................... 11,562,000
June 30, 1994............................................ 1,266,000
September 30, 1994....................................... 8,540,000
December 31, 1994........................................ 14,972,000
March 31, 1995........................................... 12,210,000
June 30, 1995............................................ 1,337,000
</TABLE>
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
SCOPE AND LIMITATIONS
This section discusses the material federal income tax consequences under
current law of the ownership and disposition of Secured Notes that are acquired
in the Offering. It does not, however, discuss every aspect of federal income
taxation that may be relevant to a particular taxpayer under special
circumstances or to foreign corporations or persons who are not citizens of the
United States or who are otherwise subject to special tax treatment under the
federal income tax laws, and it does not discuss the effect of any applicable
foreign, state, or local tax laws.
Except as otherwise indicated, statements of legal conclusion regarding tax
treatments, tax effects or tax consequences that are set forth in this section
reflect the opinion of Baker & Botts, L.L.P., counsel for the Obligors. The
conclusions are based primarily upon the Internal Revenue Code of 1986, as
amended (the "Code"), the existing regulations thereunder, and the current
rulings and decisions interpreting such provisions, all of which are subject to
change, possibly with retroactive effect. Such conclusions also take into
account the proposed treasury regulations under Sections 1271-1275 of the Code.
Proposed regulations, however, are not legally binding and may be modified
before becoming final or may be withdrawn without ever becoming final.
No ruling has been requested from the Internal Revenue Service ("IRS") on
any aspect of the Offerings, and the IRS may disagree with some conclusions set
forth below.
ACCORDINGLY, NOTEHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS.
STATED INTEREST
The receipt of stated interest on the Secured Notes will not be taxable to
Noteholders but, rather, such stated interest will be included in the original
issue discount ("OID") reportable under the rules described below.
ORIGINAL ISSUE DISCOUNT
The Secured Notes will be issued with OID within the meaning of Section
1273(a) of the Code. The amount of OID on the Secured Notes will equal the
excess of their "Redemption Price" over their "Issue Price." The "Redemption
Price" will equal the sum of the face amount and the aggregate amount of stated
interest payments to be made over the life of the Secured Notes. The "Issue
Price" of the Secured Notes will be the first price at which a substantial
portion of the Secured Notes are sold to the public in the Offering. All
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<PAGE> 79
Secured Notes acquired by a particular Noteholder in the Offering will be
treated as a single debt instrument for purposes of applying the OID rules.
The OID described in the preceding paragraph will accrue daily on the
Secured Notes on a constant yield basis over their term. Each Noteholder
generally must include in income for each taxable year the daily portion of OID
that accrues during such year while he holds the Notes (including the purchase
date and excluding the disposition date). The daily portion is determined by
allocating to each day of an accrual period (generally, each six-month period
or, in the case of the initial period, the shorter period from the issue date) a
pro rata portion of an amount determined by multiplying (i) the "adjusted issue
price" of the Secured Notes at the beginning of the accrual period by (ii) 50%
of their yield to maturity (determined on the basis of semi-annual compounding
and without reference to actual interest payments). The "adjusted issue price"
of the Secured Notes at the beginning of an accrual period will equal their
Issue Price, increased by the aggregate amount of OID that has accrued on the
Secured Notes in all prior accrual periods, and decreased by all payments
(including stated interest payments) made during all prior accrual periods.
A Noteholder's tax basis in the Secured Notes will be increased by the OID
includible in his taxable income under the foregoing rules and will be reduced
by any amounts (including stated interest) received by him with respect to the
Notes.
To promote fungibility between Secured Notes offered hereby ("New Notes")
and Secured Notes issued in the Exchange Offer ("Existing Notes"), the Company
will report to the IRS and Noteholders the same amount of OID for the New Notes
as it reports for the Existing Notes. If, as expected, the adjusted Issue Price
of the Existing Notes on the date the New Notes are issued is lower than the
actual Issue Price of the New Notes, the amount of reported OID for the New
Notes will exceed actual OID for the New Notes. Accordingly, an original
purchaser of a New Note should reduce the reported OID for the New Notes by the
excess of the actual Issue Price over the deemed Issue Price. Such reduction
should be computed in the manner provided by Section 1272(a)(7) of the Code for
persons who purchase Existing Notes for an amount in excess of the adjusted
Issue Price. The Company will only claim OID deductions for the New Notes based
on their actual Issue Price.
MARKET DISCOUNT
The market discount rules may affect resale of the Secured Notes. If a
person purchases a Secured Note at a market discount and thereafter recognizes
gain upon its disposition, such gain will be taxable as ordinary interest income
to the extent of the market discount that accrued during the period the
purchaser held such Note. Generally, market discount will exist on the purchase
of a Secured Note if the purchase price is less than the sum of the Issue Price
of the Note and the OID accrued thereon prior to such purchase. Thus, market
discount will not exist on Secured Notes that are purchased in the Offering,
except for those Notes (if any) that are purchased for less than the Issue
Price. Market discount income is recognized on a gift of a Note, as well as upon
its sale.
DISPOSITION OF SECURED NOTES
A Noteholder will recognize gain or loss upon a sale, redemption, or other
taxable disposition of a Secured Note measured by the difference between (i) the
amount of cash and the fair market value of property received and (ii) his tax
basis in the Note. Subject to the market discount rules discussed above, such
gain or loss will be capital gain or loss if the property disposed of is a
capital asset in the hands of the Noteholder.
BACKUP WITHHOLDING
Under the backup withholding rules, interest otherwise payable to a holder
of Secured Notes and the proceeds from any disposition of Secured Notes may be
subject to backup withholding at a rate of 31% unless the Noteholder (i) is a
corporation or comes within certain other exempt categories and, demonstrates
that fact when required, or (ii) provides a correct taxpayer identification
number, certifies as to no loss of exemption from backup withholding, and
otherwise complies with applicable requirements of the backup withholding rules.
77
<PAGE> 80
PLAN OF DISTRIBUTION
Offers to purchase Secured Notes are being considered by the Obligors on a
continuing basis. The Obligors may sell Secured Notes directly or through
underwriters or agents acting on a best efforts basis or as otherwise indicated
in a Prospectus Supplement. Any such underwriter or agent involved in the offer
and sale of the Secured Notes will be named in an applicable Prospectus
Supplement.
The proceeds of the sale of the Secured Notes offered hereby will be used
to fund all or a portion of the Company's $42.75 million share of the settlement
payment to be made to Unocal. The settlement of the lawsuit with Unocal is
subject to court approval, and this Offering will not be consummated unless and
until such court approval is obtained. A hearing before the court is currently
scheduled for February 28, 1994 to determine the fairness, reasonableness and
adequacy of the settlement and whether it should be finally approved by the
court. See "Unocal Litigation and Settlement."
The consummation of this Offering is also conditioned upon the sale of an
aggregate amount of Secured Notes that would result in net proceeds of at least
$40 million, before deducting expenses of the Company estimated at $225,000,
unless a Prospectus Supplement hereto otherwise provides. The Obligors will not
issue an amount of Secured Notes pursuant to this Offering that would result in
net proceeds of more than $42.75 million, before deducting expenses of the
Company. The Secured Notes may be offered and sold at a fixed price or prices,
which may be changed, or from time to time at market prices prevailing at the
time of sale, at prices related to such prevailing market prices or at
negotiated prices. Based on discussions with certain dealers, the Obligors
believe that, as of February 4, 1994, offered prices by such dealers for Secured
Notes were higher than the Accreted Value of the Secured Notes as of that date.
In the event that the Obligors accept offers to purchase Secured Notes and
receive all or a portion of the purchase price therefor prior to the time the
minimum net proceeds condition described above is satisfied, then if the
Offering is not consummated for any reason any such consideration received shall
be promptly refunded to the purchaser.
The Obligors also may, from time to time, authorize underwriters acting as
agents of the Obligors to offer and sell the Secured Notes upon the terms and
conditions set forth in any Prospectus Supplement. In connection with the sale
of Secured Notes, underwriters may be deemed to have received compensation from
the Obligors in the form of underwriting discounts or commissions and may also
receive commissions from purchasers of Secured Notes for whom they may act as
agent. Underwriters may sell Secured Notes to or through dealers, and such
dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions (which may be changed from
time to time) from the purchasers for whom they may act as agent.
If the Obligors, directly or through agents, solicit offers to purchase
Secured Notes, the Obligors reserve the sole right to accept and, together with
their agents, to reject, in whole or in part, any proposed purchase of Secured
Notes.
Any underwriting compensation paid by the Obligors to underwriters or
agents in connection with the offering of Secured Notes, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in an applicable Prospectus Supplement. Underwriters, dealers
and agents participating in the distribution of the Secured Notes may be deemed
to be underwriters under the Securities Act, and any discounts and commissions
received by them and any profit realized by them on resale of the Secured Notes
may be deemed to be underwriting discounts and commissions under the Securities
Act. Underwriters, dealers and agents may be entitled, under agreements with the
Obligors, to indemnification against and contribution toward certain civil
liabilities, including liabilities under the Securities Act, and to
reimbursement by the Obligors for certain expenses. Unless otherwise indicated
in a Prospectus Supplement, any such agent will be acting on a best efforts
basis for the period of its appointment. In the event that any agents or dealers
acting on behalf of the Obligors receive any consideration in respect of the
purchase of any of the Secured Notes offered hereby prior to the time the
minimum net proceeds condition described above has been satisfied, (i) the money
or other consideration received by such agent or dealer shall be promptly
deposited by such agent or dealer in a separate bank account, as agent or
trustee for the Obligors and the investors, until the conditions to the Offering
have been satisfied, and then the proceeds from the sale shall be released to
the Obligors and interest, if any, on the deposited amounts shall be promptly
remitted to the
78
<PAGE> 81
investors, or (ii) all such funds shall be promptly transmitted to a bank which
has agreed in writing to hold all such funds in escrow for the Company and the
investors and to release or remit such funds as provided in clause (i) above
when the conditions to the Offering have been satisfied.
Delayed Delivery Arrangements. If so indicated in an applicable Prospectus
Supplement, the Obligors will authorize underwriters or other persons acting as
the Obligors' agents to solicit offers by certain institutions to purchase
Secured Notes from the Obligors at the public offering price set forth in such
Prospectus Supplement pursuant to Delayed Delivery Contracts ("Contracts")
providing for payment and delivery on the date or dates stated in such
Prospectus Supplement. Each Contract will be for an amount not less than, and
the aggregate principal amount of Secured Notes sold pursuant to Contracts shall
not be less nor more than, the respective amounts stated in such Prospectus
Supplement. Institutions with whom Contracts, when authorized, may be made
include commercial and savings banks, insurance companies, pension funds,
investment companies, education and charitable institutions and other
institutions, but will in all cases be subject to the approval of the Obligors.
Unless otherwise stated in a Prospectus Supplement, contracts will not be
subject to any conditions except (i) the purchase by an institution of the
Secured Notes covered by its Contracts shall not at the time of delivery be
prohibited under the laws of any jurisdiction in the United States to which such
institution is subject, (ii) approval of the Settlement Agreement shall have
been granted by the Court having jurisdiction over the Unocal litigation, and
(iii) an amount of Secured Notes that would result in proceeds of at least $40
million, before deducting expenses of the Company estimated at $225,000, are
sold. Agents and underwriters will have no responsibility in respect of the
delivery or performance of Contracts.
LEGAL OPINIONS
The validity of the issuance of the Secured Notes offered by this
Prospectus will be passed upon for the Company by Baker & Botts, L.L.P., Dallas,
Texas. Robert L. Stillwell, a partner of Baker & Botts, L.L.P., is a director of
the Company.
EXPERTS
The Consolidated Financial Statements of the Company included in this
Prospectus and the financial statement schedules of the Company included
elsewhere in the Registration Statement of which this Prospectus is a part, to
the extent and for the periods indicated in their reports, have been audited by
Arthur Andersen & Co., independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports. Reference is made to
the report on the Consolidated Financial Statements, which includes an
explanatory paragraph that describes the litigation discussed in Notes 2, 9 and
14 of those Consolidated Financial Statements.
The evaluation of DeGolyer and MacNaughton, independent consulting
petroleum engineers, of certain of Mesa's proved reserves of oil and natural gas
and related information set forth herein and based on such evaluation are
included herein in reliance upon the authority of such firm as an expert with
respect to such matters.
79
<PAGE> 82
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MESA Inc. Consolidated Financial Statements for the
Nine Months Ended September 30, 1993 and 1992 (Unaudited)
Consolidated Statements of Operations............................................... F-2
Consolidated Balance Sheets......................................................... F-3
Consolidated Statements of Cash Flows............................................... F-4
Consolidated Statement of Changes in Stockholders' Equity........................... F-5
Notes to Consolidated Financial Statements.......................................... F-6
MESA Inc. Consolidated Financial Statements for the
Years Ended December 31, 1992, 1991 and 1990
Report of Independent Public Accountants............................................ F-21
Consolidated Statements of Operations............................................... F-22
Consolidated Balance Sheets......................................................... F-23
Consolidated Statements of Cash Flows............................................... F-24
Consolidated Statement of Changes in Stockholders' Equity........................... F-25
Notes to Consolidated Financial Statements.......................................... F-26
Supplemental Financial Data......................................................... F-43
</TABLE>
F-1
<PAGE> 83
MESA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------
1993 1992
--------- ---------
<S> <C> <C>
REVENUES:
Natural gas........................................................ $ 101,340 $ 102,631
Natural gas liquids................................................ 43,781 40,894
Oil and condensate................................................. 8,743 14,279
Other.............................................................. 3,165 842
--------- ---------
157,029 158,646
--------- ---------
COSTS AND EXPENSES:
Lease operating.................................................... 38,582 31,490
Production and other taxes......................................... 15,012 12,634
Exploration charges................................................ 2,178 9,099
General and administrative......................................... 16,514 18,954
Depreciation, depletion and amortization........................... 70,317 79,603
--------- ---------
142,603 151,780
--------- ---------
OPERATING INCOME..................................................... 14,426 6,866
--------- ---------
OTHER INCOME (EXPENSE):
Interest income.................................................... 8,156 10,891
Interest expense................................................... (105,000) (108,129)
Gains on dispositions of oil and gas properties.................... 9,600 12,250
Securities gains................................................... 5,778 10,525
Other.............................................................. 8,027 (4,126)
--------- ---------
(73,439) (78,589)
--------- ---------
NET LOSS............................................................. $ (59,013) $ (71,723)
--------- ---------
--------- ---------
NET LOSS PER COMMON SHARE............................................ $ (1.53) $ (1.86)
--------- ---------
--------- ---------
AVERAGE COMMON SHARES OUTSTANDING.................................... 38,615 38,571
--------- ---------
--------- ---------
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-2
<PAGE> 84
MESA INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1993 1992
------------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash investments........................................ $ 104,840 $ 157,197
Marketable securities............................................ 17,330 11,918
Accounts receivable.............................................. 35,473 44,637
Notes receivable................................................. 37,428 --
Other............................................................ 4,389 5,498
------------- ------------
Total current assets..................................... 199,460 219,250
------------- ------------
PROPERTY, PLANT AND EQUIPMENT:
Oil and gas properties, wells and equipment, using the successful
efforts method of accounting.................................. 1,842,145 1,851,555
Office and other................................................. 40,750 40,601
Accumulated depreciation, depletion and amortization............. (665,848) (611,905)
------------- ------------
1,217,047 1,280,251
------------- ------------
OTHER ASSETS:
Restricted cash of subsidiary partnership........................ 62,543 64,339
Notes receivable................................................. -- 30,315
Gas balancing receivable......................................... 44,429 42,089
Other............................................................ 36,623 40,279
------------- ------------
143,595 177,022
------------- ------------
$1,560,102 $1,676,523
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities on long-term debt............................. $ 86,371 $ 44,555
Accounts payable and accrued liabilities......................... 34,360 39,397
Interest payable................................................. 5,507 32,445
------------- ------------
Total current liabilities................................ 126,238 116,397
------------- ------------
LONG-TERM DEBT..................................................... 1,182,613 1,241,600
------------- ------------
DEFERRED REVENUE................................................... 23,104 25,982
------------- ------------
OTHER LIABILITIES.................................................. 95,682 100,231
------------- ------------
CONTINGENCIES
MINORITY INTEREST.................................................. 5,412 7,961
------------- ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, authorized 10,000,000 shares; no
shares issued and outstanding................................. -- --
Common stock, $.01 par value, authorized 100,000,000 shares;
outstanding 39,010,467 and 38,570,544 shares, respectively.... 390 386
Additional paid-in capital....................................... 274,908 273,198
Accumulated deficit.............................................. (148,245) (89,232)
------------- ------------
127,053 184,352
------------- ------------
$1,560,102 $1,676,523
------------- ------------
------------- ------------
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-3
<PAGE> 85
MESA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
---------------------
1993 1992
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................. $(59,013) $(71,723)
Adjustments to reconcile net loss to net cash from operating
activities:
Depreciation, depletion and amortization.......................... 70,317 79,603
Gains on dispositions of oil and gas properties................... (9,600) (12,250)
Accreted interest on discount notes............................... 30,536 --
Accrued interest exchanged for discount notes..................... 15,395 --
Natural gas hedging activities.................................... 324 (8,971)
Securities gains.................................................. (5,778) (10,525)
Changes in operating receivables and payables..................... (36,578) (20,837)
Other............................................................. 6,325 11,207
-------- --------
Cash provided by (used in) operating activities................... 11,928 (33,496)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................................. (22,440) (56,849)
Changes in marketable securities, net................................ 384 (4,746)
Proceeds from dispositions of oil and gas properties................. 26,118 11,429
Collection of notes receivable....................................... 5,943 21,078
Other................................................................ (6,015) (6,455)
-------- --------
Cash provided by (used in) investing activities................... 3,990 (35,543)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt......................................... (61,388) (24,550)
Debt issue costs and other........................................... (6,887) (3,651)
-------- --------
Cash used in financing activities................................. (68,275) (28,201)
-------- --------
NET DECREASE IN CASH AND CASH INVESTMENTS.............................. (52,357) (97,240)
CASH AND CASH INVESTMENTS AT BEGINNING OF PERIOD....................... 157,197 232,155
-------- --------
CASH AND CASH INVESTMENTS AT END OF PERIOD............................. $104,840 $134,915
-------- --------
-------- --------
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-4
<PAGE> 86
MESA INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
------ ------ ---------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1992.............................. 38,571 $386 $ 273,198 $ (89,232)
Net loss.............................................. -- -- -- (59,013)
Common Stock issued for 0% Convertible Notes.......... 439 4 1,710 --
------ ------ ---------- -----------
Balance, September 30, 1993............................. 39,010 $390 $ 274,908 $(148,245)
------ ------ ---------- -----------
------ ------ ---------- -----------
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-5
<PAGE> 87
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1993
(UNAUDITED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MESA Inc., a Texas corporation, was formed in connection with a transaction
(the Corporate Conversion) which reorganized the business of Mesa Limited
Partnership (the Partnership). The Partnership was formed in 1985 to succeed to
the business of Mesa Petroleum Co. (Original Mesa). Unless the context otherwise
requires, as used herein the term "Company" refers to MESA Inc. and its
subsidiaries taken as a whole and includes its predecessors.
The consolidated financial statements of the Company for the nine-month
periods ended September 30, 1993 and 1992 are unaudited but reflect, in the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to fairly present the results for such periods. The
accompanying financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto contained in the Annual
Report of the Company for the year ended December 31, 1992.
PRINCIPLES OF CONSOLIDATION
The Company owns and operates its oil and gas properties and other assets
through various direct and indirect subsidiary partnerships. At the beginning of
1993, the Company owned a 95.86% limited partnership interest and the general
partner (the General Partner) owned a 4.14% general partner interest in the
direct subsidiary partnerships. The debt exchange described in Notes 2, 4 and 6
included issuance of approximately $29.3 million of 0% convertible notes which
were convertible into approximately 7.5 million shares of common stock. As of
September 30, 1993, $1.7 million of 0% convertible notes had been converted into
439,923 shares of common stock. As a result, the Company's limited partnership
interest in the direct subsidiary partnerships has increased to 95.90% and the
General Partner's interest has decreased to 4.10%. Conversion of the remaining
0% convertible notes to common stock in the fourth quarter of 1993 will further
increase the Company's limited partnership interest to 96.51% and further
decrease the General Partner's interest to 3.49%. The accompanying consolidated
financial statements reflect the consolidated accounts of the Company and the
subsidiary partnerships after elimination of intercompany transactions. The
General Partner's interest is reflected as a minority interest. See Note 10 for
a discussion of recent events affecting the General Partner's interest and the
Company's subsidiary partnerships.
Certain reclassifications have been made to amounts reported in previous
years to conform to 1993 presentation.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company classifies all
cash investments with original maturities of three months or less as cash and
cash investments.
INVESTMENTS
Investments in marketable securities are stated at the lower of cost or
market value and are classified as current or noncurrent, depending on
management's intent at the balance sheet date. Periodic changes in the stated
value of the marketable securities portfolios are reflected in income in the
case of current investments and in stockholders' equity in the case of
noncurrent investments. The cost of securities sold is determined on the
first-in, first-out basis. The Company also enters into various futures
contracts which are not accounted for as hedges of existing assets and are
periodically adjusted to market prices. Gains and losses from such contracts are
included in securities gains in the statement of operations.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which is
F-6
<PAGE> 88
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
required to be adopted in 1994. SFAS No. 115 addresses the accounting and
reporting for investments in equity securities that have readily determinable
fair values and for all investments in debt securities. The Company's current
portfolio of securities would be classified as trading securities under the
provisions of SFAS No. 115 and would be reported at fair value, with unrealized
gains and losses included in earnings. Purchases, sales and the related gains
and losses associated with the Company's securities transactions are currently
reported as cash flows from investing activities in the cash flow statement.
Under the provisions of SFAS No. 115, transactions in trading securities will be
classified as cash flows from operating activities. The Company does not expect
the adoption of SFAS No. 115 to have a material effect on its financial position
or results of operations.
OIL AND GAS PROPERTIES
Under the successful efforts method of accounting, all costs of acquiring
unproved oil and gas properties and drilling and equipping exploratory wells are
capitalized pending determination of whether the properties have proved
reserves. If an exploratory well is determined to be nonproductive, the drilling
and equipment costs of the well are expensed at that time. All development
drilling and equipment costs are capitalized. Capitalized costs of proved
properties and estimated future dismantlement and abandonment costs are
amortized on a property-by-property basis using the unit-of-production method.
Geological and geophysical costs and delay rentals are expensed as incurred.
Unproved properties are periodically assessed for impairment of value and a
loss is recognized at the time of impairment. The aggregate carrying value of
proved properties is periodically compared with the undiscounted future net cash
flows from proved reserves, determined in accordance with Securities and
Exchange Commission (SEC) regulations, and a loss is recognized if permanent
impairment of value is determined to exist. A loss is recognized on proved
properties expected to be sold in the event that carrying value exceeds expected
sales proceeds.
NET LOSS PER COMMON SHARE
The computations of net loss per common share are based on the weighted
average number of common shares outstanding during each period.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, marketable securities,
short-term trade receivables and payables, notes receivable, restricted cash and
long-term debt. The carrying values of cash, marketable securities, short-term
trade receivables and payables, notes receivable and restricted cash approximate
fair value. The fair value of long-term debt is estimated based on the market
prices for the Company's publicly traded debt and on current rates available for
similar debt with similar maturities and security for the Company's remaining
debt.
GAS REVENUES
The Company recognizes its ownership interest in natural gas sales as
revenue. Actual production quantities sold by the Company may be different than
its ownership share of production in a given period. If the Company's sales
exceed its ownership share of production, the differences are recorded as
deferred revenue. Gas balancing receivables are recorded when the Company's
ownership share of production exceeds sales. The Company also accrues production
expenses related to its ownership share of production. At September 30, 1993,
the Company had produced and sold a net 11.9 billion cubic feet (Bcf) of natural
gas less than its ownership share of production and had recorded gas balancing
receivables, net of deferred revenues, of approximately $24.4 million.
F-7
<PAGE> 89
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company periodically enters into natural gas futures contracts as a
hedge against natural gas price fluctuations. Gains or losses on such futures
contracts are deferred and recognized as natural gas revenue when the hedged
production occurs. The Company recognized a gain of $6.2 million related to
hedging activities during the first nine months of 1992 as compared to a loss of
$.3 million for the same period in 1993. At September 30, 1993, the Company had
no deferred gains or losses related to hedging activities and did not own any
natural gas futures contracts accounted for as hedges.
TAXES
The Company provides for income taxes using the asset and liability method
under which deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. The effect on deferred taxes
of a change in tax laws or tax rates is recognized in income in the period that
includes the enactment date.
On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 (the Act)
was signed into law resulting in, among other things, an increase in the top
Federal corporate income tax rate from 34% to 35%, effective January 1, 1993.
This and other tax law changes resulting from the Act did not have a material
effect on the Company's net deferred tax asset or related valuation allowance.
Such valuation allowance completely offsets the Company's net deferred tax asset
recorded as of January 1, 1993.
See Note 10 for a discussion of a recent event relating to federal income
taxes.
(2) RESOURCES AND LIQUIDITY
FINANCIAL CONDITION
At September 30, 1993, the Company's long-term debt, net of current
maturities, totaled $1.2 billion (see Note 4). The Company also had $73.2
million of working capital; cash and securities totaled $122.2 million. Working
capital includes a $37.4 million note receivable, which was collected in October
1993 (see Note 7). Of the $122.2 million of cash and securities, $23.4 million
is held in Hugoton Capital Limited Partnership (HCLP), an indirect subsidiary
partnership. The assets of HCLP, which also holds substantially all of the
Company's Hugoton field natural gas properties, $62.5 million of restricted cash
and $541.6 million of secured debt, are dedicated to service HCLP's debt and are
not available to pay creditors of the Company or its other subsidiaries. See
Note 4 for additional discussion.
The Company's cash flows from operating activities are substantially
dependent on the amount of oil and gas produced and the prices received for such
production. Production and prices received from HCLP properties, together with
cash held within HCLP, are expected, under the Company's current operating plan,
to generate sufficient cash flow to meet HCLP's required principal and interest
obligations. However, HCLP cash flows are not expected to be sufficient to
permit HCLP to distribute any excess cash to Company subsidiaries other than
HCLP until at least 1995. During the third quarter, the Company completed the
debt exchange (Debt Exchange) described in Note 4. The notes issued in the Debt
Exchange replaced substantially all of the Company's $600 million of previously
outstanding long-term subordinated notes. The Debt Exchange will result in the
deferral of annual cash interest payments of approximately $75 million through
June 30, 1995. With the consummation of the Debt Exchange, production and prices
at Company subsidiaries other than HCLP are expected, in the aggregate, to be
sufficient to cover cash interest obligations over the next two years with cash
from operating activities. The Company's subsidiaries other than HCLP may also
supplement cash flows from operating activities with available cash and
securities balances.
Completion of the Debt Exchange also resulted in an amendment to the
majority of the Company's bank credit agreement (Credit Agreement), which
included advancing the maturity of $41 million of principal payments from 1994
to 1993 but also extending the maturity of $40 million of principal and $10
million of
F-8
<PAGE> 90
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
letter of credit obligations from 1994 to 1995. The Company believes that
completion of the Debt Exchange and Credit Agreement amendments have increased
its ability to obtain traditional equity or debt financing in the future to
repay or refinance its indebtedness. Depending on industry conditions, the
Company may also generate or preserve cash by selling assets, reducing capital
expenditures or pursuing other alternatives. As a result of the completion of
the Debt Exchange and the related amendments to the Credit Agreement, the
Company believes that it will have significantly greater cash flow and available
cash balances over the next two to three years, subject to matters discussed
below under "Litigation," whether or not production and prices increase.
LONG-TERM DEBT DEFAULT
In conjunction with the negotiation and execution of the Debt Exchange, the
Company did not make the $29.3 million of interest payments due on May 1, 1993
or the $9 million of interest payments due on August 1, 1993 relating to its 12%
and 13 1/2% subordinated notes (Subordinated Notes) resulting in events of
default under the terms of the Subordinated Note indentures and under cross
default provisions of the Credit Agreement. On August 26, 1993, interest
payments with respect to Subordinated Notes which remained outstanding after the
Debt Exchange were made to the trustee under such indentures for distribution to
holders of the remaining Subordinated Notes and, therefore, the events of
default have been cured.
LITIGATION
The Company is subject to various lawsuits, the most significant of which
relates to a 1985 investment in Unocal Corporation (Unocal). A trial had been
scheduled to begin February 22, 1994. As described in Note 8, a significant
judgment against the Company in the Unocal lawsuit would have a material adverse
effect on the financial position and results of operations of the Company.
Payment of such a judgment would remove a substantial amount of cash from the
Company at a time when cash flows from operating activities may not be
sufficient to service debt and fund capital expenditures and other obligations.
Such a payment could also reduce tangible adjusted equity, as defined, below the
$50 million level required under the amended Credit Agreement. In the event of
an adverse judgment, the Company could be required to post a bond or other
security in the amount of the judgment in order to stay execution pending any
appeal. See Note 10 for a discussion of recent events relating to the Unocal
litigation.
In the event of an adverse decision, the Company could pursue a variety of
options including sales of assets, settlement discussions to reduce the amount
of the award or to limit bond requests or negotiations to obtain relief from
certain debt obligations to banks or noteholders. The Company could also
consider seeking protection from creditors under the Federal Bankruptcy Code.
The Company's choice from among its alternatives would depend on numerous
factors including the amount of the judgment, bond or security requirements, the
financial condition of the Company and conditions in the oil and gas industry.
(3) MARKETABLE SECURITIES
The current value of marketable securities is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1993 1992
------------- ------------
<S> <C> <C>
Cost............................................... $17,330 $ 12,167
Unrealized gain (loss)............................. 291 (249)
------------- ------------
Market Value..................................... $17,621 $ 11,918
------------- ------------
------------- ------------
</TABLE>
For the nine months ended September 30, 1993, the Company recognized a net
gain of $5.8 million from its investments in securities and futures contracts
compared with net gains for the same period in 1992 of
F-9
<PAGE> 91
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$10.5 million. The net securities gains do not include gains or losses from
natural gas futures contracts accounted for as hedges of natural gas production.
Hedge gains or losses are included in natural gas revenue in the period in which
the hedged production occurs (see Note 1).
The net gains and losses recognized during a period include both realized
and unrealized gains and losses. During the nine month period ended September
30, 1993, the Company realized net gains of $4.6 million from securities
transactions and futures contracts. Net realized gains totaled $5.1 million for
the nine month period ended September 30, 1992.
(4) LONG-TERM DEBT
Long-term debt and current maturities are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1993 1992
------------- ------------
<S> <C> <C>
HCLP Secured Notes................................. $ 541,600 $ 580,850
Credit Agreement................................... 77,862 100,000
12 3/4% secured discount notes..................... 458,767 --
12 3/4% unsecured discount notes................... 144,124 --
0% convertible notes............................... 27,600 --
12% subordinated notes............................. 6,336 300,000
13 1/2% subordinated notes......................... 7,390 300,000
Other.............................................. 5,305 5,305
------------- ------------
1,268,984 1,286,155
Current maturities................................. (86,371) (44,555)
------------- ------------
Long-term debt..................................... $1,182,613 $1,241,600
------------- ------------
------------- ------------
</TABLE>
HCLP SECURED NOTES
In 1991, HCLP, which holds substantially all of the Company's Hugoton field
natural gas properties, issued $616 million of secured notes (HCLP Secured
Notes) in a private placement with a group of institutional lenders. The
issuance replaced $550 million of bank debt and funded a $66 million restricted
cash balance within HCLP. The restricted cash balance is available to supplement
cash flows from the HCLP properties in the event such cash flows are not
sufficient to fund principal and interest payments on the HCLP Secured Notes
when due. As the HCLP Secured Notes are repaid, the required restricted cash
balance is reduced.
The HCLP Secured Notes were issued in 15 series and have final stated
maturities extending through 2012 but can be retired earlier depending on the
rate of production from the Hugoton properties. As of September 30, 1993, $75.0
million has been repaid as scheduled. The HCLP Secured Notes outstanding on
September 30, 1993 bear interest at fixed rates ranging from 8.80% to 11.30%
(weighted average 10.21%). Principal and interest payments are made
semiannually. Provisions in the HCLP Secured Note agreements require interest
rate premiums to be paid to the noteholders in the event that the HCLP Secured
Notes are repaid more rapidly or slowly than scheduled in the agreements. Such
premiums, if required, would increase the effective interest rate of the HCLP
Secured Notes.
The HCLP Secured Note agreements contain various covenants which, among
other things, limit HCLP's ability to sell or acquire oil and gas property
interests, incur additional indebtedness, make unscheduled capital expenditures,
make distributions of property or funds subject to the mortgage, or enter into
certain types of long-term contracts or forward sales of production. The
agreements also require HCLP to maintain separate existence from the Company.
The assets of HCLP are dedicated to service HCLP's debt and are not available to
pay creditors of the Company or its subsidiaries other than HCLP.
F-10
<PAGE> 92
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues received from production from HCLP's Hugoton properties are
deposited in a collection account maintained by a collateral agent (Collateral
Agent). The Collateral Agent releases or reserves funds, as appropriate, for the
payment of royalties, taxes, operating costs, capital expenditures and principal
and interest on the HCLP Secured Notes. Only after all required payments have
been made may any remaining funds held by the Collateral Agent be released from
the mortgage.
In connection with the formation of HCLP and the issuance of the HCLP
Secured Notes, Mesa Operating Limited Partnership (MOLP), a direct Company
subsidiary which owns 81% of HCLP, entered into a services agreement with HCLP
pursuant to which MOLP will provide certain services necessary to operate the
Hugoton field properties and market production therefrom, process remittances of
production revenues and perform certain other administrative functions in
exchange for a services fee which totaled approximately $8 million for the nine
months ended September 30, 1993.
The restricted cash balance and cash held by the Collateral Agent for
payment of interest and principal on the HCLP Secured Notes are invested by the
Collateral Agent under the terms of a guaranteed investment contract (GIC) with
Morgan Guaranty Trust Co. of New York (Morgan). Morgan was paid $13.9 million at
the date of issuance of the HCLP Secured Notes to guarantee that funds invested
under the GIC would earn an interest rate equivalent to the weighted average
coupon rate on the outstanding principal balance of the HCLP Secured Notes
(10.21% at September 30, 1993). A portion of this amount may be refunded if the
HCLP Secured Notes are repaid earlier than if HCLP had produced according to its
scheduled production, depending primarily on prevailing interest rates at that
time.
In the first quarter of 1992, the Company contributed $32 million in cash
to HCLP, which amount was not subject to the mortgage, a portion of which has
been used to supplement HCLP's cash flows in order to make scheduled principal
payments. At September 30, 1993, approximately $10.1 million of HCLP's cash was
not subject to the mortgage but is available to be used to supplement HCLP's
cash flow in the future.
HCLP had cash balances as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1993 1992
------------- ------------
<S> <C> <C>
Cash included in current assets.................... $23,422 $ 64,141
------------- ------------
------------- ------------
Restricted cash included in noncurrent assets...... $62,543 $ 64,339
------------- ------------
------------- ------------
</TABLE>
CREDIT AGREEMENT
As of June 30, 1993, the Company had borrowed $100 million under the $150
million Credit Agreement and had outstanding $10.6 million in letter of credit
obligations secured by the Credit Agreement. The Credit Agreement was previously
scheduled to mature in June 1994. Upon consummation of the Debt Exchange (see
"Discount Notes" below and Note 2), the Company and its bank lenders amended the
Credit Agreement. Pursuant to the amendment, the Credit Agreement was reduced to
a $90 million credit facility providing for $80 million of initial borrowings
and $10 million in letter of credit obligations. Accordingly, the Company made a
$20 million principal payment under the Credit Agreement on August 26, 1993 and
agreed to make additional principal payments of $10 million in the fourth
quarter of 1993, $30 million in the first half of 1994, $40 million in the
second quarter of 1995, and to cash collateralize $10 million in letters of
credit obligations in the second quarter of 1995.
The terms of the Credit Agreement require prepayment with respect to the
next principal payment due in the amount of one-half of any proceeds from
collections under the note receivable from Bicoastal Corporation (Bicoastal)
(see Note 7). As a result of collections from Bicoastal totaling $41.0 million
in the third and fourth quarters of 1993, $10.5 million of the $30 million due
in the first half of 1994 will be prepaid in the fourth quarter of 1993.
F-11
<PAGE> 93
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The rate of interest payable on borrowings under the Credit Agreement is
the prime rate plus 1/2% or the Eurodollar rate plus 2 1/2% until borrowings
are reduced to $50 million, and thereafter reduced, subject to certain
conditions, to a rate equal to the Eurodollar rate plus 1 1/2% or the prime
rate. The Credit Agreement is secured by a first lien on the Company's West
Panhandle field properties, by the Company's equity interest in MOLP and by a
65% equity interest in HCLP.
The amendments to the Credit Agreement reduced the Company's tangible
adjusted equity requirement, as defined, from $150 million to $50 million and
increased the Company's required ratio of cash flow and available cash to debt
service requirement, as each is defined, from at least 1.25 to 1 to 1.50 to 1.
At September 30, 1993, the Company's tangible adjusted equity, as defined, was
$132 million and the ratio of cash flow and available cash to debt service was
2.11 to 1.
The provisions of the Credit Agreement prohibit the Company from paying any
dividends to equity holders, other than those paid in the form of equity
securities.
DISCOUNT NOTES
The Debt Exchange was consummated on August 26, 1993. Under the terms of
the Debt Exchange, holders of approximately $293.7 million aggregate principal
amount of 12% subordinated notes and $292.6 million aggregate principal amount
of 13 1/2% subordinated notes (together with $28.6 million of accrued interest
claims thereon) received approximately $435.5 million initial accreted value, as
defined, of 12 3/4% secured discount notes due June 30, 1998; $136.9 million
initial accreted value, as defined, of 12 3/4% unsecured discount notes due June
30, 1996 (together, the Discount Notes); $29.3 million principal amount of 0%
convertible notes due June 30, 1998 (collectively, the New Notes); and, in the
case of 13 1/2% subordinated noteholders, $13.2 million in cash. The New Notes,
which rank pari passu with each other, are senior in right of payment to the
remaining Subordinated Notes and subordinate to all permitted first lien debt,
including the Credit Agreement.
The Discount Notes will bear no interest through June 30, 1995; however,
the accreted value, as defined, of both series will increase from May 1, 1993
through June 30, 1995 at 12 3/4% per year, compounded semiannually, with the
first compounding date being June 30, 1993. After June 30, 1995, each series
will accrue interest at an annual rate of 12 3/4%, payable in cash semiannually
in arrears, with the first payment due December 31, 1995. The 0% convertible
notes bear no interest and are convertible at the option of the noteholders at
any time into shares of the Company's common stock at the rate of $3.896 per
share. As of September 30, 1993, $1.7 million of the 0% convertible notes had
been converted into 439,923 shares of common stock. If not earlier converted,
and subject to certain conditions, the 0% convertible notes are subject to
conversion at the option of the Company after November 25, 1993. The Company
intends to cause such conversion of any remaining 0% convertible notes before
December 31, 1993.
The 12 3/4% secured discount notes are secured by second liens on the
Company's West Panhandle field properties and a 65% equity interest in HCLP,
both of which currently secure the Credit Agreement. The Company's right to
maintain first lien debt is limited to $82.5 million.
The indentures governing the Discount Notes, among other things, restrict
the Company's ability to incur additional indebtedness, pay dividends, acquire
stock or make investments, loans and advances.
SUBORDINATED NOTES
The 12% subordinated notes are unsecured and mature in 1996. Interest on
these notes is payable quarterly and, at the option of the Company, may be paid
in Common Stock of the Company. The 13 1/2% subordinated notes are unsecured and
mature in 1999. Interest on these notes is payable semiannually in cash.
F-12
<PAGE> 94
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTEREST AND MATURITIES
The aggregate interest payments made during the nine months ended September
30, 1993 and 1992 were $86.0 million and $111.8 million, respectively.
Approximately $45.9 million of interest incurred during the nine months ended
September 30, 1993 has been deferred under the terms of the Debt Exchange until
the repayment dates of the Discount Notes. Such interest is included in interest
expense in the statement of operations.
The scheduled repayments on long-term debt for the last three months of
1993 and for the four succeeding years are as follows (in millions):
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
----- ----- ----- ------ -----
<S> <C> <C> <C> <C> <C>
HCLP Secured Notes................................ $ -- $42.9 $39.3 $ 45.4 $46.7
Credit Agreement(1)............................... 18.7 19.5 39.6 -- --
12 3/4% unsecured discount notes.................. -- -- -- 178.8 --
12% subordinated notes............................ -- -- -- 6.3 --
Other............................................. 5.3 -- -- -- --
----- ----- ----- ------ -----
Total................................... $24.0 $62.4 $78.9 $230.5 $46.7
----- ----- ----- ------ -----
----- ----- ----- ------ -----
</TABLE>
- ---------------
(1) Excludes $10 million in letter of credit obligations required to be cash
collateralized in 1995.
FAIR VALUE OF LONG-TERM DEBT
Based on borrowing rates currently available for secured debt with similar
maturities and credit rating, the fair value of the HCLP Secured Notes at
September 30, 1993 is estimated to be approximately $623 million.
Based on borrowing rates currently available for bank loans with similar
collateral, the fair value of the borrowings under the Credit Agreement at
September 30, 1993 is estimated to be its carrying value.
The Discount Notes are publicly traded but not listed on a national
exchange. Based on trading prices available at September 30, 1993, the fair
value of the 12 3/4% secured discount notes was $464.0 million and the fair
value of the 12 3/4% unsecured discount notes was $137.7 million.
The 12% and 13 1/2% subordinated notes are publicly traded but have not
experienced significant activity since consummation of the Debt Exchange. Based
on recent trades, the fair value of the 12% and 13 1/2% subordinated notes is
not materially different from their carrying value.
Based on the current financial condition of the Company, there is no
assurance that the Company could obtain borrowings under long-term debt
agreements with terms similar to those described above and receive proceeds
approximating the estimated fair values.
(5) PROPERTY SALES
On April 30, 1993, the Company sold a portion of its Rocky Mountain area
properties for $7.1 million, after adjustments, and recorded a gain on the sale
of approximately $4.1 million. The Company also retained a reversionary interest
in the properties under which the Company will receive a 50% net profits
interest in the properties after the purchaser has recovered its investment and
certain other costs and expenses.
On June 24, 1993, the Company sold its interest in the deep portion of the
Hugoton field not owned by HCLP for approximately $19 million, after
adjustments, and recorded a gain on the sale of approximately $5.5 million.
F-13
<PAGE> 95
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
These properties were expected to contribute approximately $5 million to
the Company's 1993 cash flows. The proceeds from these sales were added to
available cash.
(6) STOCKHOLDERS' EQUITY
At September 30, 1993, the Company had outstanding 39.0 million shares of
common stock and the Company owned a 95.90% limited partnership interest in its
direct subsidiary partnerships and the General Partner owned a 4.10% interest.
The General Partner's interest is convertible into approximately 1.7 million
shares of common stock. See Note 10 for a discussion of recent events affecting
the General Partner's interest and the Company's subsidiary partnerships.
Approximately $1.7 million of 0% convertible notes were converted into
439,923 shares of common stock in September 1993. Approximately 7.1 million
additional shares of common stock are issuable in exchange for the remaining
$27.6 million of 0% convertible notes. See Notes 2 and 4 for a discussion of the
Debt Exchange.
The Company also has authorized 10 million shares of preferred stock. No
shares of preferred stock have been issued as of September 30, 1993.
(7) NOTES RECEIVABLE
As of September 30, 1993, notes receivable consist entirely of claims
against Bicoastal. A plan of reorganization for Bicoastal was approved by the
Bankruptcy Court in September 1992 and the Company collected approximately $28.1
million in 1992 and $3.6 million in July 1993. At September 30, 1993, the
Company had remaining allowed principal claims of $37.4 million which were
collected in October 1993. The October 1993 collection resulted in a third
quarter gain of approximately $13.8 million, which represented the amount of
proceeds collected in excess of the recorded note receivable. The Company may
also collect certain interest amounts, although the timing and amount of such
collection, if any, is uncertain.
(8) CONTINGENCIES
UNOCAL
The Company is subject to a lawsuit relating to the investment in Unocal by
Original Mesa and certain other defendants (collectively, the Mesa Defendants).
This suit, filed in 1986 in Federal District Court in Los Angeles, alleges that,
pursuant to Section 16(b) of the Securities Exchange Act of 1934, "short-swing
profits" allegedly realized by the Mesa Defendants upon disposition of certain
shares of Unocal common stock in 1985 are recoverable by Unocal. The case is
currently scheduled to begin trial on February 22, 1994. The Company will have
no liability in the case if it prevails on either of the following grounds: (i)
that the 1985 acquisition of 6.7 million shares of Unocal was, as the Company
contends, effected in a single purchase, or (ii) that the Mesa Defendants
realized no profit on the disposition of any Unocal shares that might be deemed
subject to Section 16(b).
No determination can be made at this time as to the ultimate outcome of the
litigation. If the plaintiffs were to prevail and were awarded a judgment
(including interest) in the range of their estimate of $150 million, payment of
such damages would have a material adverse effect on the financial position and
results of operations of the Company. Consequences to the Company of an adverse
decision are discussed in Note 2. See Note 10 for a discussion of recent events
relating to the Unocal litigation.
MASTERSON
In February 1992, the current lessors of an oil and gas lease (the Gas
Lease) dated April 30, 1955, between R. B. Masterson, et al., as lessor, and
Colorado Interstate Gas Company (CIG), as lessee, sued CIG in Federal District
Court in Amarillo, Texas, claiming that CIG had underpaid royalties due under
the Gas
F-14
<PAGE> 96
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Lease. The Company owns an interest in the Gas Lease. The plaintiffs alleged
that the underpayment was the result of CIG's use of an improper gas sales price
upon which to calculate royalties, and that the proper price should have been
determined pursuant to a pricing clause in a July 1, 1967 amendment to the Gas
Lease. The complaint did not specify the damages sought and appeared to relate
only to royalties for periods after October 1, 1988. The plaintiffs also sought
a declaration by the court as to the proper price to be used for calculating
future royalties.
In August 1992, CIG filed a third-party complaint against the Company for
any such royalty underpayments which may be allocable to the Company's interest
in the Gas Lease.
On December 22, 1992, the plaintiffs filed a Second Amended Complaint,
including both CIG and the Company as defendants, again alleging that the use of
an improper price in calculating royalties resulted in underpayments of royalty,
but for the first time alleging that the underpayments amounted to approximately
$250 million (including interest) and covered the period July 1, 1967 to
present. In addition, the plaintiffs seek exemplary damages.
The plaintiffs have dismissed their claims against the Company for reasons
relating to the jurisdiction of the federal court; however, the third-party
complaint by CIG against the Company is not affected by the dismissal.
The plaintiffs have recently filed court papers alleging royalty
underpayments of approximately $450 million (including interest at 10%) covering
the period July 1, 1967 to the present. In addition, the plaintiffs seek
exemplary damages. Management believes that the Company has several defenses to
plaintiffs' claims, including (i) that the royalties for all periods were
properly computed and paid and (ii) that plaintiffs' claims with respect to all
periods prior to October 1, 1988 (which appear to account for the substantial
portion of the claims) were explicitly released by a 1988 written agreement
among plaintiffs, CIG and the Company and are further barred by the statute of
limitations. If the plaintiffs were to prevail, the manner in which any
resulting liability would be shared between the Company and CIG would depend on
the resolution of issues relating to the contractual agreements and the
relationship between the Company, CIG and the lessors during the period in
question.
No determination can be made at this time as to the ultimate outcome of the
litigation and no trial date has been set.
PREFERENCE UNITHOLDERS
The Company is a defendant in lawsuits related to the Corporate Conversion
pending in the U.S. District Court for the Northern District of Texas -- Dallas
Division. Plaintiffs allege, among other things, that (i) the proxy materials
delivered to unitholders in connection with the Corporate Conversion contained
material misstatements and omissions, (ii) the general partner of the
Partnership breached fiduciary duties to the preference unitholders in
structuring the transaction and allocating the common stock of the Company and
(iii) the Corporate Conversion was not properly approved by the unitholders of
the Partnership because certain procedural requirements of the partnership
agreement were allegedly not met. The Company and the other defendants have
denied the allegations and believe they are without merit. Plaintiffs seek an
order requiring payment to the former preference unitholders of $164 million in
respect of the preferential distribution rights of their units, a declaration
declaring the Corporate Conversion void and rescinding it, unspecified
compensatory and punitive damages and other relief.
OTHER
The Company is also a defendant in other lawsuits and has assumed
liabilities relating to Original Mesa and the Partnership. The Company does not
expect the resolution of the Masterson lawsuit and preference
F-15
<PAGE> 97
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
unitholder lawsuits or any of these other matters to have a material effect on
its financial position or results of operations.
(9) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The Company conducts its operations through various direct and indirect
subsidiaries. The Company's direct subsidiaries are MOLP, Mesa Midcontinent
Limited Partnership (MMLP)and Mesa Holding Limited Partnership (MHLP). MOLP owns
all of the Company's interest in the West Panhandle field of Texas, the Gulf
Coast and the Rocky Mountain area, as well as an approximate 81% limited
partnership interest in HCLP. MMLP owns an approximate 19% limited partnership
interest in HCLP. HCLP owns substantially all of the Company's Hugoton field
natural gas properties and is liable for the HCLP Secured Notes (see Note 4).
The assets and cash flows of HCLP are dedicated to service the HCLP Secured
Notes and are not available to pay creditors of the Company or its subsidiaries
other than HCLP. MOLP and the Company are liable for the Credit Agreement, the
Subordinated Notes and the New Notes. Mesa Capital Corp. (Mesa Capital), a
wholly owned subsidiary of MOLP, is also an obligor under the Subordinated Notes
and the New Notes. Mesa Capital is a financing subsidiary and has insignificant
assets and results of operations. Mesa Capital is included with MOLP in the
condensed consolidating financial statements. See Note 10 for a discussion of
recent events affecting the Company's subsidiary partnerships.
F-16
<PAGE> 98
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following are condensed consolidating financial statements of MESA
Inc., HCLP, MOLP and the Company's other direct and indirect subsidiaries
combined (in millions):
CONDENSED CONSOLIDATING BALANCE SHEETS
<TABLE>
<CAPTION>
OTHER CONSOLIDATION THE
MESA COMPANY AND COMPANY
SEPTEMBER 30, 1993 INC. HCLP MOLP SUBSIDIARIES ELIMINATION CONSOLIDATED
- ------------------ ---- ---- ---- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash investments............ $ -- $ 23 $ 15 $ 67 $ -- $ 105
Other current assets................. -- 12 29 53 -- 94
---- ---- ---- ---- ----- ------
Total current assets.............. -- 35 44 120 -- 199
---- ---- ---- ---- ----- ------
Property, plant and equipment, net... -- 665 551 1 -- 1,217
Investment in subsidiaries........... 136 -- 41 189 (366) --
Intercompany receivables............. -- -- 138 -- (138) --
Other noncurrent assets.............. -- 88 53 3 -- 144
---- ---- ---- ---- ----- ------
$136 $788 $827 $313 $(504) $1,560
---- ---- ---- ---- ----- ------
---- ---- ---- ---- ----- ------
Liabilities and Equity:
Current liabilities.................. $ -- $ 58 $ 66 $ 2 $ -- $ 126
Long-term debt....................... -- 499 684 -- -- 1,183
Intercompany payables................ 9 -- -- 148 (157) --
Other noncurrent liabilities......... -- -- 106 13 -- 119
Minority interest.................... -- -- -- -- 5 5
Partners'/Stockholders' equity
(deficit)......................... 127 231 (29) 150 (352) 127
---- ---- ---- ---- ----- ------
$136 $788 $827 $313 $(504) $1,560
---- ---- ---- ---- ----- ------
---- ---- ---- ---- ----- ------
DECEMBER 31, 1992
- -----------------
Assets:
Cash and cash investments............ $ -- $ 64 $ 16 $ 77 $ -- $ 157
Other current assets................. -- 22 31 9 -- 62
---- ---- ---- ---- ----- ------
Total current assets.............. -- 86 47 86 -- 219
---- ---- ---- ---- ----- ------
Property, plant and equipment, net... -- 682 598 -- -- 1,280
Investment in subsidiaries........... 193 -- 51 191 (435) --
Intercompany receivables............. -- -- 138 -- (138) --
Other noncurrent assets.............. -- 91 56 30 -- 177
---- ---- ---- ---- ----- ------
$193 $859 $890 $307 $(573) $1,676
---- ---- ---- ---- ----- ------
---- ---- ---- ---- ----- ------
Liabilities and Equity:
Current liabilities.................. $ -- $ 74 $ 40 $ 2 $ -- $ 116
Long-term debt....................... -- 542 700 -- -- 1,242
Intercompany payables................ 9 -- -- 142 (151) --
Other noncurrent liabilities......... -- -- 113 13 -- 126
Minority interest.................... -- -- -- -- 8 8
Partners'/Stockholders' equity
(deficit)......................... 184 243 37 150 (430) 184
---- ---- ---- ---- ----- ------
$193 $859 $890 $307 $(573) $1,676
---- ---- ---- ---- ----- ------
---- ---- ---- ---- ----- ------
</TABLE>
F-17
<PAGE> 99
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
NINE MONTHS ENDED:
<TABLE>
<CAPTION>
OTHER CONSOLIDATION THE
MESA COMPANY AND COMPANY
SEPTEMBER 30, 1993 INC. HCLP MOLP SUBSIDIARIES ELIMINATION CONSOLIDATED
- ------------------ ---- ---- ---- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................... $-- $ 68 $ 89 $ -- $ -- $157
---- ---- ---- ---- ---- ----
Costs and Expenses:
Operating, exploration and taxes..... -- 19 37 -- -- 56
General and administrative........... -- -- 15 2 -- 17
Depreciation, depletion and
amortization...................... -- 23 47 -- -- 70
---- ---- ---- ---- ---- ----
-- 42 99 2 -- 143
---- ---- ---- ---- ---- ----
Operating Income (Loss)................ -- 26 (10) (2) -- 14
---- ---- ---- ---- ---- ----
Interest Expense, Net of Interest
Income............................... -- (37) (61) 1 -- (97)
Intercompany Interest Income
(Expense)............................ -- -- 12 (12) -- --
Security Gains (Losses)................ -- -- 7 (1) -- 6
Equity in Loss of Subsidiaries......... (59) -- (9) (2) 70 --
Minority Interest...................... -- -- -- -- 3 3
Other.................................. -- -- (7) 17 5 15
---- ---- ---- ---- ---- ----
Net Income (Loss)...................... $(59) $(11) $(68) $ 1 $ 78 $(59)
---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ----
SEPTEMBER 30, 1992
- ------------------
Revenues............................... $-- $ 50 $109 $ -- $ -- $159
---- ---- ---- ---- ---- ----
Costs and Expenses:
Operating, exploration and taxes..... -- 15 38 -- -- 53
General and administrative........... -- -- 19 -- -- 19
Depreciation, depletion and
amortization...................... -- 23 57 -- -- 80
---- ---- ---- ---- ---- ----
-- 38 114 -- -- 152
---- ---- ---- ---- ---- ----
Operating Income (Loss)................ -- 12 (5) -- -- 7
---- ---- ---- ---- ---- ----
Interest Expense, Net of Interest
Income............................... -- (39) (60) 2 -- (97)
Intercompany Interest Income
(Expense)............................ -- -- 13 (13) -- --
Security Gains......................... -- -- 5 6 -- 11
Equity in Loss of Subsidiaries......... (70) -- (22) (5) 97 --
Minority Interest...................... -- -- -- -- 3 3
Other.................................. (2) -- (1) (2) 9 4
---- ---- ---- ---- ---- ----
Net Loss............................... $(72) $(27) $(70) $(12) $109 $(72)
---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ----
</TABLE>
F-18
<PAGE> 100
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED:
<TABLE>
<CAPTION>
OTHER CONSOLIDATION THE
MESA COMPANY AND COMPANY
SEPTEMBER 30, 1993 INC. HCLP MOLP SUBSIDIARIES ELIMINATION CONSOLIDATED
- ------------------ ---- ---- ---- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities... $-- $ 3 $ 8 $ 1 $ -- $ 12
---- ---- ---- ------ -------- ------
Cash Flows from Investing Activities:
Capital expenditures................. -- (6) (15) (1) -- (22)
Proceeds from sales of oil and gas
properties........................ -- -- 23 3 -- 26
Securities transactions, net......... -- -- 9 (9) -- --
Other................................ -- -- 4 2 (6) --
---- ---- ---- ------ -------- ------
-- (6) 21 (5) (6) 4
---- ---- ---- ------ -------- ------
Cash Flows from Financing Activities:
Repayments of long-term debt......... -- (39) (22) -- -- (61)
Other................................ -- 2 (9) (6) 6 (7)
---- ---- ---- ------ -------- ------
-- (37) (31) (6) 6 (68)
---- ---- ---- ------ -------- ------
Net Decrease in Cash and Cash
Investments.......................... $-- $(40) $(2) $(10) $ -- $(52)
---- ---- ---- ------ -------- ------
---- ---- ---- ------ -------- ------
SEPTEMBER 30, 1992
- ------------------
Cash Flows from Operating Activities... $-- $(8) $(28) $ 3 $ -- $(33)
---- ---- ---- ------ -------- ------
Cash Flows from Investing Activities:
Capital expenditures................. -- (2) (55) -- -- (57)
Proceeds from sales of oil and gas
properties........................ -- -- 11 -- -- 11
Securities transactions, net......... -- -- (3) (2) -- (5)
Contributions to subsidiaries........ -- -- (25) (7) 32 --
Other................................ -- -- 7 22 (14) 15
---- ---- ---- ------ -------- ------
-- (2) (65) 13 18 (36)
---- ---- ---- ------ -------- ------
Cash Flows from Financing Activities:
Repayments of long-term debt......... -- (25) -- -- -- (25)
Contributions from equityholders..... -- 32 -- -- (32) --
Other................................ -- (1) (2) (14) 14 (3)
---- ---- ---- ------ -------- ------
-- 6 (2) (14) (18) (28)
---- ---- ---- ------ -------- ------
Net Increase (Decrease) in Cash and
Cash Investments..................... $-- $(4) $(95) $ 2 $ -- $(97)
---- ---- ---- ------ -------- ------
---- ---- ---- ------ -------- ------
</TABLE>
NOTES TO CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(a) These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto of
the Company of which this note is an integral part.
(b) As of September 30, 1993, MESA Inc. owns a 95.90% limited partnership
interest in each of MOLP, MMLP and MHLP. The General Partner owns 4.10% of
each of these subsidiary partnerships. These condensed consolidating
financial statements present MESA Inc.'s investment in its subsidiaries and
MOLP's and MMLP's investments in HCLP using the equity method. Under this
method, investments are recorded at cost and adjusted for the parent
company's ownership share of the subsidiary's cumulative results of
operations. In addition, investments increase in the amount of
contributions to subsidiaries and decrease in the amount of distributions
from subsidiaries.
(c) The consolidation and elimination entries (i) eliminate the equity method
investment in subsidiaries and equity in loss of subsidiaries, (ii)
eliminate the intercompany payables and receivables, (iii) eliminate other
transactions between subsidiaries including contributions and distributions
and (iv) establish the General Partner's minority interest in the
consolidated results of operations and financial position of the Company.
F-19
<PAGE> 101
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) SUBSEQUENT EVENTS
Unocal Settlement
On January 11, 1994, the Company entered into a settlement agreement with
respect to the Unocal lawsuit described in Note 8 above, whereby the Company and
the other defendants have agreed to pay to Unocal an aggregate of $47.5 million,
of which $42.75 million will be paid by the Company and $4.75 million will be
paid by certain other unaffiliated third parties. The settlement agreement is
subject to approval by the Court, following notice by Unocal to its security
holders. The Company intends to fund substantially all of its portion of the
settlement amount with proceeds from issuance of additional 12 3/4% secured
discount notes. If the settlement agreement is not approved by the Court, the
agreement will terminate and the parties will jointly request the Court to set
the earliest practicable trial date. The Company expects to accrue a loss in the
amount of its share of the settlement in the fourth quarter of 1993.
Stockholders' Equity/Minority Interest
During the fourth quarter of 1993, the remaining 0% convertible notes
outstanding at September 30, 1993 in the amount of $27.6 million were converted
into approximately 7.1 million shares of common stock of the Company.
On December 31, 1993, the General Partner exercised his right to convert a
portion of his general partner interests in the direct subsidiary partnerships
into shares of common stock of the Company, converting approximately one-fourth
of his general partner interests into an aggregate of 416,890 shares of common
stock. On January 5, 1994, the Company effected a series of merger transactions
which resulted in the conversion of each of its subsidiary partnerships, other
than HCLP, to corporate form. Pursuant to these mergers, MOLP was merged into
Mesa Operating Co., MMLP was merged into Mesa Midcontinent Co., and MHLP was
merged into Mesa Holding Co. Pursuant to these mergers, all of the remaining
general partnership interests in the Company's subsidiary partnerships held
directly or indirectly by the General Partner were converted into an aggregate
of 1,250,670 shares of common stock, thereby eliminating the minority interest.
Taxes
In 1993, the Internal Revenue Service (IRS) completed two field
examinations of the tax returns filed by Original Mesa for 1984 through 1987 tax
years. In the fourth quarter of 1993, the IRS completed its administrative
review of the field examinations and presented the Company with an additional
tax assessment of approximately $7.7 million. In December 1993, the Company made
a payment to the IRS of approximately $13 million, which payment includes
interest, in full settlement of all claims. The Company is fully reserved for
the additional tax assessment relating to the 1984 through 1987 tax years.
F-20
<PAGE> 102
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MESA Inc.:
We have audited the accompanying consolidated balance sheets of MESA Inc.
(a Texas corporation) as of December 31, 1992 and 1991, and the related
consolidated statements of operations, cash flows and changes in stockholders'
equity for each of the three years in the period ended December 31, 1992. 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.
As discussed further in Note 14 to the consolidated financial statements,
the Company has prepared financial forecasts which indicate that the Company's
cash flows from operating activities and existing cash and securities balances
will be insufficient to fund certain principal and interest payments in 1996 on
the Company's debt. Depending on industry and market conditions, the Company may
generate cash by selling assets or issuing new debt or equity securities.
However, the Company has a limited ability to sell assets and there can be no
assurances that the Company will be able to raise equity capital or otherwise
refinance its debt.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MESA Inc. as
of December 31, 1992 and 1991, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1992, in
conformity with generally accepted accounting principles.
As discussed further in Notes 2 and 9 to the consolidated financial
statements, the Company is subject to a lawsuit asserting that "short-swing
profits" allegedly realized upon disposition of certain shares of Unocal
Corporation (Unocal) common stock are recoverable by Unocal pursuant to Section
16(b) of the Securities Exchange Act of 1934. No determination can be made at
this time as to the ultimate outcome of the litigation. Accordingly, no
provision for any liability that may result upon adjudication has been made in
the accompanying consolidated financial statements. As discussed in Notes 2 and
9, an unfavorable judgment would have a material adverse effect on the Company's
financial position and results of operations. As discussed further in Note 14 to
the consolidated financial statements, the Company and Unocal have entered into
a settlement agreement with respect to the Unocal lawsuit. No determination can
be made at this time as to whether the terms of the settlement agreement will be
met or whether the settlement will be consummated.
ARTHUR ANDERSEN & CO.
Houston, Texas
March 12, 1993 (except with respect to
the matters discussed in Note 14, as to
which the date is January 13, 1994)
F-21
<PAGE> 103
MESA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1992 1991 1990
--------- --------- ---------
<S> <C> <C> <C>
REVENUES:
Natural gas........................................... $ 157,672 $ 169,907 $ 232,220
Natural gas liquids................................... 59,669 62,031 55,507
Oil and condensate.................................... 18,701 16,111 33,780
Other................................................. 1,070 1,497 8,090
--------- --------- ---------
237,112 249,546 329,597
--------- --------- ---------
COSTS AND EXPENSES:
Lease operating....................................... 43,859 46,869 61,381
Production and other taxes............................ 18,631 18,945 24,828
Exploration charges................................... 10,008 4,691 8,507
General and administrative............................ 24,460 27,837 27,711
Depreciation, depletion and amortization.............. 113,933 117,076 163,781
--------- --------- ---------
210,891 215,418 286,208
--------- --------- ---------
OPERATING INCOME........................................ 26,221 34,128 43,389
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income....................................... 13,504 16,512 16,444
Interest expense...................................... (143,392) (150,770) (186,700)
Gains (losses) on dispositions of oil and gas
properties......................................... 12,250 33,749 (81,029)
Securities gains (losses)............................. 7,808 (2,060) (452)
Minority interest in loss............................. 3,854 3,419 8,649
Other................................................. (9,477) (14,141) (577)
--------- --------- ---------
(115,453) (113,291) (243,665)
--------- --------- ---------
NET LOSS................................................ $ (89,232) $ (79,163) $(200,276)
--------- --------- ---------
--------- --------- ---------
NET LOSS PER COMMON SHARE............................... $ (2.31) $ (2.05) $ (5.19)
--------- --------- ---------
--------- --------- ---------
DIVIDENDS PER COMMON SHARE.............................. $ -- $ -- $ .85
--------- --------- ---------
--------- --------- ---------
AVERAGE COMMON SHARES OUTSTANDING....................... 38,571 38,571 38,571
--------- --------- ---------
--------- --------- ---------
</TABLE>
(See accompanying notes to consolidated financial statements)
(The consolidated statements of operations reflect the reorganization described
in Note 1.)
F-22
<PAGE> 104
MESA INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1992 1991
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash investments......................................... $ 157,197 $ 232,155
Marketable securities............................................. 11,918 28,183
Accounts receivable............................................... 44,637 44,005
Other............................................................. 5,498 5,107
---------- ----------
Total current assets...................................... 219,250 309,450
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Oil and gas properties, wells and equipment, using the successful
efforts method of accounting................................... 1,851,555 1,790,224
Office and other.................................................. 40,601 41,861
Accumulated depreciation, depletion and amortization.............. (611,905) (501,809)
---------- ----------
1,280,251 1,330,276
---------- ----------
OTHER ASSETS:
Restricted cash of subsidiary partnership......................... 64,339 65,381
Notes receivable.................................................. 30,315 58,496
Gas balancing receivable.......................................... 42,089 23,888
Other............................................................. 40,279 45,325
---------- ----------
177,022 193,090
---------- ----------
$1,676,523 $1,832,816
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities on long-term debt.............................. $ 44,555 $ 6,310
Accounts payable and accrued liabilities.......................... 39,397 53,164
Interest payable.................................................. 32,445 33,101
---------- ----------
Total current liabilities................................. 116,397 92,575
---------- ----------
LONG-TERM DEBT...................................................... 1,241,600 1,304,395
---------- ----------
DEFERRED REVENUE.................................................... 25,982 36,203
---------- ----------
OTHER LIABILITIES................................................... 100,231 114,244
---------- ----------
CONTINGENCIES
MINORITY INTEREST................................................... 7,961 11,815
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, authorized 10,000,000 shares; no
shares issued and outstanding.................................. -- --
Common stock, $.01 par value, authorized 100,000,000 shares;
outstanding 38,570,544 and 38,570,544 shares; respectively..... 386 386
Additional paid-in capital........................................ 273,198 273,198
Accumulated deficit............................................... (89,232) --
---------- ----------
184,352 273,584
---------- ----------
$1,676,523 $1,832,816
---------- ----------
---------- ----------
</TABLE>
(See accompanying notes to consolidated financial statements)
(The consolidated balance sheets reflect the reorganization described in Note
1.)
F-23
<PAGE> 105
MESA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
(IN THOUSANDS)
<TABLE>
<CAPTION>
1992 1991 1990
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................. $ (89,232) $ (79,163) $(200,276)
Depreciation, depletion and amortization.............. 113,933 117,076 163,781
Securities (gains) losses............................. (7,808) 2,060 452
(Gains) losses on dispositions of oil and gas
properties......................................... (12,250) (33,749) 81,029
Increase in gas balancing receivables................. (17,772) (15,520) (4,376)
Decrease in deferred natural gas revenue.............. (10,287) (5,296) (6,392)
Minority interest in loss............................. (3,854) (3,419) (8,649)
(Increase) decrease in accounts receivable............ (585) 18,611 (3,784)
Increase (decrease) in payables and accrued
liabilities........................................ (7,814) 11,909 (19,414)
Other................................................. 7,230 22,469 11,445
--------- --------- ---------
Cash provided by (used in) operating
activities.................................. (28,439) 34,978 13,816
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures and acquisitions................. (69,201) (31,864) (36,513)
Proceeds from dispositions of oil and gas
properties......................................... 11,424 428,063 40,098
Sales of marketable securities........................ 126,217 164,071 574,849
Purchases of marketable securities.................... (102,161) (132,051) (367,583)
Collection of notes receivable........................ 28,181 224 56
Other................................................. (11,494) (28,764) (18,257)
--------- --------- ---------
Cash provided by (used in) investing
activities.................................. (17,034) 399,679 192,650
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions to equity owners................... -- -- (97,190)
Long-term borrowings.................................. -- 716,550 210,000
Repayments of long-term debt.......................... (24,550) (927,585) (319,750)
Funding of restricted cash balance.................... -- (66,061) --
Debt issuance costs................................... -- (15,621) --
Other................................................. (4,935) (17,589) (102)
--------- --------- ---------
Cash used in financing activities............. (29,485) (310,306) (207,042)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH INVESTMENTS.... (74,958) 124,351 (576)
CASH AND CASH INVESTMENTS AT BEGINNING OF YEAR.......... 232,155 107,804 108,380
--------- --------- ---------
CASH AND CASH INVESTMENTS AT END OF YEAR................ $ 157,197 $ 232,155 $ 107,804
--------- --------- ---------
--------- --------- ---------
</TABLE>
(See accompanying notes to consolidated financial statements)
(The consolidated statements of cash flows reflect the reorganization described
in Note 1.)
F-24
<PAGE> 106
MESA INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
------ ------ ---------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1989.......................... 38,571 $386 $ 585,355 $ --
Net loss.......................................... -- -- (200,276) --
Distributions..................................... -- -- (32,718) --
------ ------ ---------- -----------
Balance, December 31, 1990.......................... 38,571 386 352,361 --
Net loss.......................................... -- -- (79,163) --
------ ------ ---------- -----------
Balance, December 31, 1991.......................... 38,571 386 273,198 --
Net loss.......................................... -- -- -- (89,232)
------ ------ ---------- -----------
Balance, December 31, 1992.......................... 38,571 $386 $ 273,198 $ (89,232)
------ ------ ---------- -----------
------ ------ ---------- -----------
</TABLE>
(See accompanying notes to consolidated financial statements)
(The consolidated statements of changes in stockholders' equity
reflect the reorganization described in Note 1.)
F-25
<PAGE> 107
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MESA Inc., a Texas corporation, was formed in connection with a transaction
(the Corporate Conversion) which reorganized the business of Mesa Limited
Partnership (the Partnership). The Partnership was formed in 1985 to succeed to
the business of Mesa Petroleum Co. (Original Mesa). The Partnership was owned
98% by its limited partners and 2% by its general partner (the General Partner).
Unless the context otherwise requires, as used herein the term "Company" refers
to MESA Inc. and its subsidiaries taken as a whole and includes its
predecessors.
Pursuant to the Corporate Conversion, the Partnership transferred
substantially all its assets and liabilities to the Company on December 31, 1991
in exchange for all outstanding shares of the Company's common stock. The common
units and general partner interests in the Partnership that were held by the
General Partner (which would otherwise have been converted into 4.14% of the
Company's common stock) were converted into a 4.14% general partner interest in
each direct subsidiary partnership of the Company. The Partnership allocated 1.0
share of the Company's common stock for each common unit and 1.35 shares of the
Company's common stock for each preference unit to its unitholders (other than
the General Partner). Concurrently, the Company effected a one-for-five reverse
split of the common stock and the Partnership distributed to its former
unitholders (other than the General Partner) .2 shares of common stock for each
common unit and .27 shares of common stock for each preference unit.
PRINCIPLES OF CONSOLIDATION
The Company owns and operates its oil and gas properties and other assets
through subsidiary partnerships. The General Partner owns a 4.14% interest in
the direct subsidiary partnerships. The accompanying consolidated financial
statements reflect the consolidated accounts of the Company and the subsidiary
partnerships after elimination of intercompany transactions. The General
Partner's interest is reflected as a minority interest.
The Corporate Conversion has been reflected in the consolidated accounts of
the Company as a reorganization of entities under common control whereby the
historical bases of the assets and liabilities of the Partnership have been
carried forward as the recorded bases for the Company. The accompanying
consolidated financial statements reflect a retroactive restatement for all
periods presented to reflect the Corporate Conversion.
Certain reclassifications have been made to amounts reported in previous
years to conform to 1992 presentation.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company classifies all
cash investments with original maturities of three months or less as cash and
cash investments.
INVESTMENTS
Investments in marketable securities are stated at the lower of cost or
market value and are classified as current or noncurrent, depending on
management's intent at the balance sheet date. Periodic changes in the stated
value of the marketable securities portfolios are reflected in income in the
case of current investments and in stockholders' equity in the case of
noncurrent investments. The cost of securities sold is determined on the
first-in, first-out basis. The Company also enters into various futures
contracts which are not accounted for as hedges of existing assets and are
periodically adjusted to market price. Gains and losses from such contracts are
included in securities gains (losses).
F-26
<PAGE> 108
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OIL AND GAS PROPERTIES
Under the successful efforts method of accounting, all costs of acquiring
unproved oil and gas properties and drilling and equipping exploratory wells are
capitalized pending determination of whether the properties have proved
reserves. If an exploratory well is determined to be nonproductive, the drilling
and equipment costs of the well are expensed at that time. All development
drilling and equipment costs are capitalized. Capitalized costs of proved
properties and estimated future dismantlement and abandonment costs are
amortized on a property-by-property basis using the unit-of-production method.
Geological and geophysical costs and delay rentals are expensed as incurred.
Unproved properties are periodically assessed for impairment of value and a
loss is recognized at the time of impairment. The aggregate carrying value of
proved properties is periodically compared with the undiscounted future net cash
flows from proved reserves, determined in accordance with Securities and
Exchange Commission (SEC) regulations, and a loss is recognized if permanent
impairment of value is determined to exist. A loss is recognized on proved
properties expected to be sold in the event that carrying value exceeds expected
sales proceeds.
LOSS PER SHARE
The computations of loss per share are based on the weighted average number
of common shares outstanding during each period.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, marketable securities,
short-term trade receivables and payables, notes receivable, restricted cash and
long-term debt. The carrying values of cash, marketable securities, short-term
trade receivables and payables and restricted cash approximate fair value. It is
not practicable to estimate the fair value of a $27 million note receivable from
Bicoastal Corporation (Bicoastal) since Bicoastal is emerging from bankruptcy
and the Company's allowed claims in the bankruptcy exceed the carrying value of
the note. The Company expects to ultimately collect the recorded amount of the
note but the timing of collection is uncertain. See Note 8 for additional
discussion of the Bicoastal note. The fair value of long-term debt is estimated
based on the quoted market prices for the Company's publicly traded subordinated
debt and on current rates available for similar debt with similar maturities and
security for the Company's remaining debt.
GAS REVENUES
The Company recognizes its ownership interest in natural gas sales as
revenue. Actual production quantities sold by the Company may be different than
its ownership share of production in a given period. If the Company's sales
exceed its ownership interest, the differences are recorded as deferred revenue.
Gas balancing receivables are recorded when the Company's ownership interest
exceeds sales. The Company also records production expenses related to its
ownership share of production. At December 31, 1992, the Company had produced a
net 10.5 billion cubic feet of natural gas less than its ownership interest and
had recorded gas balancing receivables, net of deferred revenues, of
approximately $19.2 million.
The Company periodically enters into natural gas futures contracts as a
hedge against natural gas price fluctuations. Gains or losses on such hedges are
deferred and recognized as natural gas revenue when the hedged production
occurs. The Company recognized a loss of $1.0 million in 1990 related to hedging
activities and gains of $8.3 million and $5.6 million in 1991 and 1992,
respectively. These gains or losses are included in natural gas revenues for the
respective periods. As of December 31, 1992, the Company had deferred realized
losses of $.3 million which will be recognized as reductions of natural gas
revenue in the first quarter of 1993.
F-27
<PAGE> 109
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TAXES
The Company provides for income taxes using the asset and liability method
under which deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. The effect on deferred taxes
of a change in tax laws or tax rates is recognized in income in the period that
includes the enactment date.
(2) RESOURCES AND LIQUIDITY
Cash flows from operating activities for the years ended December 31, 1992,
1991 and 1990 were $(28) million, $35 million and $14 million, respectively. In
those same years, respectively, capital expenditures totaled $69 million, $32
million and $37 million, and cash used in financing activities, primarily to
repay or refinance debt, totaled $29 million, $310 million and $207 million. The
Company used proceeds from sales of oil and gas properties, proceeds from
collection of long-term receivables and cash and securities on hand to fund
obligations in excess of cash flows from operating activities.
At December 31, 1992, the Company's long-term debt totaled $1.2 billion
(see Note 4). The Company also had $103 million of working capital; cash and
securities totaled $169 million. Of the $169 million of cash and securities, $64
million is held in Hugoton Capital Limited Partnership, an indirect subsidiary
partnership. The assets of this subsidiary partnership, which also holds
substantially all of the Company's Hugoton field natural gas properties and $581
million of secured debt, are dedicated to service the debt of this subsidiary
partnership and are not available to pay creditors of the Company or its other
subsidiaries.
During 1993, the Company expects its interest requirements to total $139
million, its capital expenditures to total $36 million and its principal
payments on long-term debt to total $45 million (subject to matters described
below with respect to the revolving credit agreement [Credit Agreement]). The
Company's cash flows from sales of oil and gas production in 1993 are not
expected to be sufficient to service debt and fund capital expenditures.
The Company's independent public accountants included an explanatory
paragraph in their report on the 1992 consolidated financial statements of the
Company which described a potential debt covenant default which raised
substantial doubt about the Company's ability to continue as a going concern.
See Note 14 for a discussion of recent events affecting the independent public
accountants' report. The consolidated financial statements of the Company have
been prepared assuming the Company will continue as a going concern.
Accordingly, no adjustments have been made to the consolidated financial
statements to reflect any possible liquidation of assets which may be required
in the event of bankruptcy. Management believes that the Company has several
alternatives to improve its cash flow and available cash, including the Exchange
Offer. The following discussion outlines Mesa's contingencies and alternatives.
POTENTIAL LONG-TERM DEBT DEFAULT
The Company's financial forecasts indicate that, in the second or third
quarter of 1993, the Company's tangible adjusted equity, as defined, may fall
below the level required by a covenant contained in the Credit Agreement.
Borrowings under the Credit Agreement totaled $100 million at December 31, 1992
and, absent an acceleration, are due June 3, 1994. The Credit Agreement also
supports $10.6 million of outstanding letters of credit. See Note 4 for a
discussion of the Credit Agreement and tangible adjusted equity covenant. If the
Company were to fail to maintain the required level of tangible adjusted equity
and were unable to obtain a waiver of or renegotiate such covenant, it would be
in default under the Credit Agreement, giving the banks the right, subject to a
30-day grace period, to accelerate the principal payment of debt thereunder and
to require cash collateralization of outstanding letters of credit. The
Company's financial forecasts also indicate that available cash would be
insufficient to repay the amounts outstanding under the Credit Agreement in the
F-28
<PAGE> 110
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
event of default. Such an event of default, if not cured, would also constitute
an event of default under each of the indentures governing the Company's $600
million of subordinated notes, giving the holders of such notes the right to
accelerate such debt.
DEBT RESTRUCTURING
The Company has proposed an exchange offer (Exchange Offer) whereby a new
series of 12% unsecured discount notes due in August 1998 would be offered to
existing holders of the Company's 12% and 13 1/2% subordinated notes. The new
notes would accrue, but not pay, interest through August 1, 1996, after which
interest would be payable in cash. If consummated, the Exchange Offer could
result in cash savings by deferring up to $77 million of interest payments per
year. See Note 4 for a description of the Exchange Offer. Management believes
that consummation of the Exchange Offer may facilitate its ability to obtain a
waiver of or to renegotiate the tangible adjusted equity covenant and, in
addition, to negotiate an extension of the final maturity date of the Credit
Agreement beyond June 1994. However, the Company has not yet sought any such
waiver or extension and no assurance can be given that, if the Exchange Offer is
completed, such changes will actually be achieved. The Company believes that
completion of the Exchange Offer may also increase the Company's ability to
obtain traditional equity or debt financing in the future to repay or refinance
its indebtedness. The Exchange Offer is intended to reduce the Company's cash
interest requirements through August 1996, which should enhance the Company's
ability to service its debt obligations and make capital expenditures from
available cash and operating cash flows. The Company is engaged in discussions
with financial and legal advisors representing a committee of its noteholders
regarding terms of the Exchange Offer. There can be no assurance that the
Exchange Offer will be made or consummated or, if consummated, what the level of
exchange will be. In addition, depending on industry conditions, the Company may
generate or preserve cash by seeking to amend the maturity of the Credit
Agreement, selling assets, issuing new debt or equity, reducing capital
expenditures, paying interest on the 12% subordinated notes with common stock,
seeking to otherwise defer payment of interest or pursuing other alternatives.
See Note 14 for a discussion of recent events relating to the Exchange Offer.
LITIGATION
The Company is subject to various lawsuits, the most significant of which
relates to a 1985 investment in Unocal Corporation (Unocal). A trial is expected
later in 1993. As described in Note 9, a significant judgment against the
Company in the Unocal lawsuit would have a material adverse effect on the
financial position and results of operations of the Company. Payment of such a
judgment would remove a substantial amount of cash from the Company at a time
when cash flows from operating activities are not expected to be sufficient to
service debt and fund capital expenditures and other obligations. Such a payment
would also reduce tangible adjusted equity below $150 million. In the event of
an adverse judgment, the Company would expect to appeal but could be required to
post a bond or other security in the amount of the judgment in order to stay
execution pending appeal.
In the event of an adverse decision, the Company could pursue a variety of
options including sales of assets, settlement discussions to reduce the amount
of the award or to limit bond requests or negotiations to obtain relief from
certain debt obligations to banks or subordinated noteholders. The Company could
also consider seeking protection from creditors under the Federal Bankruptcy
Code. The Company's choice of alternatives would depend on numerous factors
including the amount of the judgment, the status of the Exchange Offer, the
status of renegotiations of the Credit Agreement, and conditions in the oil and
gas industry.
F-29
<PAGE> 111
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) MARKETABLE SECURITIES
Marketable securities are as follows at December 31 (in thousands):
<TABLE>
<CAPTION>
1992 1991
------- -------
<S> <C> <C>
Cost..................................................... $12,167 $28,183
Unrealized gain (loss)................................... (249) 2,698
------- -------
Market value............................................. $11,918 $30,881
------- -------
------- -------
</TABLE>
During the year ended December 31, 1992, the Company recognized a net gain
of $7.8 million from its investments in securities and futures contracts
compared with net losses in 1991 and 1990 of $2.1 million and $.5 million,
respectively. The securities gains and losses do not include gains or losses
from natural gas futures contracts accounted for as hedges of natural gas
production. Hedge gains or losses are included in natural gas revenue in the
month in which the hedged production occurs. (See Note 1).
The net gains and losses recognized during a period include both realized
and unrealized gains and losses. During 1992, the Company realized a net gain of
$10.0 million from securities transactions and futures contracts. Net realized
losses totaled $7.8 million and $11.6 million in 1991 and 1990, respectively.
(4) LONG-TERM DEBT
Long-term debt and current maturities are as follows at December 31 (in
thousands):
<TABLE>
<CAPTION>
1992 1991
---------- ----------
<S> <C> <C>
HCLP Secured Notes.................................. $ 580,850 $ 605,400
Credit Agreement.................................... 100,000 100,000
12% subordinated notes.............................. 300,000 300,000
13 1/2% subordinated notes.......................... 300,000 300,000
Other............................................... 5,305 5,305
---------- ----------
1,286,155 1,310,705
Current maturities.................................. (44,555) (6,310)
---------- ----------
Long-term debt...................................... $1,241,600 $1,304,395
---------- ----------
---------- ----------
</TABLE>
HCLP SECURED NOTES
In 1991, Hugoton Capital Limited Partnership (HCLP), a subsidiary which
holds substantially all of the Company's Hugoton field natural gas properties,
issued $616 million of secured notes (HCLP Secured Notes) in a private placement
with a group of institutional lenders. The issuance replaced $550 million of
bank debt and funded a $66 million restricted cash balance within HCLP. The
restricted cash balance is available to supplement cash flows from the HCLP
properties in the event such cash flows are not sufficient to fund principal and
interest payments on the HCLP Secured Notes when due. As the HCLP Secured Notes
are repaid, the required restricted cash balance is reduced.
The HCLP Secured Notes were issued in 15 series and have final stated
maturities extending through 2012 but can be retired earlier depending on the
rate of production from the Hugoton properties. As of December 31, 1992, $36
million has been repaid as scheduled. An additional $19.5 million of principal
was repaid as scheduled on March 1, 1993. The HCLP Secured Notes outstanding on
December 31, 1992, bear interest at fixed rates ranging from 8.6% to 11.3%
(weighted average 10.1%). Principal and interest payments are made semiannually.
Provisions in the HCLP Secured Note agreements require interest rate premiums to
be paid to the noteholders in the event that the HCLP Secured Notes are repaid
more rapidly or slowly than
F-30
<PAGE> 112
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
scheduled in the agreements. Such premiums, if required, would increase the
effective interest rate of the HCLP Secured Notes.
The HCLP Secured Note agreements contain various covenants which, among
other things, limit HCLP's ability to sell or acquire oil and gas property
interests, incur additional indebtedness, make unscheduled capital expenditures,
make distributions of property or funds subject to the mortgage, or enter into
certain types of long-term contracts or forward sales of production. The
agreements also require HCLP to maintain separate existence from the Company.
The assets of HCLP are dedicated to service HCLP's debt and are not available to
pay creditors of the Company or its subsidiaries other than HCLP.
Revenues received from production from HCLP's Hugoton properties are
deposited in a collection account maintained by a Collateral Agent. The
Collateral Agent releases or reserves funds, as appropriate, for the payment of
royalties, taxes, operating costs, capital expenditures and principal and
interest on the HCLP Secured Notes. Only after all required payments have been
made may any remaining funds held by the Collateral Agent be released from the
mortgage.
In connection with the formation of HCLP and the issuance of the HCLP
Secured Notes, Mesa Operating Limited Partnership (MOLP), a Company subsidiary
and 81% owner of HCLP, entered into a services agreement with HCLP pursuant to
which MOLP will provide certain services necessary to operate the Hugoton field
properties and market production therefrom, process remittances of production
revenues and perform certain other administrative functions in exchange for a
services fee, which totaled approximately $11 million in 1992.
The restricted cash balance and cash held by the Collateral Agent for
payment of interest and principal on the HCLP Secured Notes are invested by the
Collateral Agent under the terms of a guaranteed investment contract (GIC) with
Morgan Guaranty Trust Co. of New York (GIC Provider). The GIC Provider was paid
$13.9 million at the date of issuance of the HCLP Secured Notes to guarantee
that funds invested under the GIC would earn an interest rate equivalent to the
weighted average coupon rate on the outstanding principal balance of the HCLP
Secured Notes (10.1% at December 31, 1992). A portion of this amount may be
refunded if the HCLP Secured Notes are repaid earlier than if HCLP had produced
according to its scheduled production, depending primarily on prevailing
interest rates.
In the first quarter of 1992, the Company contributed an additional $32
million in cash to HCLP which was not subject to the mortgage, a portion of
which was used to supplement HCLP's cash flows in order to make scheduled
principal payments in 1992. At December 31, 1992, approximately $17 million of
HCLP's cash was not subject to the mortgage and is expected to be used to
supplement HCLP's cash flow in 1993.
HCLP's cash balances are as follows at December 31 (in thousands):
<TABLE>
<CAPTION>
1992 1991
------- -------
<S> <C> <C>
Cash included in current assets.......................... $64,141 $45,334
------- -------
------- -------
Restricted cash included in noncurrent assets............ $64,339 $65,381
------- -------
------- -------
</TABLE>
CREDIT AGREEMENT
The $150 million Credit Agreement, secured by the Company's West Panhandle
field oil and gas properties, is due in June 1994 and bears interest at a
designated prime rate or at a Eurodollar rate plus 1%. As of December 31, 1992,
the Company has borrowed $100 million under the Credit Agreement. The Credit
Agreement also supports $10.6 million of outstanding letters of credit. As a
result, and subject to certain conditions, $39.4 million of unused borrowing
capacity exists under the facility. The average interest rate under the Credit
Agreement at December 31, 1992 was 4.6%.
F-31
<PAGE> 113
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Credit Agreement contains a covenant that requires the Company to
maintain tangible adjusted equity, as defined, of at least $150 million. At
December 31, 1992, tangible adjusted equity was $192 million. See Note 2 for a
discussion of possible acceleration of principal payments of the borrowings
under the Credit Agreement in the second or third quarter of 1993.
The provisions of the Credit Agreement prohibit the Company from paying any
dividends to equity holders, other than those paid in the form of equity
securities.
The Credit Agreement also contains a covenant that requires the Company to
maintain a ratio of cash flow and available cash to debt service, as each is
defined, of at least 1.25 to 1. At December 31, 1992, the ratio was 1.41 to 1.
SUBORDINATED NOTES
The 12% subordinated notes are unsecured and mature in 1996. Interest on
these notes is payable quarterly and, at the option of the Company, may be paid
in common stock of the Company.
The 13 1/2% subordinated notes are unsecured and mature in 1999. Interest
on these notes is payable semiannually in cash.
The 13 1/2% subordinated notes contain a provision that restricts the
Company's ability to borrow additional funds (except for debt incurred to
refinance other debt and additional debt not exceeding $50 million) if it does
not maintain a defined cash flow coverage ratio. At December 31, 1992, the cash
flow coverage ratio was less than the requirement and, as a result, the Company
has limited ability to incur additional debt. The 12% and 13 1/2% subordinated
notes also restrict the ability of the Company to pay dividends to equity
holders if certain debt-to-equity ratios are not maintained. Under these
provisions, the Company is currently prohibited from paying dividends.
Both subordinated note agreements also contain provisions which would
permit acceleration of the principal of the notes if the Company were in default
on other debt obligations including the Credit Agreement.
On October 26, 1992, the Company filed a registration statement
(Registration Statement) with the SEC for a new series of 12% unsecured discount
notes (New Notes) due August 1998 to be offered in the Exchange Offer to
existing holders of the Company's 12% and 13 1/2% subordinated notes. As
proposed, the New Notes would accrue interest, but would not require cash
payments of interest, through August 1, 1996. The accreted value of the New
Notes, as defined, would increase from February 1, 1993 through August 1, 1996
at a rate of 12% per annum, compounded semiannually. After August 1, 1996, the
New Notes would accrue interest at 12% per annum, payable in cash. The New Notes
would be senior in right of payment to any 12% and 13 1/2% subordinated notes
that are not exchanged in the Exchange Offer.
The Exchange Offer will be made only by means of a prospectus, after the
Registration Statement is declared effective by the SEC. The terms of the
Exchange Offer are currently being negotiated and there can be no assurance that
the Exchange Offer will be made or consummated.
INTEREST AND MATURITIES
The aggregate interest payments during 1992, 1991 and 1990 were $142.7
million, $128.1 million, and $190.0 million, respectively.
F-32
<PAGE> 114
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The scheduled principal repayments on long-term debt for the next five
years are as follows:
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
----- ------ ----- ------ -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
HCLP Secured Notes........................... $39.3 $ 42.9 $39.3 $ 45.4 $46.7
Credit Agreement*............................ -- 100.0 -- -- --
12% subordinated notes*...................... -- -- -- 300.0 --
Other........................................ 5.3 -- -- -- --
----- ------ ----- ------ -----
Total.............................. $44.6 $142.9 $39.3 $345.4 $46.7
----- ------ ----- ------ -----
----- ------ ----- ------ -----
</TABLE>
- ---------------
* See Note 2 for a discussion of possible acceleration of principal payments
under the Credit Agreement and potential for cross defaults under the
subordinated notes.
FAIR VALUE OF LONG-TERM DEBT
Based on borrowing rates currently available for secured debt with similar
maturities and credit rating, the fair value of the HCLP Secured Notes at
December 31, 1992 is estimated to be approximately $630 million.
Based on borrowing rates currently available for revolving bank loans with
similar collateral, the fair value of the Credit Agreement at December 31, 1992
is estimated to be its carrying value.
The subordinated notes are publicly traded. Based on published trading
prices at December 31, 1992, the fair value of the 12% subordinated notes was
$243 million and the fair value of the 13 1/2% subordinated notes was $249
million.
Based on the current financial condition of the Company, there is no
assurance that the Company could obtain borrowings under long-term debt
agreements with terms similar to those described above and receive proceeds
approximating the estimated fair values.
(5) INCOME TAXES
At December 31, 1992, the tax basis of the Company's consolidated net
assets was greater than the financial basis of those net assets; therefore, no
deferred tax liability has been recorded. The primary difference between bases
for financial reporting purposes and for tax purposes is related to oil and gas
properties and results from (i) the additional basis recognized for tax purposes
when the Partnership was formed in 1985 and (ii) the tax basis adjustments
resulting from purchases and sales of Partnership units during the years 1986
through 1991.
On February 10, 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes," which the Company will adopt during the first quarter of 1993.
SFAS No. 109 provides for, among other things, the recognition of deferred tax
assets under certain circumstances. The tax basis of the Company's consolidated
net assets exceeds the financial basis at December 31, 1992. Therefore, the
Company will likely calculate a deferred tax asset upon adoption of SFAS No.
109. However, due to the Company's history of net operating losses and its
current financial condition, an offsetting valuation allowance will result in
little or no recognition of such asset. SFAS No. 109 prescribes an asset and
liability method to provide for income taxes. Other than allowing deferred tax
asset recognition, the provisions of SFAS No. 109 are similar to the Company's
current policy. As a result, the Company does not expect adoption of SFAS No.
109 to have a material effect on its financial position or results of
operations.
F-33
<PAGE> 115
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1992, the Company had a regular tax net operating loss
carryforward of approximately $135 million which will expire in 2007.
The Company has assumed from the Partnership any tax liabilities or refunds
which may arise as a result of any changes to Original Mesa's taxable income or
loss for open tax years.
The income tax returns of Original Mesa are open to examination by federal
and state taxing authorities for calendar years 1984 through 1987. The Internal
Revenue Service (IRS) has recently completed two field examinations of the open
tax years, which indicate that additional taxes for the subject periods may be
imposed. No formal tax assessment has been made by the IRS. An administrative
review of the field examinations is currently in process; therefore, the amount
of the eventual tax assessment, if any, cannot yet be determined. The Company
believes that it has adequately provided for any potential tax liability and
that the final resolution of the IRS examinations will not have a material
adverse effect on its financial position or results of operations.
The tax returns of the Partnership for the years 1989 through 1991 are also
subject to examination by federal and state taxing authorities. If examinations
of the Partnership returns result in changes to taxable income or loss, the
taxable income or loss of the former partners and the tax basis of the Company's
assets will be changed accordingly.
(6) PROPERTY SALES
In June 1992, the Company sold all of its Canadian interests (consisting of
overriding royalty interests in producing and nonproducing acreage) for
approximately $12 million in cash and recognized a $12 million gain.
In April 1991, the Company sold its producing gas properties in the San
Juan Basin of New Mexico and Colorado for approximately $161 million in cash and
the assumption by the purchaser of approximately $2 million in liabilities
resulting in a gain of approximately $34 million.
In March 1991, the Company sold certain of its producing oil and gas
properties and undeveloped leasehold acreage in the Texas Panhandle and in
Oklahoma for an aggregate of approximately $267 million in cash and the
assumption by the purchasers of approximately $7 million in liabilities. The
Company recognized a loss of $75 million in 1990 as a result of these
transactions.
(7) STOCKHOLDERS' EQUITY
At December 31, 1992, the Company had outstanding 38.6 million shares of
common stock. The Company owns a 95.86% limited partnership interest in the
direct subsidiary partnerships and the General Partner owns a 4.14% interest.
The General Partner's interest is convertible into 1.7 million shares of common
stock.
The Company also has authorized 10 million shares of preferred stock. No
shares of preferred stock have been issued as of December 31, 1992.
(8) NOTES RECEIVABLE
Notes receivable consist primarily of claims against Bicoastal. A plan of
reorganization for Bicoastal has been approved by the Bankruptcy Court and the
Company collected approximately $28.1 million in 1992. At December 31, 1992, the
Company had recorded receivables totaling $27.2 million from Bicoastal. In the
confirmed bankruptcy plan, the Company has total remaining allowed claims of $40
million (net of the cash received in 1992). The Company expects that it will
ultimately collect at least the remaining recorded amount of $27.2 million, but
the timing of collection is uncertain. In addition to its allowed claims, the
Company may also collect certain interest amounts.
F-34
<PAGE> 116
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) CONTINGENCIES
UNOCAL
The Company is subject to a lawsuit relating to the investment in Unocal by
Original Mesa and certain other defendants (collectively, the Mesa Defendants).
This suit, filed in 1986 in Federal District Court in Los Angeles, alleges that,
pursuant to Section 16(b) of the Securities Exchange Act of 1934, "short-swing
profits" allegedly realized by the Mesa Defendants upon disposition of certain
shares of Unocal common stock in 1985 are recoverable by Unocal. In late 1992,
the Mesa Defendants made a motion for summary judgment that a 1985 settlement
agreement between the Mesa Defendants and Unocal released the Mesa Defendants
from any potential liability in the case. In March 1993, the court denied the
Mesa Defendants' motion and granted the plaintiffs' cross motion, holding that,
as a matter of law, the settlement agreement did not release the claim asserted
by Unocal in this lawsuit. As of March 12, 1993, the case was scheduled for
trial on June 8, 1993. The Company will have no liability in the case if it
prevails on either of the following grounds: (i) that the 1985 acquisition of
6.7 million shares of Unocal was, as the Company contends, effected in a single
purchase, or (ii) that the Mesa Defendants realized no profit on the disposition
of any Unocal shares that might be deemed subject to Section 16(b). See Note 14
for a discussion of recent events relating to the Unocal litigation.
No determination can be made at this time as to the ultimate outcome of the
litigation. If the plaintiffs were to prevail and were awarded a judgment
(including interest) in the range of their estimate of $150 million, payment of
such amount would have a material adverse effect on the financial position and
results of operations of the Company. Consequences to the Company of an adverse
decision are discussed in Note 2.
MASTERSON
In February 1992, the current lessors of an oil and gas lease (the Gas
Lease) dated April 30, 1955, between R.B. Masterson, et al., as lessor, and
Colorado Interstate Gas Company (CIG), as lessee, sued CIG in Federal District
Court in Amarillo, Texas, claiming that CIG had underpaid royalties due under
the Gas Lease. The Company owns an interest in the Gas Lease. The plaintiffs
alleged that the underpayment was the result of CIG's use of an improper gas
sales price upon which to calculate royalties, and that the proper price should
have been determined pursuant to a pricing clause in a July 1, 1967 amendment to
the Gas Lease. The complaint did not specify the damages sought and appeared to
relate only to royalties for periods after October 1, 1988. The plaintiffs also
sought a declaration by the court as to the proper price to be used for
calculating future royalties.
In August 1992, CIG filed a third-party complaint against the Company for
any such royalty underpayments which may be allocable to the Company's Interest
in the Gas Lease.
On December 22, 1992, the plaintiffs filed a Second Amended Complaint,
including both CIG and the Company as defendants, again alleging that the use of
an improper price in calculating royalties resulted in underpayments of royalty,
but for the first time alleging that the underpayments amounted to approximately
$250 million (including interest) and covered the period from July 1, 1967 to
the present. In addition, the plaintiffs seek exemplary damages.
Management believes that the Company has several defenses to plaintiffs'
claims, including (i) that the royalties for all periods were properly computed
and paid and (ii) that plaintiffs' claims with respect to all periods prior to
October 1, 1988 (which appear to account for the substantial portion of the
above $250 million of claims) were explicitly released by a 1988 written
agreement among the plaintiffs, CIG and the Company and are further barred by
the statute of limitations. If the plaintiffs were to prevail, the manner in
which any resulting liability would be shared between the Company and CIG would
depend on the resolution of issues relating to the contractual agreements and
the relationship between the Company, CIG and the lessors during the period in
question.
F-35
<PAGE> 117
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
No determination can be made at this time as to the ultimate outcome of the
litigation and no trial date has been set.
PREFERENCE UNITHOLDERS
The Company is a defendant in lawsuits related to the Corporate Conversion
pending in the U.S. District Court for the Northern District of Texas-Dallas
Division. Plaintiffs allege, among other things, that (i) the proxy materials
delivered to unitholders in connection with the Corporate Conversion contained
material misstatements and omissions, (ii) the general partners of the
Partnership breached fiduciary duties to the preference unitholders in
structuring the transaction and allocating the common stock of the Company and
(iii) the Corporate Conversion was not properly approved by the unitholders of
the Partnership because certain procedural requirements of the partnership
agreement were allegedly not met. The Company and the other defendants have
denied the allegations and believe they are without merit. Plaintiffs seek an
order requiring payment to the former preference unitholders of $164 million in
respect of the preferential distribution rights of their units, a declaration
declaring the Corporate Conversion void and rescinding it, unspecified
compensatory and punitive damages and other relief.
OTHER
The Company is also a defendant in other lawsuits and has assumed
liabilities relating to Original Mesa and the Partnership. The Company does not
expect the resolution of the Masterson and preference unitholder lawsuits or any
of these other matters to have a material adverse effect on its financial
position or results of operations.
(10) EMPLOYEE BENEFIT PLANS
The Company maintains two defined contribution retirement plans for the
benefit of its employees. The Company expensed $3.3 million in 1992, $3.1
million in 1991, and $4.4 million in 1990 in connection with these plans.
In December 1991, the stockholders of the Company approved the 1991 Stock
Option Plan of the Company (the Option Plan), which authorized the grant of
options to purchase up to 2 million shares of common stock to be granted to
officers and key employees. The exercise price of each share of common stock
placed under option pursuant to the Option Plan cannot be less than 100% of the
fair market value of such share of common stock on the date the option is
granted. Upon exercise, the grantee may elect to receive either shares of common
stock or, at the discretion of the Option Committee of the Board of Directors,
cash or certain combinations of stock and cash in an amount equal to the excess
of the fair market value of the common stock at the time of exercise over the
exercise price. At December 31, 1992, the following stock options were
outstanding:
<TABLE>
<CAPTION>
NUMBER OF DATE OF EXERCISE PRICE
OPTIONS GRANT PER SHARE EXERCISABLE
- --------- --------- -------------- -----------
<S> <C> <C> <C>
1,186,000 1/10/92 $ 6.81 355,800
10,000 5/19/92 4.13 3,000
156,000 10/02/92 11.69 --
- --------- -----------
1,352,000 358,800
- --------- -----------
- --------- -----------
</TABLE>
Options are exercisable from date of grant as follows: after six months,
30%; after one year, 55%; after two years, 80%; and after three years, 100%. At
December 31, 1992, options for 638,000 shares were available for grant.
F-36
<PAGE> 118
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company had agreements with two officers to provide postretirement
deferred compensation at the rate of one-half of the participant's final rate of
compensation (subject to minimum amounts specified in the agreements) for a
period of 10 years following the date of retirement or death. In 1992, in order
to terminate the deferred compensation agreements, the Company established life
insurance plans, executed agreements with the two officers and purchased
insurance policies at an aggregate cost of $4.9 million. At the time they were
terminated, approximately $3.9 million had been accrued under the deferred
compensation agreements. The Company has fully funded the life insurance
policies and has no further obligations under such policies or under the
deferred compensation agreements.
The Company provides postretirement medical benefits for its retired
employees and retired employees of Pioneer Corporation (acquired in 1986). In
December 1990, SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions," was issued requiring accrual basis accounting for such
benefits. As a result, the Company will be required to record a liability
related primarily to postretirement medical costs for retired and current
employees. The Company will adopt SFAS No. 106 in 1993. The liability for
benefits existing at the date of adoption will be amortized over 20 years. The
Company believes that the adoption of the new standard will not have a material
effect on its financial position or its results of operations.
(11) MAJOR CUSTOMERS
Revenues include sales to Mapco Oil and Gas Company (Mapco) of $45.7
million (19.4%), Western Resources, Inc. (WRI) formerly Kansas Power & Light
Company, of $39.7 million (16.8%) and Energas Company of $23.7 million (10.0%)
in 1992. In 1991, revenues included sales to Mapco of $51.9 million (20.9%) and
WRI of $27.9 million (11.2%). In 1990, revenues included sales to Mapco of $52.0
million (16.2%) and WRI of $42.0 million (13.1%).
(12) CONCENTRATIONS OF CREDIT RISK
Substantially all of the Company's accounts receivable at December 31, 1992
result from oil and gas sales and joint interest billings to third party
companies in the oil and gas industry. This concentration of customers and joint
interest owners may impact the Company's overall credit risk, either positively
or negatively, in that these entities may be similarly affected by changes in
economic or other conditions. In determining whether or not to require
collateral from a customer or joint interest owner, the Company analyzes the
entity's net worth, cash flows, earnings, and credit ratings. Receivables are
generally not collateralized. Historical credit losses incurred by the Company
on receivables have not been significant.
(13) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The Company conducts its operations through various direct and indirect
subsidiaries. Mesa Inc.'s direct subsidiaries are MOLP, Mesa Midcontinent
Limited Partnership (MMLP) and Mesa Holding Limited Partnership. MOLP owns all
of the Company's interest in the West Panhandle field of Texas, the Gulf Coast
and the Rocky Mountain area as well as an approximate 81% limited partnership
interest in HCLP. MMLP owns an approximate 19% limited partnership interest in
HCLP. HCLP owns substantially all of the Company's Hugoton field natural gas
properties and is liable for the HCLP Secured Notes (see Note 4). The assets and
cash flows of HCLP are dedicated to service the HCLP Secured Notes and are not
available to pay creditors of the Company or its subsidiaries other than HCLP.
MOLP and Mesa Inc. are liable for the Credit Agreement and the 12% and 13 1/2%
subordinated notes and will be liable for any new debt issued under the terms of
the Exchange Offer. Mesa Capital Corp. (Mesa Capital), a wholly owned subsidiary
of MOLP, is also an obligor under the 12% and 13 1/2% subordinated notes. Mesa
Capital is a financing subsidiary and has insignificant assets and results of
operations. Mesa Capital is included with MOLP in the condensed consolidating
financial statements.
F-37
<PAGE> 119
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following are condensed consolidating financial statements of MESA
Inc., HCLP, MOLP and the Company's other direct and indirect subsidiaries
combined (in millions):
CONDENSED CONSOLIDATING BALANCE SHEETS
<TABLE>
<CAPTION>
OTHER CONSOLIDATION THE
MESA COMPANY AND COMPANY
DECEMBER 31, 1992 INC. HCLP MOLP SUBSIDIARIES ELIMINATION CONSOLIDATED
- -------------------------------------- ---- ---- ------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash investments........... $ -- $64 $ 16 $ 77 $ -- $ 157
Other current assets................ -- 22 31 9 -- 62
---- ---- ------ ------ ------------- ------------
Total current assets............. -- 86 47 86 -- 219
---- ---- ------ ------ ------------- ------------
Property, plant and equipment,
net.............................. -- 682 598 -- -- 1,280
Investment in subsidiaries.......... 193 -- 51 191 (435) --
Intercompany receivables............ -- -- 138 -- (138) --
Other assets........................ -- 91 56 30 -- 177
---- ---- ------ ------ ------------- ------------
$193 $859 $ 890 $307 $(573) $1,676
---- ---- ------ ------ ------------- ------------
---- ---- ------ ------ ------------- ------------
Liabilities and Equity:
Current liabilities................. $ -- $74 $ 40 $ 2 $ -- $ 116
Long-term debt...................... -- 542 700 -- -- 1,242
Intercompany payables............... 9 -- -- 142 (151) --
Other noncurrent liabilities........ -- -- 113 13 -- 126
Minority interest................... -- -- -- -- 8 8
Partners'/stockholders' equity...... 184 243 37 150 (430) 184
---- ---- ------ ------ ------------- ------------
$193 $859 $ 890 $307 $(573) $1,676
---- ---- ------ ------ ------------- ------------
---- ---- ------ ------ ------------- ------------
DECEMBER 31, 1991
Assets:
Cash and cash investments........... $ -- $45 $ 126 $ 61 $ -- $ 232
Other current assets................ -- 24 25 28 -- 77
---- ---- ------ ------ ------------- ------------
Total current assets............. -- 69 151 89 -- 309
---- ---- ------ ------ ------------- ------------
Property, plant and equipment,
net.............................. -- 713 617 -- -- 1,330
Investment in subsidiaries.......... 280 -- 41 188 (509) --
Intercompany receivables............ -- -- 160 -- (160) --
Other assets........................ -- 93 45 55 -- 193
---- ---- ------ ------ ------------- ------------
$280 $875 $1,014 $332 $(669) $1,832
---- ---- ------ ------ ------------- ------------
---- ---- ------ ------ ------------- ------------
Liabilities and Equity:
Current liabilities................. $ 3 $39 $ 49 $ 1 $ -- $ 92
Long-term debt...................... -- 599 705 -- -- 1,304
Intercompany payables............... 3 -- -- 156 (159) --
Other noncurrent liabilities........ -- 6 130 14 -- 150
Minority interest................... -- -- -- -- 12 12
Partners'/stockholders' equity...... 274 231 130 161 (522) 274
---- ---- ------ ------ ------------- ------------
$280 $875 $1,014 $332 $(669) $1,832
---- ---- ------ ------ ------------- ------------
---- ---- ------ ------ ------------- ------------
</TABLE>
F-38
<PAGE> 120
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED:
<TABLE>
<CAPTION>
OTHER CONSOLIDATION THE
MESA COMPANY AND COMPANY
DECEMBER 31, 1992 INC. HCLP MOLP SUBSIDIARIES ELIMINATION CONSOLIDATED
- -------------------------------------------- ----- ---- ----- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:................................... $ -- $88 $149 $ -- $ -- $ 237
---- --- ---- ------ ------ ------
Costs and Expenses:
Operating, exploration and taxes.......... -- 22 51 -- -- 73
General and administrative................ -- -- 24 -- -- 24
Depreciation, depletion and
amortization............................ -- 34 80 -- -- 114
---- --- ---- ------ ------ ------
-- 56 155 -- -- 211
---- --- ---- ------ ------ ------
Operating Income (Loss)..................... -- 32 (6) -- -- 26
---- --- ---- ------ ------ ------
Interest Expense, net of Interest Income.... -- (52) (80) 2 -- (130)
Intercompany Interest Income (Expense)...... -- -- 18 (18) -- --
Securities Gains (Losses)................... -- -- (3) 11 -- 8
Gains on Dispositions of Oil and Gas
Properties................................ -- -- 12 -- -- 12
Equity in Loss of Subsidiaries.............. (87) -- (16) (4) 107 --
Minority Interest........................... -- -- -- -- 4 4
Other....................................... (2) -- (18) (2) 13 (9)
---- --- ---- ------ ------ ------
Net Loss.................................... $(89) $(20) $(93) $ (11) $ 124 $ (89)
---- --- ---- ------ ------ ------
---- --- ---- ------ ------ ------
DECEMBER 31, 1991
Revenues:................................... $ -- $57 $178 $ 15 $ -- $ 250
---- --- ---- ------ ------ ------
Costs and Expenses:
Operating, exploration and taxes.......... -- 13 53 5 -- 71
General and administrative................ -- -- 27 1 -- 28
Depreciation, depletion and
amortization............................ -- 25 81 11 -- 117
---- --- ---- ------ ------ ------
-- 38 161 17 -- 216
---- --- ---- ------ ------ ------
Operating Income (Loss)..................... -- 19 17 (2) -- 34
---- --- ---- ------ ------ ------
Interest Expense, net of Interest Income.... -- (30) (100) (4) -- (134)
Intercompany Interest Income (Expense)...... -- -- 8 (8) -- --
Securities Gains (Losses)................... -- -- 8 (10) -- (2)
Gains on Dispositions of Oil and Gas
Properties................................ -- -- 34 -- -- 34
Equity in Loss of Subsidiaries.............. (73) -- (9) (2) 84 --
Minority Interest........................... -- -- -- -- 3 3
Other....................................... (6) -- (23) 15 -- (14)
---- --- ---- ------ ------ ------
Net Loss.................................... $(79) $(11) $(65) $ (11) $ 87 $ (79)
---- --- ---- ------ ------ ------
---- --- ---- ------ ------ ------
DECEMBER 31, 1990
Revenues:................................... $ -- $-- $262 $ 68 $ -- $ 330
---- --- ---- ------ ------ ------
Costs and Expenses:
Operating, exploration and taxes.......... -- -- 77 18 -- 95
General and administrative................ -- -- 22 6 -- 28
Depreciation, depletion and
amortization............................ -- -- 113 51 -- 164
---- --- ---- ------ ------ ------
-- -- 212 75 -- 287
---- --- ---- ------ ------ ------
Operating Income (Loss)..................... -- -- 50 (7) -- 43
---- --- ---- ------ ------ ------
Interest Expense, net of Interest Income.... -- -- (147) (23) -- (170)
Intercompany Interest Income (Expense)...... -- -- 21 (21) -- --
Securities Gains (Losses)................... -- -- 22 (22) -- --
Gains (Losses) on Dispositions of Oil and
Gas Properties............................ -- -- 3 (89) 5 (81)
Equity in Loss of Subsidiaries.............. (200) -- -- -- 200 --
Minority Interest........................... -- -- -- -- 9 9
Other....................................... -- -- (28) 27 -- (1)
---- --- ---- ------ ------ ------
Net Loss.................................... $(200) $-- $(79) $ (135) $ 214 $ (200)
---- --- ---- ------ ------ ------
---- --- ---- ------ ------ ------
</TABLE>
F-39
<PAGE> 121
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED:
<TABLE>
<CAPTION>
OTHER CONSOLIDATION THE
MESA COMPANY AND COMPANY
DECEMBER 31, 1992 INC. HCLP MOLP SUBSIDIARIES ELIMINATION CONSOLIDATED
- -------------------------------------------- ---- ----- ----- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities........ $ -- $ 16 $ (44) $ -- $ -- $ (28)
---- ----- ----- ------ ------ ------
Cash Flows from Investing Activities:
Capital expenditures...................... -- (3) (66) -- -- (69)
Proceeds from sales of oil and gas
properties.............................. -- -- 11 -- -- 11
Securities transactions, net.............. -- -- (8) 32 -- 24
Contributions to subsidiaries............. -- -- (25) (7) 32 --
Other..................................... -- -- 23 25 (31) 17
---- ----- ----- ------ ------ ------
-- (3) (65) 50 1 (17)
---- ----- ----- ------ ------ ------
Cash Flows from Financing Activities:
Repayments of long-term debt.............. -- (25) -- -- -- (25)
Contributions from equity holders......... -- 32 -- -- (32) --
Other..................................... -- (1) (1) (34) 31 (5)
---- ----- ----- ------ ------ ------
-- 6 (1) (34) (1) (30)
---- ----- ----- ------ ------ ------
Net Increase (Decrease) in Cash and Cash
Investments............................... $ -- $ 19 $(110) $ 16 $ -- $ (75)
---- ----- ----- ------ ------ ------
---- ----- ----- ------ ------ ------
DECEMBER 31, 1991
Cash Flows from Operating Activities........ $ -- $ 28 $ 8 $ (1) $ -- $ 35
---- ----- ----- ------ ------ ------
Cash Flows from Investing Activities:
Capital expenditures...................... -- (2) (29) (1) -- (32)
Proceeds from sales of oil and gas
properties.............................. -- -- 313 115 -- 428
Securities transactions, net.............. -- -- 6 26 -- 32
Contributions to subsidiaries............. -- -- (28) -- 28 --
Other..................................... -- -- (17) (13) 1 (29)
---- ----- ----- ------ ------ ------
-- (2) 245 127 29 399
---- ----- ----- ------ ------ ------
Cash Flows from Financing Activities:
Long-term borrowings...................... -- 617 100 -- -- 717
Repayments of long-term debt.............. -- (562) (246) (120) -- (928)
Contributions from equity holders......... -- 28 -- -- (28) --
Other..................................... -- (64) (29) (5) (1) (99)
---- ----- ----- ------ ------ ------
-- 19 (175) (125) (29) (310)
---- ----- ----- ------ ------ ------
Net Increase (Decrease) in Cash and Cash
Investments............................... $-- $ 45 $ 78 $ 1 $ -- $ 124
---- ----- ----- ------ ------ ------
---- ----- ----- ------ ------ ------
DECEMBER 31, 1990
Cash Flows from Operating Activities........ $ -- $ -- $ (2) $ 16 $ -- $ 14
---- ----- ----- ------ ------ ------
Cash Flows from Investing Activities:
Capital expenditures...................... -- -- (25) (11) -- (36)
Proceeds from sales of oil and gas
properties.............................. -- -- 31 9 -- 40
Securities transactions, net.............. -- -- 19 188 -- 207
Distribution from subsidiaries............ 97 -- -- -- (97) --
Other..................................... -- -- 58 (4) (72) (18)
---- ----- ----- ------ ------ ------
97 -- 83 182 (169) 193
---- ----- ----- ------ ------ ------
Cash Flows from Financing Activities:
Long-term borrowings...................... -- -- 210 -- -- 210
Repayments of long-term debt.............. -- -- (208) (112) -- (320)
Distributions to equity holders........... (97) -- (97) -- 97 (97)
Other..................................... -- -- -- (72) 72 --
---- ----- ----- ------ ------ ------
(97) -- (95) (184) 169 (207)
---- ----- ----- ------ ------ ------
Net Increase (Decrease) in Cash and Cash
Investments............................... $ -- $ -- $ (14) $ 14 $ -- $ --
---- ----- ----- ------ ------ ------
---- ----- ----- ------ ------ ------
</TABLE>
F-40
<PAGE> 122
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTES TO CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(a) These condensed consolidating financial statements should be read in
conjunction with the consolidated financial statements and notes thereto of
the Company of which this note is an integral part.
(b) MESA Inc. owns a 95.86% limited partnership interest in each of MOLP, MMLP
and MHLP. The General Partner owns 4.14% of each of these subsidiary
partnerships. These condensed consolidating financial statements present
MESA Inc.'s investment in its subsidiaries and MOLP's and MMLP's investments
in HCLP using the equity method. Under this method, investments are recorded
at cost and adjusted for the parent company's ownership share of the
subsidiary's cumulative results of operations. In addition, investments
increase in the amount of contributions to subsidiaries and decrease in the
amount of distributions from subsidiaries.
(c) The consolidating financial statements include the results of operations and
cash flows of HCLP as a separate entity after June 12, 1991 (the date of
inception of HCLP). Prior to June 1991, MOLP and MMLP owned the Hugoton
field natural gas properties currently owned by HCLP. As a result, results
of operations and cash flows related to the Hugoton field properties are
included with the results of operations and cash flows of MOLP and MMLP
(included in other Company subsidiaries) for the first five months of 1991
and for all of 1990.
(d) In connection with the formation of HCLP, MOLP and MMLP contributed
producing natural gas properties in the Hugoton field and long-term debt to
HCLP in return for limited partnership interests. These transactions did not
require cash and are not reflected in the statements of cash flows of HCLP,
MOLP or MMLP.
Non-cash contributions by MOLP and MMLP from inception (June 12, 1991)
to December 31, 1992 are summarized below (in thousands):
<TABLE>
<CAPTION>
MOLP MMLP
--------- --------
<S> <C> <C>
Oil and gas properties........................ $ 447,501 $288,819
Long-term debt................................ (451,283) (99,206)
Other assets, net of liabilities.............. 26,080 1,365
General Partner............................... (113) (964)
--------- --------
$ 22,185 $190,014
--------- --------
--------- --------
</TABLE>
(e) The consolidation and elimination entries (i) eliminate the equity method
investment in subsidiaries and equity in loss of subsidiaries, (ii)
eliminate the intercompany payables and receivables, (iii) eliminate other
transactions between subsidiaries including contributions and distributions
and (iv) establish the General Partner's minority interest in the
consolidated results of operations and financial position of the Company.
(14) SUBSEQUENT EVENTS
Completion of the Exchange Offer
In August 1993, the Company completed the Exchange Offer and effected
certain amendments to the Credit Agreement. The Exchange Offer and related
amendments to the Credit Agreement are more fully described in Notes 2 and 4 to
the consolidated financial statements of the Company for the nine months ended
September 30, 1993 included elsewhere in this Prospectus.
Completion of the Exchange Offer results in the deferral of approximately
$75 million of annual interest payments which would have been paid through June
1995. As a result of the completion of the Exchange Offer and the related
amendments to the Credit Agreement, the Company expects to be able to service
its debt and make capital expenditures with cash flows generated by operating
activities and with existing cash and securities balances during the next two
years. On December 31, 1995, the Company will begin making
F-41
<PAGE> 123
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest payments on the 12 3/4% secured discount notes due June 30, 1998 and
the 12 3/4% discount notes due June 30, 1996 (together, the Discount Notes)
issued in the Exchange Offer. Assuming no changes in the Company's capital
structure prior to such date, the Company will be required to make cash interest
payments related to the Discount Notes totaling approximately $48 million
(approximately $51 million if all of the additional secured discount notes
offered by this Prospectus are issued) on December 31, 1995 and payments
totaling approximately $84 million (approximately $90 million if all of the
additional secured discount notes are issued) during 1996. In addition, 12 3/4%
unsecured discount notes in the amount of $178.8 million and 12% subordinated
notes in the amount of $6.3 million become due in mid-1996. The Company's
current financial forecasts indicate that the Company will be unable to fund
such payments in 1996 with cash flows from operating activities and existing
cash and securities balances. Depending on industry and market conditions, the
Company may generate cash by selling assets or issuing new debt or equity
securities. However, the Company has limited ability to sell assets since its
two largest assets, its interests in the Hugoton and West Panhandle fields, are
pledged under long-term debt agreements. After the June 30, 1995 repayment of
the balances outstanding under the Credit Agreement, the Company would have
$82.5 million of first lien borrowing capacity on the West Panhandle field
properties. The Company's current business strategy includes continuing its
efforts to strengthen its financial condition by raising equity capital and
applying the proceeds thereof to retire debt, and issuing new lower-cost debt to
refinance its existing high cost debt securities. There can be no assurance that
the Company will be able to raise equity capital or otherwise refinance its
debt.
As described in Note 2 to the consolidated financial statements, the
Company's independent public accountants had previously included an explanatory
paragraph in their report on the 1992 consolidated financial statements of the
Company which described a potential debt covenant default which raised
substantial doubt about the Company's ability to continue as a going concern. In
conjunction with the filing of this Prospectus, the Company's independent public
accountants reissued their report on the Company's 1992 consolidated financial
statements. As a result of the successful completion of the Exchange Offer and
the related amendments to the Credit Agreement, the explanatory paragraph was
not included in the reissued independent public accountants' report.
However, as a result of the potential adverse financial consequences
discussed above relating to certain principal and interest payments due in 1996
on the Company's debt, the Company's independent public accountants' report, as
reissued for this Prospectus, contains an "emphasis-of-a-matter" paragraph which
calls attention to such matters.
Unocal Settlement
On January 11, 1994, the Company entered into a settlement agreement with
respect to the Unocal lawsuit described in Note 8 above, whereby the Company and
the other defendants have agreed to pay to Unocal an aggregate of $47.5 million,
of which $42.75 million will be paid by the Company and $4.75 million will be
paid by certain other unaffiliated third parties. The settlement agreement is
subject to approval by the Court, following notice by Unocal to its security
holders. The Company intends to fund substantially all of its portion of the
settlement amount with proceeds from issuance of additional 12 3/4% secured
discount notes. If the settlement agreement is not approved by the Court, the
agreement will terminate and the parties will jointly request the Court to set
the earliest practicable trial date. The Company expects to accrue a loss in the
amount of its share of the settlement in the fourth quarter of 1993.
Other Events.
See Note 10 to the Company's consolidated financial statements for the nine
months ended September 30, 1993, included elsewhere in this Prospectus, for a
discussion of other recent events relating to the Company's subsidiary
partnerships, the General Partner's interest and the IRS examinations relating
to the 1984 through 1987 tax years.
F-42
<PAGE> 124
MESA INC.
SUPPLEMENTAL FINANCIAL DATA
OIL AND GAS RESERVES AND COST INFORMATION (UNAUDITED) --
Net proved oil and gas reserves as of December 31, 1992 associated with the
Company's two most significant natural gas producing fields were estimated by
DeGolyer and MacNaughton, independent petroleum engineering consultants (D&M).
These two fields, the Hugoton and West Panhandle fields, represent over 95% of
the Company's net proved equivalent natural gas reserves at December 31, 1992.
The Company's remaining reserves in the Rocky Mountain, Gulf Coast and deep
Hugoton regions were estimated by Company engineers. All of the Company's
reserves at December 31, 1992 were in the United States. Net proved oil and gas
reserves in the Untied States and Canada as of December 31, 1991 and 1990 were
estimated by D&M. The reserves in Canada were less than 2% of the total
equivalent reserves of the Company and are not presented separately in this
report. The Company's interests in Canada were sold in 1992. In accordance with
regulations established by the SEC, the reserve estimates were based on economic
and operating conditions existing at the end of the respective years.
Future prices for natural gas were based on market prices as of each year
end and contract terms, including fixed and determinable price escalations.
Market prices as of each year end were used for future sales of oil, condensate
and natural gas liquids. Future operating costs, production and ad valorem taxes
and capital costs were based on current costs as of each year end, with no
escalation.
Over 70% of the Company's equivalent proved reserves (based on a factor of
6 thousand cubic feet (Mcf) of gas per barrel of liquids) at December 31, 1992
are natural gas. The natural gas prices in effect at December 31, 1992 (having a
weighted average of $1.94 per Mcf) were used in accordance with SEC regulations
but may not be the most appropriate or representative prices to use for
estimating reserves since such prices were influenced by the seasonal demand for
natural gas. The average price received by the Company for sales of natural gas
in 1992 was $1.66 per Mcf. Assuming all other variables used in the calculation
of reserved data are held constant, the Company estimates that each $.10 change
in the price per Mcf for natural gas production would affect the Company's
estimated future net cash flows and present value thereof, before income taxes,
by $115 million and $54 million, respectively. At December 31, 1992, the
Company's standardized measure of future net cash flows from proved reserves
(Standardized Measure) and the pre-tax Standardized Measure were less than the
net book value of oil and gas properties by approximately $225 million and $94
million, respectively. The Company believes that the ultimate future value to be
received for production from its oil and gas properties will be greater than the
current net book value of its oil and gas properties.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting the future rates of production and timing of
development expenditures. Reserve data represent estimates only and should not
be construed as being exact. Moreover, the Standardized Measure should not be
construed as the current market value of the proved oil and gas reserves or the
costs that would be incurred to obtain equivalent reserves. A market value
determination would include many additional factors including (i) anticipated
future changes in oil and gas prices, production and development costs; (ii) an
allowance for return on investment; (iii) the value of additional reserves, not
considered proved at present, which may be recovered as a result of further
exploration and development activities; and (iv) other business risks.
F-43
<PAGE> 125
MESA INC.
CAPITALIZED COSTS AND COSTS INCURRED (UNAUDITED)
Capitalized costs relating to oil and gas producing activities at December
31, 1992, 1991 and 1990 and the costs incurred during the years then ended are
set forth below (in thousands):
<TABLE>
<CAPTION>
1992 1991 1990
---------- ---------- ----------
<S> <C> <C> <C>
Capitalized Costs
Proved properties.................................... $1,850,793 $1,785,244 $2,436,199
Unproved properties.................................. 762 4,980 20,500
Accumulated depreciation, depletion and
amortization...................................... (589,720) (481,218) (678,205)
---------- ---------- ----------
Net.......................................... $1,261,835 $1,309,006 $1,778,494
---------- ---------- ----------
---------- ---------- ----------
Costs Incurred
Proved properties.................................... $ 64 $ 545 $ 510
Unproved properties.................................. 63 4,779 549
Exploration costs.................................... 15,157 7,924 8,918
Development costs.................................... 6,911 12,446 24,720
Plant facilities, gathering systems and
compressors....................................... 49,526 10,291 6,934
---------- ---------- ----------
Total........................................ $ 71,721 $ 35,985 $ 41,631
---------- ---------- ----------
---------- ---------- ----------
Depreciation, depletion and amortization............... $ 110,340 $ 112,860 $ 156,641
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-44
<PAGE> 126
MESA INC.
ESTIMATED QUANTITIES OF RESERVES (UNAUDITED)
YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
NATURAL GAS LIQUIDS,
NATURAL GAS OIL AND CONDENSATE
--------------------------------- ----------------------------
1992 1991 1990 1992 1991 1990
--------- --------- --------- ------- -------- -------
(MMcF) (MBbLS)
<S> <C> <C> <C> <C> <C> <C>
Proved Reserves
Beginning of year............ 1,367,968 1,920,797 2,110,219 83,225 101,667 86,595
Extensions and
discoveries............. 37,100 2,643 14,670 7,591 1,250 42
Purchases of producing
properties.............. 583 1,267 3,774 9 46 27
Revisions of previous
estimates............... (24,462) (95,228) (61,277) 3,028 (4,067) 20,795
Sales of producing
properties.............. (15,613) (352,989) (9,256) (637) (10,179) (559)
Production................ (89,527) (108,522) (137,333) (5,824) (5,492) (5,233)
--------- --------- --------- ------- -------- -------
End of year.................. 1,276,049 1,367,968 1,920,797 87,392 83,225 101,667
--------- --------- --------- ------- -------- -------
--------- --------- --------- ------- -------- -------
Proved Developed Reserves
Beginning of year............ 1,338,856 1,853,523 1,986,157 82,406 99,494 84,348
--------- --------- --------- ------- -------- -------
--------- --------- --------- ------- -------- -------
End of year.................. 1,223,672 1,338,856 1,853,523 82,439 82,406 99,494
--------- --------- --------- ------- -------- -------
--------- --------- --------- ------- -------- -------
</TABLE>
- ---------------
- - Proved natural gas liquids, oil and condensate reserve quantities include oil
and condensate reserves at December 31 of the respective years as follows:
1992, 7,268 MBbls; 1991, 3,956 MBbls; and 1990, 9,880 MBbls.
- - In addition to the proved reserves disclosed above, the Company owned proved
helium and carbon dioxide (CO2) reserves at December 31 of the respective
years as follows: 1992, 5,634 MMcf of helium and 46,457 MMcf of CO2; 1991,
5,705 MMcf of helium and 44,837 MMcf of CO2; 1990, 5,658 MMcf of helium and
44,797 MMcf of CO2.
- - The General Partner's 4.14% minority interest in the proved natural gas and
natural gas liquids, oil and condensate reserves of the Company at December 31
of the respective years was as follows: 1992, 52,828 MMcf and 3,618 MBbls,
respectively; 1991, 56,634 MMcf and 3,446 MBbls, respectively; and 1990,
79,521 MMcf and 4,209 MBbls, respectively.
F-45
<PAGE> 127
MESA INC.
STANDARDIZED MEASURE OF FUTURE NET CASH FLOWS
FROM PROVED RESERVES (UNAUDITED)
DECEMBER 31
(IN THOUSANDS)
<TABLE>
<CAPTION>
1992 1991 1990
---------- ---------- ----------
<S> <C> <C> <C>
Future cash inflows................................. $3,802,614 $4,078,322 $6,151,195
Future production and development costs
Operating costs and production taxes.............. (1,271,799) (1,297,999) (1,580,926)
Development and abandonment costs................. (122,860) (181,350) (201,542)
Future income taxes................................. (302,492) (394,743) (808,501)
---------- ---------- ----------
Future net cash flows............................... 2,105,463 2,204,230 3,560,226
Discount at 10% per annum......................... (1,068,282) (1,209,016) (1,893,078)
---------- ---------- ----------
Standardized Measure................................ $1,037,181 $ 995,214 $1,667,148
---------- ---------- ----------
---------- ---------- ----------
Future net cash flows before income taxes........... $2,407,955 $2,598,973 $4,368,727
---------- ---------- ----------
---------- ---------- ----------
Standardized Measure before income taxes............ $1,167,694 $1,181,013 $2,054,117
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ---------------
- - The estimate of future income taxes is based on the future net cash flows from
proved reserves adjusted for the tax basis of the oil and gas properties but
without consideration of general and administrative and interest expenses.
- - The General Partner's 4.14% minority interest in the Standardized Measure at
December 31 of the respective years was as follows: 1992, $42.9 million; 1991,
$41.2 million; and 1990, $69.0 million.
F-46
<PAGE> 128
MESA INC.
CHANGES IN THE STANDARDIZED MEASURE (UNAUDITED)
YEARS ENDED DECEMBER 31
(IN THOUSANDS)
<TABLE>
<CAPTION>
1992 1991 1990
--------- ---------- ----------
<S> <C> <C> <C>
Standardized Measure at beginning of year.................. $ 995,214 $1,667,148 $1,715,600
--------- ---------- ----------
Revisions of reserves proved in prior years
Changes in prices and production costs................... (77,527) (365,430) (126,455)
Changes in quantity estimates............................ (3,995) (83,342) 90,353
Changes in estimates of future development and
abandonment costs..................................... (2,468) (30,088) (41,443)
Net change in income taxes............................... 55,287 201,170 3,111
Accretion of discount.................................... 118,101 205,412 210,568
Other, primarily timing of production.................... 12,687 (86,815) (16,517)
--------- ---------- ----------
Total revisions.................................. 102,085 (159,093) 119,617
Extensions, discoveries and other additions, net of future
production and development costs......................... 65,737 12,013 47,776
Purchases of proved properties............................. 457 1,952 3,008
Sales of oil and gas produced, net of production costs..... (173,552) (182,235) (235,298)
Sales of producing properties.............................. (14,473) (367,308) (15,209)
Previously estimated development and abandonment costs
incurred during the period............................... 61,713 22,737 31,654
--------- ---------- ----------
Net changes in Standardized Measure........................ 41,967 (671,934) (48,452)
--------- ---------- ----------
Standardized Measure at end of year........................ $1,037,181 $ 995,214 $1,667,148
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
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<PAGE> 129
MESA INC.
QUARTERLY RESULTS (UNAUDITED)
QUARTERS ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
1992
Revenues..................................... $ 58,919 $ 51,556 $ 48,171 $ 78,466
-------- -------- ------------ -----------
-------- -------- ------------ -----------
Gross profit................................. $ 44,181 $ 36,733 $ 33,608 $ 60,100
-------- -------- ------------ -----------
-------- -------- ------------ -----------
Operating income (loss)...................... $ 9,173 $ (2,479) $ 172 $ 19,355
-------- -------- ------------ -----------
-------- -------- ------------ -----------
Net loss..................................... $(21,973) $(20,622) $(29,128) $ (17,509)
-------- -------- ------------ -----------
-------- -------- ------------ -----------
Net loss per common share.................... $ (.57) $ (.53) $ (.76) $ (.45)
-------- -------- ------------ -----------
-------- -------- ------------ -----------
1991
Revenues..................................... $ 76,244 $ 44,886 $ 43,103 $ 85,313
-------- -------- ------------ -----------
-------- -------- ------------ -----------
Gross profit................................. $ 58,320 $ 32,833 $ 28,500 $ 64,079
-------- -------- ------------ -----------
-------- -------- ------------ -----------
Operating income............................. $ 18,355 $ 435 $ 78 $ 15,260
-------- -------- ------------ -----------
-------- -------- ------------ -----------
Net loss..................................... $(18,744) $ (1,220) $(34,362) $ (24,837)
-------- -------- ------------ -----------
-------- -------- ------------ -----------
Net loss per common share.................... $ (.49) $ (.03) $ (.89) $ (.64)
-------- -------- ------------ -----------
-------- -------- ------------ -----------
</TABLE>
- ---------------
- - Gross profit consists of total revenues less lease operating expenses and
production and other taxes.
- - The Company entered into an agreement in early 1992, effective to January 1,
1991, allocating the production and reserves of the Company's West Panhandle
field properties at 77% to the Company and 23% to a third party. Throughout
1991 and 1992, the Company produced less than its 77% entitlement. To reflect
the effect of the new agreement on 1991 operations, in the fourth quarter of
1991 the Company recorded an additional $17.4 million as revenues, $13.0
million as gas balancing receivables and $4.4 million as operating expenses
relating to its entitlement. Throughout 1992, the Company recorded an
additional $23.3 million as revenues, $17.2 million as gas balancing
receivables and $6.1 million as operating expenses relating to its
entitlement.
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<PAGE> 130
ANNEX A
GLOSSARY
The following defined terms are used frequently in this Prospectus.
APAA....................... Amendment to the PAA effective as of January 1,
1993, between MOC and CIG relating to the West
Panhandle field reserves.
"B" CONTRACT............... The series of contracts between Mesa and CIG which
establish and define Mesa's West Panhandle
reserves.
BBL........................ Barrel of oil and condensate or natural gas
liquids.
BCF........................ Billion cubic feet of natural gas.
BCFE....................... Billion cubic feet of natural gas equivalents.
BTU........................ British thermal unit.
CAPITAL.................... Mesa Capital Corporation, a Delaware corporation
and a wholly-owned subsidiary of MOC.
CIG........................ Colorado Interstate Gas Company.
CODE....................... The Internal Revenue Code of 1986, as amended.
COMMISSION................. The Securities and Exchange Commission.
COMMON STOCK............... The common stock, par value $.01 per share, of the
Company.
COMPANY.................... MESA Inc., a Texas corporation.
CONVERTIBLE NOTES.......... 0% Convertible Notes due June 30, 1998, issued by
the Company, MOLP and Capital, all of which have
been converted into Common Stock.
CORPORATE CONVERSION....... The transaction that reorganized the business of
the Partnership into the Company on December 31,
1991.
CREDIT AGREEMENT........... The amended and restated revolving credit agreement
among the Company, MOC, the Banks and Societe
Generale, Southwest Agency, as Agent, as the same
may be amended, modified or supplemented from time
to time.
D&M........................ DeGolyer and MacNaughton, independent petroleum
engineering consultants.
DISCOUNT NOTES............. The Secured Notes and the Unsecured Notes.
EXCHANGE ACT............... The Securities Exchange Act of 1934.
EXCHANGE OFFER............. The Obligors' offer to exchange Secured Notes,
Unsecured Notes and Convertible Notes for
Subordinated Notes, which was completed on August
26, 1993.
FAIN PLANT................. Mesa's natural gas processing plant in the West
Panhandle field.
FERC....................... The Federal Energy Regulatory Commission.
HCLP....................... Hugoton Capital Limited Partnership, a Delaware
limited partnership and indirect subsidiary of the
Company.
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<PAGE> 131
HCLP SECURED NOTES......... The secured notes issued by HCLP in the initial
aggregate principal amount of $616.5 million and
secured by Mesa's interest in the Hugoton field.
HUGOTON FIELD.............. The Chase and Council Grove formations of the
Hugoton and Panoma fields of southwestern Kansas.
KCC........................ The Kansas Corporation Commission.
MBBL....................... Thousand barrels.
MBTU....................... Thousand British thermal units.
MCF........................ Thousand cubic feet, a standard unit of volume
measurement for natural gas.
MCFE....................... Thousand cubic feet of natural gas equivalents.
MESA....................... The Company, its subsidiaries and predecessors (the
Partnership and Original Mesa).
MESA ENVIRONMENTAL......... Mesa Environmental Ventures Limited Partnership, a
Delaware limited partnership and indirect
subsidiary of the Company.
MHC........................ Mesa Holding Co., a Delaware corporation.
MHLP....................... Mesa Holding Limited Partnership, a Delaware
limited partnership and a subsidiary of the
Company, predecessor to MHC.
MMBTU...................... Million British thermal units.
MMCF....................... Million cubic feet (or 1,000 Mcf) of natural gas.
MMCFE...................... Million cubic feet of equivalent natural gas
reserves.
MMC........................ Mesa Midcontinent Co., a Delaware corporation.
MMLP....................... Mesa Midcontinent Limited Partnership, a Delaware
limited partnership and a subsidiary of the
Company, predecessor to MMC.
MOC........................ Mesa Operating Co., a Delaware corporation.
MOLP....................... Mesa Operating Limited Partnership, a Delaware
limited partnership and a subsidiary of the
Company, predecessor to MOC.
NATURAL GAS EQUIVALENTS.... A volume, expressed in Mcf's of natural gas, which
includes not only natural gas but also oil or
natural gas liquids converted to an equivalent
quantity of natural gas on an energy equivalent
basis. Equivalent gas reserves are based on a
conversion factor of 6 Mcf of gas per barrel of
liquids.
NGPA....................... The Natural Gas Policy Act of 1978.
NGV........................ Natural gas vehicles.
OBLIGORS................... The Company, MOC and Capital.
ORIGINAL MESA.............. Mesa Petroleum Co., a Delaware corporation and a
predecessor in interest to the Company.
PAA........................ Production Allocation Agreement, effective January
1, 1991, between MOC and CIG defining production
rights and ownership of reserves from the West
Panhandle field.
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<PAGE> 132
PARTNERSHIP................ Mesa Limited Partnership, a Delaware limited
partnership and predecessor in interest to the
Company.
PROSPECTUS................. This Prospectus.
REGISTRATION STATEMENT..... The Registration Statement on Form S-1
(Registration No. 033-51909) of the Obligors
initially filed with the SEC on January 14, 1994,
together with all amendments and exhibits thereto,
of which this Prospectus is a part.
SECURED NOTES.............. 12 3/4% Secured Discount Notes due June 30, 1998,
issued by the Company, MOC and Capital and offered
hereby.
SECURITIES ACT............. The Securities Act of 1933.
SUBORDINATED NOTES......... 12% Subordinated Notes and 13 1/2% Subordinated
Notes.
TCF........................ Trillion cubic feet of natural gas.
TCFE....................... Trillion cubic feet of natural gas equivalents.
12% SUBORDINATED NOTES..... 12% Subordinated Notes due August 1, 1996, issued
by the Company, MOC and Capital.
13 1/2% SUBORDINATED
NOTES...................... 13 1/2% Subordinated Notes due May 1, 1999, issued
by the Company, MOC and Capital.
UNSECURED NOTES............ 12 3/4% Discount Notes due June 30, 1996, issued by
the Company, MOC and Capital.
WEST PANHANDLE FIELD....... The properties owned by Mesa located in the
panhandle area of northwest Texas.
WILLIAMS................... Williams Natural Gas Company.
WRI........................ Western Resources, Inc., formerly The Kansas Power
and Light Company.
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<PAGE> 133
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY AGENT OR UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
SECURED NOTES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN
THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information................. 2
Summary................................ 3
Risk Factors........................... 9
The Company............................ 13
Unocal Litigation and Settlement....... 15
Use of Proceeds........................ 16
Market Prices of Secured Notes......... 16
Historical and Pro Forma
Capitalization....................... 17
Selected Financial Information......... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations........................ 19
Business............................... 28
Regulation and Prices.................. 39
Management............................. 43
Executive Compensation................. 46
Security Ownership of Principal Owners
and Management....................... 52
Description of the Secured Notes....... 54
Certain U.S. Federal Income Tax
Consequences......................... 76
Plan of Distribution................... 78
Legal Opinions......................... 79
Experts................................ 79
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$51,000,000
12 3/4% SECURED DISCOUNT NOTES
DUE JUNE 30, 1998
--------------------
PROSPECTUS
--------------------
FEBRUARY , 1994
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 134
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTIONS
The following are the estimated expenses (other than underwriting discounts
and commissions) of the issuance and distribution of the securities being
registered payable by the Company.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............... $ 15,388
Printing and engraving expenses................................... 70,000
Blue Sky filing fees and expenses................................. 20,000
Accountants' fees................................................. 30,000
Counsel fees...................................................... 75,000
Miscellaneous..................................................... 14,612
--------
Total................................................... $225,000
--------
--------
</TABLE>
- ---------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 2.02-1 of the Texas Business Corporation Act provides that a
corporation may indemnify any director or officer who was, is or is threatened
to be made a named defendant or respondent in a proceeding because he is or was
a director or officer, provided that the director or officer (i) conducted
himself in good faith, (ii) reasonably believed (a) in the case of conduct in
his official capacity, that his conduct was in the corporation's best interests,
(b) in all other cases, that his conduct was at least not opposed to the
corporation's best interests and (iii) in the case of any criminal proceeding,
had no reasonable cause to believe his conduct was unlawful. Subject to certain
exceptions, a director or officer may not be indemnified if the person is found
liable to the corporation or if the person is found liable on the basis that he
improperly received a personal benefit. Under Texas law, reasonable expenses
incurred by a director or officer may be paid or reimbursed by the corporation
in advance of a final disposition of the proceeding after the corporation
receives a written affirmation by the director of his good faith belief that he
has met the standard of conduct necessary for indemnification and a written
undertaking by or on behalf of the director to repay the amount if it is
ultimately determined that the director or officer is not entitled to
indemnification by the corporation. Texas law requires a corporation to
indemnify an officer or director against reasonable expenses incurred in
connection with the proceeding in which he is named defendant or respondent
because he is or was a director or officer if he is wholly successful in defense
of the proceeding.
Texas law also permits a corporation to purchase and maintain insurance or
another arrangement on behalf of any person who is or was a director or officer
against any liability asserted against him and incurred by him in such a
capacity or arising out of his status as such a person, whether or not the
corporation would have the power to indemnify him against that liability under
Article 2.02-1.
The Company's Bylaws provide for the indemnification of its officers and
directors, and the advancement to them of expenses in connection with
proceedings and claims, to the fullest extent permitted by the Texas Business
Corporation Act. The Company has also entered into indemnification agreements
with its executive officers and directors that contractually provide for
indemnification and expense advancement. Both the Bylaws and the agreements
include related provisions meant to facilitate the indemnitees' receipt of such
benefits. These provisions cover, among other things: (i) specification of the
method of determining entitlement to indemnification and the selection of
independent counsel that will in some cases make such determination, (ii)
specification of certain time periods by which certain payments or
determinations must be made and actions must be taken and (iii) the
establishment of certain presumptions in favor of an indemnitee. The benefits of
certain of these provisions are available to an indemnitee only if there has
been a change in control (as defined). In addition, the Company carries
customary directors' and officers' liability insurance policies for its
directors and officers. Furthermore, the Bylaws and agreements with directors
and officers provide for indemnification for amounts (i) in respect of the
deductibles for such insurance policies, (ii) that exceed the liability limits
of such insurance policies and (iii) that would have been covered by prior
insurance
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<PAGE> 135
policies of the Company or its predecessors. Such indemnification may be made
even though directors and officers would not otherwise be entitled to
indemnification under other provisions of the Bylaws or such agreements.
The above discussion of the Company's Bylaws and of Article 2.01-1 of the
Texas Business Corporation Act is not intended to be exhaustive and is
respectively qualified in its entirety by such statute and the Bylaws.
Section 145 of the Delaware General Corporation Law (the "DGCL" permits a
corporation to indemnify any director or officer of the corporation against
expenses (including attorney's fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred in connection with any action, suit
or proceeding brought by reason of the fact that such person is or was a
director or officer of the corporation, if such person acted in good faith and
in a manner that 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, if he had no reason to believe his conduct was unlawful. In a
derivative action (i.e., one brought by or on behalf of the corporation),
indemnification may be made only for expenses actually and reasonably incurred
by any director or officer in connection with the defense or settlement of such
an action or suit, if such person acted in good faith and in a manner that he
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made if such person shall
have been adjudged to be liable to the corporation, unless and only to the
extent that the court in which the action or suit was brought shall determine
that the defendant is fairly and reasonably entitled to indemnity for such
expenses despite such adjudication of liability.
Delaware law also permits a corporation to purchase and maintain insurance
on behalf of any person who is or was a director or officer against any
liability asserted against him and incurred by him in such capacity or arising
out of his status as such, whether or not the corporation have the power to
indemnify him against that liability under Section 145 of the DGCL.
MOC's Bylaws provide that MOC may indemnify each person who is involved in
any litigation or other proceeding because such person is or was a director or
officer of MOC or its subsidiaries or is or was serving as an officer or
director of another entity at the request of MOC, against all expenses
reasonably incurred in connection therewith. Such indemnification shall be made
upon a determination by the Board of Directors, independent legal counsel or the
stockholders of the corporation that such indemnification is proper in the
circumstances because such person has met the applicable standard of conduct.
The Bylaws also provide that MOC shall indemnify a director or officer against
such expenses to the extent that he has been successful on the merits or
otherwise in defense of any such litigation or other proceeding. The Bylaws also
provide that the right to indemnification includes the right to be paid expenses
incurred in defending any proceeding in advance of its final disposition;
provided, however, that such advance payment will only be made upon the delivery
to MOC of an undertaking, by or on behalf of the director or officer, to repay
all amounts so advanced if it is ultimately determined that such director or
officer is not entitled to indemnification.
MOC's Certificate of Incorporation provides that the personal liability of
a director of the corporation shall be limited to the fullest extent permitted
by the DGCL. Pursuant to Section 102(b)(7) of the DGCL, Article Sixth of MOC's
Certificate of Incorporation eliminates the personal liability of a director to
the corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liabilities arising (i) from any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) from
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL, or (iv) from any
transaction from which the director derived an improper personal benefit.
The above discussion of MOC's Bylaws and Certificate of Incorporation is
not intended to be exhaustive and is respectively qualified in its entirety by
such documents.
Article V of the Bylaws of Capital includes the following provision:
Section 1. Indemnification of Officers and Directors. Each person who shall
have served as a director or officer of this Corporation, or at its request as
director or officer of another corporation in which it now owns or may hereafter
own shares of capital stock or of which it now is or may hereafter be a
creditor, shall be indemnified by the Corporation to the maximum extent
permitted by applicable law against expenses and
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<PAGE> 136
costs (including attorneys' fees) reasonably incurred by him in connection with
any claim asserted against him, by action in court or otherwise, by reason of
being or having been such director or officer. The foregoing right of
indemnification shall not be exclusive of other rights to which he may be
entitled under any agreement, vote of shareholders or otherwise.
The above discussion of Capital's Bylaws, and of the DGCL, is not intended
to be exhaustive and is respectively qualified in its entirety by such documents
and statute.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Exhibits
<TABLE>
<S> <C>
*3.1 -- Amended and Restated Articles of Incorporation of MESA Inc. (Exhibit
3(b) to MESA Inc.'s Registration Statement on Form S-4, Registration
No. 33-42104).
*3.2 -- Amended and Restated Bylaws of MESA Inc. (Exhibit 3(c) to MESA Inc.'s
Registration Statement on Form S-4, Registration No. 33-42104).
+3.3 -- Certificate of Incorporation of Mesa Operating Co.
+3.4 -- Bylaws of Mesa Operating Co.
+3.5 -- Certificate of Incorporation of Mesa Capital Corporation.
+3.6 -- Bylaws of Mesa Capital Corporation.
*4.1 -- Indenture dated as of May 1, 1993, among MESA Inc., Mesa Operating
Limited Partnership, Mesa Capital Corporation and Harris Trust and
Savings Bank, as trustee, including (a) a form of Secured Note, (b) a
form of Deed of Trust, Assignment of Production, Security Agreement
and Financing Statement, dated as of May 1, 1993, between MOLP and
Harris Trust and Savings Bank, as trustee, securing the Secured
Notes, and (c) a form of Security Agreement, Pledge and Financing
Statement dated as of May 1, 1993 between MOLP and Harris Trust and
Savings Bank, as trustee, securing the Secured Notes (Exhibit 4(f) to
MESA Inc.'s Form 10-Q/A dated June 30, 1993).
+4.2 -- First Supplemental Indenture dated as of January 5, 1994, among MESA
Inc., Mesa Operating Co., Mesa Capital Corporation and Harris Trust
and Savings Bank, as trustee.
*4.3 -- Indenture dated as of May 1, 1993, among MESA Inc., Mesa Operating
Limited Partnership, Mesa Capital Corporation and American Stock
Transfer & Trust Company, as trustee, including a form of Unsecured
Notes (Exhibit 4(g) to MESA Inc.'s Form 10-Q/A dated June 30, 1993).
+4.4 -- First Supplemental Indenture dated as of January 5, 1994, among MESA
Inc., Mesa Operating Co., Mesa Capital Corporation and American Stock
Transfer & Trust Company, as trustee.
*4.5 -- Indenture dated as of May 1, 1993, among MESA Inc., Mesa Operating
Limited Partnership, Mesa Capital Corporation and American Stock
Transfer & Trust Company, as trustee, including a form of Convertible
Notes (Exhibit 4(h) to MESA Inc.'s Form 10-Q/A dated June 30, 1993).
*4.6 -- Indenture dated August 14, 1986, among Mesa Capital Corporation, Mesa
Limited Partnership, Mesa Operating Limited Partnership and Mellon
Bank, N.A., as trustee (subsequently replaced by Texas Commerce Bank,
National Association, as successor trustee) (Exhibit 4(d) to Mesa
Limited Partnership's Form 10-Q dated September 30, 1986).
</TABLE>
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<PAGE> 137
<TABLE>
<S> <C>
*4.7 -- Supplemental Indenture dated July 31, 1987, among Mesa Capital
Corporation, Mesa Limited Partnership, Mesa Operating Limited
Partnership and Mellon Bank, N.A., as trustee (subsequently replaced
by Texas Commerce Bank, National Association, as successor trustee)
(Exhibit 4(e) to Mesa Limited Partnership's Form 10-Q dated September
30, 1987).
*4.8 -- Second Supplemental Collateral Trust Indenture dated as of December
31, 1991, among Mesa Capital Corporation, MESA Inc., Mesa Operating
Limited Partnership and Texas Commerce Bank National Association, as
successor trustee (Exhibit 4(c) to MESA Inc.'s Form 10-K dated
December 31, 1991).
*4.9 -- Third Supplemental Collateral Trust Indenture dated as of April 30,
1992, among Mesa Capital Corporation, as Issuer, MESA Inc. and Mesa
Operating Limited Partnership and Texas Commerce Bank National
Association, as successor trustee (Exhibit 4(j) to MESA Inc.'s Form
10-Q dated June 30, 1992).
*4.10 -- Fourth Supplemental Collateral Trust Indenture dated as of August 26,
1993, among Mesa Capital Corporation, MESA Inc., Mesa Operating
Limited Partnership and Texas Commerce Bank National Association, as
successor trustee (Exhibit 4(e) to MESA Inc.'s Form 10-Q/A dated June
30, 1993).
+4.11 -- Fifth Supplemental Collateral Trust Indenture dated as of January 5,
1994, among MESA Inc., Mesa Operating Co., Mesa Capital Corporation
and Texas Commerce Bank National Association, as successor trustee.
*4.12 -- Indenture dated May 1, 1989, among Mesa Capital Corporation, Mesa
Limited Partnership, Mesa Operating Limited Partnership, and Texas
Commerce Bank National Association, as trustee (Exhibit 4(c) to Mesa
Limited Partnership's Form 10-Q dated March 31, 1989).
*4.13 -- First Supplemental Indenture dated as of December 31, 1991, among
Mesa Capital Corporation, MESA Inc., Mesa Operating Limited
Partnership and Texas Commerce Bank National Association, as trustee
(Exhibit 4(e) to MESA Inc.'s Form 10-K dated December 31, 1991).
*4.14 -- Second Supplemental Indenture dated as of April 30, 1992, among Mesa
Capital Corporation, MESA Inc., Mesa Operating Limited Partnership
and Texas Commerce Bank National Association, as trustee (Exhibit
4(k) to MESA Inc.'s Form 10-Q dated June 30, 1992).
*4.15 -- Third Supplemental Indenture dated as of August 26, 1993, among Mesa
Capital Corporation, MESA Inc., Mesa Operating Limited Partnership
and Texas Commerce Bank National Association, as trustee (Exhibit
4(l) to MESA Inc.'s Form 10-Q/A dated June 30, 1993).
+4.16 -- Fourth Supplemental Indenture dated as of January 5, 1994, among MESA
Inc., Mesa Operating Co., Mesa Capital Corporation and Texas Commerce
Bank National Association, as trustee.
*4.17 -- Indenture dated as of May 30, 1991, among Hugoton Capital Limited
Partnership, Hugoton Capital Corporation and Bankers Trust Company,
as trustee (Exhibit 4(e) to Mesa Limited Partnership's Form 10-Q
dated June 30, 1991).
*4.18 -- First Supplemental Indenture dated September 1, 1991, among Hugoton
Capital Limited Partnership, Hugoton Capital Corporation and Bankers
Trust Company, as trustee (Exhibit 4(i) to MESA Inc.'s Registration
Statement on Form S-4, Registration No. 33-42104).
</TABLE>
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<TABLE>
<S> <C>
*4.19 -- Amended and Restated Mortgage, Assignment, Security Agreement and
Financing Statement dated June 12, 1991 from Hugoton Capital Limited
Partnership to Bankers Trust Company, as Collateral Agent (Exhibit
4(f) to Mesa Limited Partnership's Form 10-Q dated June 30, 1991).
*4.20 -- Amended and Restated Credit Agreement dated as of May 1, 1993, among
MESA Inc., Mesa Operating Limited Partnership, the Banks party
thereto and Societe Generale, Southwest Agency, as Agent (Exhibit
4.17 to MESA Inc.'s Registration Statement on Form S-4, Registration
No. 33-53706).
+4.21 -- Assignment and Assumption Agreement dated as of January 5, 1994,
among MESA Inc., Mesa Operating Co., Mesa Operating Limited
Partnership, Pickens Operating Co., the Banks party to the Credit
Agreement and the Agent with respect to the Credit Agreement.
*4.22 -- Intercreditor Agreement dated as of August 26, 1993, among Societe
Generale, Southwest Agency, as agent for the Banks under the
Company's Credit Agreement, Harris Trust and Savings Bank, as trustee
with respect to the Secured Notes, and American Stock Transfer &
Trust Company, as trustee with respect to the Unsecured Notes and the
Convertible Notes (Exhibit 4.18 to MESA Inc.'s Registration Statement
on Form S-4, Registration No. 33-53706).
-- The Company agrees to furnish the Commission, upon request, a copy of
any agreement defining the rights of holders of long-term debt of the
Company and all its subsidiaries under which the total amount of
securities authorized does not equal 10% of the total assets of the
Company and its subsidiaries on a consolidated basis.
5 -- Opinion of Baker & Botts, L.L.P.
8 -- Tax Opinion of Baker & Botts, L.L.P.
*10.1 -- Form of First Amendment to Deferred Compensation Agreement and Life
Insurance Agreement between Mesa Petroleum Co. and certain officers
and key employees (Exhibit 10(i) to Mesa Petroleum Co.'s Form 10-K
dated December 31, 1980).
*10.2 -- Hugoton (MTR) Gas Purchase Contract between The Kansas Power and
Light Company, buyer, and Mesa Operating Limited Partnership, seller,
dated effective January 1, 1990 (Exhibit 19(a) to Mesa Limited
Partnership's Form 10-Q dated June 30, 1989).
*10.3 -- Supplemental Gas Purchase Contract between The Kansas Power and Light
Company, buyer, and Mesa Operating Limited Partnership, seller, dated
effective January 1, 1990 (Exhibit 19(b) to Mesa Limited
Partnership's Form 10-Q dated June 30, 1989).
*10.4 -- Second Amended and Restated Consulting Agreement between Mesa Limited
Partnership, Mesa Operating Limited Partnership, Mesa Holding Limited
Partnership, Mesa Acquisition Limited Partnership and BTC Partners,
Inc. dated December 1, 1988 (Exhibit 10(i) to Mesa Limited
Partnership's Form 10-K dated December 31, 1988).
*10.5 -- Contract dated January 3, 1928 between Colorado Interstate Gas
Company and Amarillo Oil Company (the "B" Contract) (Exhibit 10.1 to
Pioneer Corporation's Form 10-K dated December 31, 1985).
*10.6 -- Amendments to the "B" Contract (Exhibit 10.2 to Pioneer Corporation's
Form 10-K dated December 31, 1985).
*10.7 -- Gathering Charge Agreement dated January 20, 1985, as amended, with
respect to the "B" Contract (Exhibit 10.3 to Pioneer Corporation's
Form 10-K dated December 31, 1985.
</TABLE>
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<TABLE>
<S> <C>
*10.8 -- Agreement of Compromise and Settlement dated May 29, 1987 between
Mesa Operating Limited Partnership and Colorado Interstate Gas
Company (Exhibit 10(s) to Mesa Limited Partnership's Form 10-K dated
December 31, 1987).
*10.9 -- Agreement of Sale between Pioneer Corporation and Cabot Corporation
dated August 29, 1984 (Exhibit 10.5 to Pioneer Corporation's Form
10-K dated December 31, 1985).
*10.10 -- Gas Purchase Contract dated June 27, 1949 as amended through October
3, 1985 between Amarillo Oil Company and Energas Company (Exhibit
10.6 to Pioneer Corporation's Form 10-K dated December 31, 1985).
*10.11 -- Settlement Agreement dated March 15, 1989, by and among Mesa
Operating Limited Partnership and Mesa Limited Partnership, et al.,
Energas Company and the City of Amarillo (Exhibit 10(k) to Mesa
Limited Partnership's Form 10-K dated December 31, 1990).
*10.12 -- Copy of the Partnership's Restricted MLP Unit Plan dated August 27,
1987 (Exhibit 10(w) to Mesa Limited Partnership's Form 10-K dated
December 31, 1987).
*10.13 -- Gas Purchase Agreement dated December 1, 1989 between Williams
Natural Gas Company and Mesa Operating Limited Partnership acting on
behalf of itself and as agent for Mesa Midcontinent Limited
Partnership (Exhibit 10.1 to Mesa Limited Partnership's Registration
Statement on Form S-3, Registration No. 33-32978).
*10.14 -- Form of 1991 Common Stock Option Plan of MESA Inc. (Exhibit 10(n) to
MESA Inc.'s Registration Statement on Form S-4, Registration No.
33-42104).
*10.15 -- Supplemental Stipulation and Agreement to replace the Uncontested
Settlement Agreement between Mesa Operating Limited Partnership and
Colorado Interstate Gas company with respect to deliveries of gas to
Amarillo Oil Company (now Mesa Operating Limited Partnership) by
Colorado Interstate Gas company under the "B" Contract (Exhibit 10(o)
to Mesa Limited Partnership's Form 10-K dated December 31, 1990.)
*10.16 -- Purchase and Sale Agreement dated February 6, 1991, by and among Mesa
Limited Partnership, Mesa Operating Limited Partnership and Mesa
Midcontinent Limited Partnership and Seagull Energy Corporation, as
amended by a first amendment dated February 22, 1991, a second
amendment dated March 8, 1991, and a third amendment dated March 11,
1991 (Exhibit 1 to Mesa Limited Partnership's Form 8-K dated March 8,
1991).
*10.17 -- Purchase and Sale Agreement dated February 6, 1991, by and among Mesa
Limited Partnership, Mesa Operating Limited Partnership and Mesa
Midcontinent Limited Partnership and an independent oil and gas
producer (Exhibit 3 to Mesa Limited Partnership's Form 8-K dated
March 8, 1991.)
*10.18 -- Purchase and Sale Agreement dated March 25, 1991, by and among Mesa
Limited Partnership and Mesa Operating Limited Partnership and
Conoco, Inc. (Exhibit 5 to Mesa Limited Partnership's Form 8-K dated
March 8, 1991).
*10.19 -- Incentive Bonus Plan of Mesa Operating Limited Partnership, as
amended, dated effective January 1, 1986 (Exhibit 10(s) to Mesa
Limited Partnership's Form 10-K dated December 31, 1990).
*10.20 -- Performance Bonus Plan of Mesa Operating Limited Partnership dated
effective January 1, 1990 (Exhibit 10(t) to Mesa Limited
Partnership's Form 10-K dated December 3, 1990).
</TABLE>
II-6
<PAGE> 140
<TABLE>
<S> <C>
*10.21 -- Engagement Agreement dated as of July 1, 1991 between Mesa Limited
Partnership, Mesa Operating Limited Partnership, Mesa Holding Limited
Partnership, Mesa Midcontinent Limited Partnership and Mesa
Acquisition Limited Partnership, on the one hand, and BTC Partners,
Inc., on the other hand (Exhibit 10(v) to MESA Inc.'s Registration
Statement on Form S-4, Registration No. 33-42104).
*10.22 -- Amended Supplemental Stipulation and Agreement between Mesa Operating
Limited Partnership and Colorado Interstate Gas Company filed June
18, 1991, with the Federal Energy Regulatory Commission as an offer
of partial settlement with respect to deliveries of gas to Amarillo
Oil Company (now Mesa Operating Limited Partnership) by Colorado
Interstate Gas Company under the "B" Contract (Exhibit 10(w) to MESA
Inc.'s Registration Statement on Form S-4, Registration No.
33-42104).
*10.23 -- "B" Contract Production Allocation Agreement dated July 29, 1991,
effective January 1, 1991, between Colorado Interstate Gas Company
and Mesa Operating Limited Partnership (Exhibit 10(x) to MESA Inc.'s
Registration Statement on Form S-4, Registration No. 33-42104).
+10.24 -- Amendment to "B" Contract Production Allocation Agreement effective
as of January 1, 1993 between Colorado Interstate Gas Company and
Mesa Operating Limited Partnership
+10.25 -- Agreement of Compromise and Settlement dated January 11, 1994 among
Unocal Corporation, David Colan, MESA Inc., and certain other
parties.
+12 -- Ratio of Earnings to Fixed Charges
*22 -- Subsidiaries (Exhibit 22 to MESA Inc.'s Form 10-K dated December 31,
1992).
+23.1 -- Consent of Arthur Andersen & Co.
+23.2 -- Consent of DeGolyer and MacNaughton.
23.3 -- Form of Consent of Baker & Botts, L.L.P. (included in Exhibit 5 to
this Registration Statement).
24 -- Powers of Attorney (included on signature pages to this Registration
Statement).
*25 -- Statement of Eligibility of Trustee (Exhibit 26) to MESA Inc.'s
Registration Statement on Form S-4, Registration No. 33-53706).
*28.1 -- Letter Report of the Company (Exhibit 28 to MESA Inc.'s Form 10-K
dated December 31, 1992).
</TABLE>
- ---------------
* Exhibit has been incorporated by reference as indicated.
+ Previously filed.
FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................................. S-1
Schedule III -- Condensed Financial Information of the Registrant..................... S-2
Schedule V -- Property, Plant and Equipment......................................... S-4
Schedule VI -- Accumulated Depreciation, Depletion and Amortization of Property,
Plant and Equipment................................................... S-5
Schedule X -- Supplementary Income Statement Information............................ S-6
</TABLE>
II-7
<PAGE> 141
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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.
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; (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.
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.
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-8
<PAGE> 142
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement or amendments to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Dallas, State of
Texas, on February 4, 1994.
MESA Inc.
(Registrant)
By: /s/ WILLIAM D. BALLEW
William D. Ballew,
Controller
POWER OF ATTORNEY
The undersigned directors and executive officers of MESA Inc. hereby
constitute and appoint William D. Ballew and Charles L. Carpenter, and each of
them, with full power to act without the other and with full power of
substitution and resubstitution, our true and lawful attorneys-in-fact with full
power to execute in our name and behalf in the capacities indicated below any
and all amendments (including post-effective amendments and amendments thereto)
to this Registration Statement and to file the same, with all exhibits thereto
and other documents in connection therewith with the Securities and Exchange
Commission and hereby ratify and confirm all that such attorneys-in-fact, or
either of them, or their substitutes shall lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated above.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ---------------------------- -----------------
<S> <C> <C>
/s/ BOONE PICKENS* Director and Chief Executive February 4, 1994
Boone Pickens Officer
/s/ PAUL W. CAIN* Director, President and February 4, 1994
Paul W. Cain Chief Operating Officer
/s/ WILLIAM D. BALLEW Controller (Chief Accounting February 4, 1994
William D. Ballew Officer and acting Chief
Financial Officer)
/s/ JOHN S. HERRINGTON Director February 4, 1994
John S. Herrington
/s/ WALES H. MADDEN, JR.* Director February 4, 1994
Wales H. Madden, Jr.
/s/ FAYEZ S. SAROFIM Director February 4, 1994
Fayez S. Sarofim
/s/ ROBERT L. STILLWELL* Director February 4, 1994
Robert L. Stillwell
/s/ J.R. WALSH, JR. Director February 4, 1994
J.R. Walsh, Jr.
*By: /s/ WILLIAM D. BALLEW
William D. Ballew
Attorney-in-Fact
</TABLE>
II-9
<PAGE> 143
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement or amendments to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Dallas, State of
Texas, on February 4, 1994.
MESA OPERATING CO.
(Registrant)
By: /s/ WILLIAM D. BALLEW
William D. Ballew,
Controller
POWER OF ATTORNEY
The undersigned directors and executive officers of Mesa Operating Co.
hereby constitute and appoint William D. Ballew and Charles L. Carpenter, and
each of them, with full power to act without the other and with full power of
substitution and resubstitution, our true and lawful attorneys-in-fact with full
power to execute in our name and behalf in the capacities indicated below any
and all amendments (including post-effective amendments and amendments thereto)
to this Registration Statement and to file the same, with all exhibits thereto
and other documents in connection therewith with the Securities and Exchange
Commission and hereby ratify and confirm all that such attorneys-in-fact, or
either of them, or their substitutes shall lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated above.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ---------------------------- -----------------
<S> <C> <C>
/s/ BOONE PICKENS* Director and Chief Executive February 4, 1994
Boone Pickens Officer
/s/ PAUL W. CAIN* Director, President and February 4, 1994
Paul W. Cain Chief Operating Officer
/s/ WILLIAM D. BALLEW Controller (Chief Accounting February 4, 1994
William D. Ballew Officer and acting Chief
Financial Officer)
By: /s/ WILLIAM D. BALLEW
William D. Ballew
Attorney-in-Fact
</TABLE>
II-10
<PAGE> 144
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement or amendments to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Dallas, State of
Texas, on February 4, 1994.
MESA CAPITAL CORPORATION
(Registrant)
By: /s/ WILLIAM D. BALLEW
William D. Ballew,
Controller
POWER OF ATTORNEY
The undersigned directors and executive officers of Mesa Capital
Corporation, hereby constitute and appoint William D. Ballew and Charles L.
Carpenter, and each of them, with full power to act without the other and with
full power of substitution and resubstitution, our true and lawful
attorneys-in-fact with full power to execute in our name and behalf in the
capacities indicated below any and all amendments (including post-effective
amendments and amendments thereto) to this Registration Statement and to file
the same, with all exhibits thereto and other documents in connection therewith
with the Securities and Exchange Commission and hereby ratify and confirm all
that such attorneys-in-fact, or either of them, or their substitutes shall
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated above.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ---------------------------- -----------------
<S> <C> <C>
/s/ BOONE PICKENS* Director and Chief Executive February 4, 1994
Boone Pickens Officer
/s/ PAUL W. CAIN* Director, President and February 4, 1994
Paul W. Cain Chief Operating Officer
/s/ WILLIAM D. BALLEW Controller (Chief Accounting February 4, 1994
William D. Ballew Officer and acting Chief
Financial Officer)
*By:/s/ WILLIAM D. BALLEW
William D. Ballew
Attorney-in-Fact
</TABLE>
II-11
<PAGE> 145
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MESA Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of MESA Inc. included in this registration
statement and have issued our report thereon dated March 12, 1993. Our report on
the consolidated financial statements includes an explanatory paragraph that
describes the litigation discussed in Notes 2 and 9 of those statements. Our
audits were made for the purpose of forming an opinion on those statements taken
as a whole. The schedules listed in the index above are the responsibility of
MESA Inc.'s management and are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to be
set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN & CO.
Houston, Texas
March 12, 1993
S-1
<PAGE> 146
SCHEDULE III
PAGE 1 OF 2
MESA INC.
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
- --------------------------------------------------------------------------------
MESA INC.
CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31
(IN THOUSANDS)
<TABLE>
<CAPTION>
1992 1991 1990
-------- -------- ---------
<S> <C> <C> <C>
Equity in net loss of subsidiaries............................ $(87,088) $(72,662) $(200,276)
Other expense................................................. (2,144) (6,501) --
-------- -------- ---------
Net loss...................................................... $(89,232) $(79,163) $(200,276)
-------- -------- ---------
-------- -------- ---------
Net loss per common share..................................... $ (2.31) $ (2.05) $ (5.19)
-------- -------- ---------
-------- -------- ---------
</TABLE>
(See accompanying notes to condensed financial statements)
- --------------------------------------------------------------------------------
MESA INC.
CONDENSED BALANCE SHEETS
DECEMBER 31
(IN THOUSANDS)
<TABLE>
<CAPTION>
1992 1991
-------- --------
<S> <C> <C>
Cash..................................................................... $ 1 $ 1
Investment in subsidiaries............................................... 192,996 280,084
-------- --------
$192,997 $280,085
-------- --------
-------- --------
Accounts payable......................................................... $ -- $ 2,811
Intercompany payables.................................................... 8,645 3,690
Stockholders' equity..................................................... 184,352 273,584
-------- --------
$192,997 $280,085
-------- --------
-------- --------
</TABLE>
(See accompanying notes to condensed financial statements)
- --------------------------------------------------------------------------------
MESA INC.
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
(IN THOUSANDS)
<TABLE>
<CAPTION>
1992 1991 1990
------- ------- -------
<S> <C> <C> <C>
Cash Flows from Investing Activities:
Distributions from subsidiaries................................. $ -- $ -- $97,190
------- ------- -------
-- -- 97,190
------- ------- -------
Cash Flows from Financing Activities:
Distributions to equity holders................................. -- -- (97,190)
------- ------- -------
-- -- (97,190)
------- ------- -------
Net change in cash................................................ $ -- $ -- $ --
------- ------- -------
------- ------- -------
</TABLE>
(See accompanying notes to condensed financial statements)
S-2
<PAGE> 147
SCHEDULE III
PAGE 2 OF 2
MESA INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 -- GENERAL
MESA Inc., a Texas corporation, was formed in 1991 in connection with a
transaction which reorganized the business of Mesa Limited Partnership from a
publicly-traded limited partnership into a corporation. The accompanying
condensed financial statements of MESA Inc. should be read in conjunction with
the consolidated financial statements of MESA Inc. and notes thereto included
elsewhere in this Registration Statement.
NOTE 2 -- INVESTMENT IN SUBSIDIARIES
MESA Inc. conducts its business activities through direct and indirect
subsidiary partnerships. MESA Inc. owns a 95.86% limited partnership interest in
each of its direct subsidiary partnerships, Mesa Operating Limited Partnership
(MOLP), Mesa Midcontinent Limited Partnership (MMLP) and Mesa Holding Limited
Partnership (MHLP). MOLP and MMLP own 81% and 19% limited partnership interests
in Hugoton Capital Limited Partnership (HCLP), respectively. Boone Pickens,
general partner, owns a 4.14% general partner interest in each of MOLP, MMLP and
MHLP.
These condensed financial statements present MESA Inc.'s investment in its
subsidiaries using the equity method of accounting whereby such investments are
recorded at historical cost adjusted for MESA Inc.'s ownership share of the
subsidiaries' cumulative results of operations.
NOTE 3 -- CONTINGENCIES AND GUARANTEES
MESA Inc. is an obligor under the $300 million principal amount outstanding
of unsecured 12% subordinated notes due in 1996 and under the $300 million
principal amount outstanding of unsecured 13 1/2% subordinated notes due in
1999. MESA Inc. is also a guarantor of the $100 million outstanding under a $150
million revolving credit facility which is secured by MOLP's oil and gas
properties in the West Panhandle field of Texas and is due in June 1994. See
Note 4 "Long-Term Debt" to the consolidated financial statements of MESA Inc.
included elsewhere in this Registration Statement.
S-3
<PAGE> 148
SCHEDULE V
MESA INC.
PROPERTY, PLANT AND EQUIPMENT
AS OF DECEMBER 31, 1992, 1991 AND 1990
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BALANCE, BALANCE,
BEGINNING ADDITIONS, RETIREMENTS END
CLASSIFICATION OF PERIOD AT COST OR SALES OF PERIOD
- ------------------------------------------- --------- ------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AS OF DECEMBER 31, 1992:
Oil and Gas Properties, Wells and
Equipment............................. $1,790,224 $61,713 $ (382) $1,851,555
Office and Other......................... 41,861 1,392 (2,652) 40,601
---------- ------- --------- ----------
$1,832,085 $63,105 $ (3,034) $1,892,156
---------- ------- --------- ----------
---------- ------- --------- ----------
AS OF DECEMBER 31, 1991:
Oil and Gas Properties, Wells and
Equipment............................. $2,456,699 $31,294 $(697,769) $1,790,224
Office and Other......................... 55,032 2,797 (15,968) 41,861
---------- ------- --------- ----------
$2,511,731 $34,091 $(713,737) $1,832,085
---------- ------- --------- ----------
---------- ------- --------- ----------
AS OF DECEMBER 31, 1990:
Oil and Gas Properties, Wells and
Equipment............................. $2,456,985 $33,124 $ (33,410) $2,456,699
Office and Other......................... 83,455 2,053 (30,476) 55,032
---------- ------- --------- ----------
$2,540,440 $35,177 $ (63,886) $2,511,731
---------- ------- --------- ----------
---------- ------- --------- ----------
</TABLE>
S-4
<PAGE> 149
SCHEDULE VI
MESA INC.
ACCUMULATED DEPRECIATION, DEPLETION AND
AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
AS OF DECEMBER 31, 1992, 1991 AND 1990
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BALANCE,
BEGINNING CHARGED TO RETIREMENTS BALANCE, END
CLASSIFICATION OF PERIOD INCOME OR SALES OF PERIOD
- ------------------------------------------------ --------- ---------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AS OF DECEMBER 31, 1992:
Oil and Gas Properties, Wells and Equipment... $ 481,218 $110,340 $ (1,838) $589,720
Office and Other.............................. 20,591 3,593 (1,999) 22,185
--------- -------- ---------- --------
$ 501,809 $113,933 $ (3,837) $611,905
--------- -------- ---------- --------
--------- -------- ---------- --------
AS OF DECEMBER 31, 1991:
Oil and Gas Properties, Wells and Equipment... $ 678,205 $112,860 $ (309,847) $481,218
Office and Other.............................. 23,208 5,971 (8,588) 20,591
--------- -------- ---------- --------
$ 701,413 $118,831 $ (318,435) $501,809
--------- -------- ---------- --------
--------- -------- ---------- --------
AS OF DECEMBER 31, 1990:
Oil and Gas Properties, Wells and Equipment... $ 456,721 $231,641(a) $ (10,157) $678,205
Office and Other.............................. 20,503 8,785 (6,080) 23,208
--------- -------- ---------- --------
$ 477,224 $240,426 $ (16,237) $701,413
--------- -------- ---------- --------
--------- -------- ---------- --------
</TABLE>
- ---------------
(a) Includes $75 million loss on oil and gas properties to be sold.
S-5
<PAGE> 150
SCHEDULE X
MESA INC.
SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE THREE YEARS ENDED DECEMBER 31, 1992
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
YEAR ENDED DECEMBER 31, 1992:
Taxes --
Production................................................................... $ 9,380
Ad Valorem and other......................................................... 9,251
-------
$18,631
-------
-------
YEAR ENDED DECEMBER 31, 1991:
Taxes --
Production................................................................... $10,785
Ad Valorem and other......................................................... 8,160
-------
$18,945
-------
-------
YEAR ENDED DECEMBER 31, 1990:
Taxes --
Production................................................................... $17,345
Ad Valorem and other......................................................... 7,483
-------
$24,828
-------
-------
</TABLE>
S-6
<PAGE> 1
Exhibit 5
BAKER & BOTTS
Austin L.L.P.
Houston 2001 ROSS AVENUE TELEPHONE (214) 953-6500
New York DALLAS, TEXAS 75201 FACSIMILE (214) 953-6503
Washington, D.C.
February 4, 1994
MESA Inc.
Mesa Operating Co.
Mesa Capital Corporation
2001 Ross Avenue, Suite 2600
Dallas, Texas 75201
Re: Registration Statement on Form S-1 (Registration No. 033-51909) of
MESA Inc., Mesa Operating Co. and Mesa Capital Corporation
Ladies and Gentlemen:
We have acted as counsel to MESA Inc., a Texas corporation (the
"Company"), Mesa Operating Co., a Delaware corporation ("MOC") and Mesa Capital
Corporation, a Delaware corporation ("Capital" and, together with the Company
and MOC, the "Obligors"), in connection with the above referenced Registration
Statement. At your request, this opinion of counsel is being furnished to you
for filing as Exhibit 5 to the Registration Statement.
The Registration Statement relates to the offering (the "Offering")
of $51,000,000 aggregate face amount (at maturity) of the 12 3/4% Secured
Discount Notes due June 30, 1998 (the "New Secured Notes") of the Obligors.
In connection therewith, we have examined and relied upon, among
other items, the original or copies certified to our satisfaction of (i) the
Charter and Bylaws of the Company, MOC and Capital, each as amended to date;
(ii) minutes and records of the corporate proceedings of the Obligors with
respect to the Offering (iii) the Registration Statement, including all
amendments thereto and all exhibits thereto; (iv) the Indenture, dated as of
May 1, 1993 (the "Secured Indenture"), among the Obligors and Harris Trust &
Savings Bank, as trustee, pursuant to which the New Secured Notes will be
issued; (v) certificates of public officials and of representatives of the
Company; (vi) statutes and (vii) such other documents and instruments as we
have deemed necessary for the expression of the opinions contained herein. In
giving such opinions we have relied upon certificates of officers of the
Company with respect to the accuracy of the factual matters contained in such
certificates.
<PAGE> 2
BAKER & BOTTS
L.L.P.
MESA Inc. -2- February 4, 1994
Based upon our examination as aforesaid, and subject to the
limitations hereinafter set forth, we are of the opinion that:
1. The Company has been duly incorporated and is validly
existing under the laws of the State of Texas.
2. MOC has been duly incorporated and is validly existing
under the laws of the State of Delaware.
3. Capital has been duly incorporated and is validly existing
under the laws of the State of Delaware.
4. The Secured Indenture has been duly authorized by the
Obligors and constitutes a binding agreement of such Obligors.
5. The New Secured Notes have been duly authorized by each of
the Obligors and, when duly executed and delivered by each of the Obligors and
authenticated by the Trustee under the Secured Indenture, all in accordance
with the terms of the Secured Indenture, will constitute binding obligations of
such Obligors.
The opinions set forth in paragraphs 4 and 5 above are each
subject to the effect of (i) bankruptcy, insolvency, reorganization, moratorium
or other laws relating to or affecting creditors' rights and (ii) general
principles of equity (regardless of whether such enforceability is considered
in a proceeding in equity or at law).
Robert L. Stillwell, a partner of this Firm, is member of the
Board of Directors of the Company and owns 26,500 shares of Common Stock of the
Company. The opinions set forth above are limited to matters of Delaware,
Texas and federal law as in effect on the date hereof.
<PAGE> 3
BAKER & BOTTS
L.L.P.
MESA Inc. -3- February 4, 1994
We hereby consent to the filing of this opinion of counsel as
Exhibit 5 to the Registration Statement and to the references to our Firm under
the caption "Legal Opinions" in the Prospectus included in such Registration
Statement.
Very truly yours,
<PAGE> 1
EXHIBIT 8
AUSTIN BAKER & BOTTS
HOUSTON L.L.P.
NEW YORK 2001 ROSS AVENUE
WASHINGTON, D.C. DALLAS, TEXAS 75201-2916 TELEPHONE (214) 953-6500
FACSIMILIE (214) 953-6503
February 4, 1994
MESA Inc.
Mesa Operating Co.
Mesa Capital Corporation
2001 Ross Avenue, Suite 2600
Dallas, Texas 75201
Re: Registration Statement on Form S-1 (Registration No.
033-51909) of MESA Inc., Mesa Operating Co. and Mesa Capital
Corporation
Ladies and Gentlemen:
As our opinion concerning the federal income tax consequences
of the ownership and disposition of the Secured Notes, we incorporate in their
entirety all statements of legal conclusion contained in the Registration
Statement under the caption "Certain U.S. Federal Income Tax Consequences,"
other than statements expressly attributed to another person.
We hereby consent to the filing of this opinion of counsel as
Exhibit 8 to the Registration Statement and to the references to our firm under
the caption "Certain U.S. Federal Income Tax Consequences" and "Legal Opinions"
therein.
Very truly yours,
BAKER & BOTTS, L.L.P.
