<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 21, 1996
REGISTRATION STATEMENT NO. 333-03281
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
MESA OPERATING CO., ISSUER
MESA INC., GUARANTOR
(Exact name of registrants as specified in charters)
<TABLE>
<S> <C>
DELAWARE 75-2516853
TEXAS 75-2394500
(States or other jurisdictions of (I.R.S. Employer
incorporation or organization) Identification Nos.)
STEPHEN K. GARDNER
1400 WILLIAMS SQUARE WEST 1400 WILLIAMS SQUARE WEST
5205 NORTH O'CONNOR BOULEVARD 5205 NORTH O'CONNOR BOULEVARD
IRVING, TEXAS 75039 IRVING, TEXAS 75039
(214) 444-9001 (214) 444-9001
(Address, including zip code, and telephone (Name, address, including zip code,
number, including area code, of registrants' and telephone number, including
principal executive offices) area code, of agent for service)
</TABLE>
---------------------
Copies to:
<TABLE>
<S> <C>
STEPHEN A. MASSAD GARY L. SELLERS
BAKER & BOTTS, L.L.P. SIMPSON THACHER & BARTLETT
ONE SHELL PLAZA, 910 LOUISIANA 425 LEXINGTON AVENUE
HOUSTON, TEXAS 77002 NEW YORK, NEW YORK 10017
(713) 229-1475 (212) 455-2000
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
IF THE ONLY SECURITIES BEING REGISTERED ON THIS FORM ARE BEING OFFERED
PURSUANT TO DIVIDEND OR INTEREST REINVESTMENT PLANS, PLEASE CHECK THE FOLLOWING
BOX. / /
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, OTHER THAN SECURITIES OFFERED ONLY IN CONNECTION WITH DIVIDEND OR INTEREST
REINVESTMENT PLANS, CHECK THE FOLLOWING BOX. / /
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING
PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT, PLEASE CHECK THE FOLLOWING BOX
AND LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER
EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING. / /
- ---------------
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(C)
UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING. / /
- ---------------
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434,
PLEASE CHECK THE FOLLOWING BOX. / /
The Prospectus constituting part of this Registration Statement is a
combined prospectus as permitted by Rule 429(a) under the Securities Act of
1933, as amended, and also relates to a Registration Statement on Form S-3
(Registration Statement No. 033-52627) filed by MESA Inc. and Mesa Operating Co.
and declared effective on November 2, 1994.
------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
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, AS AMENDED, 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
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 JUNE 21, 1996
PROSPECTUS
<TABLE>
<S> <C> <C>
MESA OPERATING CO.
$325,000,000 % SENIOR SUBORDINATED NOTES DUE 2006
$ % SENIOR SUBORDINATED DISCOUNT NOTES DUE 2006
</TABLE>
[MESA LOGO]
The % Senior Subordinated Notes due 2006 (the "Senior Subordinated Notes")
and the % Senior Subordinated Discount Notes due 2006 (the "Discount Notes"
and, together with the Senior Subordinated Notes, the "Notes"), are being
offered (the "Offering") by Mesa Operating Co. (the "Company"). The Notes will
be guaranteed on a senior subordinated basis by MESA Inc. (the "Parent"), of
which the Company is a wholly owned subsidiary, and by certain future
subsidiaries of the Company.
Interest on the Senior Subordinated Notes will be payable in cash semiannually
in arrears on and of each year, commencing on ,
1996. The Discount Notes are being issued at a substantial discount from their
principal amount at maturity. The Discount Notes will accrete in value until
, 2001 at a rate of % per annum, compounded semiannually. Cash
interest will not accrue on the Discount Notes prior to , 2001.
Thereafter, cash interest on the Discount Notes will accrue at a rate of %
per annum, and will be payable semi-annually in arrears on and
of each year, commencing , 2001. The Notes will be
redeemable at the option of the Company at any time on or after 2001,
at the redemption prices set forth herein, together with, as applicable, accrued
and unpaid interest, if any, to the date of redemption. Prior to ,
1999, up to 33 1/3% of the original aggregate principal amount of the Senior
Subordinated Notes will be redeemable at the option of the Company from the net
proceeds of certain sales of Equity Interests (as defined) of the Company or the
Parent, at a price of % of the principal amount of the Senior Subordinated
Notes, together with accrued and unpaid interest, if any, to the date of
redemption. In addition, prior to , 1999, up to 33 1/3% of the
original aggregate principal amount of the Discount Notes will be redeemable at
the option of the Company from the net proceeds of certain sales of Equity
Interests of the Company or the Parent, at a price of % of the Accreted
Value (as defined) of the Discount Notes. See "Description of the
Notes -- Optional Redemption." Upon the occurrence of a Change of Control (as
defined), each holder of Notes may require the Company to repurchase all or a
portion of such holder's Notes at 101% of the aggregate principal amount
thereof, together with accrued and unpaid interest, if any, to the date of
repurchase (or at 101% of the Accreted Value thereof at such date, as
applicable). See "Description of the Notes."
The proceeds of the Offering, together with the initial borrowings under the New
Credit Facility (as defined), proceeds from the sale of Preferred Stock (as
defined) described herein and existing cash balances, will be used to repay
and/or refinance substantially all of the existing debt of Mesa (as defined).
See "Use of Proceeds."
The Notes will be general, unsecured obligations of the Company and will be
subordinated in right of payment to all existing and future Senior Debt (as
defined) of the Company. As of March 31, 1996, after giving pro forma effect to
the Recapitalization (as defined) and the application of the net proceeds
therefrom, the aggregate principal amount of the Company's outstanding Senior
Debt would have been approximately $349.2 million, representing the initial
borrowings under the $525 million New Credit Facility. See "Description of the
Notes."
The Company does not intend to apply for listing of the Notes on any securities
exchange or inclusion of the Notes in any automated quotation system.
------------------------------------------------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE NOTES.
------------------------------------------------------------------------
THE NOTES 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.
------------------------------------------------------------------------
<TABLE>
<CAPTION>
===========================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(1)(3)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SENIOR SUBORDINATED NOTE % % %
TOTAL $ $ $
- ---------------------------------------------------------------------------------------------------------------------------
PER DISCOUNT NOTE % % %
TOTAL $ $ $
===========================================================================================================================
</TABLE>
(1) Plus accrued and unpaid interest or accretion, if any, as applicable, from
, 1996.
(2) The Company and the Parent have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $ .
------------------------------------------------------------------------
The Notes are being offered by Chase Securities Inc. ("CSI"), BT Securities
Corporation, Donaldson, Lufkin & Jenrette Securities Corporation and Merrill
Lynch, Pierce, Fenner & Smith Incorporated (together, the "Underwriters"),
subject to prior sale, when, as and if issued by the Company and delivered to
and accepted by the Underwriters, and subject to certain other conditions. It is
expected that delivery of the Notes will be made at the offices of CSI, 270 Park
Avenue, New York, New York, or through the facilities of the Depository Trust
Company on or about , 1996.
CHASE SECURITIES INC.
BT SECURITIES CORPORATION
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MERRILL LYNCH & CO.
, 1996
<PAGE> 3
MAP SHOWING LOCATION OF MESA'S PROPERTIES
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All statements other than statements of historical fact
included in this Prospectus, including without limitation, the statements under
"Prospectus Summary," "Risk Factors -- Financial and Transaction Risks -- High
Leverage," "Unaudited Pro Forma Financial Information," "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Capital
Resources and Liquidity" and Notes 2 and 4 to the Consolidated Financial
Statements of the Parent located elsewhere herein regarding Mesa's financial
position and liquidity, the amount of and its ability to make debt service
payments, its strategic alternatives, financial instrument covenant compliance,
cost reduction efforts and other matters, are forward-looking statements.
Although Mesa believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. Important factors that could cause actual results to
differ materially from Mesa's expectations ("Cautionary Statements") are
disclosed in this Prospectus, including without limitation in conjunction with
the forward-looking statements included in this Prospectus. All subsequent
written and oral forward-looking statements attributable to Mesa or persons
acting on its behalf are expressly qualified in their entirety by the Cautionary
Statements.
SPECIAL MEETING
Unless the context otherwise requires, statements in this Prospectus assume
that all elements of the Recapitalization described herein that are subject to
shareholder approval will be approved by the shareholders of the Parent at a
special meeting of the holders of the Parent's common stock ("Common Stock") to
be held on June 25, 1996 (the "Special Meeting"). The share numbers and related
data contained in this Registration Statement do not give effect to a proposed
1-for-4 reverse stock split with respect to the outstanding shares of Common
Stock (and the related effect on the number and price of the shares of Preferred
Stock to be issued in the Recapitalization) that will be submitted for the
approval of shareholders at the Special Meeting.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus or incorporated by reference in this Prospectus.
Unless the context otherwise requires, the term "Mesa" means MESA Inc. and its
subsidiaries taken as a whole and includes the Parent's predecessors. Quantities
stated as equivalent natural gas reserves are based on a factor of six thousand
cubic feet of natural gas per barrel of liquids. Certain terms relating to the
oil and gas business and used herein are defined in the "Glossary of Selected
Oil and Gas Terms" included elsewhere in this Prospectus. Certain capitalized
terms relating to the Notes are defined in "Description of the Notes."
THE COMPANY
OVERVIEW
Mesa is one of the largest independent oil and gas companies in the United
States, with approximately 1.9 Tcfe of proved reserves as of December 31, 1995.
Approximately 95% of Mesa's reserves are concentrated in the Hugoton field in
southwest Kansas and the West Panhandle field in Texas. These fields, which are
part of one contiguous reservoir, are considered to be among the premier natural
gas properties in the United States and are characterized by long lived reserves
and stable production. Despite operating under significant capital constraints
since 1990, Mesa has maintained a large, concentrated and efficiently managed
asset base.
On April 26, 1996, Mesa entered into a Stock Purchase Agreement with
DNR-MESA Holdings, L.P., a Texas limited partnership ("DNR") whose sole general
partner is Rainwater, Inc., a company owned by Richard E. Rainwater (together,
"Rainwater"). The agreement contemplates that Mesa will issue $265 million in
new equity and will repay and/or refinance substantially all of its $1.2 billion
of existing debt (the "Recapitalization," as more specifically described below).
The Notes being offered hereby are an integral part of the Recapitalization.
The Recapitalization will enhance Mesa's ability to compete in the oil and
gas industry by substantially increasing its cash flow available for investment
and improving its ability to attract capital, which will increase Mesa's ability
to pursue investment opportunities. Specifically, Mesa's financial condition
will improve significantly as a result of the Recapitalization due to (i) a
significant reduction in total debt outstanding, (ii) a reduction in annual cash
interest expense of approximately $75 million, (iii) the implementation of a
cost savings program designed to reduce annual general and administrative and
other operating overhead expenses by approximately $10 million and (iv) the
extension of maturities on its long term debt, which will eliminate Mesa's
present liquidity concerns.
CONTROL OF MESA
In connection with the Recapitalization, DNR will obtain the right to
nominate and elect a majority of Mesa's Board of Directors so long as DNR and/or
its affiliates own Series B Preferred Stock (as defined) and meet certain
minimum stock ownership requirements. Mesa expects to benefit from the DNR board
representatives' operational, managerial, transactional and financial expertise,
and believes that Rainwater will be an important strategic partner in the future
success of Mesa.
DNR intends to implement an orderly transition and succession plan for
Mesa's senior management. Such plans are being developed. In this regard, DNR
has requested that Boone Pickens, the Chairman of the Board and Chief Executive
Officer of Mesa, assist DNR in identifying and retaining a new Chief Executive
Officer and that he resign when such person is retained. Mr. Pickens, who will
remain on the Board of Directors following the Recapitalization, has agreed to
assist with this transition.
RESERVES
Approximately 65% of Mesa's total equivalent proved reserves are natural gas
and the balance are principally natural gas liquids ("NGLs") which are extracted
from natural gas. Approximately 95% of Mesa's proved reserves are developed. The
estimated future net cash flows before income taxes from Mesa's proved reserves,
as of December 31, 1995, aggregated approximately $2.4 billion and had a net
present value, discounted at 10%, of approximately $1 billion. See
"Business -- Properties."
3
<PAGE> 5
Hugoton Field. Mesa's most significant asset is its interest in the Hugoton
field, the largest producing gas field in the United States. Mesa's Hugoton
properties, which represent approximately 13% of the total field, contain 1.2
Tcfe of proved reserves. Mesa holds 230,000 net acres in the Hugoton field,
covering approximately 400 square miles. Mesa's properties are concentrated in
the center of the field and thus benefit from better reservoir characteristics,
including thicker productive zones, higher porosity and higher permeability.
Management believes that, as a result, Mesa's Hugoton properties will have a
longer productive life and higher natural gas recoveries than properties located
in other parts of the Hugoton field.
Mesa has working interests in approximately 1,100 wells in the Hugoton
field, 950 of which it operates, and royalty interests in approximately 300
additional wells. Mesa's Hugoton properties are capable of producing over 230
MMcf of natural gas per day. Over the past several years, Mesa has concentrated
its efforts on fully developing its existing long lived reserve base. In the
Hugoton field, these efforts have included infill drilling, installing
additional compression and gathering facilities and the construction of the
Satanta processing plant. The Satanta plant has the ability to extract a greater
quantity of NGLs per Mcf of natural gas than the plant it replaced, and has the
added ability to reject nitrogen, recover helium and produce liquefied natural
gas ("LNG").
West Panhandle Field. Mesa's other principal asset is its interest in the
West Panhandle field, which is located in the Texas panhandle. Mesa's West
Panhandle properties contain approximately 600 Bcfe of proved reserves. Natural
gas from these properties is produced from approximately 600 wells, all of which
are operated by Mesa, on over 185,000 net acres. Mesa's West Panhandle field
production is processed through Mesa's Fain processing plant, and is governed by
an agreement between Mesa and Colorado Interstate Gas Company ("CIG"). Since
1994, Mesa's entitlement to its share of West Panhandle gas production has been
limited by certain provisions of an agreement with CIG. Beginning in 1997, such
limitations will expire, subject to certain seasonal and daily entitlements of
CIG.
In the West Panhandle field, development activities over the last six years
have included 357 well workovers and redrilling projects, the addition of
compression and the expansion of processing facilities. In addition, Mesa has
identified approximately 120 locations that have additional production potential
from new areas or deeper zones that it plans to redrill over a three year period
beginning in early 1996. Mesa is also currently expanding the Fain plant to
increase processing capacity and NGL recoveries. As a result of these activities
and the expiration of its contractual production limitation, Mesa expects to
increase its share of production from the West Panhandle field from 1997 onward.
Gulf of Mexico Properties. Beginning in late 1994, Mesa began to direct a
greater portion of its capital spending towards exploration and development in
the Gulf of Mexico. Since that time, Mesa has successfully completed 17 out of
19 wells. Through December 31, 1995, Mesa's Gulf of Mexico activities have added
51 Bcfe of proved reserves. As a result, Mesa's offshore production increased by
approximately 50% on an Mcfe basis from 1994 to 1995. Offshore production gains
have continued into 1996, with first quarter offshore production having
increased on an Mcfe basis by approximately 23% over fourth quarter 1995 levels.
Because Mesa has existing production facilities offshore, it has been able to
bring new wells on production quickly and at a lower cost than could be achieved
otherwise. Mesa owns interests in 45 blocks in the Gulf of Mexico, covering
approximately 200,000 acres. Application of 3-D seismic technology to Mesa's
substantial Gulf of Mexico acreage represents a significant future opportunity
to increase reserves and cash flow. At the April 1996 federal lease sale in the
Gulf of Mexico, Mesa purchased six blocks covering 28,000 acres for a total of
$500,000.
BUSINESS STRENGTHS
Mesa believes it has certain strengths that provide it with significant
competitive advantages, including the following:
o Long Reserve Life. Mesa's properties have an estimated reserve life,
calculated by dividing total proved reserves by annual production, of
approximately 15 years, which is among the longest reserve lives of any
domestic oil and gas company. As a result of the long lived nature of its
properties, Mesa has lower reinvestment requirements to maintain reserve
quantities, production levels and values than many of its competitors.
The net present value of Mesa's proved reserves has exhibited
considerable stability over the last five years, ranging from
approximately $1.2 billion to approximately $1.0 billion on a pre-tax
basis and from $0.9 billion to $1.0 billion on an after tax basis.
o High Percentage of Proved Developed Producing Reserves. Approximately 95%
of Mesa's reserves are classified as proved developed producing. The
highly developed nature of these reserves results in
4
<PAGE> 6
relatively low capital expenditures to maintain production. The combined
effect of a highly developed and long lived reserve base provides Mesa a
long term source of cash flow to invest in future growth opportunities.
o High Degree of Operational Control. Over 90% of Mesa's production and
reserves are attributable to wells operated by Mesa, which provides Mesa
with control over the amount and timing of capital and operating
expenditures. Mesa also owns and operates all of the processing
facilities and a substantial majority of the gathering assets that
service its onshore production. Control over these assets reduces
operating expenses and enhances operational flexibility. These factors
provide Mesa with significant operating advantages, such as the ability
to (i) shift production into the heating season, when prices are
generally higher, (ii) vary the recovery of NGLs to optimize its revenue
mix, (iii) avoid production curtailments due to capacity constraints and
(iv) reduce abandonment pressures for its wells, which should increase
ultimate recoverable reserves.
o Low Cost Operator. Mesa's reserves are primarily recovered from low
pressure, shallow, geographically concentrated gas fields. Consequently,
production costs are low and averaged $0.57 per Mcfe of production in
1995.
o Expertise in Midcontinent and Gulf of Mexico. The Midcontinent, where the
Hugoton and West Panhandle fields are located, and the Gulf of Mexico are
two of the most prolific gas producing regions in the United States.
Mesa's personnel have substantial operational expertise and experience in
the oil and gas industry, particularly with respect to the technical
challenges of these regions. Mesa's operations and exploration staff has
extensive experience with the federal, state and local agencies with
responsibility for these regions. This experience provides a significant
base upon which to expand Mesa's operations as cash flow and additional
capital become available for investment following the Recapitalization.
BUSINESS STRATEGY
Following the Recapitalization, Mesa intends to position itself as a leading
independent oil and gas exploration and production company by implementing the
following primary strategies:
o Balanced Reserve Growth. Mesa plans to increase reserves and cash flow by
pursuing a balanced strategy of blending property acquisitions with
development drilling and exploration. In pursuit of its strategy, Mesa
intends to target (i) strategic property acquisitions that complement
Mesa's existing asset base, (ii) long term development projects that
provide a stable and low risk portfolio of reinvestment opportunities and
(iii) limited exposure to higher risk exploration activities.
o Exploitation of Existing Assets. Mesa will continue to focus on
exploiting its existing asset base by undertaking projects related to
development drilling, expansion of gathering systems, increased
compression, enhancement of processing facilities and value added
marketing activities.
o Reduction in Costs. Mesa intends to maintain a low cost structure to
maximize free cash flow available for investment. To this end, Mesa has
already implemented the first steps of a program designed to reduce
annual general and administrative and other operating overhead expenses
by approximately $10 million.
o Increased Financial Flexibility. After completion of the
Recapitalization, Mesa's financial flexibility will increase
substantially. Mesa is committed to maintaining financial flexibility to
enable it to access various forms of capital in order to successfully
execute its growth strategy.
5
<PAGE> 7
THE RECAPITALIZATION
The Recapitalization consists of a series of transactions that are intended
to deleverage and recapitalize Mesa through the issuance of $265 million in
equity and the repayment and/or refinancing of substantially all of Mesa's $1.2
billion of existing debt. The Recapitalization is the result of a lengthy
evaluation of Mesa's strategic alternatives, including the solicitation of
proposals for a sale of Mesa, a stock-for-stock merger, joint ventures, asset
sales, equity infusions and refinancing transactions.
The Recapitalization is proposed to be effected in two stages, as follows:
FIRST CLOSING
Sale of Equity to DNR. The Parent will sell an aggregate of $133 million
of Series B 8% Cumulative Convertible Preferred Stock of the Parent (the
"Series B Preferred Stock") to DNR pursuant to a Stock Purchase Agreement
dated April 26, 1996 (the "Stock Purchase Agreement").
Execution of New Credit Facility. The Company will enter into a new seven
year, $525 million senior secured revolving credit facility (the "New
Credit Facility"), to be guaranteed by the Parent. Mesa has received a
commitment from The Chase Manhattan Bank, N.A., Chemical Bank and Bankers
Trust Company for the New Credit Facility.
Issuance of Notes Offered Hereby. The Company will issue and sell the
Notes offered hereby for $500 million in aggregate gross proceeds.
Refinancing of Existing Debt. Mesa will repay and/or refinance
substantially all of its outstanding indebtedness (approximately $1.2
billion at March 31, 1996) with funds from the following sources: (i) the
proceeds from the sale of Series B Preferred Stock to DNR, (ii)
borrowings under the New Credit Facility, (iii) the issuance of the Notes
offered hereby, and (iv) cash and investments balances. The closing of
the foregoing transactions will occur concurrently (the "First Closing").
The New Credit Facility, the issuance of the Notes and the application of
the net proceeds therefrom are referred to herein as the "Debt
Refinancing."
SECOND CLOSING
Rights Offering. After the First Closing, the Parent will conduct a
rights offering (the "Rights Offering") whereby it will distribute to the
holders of its Common Stock transferable rights (the "Rights") to
purchase a pro rata portion of an aggregate of approximately $132 million
of Series A 8% Cumulative Convertible Preferred Stock of the Parent (the
"Series A Preferred Stock" and, together with the Series B Preferred
Stock, the "Preferred Stock").
DNR Standby Commitment. DNR will provide a standby commitment (the
"Standby Commitment") pursuant to which it will purchase additional
shares of Series B Preferred Stock equal to the number of shares of
Series A Preferred Stock, if any, not purchased in the Rights Offering,
such purchase to occur concurrently with the closing of the Rights
Offering (the "Second Closing"). DNR's obligation to purchase additional
shares of Series B Preferred Stock pursuant to the Standby Commitment
will be secured by a bank letter of credit in favor of Mesa. A
substantial portion of the funds received at the Second Closing will be
used to reduce borrowings under the New Credit Facility.
As used herein, the term "Recapitalization" refers to the purchase by DNR of
shares of Series B Preferred Stock, the Debt Refinancing and the Rights
Offering.
The Parent is a holding company with no independent operations. The Parent
currently operates primarily through three wholly owned subsidiaries, including
the Company. Immediately prior to the First Closing, the other two subsidiaries
will be merged or liquidated into the Company, which will thereafter be the
Parent's only significant direct or indirect subsidiary.
Mesa maintains its principal executive offices at 1400 Williams Square West,
5205 North O'Connor Boulevard, Irving, Texas 75039, where its telephone number
is (214) 444-9001.
The Parent's Common Stock is listed on the New York Stock Exchange under the
symbol "MXP."
6
<PAGE> 8
SOURCES AND USES OF FUNDS
The following table sets forth the proposed sources and uses of the proceeds
of the Recapitalization, after giving effect to the First Closing and the Second
Closing, assuming the Recapitalization had been completed as of March 31, 1996.
See "Use of Proceeds" for additional detail.
<TABLE>
<CAPTION>
AMOUNTS
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
SOURCES
New Credit Facility (a).................................................... $ 349.2
Senior Subordinated Notes.................................................. 325.0
Discount Notes............................................................. 175.0
Preferred Stock............................................................ 265.0
Cash and investments (b)................................................... 219.9
--------
Total sources............................................................ $ 1,334.1
========
USES
Repayment of HCLP Secured Notes (c)........................................ $ 492.3
Repayment of Existing Credit Facility (a).................................. 51.1
Redemption of 12 3/4% Secured Discount Notes due 1998...................... 617.4
Repayment of 12 3/4% Discount Notes due 1996............................... 39.7
Redemption of 13 1/2% Subordinated Notes due 1999.......................... 7.6
Prepayment premium with respect to HCLP Secured Notes (c).................. 64.0
Transaction expenses (d)................................................... 35.0
Accrued interest........................................................... 27.0
--------
Total uses............................................................... $ 1,334.1
========
</TABLE>
- ---------------
(a) Reflects initial borrowings under the $525 million New Credit Facility.
Amounts under the New Credit Facility and Mesa's existing credit facility
(the "Existing Credit Facility") do not include approximately $11.4 million
in letters of credit that are and will continue to be outstanding.
(b) Includes approximately $114.8 million in cash and cash investments, $40.0
million in investments, $56.5 million in restricted cash of Hugoton Capital
Limited Partnership ("HCLP"), a subsidiary of the Company, and $8.7 million
of refundable prepaid interest, as shown on the Parent's Consolidated
Balance Sheet as of March 31, 1996. This represents substantially all of
Mesa's cash and cash investments, investments and restricted cash at March
31, 1996.
(c) The amount of the prepayment premium that will be due upon early retirement
of the Secured Notes (the "HCLP Secured Notes") of HCLP is based on
prevailing interest rates as of the date of repayment. Such premium would
have totaled approximately $64.0 million on March 31, 1996 and approximately
$54.6 million on June 7, 1996.
(d) Represents expenses attributable to the Recapitalization, including
approximately $14.5 million attributable to the sale of the Notes.
7
<PAGE> 9
THE OFFERING
ISSUER..................... Mesa Operating Co.
SECURITIES OFFERED......... $325 million aggregate principal amount of %
Senior Subordinated Notes due 2006 and % Senior
Subordinated Discount Notes due 2006 issued at a
discount to their aggregate principal amount to
generate gross proceeds to the Company of
approximately $175 million.
MATURITY DATE.............. , 2006.
INTEREST PAYMENT DATES..... Interest will accrue on the Senior Subordinated
Notes from the date of original issuance at an
annual rate of % and will be payable
semiannually in arrears on and
of each year, commencing , 1996.
The Discount Notes will be issued at a substantial
discount to their aggregate principal amount. See
"Certain Federal Income Tax Considerations." The
Discount Notes will accrete in value until
, 2001 at a rate of % per annum,
compounded semiannually, to an aggregate principal
amount of $ million. Cash interest will not
accrue on the Discount Notes prior to ,
2001. Thereafter, interest will accrue at the rate
of % per annum and will be payable semiannually
in arrears on and of each
year, commencing on , 2001. The
effective yield of the Discount Notes is % per
annum (computed on a semiannual bond equivalent
basis).
MANDATORY REDEMPTION....... None.
OPTIONAL REDEMPTION........ Except as described below, the Notes are not
redeemable at the Company's option prior to
, 2001. After , 2001, the
Notes will be subject to redemption at the option
of the Company, in whole or in part, at the
redemption prices set forth herein, plus accrued
and unpaid interest thereon to the applicable
redemption date.
Prior to , 1999, up to 33 1/3% of the
original aggregate principal amount of the Senior
Subordinated Notes will be redeemable at the option
of the Company on any one or more occasions from
the net proceeds of sales of Equity Interests
(other than Disqualified Stock) in the Company or
the Parent, at a redemption price equal to % of
the principal amount of the Senior Subordinated
Notes, together with accrued and unpaid interest
thereon to the redemption date; provided, that at
least 66 2/3% of the original aggregate principal
amount of the Senior Subordinated Notes remains
outstanding immediately after the occurrence of
such redemption; and provided further, that such
redemption shall occur within 60 days after the
date of the closing of the related sale of such
Equity Interests. See "Description of the Notes --
Optional Redemption."
In addition, prior to , 1999, up to
33 1/3% of the original aggregate principal amount
at maturity of the Discount Notes will be
redeemable at the option of the Company on any one
or more occasions from the net proceeds of sales of
Equity Interests (other than Disqualified Stock) in
the Company or the Parent, at a redemption price
equal to % of the Accreted Value of the
Discount Notes at the date of redemption; provided,
that at least 66 2/3% of the original aggregate
principal amount at maturity of the Discount Notes
remains outstanding immediately after the
occurrence of such redemption; and provided
further, that such redemption shall occur within 60
days after the date of the closing of the related
sale of such Equity Interests. See "Description of
the Notes -- Optional Redemption."
8
<PAGE> 10
CHANGE OF CONTROL.......... Upon the occurrence of a Change of Control, the
Company will be required to offer to repurchase all
or a portion of each Holder's Notes, at an offer
price in cash equal to 101% of the aggregate
principal amount of such Notes, plus accrued and
unpaid interest, if any, thereon to the date of
repurchase (or 101% of the Accreted Value at such
date, as applicable), and to repurchase all Notes
tendered pursuant to such offer. The Company will
not be required to make such an offer upon the
occurrence of a Change of Control if a third party
makes an offer, which meets the requirements
otherwise applicable to the Company, to purchase
all of the Notes and such third party purchases all
Notes tendered pursuant to such offer. The Credit
Agreement will prohibit the Company from
repurchasing any Notes pursuant to a Change of
Control offer prior to the repayment in full of the
Senior Debt under the Credit Agreement. If a Change
of Control were to occur, the Company may not have
sufficient available funds to purchase all Notes
tendered pursuant to the Change of Control offer
after first satisfying its obligations under the
Credit Agreement or other Senior Debt that may then
be outstanding, if accelerated. If a default
occurs, the applicable trustee or holders of at
least 25% in principal amount of the Notes then
outstanding may declare the principal of and the
accrued and unpaid interest or the Accreted Value
of the Notes, as applicable, to be due and payable
immediately. However, such repayment would be
subject to certain subordination provisions in the
Indentures. See "Risk Factors -- Financial and
Transaction Risks -- Repurchase of Notes Upon
Subsequent Change of Control" and "-- Subordination
of the Notes and Guarantees" and "Description of
the Notes -- Repurchase at the Option of
Holders -- Change of Control," and "-- Events of
Default and Remedies."
RANKING.................... The Notes will be general, unsecured obligations of
the Company, will be subordinated in right of
payment to all existing and future Senior Debt of
the Company, which includes borrowings under the
New Credit Facility and any other permitted
indebtedness which does not expressly provide that
it is on a parity with or subordinated in right of
payment to the Notes. The claims of the holders of
the Notes will be subordinated to Senior Debt,
which, as of March 31, 1996, on a pro forma basis
after giving effect to the Recapitalization and the
application of the proceeds thereof, would have
been approximately $349.2 million, representing the
initial borrowings under the New Credit Facility.
See "Capitalization," "Description of the
Notes -- Subordination" and "Description of the New
Credit Facility."
GUARANTEES................. The Company's payment obligations under the Notes
will be jointly, severally and unconditionally
guaranteed on a senior subordinated basis (the
"Guarantees") by the Parent and each future
Material Restricted Subsidiary of the Company. As
of the date of the Indentures, the Company has no
Material Restricted Subsidiaries (generally, any
Restricted Subsidiary of the Company which, as of
the date of determination, represents more than 5%
of the Company's consolidated total assets or
income from operations for the most recent fiscal
year). The Guarantees will be subordinated to
Indebtedness of the Parent or the Subsidiary
Guarantors, as the case may be, to the same extent
and in the same manner as the Notes are
subordinated to Senior Debt. See "Description of
the Notes -- Guarantees" and "Description of the
New Credit Facility."
CERTAIN COVENANTS.......... The Senior Subordinated Notes will be issued
pursuant to an indenture (the "Senior Subordinated
Note Indenture") and the Discount Notes will be
issued pursuant to an indenture (the "Discount Note
Indenture" and, together with the Senior
Subordinated Note Indenture, the "Indentures"),
9
<PAGE> 11
each containing certain covenants that will, among
other things, limit the ability of the Company and
its Restricted Subsidiaries to incur additional
indebtedness and issue Disqualified Stock, pay
dividends, make distributions, make investments,
make certain other Restricted Payments, enter into
certain transactions with affiliates, dispose of
certain assets, incur liens securing pari passu or
subordinated indebtedness of the Company and engage
in mergers and consolidations. See "Description of
the Notes -- Certain Covenants."
USE OF PROCEEDS............ The net proceeds from the issuance of the Notes
offered hereby, together with the net proceeds from
the sale of shares of Series B Preferred Stock to
DNR, the initial borrowings under the New Credit
Facility, the net proceeds of the Rights Offering
and existing cash and investment balances, will be
used to repay and/or refinance substantially all of
Mesa's existing indebtedness. See "Use of
Proceeds."
---------------------
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in connection with an investment in the Notes offered hereby,
including information regarding Mesa's highly leveraged capital structure and
continuing losses, the uncertainty of natural gas and NGL prices and certain
risks associated with an investment in the Notes offered hereby.
10
<PAGE> 12
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth summary historical consolidated financial
data with respect to Mesa for the periods ended and as of the dates indicated.
The summary historical consolidated statement of operations data for the years
ended December 31, 1993, 1994 and 1995 and the historical consolidated balance
sheet data as of December 31, 1994 and 1995 are derived from the audited
Consolidated Financial Statements of the Parent included elsewhere in this
Prospectus. The summary historical consolidated statement of operations data for
the years ended December 31, 1991 and 1992 and the summary historical
consolidated balance sheet data as of December 31, 1991, 1992 and 1993 are
derived from audited Consolidated Financial Statements of the Parent that are
not included in this Prospectus. The summary historical consolidated statement
of operations data for the three months ended March 31, 1995 and March 31, 1996
and the summary historical consolidated balance sheet data as of March 31, 1996
are derived from unaudited consolidated financial statements of the Parent. This
information should be read in conjunction with the Consolidated Financial
Statements of the Parent and the notes thereto appearing elsewhere in this
Prospectus and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." See "Selected Historical Financial Data."
The following table also sets forth certain unaudited summary pro forma
financial data of Mesa for the periods ended and as of the dates indicated. The
unaudited summary pro forma statement of operations data give effect to the
Recapitalization as if the Recapitalization had occurred on January 1, 1995. The
unaudited summary pro forma balance sheet data give effect to the
Recapitalization as if the Recapitalization had occurred on March 31, 1996. See
"Use of Proceeds." The unaudited summary pro forma financial data does not
purport to represent what Mesa's results of operations or financial condition
would actually have been had the Recapitalization been consummated as of such
dates or to project Mesa's results of operations or financial condition for any
future period or as of any future date. The unaudited summary pro forma
financial data should be read in conjunction with the Unaudited Pro Forma
Financial Information and the notes thereto. See "Unaudited Pro Forma Financial
Information" and the separate historical Consolidated Financial Statements of
the Parent and notes thereto appearing elsewhere in this Prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Parent is a holding company with no independent operations. The Parent
currently operates primarily through three wholly owned subsidiaries, including
the Company. Immediately prior to the First Closing, the other two subsidiaries
will be merged or liquidated into the Company, which will thereafter be the
Parent's only significant direct or indirect subsidiary. Accordingly, following
the First Closing, the consolidated assets, liabilities, stockholders' equity,
results of operations and cash flows of the Company will be the same as those of
the Parent.
11
<PAGE> 13
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Natural gas........................... $ 169.9 $ 157.6 $ 141.8 $ 139.6 $ 129.6 $ 35.9 $ 50.6
Natural gas liquids................... 62.0 59.7 61.4 72.7 75.3 18.2 23.1
Oil and condensate.................... 16.1 18.7 12.4 7.9 19.6 5.4 4.4
Other................................. 1.5 1.1 6.6 8.5 10.5 2.7 2.5
-------- -------- -------- -------- -------- -------- --------
Total revenues.......................... 249.5 237.1 222.2 228.7 235.0 62.2 80.6
-------- -------- -------- -------- -------- -------- --------
Costs and expenses:
Lease operating....................... 46.9 43.9 51.8 52.7 51.8 12.6 13.6
Production and other taxes............ 18.9 18.6 20.4 21.3 18.4 4.7 5.4
Exploration charges................... 4.7 10.0 2.7 5.2 6.6 1.3 .5
General and administrative............ 27.8 24.5 25.2 28.5 26.8 6.6 5.6
Depreciation, depletion and
amortization........................ 117.1 113.9 100.1 92.3 83.4 21.0 30.2
-------- -------- -------- -------- -------- -------- --------
Total costs and expenses................ 215.4 210.9 200.2 200.0 187.0 46.2 55.3
-------- -------- -------- -------- -------- -------- --------
Operating income........................ 34.1 26.2 22.0 28.7 48.0 16.0 25.3
Net interest expense (a)................ (134.3) (129.9) (131.3) (131.3) (132.7) (32.8) (34.5)
Other income (b)........................ 21.0 14.5 6.9 19.2 27.1 8.9 10.3
-------- -------- -------- -------- -------- -------- --------
Net income (loss)....................... $ (79.2) $ (89.2) $ (102.4) $ (83.4) $ (57.6) $ (7.9) $ 1.1
======== ======== ======== ======== ======== ======== ========
Net income (loss) per common share...... $ (2.05) $ (2.31) $ (2.61) $ (1.42) $ (0.90) $ (.12) $ .02
======== ======== ======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
EBITDA (c).............................. $ 155.9 $ 150.1 $ 124.8 $ 126.2 $ 138.0 $ 38.3 $ 56.0
Cash flows from operating activities.... 35.0 (28.4) 32.5 48.6 69.2 29.2 (2.2)
Cash flows from investing activities.... 399.7 (17.0) 37.5 (40.3) (41.4) (10.3) (10.0)
Cash flows from financing activities.... (310.3) (29.5) (88.5) (3.6) (22.1) 2.2 (21.2)
Net cash interest expense (d)........... 130.9 126.1 78.0 47.8 90.4 12.4 34.0
Capital expenditures.................... 31.9 69.2 29.6 32.6 42.3 7.0 9.8
Ratios:
EBITDA to net interest expense........ 1.2x 1.2x 1.0x 1.0x 1.0x 1.2x 1.6x
EBITDA to net cash interest expense... 1.2x 1.2x 1.6x 2.6x 1.5x 3.1x 1.7x
Earnings to fixed charges (e)......... NM NM NM NM NM NM 1.0x
Total debt to EBITDA.................. 8.4x 8.6x 10.0x 9.7x 9.0x NM NM
Pro Forma:
EBITDA (c)............................ $ 143.0 57.2
Net interest expense (b).............. 87.1 22.5
Net cash interest expense (d)......... 62.9 16.0
Pro Forma Ratios:
EBITDA to net interest expense........ 1.6x 2.5x
EBITDA to net cash interest expense... 2.3x 3.6x
Earnings to fixed charges (e)......... NM 1.4x
BALANCE SHEET DATA (END OF PERIOD):
Cash and investments (f)................ $ 260.3 $ 169.1 $ 150.0 $ 162.5 $ 187.4 $ 155.8
Total assets............................ 1,832.8 1,676.5 1,533.4 1,484.0 1,464.7 1,409.1
Long term debt, including current
maturities............................ 1,310.7 1,286.2 1,241.3 1,223.3 1,236.7 1,214.3
Stockholders' equity.................... 273.6 184.4 112.1 124.6 67.0 68.1
Pro forma:
Cash and investments.................. 1.0
Long term debt, including current
maturities.......................... 854.5
Stockholders' equity.................. 242.2
</TABLE>
- ---------------
(a) Net interest expense represents total interest expense less interest income.
(b) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Operations -- Other Income (Expense)" for
additional detail.
(c) EBITDA represents operating income plus exploration charges and
depreciation, depletion and amortization expense. EBITDA is not presented as
an indicator of Mesa's operating performance or as a measure of liquidity.
(d) During the periods presented, certain of Mesa's total interest expense
consisted of non-cash amortization of debt issuance costs and of accretion
of interest on certain discount notes. Such accreted interest was added to
the balance of the discount notes rather than paid in cash. Net cash
interest expense reflects net interest expense less amortization of debt
issuance costs and accretion of interest on discount notes.
(e) For the purpose of determining the ratio of earnings to fixed charges,
earnings are defined as net loss plus fixed charges. Fixed charges consist
of interest expense and capitalized interest. Earnings were inadequate to
cover fixed charges for the three month period ended March 31, 1995 by $7.9
million and for each of the years ended December 31, 1991 through December
31, 1995 by $79.2 million, $91.6 million, $105.3 million, $83.5 million and
$58.5 million, respectively. For the year ended December 31, 1995, on a pro
forma basis, earnings were inadequate to cover fixed charges by $7.9
million and were inadequate to cover fixed charges and preferred dividends
by $29.7 million. (f) At March 31, 1996, cash and investments includes
$115.8 million of cash and cash investments and $40.0 million of
investments.
12
<PAGE> 14
SUMMARY RESERVE AND PRODUCTION DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1991 1992 1993 1994 1995
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C> <C>
PROVED RESERVES(A)(B):
Natural gas (Bcf).......................................... 1,368.0 1,276.0 1,202.4 1,303.2 1,218.0
Natural gas liquids (MMBbls)............................... 79.3 80.1 79.2 84.4 101.9
Oil and condensate (MMBbls)................................ 4.0 7.3 3.3 5.0 9.5
Natural gas equivalents (Bcfe)............................. 1,867.3 1,800.4 1,697.1 1,839.8 1,886.5
Percentage proved developed................................ 98% 95% 96% 96% 95%
PRODUCTION DATA:
Natural gas (Bcf).......................................... 108.5 89.5 79.8 82.3 77.3
Natural gas liquids (MMBbls)............................... 4.7 4.8 5.1 6.9 6.6
Oil and condensate (MMBbls)................................ 0.8 1.0 0.7 0.5 1.2
Natural gas equivalents (Bcfe)............................. 141.5 124.5 114.5 127.1 123.9
PRICES AT DECEMBER 31(B):
Natural gas (per Mcf)...................................... $ 1.83 $ 1.94 $ 2.14 $ 1.66 $ 1.95
Natural gas liquids (per Bbl).............................. 14.57 12.34 10.97 12.98 11.87
FUTURE NET CASH FLOWS(B):
After tax.................................................. $2,204.2 $2,105.5 $2,066.2 $2,014.8 $2,152.8
Discounted at 10%, after tax............................... 995.2 1,037.2 986.9 934.2 966.2
Before tax................................................. 2,599.0 2,408.0 2,306.2 2,225.8 2,449.8
Discounted at 10%, before tax.............................. 1,181.0 1,167.7 1,068.7 988.3 1,040.4
RESERVE LIFE INDEX (YEARS)(C)................................ 13.2 14.5 14.8 14.5 15.2
RESERVE ADDITIONS (BCFE):
Extensions and discoveries................................. 10.1 82.6 9.8 9.2 48.5
Acquisitions............................................... 1.5 0.6 0.2 0.8 1.0
Revisions(a)............................................... (119.6) (6.3) 25.8 259.8 121.2
-------- -------- -------- -------- --------
Net additions (reductions)................................. (108.0) 76.9 35.8 269.8 170.7
======== ======== ======== ======== ========
RESERVE REPLACEMENT(D):
Total...................................................... (76)% 62% 31% 212% 138%
Total, excluding revisions................................. 8% 67% 9% 8% 40%
COSTS INCURRED:
Acquisition................................................ $ 5.4 $ 0.1 $ 0.1 $ 3.0 $ 0.4
Exploration................................................ 7.9 15.2 2.7 5.2 8.2
Development................................................ 12.4 6.9 2.4 14.0 14.6
-------- -------- -------- -------- --------
Total acquisition, exploration and development........... 25.7 22.2 5.2 22.2 23.2
Facilities................................................. 10.3 49.5 24.1 11.5 15.7
-------- -------- -------- -------- --------
Total costs incurred..................................... $ 36.0 $ 71.7 $ 29.3 $ 33.7 $ 38.9
======== ======== ======== ======== ========
FINDING COSTS (PER MCFE)(E):
Total...................................................... $ NM $ 0.93 $ 0.82 $ 0.12 $ 0.23
Total, excluding revisions and facilities.................. 2.22 0.27 0.52 2.22 0.47
PER MCFE DATA:
Total revenue.............................................. $ 1.76 $ 1.90 $ 1.88 $ 1.73 $ 1.81
Production costs(f)........................................ 0.47 0.50 0.63 0.58 0.57
-------- -------- -------- -------- --------
Gross margin(g)............................................ 1.29 1.40 1.25 1.15 1.24
General and administrative expense......................... 0.20 0.20 0.22 0.23 0.22
-------- -------- -------- -------- --------
Gross profit(h)............................................ $ 1.09 $ 1.20 $ 1.03 $ 0.92 $ 1.02
======== ======== ======== ======== ========
</TABLE>
- ---------------
(a) As of December 31, 1991, 1992 and 1993, the proved oil and gas reserves for
substantially all of Mesa's properties were estimated by independent
petroleum engineering consultants. Estimates of proved reserves as of
December 31, 1994 and 1995 were prepared by Mesa's internal reserve
engineers. See "Business -- Reserves."
(b) Proved reserves and future net cash flows were estimated in accordance with
Securities and Exchange Commission (the "Commission") guidelines. Prices at
December 31 in each of the years 1991 through 1995 were used in the
calculation of proved reserves and future net cash flows and were held
constant through the periods of estimated production, except as otherwise
provided by contract, in accordance with Commission guidelines.
(c) The reserve life index is calculated as proved reserves divided by annual
production, both on a Bcfe basis.
(d) Reserve replacement is calculated as reserve additions (reductions) divided
by annual production, both on a Bcfe basis. See "Business -- Reserves."
(e) Finding costs are calculated as costs incurred divided by reserve additions
(reductions). The average five year finding costs for the period ended
December 31, 1995 were $.47 per Mcfe from all sources and $.60 per Mcfe from
all sources excluding revisions and facilities. See "Business -- Reserves."
(f) Production costs includes lease operating expenses and production and other
taxes.
(g) Gross margin is calculated as total revenue less production costs.
(h) Gross profit is calculated as gross margin less general and administrative
expense.
13
<PAGE> 15
RISK FACTORS
Prospective investors should consider carefully the following factors
relating to the business of Mesa and the Offering, together with the information
and financial data set forth elsewhere in this Prospectus, prior to making an
investment decision.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical fact included in this Prospectus,
including without limitation, the statements under "Prospectus Summary," "Risk
Factors -- Financial and Transaction Risks -- High Leverage," "Unaudited Pro
Forma Financial Information," "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Capital Resources and Liquidity" and
Notes 2 and 4 to the Consolidated Financial Statements of the Parent located
elsewhere herein regarding Mesa's financial position and liquidity, the amount
of and its ability to make debt service payments, its strategic alternatives,
financial instrument covenant compliance, cost reduction efforts and other
matters, are forward-looking statements. Although Mesa believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct.
Important factors that could cause actual results to differ materially from
Mesa's expectations are disclosed in this Prospectus, including without
limitation in conjunction with the forward-looking statements included in this
Prospectus. All subsequent written and oral forward-looking statements
attributable to Mesa or persons acting on its behalf are expressly qualified in
their entirety by the Cautionary Statements.
FINANCIAL AND TRANSACTION RISKS
High Leverage
Although completion of the Recapitalization will result in a significant
reduction of debt, Mesa will continue to be highly leveraged. After giving
effect to the consummation of the Recapitalization and the application of the
net proceeds therefrom, Mesa would have had total pro forma long term
indebtedness (including current maturities) of approximately $854.5 million and
stockholders' equity of approximately $242.2 million at March 31, 1996. See
"Capitalization" and "Unaudited Pro Forma Financial Information."
Mesa's level of indebtedness following the Recapitalization will have
several important effects on its future operations, including that (i) a
substantial portion of Mesa's cash flow from operations will be dedicated to the
payment of interest on its indebtedness and will not be available for other
purposes, (ii) the covenants contained in the New Credit Facility and in the
Indentures will require Mesa to meet certain financial tests and other
restrictions, will limit its ability to borrow additional funds, to grant liens
and to dispose of assets and will affect Mesa's flexibility in planning for and
reacting to changes in its business, including possible acquisition activities,
and (iii) Mesa's ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions, general corporate purposes
or other purposes may be impaired.
Mesa's ability to meet its debt service obligations and to reduce its total
indebtedness will be dependent upon Mesa's future performance, which will be
subject to oil and gas prices, Mesa's level of production and general economic
conditions and to financial, business and other factors affecting the operations
of Mesa, many of which are beyond its control. There can be no assurance that
Mesa's future performance will not be adversely affected by such changes in oil
and gas prices and/or production nor by such economic conditions and/or
financial, business and other factors.
History of Losses
Mesa had net losses of $79.2 million, $89.2 million, $102.4 million, $83.4
million and $57.6 million for the years ended December 31, 1991, 1992, 1993,
1994 and 1995, respectively. Although Mesa reported net income of $1.1 million
for the first quarter of 1996, Mesa expects to report a net loss for the year.
Giving effect to the Recapitalization and the application of the proceeds
therefrom to repay and/or refinance substantially all of Mesa's existing
indebtedness as if the Recapitalization and application of the proceeds had
occurred on January 1, 1995, Mesa's pro forma net loss (before preferred stock
dividends) for the year ended December 31, 1995 would have been $7.0 million and
pro forma net income for the three months ended March 31, 1996 would have been
$8.6 million. See "Unaudited Pro Forma Financial Information." In the first year
following consummation of the Recapitalization, annual interest expense is
expected to be approximately $90 million, with approximately $65 million payable
in cash, which amounts are expected in subsequent years to vary based on
outstanding borrowings and interest rates under the New Credit Facility and the
accretion of
14
<PAGE> 16
interest on the Discount Notes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The 8% dividend on the Preferred
Stock will be paid in kind(with additional shares of Preferred Stock) rather
than in cash for the first four years following issuance. Notwithstanding the
improvements in Mesa's capital structure and financial flexibility expected to
result from the Recapitalization, Mesa may continue to incur net losses and, to
the extent that natural gas prices are low, such losses may be substantial. See
"-- Business and Industry Risks -- Volatility of Natural Gas and NGL Prices."
Accountants' Going Concern Qualification
Mesa believes the successful completion of the Recapitalization will
position it to continue as a going concern and to pursue its business
strategies. Mesa's independent public accountants' report on the consolidated
financial statements of Mesa for the year ended December 31, 1995 was dated
March 6, 1996. This report included a discussion of Mesa's financial condition
and liquidity issues and expressed substantial doubt about Mesa's ability to
continue as a going concern. As the Recapitalization had not been completed as
of the date of their report, the independent public accountants did not consider
the effects of the Recapitalization in their assessment of Mesa's ability to
continue as a going concern.
Subordination of the Notes and Guarantees
The Notes and Guarantees will be subordinated in right of payment to all
existing and future Senior Debt of the Company, which includes all indebtedness
under the New Credit Facility. As of March 31, 1996, after giving pro forma
effect to the Recapitalization and the application of the net proceeds
therefrom, the Company would have had Senior Debt aggregating approximately $350
million (excluding $11.4 million in letters of credit) and would have had up to
an additional approximately $175 million available under the New Credit Facility
which, if borrowed, would be included as Senior Debt. In the event of a
liquidation, dissolution, reorganization, bankruptcy or any similar proceeding
regarding the Company, the assets of the Company will be available to pay
obligations on the Notes only after Senior Debt of the Company has been paid in
full. Accordingly, there may not be sufficient funds remaining to pay amounts
due on all or any of the Notes. See "Description of the Notes -- Subordination."
In addition to being subordinated to all existing and future Senior Debt of the
Company, the Notes and Guarantees will not be secured by any of the Company's
assets, unlike the borrowings under the New Credit Facility.
Absence of Public Market for the Notes
There is no existing trading market for the Notes. Mesa does not intend to
apply for listing of the Notes on a securities exchange or to seek approval for
quotation through an automated quotation system. The Underwriters have advised
Mesa that they currently intend to make a market in the Notes, but they are not
obligated to do so and they may discontinue such market-making at any time
without notice. Accordingly, no assurance can be given that an active trading
market for the Notes will develop, or as to the liquidity thereof. If a trading
market develops for the Notes, the future trading prices thereof will depend on
many factors including, among other things, Mesa's results of operations,
prevailing interest rates, the market for securities with similar terms and the
market for securities of other companies in similar businesses.
Original Issue Discount
The Discount Notes will be issued at a substantial discount from their
principal amount at maturity. Consequently, purchasers of the Discount Notes
generally will be required to include amounts in gross income for federal income
tax purposes in advance of receipt of the cash payments to which the income is
attributable. See "Certain Federal Income Tax Considerations" for a more
detailed discussion of the federal income tax consequences to the holders of the
Discount Notes resulting from the purchase, ownership and disposition of the
Discount Notes. If a bankruptcy case is commenced by or against the Company
under federal bankruptcy law after the issuance of the Discount Notes, the claim
of a holder of the Discount Notes with respect to the principal amount thereof
may be limited to an amount equal to the sum of (i) that initial public offering
price of the Discount Notes and (ii) that portion of the original issue discount
which is not deemed to constitute "unmatured interest" for the purposes of
federal bankruptcy law. Any original issue discount that was not accreted as of
such bankruptcy filing would constitute "unmatured interest."
Fraudulent Conveyance
Management of Mesa believes that the indebtedness represented by the Notes
and the Parent Guarantee is being incurred for proper purposes and in good
faith, and that, based on present forecasts, asset valuations and the other
financial information, after the consummation of the Recapitalization, Mesa will
be solvent, will
15
<PAGE> 17
have sufficient capital to carry on its business and will be able to pay its
debts as they mature. See, however, "-- High Leverage." Notwithstanding
management's belief, however, if a court of competent jurisdiction in a suit by
an unpaid creditor or a representative of creditors (such as a trustee in
bankruptcy or a debtor-in-possession) were to find that, at the time of the
incurrence of such indebtedness, the Company or the Parent were insolvent, were
rendered insolvent by reason of such incurrence, were engaged in a business or
transaction for which its remaining assets constituted unreasonably small
capital, intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they matured, or intended to hinder, delay or
defraud its creditors, and that the indebtedness was incurred for less than
reasonably equivalent value, then such court could, among other things, (i) void
all or a portion of the Company's or the Parent's obligations to the holders of
the Notes or the Parent Guarantee, the effect of which would be that the holders
of the Notes may not be repaid in full and/or (ii) subordinate the Company's or
the Parent's obligations to the holders of the Notes to other existing and
future indebtedness of the Company and/or the Parent to a greater extent than
would otherwise be the case, the effect of which would be to entitle such other
creditors to be paid in full before any payment could be made on the Notes or
the Guarantee.
Control of Board by DNR
Upon DNR's purchase of the Series B Preferred Stock at the First Closing,
DNR will elect a majority of the directors on Mesa's Board in accordance with
the special voting rights granted to it as holder of the Series B Preferred
Stock. Such special voting rights will continue for so long as DNR meets certain
minimum ownership requirements. See "Description of the Stock Purchase Agreement
and the Rights Offering -- The Stock Purchase Agreement." DNR's Board
representatives will have significant power and authority over the management
and affairs of Mesa and consequently, DNR will have significant control over
Mesa. DNR intends to implement an orderly transition and succession plan for
Mesa's senior management. Such plans are being developed. In this regard, DNR
has requested that Boone Pickens, the Chairman of the Board and Chief Executive
Officer of Mesa, assist DNR in identifying and retaining a new Chief Executive
Officer and that he resign when such person is retained. Mr. Pickens, who will
remain on the Board of Directors following the Recapitalization, has agreed to
assist with this transition. There can be no assurance, however, that DNR's
transition and succession plans will not cause disruption to the business and
operations of Mesa. Although Mesa expects to benefit from the participation of
DNR's Board representatives, there can be no assurances regarding the effect
that DNR's influence on and participation in the management of Mesa will have on
Mesa's financial condition and results of operations. See "Management -- DNR
Nominees to the Board of Directors."
Repurchase of Notes Upon Subsequent Change of Control
Upon the occurrence of a Change of Control (as defined in the Indentures)
subsequent to the purchase of Series B Preferred Stock by DNR, each holder of
Notes may require Mesa to repurchase all or a portion of such holder's Notes at
101% of the principal amount (or Accreted Value, as applicable) of the Notes,
together with accrued and unpaid interest, if any, to the date of repurchase.
Further, under the New Credit Facility, an event of default will occur upon a
change of control (as defined in the New Credit Facility). In such
circumstances, the lenders could require the repayment of the borrowings under
the New Credit Facility. Because the Notes will be subordinate in right of
payment to the indebtedness outstanding under the New Credit Facility and all
other existing and future Senior Debt, absent a waiver the New Credit Facility
and any such other Senior Debt would be paid in full prior to any repurchase of
the Notes upon a Change of Control. Mesa may not have sufficient financial
resources to repay all of the outstanding Senior Debt, the Notes and the other
indebtedness that would become payable upon the occurrence of such Change of
Control. The failure of the Company to repurchase the Notes as required under
the Indentures upon a Change of Control will give the Trustees and the Holders
of the Notes certain rights to declare the principal of and accrued but unpaid
interest on the Notes or, in the case of the Discount Notes prior to
, 2001, the Accreted Value of such Discount Notes, to be due and payable
immediately. See "Description of the Notes -- Events of Defaults and Remedies."
BUSINESS AND INDUSTRY RISKS
Volatility of Natural Gas and NGL Prices
Revenues generated from Mesa's operations are highly dependent upon the
sales prices of, and demand for, natural gas and NGLs. Historically, the markets
for natural gas and NGLs have been volatile and are likely to continue to be
volatile in the future. Prices for natural gas and NGLs are subject to wide
fluctuation in response to market uncertainty, changes in supply and demand and
a variety of additional factors, all of which are beyond the control of Mesa.
These factors include domestic and foreign political conditions, the overall
16
<PAGE> 18
level of supply of and demand for oil, natural gas and natural gas liquids, the
price of imports of oil and natural gas, weather conditions, the price and
availability of alternative fuels and overall economic conditions. Mesa's future
financial condition and results of operations will be dependent, in part, upon
the prices received for Mesa's natural gas production, as well as the costs of
acquiring, finding, developing and producing reserves.
As of December 31, 1995, approximately 65% of Mesa's proved reserves,
calculated on an energy-equivalent basis, were natural gas and substantially all
of its other reserves were NGLs. Substantially all of Mesa's sales of natural
gas and NGLs are made in the spot market, or pursuant to contracts based on spot
market prices, and not pursuant to long term, fixed price contracts. Any
significant decline in prices for natural gas and NGLs could have a material
adverse effect on Mesa's financial condition, results of operations and
quantities of reserves recoverable on an economic basis. Should the industry
experience significant price declines from current levels or other adverse
market conditions, Mesa may not be able to generate sufficient cash flows from
operations to meet its obligations and make planned capital expenditures.
The availability of a ready market for Mesa's natural gas and NGL production
also depends on a number of factors, including the demand for and supply of
natural gas and NGLs and the proximity of reserves to, and the capacity of, oil
and gas gathering systems, pipelines or trucking and terminal facilities.
Use and Risks of Hedging Transactions and Speculative Investments
In order to manage its exposure to price risks in the marketing of its oil
and natural gas, Mesa has in the past and may in the future enter into oil and
natural gas futures contracts on the New York Mercantile Exchange ("NYMEX"),
fixed price delivery contracts and financial swaps as hedging devices. While
intended to reduce the effects of volatility of the price of oil and natural
gas, such transactions may limit potential gains by Mesa if oil and natural gas
prices were to rise substantially over the price established by the hedge. In
addition, such transactions may expose Mesa to the risk of financial loss in
certain circumstances, including instances in which (i) production is less than
expected, (ii) there is a widening of price differentials between delivery
points for Mesa's production and Henry Hub (in the case of NYMEX futures
contracts) or delivery points required by fixed price delivery contracts to the
extent they differ from those of Mesa's production, (iii) Mesa's customers or
the counterparties to its futures contracts fail to purchase or deliver the
contracted quantities of oil or natural gas or (iv) a sudden, unexpected event
materially impacts oil or natural gas prices. Mesa also invests from time to
time in oil and gas or other futures contracts which are not intended to be
hedges of its oil and gas production. Following the Recapitalization,
speculative investments in energy futures contracts, which in prior periods have
been profitable, are expected to be limited. After May 7, 1996, Mesa had no open
speculative positions in energy futures contracts. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Results of
Operations" and "-- Other" and Note 3 of Notes to the Parent's Consolidated
Financial Statements appearing elsewhere in this Prospectus.
Reserves and Future Net Cash Flows
Information relating to Mesa's proved oil and gas reserves is based upon
engineering estimates. Reserve engineering is a subjective process of estimating
the recovery from underground accumulations of oil and natural gas that cannot
be measured in an exact manner, and the accuracy of any reserve estimate is a
function of the quality of available data and of engineering and geological
interpretation and judgment. Estimates of economically recoverable oil and gas
reserves and of future net cash flows necessarily depend upon a number of
variable factors and assumptions, such as historical production from the area
compared with production from other producing areas, the assumed effects of
regulations by governmental agencies and assumptions concerning future oil and
gas prices, future operating costs, severance and excise taxes, development
costs and workover and remedial costs, all of which may in fact vary
considerably from actual results. Because all reserve estimates are to some
degree speculative, the quantities of oil and natural gas that are ultimately
recovered, production and operation costs, the amount and timing of future
development expenditures and future oil and natural gas sales prices may all
vary from those assumed in these estimates and such variances may be material.
In addition, different reserve engineers may make different estimates of reserve
quantities and cash flows based upon the same available data. See
"Business -- Reserves."
The present values of estimated future net cash flows referred to in this
Prospectus should not be construed as the current market value of the estimated
proved oil and gas reserves attributable to Mesa's properties. In accordance
with applicable requirements of the Commission, the estimated discounted future
net cash flows from proved reserves are generally based on prices and costs as
of the date of the estimate, whereas actual future prices and costs may be
materially higher or lower. Actual future net cash flows also will be affected
by factors such as the amount and timing of actual production, supply and demand
for oil and gas,
17
<PAGE> 19
curtailments or increases in consumption by gas purchasers and changes in
governmental regulations or taxation. 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, and any future limitation
on production would affect the expected decline in reserves. See
"Business -- Production." The timing of actual future net cash flows from proved
reserves, and thus their actual present value, will be affected by the timing of
both the production and the incurrence of expenses in connection with
development and production of oil and gas properties. In addition, the 10%
discount factor, which is required by the Commission to be used to calculate
discounted future net cash flows for reporting purposes, is not necessarily the
most appropriate discount factor based on interest rates in effect from time to
time and risks associated with Mesa's business or the oil and gas industry in
general.
The information set forth in this Prospectus includes revisions of certain
reserve estimates attributable to proved properties included in the preceding
year's estimates. Such revisions reflect additional information from subsequent
activities, production history of the properties involved and any adjustments in
the projected economic life of such properties resulting from changes in product
prices. In addition, the upward revisions at year end 1994 reflect a change by
Mesa to the use of reserve estimates prepared by Mesa's internal reserve
engineers instead of estimates prepared by an independent petroleum engineering
firm. See "Business -- Reserves." Any downward revisions in the future could
adversely affect Mesa's financial condition, borrowing base under the New Credit
Facility, future prospects and market value of its securities.
Replacement of Reserves
Mesa's future performance depends in part upon its ability to acquire, find
and develop additional oil and gas reserves that are economically recoverable.
Without successful acquisition, development or exploration activities, Mesa's
reserves will decline. No assurances can be given that Mesa will be able to
acquire or find and develop additional reserves on an economic basis.
Mesa's business is capital intensive and, to maintain its asset base of
proved oil and gas reserves, a significant amount of cash flow from operations
must be reinvested in property acquisitions, development or exploration
activities. To the extent cash flow from operations is reduced and external
sources of capital become limited or unavailable, Mesa's ability to make the
necessary capital investments to maintain or expand its asset base would be
impaired. Without such investment, Mesa's oil and gas reserves would decline.
In recent years, the majority of Mesa's capital expenditures have been
dedicated to developing and upgrading its existing long lived 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. Relatively modest expenditures have been
made to explore for, develop or acquire new reserve additions. In order to
increase reserves and production, Mesa must continue its development and
exploration drilling program or undertake other replacement activities.
Following completion of the Recapitalization, Mesa's strategy will include
increasing its reserve base through acquisitions of producing properties and
continued exploitation of its existing properties. The successful acquisition of
producing properties requires an assessment of recoverable reserves, future oil
and gas prices and operating costs, potential environmental and other
liabilities and other factors. Such assessments are necessarily inexact and
their accuracy inherently uncertain. There can be no assurance that Mesa's
acquisition activities and exploration and development projects will result in
increases in reserves. Mesa's operations may be curtailed, delayed or canceled
as a result of lack of adequate capital and other factors, such as title
problems, weather, compliance with governmental regulations or price controls,
mechanical difficulties or shortages or delays in the delivery of equipment.
Furthermore, while Mesa's revenues may increase if prevailing gas and oil prices
increase significantly, Mesa's finding costs for additional reserves could also
increase. In addition, the costs of exploration and development may materially
exceed initial estimates. For a discussion of Mesa's reserves, see
"Business -- Properties" and "-- Reserves."
Operating Hazards; Limited Insurance Coverage
Mesa's operations are subject to hazards and risks inherent in drilling for
and production and transportation of natural gas and oil, such as fires, natural
disasters, explosions, encountering formations with abnormal pressures,
blowouts, cratering, pipeline ruptures and spills, any of which can result in
loss of hydrocarbons, environmental pollution, personal injury claims, and other
damage to properties of Mesa and others. These risks could result in substantial
losses to Mesa due to injury and loss of life, severe damage to and destruction
of property and equipment, pollution and other environmental damage and
suspension of operations. Moreover, Mesa's Gulf of Mexico offshore operations
are subject to a variety of operating risks peculiar to the marine environment,
such as hurricanes or other adverse weather conditions, to more extensive
18
<PAGE> 20
governmental regulation, including regulations that may, in certain
circumstances, impose strict liability for pollution damage, and to interruption
or termination of operations by governmental authorities based on environmental
or other considerations.
As protection against operating hazards, Mesa maintains insurance coverage
against some, but not all, potential losses. Mesa's coverages include, but are
not limited to, operator's extra expense, physical damage on certain assets,
employer's liability, comprehensive general liability, automobile, workers'
compensation and loss of production income insurance and limited coverage for
sudden environmental damages, but Mesa does not believe that insurance coverage
for environmental damages that occur over time is available at a reasonable
cost. Moreover, Mesa does not believe that insurance coverage for the full
potential liability that could be caused by sudden environmental damages is
available at a reasonable cost. Accordingly, Mesa may be subject to liability or
may lose substantial portions of its properties in the event of environmental
damages. The occurrence of an event that is not fully covered by insurance could
have an adverse impact on Mesa's financial condition and results of operations.
Governmental Regulation
General. Mesa's operations are affected from time to time in varying degrees
by political developments and federal and state laws and regulations. In
particular, oil and natural gas production, operations and economics are or have
been affected by price controls, taxes and other laws relating to the oil and
natural gas industry, by changes in such laws and by changes in administrative
regulations. Mesa cannot predict how existing laws and regulations may be
interpreted by enforcement agencies or court rulings, whether additional laws
and regulations will be adopted, or the effect such changes may have on its
business or financial condition. See "Business -- Regulation and Prices."
Environmental. Mesa's operations are subject to numerous laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. These laws and regulations
require the acquisition of a permit before drilling commences, restrict the
types, quantities and concentration of various substances that can be released
into the environment in connection with drilling and production activities,
limit or prohibit drilling activities on certain lands lying within wilderness,
wetlands and other protected areas, and impose substantial liabilities for
pollution which might result from Mesa's operations. Moreover, the recent trend
toward stricter standards in environmental legislation and regulation is likely
to continue. For instance, legislation has been proposed in Congress from time
to time that would reclassify certain crude oil and natural gas exploration and
production wastes as "hazardous wastes" which would make the reclassified wastes
subject to much more stringent handling, disposal and clean-up requirements. If
such legislation were to be enacted, it could have a significant impact on the
operating costs of Mesa, as well as the oil and gas industry in general.
Initiatives to further regulate the disposal of crude oil and natural gas wastes
are also pending in certain states, and these various initiatives could have a
similar impact on Mesa. Mesa could incur substantial costs to comply with
environmental laws and regulations. In addition to compliance costs, government
entities and other third parties may assert substantial liabilities against
owners and operators of oil and gas properties for oil spills, discharge of
hazardous materials, remediation and clean-up costs and other environmental
damages, including damages caused by previous property owners. The imposition of
any such liabilities on Mesa could have a material adverse effect on Mesa's
financial condition and results of operations.
The Oil Pollution Act of 1990 imposes a variety of regulations on
"responsible parties" related to the prevention of oil spills. The
implementation of new, or the modification of existing, environmental laws or
regulations, including regulations promulgated pursuant to the Oil Pollution Act
of 1990, could have a material adverse impact on Mesa. See
"Business -- Regulation and Prices -- Environmental Matters."
Competition
Mesa operates in the highly competitive areas of natural gas and oil
production, development and exploration with other companies. Factors affecting
Mesa's ability to compete in the marketplace include the availability of funds
and information relating to a property, the standards established by Mesa for
the minimum projected return on investment, the availability of alternate fuel
sources and the intermediate transportation of gas. Mesa's competitors include
major integrated oil companies and a substantial number of independent energy
companies, many of which may have substantially larger financial resources,
staffs and facilities than Mesa.
19
<PAGE> 21
USE OF PROCEEDS
The total proceeds from the Recapitalization are estimated to be
approximately $1.1 billion (including net proceeds from the Offering estimated
at $485.5 million). The following table sets forth the proposed sources and uses
of funds of the Recapitalization, after giving effect to the First Closing and
the Second Closing, assuming the Recapitalization had been consummated as of
March 31, 1996. For a description of the New Credit Facility, the Stock Purchase
Agreement, the Preferred Stock and the Rights Offering, see "Description of the
New Credit Facility" and "Description of the Stock Purchase Agreement and the
Rights Offering."
<TABLE>
<CAPTION>
AMOUNTS
---------------------
<S> <C>
(DOLLARS IN MILLIONS)
SOURCES
New Credit Facility(a)................................................... $ 349.2
Senior Subordinated Notes................................................ 325.0
Discount Notes........................................................... 175.0
Preferred Stock.......................................................... 265.0
Cash and investments(b).................................................. 219.9
--------
Total sources.......................................................... $ 1,334.1
========
USES
Repayment of HCLP Secured Notes(c)....................................... $ 492.3
Repayment of Existing Credit Facility (d)................................ 51.1
Redemption of 12 3/4% Secured Discount Notes due June 30, 1998........... 617.4
Repayment of 12 3/4% Discount Notes due June 30, 1996.................... 39.7
Redemption of 13 1/2% Subordinated Notes due May 1, 1999................. 7.6
Prepayment premium with respect to HCLP Secured Notes (e)................ 64.0
Fees and expenses relating to the Offering............................... 14.5
Other fees and expenses relating to the Recapitalization(f).............. 20.5
Accrued interest......................................................... 27.0
--------
Total uses............................................................. $ 1,334.1
========
</TABLE>
- ---------------
(a) Reflects initial borrowings under the $525 million New Credit Facility. Does
not include approximately $11.4 million in letters of credit to be
outstanding.
(b) Includes approximately $114.8 million in cash and cash investments, $40.0
million in investments, $56.5 million in restricted cash of HCLP and $8.7
million of refundable prepaid interest as shown on the Parent's Consolidated
Balance Sheets as of March 31, 1996. This represents substantially all of
Mesa's cash and cash investments, investments and restricted cash at March
31, 1996.
(c) The HCLP Secured Notes were issued by HCLP in 1991, are secured by Mesa's
Hugoton field properties and are due in semiannual installments through
August 2012. The HCLP Secured Notes outstanding at March 31, 1996 bear
interest at fixed rates ranging from 9.05% to 11.3% per annum (weighted
average 10.35%).
(d) Mesa's Existing Credit Facility is secured by a first lien on the West
Panhandle field properties held by the Company, the Parent's equity interest
in the Company and a 76% limited partnership interest in HCLP and is due in
various installments through June 1997. The Existing Credit Facility bears
interest at the lesser of a Eurodollar rate plus 2 1/2% or the prime rate
plus 1/2% (7.92% at March 31, 1996). At March 31, 1996, the Existing Credit
Facility also supported letters of credit totaling $11.4 million that are
not included in the table above.
(e) The amount of the prepayment premium that will be due upon early retirement
of the HCLP Secured Notes is based on prevailing interest rates as of the
date of repayment. Such premium would have totaled approximately $64.0
million on March 31, 1996 and approximately $54.6 million on June 7, 1996.
(f) Includes $9.3 million payable to DNR pursuant to the Stock Purchase
Agreement. See "Description of the Stock Purchase Agreement and the Rights
Offering."
20
<PAGE> 22
CAPITALIZATION
The following table sets forth the unaudited historical consolidated cash
and investments, current maturities of long term debt and capitalization of the
Parent as of March 31, 1996, as adjusted to give effect to (i) the
Recapitalization and the application of the proceeds thereof (assuming proceeds
of $1.1 billion and assuming that all Rights are exercised in full) as described
under "Use of Proceeds," and (ii) certain amendments to the Parent's articles of
incorporation increasing the authorized capital stock, as if such
Recapitalization had been consummated and such amendments had been effected on
March 31, 1996. This table should be read in conjunction with the Consolidated
Financial Statements of the Parent and the related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
--------------------------
HISTORICAL AS ADJUSTED
---------- -----------
(DOLLARS IN MILLIONS,
EXCEPT SHARE DATA)
<S> <C> <C>
Cash and investments (a)...................................................... $ 155.8 $ 1.0
======== ========
Current maturities of long term debt (b)...................................... $ 92.5 $ 5.3
-------- --------
Long term debt:
HCLP Secured Notes.......................................................... 457.3 --
Existing Credit Facility (c)................................................ 38.6 --
12 3/4% Secured Discount Notes due 1998..................................... 618.4 --
Other debt.................................................................. 7.4 --
New Credit Facility (c)..................................................... -- 349.2
Senior Subordinated Notes offered hereby.................................... -- 325.0
Discount Notes offered hereby............................................... -- 175.0
-------- --------
Total long term debt (net of current maturities).......................... 1,121.7 849.2
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized, historical;
500,000,000 shares authorized, as adjusted
Series A Preferred Stock, 140,000,000 shares authorized, 58,407,080 shares
issued and outstanding, as adjusted (liquidation preference of
$132,000,000) (d)........................................................ -- 0.6
Series B Preferred Stock, 140,000,000 shares authorized, 58,849,557 shares
issued and outstanding, as adjusted (liquidation preference of
$133,000,000) (d)........................................................ -- 0.6
Series A Junior Participating Preferred Stock, 1,000,000 shares
authorized, no shares issued and outstanding, historical and as
adjusted................................................................. -- --
Common stock, $.01 par value, 100,000,000 shares authorized, historical;
600,000,000 shares authorized, as adjusted; 64,050,009 shares issued and
outstanding, historical and as adjusted................................... 0.6 0.6
Additional paid-in capital (e).............................................. 399.0 647.8
Accumulated deficit (f)..................................................... (331.5) (407.4)
-------- --------
Total stockholders' equity................................................ 68.1 242.2
-------- --------
Total capitalization.................................................... $1,282.3 $ 1,096.7
======== ========
</TABLE>
- ---------------
(a) Includes approximately $115.8 million in cash and cash investments and $40.0
million in investments.
(b) Consists of $35.0 million relating to the HCLP Secured Notes, $12.5 million
relating to the Existing Credit Facility, $39.7 million relating to the
12 3/4% Discount Notes due 1996 and $5.3 million of other debt.
(c) Reflects initial borrowings under the $525 million New Credit Facility.
Amounts under the New Credit Facility and Mesa's Existing Credit Facility do
not include approximately $11.4 million in letters of credit that are and
will continue to be outstanding.
(d) To the extent Rights are not exercised, the number of shares of Series A
Preferred Stock to be issued will decrease and the number of shares of
Series B Preferred Stock to be issued will increase by the same amount.
(e) The increase in additional paid-in capital represents the gross proceeds
from the sale of Preferred Stock of $265.0 million, less $1.2 million of
stated capital attributable to the Preferred Stock and less $15.0 million in
expenses related to the equity issuance.
(f) The increase in the amount of the accumulated deficit of $75.9 million
represents the sum of (i) a $64.0 million prepayment premium on the HCLP
Secured Notes plus (ii) the write-off of approximately $12.6 million of
unamortized debt issuance costs related to debt being repaid and/or
refinanced, less (iii) a $.7 million gain on the extinguishment of existing
long term debt.
21
<PAGE> 23
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited condensed consolidated pro forma financial
information (the "Pro Forma Financial Statements") is based on the historical
Consolidated Financial Statements of the Parent included elsewhere in this
Prospectus, adjusted to give effect to the Recapitalization. The Pro Forma
Statements of Operations give effect to the Recapitalization as if the
Recapitalization had occurred on January 1, 1995 and the Pro Forma Balance Sheet
gives effect to the Recapitalization as if the Recapitalization had occurred on
March 31, 1996. In addition, the Pro Forma Financial Statements give effect to
certain reductions in general and administrative expenses. See Note (h) below.
The Recapitalization is more fully described elsewhere in this Prospectus.
The Pro Forma Financial Statements should be read in conjunction with the
historical Consolidated Financial Statements of the Parent and the related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus. The Pro Forma
Financial Statements do not purport to represent what Mesa's results of
operations or financial condition would actually have been had the
Recapitalization been consummated and the reduction in general and
administrative expenses been achieved on the above indicated dates, or to
project Mesa's results of operations or financial condition for any future
period or as of any future date.
22
<PAGE> 24
PRO FORMA BALANCE SHEET
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
----------------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash investments................................ $ 115.8 $ (114.8)(a) $ 1.0
Investments.............................................. 40.0 (40.0)(a) --
Accounts receivable and other............................ 47.1 -- 47.1
-------- --------- --------
Total current assets................................... 202.9 (154.8) 48.1
-------- --------- --------
Property, plant and equipment, net......................... 1,062.0 -- 1,062.0
-------- --------- --------
Other assets:
Restricted cash of subsidiary partnership................ 56.5 (56.5)(b) --
Refundable prepaid interest.............................. 8.7 (8.7)(c) --
Debt issuance costs...................................... 12.6 7.4 (d) 20.0
Gas balancing receivable................................. 58.1 -- 58.1
Other.................................................... 8.3 -- 8.3
-------- --------- --------
Total other assets..................................... 144.2 (57.8) 86.4
-------- --------- --------
Total assets......................................... $1,409.1 $ (212.6) $1,196.5
======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities on long term debt..................... $ 92.5 $ (87.2)(e) $ 5.3
Accounts payable and accrued liabilities................. 30.7 -- 30.7
Interest payable......................................... 26.9 (26.9)(e) --
-------- --------- --------
Total current liabilities.............................. 150.1 (114.1) 36.0
-------- --------- --------
Long term debt............................................. 1,121.8 (272.6)(e) 849.2
-------- --------- --------
Deferred revenue and other liabilities..................... 69.1 -- 69.1
-------- --------- --------
Stockholders' equity:
Series A Preferred Stock................................. -- 0.6 (f) 0.6
Series B Preferred Stock................................. -- 0.6 (f) 0.6
Common Stock............................................. 0.6 -- 0.6
Additional paid-in capital............................... 399.0 248.8 (f) 647.8
Accumulated deficit...................................... (331.5) (75.9)(g) (407.4)
-------- --------- --------
Total stockholders' equity............................. 68.1 174.1 242.2
-------- --------- --------
Total liabilities and stockholders' equity........... $1,409.1 $ (212.6) $1,196.5
======== ========= ========
</TABLE>
(See Notes to Pro Forma Financial Statements)
23
<PAGE> 25
PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------------------
RECAPITALIZATION G&A
HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ---------------- ----------- ---------
<S> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PER SHARE DATA)
Revenues:
Natural gas................................ $ 129.6 $ -- $ -- $ 129.6
Natural gas liquids........................ 75.3 -- -- 75.3
Oil and condensate......................... 19.6 -- -- 19.6
Other...................................... 10.5 -- -- 10.5
------- ------ ------ -------
Total revenues............................... 235.0 -- -- 235.0
------- ------ ------ -------
Costs and expenses:
Lease operating............................ 51.8 -- -- 51.8
Production and other taxes................. 18.4 -- -- 18.4
Exploration charges........................ 6.6 -- -- 6.6
General and administrative................. 26.8 -- (5.0)(h) 21.8
Depletion, depreciation and amortization... 83.4 -- -- 83.4
------- ------ ------ -------
Total costs and expenses..................... 187.0 -- (5.0) 182.0
------- ------ ------ -------
Operating income............................. 48.0 -- 5.0 53.0
------- ------ ------ -------
Other income (expense):
Interest income............................ 15.9 (15.5)(i) -- 0.4
Interest expense........................... (148.6) 61.1(j) -- (87.5)
Investment gains........................... 18.4 -- -- 18.4
Other...................................... 8.7 -- -- 8.7
------- ------ ------ -------
Total other income (expense)................. (105.6) 45.6 -- (60.0)
------- ------ ------ -------
Net loss before Preferred Stock dividends.... (57.6) 45.6 5.0 (7.0)
------- ------ ------ -------
Preferred Stock dividends.................... -- (21.9)(k) -- (21.9)
------- ------ ------ -------
Net loss available to the common
stockholders............................... $ (57.6) $ 23.7 $ 5.0 $ (28.9)
======= ====== ====== =======
Net loss per common share.................... $ (0.90) $ (0.45)
======= =======
Average shares outstanding:
Common..................................... 64.1 -- -- 64.1
Series A Preferred Stock................... -- 60.2 -- 60.2
Series B Preferred Stock................... -- 60.6 -- 60.6
Other Data:
EBITDA(l)................................ $ 138.0 $ -- $ 5.0 $ 143.0
======= ====== ====== =======
</TABLE>
(See Notes to Pro Forma Financial Statements)
24
<PAGE> 26
PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1996
-------------------------------------------------------------
RECAPITALIZATION G&A
HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ---------------- ----------- ---------
<S> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PER SHARE DATA)
Revenues:
Natural gas................................... $ 50.6 $ -- $ -- $ 50.6
Natural gas liquids........................... 23.1 -- -- 23.1
Oil and condensate............................ 4.4 -- -- 4.4
Other......................................... 2.5 -- -- 2.5
------ ----- ------ -------
Total revenues.................................. 80.6 -- -- 80.6
------ ----- ------ -------
Costs and expenses:
Lease operating............................... 13.6 -- -- 13.6
Production and other taxes.................... 5.4 -- -- 5.4
Exploration charges........................... 0.5 -- -- .5
General and administrative.................... 5.6 -- (1.2)(h) 4.4
Depletion, depreciation and amortization...... 30.2 -- -- 30.2
------ ----- ------ -------
Total costs and expenses........................ 55.3 -- (1.2) 54.1
------ ----- ------ -------
Operating income................................ 25.3 -- 1.2 26.5
------ ----- ------ -------
Other income (expense):
Interest income............................... 3.2 (3.1)(i) -- 0.1
Interest expense.............................. (37.7) 15.1(j) -- (22.6)
Investment gains.............................. 8.8 -- -- 8.8
Other......................................... 1.5 -- -- 1.5
------ ----- ------ -------
Total other income (expense).................... (24.2) 12.0 -- (12.2)
------ ----- ------ -------
Net income before Preferred Stock dividends..... 1.1 12.0 1.2 14.3
------ ----- ------ -------
Preferred Stock dividends....................... -- (5.7)(k) -- (5.7)
------ ----- ------ -------
Net income available to the common
stockholders.................................. $ 1.1 $ 6.3 $ 1.2 $ 8.6
====== ===== ====== =======
Primary income per common share................. $ .02 $ .13
====== =======
Fully diluted income per common share........... $ .07
Average shares outstanding:
Common........................................ 64.1 64.1
Series A Preferred Stock...................... -- 63.2 63.2
Series B Preferred Stock...................... -- 63.7 63.7
Other Data:
EBITDA(l)................................... $ 56.0 $ -- $ 1.2 $ 57.2
====== ===== ====== =======
</TABLE>
(See Notes to Pro Forma Financial Statements)
25
<PAGE> 27
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(a) The pro forma adjustments assume that substantially all cash and investment
balances are utilized as a source of funds in the Recapitalization.
(b) Represents the balance as of March 31, 1996 of a restricted cash balance
within HCLP that is available to supplement cash flows from HCLP's
properties in the event such cash flows are not sufficient to fund required
interest and principal payments on the HCLP Secured Notes. Such restricted
cash will be available to repay the HCLP Secured Notes in connection with
the Recapitalization.
(c) Represents the amount to be refunded under a guaranteed investment contract
entered into upon issuance of the HCLP Secured Notes.
(d) The debt issuance cost adjustment of $7.4 million consists of approximately
$20.0 million related to the Notes offered hereby and the New Credit
Facility (primarily fees to underwriters, banks, investment advisors and
DNR), net of a charge of approximately $12.6 million representing
unamortized debt issuance costs associated with the debt to be repaid and/or
refinanced.
(e) Reflects the repayment and/or refinancing of substantially all of Mesa's
existing debt, including accrued interest, as a result of the
Recapitalization. See "Use of Proceeds" and "Capitalization."
(f) The Series A and Series B Preferred Stock are reflected at par value with
the remaining proceeds, net of issuance costs, reflected in additional
paid-in capital.
(g) Reflects a nonrecurring charge of $64.0 million related to a prepayment
premium to be paid on the redemption of the HCLP Secured Notes and the write
off of $12.6 million of unamortized debt issuance costs associated with the
debt to be repaid and/or refinanced, net of an approximately $0.7 million
gain associated with the extinguishment of the existing long term debt.
(h) In conjunction with the Recapitalization and the concurrent change of
control of the Board, Mesa has committed to reducing its staff and
eliminating certain departments and activities. This adjustment reflects the
elimination of 74 positions from the total of 385 at December 31, 1995, and
a significant downsizing of the natural gas vehicle equipment business.
Following is a summary of the general and administrative expense pro forma
adjustment:
<TABLE>
<CAPTION>
AMOUNT OF ADJUSTMENT
-----------------------------------------
YEAR ENDED THREE MONTHS ENDED
G&A PRO FORMA ADJUSTMENT DECEMBER 31, 1995 MARCH 31, 1996
----------------------------------------------------- ------------------ -------------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Personnel reductions................................. $3.6 $1.0
Natural gas vehicles................................. 1.4 0.2
---- ----
Total.............................................. $5.0 $1.2
==== ====
</TABLE>
In addition to the general and administrative adjustment shown above,
management believes that it will be able to reduce general and
administrative and operating overhead expenses in excess of those amounts
reflected in the pro forma adjustment (up to $5.0 million of additional
annual reductions) subsequent to the Recapitalization. This additional
amount is not reflected as an adjustment in the Pro Forma Statement of
Operations.
(i) Substantially all interest income associated with cash investments,
investments and restricted cash is eliminated on a pro forma basis to
reflect the use of substantially all such balances to effect the
Recapitalization.
26
<PAGE> 28
(j) Reflects the reduction of interest expense as a result of the
Recapitalization. Interest expense adjustments include the following:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED
1995 MARCH 31, 1996
------------ --------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Interest expense on existing debt.............................. $145.5 $ 36.8
Interest expense on the New Credit Facility (assumed 7.0%
average annual rate)......................................... (25.0) (6.3)
Interest expense on the Senior Subordinated Notes (assumed
11.0% annual rate)........................................... (36.8) (9.2)
Interest expense on the Discount Notes (assumed 12 1/4% annual
rate)........................................................ (22.6) (6.2)
------ ------
Total adjustment............................................. $ 61.1 $ 15.1
====== ======
</TABLE>
Interest expense on existing debt does not include approximately $3.1
million for the year ended December 31, 1995 and $0.9 million for the three
months ended March 31, 1996 representing the interest portion of the
administrative fee charged by CIG in connection with Mesa's West Panhandle
field operations. The effects of fluctuations of 0.125% and 0.250% in annual
interest rates in respect of the New Credit Facility on pro forma interest
expense would have been $0.4 million and $0.8 million, respectively, for the
year ended December 31, 1995 and $0.1 million and $0.2 million,
respectively, for the three months ended March 31, 1996.
(k) Reflects the pro forma adjustment for an 8% dividend on the Preferred Stock
payable quarterly in additional shares of Preferred Stock for at least the
first four years after issuance.
(l) EBITDA represents operating income plus exploration charges and
depreciation, depletion and amortization expense. EBITDA is not presented as
an indicator of Mesa's operating performance nor as a measure of liquidity.
27
<PAGE> 29
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected financial information of Mesa as of
the dates and for the periods indicated. The selected historical consolidated
statement of operations data for the three months ended March 31, 1995 and 1996
and for the years ended December 31, 1993, 1994 and 1995 and the historical
consolidated balance sheet data as of March 31, 1996 and as of December 31, 1994
and 1995 are derived from the Consolidated Financial Statements of the Parent
included elsewhere in this Prospectus. The selected historical consolidated
statement of operations data for the years ended December 31, 1991 and 1992 and
the selected historical consolidated balance sheet data as of December 31, 1991,
1992 and 1993 are derived from consolidated financial statements of the Parent
that are not included in this Prospectus. This table should be read in
conjunction with the Consolidated Financial Statements of the Parent and related
notes thereto included elsewhere in this Prospectus and "Management's Discussion
and Analysis of Financial Condition and Results of Operations." After the
Recapitalization, it is expected that the consolidated assets, liabilities,
stockholders' equity, results of operations and cash flows of the Company and
its subsidiaries will be the same as those of the Parent and its subsidiaries.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- ------ --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Natural gas.................................. $ 169.9 $ 157.6 $ 141.8 $ 139.6 $ 129.6 $ 35.9 $ 50.6
Natural gas liquids.......................... 62.0 59.7 61.4 72.7 75.3 18.2 23.1
Oil and condensate........................... 16.1 18.7 12.4 7.9 19.6 5.4 4.4
Other........................................ 1.5 1.1 6.6 8.5 10.5 2.7 2.5
-------- -------- -------- -------- -------- ------ --------
Total revenues................................. 249.5 237.1 222.2 228.7 235.0 62.2 80.6
-------- -------- -------- -------- -------- ------ --------
Costs and expenses:
Lease operating.............................. 46.9 43.9 51.8 52.7 51.8 12.6 13.6
Production and other taxes................... 18.9 18.6 20.4 21.3 18.4 4.7 5.4
Exploration charges.......................... 4.7 10.0 2.7 5.2 6.6 1.3 .5
General and administrative................... 27.8 24.5 25.2 28.5 26.8 6.6 5.6
Depreciation, depletion and amortization..... 117.1 113.9 100.1 92.3 83.4 21.0 30.2
-------- -------- -------- -------- -------- ------ --------
Total costs and expenses....................... 215.4 210.9 200.2 200.0 187.0 46.2 55.3
-------- -------- -------- -------- -------- ------ --------
Operating income............................... 34.1 26.2 22.0 28.7 48.0 16.0 25.3
Net interest expense (a)....................... (134.3) (129.9) (131.3) (131.3) (132.7) (32.8) (34.5)
Other income (b)............................... 21.0 14.5 6.9 19.2 27.1 8.9 10.3
-------- -------- -------- -------- -------- ------ --------
Net income (loss).............................. $ (79.2) $ (89.2) $ (102.4) $ (83.4) $ (57.6) $ (7.9) $ 1.1
======== ======== ======== ======== ======== ====== ========
Net income (loss) per common share............. $ (2.05) $ (2.31) $ (2.61) $ (1.42) $ (0.90) $ (.12) $ .02
======== ======== ======== ======== ======== ====== ========
OTHER FINANCIAL DATA:
EBITDA (c)..................................... $ 155.9 $ 150.1 $ 124.8 $ 126.2 $ 138.0 38.3 56.0
Cash flows from operating activities........... 35.0 (28.4) 32.5 48.6 69.2 29.2 (2.2)
Cash flows from investing activities........... 399.7 (17.0) 37.5 (40.3) (41.4) (10.3) (10.0)
Cash flows from financing activities........... (310.3) (29.5) (88.5) (3.6) (22.1) 2.2 (21.2)
Net cash interest expense (d).................. 130.9 126.1 78.0 47.8 90.4 12.4 34.0
Capital expenditures........................... 31.9 69.2 29.6 32.6 42.3 7.0 9.8
Ratios:
EBITDA to net interest expense............... 1.2x 1.2x 1.0x 1.0x 1.0x 1.2x 1.6x
EBITDA to net cash interest expense.......... 1.2x 1.2x 1.6x 2.6x 1.5x 3.1x 1.7x
Earnings to fixed charges(e)................. NM NM NM NM NM NM 1.0x
Total debt to EBITDA......................... 8.4x 8.6x 10.0x 9.7x 9.0x NM NM
BALANCE SHEET DATA (END OF PERIOD):
Cash and investments (f)....................... $ 260.3 $ 169.1 $ 150.0 $ 162.5 $ 187.4 $ 155.8
Total assets................................... 1,832.8 1,676.5 1,533.4 1,484.0 1,464.7 1,409.1
Long term debt, including current maturities... 1,310.7 1,286.2 1,241.3 1,223.3 1,236.7 1,214.3
Stockholders' equity........................... 273.6 184.4 112.1 124.6 67.0 68.1
</TABLE>
- ---------------
(a) Net interest expense represents total interest expense less interest income.
(b) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Operations -- Other Income (Expense)" for
additional detail.
(c) EBITDA represents operating income plus exploration charges and
depreciation, depletion and amortization expense. EBITDA is not presented as
an indicator of Mesa's operating performance or as a measure of liquidity.
(d) During the periods presented, certain of Mesa's total interest expense
consisted of non-cash amortization of debt issuance costs and of accretion
of interest on certain discount notes. Such accreted interest was added to
the balance of the discount notes rather than paid in cash. Net cash
interest expense reflects net interest expense less amortization of debt
issuance costs and accretion of interest on discount notes.
(e) For the purpose of determining the ratio of earnings to fixed charges,
earnings are defined as net loss plus fixed charges. Fixed charges consist
of interest expense and capitalized interest. Earnings were inadequate to
cover fixed charges for the three month period ended March 31, 1995 by $7.9
million, and for each of the years ended December 31, 1991 through December
31, 1995 by $79.2 million, $91.6 million, $105.3 million, $83.5 million and
$58.5 million, respectively.
(f) At March 31, 1996, cash and investments includes $115.8 million of cash and
cash investments and $40.0 million of investments.
28
<PAGE> 30
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 Parent and the related notes thereto included
elsewhere in this Prospectus.
CAPITAL RESOURCES AND LIQUIDITY
Mesa is highly leveraged with over $1.2 billion of long-term debt, including
current maturities. See Note 4 of Notes to Consolidated Financial Statements for
a detailed discussion of Mesa's debt. As a result of improved results of
operations in the first quarter of 1996, Mesa now expects that cash generated by
its operations, together with available cash and investment balances, will be
sufficient to fund the debt principal and interest obligations due by June 30,
1996. In addition, if the obligations under the Existing Credit Facility are
accelerated and become due in the second half of 1996 in the event Mesa breaches
the tangible adjusted equity covenant (see Note 4 of Notes to Consolidated
Financial Statements), Mesa expects to have sufficient cash to repay those
obligations. However, whether Mesa would have sufficient cash to pay both those
obligations and the interest payments on the Secured Discount Notes due at
December 31, 1996 would depend upon results of operations for the remainder of
1996. Mesa will make decisions regarding payments on its debt as such payments
come due, taking into account the status of the Recapitalization at such times.
The Recapitalization will enhance Mesa's ability to compete in the oil and
gas industry by substantially increasing its cash flow available for investment
and improving its ability to attract capital, which will increase its ability to
pursue investment opportunities. Specifically, Mesa's financial condition will
improve significantly as a result of the Recapitalization due to (i) a
significant reduction in total debt outstanding, (ii) a reduction in annual cash
interest expense of approximately $75 million, (iii) the implementation of a
cost savings program designed to initially reduce annual general and
administrative and other operating overhead expenses by approximately $10
million, and (iv) the extension of maturities on its long term debt, which will
eliminate Mesa's present liquidity concerns.
The expected reduction of annual cash interest expense is based on the
following assumptions: (i) average borrowings outstanding under the New Credit
Facility following the Second Closing of approximately $350 million, excluding
letters of credit, and (ii) annual interest rates of approximately 7% under the
New Credit Facility, 11% under the new senior subordinated notes and 12 1/4%
under the new senior subordinated discount notes. Actual borrowings and interest
rates under the New Credit Facility will fluctuate over time and will affect
Mesa's actual cash interest expense.
Management believes that cash from operating activities, together with as
much as $175 million of availability under the $525 million New Credit Facility
following the completion of the Recapitalization, will be sufficient for Mesa to
meet its debt service obligations and scheduled capital expenditures, and to
fund its working capital needs for the next several years following the
Recapitalization.
The successful completion of the Recapitalization is expected to position
Mesa to operate and continue as a going concern and to pursue its business
strategies. The consolidated financial statements of Mesa do not include any
adjustments reflecting any treatment other than going concern accounting.
If the Recapitalization is not completed, Mesa will pursue other
alternatives to address its liquidity issues and financial condition, including
pursuing other merger and sale transactions, the possibility of seeking to
restructure its balance sheet by negotiating with its current debt holders or
seeking protection from its creditors under the federal Bankruptcy Code.
NET OPERATING LOSS CARRYFORWARDS OF MESA
At December 31, 1995, Mesa had approximately $470 million of unused net
operating loss ("NOL") carryforwards. The issuance of Series B Preferred Stock
to DNR pursuant to the Stock Purchase Agreement will cause the NOL carryforward
limitations of Section 382 of the Internal Revenue Code of 1986, as amended (the
"Code"), to apply to Mesa's NOL carryforwards. As a result, Mesa's ability to
carry forward its existing NOLs to offset future income and gain (other than
unrealized gain inherent in Mesa's assets at the time of issuance of the Series
B Preferred Stock to DNR) will be limited. The impact of this limitation cannot
be predicted with any certainty because the amount of the limitation will depend
on the value of the Common Stock and on interest rates in effect at the time of
issuance of the Series B Preferred Stock to DNR. However, based on recent Common
Stock trading prices of $3 to $4 per share and on current interest rates, Mesa's
ability to
29
<PAGE> 31
utilize its existing NOLs would be limited to approximately $11 million to $15
million per year ("Annual NOL Limitation"). As a result of the restriction on
the utilization of the NOLs, a portion of the NOLs may expire before Mesa is
able to utilize them. Any unused Annual NOL Limitation as well as any tax
operating losses which might be generated after the issuance of the Series B
Preferred Stock will carry forward for use in future years without regard to the
limitation in amount described above.
RESULTS OF OPERATIONS
First Quarter 1995 Compared to First Quarter 1996
Mesa reported net income of $1.1 million in the first quarter of 1996
compared with a net loss of $7.9 million in the first quarter of 1995.
The following table presents a summary of the results of operations of Mesa
for the three months ended March 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Revenues..................................................................... $ 62.2 $ 80.6
Operating and administrative costs........................................... (25.2) (25.1)
Depreciation, depletion and amortization..................................... (21.0) (30.2)
------ ------
- -
Operating income............................................................. 16.0 25.3
Interest expense, net of interest income..................................... (32.8) (34.5)
Other........................................................................ 8.9 10.3
------ ------
- -
Net income (loss)............................................................ $ (7.9) $ 1.1
======= ======
</TABLE>
Revenues
The table below presents, for the three months ended March 31, 1995 and
1996, the revenues, production and average prices received from sales of natural
gas, natural gas liquids and oil and condensate.
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Revenues (in millions):
Natural gas............................................................ $ 35.9 $ 50.6
Natural gas liquids.................................................... 18.2 23.1
Oil and condensate..................................................... 5.4 4.4
------- -------
Total........................................................... $ 59.5 $ 78.1
======= =======
Natural Gas Production (MMcf):
Hugoton................................................................ 12,699 12,855
West Panhandle......................................................... 4,927 5,471
Gulf of Mexico......................................................... 2,245 3,697
Other.................................................................. 4 88
------- -------
Total........................................................... 19,875 22,111
======= =======
Natural Gas Liquids Production (MBbls):
Hugoton................................................................ 930 869
West Panhandle......................................................... 696 840
Gulf of Mexico......................................................... 13 12
Other.................................................................. 1 2
------- -------
Total........................................................... 1,640 1,723
======= =======
Oil and Condensate Production (MBbls):
Hugoton................................................................ -- --
West Panhandle......................................................... 16 34
Gulf of Mexico......................................................... 292 198
Other.................................................................. 14 12
------- -------
Total........................................................... 322 244
======= =======
Weighted average sales price:
Natural gas (per Mcf).................................................. $ 1.71* $ 2.26
Natural gas liquids (per Bbl).......................................... $ 11.18 $ 13.82
Oil and condensate (per Bbl)........................................... $ 16.51 $ 17.61
</TABLE>
- ---------------
* Includes the effects of hedging activities. See below.
30
<PAGE> 32
Mesa's natural gas production increased in the first quarter of 1996
compared with the same period of 1995 due to a weather-related increase in
demand in the West Panhandle field and increased production in the Gulf of
Mexico as a result of successful drilling in 1995. Natural gas liquids
production increased slightly in the first quarter of 1996 compared to the first
quarter of 1995 in proportion to higher natural gas production in the West
Panhandle field. In the first quarter of 1996 oil and condensate production
decreased compared to the same period of 1995 due to natural decline in the Gulf
of Mexico oil properties.
Natural gas prices in first quarter of 1996 were substantially higher than
in the first quarter of 1995 due to a colder 1995/1996 winter. Natural gas
liquids and oil and condensate prices were also higher due to the colder
weather.
Approximately 85 percent of Mesa's 1996 natural gas production was sold at
market prices. The remaining 15 percent was sold under a fixed-price contract.
When circumstances warrant, Mesa hedges its production. Amortization of deferred
gains and losses from hedging activities are included in natural gas revenues
when the hedged production occurs. In the first quarter of 1995, Mesa recognized
as natural gas revenues $4.9 million of hedge gains. Mesa did not hedge any of
its first quarter 1996 production. The following table shows the effect of
hedging activities on Mesa's natural gas prices:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
---------------
1995 1996
----- -----
<S> <C> <C>
Natural gas prices (per Mcf):
Actual price received for production........................................ $1.47 $2.26
Effect of hedging activities................................................ .24 --
----- -----
Average price............................................................... $1.71 $2.26
===== =====
</TABLE>
Costs and Expenses
Mesa's aggregate costs and expenses increased by approximately 20% in the
first quarter of 1996 compared to the same period in 1995 due primarily to
increased depreciation, depletion and amortization expenses ("DD&A") resulting
from a non-recurring impairment. Lease operating expenses increased marginally
due to increased production. Production and other taxes increased 14% due to
increased production and higher natural gas prices. Exploration charges
decreased reflecting lower seismic costs. General and administrative expenses
were lower primarily due to a reduction in employee benefit expenses and lower
outside consultant costs. DD&A, which is calculated quarterly on a
unit-of-production basis, was higher by 44% primarily due to impairment of
long-lived assets of approximately $6.8 million in accordance with the adoption
of a new accounting requirement (SFAS No. 121) and higher production in the
first quarter of 1996.
Other Income (Expense)
Interest income and interest expense in the first quarter of 1996 were not
materially different from such income and expense during the same period in 1995
as average cash balances and aggregate debt outstanding were not materially
different.
Results of operations for the three months ended March 31, 1995 and 1996
include certain items which are either non-recurring or are not directly
associated with Mesa's oil and gas producing operations. The following table
sets forth the amounts of such items for the periods indicated (in millions):
<TABLE>
<CAPTION>
1995 1996
---- -----
<S> <C> <C>
Gains from investments......................................................... $4.6 $ 8.8
Gains from collections from Bicoastal Corporation.............................. 4.6 2.5
Other.......................................................................... (.3) (1.0)
---- -----
Total Other Income.................................................... $8.9 $10.3
==== =====
</TABLE>
The gains from investments relate to Mesa's investments in marketable
securities and energy futures contracts, which include NYMEX futures contracts,
commodity price swaps and options that are not accounted for as hedges of future
production. Mesa's investments in marketable securities and futures contracts
are valued at market prices at each reporting date with gains and losses
included in the statement of operations for such reporting period whether or not
such gains or losses have been realized.
31
<PAGE> 33
The gains from collection of interest from Bicoastal Corporation relate to a
note receivable from such company, which was in bankruptcy. Mesa's claims in the
bankruptcy exceeded its recorded receivable. As of March 31, 1996, Mesa had
collected the full amount of its allowed claim plus a portion of the interest
due on such claims. Mesa does not expect any future amounts received from such
company to be significant.
Years Ended December 31, 1993, 1994 and 1995
The following table presents a summary of the results of operations of Mesa
for the years indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1993 1994 1995
------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Revenues.................................................. $ 222.2 $ 228.7 $ 235.0
Operating and administrative costs........................ (100.1) (107.7) (103.6)
Depreciation, depletion and amortization.................. (100.1) (92.3) (83.4)
------- ------- -------
Operating income.......................................... 22.0 28.7 48.0
------- ------- -------
Interest expense, net of interest income.................. (131.3) (131.3) (132.7)
Other..................................................... 6.9 19.2 27.1
------- ------- -------
Net loss.................................................. $(102.4) $ (83.4) $ (57.6)
======= ======= =======
</TABLE>
Revenues, Production and Average Price Data
The table below presents, for the years indicated, the revenues, production
and average prices received from sales of natural gas, natural gas liquids and
oil and condensate.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Revenues (in millions):
Natural gas............................................. $ 141.8 $ 139.6 $ 129.6
Natural gas liquids..................................... 61.4 72.7 75.3
Oil and condensate...................................... 12.4 7.9 19.6
------- ------- -------
Total............................................ $ 215.6 $ 220.2 $ 224.5
======= ======= =======
Natural Gas Production (MMcf):
Hugoton................................................. 47,476 51,986 48,871
West Panhandle.......................................... 23,786 22,983 20,357
Gulf of Mexico.......................................... 8,517 7,359 8,073
Other................................................... 41 11 11
------- ------- -------
Total............................................ 79,820 82,339 77,312
======= ======= =======
Natural Gas Liquids Production (MBbls):
Hugoton................................................. 1,481 3,430 3,524
West Panhandle.......................................... 3,480 3,423 2,994
Gulf of Mexico.......................................... 81 53 48
Other................................................... 8 5 5
------- ------- -------
Total............................................ 5,050 6,911 6,571
======= ======= =======
Oil and Condensate Production (MBbls):
Hugoton................................................. 104 -- --
West Panhandle.......................................... 153 164 118
Gulf of Mexico.......................................... 352 337 1,025
Other................................................... 129 45 52
------- ------- -------
Total............................................ 738 546 1,195
======= ======= =======
</TABLE>
32
<PAGE> 34
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Weighted average sales prices:
Natural gas (per Mcf)
Hugoton................................................. $ 1.78 $ 1.57 $ 1.32
West Panhandle.......................................... 1.72 1.80 1.83
Gulf of Mexico.......................................... 2.08 1.81 1.59
Other................................................... .85 1.29 .54
------- ------- -------
Average(a)....................................... $ 1.79 $ 1.67 $ 1.65
======= ======= =======
Natural gas liquids (per Bbl)
Hugoton................................................. $ 12.35 $ 10.03 $ 10.76
West Panhandle.......................................... 12.04 11.06 12.33
Gulf of Mexico.......................................... 12.61 11.52 11.37
Other................................................... 10.51 8.58 8.77
------- ------- -------
Average.......................................... $ 12.14 $ 10.55 $ 11.48
======= ======= =======
Oil and condensate (per Bbl)
Hugoton................................................. $ 18.21 $ -- $ --
West Panhandle.......................................... 15.04 13.38 14.13
Gulf of Mexico.......................................... 16.69 15.18 16.57
Other................................................... 17.08 14.43 16.48
------- ------- -------
Average.......................................... $ 16.63 $ 14.58 $ 16.32
======= ======= =======
</TABLE>
- ---------------
(a) Includes the effects of hedging activities. See "-- Natural Gas Prices."
The increase in total revenues from sales of natural gas, NGLs, and oil and
condensate from 1994 to 1995 is primarily attributable to increased oil and
condensate production in 1995, increased liquids prices in 1995 and
approximately $12.7 million of natural gas hedge gains recognized in 1995. These
factors offset the decrease in natural gas and natural gas liquids production
and the lower market prices for natural gas production in 1995. The increase in
revenues from 1993 to 1994 was primarily due to increased natural gas and
natural gas liquids production in 1994, partially offset by the decrease in
prices from 1993 to 1994.
Natural gas revenues decreased from 1993 to 1994 and from 1994 to 1995. In
1995 production was lower in both the Hugoton and West Panhandle fields due to
timing and duration of equipment maintenance and weather-related reduction in
demand, respectively. Total natural gas production increased from 1993 to 1994
primarily due to higher allowables in the Hugoton field partially offset by
slightly lower West Panhandle and Gulf of Mexico production. Average natural gas
prices were slightly lower in 1995 than in 1994. Prices received for market
price-based production were $.22 per Mcf (14%) lower in 1995, at $1.33 per Mcf.
Mesa's hedge gains increased the reported prices for such production by $.20 per
Mcf to $1.53 Mcf. The lower market prices were the result of the continuing
surplus of natural gas supply. Average natural gas prices reported were 7% lower
in 1994 than in 1993 due to generally lower market prices. See "-- Natural Gas
Prices."
NGL revenues increased in 1995 compared to 1994. Hugoton field NGL
production was slightly higher despite lower natural gas production reflecting
improved yields from Mesa's Satanta plant. West Panhandle field NGL production
decreased in 1995 in proportion to the lower natural gas production. The lower
production was offset by higher average prices in 1995 due to improved market
conditions for NGLs. NGL production increased from 1993 to 1994 as a result of
increases in Hugoton field liquids production. In the third quarter of 1993 the
Satanta plant in the Hugoton field was completed. The plant, which is capable of
processing up to 250 MMcf of natural gas per day, replaced Mesa's older Ulysses
natural gas processing plant which could process up to 160 MMcf per day. The
Satanta plant has the ability to extract a greater quantity of NGLs per Mcf of
natural gas, reject nitrogen, recover helium and produce LNG.
Oil and condensate revenues increased approximately 150% from 1994 to 1995.
Gulf of Mexico production was up over 200% due to successful drilling in late
1994. Average oil and condensate prices were also higher in 1995 by $1.74 per
Bbl. Prior to the resumption of drilling in the Gulf of Mexico in 1994, Mesa's
oil and condensate production had been on a decline.
33
<PAGE> 35
West Panhandle production is governed by the terms of a contract with CIG.
See "-- Production Allocation Agreement."
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.
See "Business -- Production -- Hugoton Field."
Natural Gas Prices
Substantially all of Mesa's natural gas production is sold under short term
or long term sales contracts. Approximately 80% of Mesa's annual natural gas
sales, whether or not such sales are governed by a contract, are at market
prices. The following table shows Mesa's natural gas production sold under fixed
price contracts and production sold at market prices:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Natural Gas Production (MMcf):
Sold under fixed price contracts................................. 19,467 13,935 15,212
Sold at market prices............................................ 60,353 68,404 62,100
------ ------ ------
Total production................................................. 79,820 82,339 77,312
====== ====== ======
Percent sold at market prices.................................... 76% 83% 80%
</TABLE>
In addition to its fixed price contracts, Mesa will, when circumstances
warrant, hedge the price received for its market-sensitive production through
natural gas futures contracts. The following table shows the effects of Mesa's
fixed price contracts and hedging activities on its natural gas prices:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Average Natural Gas Prices (per Mcf):
Fixed price contracts.............................................. $ 1.94 $ 2.16 $ 2.12
===== ===== =====
Market prices received............................................. $ 1.75 $ 1.55 $ 1.33
Hedge gains (losses)............................................... (.01) .01 .20
----- ----- -----
Total market prices.............................................. $ 1.74 $ 1.56 $ 1.53
===== ===== =====
Total average prices................................................. $ 1.79 $ 1.67 $ 1.65
===== ===== =====
</TABLE>
Gains and losses from hedging activities are included in natural gas
revenues when the applicable hedged natural gas is produced. Mesa recognized
gains from hedging activities of $12.7 million in 1995 and $895,000 in 1994, and
losses of $324,000 in 1993.
Costs and Expenses
Mesa's aggregate costs and expenses declined by approximately 7% from 1994
to 1995. Lease operating expenses declined marginally due to decreased
production. Production and other taxes decreased 14% from 1994 to 1995 due to
decreased production in the Hugoton and West Panhandle fields and lower tax
rates for Hugoton field production in 1995. See "Business -- Production Costs."
Exploration charges in 1995 were greater than in 1994, reflecting increased
exploration activities in the Gulf of Mexico, and consist primarily of
exploratory dry-hole expense. General and administrative ("G&A") expenses were
lower in 1995 than in 1994 primarily due to lower legal expenses and a reduction
in employee benefit expenses. DD&A expense was lower in 1995 than in 1994
primarily due to lower equivalent production in 1995, oil and gas reserve
increases in the Hugoton and West Panhandle fields in the fourth quarters of
1994 and 1995, and additional reserve discoveries in the Gulf of Mexico in 1994
and 1995. (See "Supplemental Financial Data" in the notes to the Consolidated
Financial Statements of the Parent located elsewhere in this Prospectus for a
discussion of oil and gas reserves.)
Mesa's aggregate costs and expenses declined marginally from 1993 to 1994.
Lease operating expenses increased by 2% as a result of higher operating costs
associated with Mesa's Satanta plant and higher Hugoton field production. See
"Business -- Production Costs." Exploration charges in 1994 were greater than in
1993, reflecting Mesa's increased exploration activities in the Gulf of Mexico,
and resulted primarily from the
34
<PAGE> 36
purchase of 3-D seismic data. G&A expenses were higher in 1994 than in 1993
primarily due to litigation expenses associated with Mesa's defense of a royalty
lawsuit in the West Panhandle field. See "Business -- Legal Proceedings." DD&A
expense was lower in 1994 compared to 1993. DD&A expense reflects the 1994
reserve increases in the Hugoton and West Panhandle fields and reserve
discoveries in the Gulf of Mexico. (See "Supplemental Financial Data" in the
notes to the Consolidated Financial Statements of the Parent located elsewhere
in this Prospectus.)
Other Income (Expense)
Interest expense in 1995 was not materially different from 1994 and 1993 as
average aggregate debt outstanding did not materially change.
Interest income increased from $10.7 million in 1993 to $13.5 million in
1994 and $15.9 million in 1995 as a result of higher average cash balances and
higher average interest rates earned on these cash balances in 1994 and 1995.
Results of operations for the years 1993, 1994, and 1995 include certain
items which are either non-recurring or are not directly associated with Mesa's
oil and gas producing operations. The following table sets forth the amounts of
such items:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Gains from investments.......................................... $ 4.0 $ 6.7 $18.4
Gains from collections from Bicoastal Corporation............... 18.5 16.6 6.4
Gains on dispositions of oil and gas properties................. 9.6 -- --
Litigation settlement........................................... (42.8) -- --
Gain from adjustment of contingency reserve..................... 24.0 -- --
Expense of debt exchange transaction............................ (9.7) -- --
Other........................................................... 3.3 (4.1) 2.3
----- ----- -----
Total other income............................................ $ 6.9 $19.2 $27.1
===== ===== =====
</TABLE>
The gains from investments relate to Mesa's investments in marketable
securities and energy futures contracts, which include NYMEX futures contracts,
commodity price swaps and options that are not accounted for as hedges of future
production. Mesa's investments in marketable securities and futures contracts
are valued at market prices at each reporting date with gains and losses
included in the statement of operations for such reporting period whether or not
such gains or losses have been realized. At December 31, 1995, Mesa had
recognized but not realized approximately $7.6 million of gains primarily
associated with open positions in natural gas futures contracts. After May 7,
1996, Mesa had no open speculative positions in energy futures contracts.
The gains from collection of interest from Bicoastal Corporation relate to a
note receivable from such company, which was in bankruptcy. Mesa's claims in the
bankruptcy exceeded its recorded receivable. As of year-end 1995, Mesa had
collected the full amount of its allowed claim plus a portion of the interest
due on such claims. The gains on dispositions of oil and gas properties relate
primarily to 1993 sales of oil producing properties in the deep Hugoton and
Rocky Mountain areas for approximately $26 million.
The litigation settlement charge relates to Mesa's 1994 settlement of a
lawsuit with Unocal Corporation ("Unocal"). The litigation related to a 1985
investment in Unocal by Mesa's predecessor, Mesa Petroleum Co. ("Original
Mesa"), and certain other defendants. The plaintiffs had sought to recover
alleged "short-swing profits" plus interest totaling over $150 million pursuant
to Section 16(b) of the Exchange Act. In early 1994 Mesa and the other
defendants reached a settlement with the plaintiffs and agreed to pay $47.5
million to Unocal, of which Mesa's share was $42.8 million. Mesa issued
additional secured discount notes with a face amount of $48.2 million to fund
its share of the settlement.
In the fourth quarter of 1993, Mesa completed a settlement with the Internal
Revenue Service (the "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
in excess of the actual and estimated liabilities. As a result of the settlement
with the IRS and the resolution and revaluation of certain other contingent
liabilities, Mesa recorded a net gain of $24 million in the fourth quarter of
1993.
35
<PAGE> 37
The debt exchange expense relates to costs associated with Mesa's $600
million debt exchange transaction completed in 1993.
Production Allocation Agreement
Effective January 1, 1991, Mesa entered into the Production Allocation
Agreement (as amended, the "PAA") with CIG, which allocates 77% of reserves and
production from the West Panhandle field to Mesa and 23% to CIG. During 1993,
1994 and 1995, Mesa produced and sold 74%, 69%, and 71%, respectively, of total
production from the field; the balance of field production was sold by CIG. Mesa
records its 77% ownership interest in natural gas production as revenue. The
difference between the net value of production sold by Mesa and the net value of
its 77% entitlement is accrued as a gas balancing receivable. The revenues and
costs associated with such accrued production are included in results of
operations.
The following table presents the incremental effect on production and
results of operations from entitlement production recorded in excess of actual
sales as a result of the PAA:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------- JANUARY 1, 1991
1993 1994 1995 TO DATE
----- ----- ----- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Revenues accrued................................. $ 5.1 $ 8.7 $ 4.3 $ 58.7
Costs and expenses accrued....................... (1.1) (3.1) (1.6) (16.1)
----- ----- ----- -------
Recorded to receivable........................... 4.0 5.6 2.7 42.6
----- ----- ----- -------
Depreciation, depletion and amortization......... (1.2) (3.7) (1.7) (25.2)
----- ----- ----- -------
Total................................... $ 2.8 $ 1.9 $ 1.0 $ 17.4
===== ===== ===== =======
Production accrued:
Natural gas (MMcf)............................. 740 2,386 1,155 15,887
Natural gas liquids (MBbls).................... 106 355 171 2,275
</TABLE>
At December 31, 1995, the long term gas balancing receivable from CIG, net
of accrued costs, relating to the PAA was $42.6 million, which is included in
"Other assets" in Mesa's 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.
OTHER
See "Business -- Legal Proceedings" and Note 9 to the Consolidated Financial
Statements of the Parent included elsewhere in this Prospectus for information
regarding the status of certain pending litigation.
Mesa recognizes its ownership interest in natural gas production as revenue.
Actual production quantities sold may be different from Mesa's ownership share
of production in a given period. Mesa records these differences as gas balancing
receivables or as deferred revenue. Net gas balancing underproduction
represented approximately 5.4% of total equivalent production for the three
months ended March 31, 1996 compared to 2.6% for the same period of 1995, and
represented approximately 2% of total equivalent production for the year ended
December 31, 1995, compared with 5% during the same period in 1994 and 3% in
1993. The gas balancing receivable or deferred revenue component of natural gas
and natural gas liquids revenues in future periods is dependent on future rates
of production, field allowables and the amount of production taken by Mesa or by
its joint interest partners.
Mesa invests from time to time in marketable equity and other securities, as
well as in energy-related commodity futures contracts, which include NYMEX
futures contracts, price swaps and options. 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.
36
<PAGE> 38
BUSINESS
GENERAL
Mesa is one of the largest independent oil and gas companies in the United
States, with approximately 1.9 Tcfe of proved reserves as of December 31, 1995.
Approximately 95% of Mesa's reserves are concentrated in the Hugoton field in
southwest Kansas and the West Panhandle field in Texas. These fields, which are
part of one contiguous reservoir, are considered to be among the premier natural
gas properties in the United States and are characterized by long lived reserves
and stable production. Despite operating under significant capital constraints
since 1990, Mesa has maintained a large, concentrated and efficiently managed
asset base.
Approximately 65% of Mesa's total equivalent proved reserves are natural gas
and the balance are principally NGLs. Approximately 95% of Mesa's proved
reserves are developed. The estimated future net cash flows before income taxes
from Mesa's proved reserves, as of December 31, 1995, aggregated approximately
$2.4 billion and had a net present value, discounted at 10%, of approximately $1
billion.
The Parent is a holding company with no independent operations. The Parent
currently operates primarily through three wholly owned subsidiaries, including
the Company. Immediately prior to the First Closing, the other two subsidiaries
will be merged or liquidated into the Company, which will thereafter be the
Parent's only significant direct or indirect subsidiary.
BUSINESS STRENGTHS
Mesa believes it has certain strengths that provide it with significant
competitive advantages, including the following:
Long Reserve Life. Mesa's properties have an estimated reserve life,
calculated by dividing total proved reserves by annual production, of
approximately 15 years, which is among the longest reserve lives of any
domestic oil and gas company. As a result of their long lived nature,
Mesa has lower reinvestment requirements to maintain reserve quantities,
production levels and values than many of its competitors. The net
present value of Mesa's proved reserves has exhibited considerable
stability over the last five years, ranging from approximately $1.2
billion to approximately $1.0 billion on a pre-tax basis and from $0.9
billion to $1.0 billion on an after tax basis.
High Percentage of Proved Developed Producing Reserves. Approximately 95%
of Mesa's reserves are classified as proved developed producing. The
highly developed nature of these reserves results in relatively low
capital expenditures to maintain production. The combined effect of a
highly developed and long lived reserve base provides Mesa a long term
source of cash flow to invest in future growth opportunities.
High Degree of Operational Control. Over 90% of Mesa's production and
reserves are attributable to wells operated by Mesa, which provides Mesa
with control over the amount and timing of capital and operating
expenditures. Mesa also owns and operates all of the processing
facilities and a substantial majority of the gathering assets that
service its onshore production. Control over these assets reduces
operating expenses and enhances operational flexibility. These factors
provide Mesa with significant operating advantages, such as the ability
to (i) shift production into the heating season, when prices are
generally higher, (ii) vary the recovery of NGLs to optimize its revenue
mix, (iii) avoid production curtailments due to capacity constraints and
(iv) reduce abandonment pressures for its wells, which should increase
ultimate recoverable reserves.
Low Cost Operator. Mesa's reserves are primarily recovered from low
pressure, shallow, geographically concentrated gas fields. Consequently,
production costs are low and averaged $0.57 per Mcfe of production in
1995.
Expertise in Midcontinent and Gulf of Mexico. The Midcontinent, where the
Hugoton and West Panhandle fields are located, and the Gulf of Mexico are
two of the most prolific gas producing regions in the United States.
Mesa's personnel have substantial operational expertise and experience in
the oil and gas industry, particularly with respect to the technical
challenges of these regions. Mesa's operations and exploration staff has
extensive experience with the federal, state and local agencies with
responsibility for these regions. This experience provides a significant
base upon which to expand Mesa's operations as cash flow and additional
capital become available for investment following the Recapitalization.
37
<PAGE> 39
BUSINESS STRATEGY
Following the Recapitalization, Mesa intends to position itself as a leading
independent oil and gas exploration and production company by implementing the
following primary strategies:
Balanced Reserve Growth. Mesa plans to increase reserves and cash flow by
pursuing a balanced strategy of blending property acquisitions with
development drilling and exploration. In pursuit of its strategy, Mesa
intends to target (i) strategic property acquisitions that complement
Mesa's existing asset base, (ii) long term development projects that
provide a stable and low risk portfolio of reinvestment opportunities and
(iii) limited exposure to higher risk exploration activities.
Exploitation of Existing Assets. Mesa will continue to focus on
exploiting its existing asset base by undertaking projects related to
development drilling, expansion of gathering systems, increased
compression, enhancement of processing facilities and value added
marketing activities.
Reduction in Costs. Mesa intends to maintain a low cost structure to
maximize free cash flow available for investment. To this end, Mesa has
already implemented the first steps of a program designed to reduce
annual general and administrative and other operating overhead expenses
by approximately $10 million.
Increased Financial Flexibility. After completion of the
Recapitalization, Mesa's financial flexibility will increase
substantially. Mesa is committed to maintaining financial flexibility to
enable it to access various forms of capital in order to successfully
execute its growth strategy.
PROPERTIES
Approximately 95% of Mesa's proved reserves are concentrated in the Hugoton
field of southwest Kansas and the West Panhandle field of Texas. The two fields
are each part of a reservoir that extends from southwest Kansas, through the
Oklahoma panhandle and into the Texas panhandle. These fields, which produce gas
from depths of 3,500 feet or less, are characterized by stable, long lived, low
cost production. Mesa's other properties are primarily in the Gulf of Mexico and
the Rocky Mountains.
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, 1995, as estimated in accordance with Commission guidelines, by major areas
of operation:
<TABLE>
<CAPTION>
GULF
WEST OF
HUGOTON PANHANDLE MEXICO OTHER TOTAL
---------- --------- ------ ------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Proved reserves:
Natural gas (MMcf)........................ 863,939 283,218 38,317 32,555 1,218,029
Natural gas liquids (MBbls)............... 56,720 45,041 122 14 101,897
Oil (MBbls)............................... -- 6,817 2,303 401 9,521
Natural gas equivalents (MMcfe)........... 1,204,259 594,366 52,867 35,045 1,886,537
% Developed............................... 100% 90% 77% 41% 95%
% Natural Gas............................. 72% 48% 72% 93% 65%
% of Total................................ 64% 32% 3% 1% 100%
Future net cash flows....................... $1,481 $603 $43 $26 $2,153
Present value of future net cash flows,
discounted at 10%......................... $614 $307 $42 $3 $966
Future net cash flows, before income
taxes..................................... $1,693 $683 $42 $32 $2,450
Present value of future net cash flows,
before income taxes, discounted at 10%.... $ 658 $332 $41 $ 9 $1,040
</TABLE>
In recent years Mesa has concentrated its efforts on fully developing its
existing long lived reserve base and expanding its opportunities to sell its
production into as many markets with as few restrictions, such as those imposed
by long term contracts, as possible. In the Hugoton field, these efforts have
included infill drilling (i.e., drilling an additional well on each 640-acre
spacing unit), installing additional compression and gathering facilities, and
the construction of the Satanta natural gas processing plant, which has the
ability to extract a greater quantity of NGLs per Mcf of natural gas, reject
nitrogen, recover helium and produce LNG. Two significant gas sales contracts
related to Hugoton production expired in May 1995, giving Mesa over 200 MMcf
38
<PAGE> 40
per day of uncommitted deliverability available for sale after that date. Mesa
now has the flexibility to sell its Hugoton production under short term
contracts or on a swing or peak basis. In the West Panhandle field, development
activities have included well workovers and deepenings/redrills, adding
compression facilities, and the expansion and upgrading of natural gas
processing facilities to process greater quantities of natural gas and recover
helium. In addition, Mesa restructured its contractual arrangements in the West
Panhandle field to more clearly define its right to production and to create the
ability to sell gas outside of a restricted market area to a greater number of
potential customers. Since 1994 Mesa has directed approximately 60% of its
capital spending towards exploration and development in the Gulf of Mexico.
Mesa has maintained a large geological and geophysical database covering the
Midcontinent and other areas where it has historically operated. Following the
Recapitalization, Mesa intends to exploit its database and consider selective
acquisitions of producing properties with development and exploration potential
in the Texas Panhandle, the Hugoton field, and other areas of the Midcontinent
and Gulf of Mexico regions.
Hugoton Field
The Hugoton field in southwest Kansas is the largest producing gas field in
the continental United States. Mesa's Hugoton properties represent approximately
13% of the proved reserves in the field and are located on over 230,000 net
acres, covering approximately 400 square miles. Mesa's properties are
concentrated in the center of the field and thus benefit from better reservoir
characteristics, including thicker productive zones, higher porosity and higher
permeability. Management believes that, as a result, Mesa's Hugoton properties
will have a longer productive life and higher natural gas recoveries than
properties located in other parts of the Hugoton field. Mesa has working
interests in approximately 1,100 wells in the Hugoton field, 950 of which it
operates, and royalty interests in approximately 300 additional wells. Mesa owns
substantially all of the gathering and processing facilities which service its
production from the Hugoton field and which allow Mesa to control the
production, gathering, processing and sale of its gas to various major
intrastate and interstate pipelines through its direct interconnects.
Mesa's Hugoton properties are capable of producing more than 230 MMcf of wet
gas per day (i.e., gas production at the wellhead before processing and before
reduction for royalties). Substantially all of Mesa's Hugoton production is
processed through its Satanta plant. After processing, on a peak production day,
Mesa has available to market over 150 MMcf of residue (processed) gas and 13
MBbls of NGLs. Production in the Hugoton field is subject to allowables set by
state regulators. Mesa estimates that, for the last year, it and other major
producers in the Hugoton field have produced at full capacity in the Hugoton
field and expects such practice to continue. See "-- Production -- Hugoton
Field."
Mesa's Hugoton properties accounted for approximately 64% of its equivalent
proved reserves and 64% of the present value of estimated future net cash flows
determined as of December 31, 1995, in accordance with Commission guidelines.
The Hugoton properties accounted for approximately 48%, 53%, and 47% of Mesa's
oil and gas revenues for the years ended December 31, 1993, 1994, and 1995,
respectively. 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. See
"-- Production -- Hugoton Field."
West Panhandle Field
The West Panhandle properties are located in the central panhandle region of
Texas. Natural gas from these properties is produced from approximately 600
wells, all of which Mesa operates, on over 185,000 net acres. All of Mesa's West
Panhandle production is processed through Mesa's Fain natural gas processing
plant.
Mesa's West Panhandle reserves are owned and produced pursuant to contracts
with CIG, originally executed in 1928 by predecessors of both companies. The
PAA, an amendment to these contracts, allocates 77% of the production from the
West Panhandle field properties to Mesa and 23% to CIG, effective as of January
1, 1991. Under the associated agreements, Mesa operates the wells and production
equipment and CIG owns and operates the gathering system by which Mesa's
production is transported to the Fain plant. CIG also performs certain
administrative functions. Each party reimburses the other for certain costs and
expenses incurred for the joint account.
As of December 31, 1995, Mesa's West Panhandle properties represented
approximately 32% of Mesa's equivalent proved reserves, and approximately 32% of
the present value of estimated future net cash flows, determined in accordance
with Commission guidelines. Production from the West Panhandle properties
39
<PAGE> 41
accounted for approximately 40%, 36%, and 33% of Mesa's oil and gas revenues for
the years ended December 31, 1993, 1994, and 1995, respectively. Although the
West Panhandle properties are long lived, the percentage of Mesa's revenues
represented by West Panhandle production has been greater than the percentage of
equivalent proved reserves represented by such properties. This is a result of
higher gas prices received under a sales contract for approximately 29% of
Mesa's West Panhandle residue gas production, as well as the higher yield of
NGLs extracted from West Panhandle natural gas as compared to Hugoton natural
gas.
The Fain plant is capable of processing up to 120 MMcf of natural gas per
day. West Panhandle field natural gas contains a high quantity of NGLs. As a
result, processing this gas yields relatively greater liquids volumes than
recoveries typically realized in other natural gas fields. For example, on a
peak day, Mesa can extract approximately 12 MBbls of NGLs at its Fain plant from
an inlet gas volume of 120 MMcf.
In the last six years Mesa has deepened, redrilled, or reworked 357 wells in
the West Panhandle field, adding reserves, and increasing deliverability. Mesa
has also identified approximately 120 locations that have additional production
potential from new areas or deeper zones that it plans to redrill over a three
year period beginning in early 1996. These drilling locations target reserves in
deeper portions of the reservoirs not currently reached by existing wells. Mesa
has commenced the drilling program to develop these reserves in anticipation of
its contractual right to increase its share of West Panhandle production in 1997
and thereafter. See "-- Production -- West Panhandle Production."
Gulf of Mexico
Mesa's Gulf of Mexico properties are located offshore Texas and Louisiana.
Mesa has operated in the Gulf of Mexico since 1970 and has produced
approximately 425 Bcfe (net to Mesa's interest). Mesa currently owns interests
in 45 blocks in the Gulf of Mexico. As of December 31, 1995, these properties
had an estimated 53 Bcfe of remaining proved reserves. In addition, Mesa has
over 100,000 miles of two-dimensional ("2-D") seismic data and approximately 400
square miles of 3-D seismic data in the Gulf of Mexico. Mesa has an office in
Lafayette, Louisiana, to oversee production from its Gulf of Mexico properties.
Mesa's working interests in seven of its 45 blocks are subject to a net profits
interest owned by the Mesa Offshore Trust.
Over the last five years, Mesa has evaluated a number of its offshore
producing properties utilizing well information, 2-D seismic and production
data, combined with 3-D seismic surveys to identify further development and
exploration potential. Mesa currently has 11 3-D seismic surveys under analysis.
New well locations were identified on five producing leases in 1995 and one
exploratory block was acquired based upon interpretation of 3-D seismic data.
Since late 1994, Mesa has successfully completed 17 out of 19 wells drilled in
the Gulf of Mexico based on 3-D seismic surveys. In the aggregate, Mesa incurred
net capital costs of $36 million during this period and, through December 31,
1995, has added approximately 51 Bcfe of proved oil and gas reserves. Mesa
intends to continue its evaluation and identification of additional prospects
for drilling in 1996, depending on the success of its program and other factors.
Because it has existing infrastructure and production facilities on these
properties, Mesa expects that it will be able to bring its successful wells
on-line more quickly and at lower development costs than have been typical for
offshore production.
In April 1996, Mesa purchased six blocks covering 28,000 acres in the most
recent federal lease sale in the Gulf of Mexico. Mesa paid $500,000 for its
share of the six blocks, five of which are located in an area where Mesa has
producing interests.
Other
Mesa's other producing properties are located in the Rocky Mountain area of
the United States, which accounted for less than 1% of Mesa's total production
in 1995.
Mesa's non-oil and gas tangible properties include buildings, leasehold
improvements, and office equipment, primarily in Amarillo, Dallas, and Fort
Worth, Texas, and certain other assets. Non-oil and gas tangible properties
represent less than 2% of the net book value of Mesa's properties.
40
<PAGE> 42
RESERVES
The following table summarizes Mesa proved reserves, as estimated in
accordance with the Commission guidelines, associated with Mesa's oil and gas
properties as of December 31, 1991, 1992, 1993, 1994 and 1995 by total reserves
and reserve components.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------------
1991 1992 1993 1994 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Natural gas (MMcf)................. 1,367,968 1,276,049 1,202,444 1,303,187 1,218,029
Natural gas liquids (MBbls)........ 79,269 80,124 79,150 84,397 101,897
Oil and condensate (MBbls)......... 3,956 7,268 3,296 5,031 9,521
Natural gas equivalents (MMcfe).... 1,867,318 1,800,401 1,697,120 1,839,755 1,886,537
</TABLE>
The proved reserve estimates set forth above for 1994 and 1995 were prepared
by Mesa's internal reserve engineers. Oil and gas reserve quantities estimated
as of December 31, 1995, reflect a net increase over 1994, after production, of
approximately 171 Bcfe of natural gas. Equivalent natural gas reserves increased
in each of Mesa's major production areas. Increases in Hugoton field reserves
reflect alignment of the assumptions used in preparing the proved reserve
estimates with Mesa's practice of recovering ethane at the Satanta plant. In
previous years Hugoton proved reserve estimates were prepared assuming that Mesa
would not recover ethane which resulted in slightly higher natural gas volumes,
lower NGL volumes and lower total equivalent volumes than if ethane recovery
were assumed. The decision as to whether or not to recover ethane is based on
the relative value of ethane as a liquid versus the energy-equivalent value of
such ethane if left in the residue natural gas stream. In the future, if
economic conditions warrant, Mesa may revise proved reserves to reflect any
changes in such relative values. In the West Panhandle field, reserves were
revised upward to reflect the development drilling results over the past year
and the planned upgrade of the Fain plant for a higher rate of liquids recovery
per Mcf of gas produced from the field. In the Gulf of Mexico, reserve additions
resulted from exploratory and development drilling in 1994 and 1995.
Prior to 1994 Mesa's proved reserve estimates were prepared by DeGolyer &
MacNaughton, an independent petroleum engineering firm ("D&M"). In accordance
with a long term debt agreement, D&M prepared proved reserve estimates as of
December 31, 1995, covering Mesa's Hugoton properties in the manner and to the
extent required by the debt agreement. Their report will not be used for
purposes other than those prescribed in the debt agreement. As in prior years,
the Hugoton field reserve estimates prepared by D&M are less than those of
Mesa's engineers due to the independent engineers' different interpretation of
well-test pressure and cumulative production data related to Mesa's Hugoton
field properties. Subsequent to the change in field rules in 1994 allowing
higher production rates, Mesa's wells have been producing at or near capacity
and shut-in periods prior to testing have been brief. As a result, well-test
pressures have been generally lower than those measured prior to the field rule
changes. Mesa believes the historical pressures are more accurate and therefore
the pressure data used in its internal reserve estimates reflect only pressure
data recorded prior to the higher production rates. D&M reserve estimates are
based on well-test pressures that include the more recent data. D&M's December
31, 1995 reserve estimates for the Hugoton field reflect a downward revision
from prior estimates by D&M and, as a result, such estimates were approximately
25% less than Mesa's estimates of Hugoton field reserves as of December 31,
1995. See Note 4 to the Consolidated Financial Statements of the Parent located
elsewhere in this Prospectus for additional discussion of D&M's reserve report.
In connection with the due diligence conducted by DNR prior to entering into
the Stock Purchase Agreement, and in order to understand the differences between
D&M's report referred to above and Mesa's internal reserve estimates, DNR
requested another independent engineering firm, Williamson Petroleum
Consultants, Inc. ("Williamson"), to make an independent evaluation of the
projected gross proved gas reserves attributable to the Hugoton and West
Panhandle properties in which Mesa had an interest as of December 31, 1995. The
evaluation was based on limited data and abbreviated procedures, and did not
constitute a complete engineering estimate of such reserves. The projected gross
proved gas reserves contained in the evaluation were then used by Mesa's
internal reserve engineers in order to derive estimates of net reserves,
including NGLs, and associated economic projections using abbreviated computer
models at the summary level that could be compared to Mesa's estimates set forth
in the table above. Williamson subsequently reviewed the results of the
procedures performed by Mesa's internal reserve engineers, and concluded that
such procedures and associated estimates were reasonable and consistent and
incorporated techniques used and accepted in the oil and gas industry.
41
<PAGE> 43
The net reserves (on an MMcfe basis) derived from the data concerning gross
gas reserves provided in Williamson's evaluation were approximately 89% of the
net reserves (on an MMcfe basis) contained in Mesa's internal estimates of the
reserves attributable to Mesa's Hugoton and West Panhandle properties as of
December 31, 1995. The present value of the estimated future net cash flows
discounted at 10%, before income taxes, of such net reserves, as so derived, was
approximately 97% of the present value of the estimated future net cash flows
contained in Mesa's internal estimates of the reserves attributable to Mesa's
Hugoton and West Panhandle properties as of December 31, 1995. The difference in
net reserves is primarily due to differing opinions concerning the reserves that
could be recovered from such properties in the later years of the life of such
reserves, which are beyond the term of the Notes.
Information relating to Mesa's proved oil and gas reserves is based upon
engineering estimates. Estimates of economically recoverable oil and gas
reserves and of future net revenues depend upon a number of factors and
assumptions, such as historical production performance, 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 costs, all of which may in fact vary considerably from actual
future conditions. The accuracy of any reserve estimate is a function of the
quality of the available data, of engineering and geological interpretation and
of subjective judgment. For these reasons, estimates of the economically
recoverable quantities of oil and gas reserves 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
materially. Actual production, revenues, and expenditures with respect to Mesa's
reserves will likely vary from estimates, and such variances may be material.
See "Risk Factors -- Business and Industry Risks -- Reserves and Future Net Cash
Flows."
Each year, Mesa files reserve estimates as of the end of the preceding
fiscal year with the Energy Information Administration of the Department of
Energy (the "EIA"). Mesa's reserve estimates as of December 31, 1995, filed with
the EIA did not vary from those estimates contained herein by more than 5% as
described above.
The estimated quantities of proved oil and gas reserves, the standardized
measure of future net cash flows from proved oil and gas reserves (the
"Standardized Measure") and the changes in the Standardized Measure for each of
the three years in the period ended December 31, 1995, are included under
"Supplemental Financial Data" in the notes to the Consolidated Financial
Statements of the Company located elsewhere in this Prospectus.
PRODUCTION
Mesa's Hugoton and West Panhandle fields are both mature reservoirs that are
substantially developed and have long life production profiles. Natural gas
production is subject to numerous state and federal laws and Federal Energy
Regulatory Commission (the "FERC") regulations. See "-- Regulation and Prices."
Certain other factors affecting production in Mesa's various fields are
discussed in greater detail below.
Hugoton Field
The Kansas Corporation Commission (the "KCC") is the state regulatory agency
that regulates oil and gas production in Kansas. One of the KCC's most important
responsibilities is the determination of market demand (allowables) for the
Hugoton field and the allocation of allowables among the more than 9,000 wells
in the field.
Twice each year, the KCC sets the fieldwide allowable production at a level
estimated to be necessary to meet the Hugoton market demand for the summer and
winter production periods. The fieldwide allowable is then allocated among
individual wells determined by a series of calculations that are principally
based on each well's pressure, deliverability and acreage. The allowables
assigned to individual wells are affected by the relative production, testing,
and drilling practices of all producers in the field, as well as the relative
pressure and deliverability performance of each well.
Generally, fieldwide allowables are influenced by overall gas market supply
and demand in the United States as well as specific nominations for gas from the
parties who produce or purchase gas from the field. Since 1987, fieldwide
allowables have increased in each year except 1991. The total field allowable in
1995 was 619 Bcf of wellhead gas.
42
<PAGE> 44
In 1994 the KCC issued an order establishing new field rules which modified
the formulas used to allocate allowables among wells in the Chase formation
portion of the Hugoton field. The standard pressure used in each well's
calculated deliverability was reduced by 35%, greatly benefitting Mesa's high
deliverability wells. Also, the new rules assign a 30% greater allowable to 640
acre units with infill wells than to similar units without infill wells.
Substantially all of Mesa's Hugoton infill wells have been drilled. Mesa's share
of the allowables from the field increased from approximately 10% in late 1993
to approximately 14% after the new field rules were implemented in 1994. Mesa's
share of the field allowable averaged 14.3% in 1995. Mesa estimates that it and
the other major producers in the Hugoton field produced at or near full capacity
in 1995 and Mesa expects such practice to continue.
Mesa's net Hugoton field production decreased to approximately 70 Bcfe in
1995 compared with 73 Bcfe in 1994 as a result of changes in timing and duration
of equipment maintenance in 1995. Mesa expects its Hugoton field production will
decline slightly from 1995 levels each year through 1998. Beginning in 1999,
Mesa expects annual production declines will reach the historical levels of 8%
to 10% as a result of normal depletion.
Excluding reserve acquisitions, Mesa has invested over $138 million in
capital expenditures in its Hugoton properties since 1986 to drill 382 infill
wells, to construct the Satanta plant and related facilities, and to upgrade
gathering and compression facilities, production equipment and pipeline
interconnects in order to increase production capacity and marketing
flexibility. Mesa expects future capital expenditures for the maintenance of
production to be substantially lower.
West Panhandle Field
Mesa's production of wet gas from the West Panhandle field is governed by
the PAA and other contracts with CIG. Mesa was entitled to take wet gas
production up to a maximum of 32 Bcf in 1995. Mesa actually took 29 Bcf
primarily due to a weather-related decrease in demand in 1995. Mesa will again
be entitled to take wet gas production up to a maximum of 32 Bcf during 1996.
After deductions for processing and royalties, Mesa expects that 32 Bcf of wet
gas production will result in annual net production volumes of approximately 21
Bcf of residue gas and 3 MMBbls of NGLs. Beginning in 1997 Mesa will have the
right to take and market as much gas as it can produce, subject to specific CIG
seasonal and daily entitlements as provided for under the contracts. Assuming
continuation of existing economic and operating conditions, Mesa expects its
existing West Panhandle properties will be able to produce an average of 35 Bcf
of wet gas per year for sale in the years 1997 through 2000.
The PAA contains provisions which allocate 77% of ultimate production after
January 1, 1991 to Mesa and 23% to CIG. As a result, Mesa records 77% of total
annual West Panhandle production as sales, regardless of whether Mesa's actual
deliveries are greater or less than the 77% share. The difference between Mesa's
77% entitlement and the amount of production actually sold by Mesa to its
customers is recorded monthly as production revenue with corresponding accruals
for operating costs, production taxes, depreciation, depletion and amortization,
and gas balancing receivables. At December 31, 1995, Mesa had cumulative
production which was less than its 77% entitlement since January 1, 1991, and a
long-term gas balancing receivable of $42.6 million was recorded in Mesa's
balance sheet in other assets. In future years, as Mesa sells to customers more
than its 77% entitlement share of field production, this receivable will be
realized.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Operations -- Production Allocation Agreement."
NATURAL GAS PROCESSING
Mesa processes its natural gas production for the extraction of NGLs and
helium to enhance the market value of the gas stream. In recent years Mesa has
made substantial capital investments to enhance its natural gas processing and
helium extraction capabilities in the Hugoton and West Panhandle fields. Mesa
owns and operates its processing facilities, which allows Mesa to (i) capture
the processing margin for itself, as third-party processing agreements generally
available in the industry result in retention of a significant portion of the
processing margin by the contract processor, (ii) control the quality of the
residue gas stream, permitting it to deliver gas directly to pipelines for sales
to local distribution companies, marketing companies and end users, and (iii)
realize value from premium products such as crude helium. Mesa believes that the
ability to control its production stream from the wellhead through its
processing facilities to disposition at central delivery points enhances its
marketing opportunities and competitive position in the industry.
43
<PAGE> 45
Through its natural gas processing plants, Mesa extracts raw NGLs and crude
helium from the wet natural gas stream. The NGLs are then transported and
fractionated into their constituent hydrocarbons such as ethane, propane, normal
butane, isobutane, and natural gasolines. The NGLs and crude helium are then
sold pursuant to contracts providing for market-based prices.
Satanta Natural Gas Processing Plant
The Satanta plant has the capacity to process 250 MMcf of natural gas per
day, and enables Mesa to extract NGLs from substantially all of the gas produced
from its Hugoton field properties as well as third party producers' gas (to date
third-party gas production has been minimal). The Satanta plant also has the
ability to extract helium from the gas stream. In 1995 the Satanta plant
averaged 191 MMcf per day of inlet gas and produced a daily average of 10.9
MBbls of NGLs, 671 Mcf of crude helium and 144 MMcf of residue natural gas.
Fain Natural Gas Processing Plant
Wet gas produced from the West Panhandle field contains a high quantity of
NGLs, yielding relatively greater NGL volumes than realized from most other
natural gas fields. The Fain plant has inlet capacity of 120 MMcf per day. In
1995 the Fain plant averaged 81 MMcf per day of inlet gas and produced a daily
average of 8.1 MBbls of NGLs and condensate, 53 Mcf of crude helium and 61 MMcf
of residue natural gas.
Mesa plans to expand the Fain plant to process additional natural gas
production which Mesa expects to take beginning in 1997 and to process certain
third-party natural gas. Mesa also plans to upgrade the Fain plant to recover
additional liquids from the natural gas stream due to richer gas in the field.
SALES AND MARKETING
Following the processing of wet gas, Mesa sells the dry (or residue) natural
gas, helium, condensate and NGLs pursuant to various short term and long term
sales contracts. Substantially all of Mesa's gas and NGL sales are made at
market prices, with the exception of certain West Panhandle field volumes. Due
to a number of market forces, including the seasonal demand for natural gas,
both sales volumes from Mesa's properties and sales prices received vary on a
seasonal basis. Sales volumes and price realizations for natural gas are
generally higher during the first and fourth quarters of each calendar year.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Operations -- Revenues" for a table showing
production and prices by area for the past three years.
Hugoton Gas Sales Contracts
A substantial portion of Mesa's Hugoton field production was subject to two
gas purchase contracts with Western Resources, Inc. ("WRI") and Missouri Gas
Energy ("MGE") which expired in May 1995. The expiration of these contracts
gives Mesa over 200 MMcf per day of uncommitted natural gas production available
to sell on an uninterruptible basis under various short term, long term and peak
day contracts to a substantial number of purchasers in the Midwest. Under the
contracts, WRI and MGE had the right to purchase 19.9 Bcf during the first five
months of 1995 at market prices. In 1995 WRI and MGE together purchased 20.7 Bcf
of gas from Mesa at an average price of $1.44 per Mcf under these contracts.
Since June 1, 1995, gas previously subject to the WRI and MGE contracts has been
sold to multiple purchasers including WRI and MGE under short term contracts at
market prices.
Mesa's efforts to maximize its annual production and to direct natural gas
sales to the most favorable markets available are consistent with regulatory and
contractual requirements. Mesa sells its Hugoton field production to marketers,
pipelines, local distribution companies and end-users, generally at market
prices.
West Panhandle Gas Sales Contracts
Most of Mesa's West Panhandle field residue natural gas is sold pursuant to
gas purchase contracts with two major customers in the Texas Panhandle area.
44
<PAGE> 46
Approximately 9 Bcf per year of residue natural gas is sold to a gas utility
that serves residential and commercial customers in Amarillo, Texas, under the
terms of a long term agreement dated January 2, 1993, which supersedes the
original contract that had been in effect since 1949. The agreement contains a
pricing formula for the five year period from 1993 through 1997 whereby 70% of
the volumes sold to the gas utility are sold at fixed prices and the other 30%
of volumes sold are priced at a regional market index based on spot prices plus
$.10 per Mcf. The fixed portion of the price formula was $2.85 per Mcf in 1994,
$2.99 per Mcf in 1995 and escalates to $3.21 per Mcf in 1996 and $3.45 per Mcf
in 1997. Prices for 1998 and beyond will be determined by renegotiation. Mesa
provides the gas utility the right to take as much gas as Mesa can produce and
deliver on a given day, including a right to the residue gas volumes required to
meet the seasonal needs of its residential and commercial customers. The average
price received by Mesa for natural gas sales to the gas utility in 1995 was
$2.55 per Mcf.
Through 1995, Mesa's principal industrial customer for West Panhandle field
gas was an intrastate pipeline company which serves various markets, including
an electric power generation facility near Amarillo. In 1990 Mesa entered into a
five year contract with the pipeline company to supply gas to the power
generation facility. The contract provided for a minimum annual volume of 8.4
Bcf in 1995 at a fixed price per MMBtu of $1.70 in 1995. Mesa periodically made
sales to the pipeline company in excess of the minimum volumes specified in the
contract at market prices. In 1995 Mesa sold approximately 9.3 Bcf of residue
natural gas to the pipeline for an average price of $1.63 per Mcf. This contract
expired on December 31, 1995.
Effective January 1, 1996, Mesa entered into a four year contract with a
marketing company, an affiliate of the intrastate pipeline company, which serves
the local electric power generation facility and various other markets within
and outside Amarillo, Texas. The contract provides for the sale of Mesa's West
Panhandle field gas which is in excess of the volumes sold to the gas utility
and other existing industrial customers. The price for gas sold under this
contract is a regional market index determined monthly based on spot prices plus
$0.02 per MMBtu.
Other industrial customers purchase natural gas from Mesa under short to
intermediate term contracts. These sales totaled approximately 3.5 Bcf in 1995.
Prior to 1993, Mesa's right to sell natural gas produced from the West
Panhandle field was based, in part, upon contractual requirements to serve
customers in Amarillo, Texas, and its environs. An amendment to the PAA in 1993
removed this restriction, and Mesa now has the right to market its production
elsewhere. Mesa believes that the right to market production outside the
Amarillo area will ensure that Mesa receives competitive terms for its West
Panhandle field production. Through 1999, Mesa's West Panhandle field production
is under contract to customers as described above.
NGL, Helium and LNG Sales
NGL production from both the Satanta and Fain plants are sold by component
pursuant to a seven year contractual arrangement with Mapco Oil and Gas Company,
a major transporter and marketer of NGLs, at the greater of Midcontinent or Gulf
Coast prices at the time of sale. Crude helium is sold to an industrial gas
company under a fifteen year agreement that provides for annual price
adjustments based on market prices.
Mesa has formed an LNG production and marketing joint venture, Mesa-Pacific
LNG Joint Venture, L.L.C. ("Mesa Pacific"), with Pacific Enterprises, the parent
company of Southern California Gas Company, in an effort to profit from the
increasing use of LNG as a transportation fuel. Mesa Pacific purchases LNG from
Mesa and then markets the product to fleet operators. Mesa produces LNG at its
Satanta plant and is reviewing plans to add LNG production capabilities at the
Fain plant.
Major Customers
In 1995 revenues include sales to Mapco Petroleum, Inc. ("Mapco") of $75.0
million (34.4%) and WRI of $21.9 million (10.0%). In 1994 revenues included
sales to Mapco of $70.9 million (31.4%), WRI of $37.4 million (16.6%), and
Energas Company of $22.8 million (10.1%). In 1993 revenues included sales to
Mapco of $60.2 million (27.5%), WRI of $51.8 million (23.6%) and Natural Gas
Clearinghouse of $23.1 million (10.5%). Because of the availability of the spot
market for natural gas and NGL sales and Mesa's ability to deliver its
production to numerous geographic markets, Mesa believes that the loss of any
one or more of its major customers would not have a material adverse effect on
Mesa's financial condition or results of operations.
45
<PAGE> 47
PRODUCTION COSTS
The table below presents Mesa's total production costs (lease operating
expenses and production and other taxes) by area of operation for each of the
last three years:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1993 1994 1995
------------------ ----------------- -----------------
TOTAL PER MCFE TOTAL PER MCFE TOTAL PER MCFE
------ -------- ----- -------- ----- --------
(DOLLARS IN MILLIONS, EXCEPT PER MCFE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Lease operating expense:
Hugoton..................................... $10.0 $ .18 $12.6 $ .17 $12.7 $ .18
West Panhandle.............................. 29.9 .66 28.4 .64 28.4 .73
Gulf Coast.................................. 11.0 .99 11.1 1.15 9.8 .68
Other....................................... .9 1.03 .6 2.00 .9 2.57
----- ----- -----
51.8 .45 52.7 .41 51.8 .42
----- ----- -----
Production and other taxes:
Hugoton..................................... 15.4 .27 17.5 .24 15.0 .21
West Panhandle.............................. 4.6 .10 3.1 .07 3.2 .08
Gulf Coast.................................. .1 .01 .1 .01 .1 .00
Other....................................... .3 .30 .6 2.04 .1 .42
----- ----- -----
20.4 .18 21.3 .17 18.4 .15
----- ----- -----
Total production costs........................ $72.2 $ .63 $74.0 $ .58 $70.2 $ .57
===== ===== =====
</TABLE>
Mesa's lease operating expenses consist of lease maintenance, gathering and
processing costs and have a significant fixed-cost component. As a result, the
production cost per Mcfe in the table above is affected by changes in the volume
of oil and gas produced. Production tax rates in Kansas, where Mesa's Hugoton
field properties are located, are assessed on wellhead value. These rates were
reduced from 7% in 1993 to 6% in 1994 and 5% in 1995. In 1993 West Panhandle
field taxes included a one-time adjustment related to prior years' production.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Operations."
DRILLING ACTIVITIES
The following table shows the results of Mesa's drilling activities for the
last five years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1991 1992 1993 1994 1995
------------- ------------- ------------- ------------- -------------
GROSS NET GROSS NET GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exploratory wells:
Productive................ 6 4.7 5 4.1 -- -- -- -- 1 .3
Dry....................... 1 .2 1 .4 1 1.0 -- -- 4 4.0
Development wells:
Productive................ 26 10.9 22 16.5 43 29.1 31 24.5 20 14.0
Dry....................... -- -- -- -- -- -- 1 .8 -- --
-- ---- -- ---- -- ---- -- ---- -- ----
Total....................... 33 15.8 28 21.0 44 30.1 32 25.3 25 18.3
== ==== == ==== == ==== == ==== == ====
</TABLE>
At December 31, 1995, Mesa was participating in the drilling of one gross
(.25 net) well. Of the four gross exploratory wells drilled in 1995 that were
dry, two were in the Gulf of Mexico and two were in the Rocky Mountain region.
46
<PAGE> 48
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 December 31, 1995, is set forth in the
following table:
<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................................. 258,818 231,278 1,387 988.9 5,280 5,280
Texas.................................. 241,354 185,654 601 452.4 480 156
Wyoming................................ 11,477 4,365 2 -- 14,926 9,391
North Dakota........................... 4,661 3,532 20 3.8 3,932 2,572
Other.................................. 2,597 2,139 13 1.3 22,012 11,573
------- ------- ----- ------- ------ ------
Total onshore................... 518,907 426,968 2,023 1,446.4 46,630 28,972
------- ------- ----- ------- ------ ------
Offshore U.S.:
Louisiana.............................. 87,024 45,710 189 39.7 20,210 19,898
Texas.................................. 73,808 18,848 59 10.1 17,280 17,280
------- ------- ----- ------- ------ ------
Total offshore.................. 160,832 64,558 248 49.8 37,490 37,178
------- ------- ----- ------- ------ ------
Total acreage............................ 679,739 491,526 2,271 1,496.2 84,120 66,150
======= ======= ===== ======= ====== ======
</TABLE>
Mesa has interests in 2,092 gross (1,473.5 net) producing gas wells and 179
gross (22.7 net) producing oil wells in the United States. Mesa also owns
approximately 84,632 net acres of producing minerals and 42,964 net acres of
nonproducing minerals in the United States.
COMPETITION
The oil and gas business is highly competitive in the search for,
acquisition of, and sale 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 Mesa's. 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. 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 deliverability, its flexibility to sell
such reserves in a diverse number of markets and its ability to produce its
reserves at a low cost.
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, or in the past
have been, affected by price controls, taxes, conservation, safety,
environmental, and other laws relating to the petroleum industry, by changes in
such laws and by constantly changing administrative regulations.
Price Regulations
In the recent past, maximum selling prices for certain categories of oil,
gas, condensate and NGLs were subject to federal regulation. In 1981 all federal
price controls over sales of crude oil, condensate and NGLs were lifted.
Effective January 1, 1993, the Natural Gas Wellhead Decontrol Act (the
"Decontrol Act") deregulated natural gas prices for all "first sales" of natural
gas, which includes all sales by Mesa of its own production. As a result, all
sales of Mesa's domestically produced oil, gas, condensate and NGLs may be sold
at market prices, unless otherwise committed by contract.
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Natural Gas Regulation
Historically, interstate pipeline companies generally acted as wholesale
merchants by purchasing natural gas from producers and reselling the gas to
local distribution companies and large end users. Commencing in late 1985, the
FERC issued a series of orders that have had a major impact on interstate
natural gas pipeline operations, services, and rates, and thus have
significantly altered the marketing and price of natural gas. The FERC's key
rule making action, Order No. 636 ("Order 636"), issued in April 1992, required
each interstate pipeline to, among other things, "unbundle" its traditional
bundled sales services and create and make available on an open and
nondiscriminatory basis numerous constituent services (such as gathering
services, storage services, firm and interruptible transportation services, and
standby sales and gas balancing services), and to adopt a new rate making
methodology to determine appropriate rates for those services. To the extent the
pipeline company or its sales affiliate makes gas sales as a merchant in the
future, it does so pursuant to private contracts in direct competition with all
other sellers, such as Mesa; however, pipeline companies and their affiliates
were not required to remain "merchants" of gas, and most of the interstate
pipeline companies have become "transporters only." In subsequent orders, the
FERC largely affirmed the major features of Order 636 and denied a stay of the
implementation of the new rules pending judicial review. By the end of 1994, the
FERC had concluded the Order 636 restructuring proceedings, and, in general,
accepted rate filings implementing Order 636 on every major interstate pipeline.
However, even through the implementation of Order 636 on individual interstate
pipelines is essentially complete, many of the individual pipeline restructuring
proceedings, as well as Order 636 itself and the regulations promulgated
thereunder, are subject to pending appellate review and could possibly be
changed as a result of future court orders. Mesa cannot predict whether the
FERC's orders will be affirmed on appeal or what the effects will be on its
business.
In recent years the FERC also has pursued a number of other important policy
initiatives which could significantly affect the marketing of natural gas. Some
of the more notable of these regulatory initiatives include (i) a series of
orders in individual pipeline proceedings articulating a policy of generally
approving the voluntary divestiture of interstate pipeline owned gathering
facilities by interstate pipelines to their affiliates (the so-called "spin
down" of previously regulated gathering facilities to the pipeline's
nonregulated affiliate), (ii) the completion of a rule making involving the
regulation of pipelines with marketing affiliates under Order No. 497, (iii) the
FERC's ongoing efforts to promulgate standards for pipeline electronic bulletin
boards and electronic data exchange, (iv) a generic inquiry into the pricing of
interstate pipeline capacity, (v) efforts to refine the FERC's regulations
controlling operation of the secondary market for released pipeline capacity,
and (vi) a policy statement regarding market based rates and other
non-cost-based rates for interstate pipeline transmission and storage capacity.
Several of these initiatives are intended to enhance competition in natural gas
markets, although some, such as "spin downs," may have the adverse effect of
increasing the cost of doing business on some in the industry as a result of the
monopolization of those facilities by their new, unregulated owners. The FERC
has attempted to address some of these concerns in its orders authorizing such
"spin downs," but it remains to be seen what effect these activities will have
on access to markets and the cost to do business. As to all of these recent FERC
initiatives, the ongoing, or, in some instances, preliminary evolving nature of
these regulatory initiatives makes it impossible at this time to predict their
ultimate impact on Mesa's business.
Mesa owns, directly or indirectly, certain natural gas facilities that it
believes meet the traditional tests the FERC has used to establish a company's
status as a gatherer not subject to FERC jurisdiction under the Natural Gas Act
of 1938 (the "NGA"). Moreover, recent orders of the FERC have been more liberal
in their reliance upon or use of the traditional tests, such that in many
instances, what was once classified as "transmission" may now be classified as
"gathering." Mesa transports its own gas through these facilities. Mesa also
transports certain of its gas through gathering facilities owned by others,
including interstate pipelines. With respect to item (i) in the preceding
paragraph, on May 27, 1994, the FERC issued orders in the context of the "spin
off" or "spin down" of interstate pipeline owned gathering facilities. A "spin
off" is a FERC-approved sale of such facilities to a non-affiliate. A "spin
down" is the transfer by the interstate pipeline of its gathering facilities to
an affiliate. A number of spin offs and spin-downs have been approved by the
FERC and implemented. The FERC held that it retains jurisdiction over gathering
provided by interstate pipelines, but that it generally does not have
jurisdiction over pipeline gathering affiliates, except in the event of
affiliate abuse (such as actions by the affiliate undermining open and
nondiscriminatory access to the interstate pipeline). These orders require
nondiscriminatory access for all sources of supply, prohibit the tying of
pipeline transportation service to any service provided by the pipeline's
gathering affiliate, and require the new gathering company to submit a "default"
contract if a satisfactory contract cannot be mutually agreed upon by the
interstate pipeline and its existing customers. Several petitions for rehearing
of the FERC's May 27, 1994,
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orders were filed. On November 30, 1994, the FERC issued a series of rehearing
orders largely affirming the May 27, 1994, orders. The FERC clarified that
"default" contracts are intended to serve only as a transition mechanism to
prevent arbitrary termination of gathering service to existing customers. Also,
the FERC now requires interstate pipelines to not only seek authority under
Section 7(b) of the NGA to abandon certificated facilities, but also to seek
authority under Section 4 of the NGA to terminate service from both certificated
and uncertificated facilities. On December 31, 1994, an appeal was filed with
the U.S. Court of Appeals for the D.C. Circuit to overturn three of the FERC's
November 30, 1994, orders. Mesa cannot predict what the ultimate effect of the
FERC's orders pertaining to gathering will have on its production and marketing,
or whether the Appellate Court will affirm the FERC's orders on these matters.
State and Other Regulation
All of the jurisdictions in which Mesa owns producing oil and gas properties
have statutory provisions regulating the exploration for and production of crude
oil and natural gas. Such regulation includes requiring permits for the drilling
of wells, maintaining bonding requirements in order to drill or operate wells,
and relating to the location of wells, the method of drilling and casing wells,
the surface use and restoration of properties upon which wells are drilled and
the plugging and abandoning of wells. Mesa's operations are also subject to
various conservation laws and regulations. These include the regulation of the
size of drilling and spacing units or proration units and the density of wells
which may be drilled and the unitization or pooling of oil and gas properties.
In this regard, some states allow the forced pooling or integration of tracts to
facilitate exploration while other states rely on voluntary pooling of lands and
leases. In addition, state conservation laws establish maximum rates of
production from oil and natural gas wells, generally prohibit the venting or
flaring of natural gas and impose certain requirements regarding the ratability
of production. Some states, such as Texas, Oklahoma, and Kansas, have, in recent
years, reviewed and substantially revised methods previously used to make
monthly determinations of allowable rates of production from fields and
individual wells. See "-- Production" for a discussion of recent changes to
Mesa's allowables in the Hugoton field. The effect of these regulations is to
limit the amounts of oil and natural gas Mesa can produce from its wells, and to
limit the number of wells or the location at which Mesa can drill.
State regulation of gathering facilities generally includes various safety,
environmental, and in some circumstances, non-discriminatory take requirements,
but does not generally entail rate regulation. Natural gas gathering has
received greater regulatory scrutiny at both the state and federal levels in the
wake of the interstate pipeline restructuring under Order 636. For example,
Oklahoma recently enacted a prohibition against discriminatory gathering rates,
and certain Texas and Kansas regulatory officials have expressed interest in
evaluating similar rules in their respective states.
Federal Royalty Matters
By a letter dated May 3, 1993, directed to thousands of producers holding
interests in federal leases, the United States Department of the Interior (the
"DOI") 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 DOI's
letter set forth various theories of liability, all founded on the DOI'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 DOI 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 DOI's action, in July 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 DOI's theories. The lawsuit, styled
"Independent Petroleum Association v. Babbitt," was transferred to the United
States District Court in Washington, D.C. On June 14, 1995, the Court issued a
ruling in this case holding that royalties are payable to the United States on
gas contract settlement proceeds in accordance with the Minerals Management
Service's May 3, 1993, letter to producers. This ruling was appealed and is now
pending in the D.C. Circuit Court of Appeals. The DOI's claim in a bankruptcy
proceeding against a producer based upon an interstate pipeline's earlier
buy-out of the producer's gas sale contract was rejected by the federal
Bankruptcy Court in Lexington, Kentucky, in a proceeding styled "Century
Offshore Management Corp." While the facts of the Court's decision do not
involve all of the DOI's theories, the Court found on those at issue that DOI's
theories were without legal merit, and the Court's reasoning suggests that the
DOI's other claims are similarly deficient. This decision was
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upheld in the District Court and is now on appeal in the Sixth Circuit Court of
Appeals. Because both the "Independent Petroleum Association v. Babbitt" and
"Century Offshore Management Corp." decisions have been appealed, and because of
the complex nature of the calculations necessary to determine potential
additional royalty liability under the DOI's theories, it is impossible to
predict what, if any, additional or different royalty obligation the DOI may
assert or ultimately be entitled to recover with respect to any of Mesa's prior
natural gas contract settlements.
Environmental Matters
Mesa's operations are subject to numerous federal, state, and local laws and
regulations controlling the discharge of materials into the environment or
otherwise relating to the protection of the environment, including the
Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), also known as the "Federal Superfund Law." Such laws and
regulations, among other things, impose absolute liability upon the lessee under
a lease for the cost of clean up of pollution resulting from a lessee's
operations, subject the lessee to liability for pollution damages, may require
suspension or cessation of operations in affected areas, and impose restrictions
on the injection of liquids into subsurface aquifers that may contaminate
groundwater. Mesa maintains insurance against costs of clean-up operations, but
it is not fully insured against all such risks. A serious incident of pollution
may, as it has in the past, also result in the DOI requiring lessees under
federal leases to suspend or cease operation in the affected area. In addition,
the recent trend toward stricter standards in environmental legislation and
regulation may continue. For instance, legislation has been proposed in Congress
from time to time that would reclassify certain oil and gas production wastes as
"hazardous wastes" which would make the reclassified exploration and production
wastes subject to much more stringent handling, disposal, and clean up
requirements. If such legislation were to be enacted, it could have a
significant impact on Mesa's operating costs, as well as the oil and gas
industry in general. State initiatives to further regulate the disposal of oil
and gas wastes are also pending in certain states, and these various initiatives
could have a similar impact on Mesa.
The Oil Pollution Act of 1990 ("OPA") and regulations thereunder impose a
variety of regulations on "responsible parties" (which include owners and
operators of offshore facilities) related to the prevention of oil spills and
liability for damages resulting from such spills in United States waters. In
addition, OPA imposes ongoing requirements on responsible parties, including
proof of financial responsibility to cover at least some costs in a potential
spill. On August 25, 1993, the Minerals Management Service (the "MMS") published
an advance notice of its intention to adopt a rule under OPA that would require
owners and operators of offshore oil and gas facilities to establish $150
million in financial responsibility. Under the proposed rule, financial
responsibility could be established through insurance, guaranty, indemnity,
surety bond, letter of credit, qualification as a self insurer, or a combination
thereof. There is substantial uncertainty as to whether insurance companies or
underwriters will be willing to provide coverage under OPA because the statute
provides for direct lawsuits against insurers who provide financial
responsibility coverage, and most insurers have strongly protested this
requirement. The financial tests or other criteria that will be used to judge
self-insurance are also uncertain. As a result of the strong opposition to the
$150 million financial responsibility requirement in its present form, the DOI
has decided not to implement the OPA until some time in 1996. While there has
been discussion in the United States Congress about amending the financial
responsibility requirements of the OPA, such action has not been undertaken to
date. Mesa cannot predict the final form of the financial responsibility rule
that will be adopted by the MMS, but such rule has the potential to result in
the imposition of substantial additional annual costs on Mesa or otherwise have
material adverse effects on Mesa's operations in the Gulf of Mexico.
Under current federal regulations concerning offshore operations, the MMS is
authorized to require lessees to post supplemental bonds to cover their
potential leasehold abandonment costs. By letter dated November 9, 1995, Mesa
was advised by the MMS that it does not qualify for a waiver from supplemental
bond requirements and that Mesa may be required to post supplemental bonds
covering its potential obligations with respect to offshore operations. On
December 8, 1995, the MMS published a Notice of Proposed Rule-making in which
the MMS proposed to further clarify and update its Outer Continental Shelf
operational bond requirements. Comments with respect to this proposed rule
making were initially due March 7, 1996, subsequently extended to May 6, 1996.
Mesa submitted a "Guarantee of Abandonment of Liability Responsibility" to the
MMS on April 26, 1996 in response to discussions of this matter with the MMS and
in lieu of posting any supplemental bonds. Mesa cannot predict the final form of
the financial responsibility rule that will be adopted by the MMS or whether the
MMS will require it to post supplemental bonds, but such rule or requirement has
the potential to result in substantial additional annual costs to Mesa or
otherwise have material adverse effects on Mesa's operation in the Gulf of
Mexico.
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In 1993 a number of companies in New Mexico, including Mesa, were named in a
preliminary information request from the Environmental Protection Agency (the
"EPA") as persons who may be potentially responsible for costs incurred in
connection with the Lee Acres Landfill site. Although Mesa did not directly
dispose of any materials at the site, it may have contracted to transport
materials from its operations with certain trucking companies also named in the
information request. To the extent any materials produced by Mesa may have been
transported to the site, Mesa believes that such materials were rainwater and/or
water produced from natural gas wells, which Mesa believes are exempt or
excluded from the definitions of "hazardous waste" or "hazardous substance"
under applicable federal environmental laws, although the EPA may assert a
contrary position. Since submitting its response to the information request in
April 1994, Mesa has not received any additional inquiries or information from
the EPA concerning the site, including whether Mesa is, in fact, asserted to be
a responsible party for the site or what potential liability, if any, Mesa may
face in connection with this matter.
Mesa is not involved in any other administrative or judicial proceedings
arising under federal, state, or local environmental protection laws and
regulations which would have a material adverse effect on Mesa's financial
position or results of operations.
LEGAL PROCEEDINGS
Masterson Lawsuits
In February 1992, the current lessors of an oil and gas lease (the "Gas
Lease") dated April 30, 1955, between R. B. Masterson, et al., as lessor, and
CIG, as lessee, sued CIG in federal District Court in Amarillo, Texas, claiming
that CIG had underpaid royalties due under the Gas Lease. Under the agreements
with CIG, Mesa has an entitlement to gas produced from the Gas Lease. In August
1992, CIG filed a third-party complaint against Mesa for any such royalty
underpayments which may be allocable to Mesa. The plaintiffs alleged that the
underpayment was the result of CIG's use of an improper gas sales price upon
which to calculate royalties and that the proper price should have been
determined pursuant to a "favored-nations" clause in a July 1, 1967, amendment
to the Gas Lease. The plaintiffs also sought a declaration by the court as to
the proper price to be used for calculating future royalties.
The plaintiffs alleged royalty underpayments of approximately $500 million
(including interest at 10%) covering the period from July 1, 1967, to the
present. In March 1995, the court made certain pretrial rulings that eliminated
approximately $400 million of the plaintiffs' claims (which related to periods
prior to October 1, 1989), but which also reduced a number of Mesa's defenses.
Mesa and CIG filed stipulations with the court whereby Mesa would have been
liable for between 50% and 60%, depending on the time period covered, of an
adverse judgment against CIG for post-February 1988 underpayments of royalties.
On March 22, 1995, a jury trial began and on May 4, 1995, the jury returned its
verdict. Among its findings, the jury determined that CIG had underpaid
royalties for the period after September 30, 1989, in the amount of
approximately $140,000. Although the plaintiffs argued that the
"favored-nations" clause entitled them to be paid for all of their gas at the
highest price voluntarily paid by CIG to any other lessor, the jury determined
that the plaintiffs were estopped from claiming that the "favored-nations"
clause provides for other than a pricing-scheme to pricing-scheme comparison. In
light of this determination, and the plaintiffs' stipulation that a
pricing-scheme to pricing-scheme comparison would not result in any "trigger
prices" or damages, defendants asked the court for a judgment that plaintiffs
take nothing. The court, on June 7, 1995, entered final judgment that plaintiffs
recover no monetary damages. The plaintiffs have filed a motion for new trial,
on which the court has not yet ruled. Mesa cannot predict whether the court will
grant such motion or, if it does not, whether the plaintiffs will appeal the
court's final judgment.
On June 7, 1996, the plaintiffs filed a separate suit against CIG and Mesa
in state court in Amarillo, Texas, similarly claiming underpayment of royalties
under the "favored-nations" clause, but based upon the above-described
pricing-scheme to pricing-scheme comparison on a well-by-well monthly basis. The
plaintiffs also claim underpayment of royalties since June 7, 1995 under the
"favored-nations" clause based upon either the pricing-scheme to pricing-scheme
method or their previously alleged higher price method. Mesa believes it has
several defenses to this action and intends to contest it vigorously. Mesa has
not yet determined the amount of damages, if any, that would be payable if such
action were determined adversely to Mesa.
Thompson Lawsuit
In May 1996, the current lessors of an oil and gas lease dated October 8,
1958 between Terry Thompson, Jr., et al., as Lessor, and CIG, as Lessee, sued
CIG in state court in Amarillo claiming CIG has underpaid royalties based upon
allegations that CIG failed to develop, produce and market the gas properly.
Mesa is not
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currently a party to this litigation; however, if CIG is found to be liable for
any such underpayments, it may seek to recover from Mesa the portion of such
underpayments which may be allocable to Mesa. Mesa believes there are several
defenses to this action and, to the extent Mesa becomes a party, intends to
contest such action vigorously. Mesa has not yet determined the amount of
damages, if any, that would be payable if such action were determined adversely
to Mesa.
Preference Unitholders
The Parent was a defendant in certain purported class-action lawsuits
related to the December 31, 1991, conversion of Mesa Limited Partnership (the
"Partnership") into the Parent filed in the U.S. District Court for the Northern
District of Texas, Dallas Division, in the fall of 1991. The lawsuits were
brought under Section 14(a) of the Exchange Act and Rule 14a-9 thereunder, as
well as state law, and alleged, inter alia, that (i) the general partner of the
Partnership breached fiduciary duties to the holders of the Partnership's
preference units in structuring the conversion of the Partnership to corporate
form and allocating Common Stock among the holders of common and preference
units and (ii) the related proxy statement contained material misstatements and
omissions. This lawsuit sought payment of preferential distribution amounts on
the preference units plus unspecified damages, attorneys' fees and other relief.
On January 17, 1992, plaintiffs moved for leave to amend their compliant to
allege that it was also brought under Sections 11, 12(2) and 15 of the
Securities Act and Rule 10b-5 under the Exchange Act and to allege that the
Partnership failed to obtain an allegedly required vote of 90% of unitholders
or, in lieu thereof, the required opinion of independent counsel. On June 5,
1992, a class was certified. On August 12, 1994, the Court granted defendants'
Motion for Summary Judgment and entered a judgment in favor of all defendants.
The plaintiffs appealed, and on June 19, 1995, the Fifth Circuit affirmed the
decision of the District Court. No application for rehearing or petition for
writ of certiorari was filed. Accordingly, the judgment in favor of Mesa is
final and nonappealable.
Lease Termination
In 1991 Mesa sold certain producing oil and gas properties to Seagull Energy
Company ("Seagull"). In 1994, two lawsuits were filed against Seagull in the
100th District Court in Carson County, Texas, by certain land and royalty owners
claiming that certain of the oil and gas leases owned by Seagull have terminated
due to cessation in production and/or lack of production in paying quantities
occurring at various times from first production through 1994. In the third
quarter of 1995, Seagull filed third-party complaints against Mesa claiming
breach of warranty and false representation in connection with the sale of such
properties to Seagull. Seagull filed a similar third-party complaint June 29,
1995, against Mesa covering a different lease in the 69th District Court in
Moore County, Texas. The plaintiffs in the cases against Seagull are seeking to
terminate the leases. Seagull, in its complaint against Mesa, is seeking
unspecified damages relating to any leases which are terminated. Mesa believes
it has several defenses to these lawsuits, including a two year limitation on
indemnification set forth in the purchase and sale agreement pursuant to which
Mesa sold the properties.
Settlement with WDB Group
On June 29, 1995, a Statement of Beneficial Ownership on Schedule 13D was
filed with the Commission announcing that Dennis Washington, Marvin Davis and
certain of his affiliates, David Batchelder and Dorn Parkinson (collectively,
the "WDB Group") beneficially owned an aggregate of 6 million shares of Common
Stock, or approximately 9.4% of the outstanding shares. Mr. Batchelder and Mr.
Parkinson had been elected to Mesa's Board in May 1995 pursuant to an agreement
between Mesa and Mr. Washington.
On July 3, 1995, the Parent filed a lawsuit regarding the Schedule 13D
against the members of the WDB Group and certain other persons alleging, among
other things, that the defendants had violated Section 13(d) of the Exchange
Act, because they had constituted a group owning more than 5% of the Common
Stock since at least late 1994 but had not filed a Schedule 13D until June 29,
1995 and because the Schedule 13D failed to disclose the existence and identity
of other members of the group.
At a July 6, 1995 special meeting of the Board, the Board determined that
all strategic alternatives to enhance value for the Parent's stockholders would
be explored under the direction of the Parent's entire Board and not by an
independent committee, as proposed by the WDB Group. Thereafter, the WDB Group
filed a preliminary proxy statement and an amendment thereto whereby the WDB
Group expressed their intention to, at some point, obtain the support of the
Parent's stockholders to vote for the removal and replacement of the Board with
the WDB Group's nominees.
Simultaneously with the filing of the proxy statement, the WDB Group filed
an answer which denied the claims in Mesa's lawsuit and asserted a counterclaim
against the Parent and certain of its directors, alleging, among other things,
that certain directors had engaged in transactions in the Parent's securities
that violated
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federal securities laws, and that the adoption of Mesa's Shareholder Rights Plan
was a violation of fiduciary duty by such directors.
On September 20, 1995, Mesa and Mr. Pickens entered into an Agreement of
Compromise and Settlement (the "WDB Settlement Agreement") with the WDB Group
and certain related parties in settlement of the litigation between Mesa and the
WDB Group. Pursuant to the Agreement, Mr. Batchelder resigned from the Board.
Joel L. Reed, a business partner of Mr. Batchelder, was elected as a director.
Under the terms of the WDB Settlement Agreement, prior to December 31, 1996,
the members of the WDB Group are prohibited from soliciting or encouraging,
advising or participating in the solicitation of proxies with respect to any
securities issued by the Parent or any of its subsidiaries, and, prior to
December 31, 1996 shall not participate or engage in any solicitation of proxies
(A) with respect to any matter submitted or to be submitted to the vote of the
holders of any such securities at any annual or special meeting or (B) for the
purpose of calling a special meeting of the Parent's stockholders or the holders
of any such securities; or advise or seek to advise any person with respect to
the voting of any of the Parent's securities; or submit, or encourage any other
person to submit, or advise or assist any person with respect to the submission
of, any nominations or proposals to the Parent or to the holders of any of the
Parent's securities for consideration by its stockholders or the holders of any
of the Parent's securities at any annual or special meeting of such holders; or
otherwise take any action to request a special meeting of the holders of any of
the Parent's securities. The WDB Group may conduct a proxy solicitation with
respect to the Parent's 1996 annual meeting if, at the time of the solicitation,
the Parent has not effected a business combination, sale of assets or equity or
similar transaction that meets certain criteria as to size and as to which an
acceptable investment banker renders a favorable opinion as to the fairness of
the transaction, all as set forth in the WDB Settlement Agreement (an "Endorsed
Major Transaction") or has consummated a similar transaction that is not an
"Endorsed Transaction" under the criteria set forth in the WDB Settlement
Agreement. Upon consummation, the sale of Preferred Stock to DNR and pursuant to
the Rights Offering will constitute an Endorsed Major Transaction.
Pursuant to the WDB Settlement Agreement, Mesa's 1996 annual meeting of
stockholders will be held on July 30, 1996.
Shareholder Litigation
On July 3, 1995, Robert Strougo filed a class action and derivative action
in the District Court of Dallas County, Texas, 160th Judicial District, against
Boone Pickens, Paul W. Cain, John L. Cox, John S. Herrington, Wales H. Madden,
Jr., Fayez S. Sarofim, Robert L. Stillwell and J. R. Walsh, Jr. (the "Director
Defendants"), each of whom is a present or former director of Mesa. The class
action is purportedly brought on behalf of a class of Mesa shareholders and
alleges, inter alia, that the Board infringed upon the suffrage rights of the
class and impaired the ability of the class to receive tender offers by adoption
of a shareholder rights plan. The lawsuit is also brought derivatively on behalf
of Mesa and alleges, inter alia, that the Board breached fiduciary duties to
Mesa by adopting the shareholder rights plan and by failing to consider the sale
of Mesa. The lawsuit seeks unspecified damages, attorneys' fees, and injunctive
and other relief. Two other lawsuits filed by Herman Krangel, Lilian Krangel,
Jacquelyn A. Cady and William A. Montagne, Jr., in the District Court of Dallas
County have been consolidated into this lawsuit. The Court is presently
considering a motion to dismiss the plaintiffs' consolidated petition.
On July 18, 1995, Deborah M. Eigen and Adele Brody filed a purported
derivative lawsuit in the U.S. District Court for the Northern District of
Texas, Dallas Division, against the Director Defendants in their capacities as
members of the Board. This lawsuit is brought under state law and alleges, inter
alia, that the Board breached fiduciary duties to Mesa by adopting the
shareholder rights plan and by failing to consider the sale of Mesa. The lawsuit
is brought derivatively on behalf of Mesa and seeks unspecified damages,
attorneys' fees, and other relief. On January 22, 1996, the Court denied the
Director Defendants' motion to dismiss for failure to state a claim.
Contingencies
See Note 9 to the Consolidated Financial Statements of the Parent included
elsewhere herein for discussion of the above legal proceedings and the estimated
effect, if any, on Mesa's results of operations and financial position.
53
<PAGE> 55
MANAGEMENT
DIRECTORS
The following table sets forth each person currently serving on Mesa's Board
of Directors, (i) his name and age, (ii) the period during which he has served
as a director, and (iii) his principal occupation over the last five years
(including other directorships and business experience):
<TABLE>
<CAPTION>
NAME AND AGE BUSINESS EXPERIENCE OVER PAST FIVE YEARS
- --------------------------------------- --------------------------------------------------------------
<S> <C>
Boone Pickens, age 68.................. January 1992 - Present, Chairman of the Board of Directors and
Chief Executive Officer of Mesa; June 1, 1996 - Present,
President and Chief Operating Officer of Mesa; October 1985 -
December 1991, General Partner of the Partnership and Chief
Executive Officer and Director of Pickens Operating Co. (the
corporate general partner of the Partnership); 1964 - January
1987, Chairman of the Board, President, and founder of
Original Mesa.
Paul W. Cain, age 57................... January 1992 - Present, Director of Mesa; January 1992 - May
1996, President and Chief Operating Officer of Mesa; August
1986 - December 1991, President and Chief Operating Officer of
Pickens Operating Co.; Director of Bicoastal Corporation.
John S. Herrington, age 56............. January 1992 - Present, Director of Mesa; 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 the Department of Energy of the United
States.
Wales H. Madden, Jr, age 68............ January 1992 - Present, Director of Mesa; 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.
Dorn Parkinson, age 49................. May 1995 - Present, Director of Mesa; April 1986 - Present,
President of Washington Corporations (principal businesses of
Washington Corporations and its affiliates include rail
transport, mining, ship berthing, environmental remediation,
interstate trucking, and the repair and sale of machinery and
equipment); January 1995 - Present, Chairman of the Board of
Washington Construction Group, Inc. (heavy construction and
contract mining); July 1993 - October 1994, President and
Chief Operating Officer of Washington Construction Group,
Inc.; Director of Washington Construction Group, Inc.
Joel L. Reed, age 45................... September 1995 - Present, Director of Mesa; August 1994 -
Present, partner with Batchelder & Partners, Inc.; October
1984 - July 1994, various capacities including Chief Financial
Officer, President and Chief Executive Officer of Wagner and
Brown, Ltd. and affiliates (privately owned company consisting
of companies engaged in energy, real estate, manufacturing,
agribusiness and investment services); Director of Magnetic
Delivered Therapeutics.
Fayez S. Sarofim, age 67............... January 1992 - Present, Director of Mesa; Chairman of the
Board and President of Fayez Sarofim & Co. (investment
adviser) for more than the last five years; Director of
Teledyne, Inc., Unitrin, Inc., Argonaut Group, Inc., and
Imperial Holly Corporation.
Robert L. Stillwell, age 59............ January 1992 - Present, Director of Mesa; 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., for more
than the last five years.
</TABLE>
54
<PAGE> 56
Mr. Pickens is the sole director of the Company.
Mr. Parkinson and David H. Batchelder were elected to Mesa's Board of
Directors pursuant to an agreement dated April 1, 1995, between Mesa and Dennis
R. Washington, the beneficial owner of approximately 4.5% of the outstanding
Common Stock. Mr. Batchelder subsequently resigned from the Board and was
succeeded by Mr. Reed pursuant to the terms of the WDB Settlement Agreement
described above under "Business -- Legal Proceedings -- Settlement with WDB
Group."
DNR NOMINEES TO THE BOARD OF DIRECTORS
Assuming completion of the Recapitalization, the size of the Board of
Directors will be reduced from eight members to seven members as provided in the
Stock Purchase Agreement. The Stock Purchase Agreement contemplates that, at
such time, all but three of Mesa's current directors will resign as directors
and Richard E. Rainwater, Darla D. Moore, Kenneth A. Hersh and Philip B. Smith
will be elected by DNR to fill the four seats on the Board to which the holders
of the Series B Preferred Stock will be entitled. See "Description of the Stock
Purchase Agreement and the Rights Offering."
The Board has nominated Mr. Pickens, Mr. Herrington and Mr. Stillwell to
stand for election to the Board at Mesa's 1996 annual meeting of stockholders,
assuming that the First Closing occurs. Mr. Cain, Mr. Madden and Mr. Sarofim
have tendered letters of resignation from the Board to be effective as of the
date of the First Closing. Mr. Parkinson and Mr. Reed have advised Mesa that
they have not determined whether they will resign as directors upon the
occurrence of the First Closing. In the event that Mr. Parkinson and/or Mr. Reed
does not resign as of the First Closing, it is anticipated that Mr. Herrington
and/or Mr. Stillwell would also resign from the Board effective as of the First
Closing; however, Mr. Herrington and/or Mr. Stillwell would resume his position
as a director on the Board upon his reelection at the 1996 annual meeting of
stockholders and would succeed to the Board seats held by Mr. Parkinson and Mr.
Reed from the First Closing to the annual meeting.
The following table sets forth the name, age and five-year employment
history of Mr. Rainwater, Ms. Moore, Mr. Hersh and Mr. Smith. Mr. Rainwater and
Ms. Moore are married to each other.
<TABLE>
<CAPTION>
NAME AND AGE BUSINESS EXPERIENCE OVER PAST FIVE YEARS
- --------------------------------------- --------------------------------------------------------------
<S> <C>
Richard E. Rainwater, age 51........... 1986 - Present, independent investor and sole shareholder and
Director of Rainwater, Inc.; 1970-1986, chief investment
advisor to the Bass family of Texas; 1994 - Present, founder
and Chairman of the Board of Crescent Real Estate Equities,
Inc.; 1992, co-founder of Mid Ocean Limited; 1987, co-founder
of Columbia Hospital Corporation (predecessor to Columbia/HCA
Healthcare Corporation); 1986, founder of ENSCO International,
Inc.
Darla D. Moore, age 41................. 1994 - Present, private investment activities and chief
executive officer and Director of Rainwater, Inc.; 1989-1994,
Managing Director of Chemical Bank, Restructuring and
Reorganization Unit and Retail Industries Group; Director of
Magellan Health Services, Inc.; Trustee of George Washington
University.
Kenneth A. Hersh, age 33............... 1994 - Present, chief investment officer and Director of
Rainwater, Inc. and co-manager of investment activities of
Natural Gas Partners investment funds; 1989-1994, co-manager
of investment activities of Natural Gas Partners, L.P.; 1985-
1987, Morgan Stanley & Co. investment banking division, energy
group; Director of Tide West Oil Company and HS Resources,
Inc.
Philip B. Smith, age 45................ 1991 - Present, Director, President and Chief Executive
Officer of Tide West Oil Company; 1986-1991, Senior Vice
President of Mega Natural Gas Company; 1980-1986, executive
positions with two small exploration and production companies;
1976-1980, various positions with Samson Resources Company;
1974-1976, production engineer with Texaco, Inc.
</TABLE>
55
<PAGE> 57
EXECUTIVE OFFICERS
The following table sets forth the name, age, and five-year employment
history of each of Mesa's current executive officers:
<TABLE>
<CAPTION>
NAME AND AGE BUSINESS EXPERIENCE OVER PAST FIVE YEARS
- --------------------------------------- --------------------------------------------------------------
<S> <C>
Boone Pickens, age 68.................. January 1992 - Present, Chairman of the Board of Directors and
Chief Executive Officer of Mesa; June 1, 1996 - Present,
President and Chief Operating Officer of Mesa; October 1985 -
December 1991, General Partner of the Partnership and Chief
Executive Officer and Director of Pickens Operating Co.; 1964
-January 1987, Chairman of the Board, President, and founder
of Original Mesa.
Dennis E. Fagerstone, age 47........... January 1992 - Present, Vice President-Exploration and
Production of Mesa; May 1991 - December 1991, Vice President -
Exploration and Production of Pickens Operating Co.; June 1988
-May 1991, Vice President-Operations of Pickens Operating Co.
Stephen K. Gardner, age 36............. June 1994 - Present, Vice President and Chief Financial
Officer of Mesa; January 1992 - May 1994, Vice President of
BTC Partners Inc. (financial consultant to the Company); May
1988 - December 1991, Financial Analyst of BTC Partners, Inc.;
June 1987 - April 1988, Financial Analyst of the Partnership;
Director of Bicoastal Corporation.
Andrew J. Littlefair, age 35........... January 1992 - Present, Vice President-Public Affairs of Mesa;
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.
William D. Ballew, age 38.............. January 1992 - Present, Controller of Mesa; May 1991 -
December 1991, Controller of the Partnership; January 1991 -
May 1991, Manager - Accounting of Pickens Operating Co.;
December 1988 - December 1990, Assistant to the Controller of
Pickens Operating Co.; July 1986 - December 1988, Audit
Manager for Price Waterhouse, Dallas, Texas.
</TABLE>
Mr. Pickens, Mr. Gardner and Mr. Ballew hold the same positions at the
Company that they hold at the Parent. As part of DNR's transition and succession
plans for management, DNR has requested that Mr. Pickens assist DNR in
identifying and retaining a new Chief Executive Officer and that he resign when
such person is retained. Mr. Pickens, who will remain on the Board of Directors
following the Recapitalization, has agreed to assist with this transition. Mr.
Ballew will terminate his employment with Mesa effective on or about June 30,
1996.
56
<PAGE> 58
EXECUTIVE COMPENSATION
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 1993, 1994 and 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS-NUMBER
---------------------------------------- OF SHARES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS/SARS COMPENSATION(2)
- ------------------------------ ----- --------- --------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Boone Pickens,................ 1995 $ 675,000 $ 0 $ -- 0 $ 35,914(4)
Chairman of the Board of 1994 675,000 175,000 -- 200,000 1,094,500(5)
Directors and Chief 1993 675,000 0 -- 275,000 114,750
Executive Officer(3)
Paul W. Cain,................. 1995 400,020 0 -- 0 22,165(7)
President and Chief 1994 400,020 150,000 -- 150,000 93,503
Operating Officer(6) 1993 400,020 225,000 -- 100,000 106,253
Dennis E. Fagerstone,......... 1995 199,980 50,000 -- 0 14,663(8)
Vice
President -- Exploration 1994 199,980 100,000 -- 85,000 50,997
and Production 1993 199,980 75,000 -- 10,000 46,747
Stephen K. Gardner,........... 1995 175,020 40,000 -- 0 12,915(9)
Vice President and Chief 1994(10) 92,095 60,000 -- 135,000 25,856
Financial Officer 1993 -- -- -- -- --
Andrew J. Littlefair,......... 1995 139,980 40,000 -- 0 11,163(11)
Vice President -- Public 1994 115,980 100,000 -- 85,000 36,717
Affairs 1993 115,980 75,000 -- 25,000 32,467
</TABLE>
- ---------------
(1) 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 years ended December 31, 1995,
1994, and 1993, respectively, to each individual named in the summary
compensation table aggregated less than 10% of the total salary and bonus
reported for such individual in the summary compensation table, or $50,000,
if lower.
(2) Except as reflected in other notes, "All Other Compensation" consists of
the following 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). Mesa declared
contributions to the Retirement Plans of 5% of each employee's compensation
in 1995 and 17% of each employee's compensation in 1994 and 1993. However,
total employer contributions to the Retirement Plans for the account of a
participant in any calendar year are limited as specified by the Code and
the Retirement Plans. See "Limitation on Contributions to Benefit Plans"
below. The maximum annual amount of employer contributions to a
participant's accounts in the Retirement Plans totaled $7,500 in 1995,
$25,500 in 1994, and $30,000 in 1993. Second, to the extent that 5% of an
employee's total compensation exceeded $7,500 in 1995, that 17% of an
employee's total compensation exceeded $25,500 in 1994 (in both cases, all
employees with total compensation in excess of $150,000), and that 17% of
an employee's total compensation exceeded $30,000 in 1993 (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, in 1995
there was a reallocation to participant accounts of forfeitures in the
Profit Sharing Plan from unvested balances in the accounts of employees who
terminated during 1994.
(3) DNR has requested that Mr. Pickens assist DNR in identifying and retaining
a new Chief Executive Officer and that he resign when such person is
retained. Mr. Pickens, who will remain on the Board of Directors following
the Recapitalization, has agreed to assist with this transition.
(4) Includes the following: a $7,500 Retirement Plans contribution; a $2,164
reallocation of forfeitures in the Profit Sharing Plan; a $26,250 payment
in lieu of a Retirement Plans contribution in excess of the contribution
limitation as described in Note 2 above.
(5) Includes the following: a $25,500 Retirement Plans contribution; a $119,000
payment in lieu of a Retirement Plans contribution in excess of the
contribution limitation as described in Note 2 above; a $950,000 bonus
payment that has been deferred until Mr. Pickens' retirement and that was
subject to his
57
<PAGE> 59
continued employment (except in certain events) through December 31, 1995,
with respect to the Parent's 1994 commodities and securities investment
activities managed by him.
(6) Mr. Cain retired as Mesa's President and Chief Operating Officer effective
May 31, 1996.
(7) Includes the following: a $7,500 Retirement Plans contribution; a $2,164
reallocation of forfeitures in the Profit Sharing Plan; a $12,501 payment
in lieu of a Retirement Plans contribution in excess of the contribution
limitation as described in Note 2 above.
(8) Includes the following: a $7,500 Retirement Plans contribution; a $2,164
reallocation of forfeitures in the Profit Sharing Plan; a $4,999 payment in
lieu of a Retirement Plans contribution in excess of the contribution
limitation as described in Note 2 above.
(9) Includes the following: a $7,500 Retirement Plans contribution; a $2,164
reallocation of forfeitures in the Profit Sharing Plan; a $3,251 payment in
lieu of a Retirement Plans contribution in excess of the contribution
limitation as described in Note 2 above.
(10) Mr. Gardner became an officer of Mesa in June 1994.
(11) Includes the following: a $7,500 Retirement Plans contribution; a $2,164
reallocation of forfeitures in the Profit Sharing Plan; a $1,499 payment in
lieu of a Retirement Plans contribution in excess of the contribution
limitation as described in Note 2 above.
EMPLOYEES PREMIUM AND PROFIT SHARING PLANS
Mesa maintains the Retirement Plans for the benefit of its employees. Each
year, Mesa 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 total compensation (as defined) to the Profit Sharing
Plan. In previous years, Mesa had declared contributions of 17% to the
Retirement Plans. In 1995 Mesa declared contributions of 5% to the Retirement
Plans.
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, in conjunction with the
conversion of the Partnership to corporate form, all participants were fully
vested in their account balances in the Retirement Plans as of that date as a
result of certain property dispositions consummated in 1990 and 1991.
Participants remain fully vested in their 1991 balances, but contributions in
1992 and later years under the Retirement Plans are subject to the vesting
schedule described above.
Prior years of service with Mesa's predecessors are counted in the vesting
schedule. Amounts accumulated and vested are distributable only 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 to the lesser of what is specified
by the Code or by the Retirement Plans. The Code provides that annual additions
to a participant's account may not exceed the lesser of $30,000 or 25% of the
amount of the participant's annual compensation. The Retirement Plans provide
that aggregate annual additions to a participant's account may not exceed 17% of
eligible compensation as defined by the Retirement Plans. The eligible
compensation per the Code was limited to $150,000 in 1995, $150,000 in 1994, and
$228,000 in 1993. Mesa, in its discretion, may determine to make cash payments
of amounts attributable to an employee's participation in the Retirement Plans
to the extent such amounts exceed the Code limitations. As a matter of general
policy for employees of Mesa, Mesa 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.
58
<PAGE> 60
1991 STOCK OPTION PLAN
The 1991 Stock Option Plan (the "Option Plan") was approved by stockholders
of Mesa in 1991 and amended with the approval of stockholders in 1994. Its
purpose is to serve as an incentive to, and aid in the retention of, key
executives and other employees whose training, experience, and ability are
considered important to the operations and success of Mesa. The Option Plan is
administered by the Stock Option Committee composed of non-employee directors of
Mesa who meet the requirements of "disinterested person" in Rule 16b-3 (c)(2)(i)
of the Exchange Act. Pursuant to the Option Plan, the Stock 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 4,000,000 shares of Common Stock are currently subject to
the plan, of which options for 3,062,950 shares have been granted. At December
31, 1995, the following stock options were outstanding:
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS
---------
<S> <C>
Granted............................................................................ 3,062,950
Exercised.......................................................................... (62,720)
Forfeited.......................................................................... (67,840)
---------
Outstanding at December 31, 1995................................................... 2,932,390
=========
</TABLE>
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 Stock Option
Committee approval and to certain legal limitations, an optionee may pay all or
any portion of the purchase price by electing to have Mesa 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
that permits an optionee, in lieu of purchasing the entire number of shares
subject to purchase thereunder and subject to consent of the Stock 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 this discretion, the Stock 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 and outstanding at December 31, 1995, 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>
1,126,000........................ $ 6.8125 07/10/92 01/10/93 01/10/94 01/10/95
134,500......................... 11.6875 04/02/93 10/02/93 10/02/94 10/02/95
101,890......................... 5.8125 11/18/93 05/18/94 05/18/95 05/18/96
475,000......................... 7.3750 05/10/94 11/10/94 11/10/95 11/10/96
75,000........................ 6.1875 12/06/94 06/06/95 06/06/96 06/06/97
1,000,000........................ 4.2500 06/01/95 12/01/95 12/01/96 12/01/97
20,000........................ 5.6875 11/12/95 05/12/96 05/12/97 05/12/98
</TABLE>
There were no options granted to the Chief Executive Officer or to the other
four most highly compensated executive officers of Mesa during 1995.
59
<PAGE> 61
Options exercised in 1995, and the number and value of exercisable and
unexercisable options at December 31, 1995, for the Chief Executive Officer and
the other four most highly compensated executive officers of the Parent are as
follows:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
YEAR ENDED NUMBER OF SHARES
DECEMBER 31, 1995 UNDERLYING VALUE OF UNEXERCISED
---------------------- UNEXERCISED IN-THE-MONEY
NUMBER OF OPTIONS/SARS AT OPTIONS/SARS AT
SHARES DECEMBER 29, 1995 DECEMBER 29, 1995
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------ ------------ ---------- ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Boone Pickens.......... -- $ -- 1,130,000 145,000 $ 0 $ 0
Paul W. Cain........... -- -- 312,500 87,500 0 0
Dennis E. Fagerstone... -- -- 104,750 40,250 0 0
Stephen K. Gardner..... -- -- 74,250 60,750 0 0
Andrew J. Littlefair... -- -- 96,750 43,250 0 0
</TABLE>
At December 29, 1995, the final trading day of the year, the Parent's Common
Stock closed at $3.75 per share. The exercise price of the four grants of stock
options reflected in the aggregate in the above tables are $6.8125, $7.375,
$6.1875, and $4.25, respectively, per share. Thus, no outstanding options were
in-the-money at such date.
OTHER
There were no awards made under any long-term incentive plans from January
1, 1995, through December 31, 1995; therefore, no disclosure is required in the
Long-Term Incentive Plan Awards table. From January 1, 1995, through December
31, 1995, no options or stock appreciation rights were repriced (as defined in
Item 402(i) of Regulation S-K of the Securities Act). Except as described below
under "Employee Retention Provisions," the Parent does not have any employment
contracts or termination or change-in-control arrangements with respect to a
named executive officer of the Parent that would require disclosure pursuant to
Item 402(h) of Regulation S-K.
COMMON STOCK PURCHASE PLAN
The Parent has established a Common Stock purchase program whereby
employees, except officers, can buy Common Stock through after-tax payroll
deductions. All other full-time employees of the Company and its participating
affiliates are eligible to participate. The Parent pays the brokerage fees for
these open-market transactions.
EMPLOYEE RETENTION PROVISIONS
On August 22, 1995, the Board adopted the MESA Inc. Change in Control
Retention/Severance Plan, as amended, (the "Retention Plan"). Pursuant to the
Retention Plan, all regular employees of Mesa (other than Mr. Pickens) will be
entitled to receive certain benefits upon the occurrence of certain involuntary
termination events (as described below) following a "Change in Control" (as
defined below) of Mesa. The severance benefits consist of 200% of defined pay
for officers (which includes the highest salary and highest bonus during the
then-current and prior three calendar years before the Retention Plan was
adopted), 150% of defined pay for certain key employees (which includes salary
and bonus amounts) and a formula-based amount for all other employees, plus, in
each case, any other accrued or vested or earned but deferred compensation,
rights, options, or benefits otherwise owed to such employee upon his
termination. In addition, on the same date, the Stock Option Committee
determined that all outstanding but unvested stock options granted to an
employee under Mesa's 1991 Stock Option Plan would immediately vest and become
exercisable upon such a termination event following a Change in Control.
Mesa developed the Retention Plan in consultation with an independent
compensation consultant. That consulting firm advised the Board of Directors
that the Retention Plan is conservatively in line with common practices. The
independent firm noted, among other things, that most such plans it surveyed
provide officers with three times their defined pay, rather than two.
60
<PAGE> 62
For purposes of the Retention Plan, a "Change in Control" means (i) any
acquisition by an individual, entity or group resulting in such person's
obtaining beneficial ownership of 35% or more of the then outstanding Common
Stock or the combined voting power of the then outstanding voting securities of
Mesa entitled to vote in an election of directors, provided certain
acquisitions, including the following, shall not in and of themselves constitute
a Change in Control hereunder: (a) any acquisition of securities of Mesa made
directly from Mesa and approved by a majority of the directors then comprising
the members of the Board of Directors as of May 16, 1995 (the "Incumbent
Board"); or (b) any acquisition of beneficial ownership of a higher percentage
of the Common Stock outstanding or the voting securities of Mesa that results
solely from the acquisition, purchase or redemption of securities of Mesa by
Mesa so long as such action by Mesa was approved by a majority of the directors
then comprising the Incumbent Board; (ii) a change in the membership of the
Incumbent Board, together with members elected subsequent to May 16, 1995, whose
election or nomination for election was approved by a majority of the members of
the Incumbent Board as then constituted (excluding for this purpose any
individual whose initial assumption of office occurred as a result of an actual
or threatened election contest), cease for any reason to constitute a majority
of the Board of Directors; (iii) a reorganization, merger, consolidation or sale
of all or substantially all of the assets of Mesa, subject to certain
exceptions; or (iv) approval by the stockholders of Mesa of the complete
liquidation or dissolution of Mesa.
Following the occurrence of a Change in Control, an eligible employee would
be entitled to receive full severance benefits if, within 24 months of the
occurrence of a Change in Control: (i) the employee was terminated by Mesa
without "Cause" (as defined below); or (ii) the employee's duties,
responsibilities or rate of pay as an employee were materially and adversely
diminished in comparison to the duties, responsibilities and rate of pay enjoyed
by the employee on the effective date of the Retention Plan; or (iii) the
employee was relocated to any location in excess of 35 miles from his location
immediately prior to the Change in Control. All severance benefits with respect
to an eligible employee are payable in a lump sum within ten days after the
termination date of such employee. Under the Retention Plan, "Cause" means the
willful and continued failure of an employee to perform substantially the
employee's duties with Mesa following written demand for performance or the
willful engaging by the employee in illegal conduct or gross misconduct that is
materially and demonstrably injurious to Mesa.
The Recapitalization will not constitute a "Change in Control" for purposes
of the Retention Plan, because the incumbent Board has approved the issuance of
Series B Preferred Stock to DNR and the nomination of the persons DNR intends to
elect as directors.
DIRECTOR COMPENSATION AND CERTAIN RELATIONSHIPS
Each director of Mesa serving throughout 1995 who was not also an employee
of Mesa or its subsidiaries received compensation of $20,000 allocated quarterly
in 1995, except for Messrs. Parkinson, David H. Batchelder and Reed (who
succeeded Mr. Batchelder). Mr. Parkinson received $15,000, Mr. Batchelder
received $10,000, and Mr. Reed received $5,000 for serving as directors for
approximately seven months, four months, and three months, respectively.
Directors who are also employees of Mesa receive no remuneration for their
services as directors.
Mr. Sarofim, a director and member of the Compensation and Stock 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
adviser to certain employee benefit plans of Mesa. During the year ended
December 31, 1995, Fayez Sarofim & Co. received fees, paid by the employee
benefit plans, of $175,459 for such services and has been retained to provide
such services in 1996.
Mr. Stillwell, a director, is a partner in the law firm of Baker & Botts,
L.L.P. Mesa retained Baker & Botts, L.L.P., and incurred legal fees for such
services in 1995. Baker & Botts, L.L.P., has been retained to provide legal
services in 1996 and is advising Mesa as to certain legal matters in connection
with the Recapitalization. See "Legal Matters."
Richard E. Rainwater is the sole shareholder and President, Darla D. Moore
is the chief executive officer, and Kenneth A. Hersh is the chief investment
officer, of Rainwater Inc., the sole general partner of DNR, and will be elected
as directors of Mesa by DNR immediately following the sale of Series B Preferred
Stock to DNR at the First Closing. Upon consummation of the Recapitalization,
DNR will be the sole holder of Series B Preferred Stock, representing between
32.5% and 64.7% of Mesa's voting stock (on a fully diluted basis, and prior to
the payment of any dividends in additional shares of Preferred Stock). As such,
DNR will have the right to elect a majority of Mesa's directors and to receive
dividends as described under "Description of the Stock
61
<PAGE> 63
Purchase Agreement and the Rights Offering -- Preferred Stock." Mesa has agreed
to pay DNR (i) a fee of $4,655,000 (constituting 3.5% of the aggregate amount of
Series B Preferred Stock to be purchased at the First Closing) at the First
Closing (or as promptly as practicable thereafter as funds are available
therefor, but no later than the Second Closing) and (ii) a fee of $4,620,000
(constituting 3.5% of the maximum aggregate amount of Series B Preferred Stock
to be purchased pursuant to DNR's Standby Commitment) at the Second Closing,
less the amount by which DNR's reimbursable expenses are less than the initial
$500,000 payment Mesa made at the time it entered into the February 28 letter of
intent with Rainwater, Inc. In addition, the Stock Purchase Agreement provides
that DNR will receive a fee of $400,000 per year in consideration of DNR's
obligations under such agreement and to compensate DNR for the time that DNR has
agreed its representatives will devote to Mesa's affairs, including the
provision of certain investment analysis and assistance to Mesa during the
course of DNR's investment, and DNR will be reimbursed by Mesa for all fees and
expenses (up to a maximum of $50,000 for any calendar year) reasonably incurred
by it in connection with monitoring its investment in Mesa.
INDEMNIFICATION ARRANGEMENTS
Mesa'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. Mesa 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, Mesa has purchased customary
directors' and officers' liability insurance policies for its directors and
officers (and director nominees). 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 Mesa 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
Stock Purchase Agreement also provides for continuing indemnification following
the Recapitalization for the current directors and officers to the fullest
extent provided by law, as well as continuing coverage under Mesa's directors'
and officers' liability insurance policies.
62
<PAGE> 64
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF MANAGEMENT
The following table presents certain information as to the beneficial
ownership of Mesa's Common Stock as of May 31, 1996, by the directors, director
nominees, and officers of Mesa, individually and as a group. The following table
also indicates the number of shares of Common Stock to be beneficially owned by
such persons assuming that such persons (i) sell or otherwise fail to exercise
all of the Rights to be distributed to them in the Rights Offering or (ii)
exercise all of the Rights to be distributed to them, as well as the percentage
of the number of fully diluted shares of Common Stock to be owned by such
persons under such circumstances (assuming that there will be 181,306,646 shares
of Common Stock outstanding on a fully diluted basis, including 117,256,637
shares issuable upon conversion of shares of Series A and Series B Preferred
Stock).
<TABLE>
<CAPTION>
SHARES OWNED AFTER THE SALE OF SERIES B
SHARES OWNED BEFORE THE PREFERRED STOCK AND THE RIGHTS OFFERING(1)
SALE OF SERIES B -----------------------------------------------------
PREFERRED STOCK AND THE
RIGHTS OFFERING NO RIGHTS EXERCISED ALL RIGHTS EXERCISED
----------------------- ------------------------- ------------------------
NUMBER(2) PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE
--------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
CURRENT DIRECTORS:
Paul W. Cain...................... 322,639 * 322,639 * 331,885 *
John S. Herrington................ 10,000 * 10,000 * 19,120 *
Wales H. Madden, Jr............... 22,200 * 22,200 * 42,447 *
Boone Pickens(3).................. 5,061,626 7.8% 5,061,626 2.8% 8,647,269 4.8%
Fayez S. Sarofim.................. 1,400,000 2.2% 1,400,000 * 2,676,800 1.5%
Robert L. Stillwell............... 26,500 * 26,500 * 50,668 *
Dorn Parkinson(4)................. -- * -- * -- *
Joel L. Reed...................... -- * -- * -- *
FUTURE DIRECTORS:
Richard E. Rainwater(5)........... -- * 117,256,637 64.7% 58,849,557 32.5%
Darla D. Moore.................... -- * -- * -- *
Kenneth A. Hersh.................. -- * -- * -- *
Philip B. Smith................... -- * -- * -- *
OFFICERS:
Dennis E. Fagerstone.............. 104,750 * 104,750 * 104,750 *
Stephen K. Gardner................ 102,979 * 102,979 * 117,780 *
Andrew J. Littlefair(6)........... 113,438 * 113,438 * 128,657 *
William D. Ballew................. 64,853 * 64,853 * 66,771 *
Directors (Current and Future) and
Officers as a group (16
persons)........................ 7,228,985 11.0% 124,485,622 68.7% 71,035,704 39.3%
</TABLE>
- ---------------
* Less than 1.0%
(1) Includes shares of Common Stock issuable upon conversion of Series A and
Series B Preferred Stock.
(2) Includes shares issuable upon the exercise of options that are exercisable
within sixty days of May 31, 1996, as follows: 1,130,000 shares for Mr.
Pickens; 312,500 for Mr. Cain; 104,750 for Mr. Fagerstone; 86,750 for Mr.
Gardner; 96,750 for Mr. Littlefair; 62,750 for Mr. Ballew; and 1,793,500 for
all current directors and officers as a group. No Rights will be issued in
respect of outstanding options pursuant to the Rights Offering.
(3) Includes 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. Excludes 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.
(4) Excludes 3,800 shares of Common Stock owned by Mr. Parkinson's son as his
separate property, as to which Mr. Parkinson disclaims beneficial ownership
and with respect to which he does not have or share voting or investment
power. Mr. Parkinson is a member of the WDB Group, which has filed a
Schedule 13D which, as amended, states that the WDB Group is the beneficial
owner of 3,500,000 shares of Common Stock. See Note 4 to the table under
"-- Certain Beneficial Owners."
(5) Represents shares of Common Stock issuable upon conversion of shares of
Series B Preferred Stock to be held by DNR. Mr. Rainwater is the sole
shareholder and President of Rainwater, Inc., the sole general partner of
DNR, and, as such, may be deemed to beneficially own the shares of stock to
be held by DNR. Mr. Rainwater and Ms. Moore are married to each other but
she disclaims beneficial ownership of shares to be owned by Mr. Rainwater.
(6) Excludes 1,125 shares of Common Stock owned by Mrs. Littlefair as her
separate property, as to which Mr. Littlefair disclaims beneficial ownership
and with respect to which he does not have or share voting or investment
power.
63
<PAGE> 65
None of the foregoing persons, nor any of their affiliates, is precluded
from purchasing Notes in the Offering or thereafter.
CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information as of May 31, 1996,
regarding each person or "group" (as that term is used in Section 13(d)(3) of
the Exchange Act) known by Mesa 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 Mesa.
The following table also indicates the number of shares of Common Stock to be
beneficially owned by such persons assuming that such persons (i) sell or
otherwise fail to exercise all of the Rights to be distributed to them in the
Rights Offering or (ii) exercise all of the Rights to be distributed to them, as
well as the percentage of the number of fully diluted shares of Common Stock to
be owned by such persons under such circumstances (assuming that there will be
181,306,646 shares of Common Stock outstanding on a fully diluted basis,
including 117,256,637 shares issuable upon conversion of shares of Series A and
Series B Preferred Stock).
<TABLE>
<CAPTION>
SHARES OWNED AFTER THE SALE OF SERIES B
SHARES OWNED BEFORE PREFERRED STOCK AND THE RIGHTS OFFERING(1)
THE SALE OF SERIES B --------------------------------------------------
PREFERRED STOCK AND THE
RIGHTS OFFERING NO RIGHTS EXERCISED ALL RIGHTS EXERCISED
NAME AND ADDRESS OF ----------------------- ----------------------- -----------------------
BENEFICIAL OWNER NUMBER PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE
- ----------------------------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Boone Pickens................ 5,061,626(2) 7.8% 5,061,626 2.8% 8,647,269 4.8%
1400 Williams Square West
5205 North O'Connor
Boulevard
Irving, Texas 75039-3746
FMR Corp..................... 5,140,400(3) 8.0% 5,140,400 2.8% 9,828,445 5.4%
82 Devonshire Street
Boston, Massachusetts 02109
WDB Group.................... 3,500,000(4) 5.5% 3,500,000 1.9% 6,692,000 3.7%
c/o Dennis R. Washington
Washington Corporations
101 International Way
Missoula, Montana 59807
</TABLE>
- ---------------
(1) Includes shares of Common Stock issuable upon conversion of Series A
Preferred Stock.
(2) See notes (2) and (3) to the table under "Security Ownership of Management."
(3) The Schedule 13G filed with the Commission on February 14, 1996, by FMR
Corp. states that as of December 31, 1995, Fidelity Management & Research
Company ("Fidelity"), a wholly owned subsidiary of FMR Corp. and an
investment adviser registered under Section 203 of the Investment Advisers
Act of 1940, is the beneficial owner of 5,140,400 shares or 8.0% of Common
Stock as a result of acting as investment adviser to various investment
companies registered under Section 8 of the Investment Company Act of 1940.
The ownership of one investment company, Fidelity Capital Appreciation Fund
("Fund"), amounted to 5,140,400 shares or 8.0% of Common Stock outstanding.
Edward C. Johnson, III, chairman of FMR Corp., FMR Corp., through its
control of Fidelity, and the Fund each has sole power to dispose of the
5,140,400 shares owned by the Fund.
(4) A Schedule 13D filed by the WDB Group, as amended as of April 24, 1996,
states that such group at that date beneficially owns 3,500,000 shares of
Common Stock, as to which Dennis R. Washington has sole voting power. The
Schedule 13D filed by the WDB Group prior to that date had included Davis
Acquisition, L.P., Davis Companies, the Marvin Davis and Barbara Davis
Revocable Trust, and Marvin Davis, which collectively owned 2,500,000 shares
of Common Stock. On April 24, 1996, the WDB Group filed an amendment to the
Schedule 13D stating that the Davis entities had terminated their
participation in the WDB Group and had sold shares of Common Stock such
that, as of April 23, 1996, the Davis entities beneficially owned 1,562,500
shares of Common Stock. See "Business -- Legal Proceedings -- Settlement
with WDB Group."
64
<PAGE> 66
BENEFICIAL OWNERSHIP OF DNR
The following table sets forth the percentage of the number of fully diluted
shares of Common Stock to be beneficially owned by DNR upon the Second Closing
assuming certain percentages of the Rights are exercised in the Rights Offering,
and that DNR acquires the required number of shares of Series B Preferred Stock
at the First Closing.
<TABLE>
<CAPTION>
PERCENTAGE OF RIGHTS EXERCISED
------------------------------------
0% 25% 50% 75% 100%
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Percentage Ownership of DNR................................. 64.7% 56.7% 48.6% 40.6% 32.5%
</TABLE>
As used in this Prospectus, the number of "fully diluted" shares of Common
Stock includes shares issuable upon conversion of Series A and Series B
Preferred Stock, but excludes (i) shares issuable pursuant to employee stock
options because no such options have an exercise price below current market
prices of the Common Stock and (ii) unless otherwise indicated, shares issuable
as dividends on the Preferred Stock.
65
<PAGE> 67
DESCRIPTION OF THE NOTES
GENERAL
The Senior Subordinated Notes will be issued pursuant to an Indenture (the
"Senior Subordinated Note Indenture") among the Company, the Parent and Harris
Trust and Savings Bank, as trustee (the "Senior Subordinated Note Trustee"). The
Discount Notes will be issued pursuant to an Indenture (the "Discount Note
Indenture;" together with the Senior Subordinated Note Indenture, the
"Indentures") among the Company, the Parent and Harris Trust and Savings Bank,
as trustee (the "Discount Note Trustee;" together with the Senior Subordinated
Trustee, the "Trustees"). Copies of the Indentures are filed as exhibits to the
Registration Statement of which this Prospectus forms a part and will be made
available to prospective purchasers of the Notes upon request. The Indentures
are subject to and governed by the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"). The terms of the Notes include those stated in the
applicable Indenture and those made part of such Indenture by reference to the
Trust Indenture Act. The Notes are subject to all such terms, and Holders of the
Notes are referred to the applicable Indenture and the Trust Indenture Act for a
statement thereof. The following summary of certain provisions of the Indentures
does not purport to be complete and is qualified in its entirety by reference to
the Indentures, including the definitions therein of certain terms used below.
The definitions of certain terms used in the following summary are set forth
below under "-- Certain Definitions."
The Notes will be general unsecured obligations of the Company and will be
subordinated in right of payment to all existing and future Senior Debt. The
Notes will be guaranteed on a senior subordinated basis by the Parent and all
Material Restricted Subsidiaries of the Company, if any, and certain other
Restricted Subsidiaries. As of the date of the Indentures, the Company has no
Material Restricted Subsidiaries, and no Restricted Subsidiary is a Subsidiary
Guarantor. The obligations of the Parent and any future Subsidiary Guarantors
under the Guarantees will be general unsecured obligations of each of the Parent
and the Subsidiary Guarantors and will be subordinated in right of payment to
all obligations of the Parent and the Subsidiary Guarantors in respect of Senior
Debt. See "-- Guarantees" and "Risk Factors -- Subordination."
As of the date of the Indentures, all of the Company's Subsidiaries will be
Restricted Subsidiaries. Under certain circumstances, however, the Company will
be able to designate current and future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the
restrictive covenants set forth in the Indentures.
For purposes of this section, the term "Company" means Mesa Operating Co.
and the term "Parent" means MESA Inc. Any reference to a "Holder" means a Holder
of the Senior Subordinated Notes or the Discount Notes, as the context may
require.
SUBORDINATION
The payment of principal of, premium, if any, and interest on the Notes and
any other payment obligations of the Company in respect of the Notes (including
any obligation to repurchase the Notes) will be subordinated in right of
payment, as set forth in the Indentures, to the prior payment in full in cash of
all Senior Debt, whether outstanding on the date of the Indentures or thereafter
incurred.
Upon any payment or distribution of property or securities to creditors of
the Company in a liquidation or dissolution of the Company or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to the
Company or its property, or in an assignment for the benefit of creditors or any
marshaling of the Company's assets and liabilities, the holders of Senior Debt
will be entitled to receive payment in full in cash of all Obligations due in
respect of such Senior Debt (including interest after the commencement of any
such proceeding at the rate specified in the applicable Senior Debt, whether or
not a claim for such interest would be allowed in such proceeding) before the
Holders of the Notes will be entitled to receive any payment with respect to the
Notes and, until all Obligations with respect to Senior Debt are paid in full in
cash, any distribution to which the Holders of the Notes would be entitled shall
be made to the holders of Senior Debt (except that Holders of the Notes may
receive payments made from the trust described under "-- Legal Defeasance and
Covenant Defeasance" if the deposit into such trust was permitted to be made
under the terms of the applicable Indenture).
The Company also may not make any payment (whether by redemption, purchase,
retirement, defeasance or otherwise) upon or in respect of the Notes (except
from the trust described under "-- Legal Defeasance and Covenant Defeasance") if
(i) a default in the payment of the principal of, premium, if any, or interest
on
66
<PAGE> 68
Designated Senior Debt occurs or (ii) any other default occurs and is continuing
with respect to Designated Senior Debt that permits, or with the giving of
notice or passage of time or both (unless cured or waived) will permit, holders
of the Designated Senior Debt as to which such default relates to accelerate its
maturity and the Trustees receive a notice of such default (a "Payment Blockage
Notice") from a representative of the holders of any Designated Senior Debt.
Cash payments on the Senior Subordinated Notes (and, if after , 2001,
the Discount Notes) shall be resumed (a) in the case of a payment default, upon
the date on which such default is cured or waived and (b) in case of a
nonpayment default, the earliest of (1) the date on which such nonpayment
default is cured or waived, (2) the date the applicable Payment Blockage Notice
is retracted by written notice to the Trustees from a representative or the
holders of the Designated Senior Debt that have given such Payment Blockage
Notice and (3) 179 days after the date on which the applicable Payment Blockage
Notice is received, unless any of the events described in clause (i) of this
paragraph has then occurred and is continuing or a default of the type described
in clause (x) under the caption "Events of Default" has occurred. No new period
of payment blockage may be commenced unless and until 360 days have elapsed
since the date of commencement of the payment blockage period resulting from the
immediately prior Payment Blockage Notice. No nonpayment default in respect of
Designated Senior Debt that existed or was continuing on the date of delivery of
any Payment Blockage Notice to the Trustees shall be, or be made, the basis for
a subsequent Payment Blockage Notice.
The Indentures will further require that the Company promptly notify holders
of Senior Debt if payment of the Notes is accelerated because of an Event of
Default.
As a result of the subordination provisions described above, in the event of
a liquidation or insolvency of the Company, Holders of the Notes may recover
less ratably than creditors of the Company who are holders of Senior Debt. On a
pro forma basis, after giving effect to the Recapitalization and the application
of the proceeds therefrom, the principal amount of Senior Debt outstanding at
March 31, 1996 would have been approximately $349.2 million, representing the
initial borrowings under the $525 million New Credit Facility. See "Description
of the New Credit Facility." The Indentures will limit, subject to certain
financial tests, the amount of additional Indebtedness, including Senior Debt,
that the Company and its Restricted Subsidiaries can incur. See "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Disqualified Stock."
GUARANTEES
The Company's payment obligations under the Notes will be jointly, severally
and unconditionally guaranteed (the "Guarantees") by the Parent and each future
Material Restricted Subsidiary of the Company (generally, any Restricted
Subsidiary of the Company which, as of the date of determination, represents
more than 5% of the Company's consolidated total assets or income from
operations for the most recent fiscal year). Upon consummation of the Offering,
there will be no guarantors of the Notes other than the Parent. The Guarantees
will be subordinated to Indebtedness of the Parent or the Subsidiary Guarantor,
as the case may be, to the same extent and in the same manner as the Notes are
subordinated to Senior Debt. Each Guarantee by a Subsidiary Guarantor will be
limited in an amount not to exceed the maximum amount that can be guaranteed by
the applicable Subsidiary Guarantor without rendering such Guarantee, as it
relates to such Subsidiary Guarantor, voidable under applicable law relating to
fraudulent conveyance or fraudulent transfer or similar laws affecting rights of
creditors generally.
Each Indenture will provide that neither the Parent nor any Subsidiary
Guarantor may consolidate with or merge with or into another corporation or
other Person other than the Parent, the Company or another Subsidiary Guarantor,
unless (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger assumes all the
obligations of the Parent or such Subsidiary Guarantor, as the case may be,
pursuant to a supplemental indenture in form reasonably satisfactory to the
applicable Trustee in respect of such Indenture, (ii) immediately after giving
effect to such transaction, no Default or Event of Default exists and (iii) such
transaction does not violate any of the covenants described under the heading
"-- Certain Covenants."
The Indentures will provide that in the event of a sale or other disposition
of all or substantially all of the assets of a Subsidiary Guarantor to any
corporation or other Person (including a Subsidiary that is not a Subsidiary
Guarantor) or a sale or other disposition of all of the capital stock of a
Subsidiary Guarantor to any corporation or other Person (including a Subsidiary
that is not a Subsidiary Guarantor), by way of merger, consolidation or
otherwise, in a transaction that does not violate any of the covenants in the
Indentures, then such Subsidiary Guarantor will be released from and relieved of
any obligations under its Guarantees and such acquiring corporation or other
Person if other than the Parent or a Subsidiary Guarantor shall have no
obligation to assume or otherwise become liable under such Guarantees; provided,
if such acquiring
67
<PAGE> 69
corporation or other Person is other than the Company or a Wholly Owned
Restricted Subsidiary, the Net Proceeds of such sale or other disposition are
applied in accordance with the covenant described under the caption
"-- Repurchase at the Option of Holders -- Asset Sales."
Any Subsidiary Guarantor that is designated an Unrestricted Subsidiary in
accordance with the terms of the Indentures shall be released from and relieved
of its obligations under its Guarantees, and any Restricted Subsidiary that
becomes a Material Restricted Subsidiary and any Unrestricted Subsidiary that
ceases to be an Unrestricted Subsidiary and, thereafter, becomes a Material
Restricted Subsidiary will be required to execute Guarantees in accordance with
the terms of the Indentures.
PRINCIPAL, MATURITY AND INTEREST
The Senior Subordinated Notes will be limited in aggregate principal amount
to $325.0 million and will mature on , 2006. Interest on the Senior
Subordinated Notes will accrue at the rate of % per annum and will be
payable semi-annually in arrears on and , commencing on
, 1996, to Holders of the Senior Subordinated Notes of record on the
immediately preceding and . Interest on the Senior
Subordinated Notes will accrue from the most recent date on which interest has
been paid or, if no interest has been paid, from the date of original issuance.
The Discount Notes will be issued at a discount to their aggregate principal
amount to generate gross proceeds to the Company of approximately $175.0 million
and will mature on , 2006. Interest on the Discount Notes will
accrete in value until , 2001 at a rate of % per annum,
compounded semi-annually, to an aggregate principal amount of $ million. Cash
Interest will not accrue on the Discount Notes prior to , 2001.
Thereafter, interest will accrue at the rate of % per annum and will be
payable semi-annually in arrears on and , commencing on
, 2001, to Holders of the Discount Notes of record on the immediately
preceding and . Cash interest on the Discount Notes will
accrue from the most recent date on which interest has been paid or, if no
interest has been paid, from , 2001. All references to the principal
amount of the Discount Notes herein are references to the principal amount at
final maturity.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months. Principal, premium, if any, and interest on the Notes will be
payable at the office or agency of the Company maintained for such purpose
within the City and State of New York or, at the option of the Company, payment
of interest may be made by check mailed to the Holders of the Notes at their
respective addresses set forth in the applicable register of Holders of the
Notes. Until otherwise designated by the Company, the Company's office or agency
in New York for purposes of any Indenture will be the office of the applicable
Trustee maintained for such purpose. The Notes will be fully registered as to
principal and interest in minimum denominations of $1,000 and integral multiples
of $1,000 in excess thereof.
OPTIONAL REDEMPTION
Senior Subordinated Notes. Except as otherwise described below, the Senior
Subordinated Notes will not be redeemable at the Company's option prior to
, 2001. Thereafter, the Senior Subordinated Notes will be subject to
redemption at the option of the Company, in whole or in part, upon not less than
30 nor more than 60 days' notice, at the redemption prices (expressed as
percentages of principal amount) set forth below, plus accrued and unpaid
interest thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning on of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---------------------------------------------------------- ----------
<S> <C>
2001...................................................... %
2002...................................................... %
2003...................................................... %
2004 and thereafter....................................... 100%
</TABLE>
Prior to , 1999, the Company may, at its option, on any one or
more occasions, redeem up to 33 1/3% of the original aggregate principal amount
of the Senior Subordinated Notes at a redemption price equal to % of the
principal amount thereof, plus accrued and unpaid interest, if any, thereon to
the redemption date, with all or a portion of the net proceeds of sales of
Equity Interests (other than Disqualified Stock) in the Company or the Parent;
provided, that at least 66 2/3% of the original aggregate principal amount of
the Senior Subordinated Notes remains outstanding immediately after the
occurrence of such redemption; and provided
68
<PAGE> 70
further, that such redemption shall occur within 60 days after the date of the
closing of the related sale of such Equity Interests.
Discount Notes. Except as described below, the Discount Notes are not
redeemable at the Company's option prior to , 2001. Thereafter, the
Discount Notes will be subject to redemption at the option of the Company, in
whole or in part, upon not less than 30 nor more than 60 days' written notice,
at the redemption prices (expressed as percentages of principal amount) set
forth below, plus accrued and unpaid interest thereon from , 2001 to
the applicable redemption date, if redeemed during the twelve-month period
beginning on of each of the years indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF
PRINCIPAL
YEAR AMOUNT
-------------------------------------------------------- -------------
<S> <C>
2001.................................................... %
2002.................................................... %
2003.................................................... %
2004 and thereafter..................................... 100%
</TABLE>
Prior to , 1999, the Company may, at its option, on any one or
more occasions, redeem up to 33 1/3% of the original aggregate principal amount
of the Discount Notes at a redemption price equal to % of the Accreted Value
thereof with the net proceeds of sales of Equity Interests (other than
Disqualified Stock) in the Company or the Parent; provided, that at least
66 2/3% of the original aggregate principal amount of the Discount Notes remains
outstanding immediately after the occurrence of such redemption; and provided
further, that such redemption shall occur within 60 days after the date of the
closing of the related sale of such Equity Interests.
SELECTION AND NOTICE
In the case of any partial redemption, selection of the Notes for redemption
will be made by the applicable Trustee in compliance with the requirements of
the principal national securities exchange, if any, on which the Notes are
listed, or, if such Notes are not so listed, on a pro rata basis, by lot or by
such other method as such Trustee shall deem fair and appropriate; provided, no
Note of $1,000 or less shall be redeemed in part. Notices of redemption shall be
mailed by first class mail at least 30 but not more than 60 days before the
redemption date to the registered address of each Holder of the Notes to be
redeemed. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the redemption date, interest
ceases to accrue on the Notes or on the aggregate principal amount of the Notes
called for redemption, as the case may be.
MANDATORY REDEMPTION
Except as set forth below under "-- Repurchase at the Option of Holders,"
the Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control (as defined below under
"-- Certain Definitions"), each Holder of the Notes will have the right to
require the Company to repurchase all or any part (equal to $1,000 or an
integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to (i) 101% of the aggregate principal amount of the Senior Subordinated Notes,
plus accrued and unpaid interest, if any, thereon to the date of purchase (the
"Change of Control Senior Subordinated Note Payment"), in the case of the Senior
Subordinated Notes, and (ii) prior to , 2001, 101% of the Accreted
Value of the Discount Notes on the date of purchase and, thereafter, 101% of the
aggregate principal amount of the Discount Notes, plus accrued but unpaid
interest, if any, thereon to the date of purchase (the "Change of Control
Discount Note Payment;" together with the Change of Control Senior Subordinated
Note Payment, the "Change of Control Payment"). The right of the Holders of the
Notes to require the Company to repurchase such Notes upon a Change of Control
may not be waived by the
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applicable Trustee without the requisite approval of the Holders of the
applicable Notes. See "-- Amendment Supplement or Waiver." Within 30 days
following any Change of Control, the Company will mail a notice to each Holder
describing the transaction or transactions that constitute the Change of Control
and offering to repurchase the Notes pursuant to the procedures required by the
Indentures and described in such notice. The Change of Control Payment shall be
made on a business day not less than 30 days nor more than 60 days after such
notice is mailed (the "Change of Control Payment Date"). The Company, the Parent
and each Subsidiary Guarantor will comply with the requirements of Rule 14e-1
under the Exchange Act and any other securities laws and regulations thereunder
to the extent such laws and regulations are applicable to such party in
connection with the repurchase of the Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (i) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (ii) deposit with (a) the paying agent
for the Senior Subordinated Notes an amount equal to the Change of Control
Senior Subordinated Note Payment in respect of all the Senior Subordinated Notes
or portions thereof so tendered and (b) the paying agent for the Discount Notes
an amount equal to the Change of Control Discount Note Payment in respect of all
Discount Notes or portions thereof so tendered and (iii) deliver or cause to be
delivered to the applicable Trustee the relevant Notes so accepted, together
with an Officers' Certificate stating the aggregate principal amount (or
Accreted Value, as applicable) of such Notes or portions thereof being purchased
by the Company. The applicable paying agent will promptly mail to each Holder of
the Senior Subordinated Notes or the Discount Notes, as the case may be, so
tendered the Change of Control Payment for such Notes, and the applicable
Trustee will promptly authenticate and mail (or cause to be transferred by book
entry) to each such Holder a new Senior Subordinated Note or Discount Note, as
the case may be, equal in principal amount to any unpurchased portion of the
Notes surrendered, if any; provided, each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Company will publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Payment Date.
Except as described above with respect to a Change of Control, the
Indentures do not contain provisions that permit the Holders of the Notes to
require that the Company repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar transaction.
The Company will not be required to make a Change of Control Offer if a
third party makes the Change of Control Offer in the manner, at the times and
otherwise in compliance with the requirements set forth in the Indentures
applicable to a Change of Control Offer made by the Company and purchases all
Notes or portions thereof validly tendered and not withdrawn under such Change
of Control Offer.
The Credit Agreement will prohibit the Company from repurchasing any Notes
pursuant to a Change of Control Offer prior to the repayment in full of the
Senior Debt under the Credit Agreement. Moreover, the occurrence of certain
change of control events identified in the Credit Agreement will constitute a
default under the Credit Agreement. Any future Credit Facilities or other
agreements relating to Senior Debt to which the Company becomes a party may
contain similar restrictions and provisions. If a Change of Control were to
occur, the Company may not have sufficient available funds to pay the Change of
Control Purchase Price for all Notes that might be delivered by Holders of the
Notes seeking to accept the Change of Control Offer after first satisfying its
obligations under the Credit Agreement or other agreements relating to Senior
Debt, if accelerated. The failure of the Company to make or consummate the
Change of Control Offer or pay the Change of Control Purchase Price when due
will give the Trustees and the Holders of the Notes the rights described under
"-- Events of Default."
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Parent and its Subsidiaries taken as a whole and the
Company and its Subsidiaries taken as a whole. Although there is a developing
body of case law interpreting the phrase "substantially all," there is no
precise established definition of the phrase under applicable law. Accordingly,
the ability of a Holder of the Notes to require the Company to repurchase such
Notes as a result of a sale, lease, transfer, conveyance or other disposition of
less than all of the assets of the Parent and its Subsidiaries taken as a whole
and the Company and its Subsidiaries taken as a whole to another Person or group
may be uncertain.
Transactions or events that constitute a Change of Control may include
transactions and events that are approved by the Company's Board of Directors.
Asset Sales
The Indentures will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries (other than MEV) to, engage in an Asset Sale,
unless (i) the Company or the Restricted Subsidiary, as the
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case may be, receives consideration at the time of such Asset Sale at least
equal to the fair market value (as determined in good faith by a resolution of
the Board of Directors of the Company set forth in an Officers' Certificate
delivered to the Trustees, which determination shall be conclusive evidence of
compliance with this provision) of the assets or Equity Interests issued or sold
or otherwise disposed of and (ii) at least 80% of the consideration therefor
received by the Company or such Restricted Subsidiary (after deducting expenses
associated with such Asset Sale) is in the form of cash, Cash Equivalents, oil
and gas properties owned or held by another Person which are to be used in the
Oil and Gas Business of the Company or its Restricted Subsidiaries, or any
combination thereof; provided, that the amount of (a) any liabilities (as shown
on the Company's or such Restricted Subsidiary's most recent balance sheet or,
with respect to plugging and abandonment obligations and other similar
liabilities, in the notes thereto) of the Company or any Restricted Subsidiary
(other than contingent liabilities and liabilities that are by their terms
subordinated to the Notes or any guarantee thereof) that are assumed by the
transferee of any such assets pursuant to a customary novation agreement that
releases the Company or such Restricted Subsidiary from further liability and
(b) any Liquid Securities received by the Company or any such Restricted
Subsidiary from such transferee that are converted by the Company or such
Restricted Subsidiary into cash within 180 days after closing such Asset Sale,
shall be deemed to be cash for purposes of this provision to the extent of the
liabilities assumed or cash received.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may use such Net Proceeds, at its option, for one or more of the
following purposes: (i) to reduce Senior Debt; (ii) to make Permitted Business
Investments; (iii) to acquire controlling interests in other Oil and Gas
Businesses to the extent such Investments are not Permitted Business
Investments; (iv) to make capital expenditures in respect of the Company's or
its Restricted Subsidiaries' Oil and Gas Business; and (v) to purchase assets
that are used or useful in the Oil and Gas Business. Pending the final
application of any such Net Proceeds, the Company may temporarily reduce Senior
Debt that is revolving debt or otherwise invest such Net Proceeds in any manner
that is not prohibited by the Indentures. Any Net Proceeds from Asset Sales that
are not applied or invested as provided in the first sentence of this paragraph
will (after the expiration of the periods specified in this paragraph) be deemed
to constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $10.0 million, the
Company will be required to make an offer to all Holders of the Notes and, to
the extent required by the terms thereof, to all holders of Pari Passu
Indebtedness (an "Asset Sale Offer") to purchase the maximum principal amount of
the Senior Subordinated Notes, the Discount Notes and any such Pari Passu
Indebtedness to which the Asset Sale Offer applies that may be purchased out of
the Excess Proceeds, at an offer price in cash equal to, in the case of the
Senior Subordinated Notes or any such Pari Passu Indebtedness, 100% of the
principal amount thereof, plus accrued and unpaid interest thereon to the date
of purchase, or, in the case of the Discount Notes, prior to , 2001,
100% of the Accreted Value thereof on the date of purchase and, thereafter, 100%
of the principal amount of the Discount Notes, plus after , 2001,
accrued but unpaid interest thereon, if any, to the date of purchase, or, in the
case of any discount Pari Passu Indebtedness, 100% of the accreted value thereof
on the date of purchase, in each case, in accordance with the procedures set
forth in the Indentures or the agreements governing the Pari Passu Indebtedness,
as applicable. To the extent that the aggregate principal amount (or accreted
value, as the case may be) of the Notes and Pari Passu Indebtedness tendered
pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company
may use any remaining Excess Proceeds for general corporate purposes and will no
longer be considered "Excess Proceeds" for purposes of this paragraph. If the
sum of (i) the aggregate Accreted Value (or, if after , 2001, the
principal amount) of the Discount Notes surrendered by Holders thereof, (ii) the
aggregate principal amount of the Senior Subordinated Notes surrendered by
Holders thereof and (iii) the aggregate principal amount or accreted value, as
the case may be, of Pari Passu Indebtedness surrendered by holders thereof,
exceeds the amount of Excess Proceeds, the Trustees shall select the Notes and
Pari Passu Indebtedness to be purchased on a pro rata basis, based on the
aggregate principal amount (or accreted value, as applicable) thereof
surrendered in such Asset Sale Offer.
The Credit Agreement may prohibit the Company from purchasing any Notes from
the Net Proceeds of Asset Sales. Any future credit agreements or other
agreements relating to Senior Debt to which the Company becomes a party may
contain similar restrictions. In the event an Asset Sale Offer occurs at a time
when the Company is prohibited from purchasing the Notes, the Company could seek
the consent of its lenders to the purchase or could attempt to refinance the
Senior Debt that contains such prohibition. If the Company does not obtain such
a consent or repay such Senior Debt, the Company may remain prohibited from
purchasing the Notes. In such case, the Company's failure to purchase tendered
Notes would constitute an Event of Default
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under the Indentures which would, in turn, constitute a default under the Credit
Agreement and possibly a default under other agreements relating to Senior Debt.
In such circumstances, the subordination provisions in the Indentures would
likely restrict payments to the Holders of the Notes.
CERTAIN COVENANTS
Restricted Payments
The Indentures will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or
pay any dividend or make any other payment or distribution on account of the
Company's Equity Interests (including, without limitation, any payment to
holders of the Company's Equity Interests in connection with any merger or
consolidation involving the Company) or to the direct or indirect holders of the
Company's Equity Interests in their capacity as such (other than dividends or
distributions (a) payable in Equity Interests (other than Disqualified Stock) of
the Company, (b) to the extent necessary to permit the Parent to pay overhead,
tax liabilities, legal, accounting or other professional fees and expenses and
any fees and expenses associated with registration statements filed with the
Commission and subsequent ongoing public reporting requirements, in each case to
the extent actually incurred by the Parent in connection with acting as a
holding company for the Company and its Subsidiaries, or (c) to the extent
necessary to permit the Parent to perform its obligations to pay fees, expenses
and indemnification under the Stock Purchase Agreement (as described under
"Description of the Stock Purchase Agreement and the Rights Offering -- The
Stock Purchase Agreement"); (ii) purchase, redeem, defease or otherwise acquire
or retire for value any Equity Interests of the Company or any direct or
indirect parent or other Affiliate of the Company that is not a Wholly Owned
Restricted Subsidiary of the Company; (iii) make any principal payment on, or
purchase, redeem, defease or otherwise acquire or retire for value any
Indebtedness that is subordinated to the Notes, except any scheduled principal
payment or sinking fund payment or at final maturity; or (iv) make any
Restricted Investment (all such payments and other actions set forth in clauses
(i) through (iv) above being collectively referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described below under the caption "-- Incurrence of Indebtedness and
Issuance of Disqualified Stock;" and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made after the date of the Indentures (excluding
Restricted Payments permitted by clauses (ii), (iii), (v) and (vi) of the
next succeeding paragraph), is less than the sum of (l) 50% of the
Consolidated Net Income of the Company for the period (treated as one
accounting period) from the beginning of the first month after the date of
the Indentures to the end of the Company's most recently ended fiscal
quarter for which internal financial statements are available at the time of
such Restricted Payment (or, if such Consolidated Net Income for such period
is a deficit, less 100% of such deficit), plus (2) 100% of the aggregate net
cash proceeds received by the Company since the date of the Indentures (A)
as capital contributions to the Company (other than from a Subsidiary of the
Company or from the Rights Offering or the Standby Commitment) and (B) from
the issue, sale or exercise since the date of the Indentures of Equity
Interests in the Company or the Parent or of debt securities of the Company
or the Parent that have been converted into or exchanged for such Equity
Interests (other than Equity Interests (or convertible debt securities) sold
to a Subsidiary of the Company and other than Disqualified Stock or debt
securities that have been converted into Disqualified Stock), plus (3) to
the extent that any Restricted Investment that was made after the date of
the Indentures is sold for cash or otherwise liquidated or repaid for cash,
the lesser of (A) the net proceeds of such sale, liquidation or repayment
and (B) the initial amount of such Restricted Investment, plus (4) the
amount equal to the net reduction in Investments in Unrestricted
Subsidiaries resulting from (A) payments of dividends or interest or other
transfers of assets to the Company or any Restricted Subsidiary from
Unrestricted Subsidiaries, (B) the redesignation of Unrestricted
Subsidiaries as Restricted Subsidiaries or (C) the receipt of proceeds by
the Company or any Restricted Subsidiary from the sale or other disposition
of any portion of any Investment in an Unrestricted Subsidiary not to exceed
the amount of Investments previously made by the Company or any Restricted
Subsidiary in such
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Unrestricted Subsidiary, which amount was included in the calculation of the
amount of Restricted Payments.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof if at said date of
declaration such payment would have complied with the provisions of the
Indentures and such dividend (a) shall be deemed paid on the date of such date
of declaration for purposes of clauses (a) and (b) in the next preceding
paragraph and (b) shall be included in the determination of Restricted Payments
pursuant to clause (c) of the preceding paragraph only when declared and not
when paid, (ii) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of the Company in exchange for, or out of the proceeds of,
the substantially concurrent sale (other than to a Subsidiary of the Company) of
other Equity Interests of the Company (other than any Disqualified Stock);
provided, that the amount of any such net cash proceeds that are utilized for
any such redemption, repurchase, retirement or other acquisition shall be
excluded from clause (c)(2) of the preceding paragraph, (iii) the defeasance,
redemption or repurchase of Subordinated Indebtedness with the net cash proceeds
from an incurrence of subordinated Permitted Refinancing Debt or the
substantially concurrent sale (other than to a Subsidiary of the Company) of
Equity Interests in the Company or the Parent (other than Disqualified Stock);
provided, that the amount of any such net cash proceeds that are utilized for
any such redemption, repurchase, retirement or other acquisition shall be
excluded from clause (c)(2) of the preceding paragraph, (iv) the repurchase,
redemption or other acquisition or retirement for value of any Equity Interests
in the Company, the Parent or any Subsidiary of the Company (a) held by any of
the Company's (or any of its Subsidiaries') employees pursuant to any management
equity subscription agreement, stock option agreement or any other agreement
with such employee, or (b) in connection with a tender offer to eliminate odd
lots of such Equity Interests; provided, that the aggregate price paid for all
such repurchased, redeemed, acquired or retired Equity Interests shall not
exceed $2.0 million in any fiscal year, plus the aggregate cash proceeds
received by the Company during such fiscal year from any issuance of Equity
Interests by the Company or the Parent to any Permitted Investor or employee of
the Company or any of its Subsidiaries; and provided further, that no Default or
Event of Default shall have occurred and be continuing immediately after such
transaction, (v) repurchases of Equity Interests deemed to occur upon exercise
of stock options if such Equity Interests represent a portion of the exercise
price of such options and (vi) the defeasance, redemption, repurchase or
repayment of the Existing Debt if any of the Existing Debt is subordinated to
the Notes.
The amount of all Restricted Payments (other than cash) shall be the fair
market value (as determined in good faith by a resolution of the Board of
Directors of the Company set forth in an Officers' Certificate delivered to the
Trustees, which determination shall be conclusive evidence of compliance with
this provision) on the date of the Restricted Payment of the asset(s) proposed
to be transferred by the Company or the applicable Restricted Subsidiary, as the
case may be, pursuant to the Restricted Payment. Not later than ten days after
the date of making any Restricted Payment, the Company shall deliver to the
Trustees an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
the covenant "Restricted Payments" were computed.
In computing Consolidated Net Income for purposes of the "Restricted
Payments" covenant, (i) the Company shall use audited financial statements for
the portions of the relevant period for which audited financial statements are
available on the date of determination and unaudited financial statements and
other current financial data based on the books and records of the Company for
the remaining portion of such period and (ii) the Company shall be permitted to
rely in good faith on the financial statements and other financial data derived
from the books and records of the Company that are available on the date of
determination. If the Company makes a Restricted Payment which, at the time of
the making of such Restricted Payment, would in the good faith determination of
the Company be permitted under the requirements of the Indentures, such
Restricted Payment shall be deemed to have been made in compliance with the
Indentures notwithstanding any subsequent adjustments made in good faith to the
Company's financial statements affecting Consolidated Net Income of the Company
for any period.
Designation of Unrestricted Subsidiaries
The Board of Directors of the Company may designate any Restricted
Subsidiary to be an Unrestricted Subsidiary if such designation would not cause
a Default. For purposes of making such determination, all outstanding
Investments by the Company and its Restricted Subsidiaries (except to the extent
repaid in cash) in the Subsidiary so designated will be deemed to be Restricted
Payments at the time of such designation and will reduce the amount available
for Restricted Payments under clause (c) of the first paragraph of the
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covenant "Restricted Payments." All such outstanding Investments will be deemed
to constitute Investments in an amount equal to the fair market value of such
Investments at the time of such designation. Such designation will only be
permitted if such Restricted Payment would be permitted at such time and if such
Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary.
Incurrence of Indebtedness and Issuance of Disqualified Stock
The Indentures will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and that the Company will not, and will
not permit any of its Restricted Subsidiaries to, issue any Disqualified Stock;
provided, however, subject to the limitations set forth below, the Company and
the Subsidiary Guarantors may incur Indebtedness (including Acquired Debt) or
issue shares of Disqualified Stock if:
(i) the Fixed Charge Coverage Ratio for the Company's most recently
ended four full fiscal quarters for which internal financial statements are
available immediately preceding the date on which such additional
Indebtedness is incurred or such Disqualified Stock is issued would have
been at least 2.5 to 1, determined on a pro forma basis as set forth in the
definition of Fixed Charge Coverage Ratio; and
(ii) no Default or Event of Default shall have occurred and be
continuing at the time such additional Indebtedness is incurred or such
Disqualified Stock is issued or would occur as a consequence of the
incurrence of the additional Indebtedness or the issuance of the
Disqualified Stock.
Notwithstanding the foregoing, the Indentures will not prohibit any of the
following (collectively, "Permitted Indebtedness"): (a) the Indebtedness
evidenced by the Notes; (b) the incurrence by the Company of Indebtedness
pursuant to Credit Facilities, so long as the aggregate principal amount of all
Indebtedness outstanding under all Credit Facilities does not, at any one time,
exceed the greater of (1) $525 million or (2) the Borrowing Base; (c) the
guarantee by any Restricted Subsidiary (including any Subsidiary Guarantor) of
any Indebtedness that is permitted by the Indentures to be incurred by the
Company; provided that such Subsidiary, if not a Subsidiary Guarantor, becomes a
Subsidiary Guarantor under the Indenture; (d) all Indebtedness of the Company
and its Restricted Subsidiaries in existence as of the date of the Indentures
after giving effect to the Recapitalization and the application of the proceeds
thereof; (e) intercompany Indebtedness between or among the Company, the Parent
and any of the Company's Restricted Subsidiaries; provided, however, that (1) if
the Company is the obligor on such Indebtedness, such Indebtedness is expressly
subordinate to the payment in full of all Obligations with respect to the Notes
and (2)(A) any subsequent issuance or transfer of Equity Interests that results
in any such Indebtedness being held by a Person other than the Company, the
Parent or a Restricted Subsidiary and (B) any sale or other transfer of any such
Indebtedness to a Person that is not the Company, the Parent or a Restricted
Subsidiary shall be deemed, in each case, to constitute an incurrence of such
Indebtedness by the Company or such Restricted Subsidiary, as the case may be;
(f) Indebtedness of the Company or any Restricted Subsidiary related to any
Permitted Marketing Transaction, including, without limitation, under letters of
credit or guarantees of Indebtedness or other obligations of a party to a
Permitted Marketing Transaction; provided, that in the event that the Company or
any Restricted Subsidiary guarantees such Indebtedness or other obligations of
another party, then either (1) the Person who is obligated to purchase
hydrocarbons from such party has an investment grade credit rating from S&P or
Moody's, or in lieu thereof, a Person guaranteeing the payment of such obligated
Person has an investment grade credit rating from S&P or Moody's or (2) such
Person posts, or has posted for it, a letter of credit in favor of the Company
or such Subsidiary Guarantor with respect to all of such Person's obligations
under such contracts; (g) in addition to Indebtedness under any Credit Facility,
Indebtedness in connection with one or more standby letters of credit,
guarantees, performance bonds or other reimbursement obligations, in each case,
issued in the ordinary course of business and not in connection with the
borrowing of money or the obtaining of advances or credit (other than advances
or credit on open account, includible in current liabilities, for goods and
services in the ordinary course of business and on terms and conditions which
are customary in the Oil and Gas Business, and other than the extension of
credit represented by such letter of credit, guarantee or performance bond
itself), not to exceed in the aggregate at any time outstanding 5.0% of Total
Assets; (h) Indebtedness under Interest Rate Hedging Agreements entered into for
the purpose of limiting interest rate risks; provided, that the obligations
under such agreements are related to payment obligations on Indebtedness
otherwise permitted by the terms of this covenant and that the aggregate
notional principal amount of such agreements does not exceed 105% of the
principal amount of the Indebtedness to
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which such agreements relate; (i) Indebtedness under Oil and Gas Hedging
Contracts; provided, that such contracts were entered into in the ordinary
course of business for the purpose of limiting risks that arise in the ordinary
course of business of the Company and its Subsidiaries; (j) the incurrence by
the Company and Subsidiary Guarantors of Indebtedness not otherwise permitted to
be incurred pursuant to this paragraph; provided, that the aggregate principal
amount (or accreted value, as applicable) of all Indebtedness incurred pursuant
to this clause (j), together with all Permitted Refinancing Debt incurred
pursuant to clause (k) of this paragraph in respect of Indebtedness previously
incurred pursuant to this clause (j), does not exceed $25.0 million at any time
outstanding; (k) Permitted Refinancing Debt incurred in exchange for, or the net
proceeds of which are used to refinance, extend, renew, replace, defease or
refund, Indebtedness that was permitted by the Indentures to be incurred
(including Indebtedness previously incurred pursuant to this clause (k)); or (l)
production imbalances arising in the ordinary course of business and consistent
with past practices.
The Indentures will provide that the Company will not permit any
Unrestricted Subsidiary to incur any Indebtedness other than Non-Recourse Debt;
provided, however, if any such Indebtedness ceases to be Non-Recourse Debt, such
event shall be deemed to constitute an incurrence of Indebtedness by the Company
or a Subsidiary Guarantor of the Company.
No Layering
The Indentures will provide that (i) the Company will not incur, create,
issue, assume, guarantee or otherwise become liable for any Indebtedness that is
subordinate or junior in right of payment to any Senior Debt and senior in any
respect in right of payment to the Notes and (ii) the Parent and the Subsidiary
Guarantors will not directly or indirectly incur, create, issue, assume,
guarantee or otherwise become liable for any Indebtedness that is subordinate or
junior in right of payment to any guarantees issued in respect of Senior Debt
and senior in any respect in right of payment to the Guarantees; provided,
however, that the foregoing limitations will not apply to distinctions between
categories of Indebtedness that exist by reason of any Liens arising or created
in respect of some but not all such Indebtedness.
Liens
The Indentures will provide that the Company will not, and will not permit
any of its Subsidiaries to, create, incur, assume or otherwise cause or suffer
to exist or become effective any Lien (other than Permitted Liens) upon any of
its property or assets, now owned or hereafter acquired, securing any
Indebtedness (other than Senior Debt), unless prior to or contemporaneously
therewith the Notes are directly secured equally and ratably; provided, that (i)
if such secured Indebtedness is Pari Passu Indebtedness, the Lien securing such
Pari Passu Indebtedness shall be subordinate and junior to, or pari passu with,
the Lien securing the Notes and (ii) if such secured Indebtedness is
Subordinated Indebtedness, the Lien securing such Subordinated Indebtedness
shall be subordinate and junior to the Lien securing the Notes at least to the
same extent as such Subordinated Indebtedness is subordinated to the Notes.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Indentures will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to (i)(a) pay dividends
or make any other distributions to the Company or any of its Restricted
Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest
or participation in, or measured by, its profits or (b) pay any Indebtedness
owed by it to the Company or any of its Restricted Subsidiaries, (ii) make loans
or advances to the Company or any of its Restricted Subsidiaries or (iii)
transfer any of its properties or assets to the Company or any of its Restricted
Subsidiaries, except for such encumbrances or restrictions existing under or by
reason of (a) the Credit Agreement as in effect as of the date of the
Indentures, and any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings thereof or any
other Credit Facility; provided, that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements,
refinancings or other Credit Facilities are no more restrictive with respect to
such dividend and other payment restrictions than those contained in the Credit
Agreement as in effect on the date of the Indentures, (b) the Indentures and the
Notes, (c) applicable law, (d) any instrument governing Indebtedness or Capital
Stock of a Person acquired by the Company or any of its Restricted Subsidiaries
as in effect at the time of such acquisition (except, in the case of
Indebtedness, to the extent such Indebtedness was
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<PAGE> 77
incurred in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person and its Subsidiaries or the property
or assets of the Person and its Subsidiaries so acquired; provided, that, in the
case of Indebtedness, such Indebtedness was permitted by the terms of the
Indentures to be incurred, (e) by reason of customary non-assignment provisions
in leases entered into in the ordinary course of business and consistent with
past practices, (f) capital leases and purchase money obligations for property
leased or acquired in the ordinary course of business that impose restrictions
of the nature described in clause (iii) above on the property so leased or
acquired, (g) restrictions in the form of Liens which are not prohibited
pursuant to the "Liens" covenant and which are customary limitations on the
transfer of collateral and customary restrictions contained in stock purchase
agreements or asset sale agreements limiting the transfer of assets pending the
closing of the sale or (h) Permitted Refinancing Debt; provided, that the
restrictions contained in the agreements governing such Permitted Refinancing
Debt are no more restrictive than those contained in the agreements governing
the Indebtedness being refinanced.
Merger, Consolidation, or Sale of Substantially All Assets
The Indentures will provide that the Company may not consolidate or merge
with or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets, in one or more related transactions, to another
Person, and the Company may not permit any of its Restricted Subsidiaries to
enter into any such transaction or series of transactions if such transaction or
series of transactions would, in the aggregate, result in a sale, assignment,
transfer, lease, conveyance, or other disposition of all or substantially all of
the properties or assets of the Company to another Person, unless (i) the
Company is the surviving corporation of any such consolidation or merger or (a)
the Person formed by or surviving any such consolidation or merger (if other
than the Company) or to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made (the "Surviving Entity") is a
corporation organized or existing under the laws of the United States, any state
thereof or the District of Columbia and (b) such Surviving Entity assumes all
the obligations of the Company under the Notes and the Indentures pursuant to a
supplemental indenture for each Indenture in a form reasonably satisfactory to
the applicable Trustee, (ii) immediately before and after giving effect to such
transaction no Default or Event of Default exists, (iii) immediately after
giving effect to such transaction on a pro forma basis (and treating any
Indebtedness not previously an obligation of the Company or any Subsidiary
Guarantor which becomes the obligation of the Company or any Subsidiary
Guarantor as a result of such transaction as having been incurred at the time of
such transaction), the Consolidated Net Worth of the Company or the Surviving
Entity (if the Company is not the continuing obligor under the Indentures) is
equal to or greater than the Consolidated Net Worth of the Company immediately
prior to such transaction and (iv) except in the case of a merger of the Company
with or into a Wholly Owned Restricted Subsidiary of the Company, the Company or
the Surviving Entity (if the Company is not the continuing obligor under the
Indentures) will, at the time of such transaction and after giving pro forma
effect thereto as if such transaction had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the test set forth in the first paragraph of
the covenant described above under the caption "-- Incurrence of Indebtedness
and Issuance of Disqualified Stock." Notwithstanding the restrictions described
in the foregoing clauses (iii) and (iv), (a) any Restricted Subsidiary may
consolidate with, merge into or transfer all or part of its properties and
assets to the Company and (b) the Company may merge with an Affiliate
incorporated solely for the purpose of reincorporating in another jurisdiction.
Transactions with Affiliates
The Indentures will provide that the Company will not, and will not permit
any of its Subsidiaries to, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any of
its Affiliates (each of the foregoing, an "Affiliate Transaction"), unless (i)
such Affiliate Transaction is on terms that are no less favorable to the Company
or such Subsidiary, as the case may be, than would be available in a comparable
transaction in arm's-length dealings with an unrelated third party or, 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 the Company or such
Subsidiary, as the case may be, (ii) with respect to an Affiliate Transaction or
series of related Affiliate Transactions involving payments in excess of
$1,000,000 in the aggregate, the Company delivers an Officers' Certificate to
the Trustees certifying that such Affiliate Transaction complies with clause (i)
above, (iii) with respect to an
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<PAGE> 78
Affiliate Transaction or series of related Affiliate Transactions involving
payments in excess of $5,000,000 but less than $15,000,000 in the aggregate, the
Company delivers an Officers' Certificate to the Trustees certifying that (a)
such Affiliate Transaction or series of related Affiliate Transactions complies
with clause (i) above and (b) such Affiliate Transaction or series of related
Affiliate Transactions has been approved by a resolution adopted by a majority
of the directors of the Company who are disinterested in such Affiliate
Transaction or series of related Affiliate Transactions (which resolution shall
be conclusive evidence of compliance with this provision) and (iv) with respect
to an Affiliate Transaction or series of related Affiliate Transactions
involving payments of $15,000,000 or more in the aggregate, (A) the Company
delivers an Officers' Certificate to the Trustees certifying that (a) such
transaction or series of related transactions complies with clause (i) above and
(b) such Affiliate Transaction or series of related Affiliate Transactions has
been approved by a resolution adopted by a majority of the members of the Board
of Directors of the Company who are disinterested in such Affiliate Transaction
and (B) the Company shall have received a written opinion of a firm of
investment bankers nationally recognized in the United States that such
Affiliate Transaction or series of related Affiliate Transactions is fair from a
financial point of view to the Company or such Subsidiary (which resolution and
fairness opinion shall be conclusive evidence of compliance with this
provision); provided, however, that the foregoing restrictions shall not apply
to (1) the Recapitalization, the payment of fees, expenses and indemnifications
under the Stock Purchase Agreement (as described under "Description of the Stock
Purchase Agreement and the Rights Offering -- The Stock Purchase Agreement") or
any transaction effected pursuant to the terms of the Series A Preferred Stock
or Series B Preferred Stock of the Parent as in effect on the date of the
Indentures, (2) Permitted Investments and Restricted Payments that are permitted
by the provisions of the Indentures described above under the caption
"-- Restricted Payments," (3) loans or advances to officers, directors and
employees of the Company or any Subsidiary made in the ordinary course of
business and consistent with past practices of the Company and its Subsidiaries
not to exceed in the aggregate at any one time outstanding $2.5 million, (4) the
payment of reasonable and customary regular fees to directors of the Company or
any of its Subsidiaries who are not employees of the Company or any Subsidiary,
(5) any indemnification or similar payment made to any director or officer (A)
in accordance with the corporate charter or bylaws of the Company or any
Subsidiary, (B) under any agreement or (C) under applicable law, (6) obligations
of the Company or any Subsidiary under employee compensation and other benefit
arrangements entered into or provided for in the ordinary course of business,
(7) any transaction relating to the disposition of the Company's Investment in
MEV or (8) any transaction between or among the Company, the Parent and the
Restricted Subsidiaries..
Additional Subsidiary Guarantees
The Indentures will provide that if the Company or any of its Restricted
Subsidiaries shall acquire or create a Material Restricted Subsidiary after the
date of the Indentures, then such newly acquired or created Material Restricted
Subsidiary will be required to execute Guarantees and to deliver opinions of
counsel in accordance with the terms of the Indentures. The foregoing
requirement shall not apply to any newly acquired or created Subsidiary that has
been properly designated as an Unrestricted Subsidiary in accordance with the
Indentures for so long as it continues to constitute an Unrestricted Subsidiary.
Limitations as to Unrestricted Subsidiaries.
The Indentures will provide that the Company will not permit any
Unrestricted Subsidiary to create, assume, incur, guarantee or otherwise become
liable in respect of any Indebtedness except Non-Recourse Indebtedness. The
Company and its Restricted Subsidiaries will not designate, create or purchase
any Unrestricted Subsidiary, unless the Board of Directors of the Company shall
have made a determination (as set forth in the resolution approving such
designation, creation or purchase) that the designation, creation and operation
of the Unrestricted Subsidiary is not reasonably expected to materially and
adversely affect the financial condition, business, or operations of the Company
and its Restricted Subsidiaries taken together as a whole (which resolution
shall be conclusive evidence of compliance with this provision).
Business Activities
The Company and the Parent will not, and will not permit any Subsidiary to,
engage in any material respect in any business other than the Oil and Gas
Business.
Commission Reports
Notwithstanding that the Parent may not be required to remain, and that the
Company is not, subject to the reporting requirements of Section 13 or 15(d) of
the Exchange Act, to the extent permitted by the Exchange
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<PAGE> 79
Act the Company will file with the Commission and provide, within 15 days after
such filing, the Trustees and Holders and prospective Holders (upon request)
with the annual reports and the information, documents and other reports which
are specified in Sections 13 and 15(d) of the Exchange Act. In the event that
the Company is not permitted to file such reports, documents and information
with the Commission, the Company will provide substantially similar information
to the Trustees, the Holders and prospective Holders (upon request) as if the
Company were subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act. The Company will be deemed to have satisfied such requirements if
the Parent files and provides reports, documents and information of the types
otherwise so required, in each case within the applicable time periods, and the
Company is not required to file such reports, documents and information
separately under the applicable rules and regulations of the Commission (after
giving effect to any exemptive relief) because of the filings by the Parent. The
Company also will comply with the other provisions of Section 314(a) of the
Trust Indenture Act.
EVENTS OF DEFAULT AND REMEDIES
Each of the Indentures will provide that each of the following constitutes
an Event of Default: (i) a default for 30 consecutive days in the payment when
due of interest on the applicable Notes (whether or not prohibited by the
subordination provisions of the Indentures); (ii) a default in the payment when
due of the principal of or premium, if any, on the applicable Notes (whether or
not prohibited by the subordination provisions of the Indentures); (iii) the
failure by the Company to comply with its obligations under "Certain
Covenants -- Merger, Consolidation or Sale of Substantially All Assets" above;
(iv) the failure by the Company for 30 consecutive days after notice from the
applicable Trustee or the Holders of at least 25% in aggregate principal amount
of the Senior Subordinated Notes or the Discount Notes, as applicable, then
outstanding to comply with the provisions described under the captions
"Repurchase at the Option of Holders" and "Certain Covenants" other than the
provisions described under "-- Merger, Consolidation or Sale of Assets;" (v) the
failure by the Company for 60 consecutive days after notice from the applicable
Trustee or the Holders of at least 25% in aggregate principal amount of the
Senior Subordinated Notes or the Discount Notes, as applicable, then outstanding
to comply with any of its other agreements in the applicable Indenture or such
Notes; (vi) except as permitted by the Indentures, any Guarantee shall be held
in any judicial proceeding to be unenforceable or invalid or shall cease for any
reason to be in full force and effect or the Parent or a Subsidiary Guarantor,
or any Person acting on behalf of the Parent or a Subsidiary Guarantor, shall
deny or disaffirm its obligations under its Guarantee; (vii) the failure by the
Parent to issue Preferred Stock for gross proceeds in the amount of $132 million
pursuant to the Rights Offering and Standby Commitment or either thereof within
90 days following the date of issuance of the Notes; (viii) a default under any
mortgage, indenture or instrument under which there may be issued or by which
there may be secured or evidenced any Indebtedness for money borrowed by the
Company or any Subsidiary Guarantor, whether such Indebtedness now exists or is
created after the date of the Indentures, which default (a) is caused by a
failure to pay such Indebtedness within any applicable grace period after final
maturity (a "Payment Default") or (b) results in the acceleration of such
Indebtedness prior to its final maturity and, in each case, the principal amount
of such Indebtedness, together with the principal amount of any other such
Indebtedness under which there is then existing a Payment Default or the
maturity of which has been so accelerated, aggregates $10.0 million or more;
provided, that if any such default is cured or waived or any such acceleration
rescinded, or such Indebtedness is repaid, within a period of 10 days from the
continuation of such default beyond the applicable grace period or the
occurrence of such acceleration, as the case may be, such Event of Default under
the Indentures and any consequential acceleration of the Notes shall be
automatically rescinded; (ix) final judgments or orders rendered against the
Company or any Restricted Subsidiary that are unsatisfied and that require the
payment in money, either individually or in an aggregate amount, that is more
than $10,000,000 over the coverage under applicable insurance policies and
either (a) commencement by any creditor of an enforcement proceeding upon such
judgment (other than a judgment that is stayed by reason of pending appeal or
otherwise) or (b) the occurrence of a 60-day period during which a stay of such
judgment or order, by reason of pending appeal or otherwise, was not in effect;
and (x) certain events of bankruptcy or insolvency with respect to the Parent,
the Company or any Subsidiary Guarantor.
If any Event of Default occurs and is continuing, the applicable Trustee or
the Holders of at least 25% in principal amount of the applicable Notes then
outstanding may declare the principal of and accrued but unpaid interest on such
Notes or, in the case of the Discount Notes prior to , 2001, the
Accreted Value of such Discount Notes, to be due and payable immediately. If
payment of the Notes is accelerated because of an Event of Default, the Company
or the applicable Trustee shall notify the holders of the Designated Senior
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<PAGE> 80
Indebtedness of the acceleration. The Company may not pay the Notes until five
business days after such holders receive such notice of acceleration and,
thereafter, may pay the Notes only to the extent the subordination provisions of
the Indentures permit such payment. Notwithstanding the foregoing, in the case
of an Event of Default arising from certain events of bankruptcy or insolvency
with respect to the Parent, the Company or any Subsidiary Guarantor, all
outstanding Notes will become due and payable without further action or notice.
Holders of the Senior Subordinated Notes or the Discount Notes, as the case may
be, may not enforce the applicable Indenture or such Notes except as provided in
the applicable Indenture. Subject to certain limitations, Holders of a majority
in principal amount of the applicable Notes then outstanding may direct the
relevant Trustee in its exercise of any trust or power. Each Trustee may
withhold from Holders of the applicable Notes notice of any continuing Default
or Event of Default (except a Default or Event of Default relating to the
payment of principal or interest) if it determines that withholding notice is in
the interest of such Holders.
After a declaration of acceleration under an Indenture, but before a
judgment or decree for payment of the money due has been obtained by the
applicable Trustee, Holders of a majority in principal amount of the applicable
Notes then outstanding, by written notice to the Company and the applicable
Trustee, may rescind such declaration if (i) the Company, the Parent or any
Subsidiary Guarantor has paid or deposited with the applicable Trustee a sum
sufficient to pay (a) all sums paid or advanced by such Trustee under the
applicable Indenture and the reasonable compensation, expenses, disbursements
and advances of such Trustee, its agents and counsel and (b) all overdue
interest on the applicable Notes, if any, (ii) the rescission would not conflict
with any judgment or decree of a court of competent jurisdiction and (iii) all
Events of Default, other than the nonpayment of principal of, premium, if any,
and interest on the applicable Notes that has become due solely by such
declaration of acceleration, have been cured or waived.
The Holders of a majority in aggregate principal amount of the Senior
Subordinated Notes or the Discount Notes, as the case may be, then outstanding
by notice to the relevant Trustee may on behalf of the Holders of all of such
Notes waive any existing Default or Event of Default and its consequences under
the relevant Indenture except a continuing Default or Event of Default in the
payment of interest or premium on, or the principal of, such Notes.
The Company is required to deliver to each Trustee annually a statement
regarding compliance with the relevant Indenture, and the Company is required,
within five business days after becoming aware of any Default or Event of
Default, to deliver to the Trustees a statement specifying such Default or Event
of Default.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations and the obligations of the Parent and the Subsidiary Guarantors
discharged with respect to the outstanding Senior Subordinated Notes or Discount
Notes, as the case may be, and the Guarantees thereof ("Legal Defeasance"),
except for (i) the rights of Holders of such outstanding Notes to receive
payments in respect of the principal of, premium, if any, and interest on such
Notes when such payments are due from the trust referred to below, (ii) the
Company's obligations with respect to such Notes concerning issuing temporary
Notes, registration of such Notes, mutilated, destroyed, lost or stolen Notes
and the maintenance of an office or agency for payment and money for security
payments held in trust, (iii) the rights, powers, trusts, duties and immunities
of the relevant Trustee and the Company's obligations in connection therewith
and (iv) the Legal Defeasance provisions of the relevant Indenture. In addition,
the Company may, at its option and at any time, elect to have the obligations of
the Company, the Parent and the Subsidiary Guarantors released with respect to
certain covenants that are described in the Senior Subordinated Note Indenture
or the Discount Note Indenture, as the case may be ("Covenant Defeasance") and,
thereafter, any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the relevant Notes. In the event
Covenant Defeasance occurs, certain events (not including non-payment and
bankruptcy and insolvency events) described under "Events of Default" will no
longer constitute an Event of Default with respect to the relevant Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company or the Parent must irrevocably deposit with the applicable Trustee, in
trust, for the benefit of the Holders of the relevant Notes, cash in U.S.
dollars, non-callable U.S. Government Securities, or a combination thereof, in
such amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of, premium, if
any, and interest on the applicable Notes on the stated maturity or on the
applicable redemption date, as the case may be, and the Company must specify
whether the relevant Notes are being defeased to maturity or to a particular
redemption date, (ii) in the case of Legal Defeasance, the Company or
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the Parent shall have delivered to the applicable Trustee an opinion of counsel
reasonably acceptable to such Trustee (a) confirming that (1) the Company or the
Parent has received from, or there has been published by, the Internal Revenue
Service a ruling or (2) since the date of the applicable Indenture, there has
been a change in the applicable federal income tax law and (b) to the effect
that based on such ruling or change in law, as the case may be, Holders of the
outstanding applicable Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Legal Defeasance had not occurred, (iii) in
the case of Covenant Defeasance, the Company or the Parent shall have delivered
to the applicable Trustee an opinion of counsel reasonably acceptable to such
Trustee confirming that Holders of the outstanding applicable Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred, (iv) no Default or Event of Default
shall have occurred and be continuing on the date of such deposit (other than a
Default or Event of Default resulting from the borrowing of funds to be applied
to such deposit) or, insofar as Events of Default from bankruptcy or insolvency
events are concerned, no such Event of Default shall have occurred at any time
during the period ending on the 91st day after the date of such deposit, (v)
such Legal Defeasance or Covenant Defeasance will not result in a breach or
violation of, or constitute a default under any material agreement or instrument
(other than the relevant Indenture) to which the Company, the Parent or any of
their respective Subsidiaries is a party or by which the Company, the Parent or
any of their respective Subsidiaries is bound and (vi) the Company and the
Parent must deliver to the applicable Trustee an Officers' Certificate and an
opinion of counsel, each stating that all conditions precedent provided for
relating to the Legal Defeasance or the Covenant Defeasance have been complied
with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indentures.
The applicable registrar of the Notes and the applicable Trustee may require a
Holder, among other things, to furnish appropriate endorsements and transfer
documents, and the Company may require a Holder to pay any taxes and fees
required by law or permitted by the applicable Indenture. The Company is not
required to transfer or exchange any Note selected for redemption. Also, the
Company is not required to transfer or exchange any Note for a period of 15 days
before a selection of the Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of such Note
for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, each Indenture or
the Senior Subordinated Notes or the Discount Notes or the related Guarantees,
as the case may be, may be amended or supplemented with the consent of the
Holders of at least a majority in principal amount of the Senior Subordinated
Notes or the Discount Notes, as the case may be, then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, such Notes), and any existing Default or
Event of Default under, or compliance with any provision of, such Indenture or
such Notes or the related Guarantees may be waived with the consent of the
Holders of a majority in principal amount of the then outstanding Senior
Subordinated Notes or Discount Notes, as the case may be (including, without
limitation, consents obtained in connection with a purchase of, or tender offer
or exchange offer for, such Notes).
Without the consent of each Holder affected, an amendment or waiver may not,
with respect to any Senior Subordinated Notes or Discount Notes, as the case may
be, held by a non-consenting Holder: (i) reduce the principal amount of the
Senior Subordinated Notes or the Discount Notes, as the case may be, whose
Holders must consent to an amendment, supplement or waiver; (ii) reduce the
principal amount of or change the fixed maturity of any Senior Subordinated Note
or Discount Note, as the case may be; (iii) reduce the rate of or change the
time for payment of interest on any Senior Subordinated Note or Discount Note,
as the case may be; (iv) waive a Default or Event of Default in the payment of
principal of or premium, if any, or interest on the Senior Subordinated Notes or
the Discount Notes, as the case may be, except a recision of acceleration of the
Senior Subordinated Notes or the Discount Notes, as the case may be, by the
Holders of at least a majority in aggregate principal amount of such Notes and a
waiver of the payment default that resulted from such acceleration; (v) make any
Senior Subordinated Note or Discount Note, as the case may be, payable in money
other than that stated in such Notes; (vi) make any change in the provisions of
the Senior Subordinated Note Indenture or the Discount Note Indenture, as the
case may be, relating to waivers of past Defaults or the rights
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of Holders of the Senior Subordinated Notes or the Discount Notes, as the case
may be, to receive payments of principal of or premium, if any, or interest on
such Notes; or (vii) make any change in the foregoing amendment and waiver
provisions. In addition, any amendment to the provisions of each Indenture
described under "-- Repurchase at the Option of the Holders" or the provisions
of Article 10 of the Senior Subordinated Note Indenture or the Discount Note
Indenture, as the case may be (which relate to subordination) will require the
consent of the Holders of at least 66 2/3% in aggregate principal amount of the
Senior Subordinated Notes or the Discount Notes, as the case may be, then
outstanding if such amendment would adversely affect the rights of Holders of
such Notes. However, no amendment may be made to the subordination provisions of
the Indentures that adversely affects the rights of any holder of Senior Debt
then outstanding unless the holders of such Senior Debt (or any group or
representative thereof authorized to give a consent) consent to such change.
Notwithstanding the foregoing, without the consent of any Holder of the
Senior Subordinated Notes or the Discount Notes, as the case may be, the
Company, the Parent, the Subsidiary Guarantors and the applicable Trustee may
amend or supplement the Senior Subordinated Note Indenture or the Discount Note
Indenture, as the case may be, or such Notes to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Notes in addition to or in place of
certificated Notes, to provide for the assumption of the Company's obligations
to Holders of such Notes or the related Guarantees in the case of a merger or
consolidation, to make any change that would provide any additional rights or
benefits to the Holders of such Notes or that does not adversely affect the
legal rights under the applicable Indenture of any such Holder, or to comply
with requirements of the Commission in order to effect or maintain the
qualification of such Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEES
Each Indenture contains certain limitations on the rights of the applicable
Trustee, should it become a creditor of the Company, 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. Each Trustee will be permitted to engage in
other transactions; however, if such Trustee acquires any conflicting interest,
it must eliminate such conflict within 90 days, apply to the Commission for
permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding Senior
Subordinated Notes or Discount Notes, as the case may be, will have the right to
direct the time, method and place of conducting any proceeding for exercising
any remedy available to the applicable Trustee, subject to certain exceptions.
Each Indenture provides that in case an Event of Default shall occur (which
shall not be cured), the applicable Trustee will be required, in the exercise of
its power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, each Trustee will be under no obligation to
exercise any of its rights or powers under the applicable Indenture at the
request of any Holder of the relevant Notes, unless such Holder shall have
offered to such Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indentures. Reference
is made to the Indentures for a full definition of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Accreted Value" with respect to any Discount Note means, as of the date of
issuance of the Discount Notes, % of the offering price of the stated
principal amount of such Discount Note, and as of any date after such date of
issuance and prior to , 2001 as of which the Accreted Value is being
calculated (the "Calculation Date"), (a) if the Calculation Date is a
or interest payment date, the percentage of the stated principal amount
of such Discount Note as of such date as shown in the table below or (b) if the
Calculation Date is not a or , an amount equal to the sum of
(i) the Accreted Value of such Discount Note as of the or , 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 or to (and including) the Calculation
Date, calculated as the product of (x) % of annual coupon rate of the
Accreted Value of such Discount Note as of such immediately preceding
or and (y) a fraction, the numerator of which is the number of days
from (but excluding) such immediately preceding or 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
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of each Discount Note as of each and prior to ,
2001 shall be an amount in dollars equal to a percentage of the stated principal
amount of such Discount Note as set forth below:
<TABLE>
<CAPTION>
PMT. DATE PMT. DATE
--------- ---------
<S> <C> <C>
1996................................................... % %
1997................................................... % %
1998................................................... % %
1999................................................... % %
2000................................................... % %
2001................................................... % %
</TABLE>
On and after , 2001, the Accreted Value of each Discount Note shall
be equal to 100% of the stated principal amount thereof.
"Acquired Debt" means, with respect to any specified Person or any
Subsidiary of such specified Person, (i) Indebtedness of any other Person
existing at the time such other Person is merged with or into or became a
Subsidiary of such specified Person, including, without limitation, Indebtedness
incurred in connection with, or in contemplation of, such other Person merging
with or into or becoming a Subsidiary of such specified Person, and (ii)
Indebtedness secured by a Lien encumbering any asset acquired by such specified
Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided, beneficial
ownership of 10% or more of the voting securities of a Person shall be deemed to
be control; further provided, however, that in no event shall any limited
partner of DNR-MESA Holdings, L.P. that is a beneficial owner (within the
meaning of Rule 13d-3 under the Exchange Act) of less than 10% of the aggregate
voting power of the Capital Stock of the Company or the Parent be deemed to be
an Affiliate of the Company or the Parent.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition (but
excluding the creation of a Lien) by the Company or any of its Restricted
Subsidiaries of any assets including, without limitation, by way of a sale and
leaseback; provided, that the sale, lease, conveyance or other disposition of
all or substantially all of the assets of the Company and its Subsidiaries taken
as a whole will be governed by the provisions of the Indentures described above
under the caption "-- Repurchase at the Option of Holders -- Change of Control"
and/or the provisions described above under the caption "-- Certain
Covenants -- Merger, Consolidation, or Sale of Substantially All Assets" and not
by the provisions described above under "-- Repurchase at the Option of
Holders -- Asset Sales", and (ii) the issue or sale by the Company or any of its
Restricted Subsidiaries of Equity Interests in any of the Company's Subsidiaries
(including the sale by the Company or a Restricted Subsidiary of Equity
Interests in an Unrestricted Subsidiary), in the case of either clause (i) or
(ii), whether in a single transaction or a series of related transactions (a)
that have a fair market value in excess of $5.0 million or (b) for net proceeds
in excess of $5.0 million. Notwithstanding the foregoing, the following shall
not be deemed to be Asset Sales: (1) a transfer of assets by the Company to a
Restricted Subsidiary of the Company or by a Restricted Subsidiary of the
Company to the Company or to another Restricted Subsidiary of the Company (in
the case of a transfer to a Subsidiary that is not a Wholly Owned Restricted
Subsidiary, transfers will be excluded from the determination of "Asset Sales"
only to the extent of the Company's or the Restricted Subsidiary's interest in
such Subsidiary after giving effect to such transfer); (2) an issuance of Equity
Interests by a Restricted Subsidiary of the Company to the Company or to another
Restricted Subsidiary of the Company (in the case of an issuance of Equity
Interests to a Subsidiary that is not a Wholly Owned Restricted Subsidiary,
issuances will be excluded from the determination of "Asset Sales" only to the
extent of the Company's or the Restricted Subsidiary's interest in such
Subsidiary after giving effect to such issuance); (3) a Restricted Payment that
is permitted by the covenant described above under the caption "-- Certain
Covenants -- Restricted Payments" or a Permitted Investment; (4) the
abandonment, farm-out, lease or sublease of undeveloped oil and gas properties
in the ordinary course of business; (5) the trade or exchange by the Company or
any Restricted Subsidiary of the Company of any oil and gas property owned or
held by the Company or such Restricted Subsidiary for any oil and gas property
owned or held by another Person, which the Board of Directors of the Company
determine in good faith to be of approximately equivalent value; (6) the
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sale or transfer in the ordinary course of business of hydrocarbons or other
mineral products or other inventory or surplus or obsolete equipment; or (7)
sale of hydrocarbons pursuant to Permitted Marketing Obligations.
"Attributable Debt" in respect of a sale and leaseback transaction means, at
the time of determination, the present value (discounted at the rate of interest
implicit in such transaction, determined in accordance with GAAP) of the
obligation of the lessee for net rental payments during the remaining term of
the lease included in such sale and leaseback transaction (including any period
for which such lease has been extended, to the extent the lease payments during
such extension period are required to be capitalized on a balance sheet in
accordance with GAAP).
"Bankruptcy Code" means Title 11 of the United States Code, as amended.
"Borrowing Base" means, as of any date, the aggregate amount of borrowing
availability as of such date under all Credit Facilities that determine
availability on the basis of a borrowing base or other asset-based calculation;
provided, that in no event shall the Borrowing Base exceed $600 million.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than six
months from the date of acquisition, (iii) certificates of deposit and
eurodollar time deposits with maturities of six months or less from the date of
acquisition, bankers' acceptances with maturities not exceeding six months and
overnight bank deposits, in each case with any lender party to the Credit
Agreement or with any domestic commercial bank having capital and surplus in
excess of $500 million and a Thompson Bank Watch Rating of "B" or better, (iv)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clauses (ii) and (iii) above entered into
with any financial institution meeting the qualifications specified in clause
(iii) above, (v) commercial paper having a rating of at least Pl from Moody's or
a rating of at least Al from S&P and (vi) money market mutual or similar funds
having assets in excess of $100,000,000.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole or the Parent and its Subsidiaries taken as a whole to any "person" (as
such term is used in Section 13(d)(3) of the Exchange Act) other than a
Permitted Investor; (ii) the adoption by the shareholders of the Company or the
Parent of a plan relating to the liquidation or dissolution of the Company or
the Parent; or (iii) after no shares of the Series B Preferred Stock remain
outstanding (a) Continuing Directors cease for any reason to constitute a
majority of the members of the Board of Directors of the Company or the Parent
for a period of two consecutive years or (b) an event or series of events by
which any Person or other entity, other than a Permitted Investor, or any group
of Persons or other entities acting in concert as a partnership or other group,
other than a group of Permitted Investors, shall, as a result of a tender or
exchange offer, open market purchases, privately negotiated purchases, merger,
consolidation or otherwise, have become the beneficial owner (within the meaning
of Rule 13d-3 under the Exchange Act) of 35% or more of the aggregate voting
power of the then outstanding Capital Stock of the Parent having the right to
elect directors under ordinary circumstances.
"Commission" means the Securities and Exchange Commission.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person and its Restricted Subsidiaries for
such period, plus (i) an amount equal to any extraordinary loss plus any net
loss realized in connection with an Asset Sale (together with any related
provision for taxes), to the extent such losses were included in computing such
Consolidated Net Income, plus (ii) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries for such period, to the
extent that such provision for taxes was included in computing such Consolidated
Net Income, plus (iii) consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued
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(including, without limitation, amortization of original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of letters
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Interest Rate Hedging Agreements), to the extent that any such expense was
included in computing such Consolidated Net Income, plus (iv) depreciation,
depletion and amortization expenses (including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash expenses that were
paid in a prior period) for such Person and its Restricted Subsidiaries for such
period to the extent that such depreciation, depletion and amortization expenses
were included in computing such Consolidated Net Income, plus (v) exploration
expenses for such Person and its Restricted Subsidiaries for such period to the
extent such exploration expenses were included in computing such Consolidated
Net Income, plus (vi) other non-cash charges (excluding any such non-cash charge
to the extent that it represents an accrual of or reserve for cash charges in
any future period or amortization of a prepaid cash expense that was paid in a
prior period) of such Person and its Restricted Subsidiaries for such period to
the extent that such other non-cash charges were included in computing such
Consolidated Net Income, in each case, on a consolidated basis and determined in
accordance with GAAP. Notwithstanding the foregoing, the provision for taxes on
the income or profits of, and the depreciation, depletion and amortization,
exploration expenses and other non-cash charges and expenses of, a Restricted
Subsidiary of the referent Person shall be added to Consolidated Net Income to
compute Consolidated Cash Flow only to the extent (and in the same proportion)
that the Net Income of such Restricted Subsidiary was included in calculating
the Consolidated Net Income of such Person and only if a corresponding amount
would be permitted at the date of determination to be dividended to the Company
by such Restricted Subsidiary without prior governmental approval (that has not
been obtained), and without direct or indirect restriction pursuant to the terms
of its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to that Restricted
Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided,
that (i) the Net Income (but not loss) of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions paid in
cash to the referent Person or a Restricted Subsidiary thereof, (ii) the Net
Income of any Restricted Subsidiary shall be excluded to the extent that the
declaration or payment of dividends or similar distributions by that Restricted
Subsidiary of that Net Income is not at the date of determination permitted
without any prior governmental approval (that has not been obtained) or,
directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Restricted Subsidiary or its stockholders, (iii)
the Net Income of any Person acquired in a pooling of interests transaction for
any period prior to the date of such acquisition shall be excluded and (iv) the
cumulative effect of a change in accounting principles shall be excluded.
Notwithstanding the foregoing, for the purpose of the covenant described under
"Certain Covenants -- Limitation on Restricted Payments" only, there shall be
excluded from Consolidated Net Income any dividends or other distributions paid
in cash by Unrestricted Subsidiaries to the referent Person or a Restricted
Subsidiary thereof to the extent such dividend or other distributions increase
the amount of Restricted Payments under such covenant pursuant to clause
(c)(4)(A) thereof.
"Consolidated Net Worth" means the total of the amounts shown on the balance
sheet of the Company and its consolidated Restricted Subsidiaries, determined on
a consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending prior to the taking of any action for the
purpose of which the determination is being made and for which financial
statements are available (but in no event ending more than 135 days prior to the
taking of such action), as (i) the par or stated value of all outstanding
Capital Stock of the Company, plus (ii) paid-in capital or capital surplus
relating to such Capital Stock, plus (iii) any retained earnings or earned
surplus, less (a) any accumulated deficit and (b) any amounts attributable to
Disqualified Stock.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company or the Parent, as the case may be, who (i)
was a member of such Board of Directors immediately after the first date on
which no shares of Series B Preferred Stock were outstanding or (ii) was
nominated for election or elected to such Board of Directors with the approval
of (a) a majority of the Continuing Directors who were members of such Board at
the time of such nomination or election or (b) a majority of those directors who
were previously approved by Continuing Directors.
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"Credit Agreement" means that certain Credit Agreement, dated as of
, 1996, by and among the Company, the Parent, Chase, as
administrative agent and as a lender, Bankers Trust, as syndication agent and as
a lender, Societe General, as documentation agent and as a lender, and certain
banks, financial institutions and other entities, as lenders, providing for up
to $525 million of Indebtedness, including any related notes, letters of credit
issued thereunder, guarantees, collateral documents, instruments and agreements
executed in connection therewith, and in each case as amended, restated,
modified, renewed, refunded, increased, replaced or refinanced, in whole or in
part, from time to time, whether or not with the same lenders or agents.
"Credit Facilities" means, with respect to the Company, one or more debt
facilities (including, without limitation, the Credit Agreement) or commercial
paper facilities with banks or other lenders providing for revolving credit
loans, term loans, production payment financing, receivables financing
(including through the sale of receivables to such lenders or to special purpose
entities formed to borrow from such lenders against such receivables) or letters
of credit, in each case, as amended, restated, modified, renewed, refunded,
increased, replaced or refinanced in whole or in part from time to time.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Senior Debt" means (i) the Credit Agreement and (ii) any other
Senior Debt permitted under the applicable Indenture the principal amount of
which is $25 million or more and that has been designated by the Company as
"Designated Senior Debt."
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, (i) matures or is mandatorily
redeemable for cash, pursuant to a sinking fund obligation or otherwise, or
redeemable for cash at the option of the holder thereof, in whole or in part, on
or prior to the date that is 91 days after the date on which the Notes mature or
(ii) requires the payment of cash dividends or other cash distributions on or
prior to the date that is 91 days after the date on which the Notes mature.
"Dollar-Denominated Production Payments" means production payment
obligations recorded as liabilities in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock) and, with respect to any
employee benefit plans, stock appreciation rights.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Debt" means Indebtedness of the Parent and its Subsidiaries in
existence after giving effect to the application of the proceeds of the
Recapitalization on the First Closing Date, in an aggregate principal amount not
to exceed $12.9 million, together with all accrued and unpaid interest thereon
and all premiums payable with respect thereto until such amounts are repaid.
"Fixed Charge Coverage Ratio" means, with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
Company or any of its Restricted Subsidiaries incurs, assumes, guarantees or
redeems or pays any Indebtedness (other than revolving credit borrowings) or
issues or redeems Disqualified Stock subsequent to the commencement of the
period for which the Fixed Charge Coverage Ratio is being calculated but prior
to the date on which the calculation of the Fixed Charge Coverage Ratio is made
(the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be
calculated giving pro forma effect to such incurrence, assumption, guarantee or
redemption or payment of Indebtedness, or such issuance or redemption of
Disqualified Stock, as if the same had occurred at the beginning of the
applicable four-quarter reference period. In addition, for purposes of making
the computation referred to above, (i) acquisitions that have been made by the
Company or any of its Restricted Subsidiaries, including through mergers or
consolidations and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period and on or
prior to the Calculation Date (including, without limitation, any acquisition to
occur on the Calculation Date) shall be deemed to have occurred on the first day
of the four-quarter reference period and Consolidated Cash Flow for such
reference period shall be calculated without giving effect to clause (iii) of
the proviso set forth in the definition of Consolidated Net Income, (ii) the net
proceeds of Indebtedness incurred or Disqualified Stock issued by the Company or
any of its Restricted Subsidiaries pursuant to the first paragraph of the
covenant described under the caption "-- Certain Covenants -- Incurrence of
Indebtedness
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and Issuance of Disqualified Stock" during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date
shall be deemed to have been received by the Company or any such Restricted
Subsidiary on the first day of the four-quarter reference period and applied to
its intended use on such date, (iii) the Consolidated Cash Flow attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded and
(iv) the Fixed Charges attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, but only to the extent that the obligations
giving rise to such Fixed Charges will not be obligations of the referent Person
or any of its Restricted Subsidiaries following the Calculation Date.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether paid or accrued (including,
without limitation, amortization of original issue discount, non-cash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease Obligations,
imputed interest with respect to Attributable Debt, commissions, discounts and
other fees incurred in respect of letter of credit or bankers' acceptance
financings), (ii) the consolidated interest expense of such Person and its
Restricted Subsidiaries that was capitalized during such period, (iii) any
interest expense on Indebtedness of another Person that is guaranteed by such
Person or any of its Restricted Subsidiaries or secured by a Lien on assets of
such Person or any of its Restricted Subsidiaries (whether or not such guarantee
or Lien is called upon) and (iv) all cash dividend payments (and non-cash
dividend payments (unless paid in Equity Interests which are not Disqualified
Stock) in the case of a Person that is a Restricted Subsidiary) on any series of
preferred stock of such Person or any of its Restricted Subsidiaries owned by
Persons other than the Company or a Restricted Subsidiary.
For purposes of the definition of Fixed Charges, (i) interest on a Capital
Lease Obligation shall be deemed to accrue at an interest rate reasonably
determined by the Board of Directors of such Person (as evidenced by a
resolution of the Board of Directors of the Company) to be the rate of interest
implicit in such Capital Lease Obligation in accordance with GAAP, (ii) interest
on Indebtedness that is determined on a fluctuating basis shall be deemed to
have accrued at a fixed rate per annum equal to the rate of interest of such
Indebtedness in effect on the date Fixed Charges are being calculated, subject
to the proviso in clause(iii), (iii) interest on Indebtedness that may
optionally be determined at an interest rate based upon a factor of a prime or
similar rate, a eurocurrency interbank offered rate, or other rate, shall be
deemed to have been based upon the rate actually chosen, or, if none, then based
upon such optional rate chosen as the Company may designate, (provided, that for
the period following the date on which the rate actually chosen ceases to be in
effect, the Company may designate an optional rate other than that actually
chosen, which optional rate shall be deemed to accrue at a fixed per annum equal
to the rate of interest on such optional rate in effect on the date Fixed
Charges are being calculated) and (iv) Fixed Charges shall be increased or
reduced by the net cost (including amortization of discount) or benefit
associated with obligations under Interest Rate Hedging Agreements attributable
to such period.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Indebtedness" means, with respect to any Person, without duplication, (i)
any indebtedness of such Person, whether or not contingent, (a) in respect of
borrowed money, (b) evidenced by bonds, notes, debentures or similar
instruments, (c) evidenced by letters of credit (or reimbursement agreements in
respect thereof) or banker's acceptances, (d) representing Capital Lease
Obligations, (e) representing the balance deferred and unpaid of the purchase
price of any property, except any such balance that constitutes an accrued
expense or trade payable, (f) representing any obligations in respect of
Interest Rate Hedging Agreements or Oil and Gas Hedging Contracts and (g) in
respect of any Production Payment, (ii) all indebtedness of others of the type
referred to in clause (i), (iii), (iv) or (v) secured by a Lien on any asset of
such Person (whether or not such indebtedness is assumed by such Person, except
that the amount of such indebtedness not assumed shall be deemed to be the
lesser of the value of such asset and the amount of such indebtedness so
secured),
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(iii) obligations of such Person in respect of production imbalances, (iv)
Attributable Debt of such Person, (v) Acquired Debt of such Person and (vi) to
the extent not otherwise included in the foregoing, the guarantee by such Person
of any indebtedness of any other Person of the type referred to in the preceding
clause (i), (iii), (iv) or (v).
"Interest Rate Hedging Agreements" means, with respect to any Person, the
obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements and (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in interest rates.
"Investments" means, with respect to any Person, all investments by such
Person (including investments by such Person in Affiliates) in the form of
direct or indirect loans (including guarantees of Indebtedness or other
obligations, but excluding trade credit and other ordinary course advances
customarily made in the Oil and Gas Business), advances or capital contributions
(excluding commission, travel and similar advances to officers and employees
made in the ordinary course of business), purchases or other acquisitions for
consideration of Indebtedness, Equity Interests or other securities, together
with all items that are or would be classified as investments on a balance sheet
prepared in accordance with GAAP; provided, that the following shall not
constitute Investments: (i) an acquisition of assets, Equity Interests or other
securities by the Company for consideration consisting of Equity Interests
(other than Disqualified Stock) in the Company; (ii) Interest Rate Hedging
Agreements entered into in accordance with the limitations set forth in clause
(h) of the second paragraph of the covenant described under the caption
"-- Certain Covenants -- Incurrence of Indebtedness and Issuance of Disqualified
Stock;" (iii) Oil and Gas Hedging Contracts entered into in accordance with the
limitations set forth in clause (i) of the second paragraph of the covenant
described under the caption "-- Certain Covenants -- Incurrence of Indebtedness
and Issuance of Disqualified Stock;" and (iv) Permitted Marketing Transactions.
If the Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted Subsidiary
of the Company (other than MEV) such that, after giving effect to any such sale
or disposition, such Person is no longer a Subsidiary of the Company, the
Company shall be deemed to have made an Investment on the date of any such sale
or disposition equal to the fair market value of the Equity Interests of such
Subsidiary not sold or disposed of.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction).
"Liquid Securities" means securities (i) of an issuer that is not an
Affiliate of the Company and (ii) that are publicly traded on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market; provided,
that securities meeting the requirements of clauses (i) and (ii) above shall be
treated as Liquid Securities from the date of receipt thereof until the earlier
of (a) the date on which such securities are sold or exchanged for cash or Cash
Equivalents and (b) 180 days following the date of the closing of the Asset Sale
in connection with which such Liquid Securities were received. In the event such
securities are not sold or exchanged for cash or Cash Equivalents within such
180-day period, for purposes of determining whether the transaction pursuant to
which the Company or a Restricted Subsidiary received the securities was in
compliance with the covenant described under the caption "-- Repurchase at the
Option of Holders -- Asset Sales," such securities shall be deemed not to have
been Liquid Securities at any time.
"Material Restricted Subsidiary" means any Restricted Subsidiary of the
Company which, as of the relevant date of determination, would be a "significant
subsidiary" as defined in Reg. sec. 230.405 promulgated pursuant to the
Securities Act as in effect on the date of issuance of the Notes, assuming the
Company is the "registrant" referred to in such definition, except that the 10%
amounts referred to in such definition shall be deemed to be 5%.
"MEV" means Mesa Environmental Ventures Co. and its Subsidiaries.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain or loss,
together with any related provision for taxes on such gain or loss, realized in
connection with (a) any Asset Sale (including, without limitation, dispositions
pursuant to sale and leaseback
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transactions) or (b) the disposition of any securities by such Person or any of
its Restricted Subsidiaries or the extinguishment of any Indebtedness of such
Person or any of its Restricted Subsidiaries and (ii) any extraordinary or
nonrecurring gain or loss, together with any related provision for taxes on such
extraordinary or nonrecurring gain or loss.
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of
Liquid Securities or any other non-cash consideration received in any Asset
Sale, but excluding cash amounts placed in escrow, until such amounts are
released to the Company), net of the direct costs relating to such Asset Sale
(including, without limitation, legal, accounting and investment banking fees
and expenses, and sales commissions) and any relocation expenses incurred as a
result thereof, taxes paid or payable as a result thereof (after taking into
account any available tax credits or deductions and any tax sharing
arrangements), amounts paid to minority interest holders, amounts required to be
applied to the repayment of Indebtedness (other than Indebtedness under any
Credit Facility) secured by a Lien on the asset or assets that were the subject
of such Asset Sale and any reserve for adjustment in respect of the sale price
of such asset or assets established in accordance with GAAP and any reserve
established for future liabilities.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides any guarantee or credit
support of any kind (including any undertaking, guarantee, indemnity, agreement
or instrument that would constitute Indebtedness) or (b) is directly or
indirectly liable (as a guarantor or otherwise), (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Restricted Subsidiaries to declare a default under such
other Indebtedness or cause the payment thereof to be accelerated or payable
prior to its stated maturity and (iii) the explicit terms of which provide that
there is no recourse against any of the assets of the Company or its Restricted
Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Oil and Gas Business" means (i) the acquisition, exploration, exploitation,
development, operation and disposition of interests in oil, gas and other
hydrocarbon properties, (ii) the gathering, marketing, treating, processing,
storage, 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, storage, transportation or
marketing of oil, gas and other minerals and products produced in association
therewith and (iv) any activity that is ancillary or necessary or desirable to
facilitate the activities described in clauses (i) through (iii) of this
definition.
"Oil and Gas Hedging Contracts" means any oil and gas purchase or hedging
agreement, and other agreement or arrangement, in each case, that is designed to
provide protection against oil and gas price fluctuations.
"Pari Passu Indebtedness" means Indebtedness that ranks pari passu in right
of payment to the Notes.
"Permitted Business Investments" means investments made in the ordinary
course of, and of a nature that is or shall have become customary in, the Oil
and Gas Business as a means of actively exploiting, exploring for, acquiring,
developing, processing, gathering, marketing or transporting oil and gas through
agreements, transactions, interests or arrangements which permit one to share
risks or costs, comply with regulatory requirements regarding local ownership or
satisfy other objectives customarily achieved through the conduct of Oil and Gas
Business jointly with third parties, including, without limitation, (i)
ownership interests in oil and gas properties, processing facilities, gathering
systems or ancillary real property interests and (ii) Investments in the form of
or pursuant to operating agreements, processing agreements, farm-in agreements,
farm-out agreements, development agreements, area of mutual interest agreements,
unitization agreements, pooling agreements, joint bidding agreements, service
contracts, joint venture agreements, partnership agreements (whether general or
limited), limited liability company agreements, subscription agreements, stock
purchase agreements and other similar agreements with third parties.
"Permitted Indebtedness" has the meaning given in the covenant described
under the caption "-- Certain Covenants -- Incurrence of Indebtedness and
Issuance of Disqualified Stock."
"Permitted Investments" means (i) any Investment in the Company or in a
Restricted Subsidiary of the Company, (ii) any Investment in Cash Equivalents or
securities issued or directly and fully guaranteed or
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insured by the United States government or any agency or instrumentality thereof
having maturities of not more than one year from the date of acquisition, (iii)
any Investment by the Company or any Restricted Subsidiary of the Company in a
Person if, as a result of such Investment and any related transactions that at
the time of such Investment are contractually mandated to occur, (a) such Person
becomes a Restricted Subsidiary of the Company or (b) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys all or
substantially all of its assets to, or is liquidated into, the Company or a
Restricted Subsidiary of the Company, (iv) any Investment made as a result of
the receipt of non-cash consideration from an Asset Sale that was made pursuant
to and in compliance with the covenant described above under the caption
"-- Repurchase at the Option of Holders -- Asset Sales," (v) other Investments
having an aggregate fair market value (measured on the date each such Investment
was made and without giving effect to subsequent changes in value), when taken
together with all other Investments made pursuant to this clause (v) that are at
the time outstanding (net of repayments, dividends and distributions received
with respect to such Investments), not to exceed $37.5 million, (vi) Permitted
Business Investments, (vii) any Investment acquired by the Company in exchange
for Equity Interests in the Company or the Parent (other than Disqualified
Stock), (viii) Investments in Unrestricted Subsidiaries with net cash proceeds
contributed to the common equity capital of the Company or a Restricted
Subsidiary since the date of the Indentures; provided, that the amount of any
such net cash proceeds that are used for any such Investment shall be excluded
from clause (c)(2) of the first paragraph of the covenant described under the
caption "-- Certain Covenants -- Restricted Payments" and (ix) Investments
received in connection with any good faith settlement of a bankruptcy
proceeding.
"Permitted Investor" means any Person who is or was (i) a holder of shares
of the Series B Preferred Stock or (ii) an Affiliate of a Person described in
the immediately preceding clause (i).
"Permitted Liens" means (i) Liens securing Senior Debt under the Credit
Agreement, (ii) Liens securing Indebtedness of a Subsidiary and Liens securing
Senior Debt, in each case, that is outstanding on the date of issuance of the
Notes (after giving effect to the Recapitalization and the use of the proceeds
therefrom) and Liens securing Senior Debt that is permitted by the terms of the
Indentures to be incurred, (iii) Liens in favor of the Company or any Restricted
Subsidiary, (iv) Liens on property or assets existing at the time of acquisition
thereof by the Company or any Subsidiary of the Company and Liens on property or
assets of a Subsidiary existing at the time it became a Subsidiary; provided,
that such Liens were in existence prior to the contemplation of the acquisition
and do not extend to any property or assets other than the acquired property or
assets or the property or assets of the acquired Subsidiary, (v) Liens incurred
or deposits made in the ordinary course of business in connection with workers'
compensation, unemployment insurance or other kinds of social security, or to
secure the payment or performance of tenders, statutory or regulatory
obligations, surety or appeal bonds, bids, leases, government contracts and
other contracts (other than for borrowed money), performance and return-of-money
bonds or other obligations of a like nature incurred in the ordinary course of
business (including, without limitation, lessee or operator obligations under
statutes, governmental regulations or instruments related to the ownership,
exploration and production of oil, gas and minerals on state or federal lands or
waters), (vi) Liens existing on the date of the Indentures (after giving effect
to the Recapitalization and the use of proceeds therefrom), (vii) Liens for
taxes, assessments and governmental charges and claims that are not yet
delinquent or that are being contested in good faith by appropriate proceedings
promptly instituted and diligently concluded; provided, that any reserve or
other appropriate provision as shall be required in conformity with GAAP shall
have been made therefor, (viii) statutory liens of landlords, mechanics,
suppliers, vendors, warehousemen, carriers and other like Liens arising in the
ordinary course of business, (ix) pre-judgment Liens and judgment Liens not
giving rise to an Event of Default so long as any appropriate legal proceeding
that may have been duly initiated for the review of such judgment shall not have
been finally terminated or the period within which such proceeding may be
initiated shall not have expired, (x) Liens on, or related to, properties or
assets to secure all or part of the costs incurred in the ordinary course of the
Oil and Gas Business for the exploration, drilling, development, production,
processing, transportation, marketing or storage or operation thereof and to
support trade letters of credit and bankers' acceptances issued or created in
the ordinary course of business, (xi) Liens encumbering pipelines or pipeline
facilities that arise under operation of law, (xii) Liens arising under
operating agreements, joint venture agreements, partnership agreements, oil and
gas leases, farm-out agreements, division orders, contracts for the sale,
transportation or exchange of oil or natural gas, unitization and pooling
declarations and agreements, area of mutual interest agreements and other
agreements that are customary in the Oil and Gas Business, (xiii) Liens reserved
in oil and gas mineral leases for bonus and rental payments and for compliance
with the terms of such leases, (xiv) Liens constituting survey exceptions,
encumbrances, easements, and reservations of, and rights to others for,
rights-of-way, zoning and other restrictions as to the
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use of real properties, and minor defects of title which, in the case of any of
the foregoing, do not secure the payment of borrowed money, and in the aggregate
do not materially adversely affect the value of the assets of the Company and
its Restricted Subsidiaries, taken as a whole, or materially impair the use of
such properties for the purposes for which such properties are held by the
Company or such Subsidiaries, (xv) Liens not otherwise permitted by clauses (i)
through (xiv) that are incurred in the ordinary course of business of the
Company or any Subsidiary of the Company with respect to obligations that do not
exceed $5.0 million at any one time outstanding, (xvi) Liens on assets of
Unrestricted Subsidiaries that secure Non-Recourse Debt of Unrestricted
Subsidiaries, (xvii) any interest or title of a lessor under any Capital Lease
Obligation and (xviii) purchase money Liens; provided, however, that (a) the
related purchase money Indebtedness shall not be secured by any property or
assets of the Company or any Restricted Subsidiary other than the property and
assets so acquired and the proceeds thereof and (b) the Lien securing such
Indebtedness shall be created no later than 10 days after such acquisition.
"Permitted Marketing Transaction" means (i) a transaction in which the
Company or any Subsidiary of the Parent either (a) establishes a position using
New York Mercantile Exchange Crude Oil or Natural Gas Futures contracts to
purchase hydrocarbons for future delivery to it or (b) purchases or commits to
purchase hydrocarbons for future delivery to it, and contemporaneous with such
purchase transaction either (1) establishes one or more positions using New York
Mercantile Exchange Crude Oil or Natural Gas Futures contracts to resell at a
date subsequent to such delivery date or (2) enters into a contract with a
Person to resell at a date subsequent to such delivery date, a similar aggregate
quantity and quality of hydrocarbons as so purchased by the Company or such
Subsidiary, as applicable, at an aggregate price greater than the Indebtedness
incurred for the hydrocarbons so purchased by the Company or such Subsidiary or
(ii) any other purchase by the Company or any Subsidiary of the Parent of
hydrocarbons for which the Company or such Subsidiary has contracts to sell.
"Permitted Refinancing Debt" means any Indebtedness of the Company or any of
its Restricted Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other
Indebtedness (other than Indebtedness incurred under a Credit Facility) of the
Company or any of its Restricted Subsidiaries; provided, that: (i) the principal
amount (or accreted value, if applicable) of such Permitted Refinancing Debt
does not exceed the principal amount (or accreted value, if applicable) of the
Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded,
plus the amount of premiums, prepayment penalties and other amounts required to
be paid to the holders of such Indebtedness in connection therewith and
reasonable fees and expenses incurred in connection therewith; (ii) such
Permitted Refinancing Debt has a final maturity date on or later than the final
maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded
is subordinated in right of payment to the Notes, such Permitted Refinancing
Debt has a final maturity date later than the final maturity date of, and is
subordinated in right of payment to, the Notes at least to the same extent as
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; and (iv) such Indebtedness is incurred either by the Company or by the
Restricted Subsidiary who is the obligor on the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded.
"Production Payments" means Dollar-Denominated Production Payments and
Volumetric Production Payments, collectively.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" means any direct or indirect Subsidiary of the
Company that is not an Unrestricted Subsidiary.
"S&P" means Standard & Poor's Ratings Group and its successors.
"Senior Debt" means (i) Indebtedness of the Company or any Subsidiary of the
Company under or in respect of any Credit Facility, whether for principal,
interest (including interest accruing after the filing of a petition initiating
any proceeding pursuant to any bankruptcy law, whether or not the claim for such
interest is allowed as a claim in such proceeding), reimbursement obligations,
fees, commissions, expenses, indemnities or other amounts, and (ii) any other
Indebtedness permitted under the terms of the applicable Indenture, unless the
instrument under which such Indebtedness is incurred expressly provides that it
is on a parity with or subordinated in right of payment to the applicable Notes.
Notwithstanding anything to the contrary in the foregoing sentence, Senior Debt
will not include, (a) any Indebtedness of the Company to any of its
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Subsidiaries or other Affiliates, or (b) any Indebtedness that is incurred in
violation of the applicable Indenture (other than Indebtedness under (i) any
Credit Agreement or (ii) any other Credit Facility that is incurred on the basis
of a representation by the Company to the applicable lenders that it is
permitted to incur such Indebtedness under the Indentures).
"Series B Preferred Stock" means the Series B 8% Cumulative Convertible
Preferred Stock of the Parent.
"Subordinated Indebtedness" means any Indebtedness of the Company or any
Restricted Subsidiary (whether outstanding on the date of the issuance of the
Notes or thereafter incurred) which is subordinate or junior in right of payment
to the Notes pursuant to a written agreement.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock, entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Subsidiary Guarantors" means any Restricted Subsidiary of the Company that
executes a Guarantee in accordance with the provisions of the Indentures and any
successor or assign of such Subsidiary that becomes obligated under any
Guarantee pursuant to the Indentures.
"Total Assets" means, with respect to the Company, the total consolidated
assets of the Company and its Restricted Subsidiaries, as shown on the most
recent balance sheet of the Company.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company which at
the time of determination shall be an Unrestricted Subsidiary (as designated by
the Board of Directors of the Company, as provided below) and (ii) any
subsidiary of an Unrestricted Subsidiary. The Board of Directors of the Company
may designate any Subsidiary of the Company (including any newly acquired or
newly formed Subsidiary or a Person becoming a Subsidiary through merger or
consolidation or Investment therein) to be an Unrestricted Subsidiary only if:
(a) such Subsidiary does not own any Capital Stock of, or own or hold any Lien
on any property of, any other Subsidiary of the Company which is not a
Subsidiary of the Subsidiary to be so designated or otherwise an Unrestricted
Subsidiary; (b) all the Indebtedness of such Subsidiary shall at the date of
designation, and will at all times thereafter consist of, Non-Recourse Debt; (c)
the Company certifies that such designation complies with the "Limitation on
Restricted Payments" covenant; (d) such Subsidiary, either alone or in the
aggregate with all other Unrestricted Subsidiaries, does not operate, directly
or indirectly, all or substantially all of the business of the Company and the
Subsidiaries; (e) such Subsidiary does not, directly or indirectly, own any
Indebtedness of or Equity Interest in, and has no Investments in, the Company or
any Restricted Subsidiary; (f) such Subsidiary is a Person with respect to which
neither the Company nor any of its Restricted Subsidiaries has any direct or
indirect obligation (1) to subscribe for additional Equity Interests or (2) to
maintain or preserve such Person's financial condition or to cause such Person
to achieve any specified levels of operating results; and (g) on the date such
Subsidiary is designated an Unrestricted Subsidiary, such Subsidiary is not a
party to any agreement, contract, arrangement or understanding with the Company
or any Restricted Subsidiary with terms substantially less favorable to the
Company than those that might have been obtained from Persons who are not
Affiliates of the Company. Any such designation by the Board of Directors of the
Company shall be evidenced to the Trustees by filing with the Trustees a
resolution of the Board of Directors of the Company giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions. If, at any time, any Unrestricted
Subsidiary would fail to meet the foregoing requirements as an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the Indenture and any Indebtedness of such Subsidiary shall be
deemed to be incurred as of such date. The Board of Directors of the Company may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided,
that immediately after giving effect to such designation, no Default or Event of
Default shall have occurred and be continuing or would occur as a consequence
thereof and the Company could incur at least $1.00 of additional Indebtedness
(excluding Permitted Indebtedness) pursuant to the first paragraph of the
"Incurrence of Indebtedness and Issuance of Disqualified Stock" covenant on a
pro forma basis taking into account such designation.
"Volumetric Production Payments" means production payment obligations
recorded as deferred revenue in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
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"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" means, with respect to any Person, a
Restricted Subsidiary of such Person, all of the outstanding Capital Stock or
other ownership interests of which (other than directors' qualifying shares) are
owned, directly or indirectly, by such Person or by one or more Wholly Owned
Restricted Subsidiaries of such Person.
DESCRIPTION OF THE NEW CREDIT FACILITY
Concurrently with the issuance and sale of the Notes offered hereby, the
Company will make the initial borrowings under the New Credit Facility. Mesa has
obtained a commitment for the New Credit Facility from Chemical Bank and The
Chase Manhattan Bank, N.A. (together, "Chase") and Bankers Trust Company
("Bankers Trust") that contains the terms described below. The Company will be
the borrower under the New Credit Facility, and all borrowings will be
unconditionally guaranteed by the Parent and each of its direct and indirect
subsidiaries that are restricted subsidiaries pursuant to the terms of the New
Credit Facility and will be secured by a first priority security interest in
tangible and intangible assets representing at least 85% of Mesa's total
assessed collateral value, which assets will include at least all of Mesa's West
Panhandle and Hugoton properties and the capital stock of such restricted
subsidiaries.
The New Credit Facility will be a seven year revolving credit facility for
an aggregate of up to $525 million, a portion of which will be available for the
issuance of letters of credit. Chase and Bankers Trust have advised Mesa that
each will provide $250 million of the New Credit Facility, but that they intend
to syndicate the facility to a group of lenders to be identified by them in
consultation with Mesa. The Company expects to borrow substantially all of the
$525 million available under the New Credit Facility (including letters of
credit) at the First Closing concurrently with the issuance and sale of the
Notes and the initial sale of Series B Preferred Stock to DNR pursuant to the
Stock Purchase Agreement, and to repay a portion of the New Credit Facility at
the Second Closing upon consummation of the Rights Offering and any sale of
additional shares of Series B Preferred Stock to DNR pursuant to the Standby
Commitment, such that approximately $375 million (excluding letters of credit)
will be outstanding under the New Credit Facility following the Second Closing.
See "Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The New Credit Facility will be subject to mandatory prepayment by the
amount of (i) 75% of the net proceeds of any sale or issuance of equity by Mesa
after the consummation of the First Closing (except from the net proceeds of the
Rights Offering or the Standby Commitment and except, under certain
circumstances, from the net proceeds of other equity issuances which are used to
repay a portion of the Notes) and (ii) 100% of the net proceeds of the
incurrence of certain indebtedness by Mesa. Borrowings under the New Credit
Facility will be subject to a borrowing base to be determined annually by the
lenders based on certain proved oil and gas reserves and other assets of Mesa,
which may be adjusted more frequently upon the occurrence of certain events,
including the sale of assets included in the borrowing base. Initially, the
borrowing base will be $525 million. To the extent that the borrowing base is
less than the aggregate principal amount of all outstanding loans and letters of
credit under the New Credit Facility, 50% of each deficiency must be cured
within 90 days and the balance must be cured within 180 days; unless such
deficiency is a result of an asset sale, in any event the deficiency must be
cured the date the borrowing base is re-determined or a result of such sale.
At Mesa's option, borrowings under the New Credit Facility will bear
interest at either (i) the "Adjusted Base Rate" (i.e., the highest of Chase's
prime commercial lending rate, the secondary market rate for certificates of
deposit plus 1% per annum and the federal funds rate plus 0.5% per annum) plus
0.5% or (ii) the Eurodollar rate plus 1.5%.
The loan documents governing the New Credit Facility will contain certain
customary covenants and restrictions relating to Mesa's operations and other
covenants and restrictions customarily found in credit facilities of this type.
The closing of the New Credit Facility is conditioned upon, among other
things, the consummation of the issuance and sale of the Notes and the initial
sale of Series B Preferred Stock to DNR pursuant to the Stock
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Purchase Agreement, the absence of a material adverse condition or material
adverse change in or affecting Mesa's business, operations, property or
condition (financial or otherwise) or prospects, the satisfaction of certain
financial requirements and the lenders' receipt of and satisfaction with certain
reports regarding Mesa's assets and operations.
DESCRIPTION OF THE STOCK PURCHASE AGREEMENT
AND THE RIGHTS OFFERING
THE STOCK PURCHASE AGREEMENT
The Stock Purchase Agreement provides for the issuance and sale by the
Parent of shares of Series A and Series B Preferred Stock as follows:
(a) The Parent will issue and sell to DNR approximately 58.8 million
shares of Series B Preferred Stock for an aggregate purchase price of $133
million at the First Closing.
(b) Immediately after the First Closing, the Parent will conduct the
Rights Offering whereby it will distribute to the holders of its Common
Stock transferable Rights to purchase a pro rata portion of an aggregate of
approximately 58.4 million shares of Series A Preferred Stock for an
aggregate of approximately $132 million.
(c) The Parent will issue and sell to DNR an additional number of shares
of Series B Preferred Stock equal to the number of shares of Series A
Preferred Stock not purchased pursuant to the exercise of Rights
concurrently with the completion of the Rights Offering at the Second
Closing.
The Stock Purchase Agreement requires DNR to comply, and to cause its
affiliates to comply, with reasonable requests of the lenders under the New
Credit Facility to provide, at the time of the First Closing, a letter of credit
to secure DNR's obligations to purchase shares pursuant to its Standby
Commitment.
The Stock Purchase Agreement requires Mesa to pay all expenses incurred by
Mesa in connection with the Recapitalization and to reimburse DNR for its
reasonable out of pocket expenses incurred in connection with the
Recapitalization (including fees and expenses of counsel and all third party
consultants engaged by DNR to assist in the Recapitalization). An initial
payment in the amount of $500,000 previously paid by Mesa to DNR will be
credited against the fees and expenses otherwise subject to reimbursement under
the Stock Purchase Agreement. In addition, Mesa has agreed to pay DNR (i) a fee
of $4,655,000 (constituting 3.5% of the aggregate amount of Series B Preferred
Stock to be purchased at the First Closing) at the First Closing (or as promptly
as practicable thereafter as funds are available therefor, but no later than the
Second Closing) and (ii) a fee of $4,620,000 (constituting 3.5% of the maximum
aggregate amount of Series B Preferred Stock to be purchased at the Second
Closing) at the Second Closing, less the amount by which DNR's reimbursable
expenses as of the Second Closing are less than the initial $500,000 payment.
The Stock Purchase Agreement also provides that, for so long as the Minimum
Ownership Condition (as defined below) is satisfied, DNR will be entitled to
receive a fee of $400,000 per year (payable quarterly in arrears, beginning
September 30, 1996) in exchange for DNR's continuing analysis and assistance to
Mesa during the course of its investment, and in lieu of any transaction or
success fees to which DNR might otherwise typically be entitled for any such
services performed in connection with specific transactions in which Mesa
participates in the future. Under the Stock Purchase Agreement, Mesa will also
be required to reimburse DNR for all fees and expenses (up to a maximum of
$50,000 for any calendar year) reasonably incurred by it in connection with its
investment in Mesa. The Minimum Ownership Condition will be met so long as (i)
DNR and/or its affiliates continue to own at least 34,132,743 shares of Series B
Preferred Stock (58% of the shares DNR will purchase at the First Closing) or at
least 15% of the total number of shares of Common Stock outstanding (including
shares issuable upon conversion of outstanding Series A and Series B Preferred
Stock) and (ii) at least half of such shares are owned by, and the majority of
the voting power thereof is exercised by, Richard E. Rainwater and his
affiliates.
The Stock Purchase Agreement contains certain mutual indemnification
agreements between DNR and Mesa for claims and liabilities arising out of the
Stock Purchase Agreement, the Recapitalization and breaches of representations,
warranties, covenants and agreements contained in the Stock Purchase Agreement;
provided that claims for indemnity with respect to the breach of representations
and warranties are not required to be paid by either party unless each such
claim payable by such party equals or exceeds $50,000 and then only to the
extent that the aggregate amount of all such claims exceeds $500,000.
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From and after the First Closing, all decisions on behalf of Mesa as to the
payment of indemnification under the Stock Purchase Agreement and otherwise
regarding Mesa's rights and obligations under the Stock Purchase Agreement are
required to be made by a committee of directors consisting of all directors
other than those elected by the holders of Series B Preferred Stock.
DESCRIPTION OF PREFERRED STOCK
Each share of Preferred Stock will be convertible into one share of Common
Stock (subject to adjustment) at the option of the holder at any time prior to
redemption. Subject to any restrictions imposed by the terms of the New Credit
Facility or the Indentures, the Preferred Stock is redeemable in whole or in
part at the option of the Parent on any dividend payment date after the
thirtieth day following the tenth anniversary of the original issue date of the
Series B Preferred Stock. All outstanding shares of Series A and Series B
Preferred Stock will be subject to mandatory redemption on June 30, 2008. The
redemption price upon any optional or mandatory redemption will be equal to the
stated value (the "Stated Value") of the shares being redeemed (initial stated
value of $2.26 per share), plus all accrued but unpaid dividends through the
redemption date that have not been added to the Stated Value of such shares. The
redemption price may be paid either in cash or shares of Common Stock, at the
Parent's option. Dividends on the Preferred Stock will be cumulative from the
date of issuance and will be payable quarterly at the rate of 8% per annum of
the Stated Value per share on the last business day of March, June, September
and December of each year, beginning September 30, 1996. During the first four
years following the issue date, all dividends will be paid in kind with
additional shares of Preferred Stock based on the Stated Value of such shares.
Thereafter, Mesa may elect to pay dividends in cash rather than in kind if
certain financial tests are satisfied. The liquidation preference of the
Preferred Stock is $2.26 per share, plus accrued and unpaid dividends.
The Series A Preferred Stock and the Series B Preferred Stock will vote with
the Common Stock as a single class on all matters brought before the
shareholders, except as otherwise required by law and except for (i) certain
special voting rights of the Series B Preferred Stock that will exist so long as
the Minimum Ownership Condition is satisfied, including the right of the holders
of the Series B Preferred Stock to elect four of the seven members of the Board,
and (ii) the right of the holders of Series A Preferred Stock to elect two
directors in the event of certain dividend arrearages. Following consummation of
the Rights Offering (assuming all Rights are exercised in full), the shares of
Series B Preferred Stock outstanding will constitute 50.1% of the total shares
of Preferred Stock outstanding and 32.5% of the total Common Stock outstanding
(on a fully diluted basis).
THE RIGHTS OFFERING
Each holder of Common Stock will receive .912 transferable Rights for each
share of Common Stock held of record by such holder on a record date to be
established after the Special Meeting. No fractional Rights or cash in lieu
thereof will be distributed by Mesa; instead, the number of Rights distributed
by Mesa to each holder of Common Stock will be rounded up to the nearest whole
number. An aggregate of approximately 58.4 million Rights will be distributed
pursuant to the Rights Offering. One Right plus $2.26 in cash (the "Subscription
Price") will entitle the holder to one share of Series A Preferred Stock. An
aggregate of approximately 58.4 million shares of Series A Preferred Stock will
be sold upon exercise of the Rights, assuming all Rights are exercised in full.
One Right will entitle the holder thereof to receive, upon payment of the
Subscription Price, one share of Series A Preferred Stock (the "Basic
Subscription Privilege"). In addition, each holder of Rights who exercises in
full such holder's Basic Subscription Privilege may also subscribe at the
Subscription Price for additional shares of Series A Preferred Stock available
as a result of unexercised Rights, if any (the "Oversubscription Privilege"). If
an insufficient number of shares of Series A Preferred Stock is available to
satisfy fully all exercises of the Oversubscription Privilege, the available
shares will be prorated among holders who exercise their Oversubscription
Privilege.
The Rights Offering will commence promptly after the First Closing and will
expire not less than 16 nor more than 21 days thereafter, subject to extension
by Mesa.
The Rights will be transferable, and it is expected that they will trade on
the New York Stock Exchange until the close of business on the last New York
Stock Exchange trading day prior to the Expiration Date.
94
<PAGE> 96
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a general discussion of certain federal income tax
considerations that may be relevant to investors who are original purchasers of
the Notes. 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 Mesa. The conclusions are based on the
provisions of the Code, the Treasury Regulations promulgated thereunder, and
administrative and judicial interpretations thereof, all as in effect as of the
date hereof and all of which are subject to change (possibly on a retroactive
basis). The following discussion does not purport to deal with all aspects of
federal income taxation that may be relevant to a particular investor in light
of such investor's personal investment circumstances. Nor does the discussion
address special rules applicable to certain types of investors subject to
special treatment under the Code (including, without limitation, financial
institutions, broker-dealers, regulated investment companies, life insurance
companies, tax-exempt organizations, foreign corporations and non-resident
aliens). Moreover, the discussion is limited to those who will hold the Notes as
capital assets (generally, property held for investment) within the meaning of
Section 1221 of the Code. No consideration of any aspects of state, local or
foreign taxation is included herein. Mesa has not sought, nor does it intend to
seek, any rulings from the IRS relating to the tax issues addressed herein.
EACH PROSPECTIVE INVESTOR IS URGED TO CONSULT SUCH INVESTOR'S OWN TAX
ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF A PURCHASE OF NOTES IN LIGHT OF
SUCH HOLDER'S OWN PARTICULAR TAX SITUATION, INCLUDING THE APPLICATION AND EFFECT
OF THE CODE, AS WELL AS STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
STATED INTEREST
Stated interest paid or accrued on the Senior Subordinated Notes will be
taxable to a holder as ordinary income in accordance with the holder's method of
accounting for federal income tax purposes. The receipt of stated interest on
the Discount Notes will not be taxable to the holders but, rather, such stated
interest will be included in the original issue discount ("OID") reportable
under the rules described below.
ORIGINAL ISSUE DISCOUNT
The Discount Notes will be issued with OID within the meaning of Section
1273(a) of the Code. The amount of OID on the Discount 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 Discount Notes. The "issue
price" of the Discount Notes will be the first price at which a substantial
portion of the Discount Notes are sold in the Offering (excluding sales to bond
houses, brokers or similar persons acting in the capacity of underwriter,
placement agent or wholesaler). All Discount Notes acquired by a particular
holder 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 on the Discount
Notes on a constant yield basis over their term. Each holder of a Discount Note
generally must include in income for any particular taxable year the daily
portion of OID that accrues on the Discount Note for each day during the taxable
year on which such holder holds the Discount Note and in advance of the receipt
of the cash to which such OID is attributable, regardless of such holder's
method of tax accounting. The daily portion is determined by allocating to each
day of an accrual period (generally, in the case of the Discount Notes, the
initial period beginning on the issue date and ending on , 1996 and
each subsequent six-month period thereafter ending on and
) a pro rata portion of an amount determined by multiplying (i) the
"adjusted issue price" of the Discount Notes at the beginning of the accrual
period by (ii) their yield to maturity (determined on the basis of semiannual
compounding and without reference to actual interest payments and properly
adjusted for the length of the accrual period). The "adjusted issue price" of
the Discount 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 Discount
Notes in all prior accrual periods, and decreased by all payments (including
stated interest payments) made on the Discount Notes during all prior accrual
periods. The Company is required to provide holders of record other than
corporations and other exempt holders with information returns stating the
amount of OID accrued on the Discount Notes.
95
<PAGE> 97
A Discount Note holder's tax basis in the Discount Notes will be increased
by the OID includable in such holder's taxable income under the foregoing rules
and will be reduced by any payments (including payments of stated interest)
received by such holder with respect to the Discount Notes.
IMPACT OF APPLICABLE HIGH YIELD DISCOUNT OBLIGATION RULES
If the yield-to-maturity on the Discount Notes equals or exceeds the sum of
5% and the "applicable federal rate" (within the meaning of Section 1274(d) of
the Code) in effect for the month in which the Discount Notes are issued
("AFR"), the Discount Notes would be considered "applicable high yield discount
obligations" within the meaning of Section 163(i) of the Code. In such a case,
the Company would not be permitted to take a deduction for U.S. federal income
tax purposes for interest and OID accrued on the Discount Notes until such time
as the Company actually pays such interest and OID in cash or in property other
than stock or debt of Mesa (or persons related to Mesa). Moreover, to the extent
that (i) the yield to maturity of the Discount Notes exceeds (ii) the sum of 6%
and the AFR, such excess (the "Dividend-Equivalent Interest") would not be
deductible at any time by the Company for U.S. federal income tax purposes
(regardless of whether the Company actually pays such Dividend Equivalent
Interest in cash or in other property). For purposes of the dividends-received
deduction, such Dividend-Equivalent Interest would be treated as a dividend to
the extent it is deemed to have been paid out of the Company's current or
accumulated earnings and profits. Accordingly, a holder of a Discount Note that
is a domestic corporation may be entitled to take a dividends-received deduction
with respect to any Dividend-Equivalent Interest received by such corporate
holder on the Discount Note.
MARKET DISCOUNT
The market discount rules may affect resale of the Notes. If a subsequent
purchaser of a Note purchases the Note at a "market discount" and thereafter
recognizes gain upon its disposition, such gain will be taxable as ordinary
interest income (rather than capital gain) to the extent of the "market
discount" that has accrued (and has not otherwise been included in income
pursuant to an election made by such subsequent purchaser) during the period the
subsequent purchaser held such Note. Generally, "market discount" will exist on
the purchase of a Note if the purchase price is less than the adjusted issue
price of the Note and any such market discount will accrue over the remaining
term of the Note on a straight line basis or, at the election of the subsequent
purchaser, on a constant yield to maturity basis.
DISPOSITION
A holder whose Notes are sold or redeemed for cash will recognize gain or
loss to the extent of the difference between the cash received (other than
amounts reflecting accrued and unpaid stated interest on the Senior Subordinated
Notes, which will be taxed as ordinary income), and the holder's adjusted tax
basis in the Notes. Subject to the market discount rules discussed above, such
gain or loss will be capital gain or loss. Any such capital gain or loss will be
long-term capital gain or loss if the Note was held by the holder for more than
one year. Under current law, (i) net capital gains of individuals are, under
certain circumstances, taxed at lower rates than items of ordinary income and
(ii) the deductibility of capital losses is subject to certain limitations.
Proceeds from such a disposition of Notes can also be subject to the backup
withholding rules discussed below unless an exemption applies.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Certain holders of Notes may be subject to backup withholding at the rate of
31% with respect to interest and OID paid on the Notes or with respect to
proceeds received from a disposition of the Notes. Generally, backup withholding
applies only when such holder (i) fails to furnish or certify a correct taxpayer
identification number ("TIN") to the payor in the manner required or otherwise
qualify for an exemption, (ii) is notified by the IRS that it has failed to
report payments of interest and dividends properly or (iii) under certain
circumstances, fails to provide a certified statement, signed under penalties of
perjury, that the TIN furnished is the correct number and that such holder is
not subject to backup withholding. Backup withholding is not an additional tax
but, rather, is a method of tax collection. Holders will be entitled to credit
any amounts withheld under the backup withholding rules against their actual tax
liabilities provided the required information is furnished to the IRS.
For each calendar year, the Company will report to the holders of Notes and
to the IRS the amount of any "reportable payments" made by the Company which are
required to be reported under United States Treasury Regulations and the amount
of tax withheld, if any, with respect to such reportable payments.
96
<PAGE> 98
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement") dated , 1996 among the Company, the
Parent and the Underwriters, the Company and the Parent have agreed to sell to
the Underwriters, and the Underwriters have severally agreed to purchase from
the Company, the following respective amounts of the Notes:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
OF SENIOR PRINCIPAL
SUBORDINATED AMOUNT OF
UNDERWRITER NOTES DISCOUNT NOTES
------------------------------------------------------------- ---------------- ---------------
<S> <C> <C>
Chase Securities Inc......................................... $ $
BT Securities Corporation....................................
Donaldson, Lufkin & Jenrette Securities Corporation..........
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.....................................
-------- --------
Total............................................... $ $
======== ========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the Notes offered
hereby if any of the Notes are purchased. The Company and the Parent have been
advised by the Underwriters that the Underwriters propose to offer the Notes to
the public initially at the respective public offering prices set forth on the
cover page of this Prospectus, and to certain dealers initially at such price
less a discount not in excess of % of the principal amount or initial
accreted value, as the case may be, of the Notes. The Underwriters may allow,
and such dealers may reallow, a concession to certain other dealers not in
excess of % of the principal amount or initial accreted value, as the case
may be, of the Notes. After the initial public offering, the Underwriters may
change the public offering price, the discount and the concession.
The Notes comprise new issues of securities with no established trading
market. The Company and the Parent have been advised by the Underwriters that
the Underwriters intend to make a market in the Notes, as permitted by
applicable laws and regulations. No assurance can be given, however, that the
Underwriters will make a market in the Notes, or as to the liquidity of, or the
trading market for the Notes.
The Company and the Parent have agreed to indemnify the Underwriters against
certain civil liabilities, including liabilities under the Securities Act, and
to contribute to payments which the Underwriters might be required to make in
respect thereof.
Chase Manhattan Bank, N.A. and Chemical Bank, affiliates of Chase Securities
Inc., will be lenders under the New Credit Facility and Chase Manhattan Bank,
N.A. will act as administrative agent thereunder. In addition, Bankers Trust
Company, an affiliate of BT Securities Corporation, is a lender and agent under
the New Credit Facility. See "Description of the New Credit Facility."
LEGAL MATTERS
Certain legal matters in connection with the Notes and the Guarantees
offered hereby will be passed upon for Mesa by Baker & Botts, L.L.P. Robert L.
Stillwell, a partner of Baker & Botts, L.L.P., is a director of Mesa and owns
26,500 shares of Common Stock. Certain legal matters will be passed upon for the
Underwriters by Simpson Thacher & Bartlett (a partnership which includes
professional corporations).
EXPERTS
The Consolidated Financial Statements of the Parent included and
incorporated by reference in this Prospectus and elsewhere in the Registration
Statement, to the extent and for the periods indicated in their report, have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
Reference is made to said report which is modified to include a discussion of
substantial doubt as to Mesa's ability to continue as a going concern as
discussed further in Note 2 of Notes to the audited Consolidated Financial
Statements.
97
<PAGE> 99
ADDITIONAL INFORMATION
The Company and the Parent have filed with the Commission Registration
Statements on Form S-3 (the "Registration Statements") under the Securities Act
with respect to the securities offered by this Prospectus. This Prospectus
constitutes a part of the Registration Statements and does not contain all of
the information set forth in the Registration Statements, 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 Statements, 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
Mesa and the securities offered hereby, reference is made to the Registration
Statements, including the exhibits and schedules thereto.
The Registration Statements, 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
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and Seven World Trade Center, 13th Floor, New York, New York 10048.
Mesa is subject to the informational requirements of the Exchange Act and in
accordance with the Exchange 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 Parent 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 Common Stock and the 13 1/2% Subordinated Notes are listed.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Incorporated by reference in this Prospectus, and subject in each case to
information contained in this Prospectus, are the following documents filed by
Mesa with the Commission pursuant to the Exchange Act: (1) Mesa's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995; (2) Mesa's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996; (3) Mesa's Current
Report on Form 8-K dated March 1, 1996; (4) Mesa's Current Report on Form 8-K
dated April 29, 1996 and (5) Mesa's Proxy Statement dated May 24, 1996.
Each document filed by Mesa pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act subsequent to the date of this Prospectus and prior to the
termination of the Rights Offering shall be deemed to be incorporated by
reference in this Prospectus and to be a part of this Prospectus from the date
of filing of such document. Any statement contained in a document incorporated
or deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statements as modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
Mesa will provide without charge to each person, including any beneficial
owner, to whom this Prospectus is delivered, upon the written or oral request of
such person, a copy of any and all of the documents incorporated by reference
herein (other than exhibits to such documents unless such exhibits are
specifically incorporated by reference in such documents). Such request should
be directed to Investor Relations, MESA Inc., 1400 Williams Square West, 5205
North O'Connor Boulevard, Irving, Texas 75039 (telephone: (214) 444-9001).
98
<PAGE> 100
GLOSSARY OF SELECTED OIL AND GAS TERMS
The following are abbreviations and definitions of certain terms commonly
used in the oil and gas industry and this Prospectus.
"Bbl" means a barrel of oil and condensate or natural gas liquids.
"Bcf" means billion cubic feet of natural gas.
"Bcfe" means billion cubic feet of natural gas equivalents.
"Btu" or "British Thermal Unit" means the quantity of heat required to raise
the temperature of one pound of water by one degree Fahrenheit.
"Condensate" means a hydrocarbon mixture that becomes liquid and separates
from natural gas when the gas is produced and is similar to crude oil.
"Development well" means a well drilled within the proved area of an oil or
gas reservoir to the depth of a stratigraphic horizon known to be productive.
"Gross," when used with respect to acres or wells, refers to the total acres
or wells in which Mesa has a working interest.
"MBbls" means thousands of barrels of oil.
"Mcf" means thousand cubic feet of natural gas.
"Mcfe" means thousand cubic feet of natural gas equivalents.
"MMBbls" means millions of barrels of oil.
"MMBtu" means one million British Thermal Units.
"MMcf" means million cubic feet of natural gas.
"MMcfe" means million cubic feet of natural gas equivalents.
"Natural gas equivalents" means a volume, expressed in Mcf's of natural gas,
that 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.
"Net," when used with respect to acres or wells, refers to gross acres of
wells multiplied, in each case, by the percentage working interest owned by
Mesa.
"Net production" means production that is owned by Mesa less royalties and
production due others.
"Oil" means crude oil or condensate.
"Operator" means the individual or company responsible for the exploration,
development and production of an oil or gas well or lease.
"Present Value of Future Net Revenues" or "Present Value of Proved Reserves"
means the present value of estimated future revenues to be generated from the
production of proved reserves calculated in accordance with Commission
guidelines, net of estimated production and future development costs, using
prices and costs as of the date of estimation without future escalation, except
as otherwise provided by contract, without giving effect to non-property related
expenses such as general and administrative expenses, debt service, future
income tax expense and depreciation, depletion and amortization, and discounted
using an annual discount rate of 10%.
"Proved developed reserves" means reserves that can be expected to be
recovered through existing wells with existing equipment and operating methods.
Additional oil and gas expected to be obtained through the application of fluid
injection or other improved recovery techniques for supplementing the natural
forces and mechanisms of primary recovery will be included as "proved developed
reserves" only after testing by a pilot project or after the operation of an
installed program has confirmed through production response that increased
recovery will be achieved.
"Proved reserves" means the estimated quantities of crude oil, natural gas
and natural gas liquids that geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from
99
<PAGE> 101
known reservoirs under existing economic and operating conditions (i.e., prices
and costs as of the date the estimate is made). Prices include consideration of
changes in existing prices provided only by contractual arrangements, but not on
escalation based upon future conditions.
i. Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation test. The area
of a reservoir considered proved includes (A) that portion delineated by
drilling and defined by gas-oil and/or oil-water contacts, if any; and (B)
the immediately adjoining portions not yet drilled, but which can be
reasonably judged as economically productive on the basis of available
geological and engineering data. In the absence of information on fluid
contacts, the lowest known structural occurrence of hydrocarbons controls
the lower proved limit of the reservoir.
ii. Reserves that can be produced economically through application of
improved recovery techniques (such as fluid injection) are included in the
"proved" classification when successful testing by a pilot project, or the
operation of an installed program in the reservoir, provides support for the
engineering analysis on which the project or program was based.
iii. Estimates of proved reserves do not include the following: (A) oil
that may become available from known reservoirs but is classified separately
as "indicated additional reserve"; (B) crude oil, natural gas and natural
gas liquids, the recovery of which is subject to reasonable doubt because of
uncertainty as to geology, reservoir characteristics or economic factors;
(C) crude oil, natural gas and natural gas liquids that may occur in
undrilled prospects; and (D) crude oil, natural gas and natural gas liquids
that may be recovered from oil shales, coal, gilsonite and other such
sources.
"Proved undeveloped reserves" means reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion. Reserves on undrilled
acreage is limited to those drilling units offsetting productive units that are
reasonably certain of production when drilled. Proved reserves for other
undrilled units can be claimed only where it can be demonstrated with certainty
that there is continuity of production from the existing productive formation.
Under no circumstances are estimates for proved undeveloped reserves
attributable to any acreage for which an application of fluid injection or other
improved recovery technique is contemplated, unless such techniques have been
proved effective by actual tests in the area and in the same reservoir.
"Reserves" means proved reserves.
"Royalty" means an interest in an oil and gas lease that gives the owner of
the interest the right to receive a portion of the production from the leased
acreage (or of the proceeds of the sale thereof), but generally does not require
the owner to pay any portion of the costs of drilling or operating the wells on
the leased acreage. Royalties may be either landowner's royalties, which are
reserved by the owner of the leased acreage at the time the lease is granted, or
overriding royalties, which are usually reserved by the owner of the leasehold
in connection with a transfer to a subsequent owner.
"Tcfe" means trillion cubic feet of natural gas equivalents.
"3-D seismic" means seismic data that are acquired and processed to yield a
three-dimensional picture of the subsurface.
"Working interest" means an interest in an oil and gas lease that gives the
owner of the interest the right to drill for and produce oil and gas on the
leased acreage and requires the owner to pay a share of the costs of drilling
and production operations. The share of production to which a working interest
owner is entitled will always be smaller than the share of costs that the
working interest owner is required to bear, with the balance of the production
accruing to the owners of royalties. For example, the owner of a 100% working
interest in a lease burdened only by a landowner's royalty of 12.5% would be
required to pay 100% of the costs of a well but would be entitled to retain only
87.5% of the production.
100
<PAGE> 102
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MESA Inc. Consolidated Financial Statements for the Three Months Ended March 31, 1996 and 1995
Consolidated Statements of Operations......................................................... F-2
Consolidated Balance Sheets................................................................... F-3
Consolidated Statements of Cash Flows......................................................... F-4
Consolidated Statements 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, 1995
and 1994
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 Statements of Changes in Stockholders' Equity.................................... F-25
Notes to Consolidated Financial Statements.................................................... F-26
Supplemental Financial Data................................................................... F-49
</TABLE>
F-1
<PAGE> 103
MESA INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1995 1996
-------- --------
<S> <C> <C>
REVENUES:
Natural gas.................................................................. $ 35,856 $ 50,567
Natural gas liquids.......................................................... 18,206 23,136
Oil and condensate........................................................... 5,393 4,363
Other........................................................................ 2,792 2,577
-------- --------
62,247 80,643
-------- --------
COSTS AND EXPENSES:
Lease operating.............................................................. 12,574 13,544
Production and other taxes................................................... 4,745 5,406
Exploration charges.......................................................... 1,304 544
General and administrative................................................... 6,644 5,584
Depreciation, depletion and amortization..................................... 21,006 30,242
-------- --------
46,273 55,320
-------- --------
OPERATING INCOME............................................................... 15,974 25,323
-------- --------
OTHER INCOME (EXPENSE):
Interest income.............................................................. 3,909 3,217
Interest expense............................................................. (36,663) (37,749)
Gains on investments......................................................... 4,553 8,763
Gain from collection of interest from Bicoastal Corporation.................. 4,653 2,548
Other........................................................................ (320) (1,045)
-------- --------
(23,868) (24,266)
-------- --------
NET INCOME (LOSS).............................................................. $ (7,894) $ 1,057
======== ========
NET INCOME (LOSS) PER COMMON SHARE............................................. $ (.12) $ .02
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING..................................... 64,050 64,050
======== ========
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-2
<PAGE> 104
MESA INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, 1996
1995 -----------
------------ (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash investments............................................ $ 149,143 $ 115,755
Investments.......................................................... 38,280 39,956
Accounts and notes receivable........................................ 44,734 40,485
Other................................................................ 4,590 6,663
---------- ----------
Total current assets.......................................... 236,747 202,859
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Oil and gas properties, wells and equipment using the successful
efforts method of accounting....................................... 1,900,163 1,907,487
Office and other..................................................... 41,603 41,783
Accumulated depreciation, depletion and amortization................. (859,077) (887,232)
---------- ----------
1,082,689 1,062,038
---------- ----------
OTHER ASSETS:
Restricted cash of subsidiary partnership............................ 57,731 56,541
Gas balancing receivable............................................. 56,020 58,145
Other................................................................ 31,509 29,513
---------- ----------
145,260 144,199
---------- ----------
$1,464,696 $1,409,096
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities on long-term debt................................. $ 101,413 $ 92,502
Accounts payable and accrued liabilities............................. 31,068 30,712
Interest payable..................................................... 60,465 26,887
---------- ----------
Total current liabilities..................................... 192,946 150,101
---------- ----------
LONG-TERM DEBT......................................................... 1,135,330 1,121,768
---------- ----------
DEFERRED REVENUE....................................................... 17,578 17,328
---------- ----------
OTHER LIABILITIES...................................................... 51,838 51,838
---------- ----------
CONTINGENCIES
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 64,050,009 shares...................................... 640 640
Additional paid-in capital........................................... 398,965 398,965
Accumulated deficit.................................................. (332,601) (331,544)
---------- ----------
67,004 68,061
---------- ----------
$1,464,696 $1,409,096
========== ==========
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-3
<PAGE> 105
MESA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1995 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................ $ (7,894) $ 1,057
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation, depletion and amortization................................... 21,006 30,242
Accreted interest on discount notes........................................ 19,585 --
Gains from investments..................................................... (4,553) (8,763)
Changes in operating receivables and payables.............................. (16,875) (35,142)
Changes in investments, net................................................ 16,038 7,087
Other...................................................................... 1,886 3,288
-------- --------
Cash provided by (used in) operating activities....................... 29,193 (2,231)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures......................................................... (7,039) (9,754)
Other........................................................................ (3,230) (228)
-------- --------
Cash used in investing activities..................................... (10,269) (9,982)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt................................................. -- (22,365)
Other........................................................................ 2,150 1,190
-------- --------
Cash provided by (used in) financing activities....................... 2,150 (21,175)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH INVESTMENTS........................... 21,074 (33,388)
CASH AND CASH INVESTMENTS AT BEGINNING OF PERIOD............................... 143,422 149,143
-------- --------
CASH AND CASH INVESTMENTS AT END OF PERIOD..................................... $164,496 $115,755
======== ========
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-4
<PAGE> 106
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, 1995............................. 64,050 $640 $398,965 $(332,601)
Net income........................................... -- -- -- 1,057
------ ---- -------- ---------
BALANCE, March 31, 1996................................ 64,050 $640 $398,965 $(331,544)
====== ==== ======== =========
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-5
<PAGE> 107
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MESA Inc., a Texas corporation, was formed in 1991 in connection with a
transaction which reorganized the business of Mesa Limited Partnership (the
"Partnership") into corporate form. 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 "Mesa" refers to MESA Inc.
and its subsidiaries taken as a whole and includes its predecessors.
Mesa is primarily in the business of exploring for, developing, producing,
processing and selling natural gas and oil in the United States. Over 65% of
Mesa's annual equivalent production is natural gas and the balance is
principally natural gas liquids. Mesa's primary producing areas are the Hugoton
field of southwest Kansas, the West Panhandle field of Texas and the Gulf of
Mexico offshore Texas and Louisiana. Production from Mesa's properties has
access to a substantial portion of the major metropolitan markets in the United
States, primarily in the midwest and northeast, through numerous pipelines and
other purchasers.
The consolidated financial statements of Mesa for the three month period
ended March 31, 1996 and 1995, 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 preparation of the
consolidated financial statements of Mesa in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from the estimates. The
accompanying financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto contained in Mesa's Annual
Report on Form 10-K ("Form 10-K") for the year ended December 31, 1995.
PRINCIPLES OF CONSOLIDATION
Mesa owns and operates its oil and gas properties and other assets through
its direct and indirect subsidiaries. The accompanying consolidated financial
statements reflect the consolidated accounts of Mesa and its subsidiaries after
elimination of intercompany transactions.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, Mesa classifies all cash
investments with original maturities of three months or less as cash and cash
investments.
INVESTMENTS
Mesa invests from time to time in marketable equity and other securities
which are classified as "trading securities" and reported at fair value, with
unrealized gains and losses included in net income (loss) for the current
period. The cost of securities sold is determined on the first-in, first-out
basis.
Mesa enters into various energy futures contracts including New York
Mercantile Exchange ("NYMEX") futures contracts, commodity price swaps and
options which are not intended to be hedges of future natural gas or crude oil
production. Investments in such contracts are adjusted to market prices at the
end of each reporting period and gains and losses are included in gains from
investments in the statements 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
F-6
<PAGE> 108
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amortized on a property-by-property basis using the unit-of-production method.
Geological and geophysical costs and delay rentals are expensed as incurred.
In the first quarter of 1996 Mesa adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," which establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill. SFAS No. 121 requires a review for impairment whenever
circumstances indicate that the carrying amount of an asset may not be
recoverable. Mesa will estimate future cash flows (undiscounted and without
interest charges) expected to result from use of an asset. Impairment is only
recognized if the carrying amount of an asset is greater than the expected
future cash flows and the amount of impairment is based on the fair value of the
asset. An impairment charge of $6.8 million is included in depreciation,
depletion and amortization expense for the first quarter of 1996 in the
consolidated statements of operations which impairment relates primarily to a
Gulf Coast oil and gas property.
NET INCOME (LOSS) PER COMMON SHARE
The computations of net income (loss) per common share are based on the
weighted average number of common shares outstanding during each period.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Mesa's financial instruments consist of cash, marketable securities,
short-term trade receivables and payables, restricted cash, notes receivable,
and long-term debt. The carrying values of cash, marketable securities,
short-term trade receivables and payables, restricted cash, and notes receivable
approximate fair value. The fair value of long-term debt is estimated based on
the market prices for Mesa's publicly traded debt and on current rates available
for similar debt with similar maturities and security for Mesa's remaining debt
(see Note 4).
GAS REVENUES
Mesa recognizes its ownership interest in natural gas production as revenue.
Actual production quantities sold by Mesa may be different than its ownership
share of production in a given period. If Mesa's sales exceed its ownership
share of production, the differences are recorded as deferred revenue. Gas
balancing receivables are recorded when Mesa's ownership share of production
exceeds sales. Mesa also accrues production expenses related to its ownership
share of production. At March 31, 1996, Mesa had produced and sold a net 23.4
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 $41.2 million. Substantially all of Mesa's gas balancing
receivables and deferred revenue are classified as long-term.
Mesa periodically enters into NYMEX 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. Mesa recognized net gains of $4.9 million in the first
quarter of 1995 related to hedging activities and did not hedge any of its
natural gas production for the first quarter of 1996.
TAXES
Mesa provides for income taxes using the asset and liability method under
which deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. The effect on deferred taxes
of a change in tax laws or tax rates is recognized in income in the period that
includes the enactment date.
OTHER
In October 1995 the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which establishes accounting and
reporting standards for stock-based employee compensation plans. SFAS No. 123
defines a fair value-based method of accounting for stock options or
F-7
<PAGE> 109
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
similar equity instruments, but allows companies to continue to measure
compensation cost using the intrinsic value-based method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees."
Mesa will not adopt the fair value-based method of accounting for its option
plans and, accordingly, adoption of this statement will have no impact on Mesa's
results of operations.
(2) RESOURCES AND LIQUIDITY
LONG-TERM DEBT AND CASH FLOWS
Mesa is highly leveraged with over $1.2 billion of long-term debt, including
current maturities. The major components of Mesa's debt are (1) $492.3 million
of secured notes ("HCLP Secured Notes") due in installments through 2012 at
Hugoton Capital Limited Partnership ("HCLP"), an indirect, wholly owned
subsidiary, (2) $51.1 million (plus $11.4 million in letter of credit
obligations) outstanding under a bank credit facility, due in installments
through 1997, with the majority of such debt due on June 23, 1997, (3) $39.7
million of unsecured discount notes due on June 30, 1996, and (4) $617.4 million
of secured discount notes due on June 30, 1998. Both the secured and unsecured
discount notes are subordinate to the bank credit facility. See Note 4 for a
complete description of Mesa's long-term debt.
Mesa is required to make significant principal and interest payments on its
debt during the remainder of 1996. Mesa is required to make $81.6 million of
principal and interest payments related to its discount notes and $12.5 million
of principal payments related to its bank credit facility by June 30, 1996. In
addition, Mesa is required to pay $39.4 million in interest on its secured
discount notes on December 31, 1996. In the aggregate, assuming no acceleration
of amounts due under any of Mesa's long-term debt agreements, Mesa's principal
and interest obligations for the remainder of 1996, excluding HCLP, will total
almost $140 million.
The assets and cash flows of HCLP that are subject to the mortgage securing
HCLP's debt are dedicated to service HCLP's debt and are not available to pay
creditors of Mesa or its subsidiaries other than HCLP.
Mesa's bank credit facility contains a covenant requiring it to maintain
tangible adjusted equity, as defined, of at least $50 million. At March 31,
1996, tangible adjusted equity was approximately $67.8 million. Assuming no
changes in its capital structure and no significant transactions completed, Mesa
expects that it will incur losses from operations for the remainder of 1996 and
that its tangible adjusted equity will fall below $50 million during 1996. If
and when Mesa determines that tangible adjusted equity is below $50 million, an
Event of Default, as defined, would occur under the bank credit facility and the
bank would have the right to accelerate the payment of all outstanding principal
and require cash collateralization of letters of credit. An Event of Default
under the bank credit facility would cause a cross default under Mesa's secured
and unsecured discount note indentures unless and until the bank credit facility
default were cured or waived or the debt under the bank credit facility were
repaid or otherwise discharged. The Events of Default, if they occur and are not
waived, could result in acceleration of approximately $656 million of long-term
debt principal otherwise due in mid-1997 and mid-1998. Pursuant to the
subordination provisions of the discount note indentures, Mesa would be
prohibited from making any payments on such notes for specified periods upon and
during the continuance of any Event of Default under the bank credit facility.
As a result of improved results of operations in the first quarter of 1996,
Mesa now expects that cash generated by its operations, together with available
cash and investment balances, will be sufficient to fund the debt principal and
interest obligations due by June 30, 1996. In addition, if the obligations under
the bank credit facility are accelerated and become due in the second half of
1996 as discussed above, Mesa expects to have sufficient cash to repay those
obligations. However, whether Mesa would have sufficient cash to pay both those
obligations and the interest payments on its secured discount notes due at
December 31, 1996 would depend upon results of operations for the remainder of
1996. Mesa will make decisions regarding payments on its debt as such payments
come due, taking into account the status at such time of the Recapitalization
discussed below.
F-8
<PAGE> 110
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPOSED RECAPITALIZATION
On April 26, 1996, Mesa entered into a stock purchase agreement with
DNR-MESA Holdings L.P., a Texas limited partnership ("DNR"), whose sole general
partner is Rainwater Inc., a Texas corporation owned by Richard E. Rainwater.
The agreement contemplates that Mesa will issue $265 million in new equity and
will repay and/or refinance substantially all of its $1.2 billion of existing
debt (the "Recapitalization"). DNR will purchase approximately 58.8 million
shares of a new class of convertible preferred stock entitled Series B 8%
Cumulative Convertible Preferred Stock ("Series B Preferred") in a private
placement and Mesa will offer approximately 58.4 million shares of Series A 8%
Cumulative Convertible Preferred Stock ("Series A Preferred") to Mesa
stockholders in a rights offering (the "Rights Offering"). DNR will provide a
standby commitment to purchase an additional number of shares of Series B
Preferred equal to the number of shares of Series A Preferred not subscribed to
in the Rights Offering. The rights, to be distributed to common stockholders on
a pro rata basis, will allow the stockholders to purchase, in respect of each
share of common stock, .912 shares of Series A Preferred at $2.26 per share, the
same per share price at which DNR will purchase shares of Series B Preferred.
The rights will be transferrable and holders of the rights will be offered
over-subscription privileges for shares not purchased by other rights holders.
Each share of Series A and B Preferred will be convertible into one share of
Mesa common stock at any time prior to mandatory redemption in 2008. An annual
8% pay-in-kind dividend will be paid on the shares during the first four years
following issuance. Thereafter, the 8% dividend may, at the option of Mesa, be
paid in cash or additional shares depending on whether certain financial tests
are met and subject to any limitations in Mesa's debt agreements.
The Series A and B Preferred will represent 64.7% of the fully diluted
common shares at the time of issuance and 71.5% after the mandatory four-year
pay-in-kind period, excluding stock options and assuming no other stock issuance
by Mesa. The Series A and B Preferred will have a liquidation preference per
share equal to $2.26 plus accrued and unpaid dividends. The terms of the Series
A and Series B Preferred are substantially identical except for certain voting
rights and certain provisions relating to transferability. The Series A and B
Preferred will vote with the common stock as a single class on all matters,
except as otherwise required by law and except for certain special voting rights
of the Series B Preferred, including the right of the holders of the Series B
Preferred to nominate and elect a majority of Mesa's Board of Directors for so
long as DNR and its affiliates meet certain minimum stock ownership requirements
and certain rights of the holders of the Series A Preferred to elect two
directors in the event of certain dividend arrearages.
The sale of shares to DNR and certain other matters will be submitted to a
vote of stockholders at a special meeting expected to take place in June 1996.
Mesa expects to issue shares to DNR and to complete the refinancing of its
existing debt promptly after that meeting. The Rights Offering would commence
promptly thereafter. On May 9, 1996, Mesa filed a registration statement with
the Securities and Exchange Commission (the "SEC") for the issuance and sale of
$132 million of Series A Preferred through the Rights Offering.
On May 7, 1996, Mesa and Mesa Operating Co., a direct wholly owned
subsidiary of Mesa ("MOC"), filed a registration statement with the SEC for the
issuance and sale of $500 million of senior subordinated notes ("New Notes")
consisting of $325 million of senior subordinated notes and $175 million of
senior subordinated discount notes, both with ten year maturities. In addition
Mesa has received a commitment from a group of banks for a new $525 million
senior secured revolving credit facility ("New Credit Facility"). Borrowings
under the New Credit Facility and the New Notes, together with existing cash and
investment balances and the $265 million of new equity, will be used to repay
and/or refinance substantially all of Mesa's existing debt. MOC will be the
borrower under the New Credit Facility and the issuer of the New Notes. Mesa
will fully and unconditionally guarantee MOC's obligations under both the New
Credit Facility and the New Notes.
In connection with the Recapitalization, Mesa's other direct wholly owned
subsidiaries, Mesa Holding Co. ("MHC") and Hugoton Management Company ("HMC"),
as well as HCLP, will be merged with and into MOC, with MOC being the surviving
entity. As a result, MOC will be Mesa's only direct wholly owned subsidiary as
well as its only significant subsidiary. Of the subsidiaries of MOC that will
exist following the Recapitalization, none will have any operations other than
Mesa Environmental Ventures Co. ("Mesa Environmental") and Mesa Transmission Co.
("Mesa Transmission"). Neither Mesa Environmental nor Mesa Transmission nor any
of the other subsidiaries of MOC (collectively, the "Non-guarantors") will
guarantee any of MOC's or Mesa's
F-9
<PAGE> 111
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
debt. Mesa Environmental's and Mesa Transmission's assets, liabilities and
results of operations are inconsequential to those of Mesa and, following the
Recapitalization, all Non-guarantors individually and in the aggregate will be
inconsequential to MOC and Mesa. After the Recapitalization, Mesa will be a
holding company with no individual assets, liabilities or operations other than
shares of common stock of MOC and guarantees of MOC debt; accordingly, the
consolidated assets, liabilities, stockholders' equity, results of operations
and cash flows of MOC and its subsidiaries will be the same as those of Mesa and
its subsidiaries. See Note 6 for disclosure.
The consummation of the Recapitalization is subject to certain conditions
including stockholder approval and completion of the refinancing.
EFFECT OF THE RECAPITALIZATION
The Recapitalization will enhance Mesa's ability to compete in the oil and
gas industry by substantially increasing its cash flow available for investment
and improving its ability to attract capital, which will increase its ability to
pursue investment opportunities. Specifically, Mesa's financial condition will
improve significantly as a result of the Recapitalization due to (i) a
significant reduction in total debt outstanding, (ii) a reduction in annual cash
interest expense of approximately $75 million, (iii) the implementation of a
cost savings program designed to initially reduce annual general and
administrative and other operating overhead expenses by approximately $10
million, and (iv) the extension of maturities on its long-term debt, which will
eliminate Mesa's present liquidity concerns.
The expected reduction of annual cash interest expense is based on the
following assumptions: (i) initial borrowings under the New Credit Facility of
approximately $350 million and (ii) annual interest rates of approximately 7%
under the New Credit Facility, 11% under the senior subordinated notes and
12 1/4% under the senior subordinated discount notes. Actual borrowings and
interest rates under the New Credit Facility will fluctuate over time and will
affect Mesa's actual cash interest expense.
Management believes that cash from operating activities, together with as
much as $175 million of availability under the $525 million New Credit Facility
following the completion of the Recapitalization, will be sufficient for Mesa to
meet its debt service obligations and scheduled capital expenditures, and to
fund its working capital needs for the next several years following the
Recapitalization.
The successful completion of the Recapitalization is expected to position
Mesa to operate and continue as a going concern and to pursue its business
strategies. The consolidated financial statements of Mesa do not include any
adjustments reflecting any treatment other than going concern accounting.
If the Recapitalization is not completed, Mesa will pursue other
alternatives to address its liquidity issues and financial condition, including
pursuing other merger and sale transactions, the possibility of seeking to
restructure its balance sheet by negotiating with its current debt holders or
seeking protection from its creditors under the Federal Bankruptcy Code.
F-10
<PAGE> 112
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) INVESTMENTS
The value of investments are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ---------
<S> <C> <C>
NYMEX Futures Contracts:
Margin Cash.................................................... $17,498 $33,078
Unrealized gain in trading contracts........................... 7,558 4,963
Commodity Price Swaps:
Margin Cash.................................................... 2,434 548
Unrealized gain (loss) in price swaps.......................... (811) 1,367
Natural Gas Options:
Premiums....................................................... 66 --
Unrealized gain in trading options............................. 978 --
Equity securities:
Cost........................................................... 10,719 --
Unrealized loss................................................ (162) --
------- -------
Total market value...................................... $38,280 $39,956
======= =======
</TABLE>
For the three months ended March 31, 1996, Mesa recognized net gains of
approximately $8.8 million from its investments compared with net gains for the
same period in 1995 of $4.6 million. These gains do not include gains or losses
from natural gas futures contracts accounted for a hedge of natural gas
production. Hedge gains or losses are included in natural gas revenue in the
period in which the hedged production occurs (see Note 1).
The net investment gains and losses recognized during a period include both
realized and unrealized gains and losses. Mesa realized net gains from
investments of $10.0 million for the three months ended March 31, 1996, and $5.9
million for the same period in 1995. At March 31, 1996, Mesa had recognized but
not realized approximately $6.3 million of gains associated primarily with
natural gas futures.
In 1995 Mesa invested in certain over-the-counter commodity price swap
agreements for trading purposes. Mesa is required to make payments to (or
receive payments from) a counter party based on the differential between a fixed
and a variable price for specified natural gas volumes. Mesa's agreements were
to expire on the last day of trading for April, May and June 1996 natural gas
futures contracts as determined by the NYMEX. During the three months ended
March 31, 1996, Mesa closed out certain of these positions pertaining to 6.9
million British thermal units ("BTUs") of natural gas at a gain of $1.7 million.
Mesa was the fixed price payor on a notional quantity of 3.2 million BTUs of
natural gas (which remained open from year-end) with a fair value of $7.1
million at March 31, 1996. The remaining agreements were to expire on the last
trading day for June 1996 natural gas futures contracts as determined by the
NYMEX and were closed in mid-April at a gain of approximately $1.7 million. The
average fair value of all commodity price swaps during the three months ended
March 31, 1996 was $15.1 million. In 1995 Mesa also entered into 1,800
over-the-counter natural gas futures call and put options contracts (each
contract represents 10,000 MMBTUs of natural gas). Such contracts were closed
early in the first quarter of 1996 at a gain of $1.1 million. The average fair
value of such option contracts while open was $.8 million. The counter party to
these instruments is a credit-worthy financial institution which is a recognized
market maker. Mesa believes the risk of incurring losses related to the credit
risk of the party is remote.
F-11
<PAGE> 113
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) LONG-TERM DEBT
Long-term debt and current maturities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ----------
<S> <C> <C>
HCLP Secured Notes............................................... $ 504,674 $ 492,309
Credit Agreement................................................. 61,131 51,131
12 3/4% secured discount notes................................... 618,518 618,410
12 3/4% unsecured discount notes................................. 39,725 39,725
13 1/2% subordinated notes....................................... 7,390 7,390
Other............................................................ 5,305 5,305
---------- ----------
1,236,743 1,214,270
Current maturities............................................... (101,413) (92,502)
---------- ----------
Long-term debt................................................... $1,135,330 $1,121,768
========== ==========
</TABLE>
HCLP SECURED NOTES
In 1991 HCLP issued $616 million of HCLP Secured Notes in a private
placement with a group of institutional lenders. The issuance funded a $66
million restricted cash balance within HCLP, which 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. HCLP holds substantially all of Mesa's Hugoton field natural
gas properties.
The HCLP Secured Notes were issued in 15 series and have final stated
maturities extending through 2012 but can be retired earlier. The HCLP Secured
Notes outstanding at March 31, 1996, bear interest at fixed rates ranging from
9.05% to 11.30% per annum (weighted average 10.35%). Principal payments, if
required, 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 under the initial scheduled amortization. Beginning in August 1994,
HCLP elected to make principal payments on the HCLP Secured Notes based on
actual production, rather than according to the initial scheduled amortization.
As a result, interest rate premiums at a rate of 1.5% per annum will be applied
to those principal amounts not paid according to the initial scheduled
amortization and .35% per annum will be applied to the remaining notes. Such
premiums have increased the effective weighted average interest rate payable on
the remaining HCLP Secured Notes outstanding to 10.84% per annum at March 31,
1996.
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 Mesa and its
other subsidiaries. The assets of HCLP that are subject to the mortgage securing
the HCLP Secured Notes are dedicated to service HCLP's debt and are not
available to pay creditors of Mesa or its subsidiaries other than HCLP. Any cash
not subject to the mortgage is available for distribution to Mesa's subsidiaries
which own HCLP's equity.
The HCLP Secured Note agreements also contain a provision which requires
calculation and payment of premiums on early retirement of the HCLP Secured
Notes. The prepayment premium calculation is based on prevailing interest rates
at the date of redemption. In the aggregate, such premiums would have totaled
$60 million as of March 31, 1996 and approximately $55 million on May 14, 1996.
Mesa is currently negotiating with the holders of the HCLP Secured Notes as to
the amount of prepayment premium, if any, to be paid upon redemption of the HCLP
Secured Notes.
Revenues received from production from HCLP's Hugoton properties are
deposited in a collection account maintained by a collateral agent (the
"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
F-12
<PAGE> 114
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 accordance with the HCLP Secured Note agreements on April 19, 1996, HCLP
obtained its reserve estimates as of December 31, 1995, prepared by an
independent engineering consultant covering its Hugoton field properties. The
reserve quantities in such reserve report are compared to the initial reserve
quantities set forth in the HCLP Secured Note agreements, adjusted for
production. The quantities in such reserve report were less than the adjusted
initial quantities, and a Deficit Reserve Amount ("DRA"), as defined, of .0215
Bcfe was determined to exist. To the extent a DRA exists, the Collateral Agent
may be required to retain additional funds in the collection account subject to
the mortgage for the repayment of the HCLP Secured Notes. However, HCLP
determined in accordance with the HCLP Secured Note agreements, that the DRA was
not so significant as to require additional funds to be retained in the
collection account subject to the mortgage for the repayment of the HCLP Secured
Notes.
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 (the "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 (10.35% at March 31, 1996). 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.
HCLP's cash balances were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ---------
<S> <C> <C>
Subject to the mortgage............................................. $40,163 $35,894
Not subject to the mortgage......................................... 7,450 5,249
------- -------
Cash included in current assets..................................... $47,613 $41,143
======= =======
Restricted cash included in noncurrent assets....................... $57,731 $56,541
======= =======
Refundable GIC fee included in noncurrent assets.................... $ 9,010 $8,667
======= =======
</TABLE>
Mesa Operating Co. ("MOC"), a Mesa subsidiary which owns substantially all
of the limited partnership interest of HCLP, is party to a services agreement
with HCLP. MOC provides 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. The fee totaled approximately $5.3 million for the first three
months of 1996 and $5.1 million for the same period in 1995.
CREDIT AGREEMENT
As of March 31, 1996, Mesa had outstanding borrowings of approximately $51.1
million and letter of credit obligations of $11.4 million under its $82.5
million bank credit facility, as amended (the "Credit Agreement"). The Credit
Agreement requires principal payments of $22.5 million in the first half of 1996
with the remainder due in June 1997 (including cash collateralization of letters
of credit outstanding at that time).
The rate of interest payable on borrowings under the Credit Agreement is the
lesser of the Eurodollar rate plus 2 1/2% or the prime rate plus 1/2%.
Obligations under the Credit Agreement are secured by a first lien on Mesa's
West Panhandle field properties, Mesa's equity interest in MOC and a 76% limited
partner interest in HCLP.
The Credit Agreement requires Mesa to maintain tangible adjusted equity, as
defined, of at least $50 million and available cash, as defined, of $32.5
million. At March 31, 1996, Mesa's tangible adjusted equity, as defined, was
approximately $67.8 million and available cash, as defined, was $113.5 million.
See Note 2 for discussion of the tangible adjusted equity covenant and its
potential effect on Mesa's liquidity.
F-13
<PAGE> 115
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The 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.
DISCOUNT NOTES
In August 1993, Mesa issued approximately $435.5 million initial accreted
value ($569.2 million face amount), as defined, of 12 3/4% secured discount
notes due June 30, 1998, $136.9 million initial accreted value ($178.8 million
face amount) of 12 3/4% unsecured discount notes due June 30, 1996 (together,
the "Discount Notes") and $29.3 million principal amount of 0% convertible
notes. These notes were exchanged (the "Debt Exchange") for an aggregate $586.3
million of the outstanding 12% subordinated notes due 1996 (all of which have
been repaid) and 13 1/2% subordinated notes due 1999 (plus accrued interest
thereon). The 0% convertible notes were converted into approximately 7.5 million
shares of common stock in 1993. The Discount Notes rank pari passu with each
other, are senior to other subordinated debt and are subordinate to all
permitted first lien debt, as defined, including obligations under the Credit
Agreement.
In 1994, Mesa issued an additional $48.2 million face amount of 12 3/4%
secured discount notes and used the proceeds to settle a lawsuit. Also in 1994,
Mesa redeemed $139.1 million face amount of 12 3/4% unsecured discount notes
with proceeds from a public offering of Mesa common stock and from additional
borrowings under the Credit Agreement.
The Discount Notes did not accrue interest through June 30, 1995; however,
the accreted value, as defined, of both series increased at a rate of 12 3/4%
per year, compounded semiannually, until June 30, 1995. Beginning July 1, 1995,
each series began to accrue interest at an annual rate of 12 3/4%, payable in
cash semiannually in arrears, with the first payment due on December 31, 1995.
The 12 3/4% secured discount notes are secured by second liens on Mesa's
West Panhandle field properties and a 76% limited partner interest in HCLP, both
of which also secure obligations under the Credit Agreement. Mesa's right to
maintain first lien debt, as defined, is limited by the terms of the Discount
Notes to $82.5 million.
See Note 2 for a discussion of certain cross-default provisions in the
Discount Note indentures which could become effective if Mesa defaults under the
terms of the tangible adjusted equity covenant of the Credit Agreement.
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.
SUBORDINATED NOTES
The 13 1/2% subordinated notes are unsecured and mature in 1999. Interest on
these notes is payable semiannually in cash.
INTEREST AND MATURITIES
The aggregate interest payments, net of amounts capitalized, made during the
three months ended March 31, 1996 and 1995, were $70.8 million and $29.0
million, respectively. The interest payments in the first quarter of 1996
included a $42 million interest payment on January 2, 1996, according to terms
of the Discount Notes, related to Mesa's Discount Notes which was due December
31, 1995. Payment of approximately $19.7 million of interest incurred during the
three months ended March 31, 1995 was 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 consolidated statements of operations for
the first quarter of 1995.
F-14
<PAGE> 116
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The scheduled principal repayments on long-term debt for the remainder of
1996 and for the four succeeding years are as follows (in millions):
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000
----- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C>
HCLP Secured Notes.................................... $21.5 $33.3 $ 36.1 $37.1 $36.0
Credit Agreement(a)(b)................................ 12.5 38.6 -- -- --
12 3/4% secured discount notes(c)..................... -- -- 617.4 -- --
12 3/4% unsecured discount notes(c)................... 39.7 -- -- -- --
13 1/2% subordinated notes............................ -- -- -- 7.4 --
Other................................................. 5.3 -- -- -- --
----- ----- ------ ----- -----
Total........................................ $79.0 $71.9 $653.5 $44.5 $36.0
===== ===== ====== ===== =====
</TABLE>
- ---------------
(a) Excludes approximately $11.4 million in letter of credit obligations
currently outstanding and required to be cash collateralized in June 1997.
(b) Maturities may be accelerated if tangible adjusted equity falls below $50
million. (See Note 2).
(c) Maturities may be accelerated if an Event of Default occurs and continues
under the Credit Agreement. (See Note 2).
FAIR VALUE OF LONG-TERM DEBT
The following is a summary of estimated fair value of Mesa's long-term debt
as of the years ended (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 MARCH 31, 1996
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
HCLP Secured Notes............................... $504,674 $568,641 $492,309 $539,078
Credit Agreement................................. 61,131 61,131 51,131 51,131
12 3/4% secured discount notes................... 618,518 541,905 618,410 606,042
12 3/4% unsecured discount notes................. 39,725 35,262 39,725 39,700
13 1/2% subordinated notes....................... 7,390 7,390 7,390 7,390
</TABLE>
The fair value of long-term debt is estimated based on the market prices for
Mesa's publicly traded debt and on current rates available for similar debt with
similar maturities and security for Mesa's remaining debt. Based on the current
financial condition of Mesa, there is no assurance that Mesa could obtain
borrowings under long-term debt agreements with terms similar to those described
above and receive proceeds approximating the estimated fair values. See Note 2
for proposed Recapitalization.
(5) CONTINGENCIES
MASTERSON
In February 1992 the current lessors of an oil and gas lease (the "Gas
Lease") dated April 30, 1955, between R. B. Masterson, et al., as lessor, and
Colorado Interstate Gas Company ("CIG"), as lessee, sued CIG in Federal District
Court in Amarillo, Texas, claiming that CIG had underpaid royalties due under
the Gas Lease. Under the agreements with CIG, Mesa has an entitlement to gas
produced from the Gas Lease. In August 1992 CIG filed a third-party complaint
against Mesa for any such royalty underpayments which may be allocable to Mesa.
Plaintiffs alleged that the underpayment was the result of CIG's use of an
improper gas sales price upon which to calculate royalties and that the proper
price should have been determined pursuant to a "favored-nations" clause in a
July 1, 1967, amendment to the Gas Lease (the "Gas Lease Amendment"). The
plaintiffs also sought a declaration by the court as to the proper price to be
used for calculating future royalties.
The plaintiffs alleged royalty underpayments of approximately $500 million
(including interest at 10%) covering the period from July 1, 1967, to the
present. In March 1995 the court made certain pretrial rulings that eliminated
approximately $400 million of the plaintiffs' claims (which related to periods
prior to October 1,
F-15
<PAGE> 117
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1989), but which also reduced a number of Mesa's defenses. Mesa and CIG filed
stipulations with the court whereby Mesa would have been liable for between 50%
and 60%, depending on the time period covered, of an adverse judgment against
CIG for post-February 1988 underpayments of royalties.
On March 22, 1995, a jury trial began and on May 4, 1995, the jury returned
its verdict. Among its findings, the jury determined that CIG had underpaid
royalties for the period after September 30, 1989, in the amount of
approximately $140,000. Although the plaintiffs argued that the
"favored-nations" clause entitled them to be paid for all of their gas at the
highest price voluntarily paid by CIG to any other lessor, the jury determined
that the plaintiffs were estopped from claiming that the "favored-nations"
clause provides for other than a pricing-scheme to pricing-scheme comparison. In
light of this determination, and the plaintiffs' stipulation that a
pricing-scheme to pricing-scheme comparison would not result in any "trigger
prices" or damages, defendants asked the court for a judgment that plaintiffs
take nothing. The court, on June 7, 1995, entered final judgment that plaintiffs
recover no monetary damages. The plaintiffs have filed a motion for new trial on
which the court has not yet ruled. Mesa cannot predict whether the court will
grant such motion or, if it does not, whether the plaintiffs will appeal the
court's final judgment. However, based on the jury verdict and final judgment,
Mesa does not expect the ultimate resolution of this lawsuit to have a material
adverse effect on its financial position or results of operations.
On June 7, 1996, the plaintiffs filed a separate suit against CIG and Mesa
in state court in Amarillo, Texas, similarly claiming underpayment of royalties
under the "favored-nations" clause, but based upon the above-described
pricing-scheme to pricing-scheme comparison on a well-by-well monthly basis. The
plaintiffs also claim underpayment of royalties since June 7, 1995 under the
"favored-nations" clause based upon either the pricing-scheme to pricing-scheme
method or their previously alleged higher price method. Mesa believes it has
several defenses to this action and intends to contest it vigorously. Mesa has
not yet determined the amount of damages, if any, that would be payable if such
action were determined adversely to Mesa.
THOMPSON
In May 1996, the current lessors of an oil and gas lease dated October 8,
1958 between Terry Thompson, Jr., et al., as Lessor, and CIG, as Lessee, sued
CIG in state court in Amarillo claiming CIG has underpaid royalties based upon
allegations that CIG failed to develop, produce and market the gas properly.
Mesa is not currently a party to this litigation; howevere, if CIG is found to
be liable for any such underpayments, it may seek to recover from Mesa the
portion of such underpayments which may be allocable to Mesa. Mesa believes
there are several defenses to this action and, to the extent Mesa becomes a
party, intends to contest such action vigorously. Mesa has not yet determined
the amount of damages, if any, that would be payable if such action were
determined adversely to Mesa.
LEASE TERMINATION
In 1991 Mesa sold certain producing oil and gas properties to Seagull Energy
Company ("Seagull"). In 1994 two lawsuits were filed against Seagull in the
100th District Court in Carson County, Texas, by certain land and royalty owners
claiming that certain of the oil and gas leases owned by Seagull have terminated
due to cessation in production and/or lack of production in paying quantities
occurring at various times from first production through 1994. In the third
quarter of 1995 Seagull filed third-party complaints against Mesa claiming
breach of warranty and false representation in connection with the sale of such
properties to Seagull. Mesa believes it has several defenses to these lawsuits
including a two-year limitation on indemnification set forth in the purchase and
sale agreement.
Seagull filed a similar third-party complaint against Mesa covering a
different lease in the 69th District Court in Moore County, Texas. Mesa believes
it has similar defenses in this case.
The plaintiffs in the cases against Seagull are seeking to terminate the
leases. Seagull, in its complaint against Mesa, is seeking unspecified damages
relating to any leases which are terminated.
Mesa does not expect the resolution of this lawsuit to have a material
adverse effect on its financial position or results of operations.
F-16
<PAGE> 118
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER
Mesa is also a defendant in other lawsuits and has assumed liabilities
relating to Original Mesa and the Partnership. Mesa does not expect the
resolution of these other matters to have a material adverse effect on its
financial position or results of operations.
(6) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Mesa conducts its operations through various direct and indirect
subsidiaries. On December 31, 1995, Mesa's direct subsidiaries were MOC, MHC and
HMC, all of which were wholly owned by Mesa. MOC owns all of Mesa's interest in
the West Panhandle field of Texas, the Gulf Coast and the Rocky Mountain areas,
as well as a 98.6% limited partnership interest in HCLP. MHC owns cash and
securities, a 0.9% limited partnership interest in HCLP and 100% of Mesa
Environmental, a company established to compete in the natural gas vehicle
market. HMC owns the 0.5% general partner interest in HCLP. HCLP owns
substantially all of Mesa's Hugoton field natural gas properties.
In early 1994 Mesa effected a series of merger transactions which resulted
in the conversion of the predecessors of MOC, MHC, and the other subsidiary
partnerships, other than HCLP, to corporate form and eliminated all of the
General Partner's minority interests in the subsidiaries.
Subsidiary Debt
HCLP, together with its wholly owned subsidiary Hugoton Capital Corporation
(a single purpose financing subsidiary of HCLP), are jointly and severally
liable as co-obligors on the HCLP Secured Notes (see Note 4). The assets and
cash flows of HCLP that are subject to the mortgage securing the HCLP Secured
Notes are dedicated to service the HCLP Secured Notes and are not available to
pay creditors of Mesa or its subsidiaries other than HCLP. Hugoton Capital
Corporation, which has insignificant assets and results of operations, is
included within HCLP in the condensed consolidating financial statements. MOC is
the borrower and primary obligor under, and Mesa has unconditionally guaranteed
MOC's obligations under, the Credit Agreement. Mesa, MOC and Mesa Capital Corp.
("Mesa Capital") are jointly and severally liable as co-obligors under the
13 1/2% subordinated notes and the Discount Notes. Mesa Capital is a wholly
owned financing subsidiary of MOC. Mesa Capital, which has insignificant assets
and results of operations, is included with MOC in the condensed consolidating
financial statements.
Other Mesa subsidiaries in the condensed consolidating financial statements
include MHC, HMC, and Mesa Environmental. No such other subsidiary is an obligor
or guarantor under any long term debt.
Intercompany Debt
As of December 31, 1993, MHC had intercompany payables to MOC of
approximately $123 million. On February 28, 1994, MHC assigned an 18% limited
partnership interest in HCLP (out of its total interest of 18.9%) to MOC in
satisfaction of $90 million of intercompany payables. Provisions of the Discount
Note indentures required the repayment of intercompany indebtedness to specified
levels and provided that any HCLP limited partnership interests transferred in
satisfaction of intercompany debt would be valued at $5 million for each one
percent of interest assigned. MHC repaid an additional $33 million of
intercompany debt to MOC in cash during 1994. As a result of these transactions,
MOC now owns a 98.6% limited partnership interest in HCLP, and all of MHC's
intercompany debt to MOC which was outstanding at December 31, 1993, was
eliminated.
Condensed Consolidating Financial Statements
The following are condensed consolidating financial statements of MESA Inc.,
HCLP, MOC, and Mesa's other subsidiaries combined (in millions). These
statements are presented to provide financial information with respect to the
obligors under Mesa's debt for the benefit of the holders of such debt. Separate
financial statements of the obligors under Mesa's debt are not presented because
they are not required and because Mesa believes that they would not be material
to investors. See Note 4 for additional information regarding Mesa's long term
debt.
F-17
<PAGE> 119
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OTHER CONSOL.
MESA MESA AND MESA
DECEMBER 31, 1995 INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- ----------------------------------------------------- ---- ---- ---- ----- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash investments.......................... $-- $47 $ 38 $64 $ -- $ 149
Other current assets............................... -- 20 53 15 -- 88
--- ---- ---- --- ----- ------
Total current assets........................ -- 67 91 79 -- 237
--- ---- ---- --- ----- ------
Property, plant and equipment, net................. -- 602 478 3 -- 1,083
Investment in subsidiaries......................... 76 -- 115 10 (201) --
Intercompany receivables........................... -- -- 9 -- (9) --
Other noncurrent assets............................ -- 82 58 5 -- 145
--- ---- ---- --- ----- ------
$76 $751 $751 $97 $(210) $1,465
=== ==== ==== === ===== ======
Liabilities and Equity:
Current liabilities................................ $-- $64 $128 $ 1 $ -- $ 193
Long-term debt..................................... -- 471 665 -- -- 1,136
Intercompany payables.............................. 9 -- -- -- (9) --
Other noncurrent liabilities....................... -- -- 66 3 -- 69
Partners'/Stockholders' equity (deficit)........... 67 216 (108) 93 (201) 67
--- ---- ---- --- ----- ------
$76 $751 $751 $97 $(210) $1,465
=== ==== ==== === ===== ======
MARCH 31, 1996
Assets:
Cash and cash investments.......................... $-- $41 $ 17 $58 $ -- $ 116
Other current assets............................... -- 19 64 4 -- 87
--- ---- ---- --- ----- ------
Total current assets........................ -- 60 81 62 -- 203
--- ---- ---- --- ----- ------
Property, plant and equipment, net................. -- 594 465 3 -- 1,062
Investment in subsidiaries......................... 77 -- 121 10 (208) --
Intercompany receivables........................... -- -- 9 -- (9) --
Other noncurrent assets............................ -- 80 61 3 -- 144
--- ---- ---- --- ----- ------
$77 $734 $737 $78 $(217) $1,409
=== ==== ==== === ===== ======
Liabilities and Equity:
Current liabilities................................ $-- $55 $ 95 $-- $ -- $ 150
Long-term debt..................................... -- 457 665 -- -- 1,122
Intercompany payables.............................. 9 -- -- -- (9) --
Other noncurrent liabilities....................... -- -- 65 4 -- 69
Partners'/Stockholders' equity (deficit)........... 68 222 (88) 74 (208) 68
--- ---- ---- --- ----- ------
$77 $734 $737 $78 $(217) $1,409
=== ==== ==== === ===== ======
</TABLE>
F-18
<PAGE> 120
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED:
<TABLE>
<CAPTION>
OTHER CONSOL.
MESA MESA AND MESA
MARCH 31, 1995 INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- ------------------------------------------------------ ---- ---- ---- ----- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues.............................................. -- 25 37 -- -- 62
--- ---- ---- --- --- ----
Costs and Expenses:
Operating, exploration and taxes.................... -- 9 9 -- -- 18
General and administrative.......................... -- -- 6 1 -- 7
Depreciation, depletion and amortization............ -- 9 12 -- -- 21
--- ---- ---- --- --- ----
-- 18 27 1 -- 46
--- ---- ---- --- --- ----
Operating Income (Loss)............................... -- 7 10 (1) -- 16
--- ---- ---- --- --- ----
Interest expense, net of interest income.............. -- (12 ) (22) 1 -- (33)
Equity in loss of subsidiaries........................ (8 ) -- (5) -- 13 --
Other................................................. -- -- 4 5 -- 9
--- ---- ---- --- --- ----
Net Income (Loss)..................................... $(8 ) $(5 ) $(13) $ 5 $13 $ (8)
=== ==== ==== === === ====
MARCH 31, 1996
Revenues.............................................. $-- $37 $ 43 $ 1 $-- $ 81
--- ---- ---- --- --- ----
Costs and Expenses:
Operating, exploration and taxes.................... -- 10 9 -- -- 19
General and administrative.......................... -- -- 5 1 -- 6
Depreciation, depletion and amortization............ -- 9 19 2 -- 30
--- ---- ---- --- --- ----
-- 19 33 3 -- 55
--- ---- ---- --- --- ----
Operating Income (Loss)............................... -- 18 10 (2) -- 26
--- ---- ---- --- --- ----
Interest expense, net of interest income.............. -- (12 ) (23) -- -- (35)
Equity income of subsidiaries......................... 1 -- 6 -- (7) --
Other................................................. -- -- 7 3 -- 10
--- ---- ---- --- --- ----
Net Income............................................ $ 1 $ 6 $ -- $ 1 $(7) $ 1
=== ==== ==== === === ====
</TABLE>
F-19
<PAGE> 121
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED:
<TABLE>
<CAPTION>
OTHER CONSOL.
MESA MESA AND MESA
MARCH 31, 1995 INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- ----------------------------------------------------- ---- ---- ---- ----- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities................. $-- $(3) $ 26 $ 6 $ -- $ 29
---- ---- ---- ---- ---- ----
Cash Flows from Investing Activities:
Capital expenditures............................... -- (1) (5) (1) -- (7)
Other.............................................. -- -- -- (3) -- (3)
---- ---- ---- ---- ---- ----
-- (1) (5) (4) -- (10)
---- ---- ---- ---- ---- ----
Cash Flows from Financing Activities:
Other.............................................. -- 2 -- -- -- 2
---- ---- ---- ---- ---- ----
-- 2 -- -- -- 2
---- ---- ---- ---- ---- ----
Net Increase (Decrease) in Cash and Cash
Investments........................................ $-- $(2) $ 21 $ 2 $ -- $ 21
==== ==== ==== ==== ==== ====
MARCH 31, 1996
Cash Flows from Operating Activities................. $-- $ 6 $(22) $ 14 $ -- $ (2)
---- ---- ---- ---- ---- ----
Cash Flows from Investing Activities:
Capital expenditures............................... -- (1) (9) -- -- (10)
Contribution to subsidiary......................... -- -- -- -- -- --
---- ---- ---- ---- ---- ----
-- (1) (9) -- -- (10)
---- ---- ---- ---- ---- ----
Cash Flows from Financing Activities:
Dividend to parent................................. -- -- -- (20) 20 --
Contribution from parent........................... -- -- 20 -- (20) --
Repayments of long-term debt....................... -- (12) (10) -- -- (22)
Other.............................................. -- 1 -- -- -- 1
---- ---- ---- ---- ---- ----
-- (11) 10 (20) -- (21)
---- ---- ---- ---- ---- ----
Net Increase (Decrease) in cash and cash
investments........................................ $-- $(6) $(21) $ (6) $ -- $(33)
==== ==== ==== ==== ==== ====
</TABLE>
NOTES TO CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(a) These condensed consolidating financial statements should be read in
conjunction with the consolidated financial statements of Mesa and notes
thereto of which this note is an integral part.
(b) As of March 31, 1996, Mesa owns 100% interest in each of MOC, MHC, and HMC.
These condensed consolidating financial statements present Mesa's investment
in its subsidiaries and MOC's and MHC'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 income (loss) of subsidiaries, (ii)
eliminate the intercompany payables and receivables, and (iii) eliminate
other transactions between subsidiaries including contributions and
distributions.
F-20
<PAGE> 122
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MESA Inc.:
We have audited the accompanying consolidated balance sheets of MESA Inc. (a
Texas corporation) and subsidiaries as of December 31, 1995 and 1994, 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, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MESA Inc. and
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed further in Note 2 to the
consolidated financial statements, the Company's current financial forecasts
indicate that cash generated by operating activities, together with available
cash and investment balances, will not be sufficient for the Company to make all
of its required debt principal and interest obligations due in June 1996. Also,
as discussed in Notes 2 and 4 to the consolidated financial statements, certain
covenants related to the Company's bank debt and certain cross-default
provisions of the Discount Notes could result in the acceleration of
approximately $656 million of long-term debt principal (due in mid-1997 and
mid-1998) to the first half of 1996. As a result, there is substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 2 to the consolidated
financial statements. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Houston, Texas
March 6, 1996 (except with
respect to the matter
discussed in Note 13, as
to which the date is
May 7, 1996)
F-21
<PAGE> 123
MESA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Natural gas.................................................... $ 141,798 $ 139,580 $ 129,534
Natural gas liquids............................................ 61,427 72,771 75,321
Oil and condensate............................................. 12,428 7,877 19,594
Other.......................................................... 6,551 8,509 10,510
--------- --------- ---------
222,204 228,737 234,959
--------- --------- ---------
Costs and Expenses:
Lease operating................................................ 51,819 52,655 51,815
Production and other taxes..................................... 20,332 21,306 18,403
Exploration charges............................................ 2,705 5,157 6,604
General and administrative..................................... 25,237 28,649 26,749
Depreciation, depletion and amortization....................... 100,099 92,287 83,423
--------- --------- ---------
200,192 200,054 186,994
--------- --------- ---------
Operating Income................................................. 22,012 28,683 47,965
--------- --------- ---------
Other Income (Expense):
Interest income................................................ 10,704 13,457 15,922
Interest expense............................................... (142,002) (144,757) (148,630)
Gains from investments......................................... 3,954 6,698 18,420
Gains from collections from Bicoastal Corporation.............. 18,450 16,577 6,352
Gains on dispositions of oil and gas properties................ 9,600 -- --
Litigation settlement.......................................... (42,750) -- --
Gain from adjustment of contingency reserve.................... 24,000 -- --
Other.......................................................... (6,416) (4,011) 2,403
--------- --------- ---------
(124,460) (112,036) (105,533)
--------- --------- ---------
Net Loss......................................................... $(102,448) $ (83,353) $ (57,568)
========= ========= =========
Net Loss Per Common Share........................................ $ (2.61) $ (1.42) $ (.90)
========= ========= =========
Weighted Average Common Shares Outstanding....................... 39,272 58,860 64,050
========= ========= =========
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-22
<PAGE> 124
MESA INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash investments................................................. $ 143,422 $ 149,143
Investments............................................................... 19,112 38,280
Accounts and notes receivable............................................. 38,938 44,734
Other..................................................................... 3,372 4,590
---------- ----------
Total current assets............................................... 204,844 236,747
---------- ----------
Property, Plant and Equipment:
Oil and gas properties, wells and equipment, using the successful efforts
method of accounting.................................................... 1,867,842 1,900,163
Office and other.......................................................... 43,836 41,603
Accumulated depreciation, depletion and amortization...................... (781,230) (859,077)
---------- ----------
1,130,448 1,082,689
---------- ----------
Other Assets:
Restricted cash of subsidiary partnership................................. 61,299 57,731
Gas balancing receivable.................................................. 54,971 56,020
Other..................................................................... 32,397 31,509
---------- ----------
148,667 145,260
---------- ----------
$1,483,959 $1,464,696
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities on long-term debt...................................... $ 30,537 $ 101,413
Accounts payable and accrued liabilities.................................. 40,468 31,068
Interest payable.......................................................... 18,184 60,465
---------- ----------
Total current liabilities.......................................... 89,189 192,946
---------- ----------
Long-Term Debt.............................................................. 1,192,756 1,135,330
---------- ----------
Deferred Revenue............................................................ 21,900 17,578
---------- ----------
Other Liabilities........................................................... 55,542 51,838
---------- ----------
Contingencies
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
64,050,009 and 64,050,009 shares, respectively.......................... 640 640
Additional paid-in capital................................................ 398,965 398,965
Accumulated deficit....................................................... (275,033) (332,601)
---------- ----------
124,572 67,004
---------- ----------
$1,483,959 $1,464,696
========== ==========
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-23
<PAGE> 125
MESA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------
1993 1994 1995
--------- --------- --------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss........................................................ $(102,448) $ (83,353) $(57,568)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation, depletion and amortization...................... 100,099 92,287 83,423
Gains on dispositions of oil and gas properties............... (9,600) -- --
Accreted interest on discount notes........................... 49,160 79,352 38,957
Accrued interest exchanged for discount notes................. 15,395 -- --
Litigation settlement......................................... 42,750 (42,750) --
Gain from adjustment of contingency reserves.................. (24,000) -- --
Decrease (increase) in gas balancing receivables.............. (4,942) (7,840) 1,516
Decrease in deferred natural gas revenue...................... (3,370) (785) (4,219)
Settlement of prior year tax claims........................... (12,931) -- --
Natural gas hedging activities................................ 324 9,715 (9,715)
Sales of investments.......................................... 39,283 18,771 48,555
Purchases of investments...................................... (34,711) (19,866) (49,003)
Gains from investments........................................ (3,954) (6,698) (18,420)
(Increase) decrease in accounts receivable.................... 1,986 5,934 (12,047)
Increase (decrease) in payables and accrued liabilities....... (15,887) (3,142) 45,243
Other......................................................... (4,662) 6,972 2,519
--------- --------- --------
Net cash provided by operating activities................ 32,492 48,597 69,241
--------- --------- --------
Cash Flows From Investing Activities:
Capital expenditures............................................ (29,636) (32,590) (42,297)
Proceeds from dispositions of oil and gas properties............ 26,118 -- --
Collection of notes receivable.................................. 47,501 -- --
Other........................................................... (6,461) (7,660) 860
--------- --------- --------
Net cash provided by (used in) investing activities...... 37,522 (40,250) (41,437)
--------- --------- --------
Cash Flows From Financing Activities:
Issuance of common stock........................................ -- 93,067 --
Repayments of long-term debt.................................... (80,102) (175,107) (25,507)
Long-term borrowings............................................ -- 77,754 --
Debt issuance costs............................................. (9,651) -- --
Other........................................................... 1,251 652 3,424
--------- --------- --------
Net cash used in financing activities.................... (88,502) (3,634) (22,083)
--------- --------- --------
Net Increase (Decrease) in Cash and Cash Investments.............. (18,488) 4,713 5,721
Cash and Cash Investments at Beginning of Year.................... 157,197 138,709 143,422
--------- --------- --------
Cash and Cash Investments at End of Year.......................... $ 138,709 $ 143,422 $149,143
========= ========= ========
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-24
<PAGE> 126
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, 1992................................. 38,571 $386 $273,198 $ (89,232)
Net loss................................................. -- -- -- (102,448)
Common stock issued for 0% convertible notes............. 7,523 75 29,239 --
Common stock issued for the partial conversion of the
General Partner minority interest...................... 417 4 907 --
------ ---- -------- ---------
Balance, December 31, 1993................................. 46,511 465 303,344 (191,680)
Net loss................................................. -- -- -- (83,353)
Common stock issued for the conversion of the remaining
General Partner minority interest...................... 1,251 13 2,716 --
Common stock issued in secondary public offering......... 16,288 162 92,905 --
------ ---- -------- ---------
Balance, December 31, 1994................................. 64,050 640 398,965 (275,033)
Net loss................................................. -- -- -- (57,568)
------ ---- -------- ---------
Balance, December 31, 1995................................. 64,050 $640 $398,965 $(332,601)
====== ==== ======== =========
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-25
<PAGE> 127
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MESA Inc., a Texas corporation, was formed in 1991 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 Company is primarily in the business of exploring for, developing,
producing, processing and selling natural gas and oil in the United States. Over
60% of the Company's annual equivalent production is natural gas and the balance
is principally natural gas liquids. The Company's primary producing areas are
the Hugoton field of southwest Kansas, the West Panhandle field of Texas and the
Gulf of Mexico offshore Texas and Louisiana. Production from the Company's
properties has access to a substantial portion of the major metropolitan markets
in the United States, primarily in the midwest and northeast, through numerous
pipelines and other purchasers.
The preparation of the consolidated financial statements of the Company in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from the
estimates.
PRINCIPLES OF CONSOLIDATION
The Company owns and operates its oil and gas properties and other assets
through various direct and indirect subsidiaries. Pursuant to the Corporate
Conversion, the Company obtained a 95.86% limited partnership interest and Boone
Pickens (the "General Partner") obtained a 4.14% general partner interest in
three direct subsidiary partnerships. The general partner interest was
convertible into a total of 1,667,560 shares of common stock of the Company. On
December 31, 1993, the General Partner converted approximately one-fourth of his
general partner interests into common stock. In early 1994 the Company effected
a series of merger transactions which resulted in the conversion of each of its
direct subsidiary partnerships to corporate form (see Note 13). Pursuant to
these mergers, the remaining general partner interests in the Company's
subsidiary partnerships held directly or indirectly by the General Partner were
converted into common stock, thereby eliminating the minority interest.
The accompanying consolidated financial statements reflect the consolidated
accounts of the Company and its subsidiaries after elimination of intercompany
transactions.
Certain reclassifications have been made to amounts reported in previous
years to conform to 1995 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
On January 1, 1994, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," which addresses the accounting and reporting for investments
in equity securities that have readily determinable fair values and for all
investments in debt securities. The Company's portfolio of securities is
classified as "trading securities" under the provisions of SFAS No. 115 and is
reported at fair value, with unrealized gains and losses included in net income
(loss) for the current period. The cost of securities sold is determined on the
first-in, first-out basis. Prior to January 1, 1994, investments in marketable
securities were stated at the lower of cost or market. The adoption of SFAS No.
115 did not have a material effect on the financial position or results of
operations of the Company.
F-26
<PAGE> 128
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company enters into various energy futures contracts including New York
Mercantile Exchange ("NYMEX") futures contracts, commodity price swaps and
options which are not intended to be hedges of future natural gas or crude oil
production. Investments in such contracts are adjusted to market prices at the
end of each reporting period and gains and losses are included in gains from
investments in the statements 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
whereby the ratio of annual production to beginning of period proved oil and gas
reserves is applied to the remaining net book value of such properties. Oil and
gas reserve quantities represent estimates only and there are numerous
uncertainties inherent in the estimation process. Actual future production may
be materially different from amounts estimated and such differences could
materially affect future amortization of proved properties. Geological and
geophysical costs and delay rentals are expensed as incurred.
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 (the "Commission") 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.
In March 1995 the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," which establishes accounting standards for
the impairment of long-lived assets, certain identifiable intangibles and
goodwill. SFAS No. 121 requires a review for impairment whenever circumstances
indicate that the carrying amount of an asset may not be recoverable. In
performing the review for recoverability, the Company would estimate future cash
flows (undiscounted and without interest charges) expected to result from use of
an asset and its eventual disposition. Impairment is recognized only if the
carrying amount of an asset is greater than the expected future cash flows. The
amount of impairment is based on the fair value of the asset. Under SFAS No.
121, each field is individually evaluated for impairment. The Company will adopt
the provisions of SFAS No. 121 in 1996 and has estimated that impairment of
approximately $10 to $12 million will be charged to operations in the first
quarter of 1996. Such impairment relates primarily to a Gulf Coast oil and gas
property.
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,
commodity price swaps, options, short-term trade receivables and payables,
restricted cash, notes receivable, and long-term debt. The carrying values of
cash, marketable securities, notes receivable, short-term trade receivables and
payables, and restricted cash approximate fair value. The carrying values of the
commodity price swaps and options represent their required cash deposits plus or
minus unrealized gains and losses (see Note 3). 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 (see Note 4).
F-27
<PAGE> 129
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GAS REVENUES
The Company recognizes its ownership interest in natural gas production 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 December 31, 1995, the
Company had produced and sold a cumulative net 21.9 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 $38.8 million.
Substantially all of the Company's gas balancing receivables and deferred
revenue are classified as long-term.
The Company periodically enters into NYMEX 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 net gains of $12.7 million and
$895,000 in 1995 and 1994, respectively, and a net loss of $324,000 in 1993
related to hedging activities.
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
LONG-TERM DEBT AND CASH FLOWS
The Company is highly leveraged with over $1.2 billion of long-term debt,
including current maturities. The major components of the Company's debt are (1)
$504.7 million of secured notes due in installments through 2012 at Hugoton
Capital Limited Partnership ("HCLP"), an indirect, wholly owned subsidiary, (2)
$61.1 million (plus $11.4 million in letter of credit obligations) outstanding
under a bank credit facility, due in installments through 1997, with the
majority of such debt due on June 23, 1997, (3) $39.7 million of unsecured
discount notes due on June 30, 1996, and (4) $617.4 million of secured discount
notes due on June 30, 1998. Both the secured and unsecured discount notes are
subordinate to the bank credit facility. See Note 4 for a complete description
of the Company's long-term debt.
The Company is required to make significant principal and interest payments
on its debt during the first six months of 1996. Including the $42 million of
interest paid on its discount notes on January 2, 1996, the Company is required
to make $123.5 million of principal and interest payments related to its
discount notes and $22.5 million of principal payments related to its bank
credit facility by June 30, 1996.
The Company's bank credit facility contains a covenant requiring the Company
to maintain tangible adjusted equity, as defined, of at least $50 million. At
December 31, 1995, tangible adjusted equity was $64.7 million. Assuming no
changes in its capital structure and no significant transactions are completed,
the Company expects to continue to report substantial net losses and expects its
tangible adjusted equity to fall below $50 million in the first half of 1996. If
and when the Company determines that tangible adjusted equity is below $50
million, an Event of Default, as defined, would occur under the bank credit
facility and the bank would have the right to accelerate the payment of all
outstanding principal and require cash collateralization of letters of credit.
An Event of Default under the bank credit facility would cause a cross default
under the Company's secured and unsecured discount note indentures unless and
until the bank credit facility default were cured or waived or the debt under
the bank credit facility were repaid or otherwise discharged. The Events of
Default, if they occur and are not waived, could result in acceleration of
approximately $656 million of long-term debt principal due in mid-1997 and
mid-1998 to the first half of 1996. Pursuant to the subordination provisions of
the
F-28
<PAGE> 130
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
discount note indentures, the Company would be prohibited from making any
payments on such notes for specified periods upon and during the continuance of
any Event of Default under the bank credit facility.
The assets and cash flows of HCLP that are subject to the mortgage securing
HCLP's debt are dedicated to service HCLP's debt and are not available to pay
creditors of the Company or its subsidiaries other than HCLP.
The Company's current financial forecasts indicate, assuming no changes in
its capital structure and no significant transactions are completed, that cash
generated by operating activities, together with available cash and investment
balances will not be sufficient to make all of its required debt principal and
interest obligations due in June 1996. If amounts outstanding under the Credit
Agreement were to be accelerated in the first half of 1996, the Company would
expect to have sufficient cash to meet the Credit Agreement obligations and cure
an Event of Default under the Credit Agreement and avoid, at that time, cross
defaults under the terms of its Discount Note indentures. However, such a
payment would substantially deplete the Company's remaining cash and investments
balances. The Company will make decisions regarding such payments on its debt as
they come due, taking into account the status at that time of the Rainwater
transaction discussed below.
EXPLORATION OF STRATEGIC ALTERNATIVES/PROPOSED TRANSACTION WITH RAINWATER
In an effort to address its liquidity issues and to position the Company for
expansion through exploration and development, in December 1994 the Company
announced its intent to sell all or a portion of its interests in the Hugoton
field. In the first quarter of 1995 the Company began an auction process to sell
such properties. The Company's Board of Directors (the "Board") concluded the
auction process in the second quarter of 1995 after no acceptable bids were
received for the Hugoton properties.
On July 6, 1995, the Board approved and implemented a proposal solicitation
process which expanded its exploration of strategic alternatives to include
consideration of the sale of the Company, a stock-for-stock merger, joint
ventures, asset sales, equity infusions, and refinancing transactions. The
Company engaged an independent financial advisor to assist in these efforts and
to solicit proposals on its behalf. The proposal solicitation process commenced
in August 1995 and the Company received proposals beginning on November 20,
1995.
On February 28, 1996, the Company signed a letter of intent with Rainwater,
Inc. ("Rainwater"), an independent investment company owned by Ft. Worth, Texas,
investor Richard Rainwater, to raise $265 million of equity in connection with a
refinancing of the Company's debt. Pursuant to the terms of the letter of
intent, Rainwater will purchase in a private placement approximately 58.8
million shares of a new class of convertible preferred stock and the Company
will offer approximately 58.4 million shares of convertible preferred stock to
the Company stockholders in a rights offering (the "Rights Offering"). Rainwater
will provide a standby commitment to purchase any shares of preferred stock not
subscribed to in the Rights Offering. Rights will be distributed to common
stockholders on a pro rata basis. The rights will allow the stockholder to
purchase, in respect of each share of common stock, approximately .91 shares of
preferred stock at $2.26 per share, the same per share price at which Rainwater
will purchase preferred shares. The rights will be transferrable and holders of
the rights will be offered over-subscription privileges for shares not purchased
by other rights holders.
Each preferred share will be convertible into one share of the Company
common stock at any time prior to mandatory redemption in 2006. An annual 8%
pay-in-kind dividend will be paid on the preferred shares during the first four
years following issuance. Thereafter, the 8% dividend may, at the option of the
Company, be paid in cash or additional shares depending on whether certain
financial tests are met.
The preferred stock will represent 63.6% of the fully diluted common shares
at the time of issuance and 70.6% after the mandatory four-year pay-in-kind
period, assuming no other stock issuance by the Company. The preferred stock
will have a liquidation price equal to the purchase price. The preferred shares
purchased in the Rights Offering will vote with the common stock as a single
class on all matters, except as otherwise required by law and except for certain
special voting rights for shares held by Rainwater.
F-29
<PAGE> 131
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rainwater will be entitled to elect two members of the Company's Board,
which will have seven directors. The Rainwater designees will constitute two of
the three members of a newly formed executive committee of the Board. The
executive committee will act for the whole Board on matters which by law do not
need Board authorization and will have authority over major capital
transactions, stock issuances, financing arrangements, budgeting, and other
items.
During an interim 30-day period beginning February 28, 1996, the Company,
with assistance from Rainwater, will seek commitments for new bank loans plus
assurance of availability of new subordinated debt to be issued in conjunction
with the transaction. Proceeds from the new debt, when combined with proceeds
from the newly issued equity and the Company's available cash balances, would
refinance or repay all of the Company's existing debt.
The proposed transaction is subject to certain conditions, including
negotiation and execution of definitive agreements, arrangement of the new debt
financing, due diligence by Rainwater and the Company stockholder approval. The
parties anticipate executing definitive agreements in about 30 days. The
transaction will be submitted to a vote of stockholders at a special meeting
expected to take place in June 1996. The Rights Offering would commence promptly
after that meeting. There can be no assurance that this transaction will be
completed, or if completed, what the final terms or timing thereof will be. Nor
can there be any assurance regarding the availability or terms of any
refinancing debt.
The ability of the Company to continue as a going concern is dependent upon
several factors. The successful completion of the Rainwater transaction is
expected to position the Company to operate and continue as a going concern and
to pursue its business strategies. The consolidated financial statements of the
Company do not include any adjustments reflecting any treatment other than going
concern accounting.
If the Rainwater transaction is not completed, the Company will pursue other
alternatives to address its liquidity issues and financial condition, including
other potential transactions arising from the proposal solicitation process, the
possibility of seeking to restructure its balance sheet by negotiating with its
current debt holders or seeking protection from its creditors under the Federal
Bankruptcy Code.
(3) INVESTMENTS
The value of investments are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1994 1995
------- -------
<S> <C> <C>
Equity securities:
Cost................................................................... $ 9,489 $10,719
Unrealized loss........................................................ (1,381) (162)
NYMEX Futures Contracts:
Margin Cash............................................................ 1,337 17,498
Unrealized gain in hedge contracts..................................... 6,823 --
Unrealized gain in trading contracts................................... 2,844 7,558
Commodity Price Swaps:
Margin Cash............................................................ -- 2,434
Unrealized loss in price swaps......................................... -- (811)
Natural Gas Options:
Premiums............................................................... -- 66
Unrealized gain in trading options..................................... -- 978
------- -------
Total market value..................................................... $19,112 $38,280
======= =======
</TABLE>
In 1995 the Company recognized net gains of approximately $18.4 million from
its investments compared with net gains in 1994 of $6.7 million and in 1993 of
$4.0 million. These gains do not include gains or losses from natural gas
futures contracts accounted for as a hedge of natural gas production. Hedge
gains or losses are included in natural gas revenue in the period in which the
hedged production occurs (see Note 1).
F-30
<PAGE> 132
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net investment gains and losses recognized during a period include both
realized and unrealized gains and losses. The Company realized net gains from
investments of $12.3 million in 1995, $4.7 million in 1994, and $2.3 million in
1993. At December 31, 1995, the Company had recognized but not realized
approximately $7.6 million of gains associated primarily with natural gas
futures. Subsequent to year end, the Company closed some of its positions which
were open on December 31, 1995. As of March 6, 1996, the Company had closed
substantially all of the positions open at December 31, 1995, at a realized loss
of $156,000. Positions which were open at December 31, 1995, and remain open had
unrealized gains of $1.7 million at March 6, 1996.
In 1995 the Company invested in certain over-the-counter commodity price
swap agreements for trading purposes. The Company is required to make payments
to (or receive payments from) a counter party based on the differential between
a fixed and a variable price for specified natural gas volumes. The Company's
agreements expire on the last day of trading for April, May and June 1996
natural gas futures contracts as determined by the NYMEX. The Company is the
fixed price payor on a notional quantity of 10.1 million British thermal units
of natural gas with a fair value of $18.3 million at December 31, 1995. The
average fair value of such commodity price swaps during 1995 was $18.4 million.
In 1995 the Company also entered into over-the-counter natural gas futures call
and put options contracts. At December 31, 1995, the open quantity of options
was 1,800 contracts (each contract represents 10,000 MMBtu of natural gas) with
a fair value of $1.0 million. The average fair value of such option contracts
during 1995 was $.4 million. The counter party to these instruments is a
credit-worthy financial institution which is a recognized market-maker. The
Company believes the risk of incurring losses related to credit risk of the
counter party is remote.
(4) LONG-TERM DEBT
Long-term debt and current maturities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
HCLP Secured Notes.................................................. $ 520,180 $ 504,674
Credit Agreement.................................................... 71,131 61,131
12 3/4% secured discount notes...................................... 581,942 618,518
12 3/4% unsecured discount notes.................................... 37,345 39,725
13 1/2% subordinated notes.......................................... 7,390 7,390
Other............................................................... 5,305 5,305
---------- ----------
1,223,293 1,236,743
Current maturities.................................................. (30,537) (101,413)
---------- ----------
Long-term debt...................................................... $1,192,756 $1,135,330
========== ==========
</TABLE>
HCLP Secured Notes
In 1991 HCLP issued $616 million of secured notes (the "HCLP Secured Notes")
in a private placement with a group of institutional lenders. The issuance also
funded a $66 million restricted cash balance within HCLP, which 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. HCLP holds substantially all of the Company's Hugoton field
natural gas properties.
The HCLP Secured Notes were issued in 15 series and have final stated
maturities extending through 2012 but can be retired earlier. The HCLP Secured
Notes outstanding at December 31, 1995, bear interest at fixed rates ranging
from 8.80% to 11.30% per annum (weighted average 10.31%). 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 under the initial
scheduled amortization. Beginning in August 1994, HCLP elected to make principal
payments on the HCLP Secured Notes based on actual production, rather than
according to the initial scheduled amortization. As a result, interest rate
premiums at a rate of 1.5% per annum will be applied to those principal amounts
not paid according to the initial scheduled amortization and .35% per annum will
be applied to the remaining notes.
F-31
<PAGE> 133
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Such premiums have increased the effective weighted average interest rate
payable on the remaining HCLP Secured Notes outstanding to 10.79% per annum at
December 31, 1995.
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 and
its other subsidiaries. The assets of HCLP that are subject to the mortgage
securing the HCLP Secured Notes are dedicated to service HCLP's debt and are not
available to pay creditors of the Company or its subsidiaries other than HCLP.
Any cash not subject to the mortgage is available for distribution to the
Company's subsidiaries which own HCLP's equity.
The HCLP Secured Note agreements also contain a provision which requires
calculation and payment of premiums on early retirement of the HCLP Secured
Notes. The actual premiums due in the event of a redemption of the HCLP Secured
Notes will depend on prevailing interest rates at the date of redemption and the
amount of debt redeemed. In the aggregate, such premiums would have totaled $79
million as of December 31, 1995.
Revenues received from production from HCLP's Hugoton properties are
deposited in a collection account maintained by a collateral agent (the
"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.
By April 29, 1996, HCLP is required to obtain a reserve report as of
December 31, 1995, covering its Hugoton field properties prepared by an
independent engineering consultant. HCLP is required to compare the reserve
quantities in such reserve report to the initial reserve quantities set forth in
the HCLP Secured Note agreements, adjusted for production. If the quantities in
such reserve report are less than the adjusted initial quantities, a Deficit
Reserve Amount ("DRA"), as defined, is determined to exist. To the extent a DRA
exists, the Collateral Agent is required to retain additional funds in the
collection account subject to the mortgage for the repayment of the HCLP Secured
Notes. The Company is not obligated to fund any principal payments at HCLP from
sources other than HCLP's Hugoton field properties. The independent reserve
report has not been completed, but HCLP has received preliminary indications
that the independent engineers' estimates of reserve quantities related to the
Hugoton field properties will reflect a downward revision from previous years.
Although HCLP has not determined whether a DRA will result from such downward
revisions, preliminary estimates indicate that a DRA, if any, will not be
material. See Note 14 (unaudited) for subsequent events affecting the DRA.
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 (the "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 (10.31% at December 31, 1995). 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.
F-32
<PAGE> 134
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
HCLP's cash balances were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1994 1995
------- -------
<S> <C> <C>
Subject to the mortgage.................................................. $48,087 $40,163
Not subject to the mortgage.............................................. 1,551 7,450
------- -------
Cash included in current assets.......................................... $49,638 $47,613
======= =======
Restricted cash included in noncurrent assets............................ $61,299 $57,731
======= =======
Refundable GIC fee included in noncurrent assets......................... $10,295 $ 9,010
======= =======
</TABLE>
Mesa Operating Co. ("MOC"), a Company subsidiary which owns 99% of the
limited partnership interests of HCLP, is party to a services agreement with
HCLP. MOC provides services necessary to operate the Hugoton field properties
and market production therefrom, processes remittances of production revenues
and performs certain other administrative functions in exchange for a services
fee. The fee totaled approximately $13.2 million in 1995, $12.8 million in 1994,
and $11.4 million in 1993.
Credit Agreement
As of December 31, 1995, the Company had outstanding borrowings of
approximately $61.1 million and letter of credit obligations of $11.4 million
under its $82.5 million bank credit facility, as amended (the "Credit
Agreement"). The Credit Agreement requires principal payments of $22.5 million
in the first half of 1996 with the remainder due in June 1997 (including cash
collateralization of letters of credit outstanding at that time).
The rate of interest payable on borrowings under the amended Credit
Agreement is the lesser of the Eurodollar rate plus 2 1/2% or the prime rate
plus 1/2%. Obligations under the Credit Agreement are secured by a first lien
on the Company's West Panhandle field properties, the Company's equity interest
in MOC and a 76% limited partner interest in HCLP.
The amended Credit Agreement requires the Company to maintain tangible
adjusted equity, as defined, of at least $50 million and available cash, as
defined, of at least $32.5 million. At December 31, 1995, the Company's tangible
adjusted equity, as defined, was approximately $64.7 million and available cash,
as defined, was $139.5 million (See Note 2 for discussion of the tangible
adjusted equity covenant and its potential effect on the Company's liquidity).
The Credit Agreement also restricts, among other things, the Company's
ability to incur additional indebtedness, create liens, pay dividends, acquire
stock or make investments, loans and advances.
Discount Notes
In conjunction with a debt exchange transaction consummated on August 26,
1993, (the "Debt Exchange"), the Company issued approximately $435.5 million
initial accreted value, as defined, of 12 3/4% secured discount notes due June
30, 1998 and $136.9 million initial accreted value, as defined, of 12 3/4%
unsecured discount notes due June 30, 1996 (together, the "Discount Notes") in
exchange for $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 the $28.6 million of accrued interest claims thereon). The
Company also issued $29.3 million principal amount of 0% convertible notes due
June 30, 1998, which were converted into approximately 7.5 million shares of
common stock by the end of 1993. The Discount Notes, which rank pari passu with
each other, are senior in right of payment to the remaining 13 1/2% subordinated
notes due 1999 and subordinate to all permitted first lien debt, as defined,
including obligations under the Credit Agreement.
On March 2, 1994, the Company issued $48.2 million face amount of additional
12 3/4% secured discount notes due June 30, 1998. The proceeds of $42.8 million
were used to pay the settlement amount arising from the 1994 settlement of a
lawsuit with Unocal Corporation ("Unocal"). The additional indebtedness incurred
to settle the Unocal lawsuit was specifically permitted under the terms of the
indentures governing the Discount Notes and under the Credit Agreement (See Note
9 for additional discussion of the Unocal litigation).
F-33
<PAGE> 135
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Discount Notes did not accrue interest through June 30, 1995; however,
the accreted value, as defined, of both series increased at a rate of 12 3/4%
per year, compounded semiannually, until June 30, 1995. Beginning July 1, 1995,
each series began to accrue interest at an annual rate of 12 3/4%, payable in
cash semiannually in arrears, with the first payment due on December 31, 1995.
In the second quarter of 1994 the Company completed a public offering in
which 16.3 million shares of the Company's common stock were sold for net
proceeds of $93 million ($6 per share) (the "Equity Offering"). The Company used
approximately $87 million of the proceeds to redeem or repurchase $87 million
accreted value ($99.1 million face amount at maturity) of 12 3/4% unsecured
discount notes which were due in 1996.
In the fourth quarter of 1994 the Company used proceeds from increased
borrowings under its amended Credit Agreement to redeem $37.6 million accreted
value ($40.0 million face amount at maturity) of 12 3/4% unsecured discount
notes which were due in 1996.
The 12 3/4% secured discount notes are secured by second liens on the
Company's West Panhandle field properties and a 76% limited partner interest in
HCLP, both of which also secure obligations under the Credit Agreement. The
Company's right to maintain first lien debt, as defined, is limited by the terms
of the Discount Notes to $82.5 million.
See Note 2 for a discussion of certain cross-default provisions in the
Discount Note indentures which could become effective if the Company defaults
under the terms of the tangible adjusted equity covenant of the Credit
Agreement.
The indentures governing the Discount Notes restrict, among other things,
the Company's ability to incur additional indebtedness, pay dividends, acquire
stock or make investments, loans and advances.
Subordinated Notes
The 13 1/2% subordinated notes are unsecured and mature in 1999. Interest on
these notes is payable semiannually in cash.
Interest and Maturities
The aggregate interest payments, net of amounts capitalized, made during
1995, 1994, and 1993 were $63.8 million, $62.1 million and $86.5 million,
respectively. In addition, on January 2, 1996, according to terms of the
Discount Notes, the Company made a $42 million interest payment related to its
Discount Notes which was due December 31, 1995. Payment of approximately $39.0
million, $70.6 million and $64.6 million of interest incurred during 1995, 1994
and 1993, respectively, 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 1995, 1994 and 1993 consolidated statements of
operations.
The scheduled principal repayments on long-term debt for the next five years
are as follows (in millions):
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000
------ ----- ------ ----- -----
<S> <C> <C> <C> <C> <C>
HCLP Secured Notes(a)............................... $ 33.9 $33.3 $ 36.1 $37.1 $36.0
Credit Agreement(b)(c).............................. 22.5 38.6 -- -- --
12 3/4% secured discount notes(d)................... -- -- 617.4 -- --
12 3/4% unsecured discount notes(d)................. 39.7 -- -- -- --
13 1/2% subordinated notes.......................... -- -- -- 7.4 --
Other............................................... 5.3 -- -- -- --
------ ----- ------ ----- -----
Total...................................... $101.4 $71.9 $653.5 $44.5 $36.0
====== ===== ====== ===== =====
</TABLE>
- ---------------
(a) Principal payment requirements could be greater, in the aggregate, in 1996
through 1998 if a DRA is determined to exist.
(b) Excludes approximately $11.4 million in letter of credit obligations
currently outstanding and required to be cash collateralized in June 1997.
F-34
<PAGE> 136
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Maturities may be accelerated if tangible adjusted equity falls below $50
million (See Note 2).
(d) Maturities may be accelerated if an Event of Default occurs and continues
under the Credit Agreement (See Note 2).
Fair Value of Long-Term Debt
The following is a summary of estimated fair value of the Company's
long-term debt as of the years ended (in thousands):
<TABLE>
<CAPTION>
1994 1995
---------------------- ----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
HCLP Secured Notes............................... $520,180 $ 535,135 $504,674 $ 568,641
Credit Agreement................................. 71,131 71,131 61,131 61,131
12 3/4% secured discount notes................... 581,942 528,688 618,518 541,905
12 3/4% unsecured discount notes................. 37,345 37,591 39,725 35,262
13 1/2% subordinated notes....................... 7,390 7,390 7,390 7,390
</TABLE>
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.
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
The Company provides for income taxes using the asset and liability method
under which deferred tax assets and liabilities are recognized by applying the
enacted statutory tax rates applicable to future years to temporary differences
between the financial statement and tax bases of existing assets and
liabilities. The tax basis of the Company's consolidated net assets is greater
than the financial basis of those net assets; therefore a net deferred tax asset
has been recorded. However, due to the Company's history of net operating losses
and its current financial condition, a valuation allowance has been recorded
which offsets the entire net deferred tax asset. A summary of the Company's net
deferred tax asset is as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1994 1995
----- -----
<S> <C> <C>
Deferred tax asset........................................................... $ 240 $ 261
Deferred tax liability....................................................... -- --
Valuation allowance.......................................................... (240) (261)
----- -----
Net deferred tax asset.............................................. $ -- $ --
===== =====
</TABLE>
The principal components of the Company's net deferred tax asset (utilizing
a 39% combined federal and state income tax rate) and the valuation allowance
are as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1994 1995
----- -----
<S> <C> <C>
Tax basis of oil and gas properties in excess of financial basis............. $ 80 $ 75
Regular tax net operating loss carryforward.................................. 156 184
Other, net................................................................... 4 2
Valuation allowance.......................................................... (240) (261)
----- -----
Net deferred tax asset.............................................. $ -- $ --
===== =====
</TABLE>
F-35
<PAGE> 137
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1995, the Company had a regular tax net operating loss
carryforward of approximately $470 million. Additionally, the Company had an
alternative minimum tax loss carryforward available to offset future alternative
minimum taxable income of approximately $450 million. If not used, these
carryforwards will expire between 2007 and 2010.
The Internal Revenue Service Code of 1986 (the "Code") contains numerous
provisions which restrict or limit the use of corporate tax attributes in
conjunction with corporate acquisitions, dispositions, and reorganizations.
Included among these restrictive provisions is Code Section 382 which, in
general, limits the utilization of net operating loss carryovers subsequent to a
substantial change (generally more than 50%) in corporate stock ownership. The
Section 382 ownership change (as defined for tax purposes) is considered on a
cumulative basis over a specified time period, normally three years. Successful
completion of the Rainwater transaction (see Note 2) is expected to result in a
Section 382 ownership change which will limit the utilization of the Company's
tax carryforwards prior to their expiration.
The Company 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. During 1993, the Internal Revenue Service (the "IRS")
completed two field examinations of the tax returns filed by Original Mesa for
the tax years 1984 through 1987. 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 for these years. The Company was fully reserved for the
additional tax assessment relating to the tax years 1984 through 1987. As of
January 1, 1995, there are no remaining open tax years for Original Mesa for
federal income tax purposes.
(6) PROPERTY SALES
In April 1993 the Company sold a portion of its Rocky Mountain area
properties for approximately $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.
In June 1993 the Company sold its interest in the deep portion of the
Hugoton field not owned by HCLP for approximately $19.0 million, after
adjustments, and recorded a gain on the sale of approximately $5.5 million.
(7) STOCKHOLDERS' EQUITY
At December 31, 1995, the Company had outstanding 64.1 million shares of
common stock. In 1993 the Company issued 7.5 million shares of common stock in
conjunction with the Debt Exchange (see Note 4). In late 1993 and 1994 the
Company issued a total of approximately 1.7 million shares of common stock in
exchange for the General Partner's 4.14% interest in the subsidiary partnerships
of the Company (see Note 1). In 1994 the Company completed the Equity Offering
which resulted in the issuance of an additional 16.3 million shares of common
stock. Proceeds from the Equity Offering increased stockholders' equity by
approximately $93 million and were used to reduce long-term debt (see Note 4).
The Company has authorized 10 million shares of preferred stock. No shares
of preferred stock have been issued as of December 31, 1995.
In July 1995, in conjunction with the determination of the Board of
Directors of the Company to include the possible sale or merger of the Company
among its strategic alternatives, the Board approved a proposal that the Company
adopt a limited-term stockholder rights plan (the "Rights Plan"). The provisions
of the Rights Plan would be triggered if a person or group acquired beneficial
ownership of 10% or more of the Company's common stock after July 6, 1995,
except pursuant to a "permitted offer" -- a tender or exchange offer that meets
certain criteria, whether or not approved by the Board. However, if any person
or group beneficially owned more than 10% of the common stock on July 6, 1995,
the Rights Plan would not be triggered unless that person or group were to
obtain beneficial ownership of more than 100,000 additional shares. If
triggered, the Rights Plan would allow all stockholders, other than the person
or group exceeding the beneficial ownership threshold, to purchase common stock
at a 50% discount.
F-36
<PAGE> 138
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) NOTES RECEIVABLE
Prior to 1992 the Company had notes receivable totaling $68 million,
exclusive of interest, from Bicoastal Corporation ("Bicoastal") which was in
bankruptcy. Because of the uncertainty of collection, the Company did not record
interest on these notes. A plan of reorganization for Bicoastal was approved by
the Bankruptcy Court in September 1992. During 1992 and 1993, the Company
collected a total of approximately $74 million from Bicoastal, representing all
of the Company's principal amount of allowed claims in the bankruptcy
reorganization plan, plus an additional amount representing a portion of its
interest claims. As a result, the Company recorded gains of $18.5 million in
1993 relating to collections in excess of the recorded receivable. In 1995 and
1994 the Company recorded gains of $6.4 million and $16.6 million, respectively,
from additional interest claims collected from Bicoastal.
(9) CONTINGENCIES
Masterson
In February 1992 the current lessors of an oil and gas lease (the "Gas
Lease") dated April 30, 1955, between R. B. Masterson, et al., as lessor, and
Colorado Interstate Gas Company ("CIG"), as lessee, sued CIG in Federal District
Court in Amarillo, Texas, claiming that CIG had underpaid royalties due under
the Gas Lease. Under the agreements with CIG, Mesa has an entitlement to gas
produced from the Gas Lease. In August 1992 CIG filed a third-party complaint
against the Company for any such royalty underpayments which may be allocable to
the Company. The plaintiffs alleged that the underpayment was the result of
CIG's use of an improper gas sales price upon which to calculate royalties and
that the proper price should have been determined pursuant to a
"favored-nations" clause in a July 1, 1967, amendment to the Gas Lease (the "Gas
Lease Amendment"). The plaintiffs also sought a declaration by the court as to
the proper price to be used for calculating future royalties.
The plaintiffs alleged royalty underpayments of approximately $500 million
(including interest at 10%) covering the period from July 1, 1967, to the
present. In March 1995 the court made certain pretrial rulings that eliminated
approximately $400 million of the plaintiffs' claims (which related to periods
prior to October 1, 1989), but which also reduced a number of the Company's
defenses. The Company and CIG filed stipulations with the court whereby the
Company would have been liable for between 50% and 60%, depending on the time
period covered, of an adverse judgment against CIG for post-February 1988
underpayments of royalties.
On March 22, 1995, a jury trial began and on May 4, 1995, the jury returned
its verdict. Among its findings, the jury determined that CIG had underpaid
royalties for the period after September 30, 1989, in the amount of
approximately $140,000. Although the plaintiffs argued that the
"favored-nations" clause entitled them to be paid for all of their gas at the
highest price voluntarily paid by CIG to any other lessor, the jury determined
that the plaintiffs were stopped from claiming that the "favored-nations" clause
provides for other than a pricing-scheme to pricing-scheme comparison. In light
of this determination, and the plaintiffs' stipulation that a pricing-scheme to
pricing-scheme comparison would not result in any "trigger prices" or damages,
defendants asked the court for a judgment that plaintiffs take nothing. The
court, on June 7, 1995, entered final judgment that plaintiffs recover no
monetary damages. The Company cannot predict whether the plaintiffs will appeal.
However, based on the jury verdict and final judgment, the Company does not
expect the ultimate resolution of this lawsuit to have a material adverse effect
on its financial position or results of operations.
Lease Termination
In 1991 the Company sold certain producing oil and gas properties to Seagull
Energy Company ("Seagull"). In 1994 two lawsuits were filed against Seagull in
the 100th District Court in Carson County, Texas, by certain land and royalty
owners claiming that certain of the oil and gas leases owned by Seagull have
terminated due to cessation in production and/or lack of production in paying
quantities occurring at various times from first production through 1994. In the
third quarter of 1995 Seagull filed third-party complaints against the Company
claiming breach of warranty and false representation in connection with the sale
of such properties to Seagull. The Company believes it has several defenses to
these lawsuits including a two-year limitation on indemnification set forth in
the purchase and sale agreement.
F-37
<PAGE> 139
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Seagull filed a similar third-party complaint against the Company covering a
different lease in the 69th District Court in Moore County, Texas. The Company
believes it has similar defenses in this case.
The plaintiffs in the cases against Seagull are seeking to terminate the
leases. Seagull, in its complaint against the Company, is seeking unspecified
damages relating to any leases which are terminated.
The Company does not expect the resolution of this lawsuit to have a
material adverse effect on its financial position or results of operations.
Unocal
The Company was subject to a lawsuit relating to a 1985 investment in Unocal
which asserted that certain profits allegedly realized by the Company and other
defendants upon the disposition of Unocal common stock in 1985 were recoverable
by Unocal pursuant to Section 16(b) of the Securities Exchange Act of 1934. On
January 11, 1994, the Company and other defendants entered into a settlement
agreement (the "Settlement Agreement") whereby they agreed to pay Unocal an
aggregate of $47.5 million, of which $42.75 million was to be paid by the
Company and $4.75 million by the other defendants. The Settlement Agreement was
approved by the court on February 28, 1994. The Company funded its share of the
settlement amount with proceeds from issuance of additional long-term debt. (See
Note 4 for discussion of the issuance of the additional long-term debt.) As a
result of the settlement, the Company recognized a $42.8 million loss in the
fourth quarter of 1993.
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 these other matters to have a material adverse effect
on its financial position or results of operations.
The Company assumed certain litigation and tax-related obligations from
Original Mesa and the Partnership and also recorded certain contingent
liabilities relating to various matters, including litigation, office space
leases and retirement benefit obligations, in conjunction with the 1986
acquisition of Pioneer Corporation ("Pioneer") and the 1988 acquisition of
Tenneco Inc.'s midcontinent division. During the fourth quarter of 1993, the
Company settled certain claims with the IRS (see Note 5) and resolved or
revalued certain other contingent liabilities to reflect actual or estimated
liabilities. The Company had previously reserved for the IRS claims and certain
other contingencies in excess of the actual or estimated liabilities. As a
result, the Company recorded a net gain of $24 million in the fourth quarter of
1993.
(10) EMPLOYEE BENEFIT PLANS
Retirement Plans
The Company maintains two defined contribution retirement plans for the
benefit of its employees. The Company expensed $.8 million in 1995, $3.3 million
in 1994, and $3.2 million in 1993 in connection with these plans. The Company
determines the contributions to such plans based on a percentage of each
employee's compensation, subject to limitations specified by the Code. The
Company declared contributions of 5% of each employee's compensation in 1995 and
17% of each employee's compensation in 1994 and 1993.
F-38
<PAGE> 140
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Option Plan
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 two million shares of common stock to officers and key
employees. In May 1994 the stockholders of the Company approved an amendment to
the Option Plan which increased the number of shares of common stock authorized
from two million to four million. The exercise price for each share of common
stock placed under option cannot be less than 100% of the fair market value of
the common stock on the date the option is granted. Upon exercise, the grantee
may elect to receive either shares of common stock or, at the discretion of the
Option Committee of the Board of Directors, cash or certain combinations of
stock and cash in an amount equal to the excess of the fair market value of the
common stock at the time of exercise over the exercise price. At December 31,
1995, the following stock options were outstanding:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS
-----------------
<S> <C>
Outstanding at December 31, 1994............................................ 2,976,460
Granted................................................................... 20,000
Exercised................................................................. --
Forfeited................................................................. (14,070)
---------
Outstanding at December 31, 1995............................................ 2,932,390
=========
</TABLE>
The outstanding options at December 31, 1995, are detailed as follows:
<TABLE>
<CAPTION>
EXERCISE
NUMBER OF OPTIONS DATE OF GRANT PRICE PER SHARE EXERCISABLE
- ----------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
1,126,000................................... 01/10/92 $ 6.8125 1,126,000
134,500................................... 10/02/92 11.6875 134,500
101,890................................... 05/18/93 5.8125 81,512
475,000................................... 11/10/93 7.3750 380,000
75,000................................... 06/06/94 6.1875 41,250
1,000,000................................... 12/01/94 4.2500 550,000
20,000................................... 05/12/95 5.6875 6,000
--------- ---------
2,932,390 2,319,262
========= =========
</TABLE>
Options are exercisable from the 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, 1995, options for 1,004,890 shares were available for grant.
In October 1995 the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which establishes accounting and reporting standards for
stock-based employee compensation plans. SFAS No. 123 defines a fair value-based
method of accounting for stock options or similar equity instruments, but allows
companies to continue to measure compensation cost using the intrinsic
value-based method prescribed by Accounting Principles Board Opinion ("APB") No.
25, "Accounting for Stock Issued to Employees." Under the fair value-based
method, compensation cost is measured at the grant date based on the value of
the award and is recognized over the service period (generally, the vesting
period). Under the intrinsic value-based method, compensation cost is the
excess, if any, of the quoted market price of the stock at the date of grant
over the exercise price.
Under the provisions of SFAS No. 123, a company may elect to measure
compensation cost associated with its stock option and similar plans as a
component of compensation expense in its statement of operations. Companies may
also elect to continue to measure compensation cost under the provisions of APB
No. 25. Companies which elect to continue measurement under APB No. 25 are
required to provide pro forma disclosure in the notes to financial statements
reflecting the difference, if any, between compensation cost included in net
income and the cost if the fair value-based method were used including effects
on earnings per share. Since the inception of the Option Plan, the Company has
not recognized any compensation cost related
F-39
<PAGE> 141
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to grants of stock options. The disclosure requirements of this statement are
effective for financial statements for fiscal years beginning after December 15,
1995. At this time, the Company does not expect to adopt the fair value-based
method of accounting for its stock option plans and, accordingly, adoption of
this statement will have no impact on the Company's results of operations.
Postretirement Benefits
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," which requires that
the costs of such benefits be recorded over the periods of employee service to
which they relate. For the Company, this standard primarily applies to
postretirement medical benefits for retired and current employees. The liability
for benefits existing at the date of adoption (the "Transition Obligation") will
be amortized over the remaining life of the retirees or 20 years, whichever is
shorter.
The Company maintains two separate plans for providing postretirement
medical benefits. One plan covers the Company's retirees and current employees
(the "Mesa Plan"). The other plan relates to the retirees of Pioneer which was
acquired by the Company in 1986 (the "Pioneer Plan"). Under the Mesa Plan,
employees who retire from the Company and who have had at least ten years of
service with the Company after attaining age 45 are eligible for postretirement
health care benefits. These benefits may be subject to deductibles, copayment
provisions, retiree contributions and other limitations and the Company has
reserved the right to change the provisions of the plan. The Pioneer Plan is
maintained for Pioneer retirees and dependents only and is subject to
deductibles, copayment provisions and certain maximum payment provisions. The
Company does not have the right to change the Pioneer Plan or to require retiree
contributions. Both plans are self-insured indemnity plans and both coordinate
benefits with Medicare as the primary payer. Neither plan is funded.
The following table reconciles the status of the two plans with the amount
included under other liabilities in the consolidated balance sheet at December
31, 1995, (in thousands):
<TABLE>
<CAPTION>
MESA PLAN PIONEER PLAN TOTAL
--------- ------------ -------
<S> <C> <C> <C>
Accumulated Postretirement Benefit Obligation ("APBO"):
Retirees and dependents................................. $ 1,080 $ 11,289 $12,369
Actives -- fully eligible............................... 353 -- 353
Other actives........................................... 731 -- 731
------- -------- -------
Total APBO....................................... 2,164 11,289 13,453
Unrecognized Transition Obligation........................ (1,420) (2,310) (3,730)
------- -------- -------
Accrued Postretirement Benefit Obligation................. $ 744 $ 8,979(a) $ 9,723
======= ======== =======
</TABLE>
- ---------------
(a) The Company established an accrued liability associated with the Pioneer
Plan in conjunction with its acquisition of Pioneer in 1986.
For measurement purposes, the 1995 annual rate of increase in per capita
cost of covered health care benefits was assumed to be 10% for those
participants under age 65 and 9% for those participants over age 65. The rates
were assumed to decrease gradually to 5.0% by the year 2000 and to remain at
that level thereafter. The health care cost trend rate assumption affects the
amount of the Transition Obligation and periodic cost reported. An increase in
the assumed health care cost trend rates by 1% in each year would increase the
APBO as of December 31, 1995, by approximately $735,000 and the net periodic
postretirement benefit cost for the year ended December 31, 1995, by
approximately $77,000. The net periodic postretirement benefit cost for the year
ended December 31, 1995, was approximately $1.4 million based on the assumptions
used.
The discount rate used in determining the APBO as of December 31, 1995, was
8%.
F-40
<PAGE> 142
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents the Company's cost of postretirement benefits
other than pensions for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Net periodic postretirement benefit cost:
Service cost..................................................... $ 96 $ 110 $ 124
Interest cost.................................................... 988 988 1,005
Amortization of Transition Obligation............................ 276 276 276
------ ------ ------
$1,360 $1,374 $1,405
====== ====== ======
Actual costs of providing benefits:
Mesa Plan........................................................ $ 123 $ 120 $ 4
Pioneer Plan..................................................... 909 666 918
------ ------ ------
$1,032 $ 786 $ 922
====== ====== ======
</TABLE>
(11) MAJOR CUSTOMERS
In 1995 revenues include sales to Mapco Petroleum, Inc. ("Mapco") of $75.0
million (34.4%) and Western Resources, Inc. ("WRI") of $21.9 million (10.0%). In
1994 revenues included sales to Mapco of $70.9 million (31.4%), WRI of $37.4
million (16.6%), and Energas Company of $22.8 million (10.1%). In 1993 revenues
included sales to Mapco of $60.2 million (27.5%), WRI of $51.8 million (23.6%)
and Natural Gas Clearinghouse of $23.1 million (10.5%).
(12) CONCENTRATIONS OF CREDIT RISK
Substantially all of the Company's accounts receivable at December 31, 1995,
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. On December 31, 1995, the Company's direct subsidiaries were MOC,
Mesa Holding Co. ("MHC") and Hugoton Management Co. ("HMC"), all of which were
wholly owned by the Company. MOC owns all of the Company's interest in the West
Panhandle field of Texas, the Gulf Coast and the Rocky Mountain areas, as well
as a 98.6% limited partnership interest in HCLP. MHC owns cash and securities, a
0.9% limited partnership interest in HCLP and 100% of Mesa Environmental
Ventures Co. ("Mesa Environmental"), a company established to compete in the
natural gas vehicle market. HMC owns the 0.5% general partner interest in HCLP.
HCLP owns substantially all of the Company's Hugoton field natural gas
properties.
In early 1994 the Company effected a series of merger transactions which
resulted in the conversion of the predecessors of MOC, MHC, and the other
subsidiary partnerships, other than HCLP, to corporate form and eliminated all
of the General Partner's minority interests in the subsidiaries.
Subsidiary Debt
HCLP, together with its wholly owned subsidiary Hugoton Capital Corporation
(a single purpose financing subsidiary of HCLP), are jointly and severally
liable as co-obligors on the HCLP Secured Notes (see Note 4). The assets and
cash flows of HCLP that are subject to the mortgage securing the HCLP Secured
Notes are dedicated to service the HCLP Secured Notes and are not available to
pay creditors of the Company or its subsidiaries other than HCLP. Hugoton
Capital Corporation, which has insignificant assets and results of operations,
is included within HCLP in the condensed consolidating financial statements. MOC
is the borrower and primary obligor under, and the Company has unconditionally
guaranteed MOC's obligations under, the
F-41
<PAGE> 143
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Credit Agreement. The Company, MOC and Mesa Capital Corp. ("Mesa Capital") are
jointly and severally liable as co-obligors under the 13 1/2% subordinated notes
and the Discount Notes. Mesa Capital is a wholly owned financing subsidiary of
MOC. Mesa Capital, which has insignificant assets and results of operations, is
included with MOC in the condensed consolidating financial statements.
Other Company subsidiaries in the condensed consolidating financial
statements include MHC, HMC, and Mesa Environmental. No such other Company
subsidiary is an obligor or guarantor under any long term debt.
Intercompany Debt
As of December 31, 1993, MHC had intercompany payables to MOC of
approximately $123 million. On February 28, 1994, MHC assigned an 18% limited
partnership interest in HCLP (out of its total interest of 18.9%) to MOC in
satisfaction of $90 million of intercompany payables. Provisions of the Discount
Note indentures required the repayment of intercompany indebtedness to specified
levels and provided that any HCLP limited partnership interests transferred in
satisfaction of intercompany debt would be valued at $5 million for each one
percent of interest assigned. MHC repaid an additional $33 million of
intercompany debt to MOC in cash during 1994. As a result of these transactions,
MOC now owns a 98.6% limited partnership interest in HCLP, and all of MHC's
intercompany debt to MOC which was outstanding at December 31, 1993, was
eliminated.
Condensed Consolidating Financial Statements
The following are condensed consolidating financial statements of MESA Inc.,
HCLP, MOC, and the Company's other subsidiaries combined (in millions). These
statements are presented to provide financial information with respect to the
obligors under the Company's debt for the benefit of the holders of such debt.
Separate financial statements of the obligors under the Company's debt are not
presented because they are not required and because the Company believes that
they would not be material to investors. See Note 4 for additional information
regarding the Company's long term debt.
Condensed Consolidating Balance Sheets
<TABLE>
<CAPTION>
OTHER CONSOL. THE
COMPANY AND COMPANY
DECEMBER 31, 1994 MESA INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- -------------------------------------------- --------- ---- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash investments................. $ -- $50 $ 24 $ 70 $ -- $ 144
Other current assets...................... -- 16 39 6 -- 61
----- ---- ----- ---- ----- ------
Total current assets............... -- 66 63 76 -- 205
----- ---- ----- ---- ----- ------
Property, plant and equipment, net........ -- 626 503 1 -- 1,130
Investment in subsidiaries................ 134 -- 126 10 (270) --
Intercompany receivables.................. -- -- 9 -- (9) --
Other noncurrent assets................... -- 88 58 3 -- 149
----- ---- ----- ---- ----- ------
$ 134 $780 $ 759 $ 90 $(279) $1,484
===== ==== ===== ==== ===== ======
Liabilities and Equity:
Current liabilities....................... $ -- $47 $ 41 $ 1 $ -- $ 89
Long-term debt............................ -- 505 688 -- -- 1,193
Intercompany payables..................... 9 -- -- -- (9) --
Other noncurrent liabilities.............. -- -- 73 4 -- 77
Partners'/Stockholders' equity
(deficit)............................... 125 228 (43) 85 (270) 125
----- ---- ----- ---- ----- ------
$ 134 $780 $ 759 $ 90 $(279) $1,484
===== ==== ===== ==== ===== ======
</TABLE>
F-42
<PAGE> 144
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OTHER CONSOL. THE
COMPANY AND COMPANY
DECEMBER 31, 1995 MESA INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- -------------------------------------------- --------- ---- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash investments................. $ -- $47 $ 38 $ 64 $ -- $ 149
Other current assets...................... -- 20 53 15 -- 88
----- ---- ----- ---- ----- ------
Total current assets............... -- 67 91 79 -- 237
----- ---- ----- ---- ----- ------
Property, plant and equipment, net........ -- 602 478 3 -- 1,083
Investment in subsidiaries................ 76 -- 115 10 (201) --
Intercompany receivables.................. -- -- 9 -- (9) --
Other noncurrent assets................... -- 82 58 5 -- 145
----- ---- ----- ---- ----- ------
$ 76 $751 $ 751 $ 97 $(210) $1,465
===== ==== ===== ==== ===== ======
Liabilities and Equity:
Current liabilities....................... $ -- $64 $ 128 $ 1 $ -- $ 193
Long-term debt............................ -- 471 665 -- -- 1,136
Intercompany payables..................... 9 -- -- -- (9) --
Other noncurrent liabilities.............. -- -- 66 3 -- 69
Partners'/Stockholders' equity
(deficit)............................... 67 216 (108) 93 (201) 67
----- ---- ----- ---- ----- ------
$ 76 $751 $ 751 $ 97 $(210) $1,465
===== ==== ===== ==== ===== ======
</TABLE>
CONDENSED CONSOLIDATING STATEMENTS OF
OPERATIONS YEARS ENDED:
<TABLE>
<CAPTION>
OTHER CONSOL. THE
COMPANY AND COMPANY
DECEMBER 31, 1993 MESA INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- -------------------------------------------- --------- ---- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................................... $ -- $103 $ 120 $ (1) $ -- $ 222
----- ---- ----- ---- ----- ------
Costs and Expenses:
Operating, exploration and taxes.......... -- 27 48 -- -- 75
General and administrative................ -- -- 23 2 -- 25
Depreciation, depletion and
amortization............................ -- 35 65 -- -- 100
----- ---- ----- ---- ----- ------
-- 62 136 2 -- 200
----- ---- ----- ---- ----- ------
Operating Income (Loss)..................... -- 41 (16) (3) -- 22
----- ---- ----- ---- ----- ------
Interest expense, net of interest income.... -- (50) (83) 2 -- (131)
Intercompany interest income (expense)...... -- -- 16 (16) -- --
Gains of dispositions of oil and gas
properties................................ -- -- 10 -- -- 10
Equity in loss of subsidiaries.............. (102) -- (7) (2) 111 --
Other....................................... -- -- (42) 29 10 (3)
----- ---- ----- ---- ----- ------
Net Income (Loss)........................... $(102) $(9) $(122) $ 10 $ 121 $ (102)
===== ==== ===== ==== ===== ======
</TABLE>
F-43
<PAGE> 145
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OTHER CONSOL. THE
COMPANY AND COMPANY
DECEMBER 31, 1994 MESA INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- -------------------------------------------- --------- ---- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................................... $ -- $113 $ 116 $ -- $ -- $ 229
----- ---- ----- ----- ----- ------
Costs and Expenses:
Operating, exploration and taxes.......... -- 30 49 -- -- 79
General and administrative................ -- -- 26 3 -- 29
Depreciation, depletion and
amortization............................ -- 37 55 -- -- 92
----- ---- ----- ----- ----- ------
-- 67 130 3 -- 200
----- ---- ----- ----- ----- ------
Operating Income (Loss)..................... -- 46 (14) (3) -- 29
----- ---- ----- ----- ----- ------
Interest expense, net of interest income.... -- (47) (87) 3 -- (131)
Losses on dispositions of oil and gas
properties................................ -- -- -- (91)(d) 91 --
Equity in loss of subsidiaries.............. (83) -- (1) -- 84 --
Other....................................... -- -- 22 15 (18) 19
----- ---- ----- ----- ----- ------
Net Loss.................................... $ (83) $ (1) $ (80) $ (76) $ 157 $ (83)
===== ==== ===== ===== ===== ======
</TABLE>
<TABLE>
<CAPTION>
OTHER CONSOL. THE
COMPANY AND COMPANY
DECEMBER 31, 1995 MESA INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- -------------------------------------------- --------- ---- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................................... $ -- $ 97 $ 137 $ 1 $ -- $ 235
----- ---- ----- ----- ----- ------
Costs and Expenses:
Operating, exploration and taxes.......... -- 28 49 -- -- 77
General and administrative................ -- -- 24 3 -- 27
Depreciation, depletion and
amortization............................ -- 34 49 -- -- 83
----- ---- ----- ----- ----- ------
-- 62 122 3 -- 187
Operating Income (Loss)..................... -- 35 15 (2) -- 48
----- ---- ----- ----- ----- ------
Interest expense, net of interest income.... -- (47) (91) 5 -- (133)
Equity in loss of subsidiaries.............. (58) -- (11) -- 69 --
Other....................................... -- -- 21 6 -- 27
----- ---- ----- ----- ----- ------
Net Income (Loss)........................... $ (58) $(12) $ (66) $ 9 $ 69 $ (58)
===== ==== ===== ===== ===== ======
</TABLE>
F-44
<PAGE> 146
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEARS ENDED:
<TABLE>
<CAPTION>
OTHER CONSOL. THE
COMPANY AND COMPANY
DECEMBER 31, 1993 MESA INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- -------------------------------------------- --------- ---- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities........ $ -- $ 21 $ 16 $ (4) $ -- $ 33
----- ---- ----- ----- ----- ------
Cash Flows from Investing Activities:
Capital expenditures...................... -- (8) (21) (1) -- (30)
Proceeds from dispositions of oil and gas
properties.............................. -- -- 26 -- -- 26
Other..................................... -- -- 30 46 (35) 41
----- ---- ----- ----- ----- ------
-- (8) 35 45 (35) 37
----- ---- ----- ----- ----- ------
Cash Flows from Financing Activities:
Repayments of long-term debt.............. -- (39) (41) -- -- (80)
Other..................................... -- 2 (10) (35) 35 (8)
----- ---- ----- ----- ----- ------
-- (37) (51) (35) 35 (88)
----- ---- ----- ----- ----- ------
Net Increase (Decrease) in Cash and Cash
Investments............................... $ -- $(24) $ -- $ 6 $ -- $ (18)
===== ==== ===== ==== ===== ======
</TABLE>
<TABLE>
<CAPTION>
OTHER CONSOL. THE
MESA COMPANY AND COMPANY
DECEMBER 31, 1994 INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- ----------------------------------------------- ----- ---- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities........... $ -- $ 41 $ (15) $ 23 $ -- $ 49
----- ---- ----- ----- ----- ------
Cash Flows from Investing Activities:
Capital expenditures......................... -- (7) (26) -- -- (33)
Contributions to subsidiaries................ (93) -- (5) (1) 99 --
Distributions from subsidiaries.............. -- -- 10 -- (10) --
Other........................................ -- -- 28 (2) (33) (7)
----- ---- ----- ----- ----- ------
(93) (7) 7 (3) 56 (40)
----- ---- ----- ----- ----- ------
Cash Flows from Financing Activities:
Issuance of common stock..................... 93 -- -- -- -- 93
Repayments of long-term debt................. -- (21) (154) -- -- (175)
Long-term borrowings......................... -- -- 78 -- -- 78
Contributions from equity holders............ -- 6 93 -- (99) --
Distribution to partners..................... -- (10) -- -- 10 --
Other........................................ -- 1 (1) (33) 33 --
----- ---- ----- ----- ----- ------
93 (24) 16 (33) (56) (4)
----- ---- ----- ----- ----- ------
Net Increase (Decrease) in Cash and Cash
Investments.................................. $ -- $ 10 $ 8 $ (13) $ -- $ 5
===== ==== ===== ===== ===== ======
</TABLE>
F-45
<PAGE> 147
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OTHER CONSOL. THE
MESA COMPANY AND COMPANY
DECEMBER 31, 1995 INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- ----------------------------------------------- ----- ---- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities........... $ -- $20 $ 50 $ (1) $ -- $ 69
---- ----- ---- ----- ------
Cash Flows from Investing Activities:
Capital expenditures......................... -- (10 ) (30) (2) -- (42 )
Other........................................ -- -- 4 (3) -- 1
---- ----- ---- ----- ------
-- (10 ) (26) (5) -- (41 )
---- ----- ---- ----- ------
Cash Flows from Financing Activities:
Repayments of long-term debt................. -- (16 ) (10) -- -- (26 )
Other........................................ -- 4 -- -- -- 4
---- ----- ---- ----- ------
-- (12 ) (10) -- -- (22 )
---- ----- ---- ----- ------
Net Increase (Decrease) in Cash and Cash
Investments.................................. $ -- $(2 ) $ 14 $ (6) $ -- $ 6
==== ===== ==== ===== ======
</TABLE>
- ---------------
Notes to Condensed Consolidated Financial Statements
(a) These condensed consolidating financial statements should be read in
conjunction with the consolidated financial statements of the Company and
notes thereto of which this note is an integral part.
(b) As of December 31, 1995, the Company owns 100% interest in each of MOC, MHC,
and HMC. These condensed consolidating financial statements present the
Company's investment in its subsidiaries and MOC's and MHC'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 income (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.
(d) The condensed consolidating statement of operations of MHC for the year
ended December 31, 1994, reflects a $91 million loss from its disposition of
an 18% equity interest in HCLP. The HCLP equity interest was used to repay a
portion of MHC's intercompany payable to MOC and was valued, in accordance
with the provisions of the Discount Note indentures, at $5 million for each
one percent of interest assigned. A loss was recognized for the difference
between the carrying value of the HCLP interest assigned to MOC and the $90
million value attributed to such interests which reduced the intercompany
payable. The loss recognized by MHC is eliminated in consolidation.
Subsequent Events
On May 7, 1996, the Company and MOC, filed a registration statement with the
SEC for the issuance and sale of $500 million of senior subordinated notes ("New
Notes") consisting of $325 million of senior subordinated notes and $175 million
of senior subordinated discount notes, both with ten year maturities. In
addition the Company has received a commitment from a group of banks for a new
$525 million senior secured revolving credit facility ("New Credit Facility").
Borrowings under the New Credit Facility and the New Notes, together with
existing cash and investment balances and $265 million of new equity, will be
used to repay and/or refinance substantially all of the Company's existing debt.
MOC will be the borrower under the New Credit Facility and the issuer of the New
Notes. The Company will fully and unconditionally guarantee MOC's obligations
under both the New Credit Facility and the New Notes.
In connection with the foregoing, the Company's other direct wholly owned
subsidiaries, MHC and HMC, as well as HCLP, will be merged with and into MOC,
with MOC being the surviving entity. As a result, MOC will be the Company's only
direct wholly owned subsidiary as well as its only significant subsidiary. Of
the
F-46
<PAGE> 148
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
subsidiaries of MOC that will exist following the issuance of the New Notes,
none will have any operations other than Mesa Environmental and Mesa
Transmission Co. ("Mesa Transmission"). Neither Mesa Environmental nor Mesa
Transmission nor any of the other subsidiaries of MOC (collectively, the
"Non-guarantors") will guarantee any of MOC's or the Company's debt. Mesa
Environmental's and Mesa Transmission's assets, liabilities and results of
operations are inconsequential to those of the Company and, following the
issuance of the New Notes, all Non-guarantors individually and in the aggregate
will be inconsequential to MOC and the Company. After the issuance of the New
Notes, the Company will be a holding company with no individual assets,
liabilities or operations other than shares of common stock of MOC and
guarantees of MOC debt; accordingly, the consolidated assets, liabilities,
stockholders' equity, results of operations and cash flows of MOC and its
subsidiaries will be the same as those of the Company and its subsidiaries.
(14) SUBSEQUENT EVENTS (SUBSEQUENT TO THE DATE OF AUDITOR'S EXAMINATION AND
UNAUDITED)
Resources and Liquidity
Subsequent to the issuance of the consolidated financial statements of the
Company for the year ended December 31, 1995, the Company revised its current
financial forecasts to reflect actual first quarter 1996 results and
expectations of increased prices to be received for oil and gas production in
1996. As a result, the Company expects to have sufficient available cash and
investment balances to make its principal and interest payments due in June
1996. However, assuming no changes in its capital structure and no significant
transactions are completed, the current financial forecasts indicate that cash
generated by operating activities, together with available cash and securities
balances will not be sufficient to make all of the required debt principal and
interest payments due in the second half of 1996. Such required payments may
include accelerated principal payments under the Credit Agreement and Discount
Notes. See Note 2 for a discussion of a potential Event of Default.
Stock Purchase Agreement
On April 26, 1996, the Company entered into a Stock Purchase Agreement with
DNR-Mesa Holdings, L.P., a Texas limited partnership ("DNR") whose sole general
partner is Rainwater. Upon DNR's purchase of 58.8 million shares of a new class
of convertible preferred stock at the first closing under the Stock Purchase
Agreement, DNR as the holder of such preferred stock will elect a majority of
the directors of the Company's board of directors in accordance with the special
voting rights granted to it as the holder of such preferred stock. Such special
voting rights will continue for so long as DNR meets certain minimum ownership
requirements.
HCLP Secured Notes
Subsequent to the issuance of the consolidated financial statements of the
Company for the year ended December 31, 1995, the Company obtained the reserve
report required to be prepared under the HCLP Secured Note Agreements covering
the Hugoton field properties. The reserve report resulted in a downward revision
and a DRA was determined to exist. However, such DRA will not cause the
Collateral Agent to retain additional funds in the collection account. Therefore
principal repayments in addition to those set forth in the scheduled maturities
table in Note 4 will not be required. See Note 4 for additional discussion of
the DRA.
Proposed Recapitalization
On April 26, 1996, the Company entered into a stock purchase agreement with
DNR-MESA Holdings L.P., a Texas limited partnership ("DNR"), whose sole general
partner is Rainwater Inc., a Texas corporation owned by Richard E. Rainwater.
The agreement contemplates that the Company will issue $265 million in new
equity and will repay and/or refinance substantially all of its $1.2 billion of
existing debt (the "Recapitalization"). DNR will purchase approximately 58.8
million shares of a new class of convertible preferred stock entitled Series B
8% Cumulative Convertible Preferred Stock ("Series B Preferred") in a private
placement and the Company will offer approximately 58.4 million shares of Series
A 8% Cumulative Convertible Preferred Stock ("Series A Preferred") to the
Company's stockholders in a rights offering (the "Rights Offering"). DNR will
provide a standby commitment to purchase an additional number of shares of
Series B Preferred equal to the number of shares of Series A Preferred not
subscribed to in the Rights Offering. The rights, to be distributed to common
stockholders on a pro rata basis, will allow the stockholders to purchase, in
respect of each share of common stock, .912 shares of Series A Preferred at
$2.26 per share, the
F-47
<PAGE> 149
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
same per share price at which DNR will purchase shares of Series B Preferred.
The rights will be transferrable and holders of the rights will be offered
over-subscription privileges for shares not purchased by other rights holders.
Each share of Series A and B Preferred will be convertible into one share of
the Company's common stock at any time prior to mandatory redemption in 2008. An
annual 8% pay-in-kind dividend will be paid on the shares during the first four
years following issuance. Thereafter, the 8% dividend may, at the option of the
Company, be paid in cash or additional shares depending on whether certain
financial tests are met and subject to any limitations in the Company's debt
agreements.
The Series A and B Preferred will represent 64.7% of the fully diluted
common shares at the time of issuance and 71.5% after the mandatory four-year
pay-in-kind period, excluding stock options and assuming no other stock issuance
by the Company. The Series A and B Preferred will have a liquidation preference
per share equal to $2.26 plus accrued and unpaid dividends. The terms of the
Series A and Series B Preferred are substantially identical except for certain
voting rights and certain provisions relating to transferability. The Series A
and B Preferred will vote with the common stock as a single class on all
matters, except as otherwise required by law and except for certain special
voting rights of the Series B Preferred, including the right of the holders of
the Series B Preferred to nominate and elect a majority of the Company's Board
of Directors for so long as DNR and its affiliates meet certain minimum stock
ownership requirements and certain rights of the holders of the Series A
Preferred to elect two directors in the event of certain dividend arrearages.
The sale of shares to DNR and certain other matters will be submitted to a
vote of stockholders at a special meeting expected to take place in June 1996.
The Company expects to issue shares to DNR and to complete the refinancing of
its existing debt promptly after that meeting. The Rights Offering would
commence promptly thereafter. On May 9, 1996, the Company filed a registration
statement with the Securities and Exchange Commission (the "SEC") for the
issuance and sale of $132 million of Series A Preferred through the Rights
Offering.
The consummation of the Recapitalization is subject to certain conditions
including stockholder approval and completion of the refinancing.
Effect of the Recapitalization
The Recapitalization will enhance the Company's ability to compete in the
oil and gas industry by substantially increasing its cash flow available for
investment and improving its ability to attract capital, which will increase its
ability to pursue investment opportunities. Specifically, the Company's
financial condition will improve significantly as a result of the
Recapitalization due to (i) a significant reduction in total debt outstanding,
(ii) a reduction in annual cash interest expense of approximately $75 million,
(iii) the implementation of a cost savings program designed to initially reduce
annual general and administrative and other operating overhead expenses by
approximately $10 million, and (iv) the extension of maturities on its long-term
debt, which will eliminate the Company's present liquidity concerns.
The expected reduction of annual cash interest expense is based on the
following assumptions: (i) initial borrowings under the New Credit Facility of
approximately $350 million, and (ii) annual interest rates of approximately 7%
under the New Credit Facility, 11% under the senior subordinated notes and
12 1/4% under the senior subordinated discount notes. Actual borrowings and
interest rates under the New Credit Facility will fluctuate over time and will
affect Mesa's actual cash interest expense.
Management believes that cash from operating activities, together with as
much as $175 million of availability under the $525 million New Credit Facility
following the completion of the Recapitalization, will be sufficient for the
Company to meet its debt service obligations and scheduled capital expenditures,
and to fund its working capital needs for the next several years following the
Recapitalization.
The successful completion of the Recapitalization is expected to position
the Company to operate and continue as a going concern and to pursue its
business strategies. The consolidated financial statements of the Company do not
include any adjustments reflecting any treatment other than going concern
accounting.
If the Recapitalization is not completed, the Company will pursue other
alternatives to address its liquidity issues and financial condition, including
pursuing other merger and sale transactions, the possibility of seeking to
restructure its balance sheet by negotiating with its current debt holders or
seeking protection from its creditors under the Federal Bankruptcy Code.
F-48
<PAGE> 150
MESA INC.
SUPPLEMENTAL FINANCIAL DATA
Oil and Gas Reserves and Cost Information (Unaudited)
Net proved oil and gas reserves as of December 31, 1995 and 1994, were
estimated by Company engineers. Net proved oil and gas reserves as of December
31, 1993, associated with the Company's two most significant natural gas
producing fields were estimated by independent petroleum engineering
consultants. These two fields, the Hugoton and West Panhandle fields,
represented over 95% of the Company's net proved equivalent natural gas reserves
as of the date estimated by the independent petroleum engineers. All of the
Company's reserves at December 31, 1995, 1994, and 1993, were in the United
States. In accordance with regulations established by the Commission, the
reserve estimates were based on economic and operating conditions existing at
the end of the respective years.
Future prices for natural gas were based on market prices as of each year
end and contract terms, including fixed and determinable price escalations.
Market prices received as of each year end were used for future sales of oil,
condensate and natural gas liquids. Future operating costs, production and ad
valorem taxes and capital costs were based on current costs as of each year end,
with no escalation.
Approximately 65% of the Company's equivalent proved reserves (based on a
factor of six thousand cubic feet "Mcf" of gas per barrel of liquids) at
December 31, 1995, is natural gas. The natural gas prices in effect at December
31, 1995, (having a weighted average of $1.95 per Mcf) were used in accordance
with Commission regulations but may not be the most appropriate or
representative prices to use for estimating reserves since such prices were
influenced by the seasonal demand for natural gas and contractual arrangements
at that date. The average price received by the Company for sales of natural gas
in 1995 was $1.48 per Mcf. Assuming all other variables used in the calculation
of reserve 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, both before income
taxes, by $109 million and $44 million, respectively. At December 31, 1995, the
Company's standardized measure of future net cash flows from proved reserves
(the "Standardized Measure") and the pretax Standardized Measure were less than
the net book value of oil and gas properties by approximately $100 million and
$25 million, respectively. The Company believes that the ultimate 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.
At December 31, 1993, the Company's internal estimates of proved reserves
for the Hugoton and West Panhandle properties were greater than the estimates
prepared by independent petroleum engineers as of such date. In the Hugoton
field, the primary difference reflects increased reserves for properties on
which the Company drilled 382 infill wells since 1987 resulting from the
Company's internal interpretation of pressure and cumulative production data. In
the West Panhandle field, the reserve differences result from the interpretation
of cumulative production data on producing wells and in the estimates of proved
undeveloped reserves.
Oil and gas reserve quantities estimated as of December 31, 1995, reflect a
net increase over 1994, after production, of approximately 171 Bcfe of natural
gas. Equivalent natural gas reserves increased in each of the Company's major
production areas. Increases in Hugoton field reserves reflect alignment of the
assumptions used in preparing the proved reserve estimates with the Company's
practice of recovering ethane at the Satanta Plant. In previous years Hugoton
proved reserve estimates were prepared assuming that the Company would not
recover ethane which resulted in slightly higher natural gas volumes, lower
natural gas liquids volumes and lower total equivalent volumes than if ethane
recovery were assumed. The decision as to whether or not to recover ethane is
based on the relative value of ethane as a liquid versus the energy-equivalent
value of such ethane if left in the residue natural gas. In the future, if
economic conditions warrant, the Company may revise proved reserves to reflect
any changes in such relative values. In the West Panhandle field, reserves were
revised upward to reflect the development drilling results over the past year
and the planned upgrade of the Fain Plant for a higher rate of liquids recovery
per Mcf of gas produced from the field. In the Gulf Coast, reserve additions
resulted from exploratory and development drilling in 1994 and 1995.
There are numerous uncertainties inherent in estimating quantities of proved
reserves and in projecting the future rates of production and timing of
development expenditures. Reserve data represent estimates only and should not
be construed as being exact. Estimates prepared by other engineers might be
materially different from those set forth herein. Moreover, the Standardized
Measure should not be construed as the current market value of the proved oil
and gas reserves or the costs that would be incurred to obtain equivalent
F-49
<PAGE> 151
reserves. A market value determination would include many additional factors
including (i) anticipated future changes in oil and gas prices, and production
and development costs; (ii) an allowance for return on investment; (iii) the
value of additional reserves, not considered proved at present, which may be
recovered as a result of further exploration and development activities; and
(iv) other business risks.
CAPITALIZED COSTS AND COSTS INCURRED (UNAUDITED)
Capitalized costs relating to oil and gas producing activities at December
31, 1995, 1994, and 1993 and the costs incurred during the years then ended are
set forth below (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Capitalized Costs:
Proved properties............................................. $1,845,483 $1,865,004 $1,897,168
Unproved properties........................................... 754 2,838 2,995
Accumulated depreciation, depletion and amortization.......... (670,706) (753,827) (834,304)
---------- ---------- ----------
Net.................................................... $1,175,531 $1,114,015 $1,065,859
========== ========== ==========
Costs Incurred:
Exploration and development:
Proved properties........................................... $ 73 $ 523 $ 269
Unproved properties......................................... 17 2,425 157
Exploration costs........................................... 2,705 5,157 8,167
Development costs........................................... 2,381 14,043 14,572
---------- ---------- ----------
Total exploration and development............................. 5,176 22,148 23,165
---------- ---------- ----------
Plants and facilities:
Processing plants........................................... 17,501 3,248 1,850
Field compression facilities................................ 4,387 3,129 10,561
Other....................................................... 2,257 5,168 3,354
---------- ---------- ----------
Total plants and facilities................................. 24,145 11,545 15,765
---------- ---------- ----------
Total costs incurred.......................................... $ 29,321 $ 33,693 $ 38,930
========== ========== ==========
Depreciation, depletion and amortization........................ $ 96,774 $ 89,413 $ 80,513
========== ========== ==========
</TABLE>
ESTIMATED QUANTITIES OF RESERVES (UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------
NATURAL GAS (MMCF) 1993 1994 1995
- ----------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Proved Reserves:
Beginning of year.............................................. 1,276,049 1,202,444 1,303,187
Extensions and discoveries................................... 5,132 6,211 29,728
Purchases of producing properties............................ 166 822 1,000
Revisions of previous estimates.............................. 7,284 176,049 (38,574)
Sales of producing properties................................ (6,367) -- --
Production................................................... (79,820) (82,339) (77,312)
--------- --------- ---------
End of year.................................................... 1,202,444 1,303,187 1,218,029
========= ========= =========
Proved Developed Reserves:
Beginning of year.............................................. 1,223,672 1,159,453 1,257,883
========= ========= =========
End of year.................................................... 1,159,453 1,257,883 1,160,751
========= ========= =========
</TABLE>
F-50
<PAGE> 152
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
NATURAL GAS (MMCF) 1993 1994 1995
- ----------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
NATURAL GAS LIQUIDS, OIL AND CONDENSATE(MBBLS)
Proved Reserves:
Beginning of year.............................................. 87,392 82,446 89,428
Extensions and discoveries................................... 778 491 3,121
Purchases of producing properties............................ -- 1 5
Revisions of previous estimates.............................. 3,083 13,947 26,630
Sales of producing properties................................ (3,019) -- --
Production................................................... (5,788) (7,457) (7,766)
--------- --------- ---------
End of year.................................................... 82,446 89,428 111,418
========= ========= =========
Proved Developed Reserves:
Beginning of year.............................................. 82,439 79,294 85,656
========= ========= =========
End of year.................................................... 79,294 85,656 105,197
========= ========= =========
</TABLE>
- - Proved natural gas liquids, oil and condensate reserve quantities include oil
and condensate reserves at December 31 of the respective years as follows:
1993, 3,296 MBbls, 1994, 5,031 MBbls; and 1995, 9,521 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: 1993, 5,198 MMcf of helium and 46,376 MMcf of CO2, 1994,
4,457 MMcf of helium and 46,459 MMcf of CO2; and 1995, 3,670 MMcf of helium
and 46,459 MMcf of CO2.
STANDARDIZED MEASURE OF FUTURE NET CASH FLOWS FROM PROVED RESERVES (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------
1993 1994 1995
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows......................................... $ 3,723,760 $ 3,513,282 $ 3,804,371
Future production and development costs:
Operating costs and production taxes...................... (1,337,224) (1,192,005) (1,257,957)
Development and abandonment costs......................... (80,310) (95,441) (96,594)
Future income taxes....................................... (240,017) (211,076) (296,987)
----------- ----------- -----------
Future net cash flows....................................... 2,066,209 2,014,760 2,152,833
Discount at 10% per annum................................. (1,079,278) (1,080,578) (1,186,644)
----------- ----------- -----------
Standardized Measure........................................ $ 986,931 $ 934,182 $ 966,189
=========== =========== ===========
Future net cash flows before income taxes................... $ 2,306,226 $ 2,225,836 $ 2,449,820
=========== =========== ===========
Standardized Measure before income taxes.................... $ 1,068,740 $ 988,325 $ 1,040,413
=========== =========== ===========
</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.
F-51
<PAGE> 153
CHANGES IN STANDARDIZED MEASURE (UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------
1993 1994 1995
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Standardized Measure at beginning of year........................ $1,037,181 $ 986,931 $ 934,182
---------- --------- ---------
Revisions of reserves proved in prior years:
Changes in prices and production costs......................... 6,178 (121,300) 52,724
Changes in quantity estimates.................................. 17,616 151,538 71,673
Changes in estimates of future development and abandonment
costs........................................................ 8,054 (27,343) (18,424)
Net change in income taxes..................................... 48,703 27,666 (20,081)
Accretion of discount.......................................... 116,769 106,874 98,833
Other, primarily timing of production.......................... (108,371) (80,650) (94,511)
---------- --------- ---------
Total revisions.................................................. 88,949 56,785 90,214
Extensions, discoveries and other additions, net of future
production and development costs............................... 4,456 8,075 61,259
Purchases of proved properties................................... 138 463 1,692
Sales of oil and gas produced, net of production costs........... (143,502) (146,267) (154,231)
Sales of producing properties.................................... (26,907) -- --
Previously estimated development and abandonment costs incurred
during the period.............................................. 26,616 28,195 33,073
---------- --------- ---------
Net changes in Standardized Measure.............................. (50,250) (52,749) 32,007
---------- --------- ---------
Standardized Measure at end of year.............................. $ 986,931 $ 934,182 $ 966,189
========== ========= =========
</TABLE>
QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1995:
Revenues....................................... $ 62,247 $ 59,174 $ 48,967 $ 64,571
======== ======== ======== ========
Gross profit(1)................................ $ 44,928 $ 44,066 $ 29,926 $ 45,821
======== ======== ======== ========
Operating income............................... $ 15,974 $ 17,080 $ 219 $ 14,692
======== ======== ======== ========
Net loss....................................... $ (7,894) $(13,953) $(32,473) $ (3,248)(2)
======== ======== ======== ========
Net loss per common share...................... $ (.12) $ (.22) $ (.51) $ (.05)
======== ======== ======== ========
1994:
Revenues....................................... $ 61,084 $ 53,361 $ 45,725 $ 68,567
======== ======== ======== ========
Gross profit(1)................................ $ 42,214 $ 34,462 $ 28,713 $ 49,387
======== ======== ======== ========
Operating income (loss)........................ $ 10,176 $ 4,867 $ (2,065) $ 15,705
======== ======== ======== ========
Net loss....................................... $(17,766) $(25,338) $(25,907) $(14,342)
======== ======== ======== ========
Net loss per common share...................... $ (.37) $ (.43) $ (.40) $ (.22)
======== ======== ======== ========
</TABLE>
- ---------------
(1) Gross profit consists of total revenues less lease operating expenses and
production and other taxes.
(2) In the fourth quarter of 1995 results of operations included net gains from
investments of $18.4 million. (See Note 3 to the consolidated financial
statements of the Company).
F-52
<PAGE> 154
No dealer, salesman or other person has been authorized to give any information
or to make any representations other than those contained in this Prospectus in
connection with the offer contained herein, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Parent, the Company or the Underwriters. This Prospectus does not
constitute an offer to sell or the solicitation of an offer to buy, any
securities other than the securities to which it relates or any offer to sell,
or the solicitation of an offer to buy, such securities in any circumstances in
which such offer or solicitation is unlawful. Neither the delivery of this
Prospectus nor any sale made hereunder will, under any circumstances, create an
implication that there has been no change in the affairs of the Parent or the
Company since the date hereof or that the information contained herein is
correct as of any time subsequent to its date.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary.......................... 3
Risk Factors................................ 14
Use of Proceeds............................. 20
Capitalization.............................. 21
Unaudited Pro Forma Financial Information... 22
Selected Historical Financial Data.......... 28
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 29
Business.................................... 37
Management.................................. 54
Executive Compensation...................... 57
Security Ownership of Certain Beneficial
Owners and Management..................... 63
Description of the Notes.................... 66
Description of the New Credit Facility...... 92
Description of the Stock Purchase Agreement
and the Rights Offering................... 93
Certain Federal Income Tax Considerations... 95
Underwriting................................ 97
Legal Matters............................... 97
Experts..................................... 97
Additional Information...................... 98
Incorporation of Certain Documents by
Reference................................. 98
Glossary of Selected Oil and Gas Terms...... 99
Index to Consolidated Financial
Statements................................ F-1
</TABLE>
PROSPECTUS
MESA OPERATING CO.
$325,000,000 % SENIOR
SUBORDINATED NOTES DUE 2006
$ % SENIOR
SUBORDINATED DISCOUNT NOTES
DUE 2006
(MESA LOGO)
CHASE SECURITIES INC.
BT SECURITIES CORPORATION
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MERRILL LYNCH & CO.
, 1996
<PAGE> 155
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the estimated expenses of the issuance and distribution of
the securities being registered, all of which will be borne by Mesa.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................................ $ 68,966
NASD fee........................................................................... 20,500
Printing and engraving expenses.................................................... 200,000
Accounting fees and expenses....................................................... 100,000
Blue Sky fees and expenses......................................................... 10,000
Legal fees and expenses............................................................ 250,000
Trustee fees and expenses.......................................................... 15,000
Rating agency fees................................................................. 50,000
Miscellaneous...................................................................... 135,534
--------
Total..................................................................... $850,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Mesa Operating Co.
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 attorneys' 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, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise, 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 reasonable cause to believe
his conduct was unlawful. In a derivative action (i.e., one brought by or in the
right of the corporation), indemnification may be made only for expenses
actually and reasonably incurred by any officer or director 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 may be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
court in which such action or suit was brought shall determine that, such person
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 has the power to
indemnify him against that liability under Section 145 of the DGCL.
The Company's Bylaws provide that the Company may indemnify each person who
is involved in any litigation or other proceeding because such person is or was
a director or officer of the Company or its subsidiaries or is or was serving as
an officer or director of another entity at the request of the Company, against
all expenses reasonably incurred in connection therewith. Such indemnification
will be made upon a determination by the Board of Directors of the Company,
independent legal counsel or the stockholders of the Company that such
indemnification is proper in the circumstances because such person has met the
applicable standard of conduct. The Bylaws also provide that the Company will
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 the Company of an undertaking, by or on
behalf of the
II-1
<PAGE> 156
director or officer, to repay all amounts so advanced if it is ultimately
determined that such director or officer is not entitled to indemnification.
The Company's Certificate of Incorporation provides that the personal
liability of a director of the Company will be limited to the fullest extent
permitted by the DGCL. Pursuant to Section 102(b)(7) of the DGCL, Article Sixth
of the Company's Certificate of Incorporation eliminates the personal liability
of a director to the Company 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 Company 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 the Company's Bylaws and Certificate of
Incorporation is not intended to be exhaustive and is respectively qualified in
its entirety by such documents.
MESA Inc.
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 Parent'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 Parent 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 Parent 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 policies of
the Parent 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 Parent'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.
II-2
<PAGE> 157
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
<TABLE>
<S> <C>
*1.1 Form of Underwriting Agreement.
4.1 Form of Senior Subordinated Note Indenture among Mesa Operating Co., MESA Inc. and Harris
Trust and Savings Bank, as trustee.
4.2 Form of Senior Subordinated Discount Note Indenture among Mesa Operating Co., MESA Inc. and
Harris Trust and Savings Bank, as trustee.
5 Opinion of Baker & Botts, L.L.P.
8 Tax Opinion of Baker & Botts, L.L.P.
*12 Computation of Ratio of Earnings to Fixed Charges
23.1 Consent of Arthur Andersen LLP, independent accountants.
23.2 Consent of Baker & Botts, L.L.P. (included in Exhibit 5 and Exhibit 8 to this Registration
Statement).
*24 Powers of Attorney of directors and officers of Mesa Operating Co. and MESA Inc. (included
on signature pages to this Registration Statement).
25 Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of 1939.
</TABLE>
- ---------------
* Previously filed.
ITEM 17. UNDERTAKINGS.
Each of the undersigned registrants hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Parent's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement 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.
Each of the undersigned registrants hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as a part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus 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.
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 provisions described under Item 15 above, or
otherwise, each of the registrants 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 of 1933 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 of 1933 and will be governed by the final adjudication of such
issue.
II-3
<PAGE> 158
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Dallas, State of Texas, on the 20th day of June, 1996.
MESA OPERATING CO.
By: /s/ BOONE PICKENS*
------------------------------------
Boone Pickens,
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------- ------------------------------------- --------------
<C> <S> <C>
/s/ BOONE PICKENS* Director, President, Chief Executive June 20, 1996
- ------------------------------------------------- Officer and Chief Operating Officer
Boone Pickens (Principal Executive Officer)
/s/ STEPHEN K. GARDNER* Vice President and Chief Financial June 20, 1996
- ------------------------------------------------- Officer (Principal Financial
Stephen K. Gardner Officer)
/s/ WILLIAM D. BALLEW Controller (Principal Accounting June 20, 1996
- ------------------------------------------------- Officer)
William D. Ballew
*By: /s/ WILLIAM D. BALLEW
- -------------------------------------------------
William D. Ballew
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 159
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Dallas, State of Texas, on the 20th day of June, 1996.
MESA Inc.
By: /s/ BOONE PICKENS*
------------------------------
Boone Pickens,
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------- ------------------------------- --------------------
<C> <S> <C>
/s/ BOONE PICKENS* President, Chief Executive June 20, 1996
- ------------------------------------------------- Officer, Chief Operating
Boone Pickens Officer and Chairman of the
Board of Directors (Principal
Executive Officer)
/s/ STEPHEN K. GARDNER* Vice President and Chief June 20, 1996
- ------------------------------------------------- Financial Officer (Principal
Stephen K. Gardner Financial Officer)
/s/ WILLIAM D. BALLEW Controller (Principal June 20, 1996
- ------------------------------------------------- Accounting Officer)
William D. Ballew
/s/ PAUL W. CAIN* Director June 20, 1996
- -------------------------------------------------
Paul W. Cain
/s/ JOHN S. HERRINGTON* Director June 20, 1996
- -------------------------------------------------
John S. Herrington
/s/ WALES H. MADDEN, JR.* Director June 20, 1996
- -------------------------------------------------
Wales H. Madden, Jr.
Director
- -------------------------------------------------
Dorn Parkinson
Director
- -------------------------------------------------
Joel L. Reed
/s/ FAYEZ S. SAROFIM* Director June 20, 1996
- -------------------------------------------------
Fayez S. Sarofim
/s/ ROBERT L. STILLWELL* Director June 20, 1996
- -------------------------------------------------
Robert L. Stillwell
*By: /s/ WILLIAM D. BALLEW
- -------------------------------------------------
William D. Ballew
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 160
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement.
4.1 Form of Senior Subordinated Note Indenture among Mesa Operating Co., MESA Inc. and Harris
Trust and Savings Bank, as trustee.
4.2 Form of Senior Subordinated Discount Note Indenture among Mesa Operating Co., MESA Inc. and
Harris Trust and Savings Bank, as trustee.
5 Opinion of Baker & Botts, L.L.P.
8 Tax Opinion of Baker & Botts, L.L.P.
*12 Computation of Ratio of Earnings to Fixed Charges
23.1 Consent of Arthur Andersen LLP, independent accountants.
23.2 Consent of Baker & Botts, L.L.P. (included in Exhibit 5 and Exhibit 8 to this Registration
Statement).
*24 Powers of Attorney of directors and officers of Mesa Operating Co. and MESA Inc.
25 Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of 1939.
</TABLE>
- ---------------
* Previously filed.
<PAGE> 1
Exhibit 4.1
INDENTURE dated as of _____ __, 1996 among Mesa Operating Co.,
Inc., a Delaware corporation (the "Company"), as issuer MESA INC., a Texas
Corporation (the "Parent"), as a guarantor and Harris Trust and Savings Bank,
as trustee (the "Trustee").
The Company, the Parent and the Trustee agree as follows for
the benefit of each other and for the equal and ratable benefit of the Holders
of the [__]% Senior Subordinated Notes due 2006 of the Company (the "Notes"):
ARTICLE 1
DEFINITIONS AND INCORPORATION
BY REFERENCE
Section 1.1. Definitions.
"Acquired Debt" means, with respect to any specified Person or
any Subsidiary of such Person (i) Indebtedness of any other Person existing at
the time such other Person is merged with or into or became a Subsidiary of
such specified Person, including, without limitation, Indebtedness incurred in
connection with, or in contemplation of, such other Person merging with or into
or becoming a Subsidiary of such specified Person, and (ii) Indebtedness
secured by a Lien encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling,"
"controlled by" and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such Person,
whether through the ownership of voting securities, by agreement or otherwise;
provided that beneficial ownership of 10% or more of the voting securities of a
Person shall be deemed to be control; further provided, however, that in no
event shall any limited partner of DNR that is a beneficial owner (within the
meaning of Rule 13d-3 under the Exchange Act) of less than 10% of the aggregate
voting power of the Capital Stock of the Company or the Parent be deemed to be
an Affiliate of the Company or the Parent.
"Agent" means any Registrar, Paying Agent or co-registrar.
"Asset Sale" means (i) the sale, lease, conveyance or other
disposition (but excluding the creation of a Lien) by the
<PAGE> 2
Company or any of its Restricted Subsidiaries of any assets including, without
limitation, by way of a sale and leaseback (provided that the sale, lease,
conveyance or other disposition of all or substantially all of the assets of
the Company and its Subsidiaries taken as a whole shall be governed by Sections
4.13 and/or 5.1 hereof and not by Section 4.10 hereof), and (ii) the issue or
sale by the Company or any of its Restricted Subsidiaries of Equity Interests
of any of the Company's Subsidiaries (including the sale by a Restricted
Subsidiary of Equity Interests in an Unrestricted Subsidiary), in the case of
either clause (i) or (ii), whether in a single transaction or a series of
related transactions (a) that have a fair market value in excess of $5.0
million or (b) for net proceeds in excess of $5.0 million. Notwithstanding the
foregoing, the following shall not be deemed to be Asset Sales: (1) a transfer
of assets by the Company to a Restricted Subsidiary of the Company or by a
Restricted Subsidiary of the Company to the Company or to another Restricted
Subsidiary of the Company (in the case of a transfer to a Subsidiary that is
not a Wholly Owned Restricted Subsidiary, transfers will be excluded from this
definition only to the extent of the Company's or the Restricted Subsidiary's
interest in such Subsidiary after giving effect to such transfer), (2) an
issuance of Equity Interests by a Restricted Subsidiary of the Company to the
Company or to another Restricted Subsidiary of the Company (in the case of an
issuance of Equity Interests to a Subsidiary that is not a Wholly Owned
Restricted Subsidiary, issuances will be excluded from this definition only to
the extent of the Company's or the Restricted Subsidiary's interest in such
Subsidiary after giving effect to such issuance), (3) a Permitted Investment or
Restricted Payment that is permitted by Section 4.7, (4) the abandonment,
farm-out, lease or sublease of developed or undeveloped oil and gas properties
in the ordinary course of business, (5) the trade or exchange by the Company or
any Restricted Subsidiary of the Company of any oil and gas property owned or
held by the Company or such Restricted Subsidiary for any oil and gas property
owned or held by another Person, which the Board of Directors of the Company
determines in good faith to be of approximately equivalent value, (6) the sale
or transfer of hydrocarbons or other mineral products or other inventory or
surplus or obsolete equipment in the ordinary course of business or (7) sale of
hydrocarbons pursuant to Permitted Marketing Obligations.
"Attributable Debt" in respect of a sale and leaseback
transaction means, at the time of determination, the present value (discounted
at the rate of interest implicit in such transaction, determined in accordance
with GAAP) of the obligation of the lessee for net rental payments during the
remaining term of the lease included in such sale and leaseback transaction
(including any period for which such lease has been extended to the extent the
lease payments during such extension period are required to be capitalized on a
balance sheet in accordance with GAAP).
<PAGE> 3
3
"Bankruptcy Code" means Title 11 of the United States Code, as
amended.
"Board of Directors" means the Board of Directors of the
Company or the Parent, as applicable, or any authorized committee of such Board
of Directors.
"Borrowing Base" means, as of any date, the aggregate amount
of borrowing availability as of such date under all Credit Facilities that
determine availability on the basis of a borrowing base or other asset-based
calculation, provided that in no event shall the Borrowing Base exceed $600.0
million.
"Business Day" means any day other than a Legal Holiday.
"Capital Lease Obligation" means, at the time any
determination thereof is to be made, the amount of the liability in respect of
a capital lease that would at such time be required to be capitalized on a
balance sheet in accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation,
corporate stock, (ii) in the case of an association or business entity, any and
all shares, interests, participations, rights or other equivalents (however
designated) of corporate stock, (iii) in the case of a partnership, partnership
interests (whether general or limited) and (iv) any other interest or
participation that confers on a Person the right to receive a share of the
profits and losses of, or distributions of assets of, the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii)
securities issued or directly and fully guaranteed or insured by the United
States government or any agency or instrumentality thereof having maturities of
not more than six months from the date of acquisition, (iii) certificates of
deposit and eurodollar time deposits with maturities of six months or less from
the date of acquisition, bankers' acceptances with maturities not exceeding six
months and overnight bank deposits, in each case with any lender party to the
Credit Agreement or with any domestic commercial bank having capital and
surplus in excess of $500 million and a Thompson Bank Watch Rating of "B" or
better, (iv) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (ii) and (iii) above
entered into with any financial institution meeting the qualifications
specified in clause (iii) above, (v) commercial paper having a rating of at
least P1 from Moody's or a rating of at least A1 from S&P and (vi) money market
mutual or similar funds having assets in excess of $100,000,000.
"Change of Control" means the occurrence of any of the
following: (i) the sale, lease, transfer, conveyance or other disposition
(other than by way of merger or consolidation), in
<PAGE> 4
4
one or a series of related transactions, of all or substantially all of the
assets of the Company and its Subsidiaries taken as a whole or the Parent and
its Subsidiaries taken as a whole to any "person" (as such term is used in
Section 13(d)(3) of the Exchange Act) other than a Permitted Investor, (ii) the
adoption by the shareholders of the Company or the Parent of a plan relating to
the liquidation or dissolution of the Company or the Parent, (iii) after no
shares of the Series B Preferred Stock remain outstanding (a) Continuing
Directors cease for any reason to constitute a majority of the members of the
Board of Directors of the Company or the Parent for a period of two consecutive
years or (b) an event or series of events by which any person or other entity,
other than a Permitted Investor, or any group of Persons or other entities
acting in concert as a partnership or other group, other than a group of
Permitted Investors, shall, as a result of a tender or exchange offer, open
market purchases, privately negotiated purchases, merger, consolidation or
otherwise, have become the beneficial owner (within the meaning of rule 13d-3
under the Exchange Act) of 35% or more of the aggregate voting power of the
then outstanding Capital Stock of the Parent having the right to elect
directors under ordinary circumstances.
"Closing Date" the date of the closing of the sale of the
Notes offered pursuant to the Offering.
"Commission" means the Securities and Exchange Commission.
"Consolidated Cash Flow" means, with respect to any Person for
any period, the Consolidated Net Income of such Person and its Restricted
Subsidiaries for such period plus (i) an amount equal to any extraordinary loss
plus any net loss realized in connection with an Asset Sale (together with any
related provision for taxes), to the extent such losses were included in
computing such Consolidated Net Income, plus (ii) provision for taxes based on
income or profits of such Person and its Restricted Subsidiaries for such
period, to the extent that such provision for taxes was included in computing
such Consolidated Net Income, plus (iii) consolidated interest expense of such
Person and its Restricted Subsidiaries for such period, whether paid or accrued
(including, without limitation, amortization of original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Interest Rate Hedging Agreements), to the extent that any such expense was
included in computing such Consolidated Net Income, plus (iv) depreciation,
depletion and amortization expenses (including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash expenses that were
paid in a prior period) for such
<PAGE> 5
5
Person and its Restricted Subsidiaries for such period to the extent that such
depreciation, depletion and amortization expenses were included in computing
such Consolidated Net Income, plus (v) exploration expenses for such Person and
its Restricted Subsidiaries for such period to the extent such exploration
expenses were included in computing such Consolidated Net Income, plus (vi)
other non-cash charges (excluding any such non-cash charge to the extent that
it represents an accrual of or reserve for cash charges in any future period or
amortization of a prepaid cash expense that was paid in a prior period) of such
Person and its Restricted Subsidiaries for such period to the extent that such
other noncash charges were included in computing such Consolidated Net Income,
in each case, on a consolidated basis and determined in accordance with GAAP.
Notwithstanding the foregoing, the provision for taxes on the income or profits
of, and the depreciation, depletion and amortization, exploration and other
non-cash charges and expenses of, a Restricted Subsidiary of the referent
Person shall be added to Consolidated Net Income to compute Consolidated Cash
Flow only to the extent (and in same proportion) that the Net Income of such
Restricted Subsidiary was included in calculating the Consolidated Net Income
of such Person and only if a corresponding amount would be permitted at the
date of determination to be dividended to the Company by such Restricted
Subsidiary without prior governmental approval (that has not been obtained),
and without direct or indirect restriction pursuant to the terms of its charter
and all agreements, instruments, judgments, decrees, orders, statutes, rules
and governmental regulations applicable to that Restricted Subsidiary or its
stockholders.
"Consolidated Net Income" means, with respect to any Person
for any period, the aggregate of the Net Income of such Person and its
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that (i) the Net Income (but not loss) of any Person that
is not a Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Restricted Subsidiary
thereof, (ii) the Net Income of any Restricted Subsidiary shall be excluded to
the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (that
has not been obtained) or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to that Restricted Subsidiary or its
stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition
shall be excluded and (iv) the cumulative effect of a change in accounting
principles shall be excluded. Notwithstanding the foregoing, for the purpose
of Section 4.8 only, there shall be excluded from Consolidated Net Income any
dividends or other distributions paid in cash by
<PAGE> 6
6
Unrestricted Subsidiaries to the referent Person or a Restricted Subsidiary
thereof to the extent such dividend or other distributions increase the amount
of Restricted Payments pursuant to Subsection 4.8(c)(iv)(A).
"Consolidated Net Worth" means the total of the amounts shown
on the balance sheet of the Company and its consolidated Restricted
Subsidiaries, determined on a consolidated basis in accordance with GAAP, as of
the end of the most recent fiscal quarter of the Company ending prior to the
taking of any action for the purpose of which the determination is being made
and for which financial statements are available (but in no event ending more
than 135 days prior to the taking of such action), as (i) the par or stated
value of all outstanding Capital Stock of the Company, plus (ii) paid-in
capital or capital surplus relating to such Capital Stock, plus (iii) any
retained earnings or earned surplus, less (a) any accumulated deficit and (b)
any amounts attributable to Disqualified Stock.
"Continuing Directors" means, as of any date of determination,
any member of the Board of Directors of the Company or the Parent, as the case
may be, who (i) was a member of such Board of Directors immediately after the
first date on which no shares of Series B Preferred Stock were outstanding or
(ii) was nominated for election or elected to such Board of Directors with the
approval of (a) a majority of the Continuing Directors who were members of such
Board at the time of such nomination or election or (b) a majority of those
directors who were previously approved by Continuing Directors.
"Corporate Trust Office of the Trustee" shall be at the
address of the Trustee specified in Section 12.2 hereof or such other
address as to which the Trustee may give notice to the Company.
"Credit Agreement" means that certain Credit Agreement, dated
as of ___________, 1996, by and among the Company, the Parent, The Chase
Manhattan Bank, N.A. as administrative agent and as a lender, Chemical Bank, as
a lender, Bankers Trust, as syndication agent and as a lender, Societe
Generale, as documentation agent and as a lender and certain banks, financial
institutions and other entities, as lenders, providing for up to $500.0 million
of Indebtedness, including any related notes, letters of credit issued
thereunder, guarantees, collateral documents, instruments and agreements
executed in connection therewith, and in each case as amended, restated,
modified, renewed, refunded, increased, replaced or refinanced, in whole or in
part, from time to time, whether or not with the same lenders or agents.
"Credit Facilities" means, with respect to the Company, one or
more debt facilities (including, without limitation, the Credit Agreement) or
commercial paper facilities with banks or other lenders providing for revolving
credit loans, term loans,
<PAGE> 7
7
production payment financing, receivables financing (including through the sale
of receivables to such lenders or to special purpose entities formed to borrow
from such lenders against such receivables) or letters of credit, in each case,
as amended, restated, modified, renewed, refunded, increased, replaced or
refinanced in whole or in part from time to time.
"Default" means any event that is or with the passage of time
or the giving of notice or both would be an Event of Default.
"Depository" means, with respect to the Notes issued in the
form of one or more Global Notes, The Depository Trust Company or another
Person designated as Depository by the Company, which must be a clearing
agency registered under the Exchange Act.
"Designated Senior Debt" means (i) the Credit Agreement and
(ii) any other Senior Debt permitted under this Indenture the principal amount
of which is $25 million or more and that has been designated by the Company as
"Designated Senior Debt."
"Discount Notes" the __% Senior Subordinated Discount Notes
issued by the Company due ____ 2006.
"Discount Notes Indenture" means the Indenture dated as of
____ __, 1996 among the Company, the Parent, and Harris Trust and Savings Bank,
as trustee, pursuant to which the Discount Notes were issued, as the same may
be amended, supplemented or otherwise modified from time to time.
"Disqualified Stock" means any Capital Stock that, by its
terms (or by the terms of any security into which it is convertible or for
which it is exchangeable), or upon the happening of any event, (i) matures or
is mandatorily redeemable for cash, pursuant to a sinking fund obligation or
otherwise, or redeemable for cash at the option of the Holder thereof, in whole
or in part, on or prior to the date that is 91 days after the date on which the
Notes mature, or (ii) requires the payment of cash dividends or other cash
distributions on or prior to the date that is 91 days after the date on which
the Notes mature.
"DNR" means DNR-MESA Holdings, L.P., a Delaware limited
partnership.
"Dollar-Denominated Production Payments" means production
payment obligations recorded as liabilities in accordance with GAAP, together
with all undertakings and obligations in connection therewith.
"Equity Interests" means Capital Stock and all warrants,
options or other rights to acquire Capital Stock (but excluding any debt
security that is convertible into, or
<PAGE> 8
8
exchangeable for, Capital Stock) and, with respect to any employee benefit
plans, stock appreciation rights.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Existing Debt" means Indebtedness of the Parent and its
Subsidiaries in existence after giving effect to the application of the
proceeds of the Recapitalization on the Closing Date, in an aggregate principal
amount not to exceed $12,900,000, together with all accrued and unpaid interest
thereon and all premiums payable with respect thereto until such amounts are
repaid.
"Fixed Charge Coverage Ratio" means with respect to any Person
for any period, the ratio of the Consolidated Cash Flow of such Person for such
period to the Fixed Charges of such Person for such period. In the event that
the Company or any of its Restricted Subsidiaries incurs, assumes, Guarantees,
redeems or pays any Indebtedness (other than revolving credit borrowings) or
issues or redeems Disqualified Stock subsequent to the commencement of the
period for which the Fixed Charge Coverage Ratio is being calculated but prior
to the date on which the calculation of the Fixed Charge Coverage Ratio is made
(the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be
calculated giving pro forma effect to such incurrence, assumption, guarantee or
redemption or payment of Indebtedness, or such issuance or redemption of
Disqualified Stock, as if the same had occurred at the beginning of the
applicable four-quarter reference period. In addition, for purposes of making
the computation referred to above, (i) acquisitions that have been made by the
Company or any of its Restricted Subsidiaries, including through mergers or
consolidations and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period and on or
prior to the Calculation Date (including, without limitation, any acquisition
to occur on the Calculation Date) shall be deemed to have occurred on the first
day of the four-quarter reference period and Consolidated Cash Flow for such
reference period shall be calculated without giving effect to clause (iii) of
the proviso set forth in the definition of Consolidated Net Income, (ii) the
net proceeds of Indebtedness incurred or Disqualified Stock issued by the
Company or any of its Restricted Subsidiaries pursuant to the first paragraph
of Section 4.9 hereof during the four-quarter reference period or subsequent to
such reference period and on or prior to the Calculation Date shall be deemed
to have been received by the Company or any such Restricted Subsidiary on the
first day of the four-quarter reference period and applied to its intended use
on such date, (iii) the Consolidated Cash Flow attributable to discontinued
operations, as determined in accordance with GAAP, and operations
<PAGE> 9
9
or businesses disposed of prior to the Calculation Date, shall be excluded and
(iv) the Fixed Charges attributable to discontinued operations, as determined
in accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, but only to the extent that the
obligations giving rise to such Fixed Charges shall not be obligations of the
referent Person or any of its Restricted Subsidiaries following the Calculation
Date.
"Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) the consolidated interest expense
of such Person and its Restricted Subsidiaries for such period, whether paid or
accrued (including, without limitation, amortization of original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees incurred in respect of letter of credit
or bankers' acceptance financings; (ii) the consolidated interest expense of
such Person and its Restricted Subsidiaries that was capitalized during such
period, (iii) any interest expense on Indebtedness of another Person that is
guaranteed by such Person or any of its Restricted Subsidiaries or secured by a
Lien on assets of such Person or any of its Restricted Subsidiaries (whether or
not such guarantee or Lien is called upon) and (iv) all cash dividend payments
(and non-cash dividend payments (unless paid in Equity Interests which are not
Disqualified Stock) in the case of a Person that is a Restricted Subsidiary) on
any series of preferred stock of such Person or any of its Restricted
Subsidiaries owned by Persons other than the Company or a Restricted
Subsidiary. For purposes of the definition of Fixed Charges, (i) interest on a
Capital Lease Obligation shall be deemed to accrue at an interest rate
reasonably determined by the Board of Directors of such Person (as evidenced by
a resolution of the Board of Directors of the Company) to be the rate of
interest implicit in such Capital Lease Obligation in accordance with GAAP,
(ii) interest on Indebtedness that is determined on a fluctuating basis shall
be deemed to have accrued at a fixed rate per annum equal to the rate of
interest of such Indebtedness in effect on the date Fixed Charges are being
calculated, subject to the proviso in clause (iii), (iii) interest on
Indebtedness that may optionally be determined at an interest rate based upon a
factor of a prime or similar rate, a eurocurrency interbank offered rate, or
other rate, shall be deemed to have been based upon the rate actually chosen,
or, if none, then based upon such optional rate chosen as the Company may
designate, (provided, that for the period following the date on which the rate
actually chosen ceases to be in effect, the Company may designate an optional
rate other than that actually chosen, which optional rate shall be deemed to
accrue at a fixed per annum equal to the rate of interest on such optional rate
in effect on the date Fixed Charges are being calculated) and (iv) Fixed
Charges shall be increased or reduced by the net cost (including amortization
of discount) or benefit associated with obligations under Interest Rate Hedging
Agreements attributable to such period.
<PAGE> 10
10
"GAAP" means generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as have been approved by a significant segment
of the accounting profession, which are in effect from time to time.
"Government Securities" means securities that are (a) direct
obligations of the United States of America for the timely payment of which its
full faith and credit is pledged or (b) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States
of America the timely payment of which is unconditionally guaranteed as a full
faith and credit obligation by the United States of America, which, in either
case, are not callable or redeemable at the option of the issuer thereof, and
shall also include a depository receipt issued by a bank (as defined in Section
3(a)(2) of the Securities Act), as custodian with respect to any such
Government Security or a specific payment of principal of or interest on any
such Government Security held by such custodian for the account of the holder
of such depository receipt; provided, that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to
the holder of such depository receipt from any amount received by the custodian
in respect of the Government Security or the specific payment of principal of
or interest on the Government Security evidenced by such depository receipt.
"guarantee" means a guarantee (other than by endorsement of
negotiable instruments for collection in the ordinary course of business),
direct or indirect, in any manner (including, without limitation, letters of
credit and reimbursement agreements in respect thereof), of all or any part of
any Indebtedness.
"Guarantee" means each of the Guarantees of the Notes by the
Parent and Subsidiary Guarantor hereunder.
"Guarantors" means each of (i) the Parent, and (ii) any
Material Restricted Subsidiary of the Company that executes a Guarantee in
accordance with the provisions of this Indenture, and, in each case, their
respective successors and assigns.
"Holder" means a Person in whose name a Note is registered on
the Registrar's books.
"Indebtedness" means, with respect to any Person, without
duplication, (a) any indebtedness of such Person, whether or not contingent,
(i) in respect of borrowed money, (ii) evidenced by bonds, notes, debentures or
similar instruments, (iii) evidenced by letters of credit (or reimbursement
agreements in respect thereof) or banker's acceptances, (iv) representing
Capital Lease Obligations, (v) representing the balance deferred
<PAGE> 11
11
and unpaid of the purchase price of any property, except any such balance that
constitutes an accrued expense or trade payable, (vi) representing any
obligations in respect of Interest Rate Hedging Agreements or Oil and Gas
Hedging Contracts, and (vii) in respect of any Production Payment, (b) all
indebtedness of others of the type referred to in clauses (a), (c), (d) or (e)
secured by a Lien on any asset of such Person (whether or not such indebtedness
is assumed by such Person, except that the amount of such indebtedness not
assumed shall be deemed to be the lesser of the value of such asset and the
amount of such indebtedness so secured), (c) obligations of such Person in
respect of production imbalances and (d) Attributable Debt of such Person, (e)
Acquired Debt of such Person and (f) to the extent not otherwise included in
the foregoing, the guarantee by such Person of any indebtedness of any other
Person, of the type referred to in the preceding clauses (a), (c), (d) or (e).
"Indenture" means this Indenture, as amended or supplemented
from time to time.
"Interest Rate Hedging Agreements" means, with respect to any
Person, the obligations of such Person under (i) interest rate swap agreements,
interest rate cap agreements and interest rate collar agreements and (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in interest rates.
"Investments" means, with respect to any Person, all
investments by such Person (including investments by such Person in Affiliates)
in the form of direct or indirect loans (including guarantees of Indebtedness
or other obligations, but excluding trade credit and other ordinary course
advances customarily made in the Oil and Gas Business), advances or capital
contributions (excluding commission, travel and similar advances to officers
and employees made in the ordinary course of business), purchases or other
acquisitions for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP; provided that
the following shall not constitute Investments: (i) an acquisition of assets,
Equity Interests or other securities by the Company for consideration
consisting of Equity Interests (other than Disqualified Stock) in the Company,
(ii) Interest Rate Hedging Agreements entered into in accordance with the
limitations set forth in clause (h) of the definition of "Permitted
Indebtedness" set forth in Section 4.9 hereof and (iii) Oil and Gas Hedging
contracts entered into in accordance with the limitations set forth in clause
(i) of the definition of "Permitted Indebtedness" set forth in Section 4.9
hereof and (iv) Permitted Marketing Transactions. If the Company or any
Restricted Subsidiary of the Company sells or otherwise disposes of any Equity
Interests of any direct or indirect Restricted Subsidiary of the Company (other
than MEV) such that, after giving effect to any such sale or disposition, such
Person is no longer a Subsidiary of the Company, the Company shall be
<PAGE> 12
12
deemed to have made an Investment on the date of any such sale or disposition
equal to the fair market value of the Equity Interests of such Subsidiary not
sold or disposed of.
"Legal Holiday" means a Saturday, a Sunday or a day on which
banking institutions in the City of New York, the City of Chicago or at a place
of payment are authorized by law, regulation or executive order to remain
closed. If a payment date is a Legal Holiday at a place of payment, payment
may be made at that place on the next succeeding day that is not a Legal
Holiday, and no interest shall accrue for the intervening period.
"Lien" means, with respect to any asset, any mortgage, lien,
pledge, charge, security interest or encumbrance of any kind in respect of such
asset, whether or not filed, recorded or otherwise perfected under applicable
law (including any conditional sale or other title retention agreement, any
lease in the nature thereof, any option or other agreement to sell or give a
security interest in and any filing of or agreement to give any financing
statement under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Liquid Securities" means securities (i) of an issuer that is
not an Affiliate of the Company and (ii) that are publicly traded on the New
York Stock Exchange, the American Stock Exchange or the Nasdaq National Market;
provided, that securities meeting the requirements of clauses (i) and (ii)
above shall be treated as Liquid Securities from the date of receipt thereof
until and only until the earlier of (x) the date on which such securities are
sold or exchanged for cash or cash equivalents and (y) 180 days following the
date of the closing of the Asset Sale in connection with which such Liquid
Securities were received. In the event such securities are not sold or
exchanged for cash or cash equivalents within such 180-day period, for purposes
of determining whether the transaction pursuant to which the Company or a
Restricted Subsidiary received the securities was in compliance with the
provisions of Section 4.10 hereof, such securities shall be deemed not to have
been Liquid Securities at any time.
"Material Restricted Subsidiary" means any Restricted
Subsidiary of the Company, which, as of the relevant date of determination,
would be a "significant subsidiary" as defined in Reg. Section 230.405
promulgated pursuant to the Securities Act as in effect on the date of issuance
of the Notes, assuming the Company is the "registrant" referred to in such
definition, except that the 10% amounts referred to in such definition shall be
deemed to be 5%.
"MEV" means Mesa Environmental Ventures Co. and its
Subsidiaries
"Moody's" means Moody's Investors Service, Inc. and its
successors.
<PAGE> 13
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"Net Income" means, with respect to any Person, the net income
(loss) of such Person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends, excluding, however, (i) any
gain or loss, together with any related provision for taxes on such gain or
loss, realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b)
the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain or
loss, together with any related provision for taxes on such extraordinary or
nonrecurring gain or loss.
"Net Proceeds" means the aggregate cash proceeds received by
the Company or any of its Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any cash received upon the sale or other
disposition of Liquid Securities or any other any non-cash consideration
received in any Asset Sale, but excluding cash amounts placed in escrow, until
such amounts are released to the Company), net of the direct costs relating to
such Asset Sale (including, without limitation, legal, accounting and
investment banking fees and expenses, and sales commissions) and any relocation
expenses incurred as a result thereof, taxes paid or payable as a result
thereof (after taking into account any available tax credits or deductions and
any tax sharing arrangements), amounts paid to minority interest holders,
amounts required to be applied to the repayment of Indebtedness (other than
Indebtedness under any Credit Facility) secured by a Lien on the asset or
assets that were the subject of such Asset Sale and any reserve for adjustment
in respect of the sale price of such asset or assets established in accordance
with GAAP and any reserve established for future liabilities.
"Non-Recourse Debt" means Indebtedness (i) as to which neither
the Company nor any of its Restricted Subsidiaries (a) provides any guarantee
or credit support of any kind (including any undertaking, guarantee, indemnity
or agreement or instrument that would constitute Indebtedness) or (b) is
directly or indirectly liable (as a guarantor or otherwise); (ii) no default
with respect to which (including any rights that the holders thereof may have
to take enforcement action against an Unrestricted Subsidiary) would permit
(upon notice, lapse of time or both) any holder of any other Indebtedness of
the Company or any of its Restricted Subsidiaries to declare a default on such
other Indebtedness or cause the payment thereof to be accelerated or payable
prior to its stated maturity; and (iii) the explicit terms of which provide
that there is no recourse against any of the assets of the Company or its
Restricted Subsidiaries.
"Note Custodian" means the Trustee or the Registrar, as
custodian with respect to the Notes in global form, or any
<PAGE> 14
14
successor entity thereto or any entity acting as custodian with respect to
Notes in global form.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Offering" means the offering of the Notes by the Company.
"Officer" means, with respect to any Person, the Chairman of
the Board, the Chief Executive Officer, the President, the Chief Operating
Officer, the Chief Financial Officer, the Treasurer, any Assistant Treasurer,
the Controller, the Secretary, the Assistant Secretary or any Vice-President of
such Person.
"Officers' Certificate" means a certificate signed on behalf
of the Company, by two Officers of the Company, one of whom must be the
principal executive officer, the principal financial officer, the treasurer or
the principal accounting officer of the Company, that meets the requirements of
Section 12.5 hereof.
"Oil and Gas Business" means (i) the acquisition, exploration,
exploitation development, operation and disposition of interests in oil, gas
and other hydrocarbon properties, (ii) the gathering, marketing, treating,
processing, storage, 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, storage,
transportation or marketing of oil, gas and other minerals and products
produced in association therewith and (iv) any activity that is ancillary or
necessary or desirable to facilitate the activities described in clauses (i)
through (iii) of this definition.
"Oil and Gas Hedging Contracts" means any oil and gas purchase
or hedging agreement, and other agreement or arrangement, in each case, that is
designed to provide protection against oil and gas price fluctuations.
"Opinion of Counsel" means an opinion from legal counsel who
is reasonably acceptable to the Trustee, that meets the requirements of Section
12.5 hereof. The counsel may be an employee of or counsel to the Company, the
Parent, any Subsidiary Guarantor or the Trustee.
"Pari Passu Indebtedness" means indebtedness which ranks pari
passu in right of payment to the Notes, including the Discount Notes.
<PAGE> 15
15
"Permitted Business Investments" means investments made in the
ordinary course of, and of a nature that is or shall have become customary in,
the Oil and Gas Business as a means of actively exploiting, exploring for,
acquiring, developing, processing, gathering, marketing or transporting oil and
gas through agreements, transactions, interests or arrangements which permit
one to share risks or costs, comply with regulatory requirements regarding
local ownership or satisfy other objectives customarily achieved through the
conduct of Oil and Gas Business jointly with third parties, including, without
limitation, (i) ownership interests in oil and gas properties, processing
facilities, gathering systems or ancillary real property interests and (ii)
Investments in the form of or pursuant to operating agreements, processing
agreements, farm-in agreements, farm-out agreements, development agreements,
area of mutual interest agreements, unitization agreements, pooling agreements,
joint bidding agreements, service contracts, joint venture agreements,
partnership agreements (whether general or limited), limited liability company
agreements, subscription agreements, stock purchase agreements and other
similar agreements with third parties.
"Permitted Investments" means (a) any Investment in the
Company or in a Restricted Subsidiary of the Company; (b) any Investment in
Cash Equivalents or securities issued or directly and fully guaranteed or
insured by the United States government or any agency or instrumentality
thereof having maturities of not more than one year from the date of
acquisition; (c) any Investment by the Company or any Restricted Subsidiary of
the Company in a Person if, as a result of such Investment and any related
transactions that at the time of such Investment are contractually mandated to
occur, (i) such Person becomes a Restricted Subsidiary of the Company or (ii)
such Person is merged, consolidated or amalgamated with or into, or transfers
or conveys all or substantially all of its assets to, or is liquidated into,
the Company or a Restricted Subsidiary of the Company; (d) any Investment made
as a result of the receipt of non-cash consideration from an Asset Sale that
was made pursuant to and in compliance with Section 4.10 hereof; (e) other
Investments having an aggregate fair market value (measured on the date each
such Investment was made and without giving effect to subsequent changes in
value), when taken together with all other Investments made pursuant to this
clause (e) that are at the time outstanding, not (net of repayments, dividends
and distributions received with respect to such Investments) to exceed $37.5
million; (f) Permitted Business Investments; (g) any Investment acquired by the
Company in exchange for Equity Interests in the Company or the Parent (other
than Disqualified Stock); (h) Investments in Unrestricted Subsidiaries with net
cash proceeds contributed to the common equity capital of the Company or a
Restricted Subsidiary since the date of this Indenture, provided that the
amount of any such net cash proceeds that are used for any such Investment
shall be excluded from clause (c)(ii) of the first paragraph of Section 4.7
hereof and
<PAGE> 16
16
(i) Investments received in connection with any good faith settlement of a
bankruptcy proceeding.
"Permitted Investor" means any Person who is or was (i) a
holder of Shares of the Series B Preferred Stock or (ii) an Affiliate of a
Person described in the immediately preceding clause (i).
"Permitted Liens" means (i) Liens securing Senior Debt under
the Credit Agreement, (ii) Liens securing Indebtedness of a Subsidiary and
Liens securing Senior Debt, in each case, that is outstanding on the date of
issuance of the Notes (after giving effect to the Recapitalization and the use
of the proceeds therefrom) and Liens securing Senior Debt that is permitted by
the terms of the Indentures to be incurred, (iii) Liens in favor of the Company
or any Restricted Subsidiary, (iv) Liens on property or assets existing at the
time of acquisition thereof by the Company or any Subsidiary of the Company and
Liens on property or assets of a Subsidiary existing at the time it became a
Subsidiary; provided, that such Liens were in existence prior to the
contemplation of the acquisition and do not extend to any property or assets
other than the acquired property or assets or the property or assets of the
acquired Subsidiary, (v) Liens incurred or deposits made in the ordinary course
of business in connection with workers' compensation, unemployment insurance or
other kinds of social security, or to secure the payment or performance of
tenders, statutory or regulatory obligations, surety or appeal bonds, bids,
leases, government contracts and other contracts (other than for borrowed
money), performance and return-of-money bonds or other obligations of a like
nature incurred in the ordinary course of business (including, without
limitation, lessee or operator obligations under statutes, governmental
regulations or instruments related to the ownership, exploration and production
of oil, gas and minerals on state or federal lands or waters), (vi) Liens
existing on the date of the Indentures (after giving effect to the
Recapitalization and the use of proceeds therefrom), (vii) Liens for taxes,
assessments and governmental charges and claims that are not yet delinquent or
that are being contested in good faith by appropriate proceedings promptly
instituted and diligently concluded; provided, that any reserve or other
appropriate provision as shall be required in conformity with GAAP shall have
been made therefor, (viii) statutory liens of landlords, mechanics, suppliers,
vendors, warehousemen, carriers and other like Liens arising in the ordinary
course of business, (ix) pre-judgment Liens and judgment Liens not giving rise
to an Event of Default so long as any appropriate legal proceeding that may
have been duly initiated for the review of such judgment shall not have been
finally terminated or the period within which such proceeding may be initiated
shall not have expired, (x) Liens on, or related to, properties or assets to
secure all or part of the costs incurred in the ordinary course of the Oil and
Gas Business for the exploration, drilling, development, production,
processing, transportation, marketing or storage or operation
<PAGE> 17
17
thereof and to support trade letters of credit and bankers' acceptances issued
or created in the ordinary course of business, (xi) Liens encumbering pipelines
or pipeline facilities that arise under operation of law, (xii) Liens arising
under operating agreements, joint venture agreements, partnership agreements,
oil and gas leases, farm-out agreements, division orders, contracts for the
sale, transportation or exchange of oil or natural gas, unitization and pooling
declarations and agreements, area of mutual interest agreements and other
agreements that are customary in the Oil and Gas Business, (xiii) Liens
reserved in oil and gas mineral leases for bonus and rental payments and for
compliance with the terms of such leases, (xiv) Liens constituting survey
exceptions, encumbrances, easements, and reservations of, and rights to others
for, rights-of-way, zoning and other restrictions as to the use of real
properties, and minor defects of title which, in the case of any of the
foregoing, do not secure the payment of borrowed money, and in the aggregate do
not materially adversely affect the value of the assets of the Company and its
Restricted Subsidiaries, taken as a whole, or materially impair the use of such
properties for the purposes for which such properties are held by the Company
or such Subsidiaries, (xv) Liens not otherwise permitted by clauses (i) through
(xiv) that are incurred in the ordinary course of business of the Company or
any Subsidiary of the Company with respect to obligations that do not exceed
$5.0 million at any one time outstanding, (xvi) Liens on assets of Unrestricted
Subsidiaries that secure Non-Recourse Debt of Unrestricted Subsidiaries, (xvii)
any interest or title of a lessor under any Capital Lease Obligation and
(xviii) purchase money Liens; provided, however, that (a) the related purchase
money Indebtedness shall not be secured by any property or assets of the
Company or any Restricted Subsidiary other than the property and assets so
acquired and the proceeds thereof and (b) the Lien securing such Indebtedness
shall be created no later than 10 days after such acquisition.
"Permitted Marketing Transaction" means (i) a transaction in
which the Company or any Subsidiary of the Parent either (a) establishes a
position using New York Mercantile Exchange Crude Oil or Natural Gas Futures
contracts to purchase hydrocarbons for future delivery to it or (b) purchases
or commits to purchase hydrocarbons for future delivery to it, and
contemporaneous with such purchase transaction either (1) establishes one or
more positions using New York Mercantile Exchange Crude Oil or Natural Gas
Futures contracts to resell at a date subsequent to such delivery date or (2)
enters into a contract with a Person to resell at a date subsequent to such
delivery date, a similar aggregate quantity and quality of hydrocarbons as so
purchased by the Company or such Subsidiary, as applicable, at an aggregate
price greater than the Indebtedness incurred for the hydrocarbons so purchased
by the Company or such Subsidiary or (ii) any other purchase by the Company or
any Subsidiary of the Parent of hydrocarbons for which the Company or such
Subsidiary has contracts to sell.
<PAGE> 18
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"Permitted Refinancing Debt" means any Indebtedness of the
Company or any of its Restricted Subsidiaries issued in exchange for, or the
net proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness (other than Indebtedness incurred under a Credit
Facility) of the Company or any of its Restricted Subsidiaries; provided that:
(i) the principal amount (or accreted value, if applicable) of such Permitted
Refinancing Debt does not exceed the principal amount (or accreted value, if
applicable) of the Indebtedness so extended, refinanced, renewed, replaced,
defeased or refunded, plus the amount of premiums and prepayment penalties and
other amounts required to be paid to the holders of such Indebtedness in
connection therewith and reasonable fees and expenses incurred in connection
therewith; (ii) such Permitted Refinancing Debt has a final maturity date on or
later than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of, the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the
Notes, such Permitted Refinancing Debt has a final maturity date later than the
final maturity date of, and is subordinated in right of payment to, the Notes
on terms at least to the same extent as the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness
is incurred either by the Company or by the Restricted Subsidiary who is the
obligor on the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded.
"Person" means any individual, corporation, partnership,
limited liability company, joint venture, association, joint-stock company,
trust, unincorporated organization, government or any agency or political
subdivision thereof or any other entity.
"Preferred Stock" means the collective reference to the Series
A Preferred Stock and the Series B Preferred Stock.
"Production Payments" means Dollar-Denominated Production
Payments and Volumetric Production Payments, collectively.
"Recapitalization" means the use of the net proceeds by the
Parent and the Company from (i) the sale of the Notes and the Discount Notes,
(ii) the credit facility pursuant to the Credit Agreement, (iii) the sale of
the Series B Preferred Stock pursuant to the Stock Purchase Agreement and (iv)
the sale of the Series A Preferred Stock pursuant to the Rights Offering along
with cash and investment balances of the Parent and the Company to repay and/or
refinance substantially all of the Parent's, the Company's and their respective
Subsidiaries' outstanding Indebtedness.
<PAGE> 19
19
"Repurchase Offer" means an offer made by the Company to
purchase all or any portion of a Holder's Notes pursuant to Section 4.10 or
4.13 hereof.
"Responsible Officer" when used with respect to the Trustee,
means any officer within the Corporate Trust Department of the Trustee (or any
successor group of the Trustee) or any other officer of the Trustee customarily
performing functions similar to those performed by any of the above designated
officers and also means, with respect to a particular corporate trust matter,
any other officer to whom such matter is referred because of his knowledge of
and familiarity with the particular subject.
"Restricted Investment" means an Investment other than a
Permitted Investment.
"Restricted Subsidiary" means any direct or indirect
Subsidiary of the Company that is not an Unrestricted Subsidiary.
"Rights Offering" means the rights offering by the Parent
whereby it will distribute to holders of its common stock transferrable rights
to purchase a pro rata portion of approximately 58,400,000 shares of Series A
Preferred Stock.
"S&P" means Standard & Poor's Ratings Group and its
successors.
"Securities Act" means the Securities Act of 1933, as amended.
"Series A Preferred Stock" means the Series A 8% Cumulative
Convertible Preferred Stock of the Parent.
"Series B Preferred Stock" means the Series B 8% Cumulative
Convertible Preferred Stock of the Parent.
"Standby Commitment" means the standby commitment provided by
DNR pursuant to which it will purchase additional shares of Series B Preferred
Stock equal to the number of shares of Series A Preferred Stock, if any, not
purchased in the Rights Offering.
"Stock Purchase Agreement" means the Stock Purchase Agreement
dated April 26, 1996 between the Parent and DNR, as the same may be amended,
supplemented, or otherwise modified from time to time.
"Subordinated Indebtedness" means any Indebtedness of the
Company or any Restricted Subsidiary (whether outstanding on the date of the
issuance of the Notes or thereafter incurred) which is expressly by its terms
subordinated or junior in right of payment to the Notes pursuant to a written
agreement.
<PAGE> 20
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"Subsidiary" means, with respect to any Person, (i) any
corporation, association or other business entity of which more than 50% of the
total voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or indirectly,
by such Person or one or more of the other Subsidiaries of that Person (or a
combination thereof) and (ii) any partnership (a) the sole general partner or
the managing general partner of which is such Person or a Subsidiary of such
Person or (b) the only general partners of which are such Person or of one or
more Subsidiaries of such Person (or any combination thereof).
"Subsidiary Guarantors" means any Material Restricted
Subsidiary of the Company that executes a Guarantee in accordance with the
provisions of this Indenture and any successor or assign of such Subsidiary
that becomes obligated under any Guarantee pursuant to this Indenture.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C.
Sections 77aaa-77bbbb) as in effect on the date on which this Indenture is
qualified under the TIA.
"Total Assets" means, with respect to the Company, the total
consolidated assets of the Company and its Restricted Subsidiaries, as shown on
the most recent balance sheet of the Company.
"Trustee" means the party named as such in the preamble to
this Indenture until a successor replaces it in accordance with the applicable
provisions of this Indenture and thereafter means the successor serving
hereunder.
"Unrestricted Subsidiary" means (i) any Subsidiary of the
Company which at the time of determination shall be an Unrestricted Subsidiary
(as designated by the Board of Directors of the Company, as provided below) and
(ii) any subsidiary of an Unrestricted Subsidiary. The Board of Directors of
the Company may designate any Subsidiary of the Company (including any newly
acquired or newly formed Subsidiary or a Person becoming a Subsidiary through
merger or consolidation or Investment therein) to be an Unrestricted Subsidiary
only if: (a) such Subsidiary does not own any Capital Stock of, or own or hold
any Lien on any property of, any other Subsidiary of the Company which is not a
Subsidiary of the Subsidiary to be so designated or otherwise an Unrestricted
Subsidiary; (b) all the Indebtedness of such Subsidiary shall at the date of
designation, and will at all times thereafter consist of, Non-Recourse Debt;
(c) the Company certifies that such designation was permitted by Section 4.7;
(d) such Subsidiary, either alone or in the aggregate with all other
Unrestricted Subsidiaries, does not operate, directly or indirectly, all or
substantially all of the business of the Company and the Subsidiaries; (e) such
Subsidiary does not, directly or indirectly, own any Indebtedness of or Equity
<PAGE> 21
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Interest in, and has no Investments in, the Company or any Restricted
Subsidiary; (f) such Subsidiary is a Person with respect to which neither the
Company nor any of its Restricted Subsidiaries has any direct or indirect
obligation (1) to subscribe for additional Equity Interests or (2) to maintain
or preserve such Person's financial condition or to cause such Person to
achieve any specified levels of operating results; and (g) on the date such
Subsidiary is designated an Unrestricted Subsidiary, such Subsidiary is not a
party to any agreement, contract, arrangement or understanding with the Company
or any Restricted Subsidiary with terms substantially less favorable to the
Company than those that might have been obtained from Persons who are not
Affiliates of the Company and (h) the Board of Directors of the Company shall
have made a determination (as set forth in the resolution approving such
designation, creation or purchase) that the designation, creation and operation
of the Unrestricted Subsidiary is not reasonably expected to materially and
adversely affect the financial condition, business, or operations of the
Company and its Restricted Subsidiaries taken together as a whole (which
resolution shall be conclusive evidence of compliance with this provision).
Any such designation by the Board of Directors of the Company shall be
evidenced to the Trustee by filing with the Trustee a resolution of the Board
of Directors of the Company giving effect to such designation and an Officer's
Certificate certifying that such designation complied with the foregoing
conditions. If, at any time, any Unrestricted Subsidiary would fail to meet
the foregoing requirements as an Unrestricted Subsidiary, it shall thereafter
cease to be an Unrestricted Subsidiary for purposes of the Indenture and any
Indebtedness of such Subsidiary shall be deemed to be incurred as of such date.
The Board of Directors of the Company may designate any Unrestricted Subsidiary
to be a Restricted Subsidiary; provided, that immediately after giving effect
to such designation, no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof and the Company could incur
at least $1.00 of additional Indebtedness (excluding Permitted Indebtedness)
pursuant to Section 4.9 on a pro forma basis taking into account such
designation.
"Volumetric Production Payments" means production payment
obligations recorded as deferred revenue in accordance with GAAP, together with
all undertakings and obligations in connection therewith.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the sum
of the products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
<PAGE> 22
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"Wholly Owned Restricted Subsidiary" means, with respect to
any Person, a Restricted Subsidiary of such Person, all of the outstanding
Capital Stock or other ownership interests of which (other than directors'
qualifying shares) are owned, directly or indirectly, by such Person or by one
or more Wholly Owned Restricted Subsidiaries of such Person.
Section 1.2. Other Definitions.
<TABLE>
<CAPTION>
Defined in
Term Section
<S> <C>
"Affiliate Transaction" . . . . . . . . . . . . . . . . . . . 4.11
"Asset Sale Offer" . . . . . . . . . . . . . . . . . . . . . . 3.9
"Bankruptcy Law" . . . . . . . . . . . . . . . . . . . . . . . 10.2
"Change of Control Offer" . . . . . . . . . . . . . . . . . . 4.13
"Change of Control Payment" . . . . . . . . . . . . . . . . . 4.13
"Change of Control Payment Date" . . . . . . . . . . . . . . . 4.13
"Closing Date" . . . . . . . . . . . . . . . . . . . . . . . . 2.1
"Covenant Defeasance" . . . . . . . . . . . . . . . . . . . . 8.3
"Custodian" . . . . . . . . . . . . . . . . . . . . . . . . . 6.1
"Designated Senior Debt" . . . . . . . . . . . . . . . . . . . 10.2
"DTC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3
"Event of Default" . . . . . . . . . . . . . . . . . . . . . . 6.1
"Excess Proceeds" . . . . . . . . . . . . . . . . . . . . . . 4.10
"Global Note Holder" . . . . . . . . . . . . . . . . . . . . . 2.1
"incur" . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.9
"Legal Defeasance" . . . . . . . . . . . . . . . . . . . . . . 8.2
"Notice of Default" . . . . . . . . . . . . . . . . . . . . . 6.1
"Offer Amount" . . . . . . . . . . . . . . . . . . . . . . . . 3.9
"Offer Period" . . . . . . . . . . . . . . . . . . . . . . . . 3.9
"Paying Agent" . . . . . . . . . . . . . . . . . . . . . . . . 2.3
"Payment Blockage Notice" . . . . . . . . . . . . . . . . . . 10.4
"Payment Default" . . . . . . . . . . . . . . . . . . . . . . 6.1
"Permitted Indebtedness" . . . . . . . . . . . . . . . . . . . 4.9
"Purchase Date" . . . . . . . . . . . . . . . . . . . . . . . 3.9
"Registrar" . . . . . . . . . . . . . . . . . . . . . . . . . 2.3
"Restricted Payments" . . . . . . . . . . . . . . . . . . . . 4.7
"Senior Debt" . . . . . . . . . . . . . . . . . . . . . . . . 10.2
</TABLE>
Section 1.3. Incorporation By Reference of Trust Indenture
Act.
Whenever this Indenture refers to a provision of the TIA, the
provision is incorporated by reference in and made a part of this Indenture.
The following TIA terms used in this Indenture have the
following meanings:
"indenture securities" means the Notes;
"indenture to be qualified" means this Indenture;
<PAGE> 23
23
"indenture trustee" or "institutional trustee" means the
Trustee;
"obligor" with respect to the Notes means the Company and with
respect to the Guarantees means the Parent and any Subsidiary Guarantor and any
successor obligor upon the Notes and the Guarantees, respectively.
All other terms used in this indenture that are defined by the
TIA, defined by TIA reference to another statute or defined by rule enacted by
the Commission under the TIA have the meanings so assigned to them.
Section 1.4. Rules of Construction.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the
meaning assigned to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) words in the singular include the plural, and in the
plural include the singular;
(5) provisions apply to successive events and
transactions; and
(6) references to sections of or rules under the
Securities Act shall be deemed to include substitute, replacement of
successor sections or rules adopted by the Commission from time to
time.
ARTICLE 2
THE NOTES
Section 2.1. Form and Dating.
The Notes and the Trustee's certificate of authentication
shall be substantially in the form of Exhibit A hereto. The Guarantees of the
Parent and the Subsidiary Guarantors, if any, shall be substantially in the
form of Exhibit C hereto, the terms of which are incorporated in and made part
of this indenture. The Notes may have notations, legends or endorsements
required by law, stock exchange rule or usage. Each Note shall be dated the
date of its issuance and shall show the date of its authentication. The Notes
will be fully registered as to principal and interest in minimum denominations
of $1,000 and integral multiples of $1,000 in excess thereof.
<PAGE> 24
24
The Notes offered and sold may be issued initially in the form
of one or more fully registered Global Notes, with, or on behalf of, The
Depository Trust Company and registered in the name of Cede & Co., as nominee
of the Depository (such nominee being referred to herein as the "Global Note
Holder"), or will remain in the custody of the Registrar pursuant to the Fast
Balance Certificate Agreement between the Depository and the Registrar and
shall bear the legend set forth as Exhibit B. Except as set forth in Section
2.6, the Global Notes may be transferred, in whole and not in part, only to
another nominee of the Depository or to a successor of the Depository or its
nominee.
The terms and provisions contained in the Notes shall
constitute, and are hereby expressly made, a part of this Indenture and the
Company, Parent, any Subsidiary Guarantor and the Trustee, by their execution
and delivery of this Indenture, expressly agree to such terms and provisions
and (as to the Trustee, to the extent such terms and provisions pertain to the
Trustee) to be bound thereby.
Notes issued in global form shall be substantially in the form
of Exhibit A attached hereto (including the legend on Exhibit B). Notes issued
in certificated form shall be substantially in the form of Exhibit A attached
hereto (but without including the legend on Exhibit B). Each Global Note shall
represent such of the outstanding Notes as shall be specified therein and each
shall provide that it shall represent the aggregate amount of outstanding Notes
from time to time endorsed thereon and that the aggregate amount of outstanding
Notes represented thereby may from time to time be reduced or increased, as
appropriate, to reflect exchanges and redemptions. Any endorsement of a Global
Note to reflect the amount of any increase or decrease in the amount of
outstanding Notes represented thereby shall be made by the Trustee or the Note
Custodian, at the direction of the Trustee, in accordance with instructions
given by the Holder thereof as required by Section 2.6 hereof.
Section 2.2. Execution and Authentication.
Two Officers shall sign the Notes for the Company by manual or
facsimile signature. The Company's seal shall be reproduced on the Notes and
may be in facsimile form.
If an Officer whose signature is on a Note no longer holds
that office at the time a Note is authenticated, the Note shall nevertheless be
valid.
A Note shall not be valid until authenticated by the manual
signature of the Trustee. The signature shall be conclusive evidence that the
Note has been authenticated under this Indenture.
<PAGE> 25
25
The Trustee shall, upon a written order of the Company signed
by two Officers, authenticate Notes for original issue up to the aggregate
principal amount of $325,000,000. The aggregate principal amount of Notes
outstanding at any time may not exceed $325,000,000, except as provided in
Section 2.7 hereof.
The Trustee may appoint an authenticating agent acceptable to
the Company to authenticate Notes. An authenticating agent may authenticate
Notes whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as an Agent to deal with the Company
or an Affiliate of the Company.
Section 2.3. Registrar and Paying Agent.
The Company shall maintain an office or agency in the Borough
of Manhattan, The City of New York where (i) Notes may be presented for
registration of transfer or for exchange ("Registrar") and (ii) Notes may be
presented for payment ("Paying Agent"). The Registrar shall keep a register of
the Notes and of their transfer and exchange. The Company may appoint one or
more co-registrars and one or more additional paying agents. The term
"Registrar" includes any co-registrar and the term "Paying Agent" includes any
additional paying agent. The Company may change any Paying Agent or Registrar
without notice to any Holder. The Company shall notify the Trustee in writing
of the name and address of any Agent not a party to this Indenture. If the
Company fails to appoint or maintain another entity as Registrar or Paying
Agent, the Trustee shall act as such. The Company or any of its Subsidiaries
may act as Paying Agent or Registrar.
The Company initially appoints The Depository Trust Company
("DTC")to act as Depository with respect to the Global Notes.
The Company initially appoints the Trustee to act as the
Registrar and Paying Agent and to act as Note Custodian with respect to the
Global Notes.
Section 2.4. Paying Agent to Hold Money in Trust.
The Company shall require each Paying Agent, including the
Trustee (who shall be deemed to have agreed by its execution of this
Indenture), to agree in writing that the Paying Agent shall hold in trust for
the benefit of Holders or the Trustee (unless the Paying Agent is the Trustee,
in which case it shall hold in trust for the Holders) all money held by the
Paying Agent for the payment of principal, premium, if any, or interest, on the
Notes, and shall notify the Trustee of any default by the Company, the Parent
or any Subsidiary Guarantor in making any such payment. While any such default
continues, the Trustee may require a Paying Agent to pay all money held by it
to the
<PAGE> 26
26
Trustee. The Company at any time may require a Paying Agent to pay all money
held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent
(if other than the Company, the Parent or a Subsidiary) shall have no further
liability for the money. If the Company, the Parent or a Subsidiary acts as
Paying Agent, it shall segregate and hold in a separate trust fund for the
benefit of the Holders all money held by it as Paying Agent. Upon any
bankruptcy or reorganization proceedings relating to the Company, the Parent or
a Subsidiary Guarantor, the Trustee shall serve as sole Paying Agent for the
Notes.
Section 2.5. Holder Lists.
The Trustee shall preserve in as current a form as is
reasonably practicable the most recent list available to it of the names and
addresses of all Holders and shall otherwise comply with TIA Section 312(a).
If the Trustee is not the Registrar, the Company, the Parent and/or the
Subsidiary Guarantors shall furnish to the Trustee at least seven Business Days
before each interest payment date and at such other times as the Trustee may
request in writing, a list in such form and as of such date as the Trustee may
reasonably require of the names and addresses of the Holders of Notes and the
Company, the Parent and the Subsidiary Guarantors shall otherwise comply with
TIA Section 312(a).
Section 2.6. Transfer and Exchange.
Subject to the provisions of Section 2.13, when Notes are
presented to the Registrar with a request to register the transfer of such
Notes or to exchange such Notes for an equal principal amount of Notes of other
authorized denominations, the Registrar shall register the transfer or make the
exchange as requested if its requirements for such transaction are met;
provided, however, that the Notes surrendered for transfer or exchange shall be
duly endorsed or accompanied by a written instrument of transfer duly executed
by the Holder thereof (or his attorney duly authorized in writing) in form
satisfactory to the Company and to the Registrar. In order to permit
registrations of transfers and exchanges, the Company shall execute and the
Trustee shall authenticate Notes at the Registrar's written request. No
service charge shall be made for any registration of transfer or exchange or of
redemption, but the Company may, by notice to the Trustee, require payment of a
sum sufficient to cover any transfer tax or similar governmental charge payable
in connection therewith (other than any such transfer taxes or other
governmental charge payable upon exchanges or transfers pursuant to Sections
2.2, 2.3, 3.6, 3.7(b) or 3.9). The Registrar shall not be required to register
the transfer of or exchange of any Note (i) during a period beginning at the
opening of business 15 days before the mailing of a notice of redemption of
Notes and ending at the close of business on the day of such mailing and (ii)
selected for redemption in whole or in part pursuant to Article Three, except
the unredeemed portion of any Note being redeemed in part.
<PAGE> 27
27
Prior to due presentment for the registration of a transfer of
any Note, the Trustee, any Agent and the Company may deem and treat the Person
in whose name any Note is registered as the absolute owner of such Note for the
purpose of receiving payment of principal of and interest on such Notes, and
neither the Trustee, any Agent nor the Company shall be affected by notice to
the contrary.
Section 2.7. Replacement Notes.
If any mutilated Note is surrendered to the Trustee, or the
Company and the Trustee receive evidence to their satisfaction of the
destruction, loss or theft of any Note, the Company shall issue and the
Trustee, upon the receipt of a written authentication order of the Company
signed by two Officers of the Company, shall authenticate a replacement Note if
the Trustee's requirements are met. If required by the Trustee or the Company,
an indemnity bond must be supplied by the Holder that is sufficient in the
judgment of the Trustee and the Company to protect the Company, the Trustee,
any Agent and any authenticating agent from any loss that any of them may
suffer if a Note is replaced. The Company and the Trustee may charge for its
expenses in replacing a Note.
Every replacement Note is an additional obligation of the
Company and shall be entitled to all of the benefits of this Indenture equally
and proportionately with all other Notes duly issued hereunder.
Section 2.8. Outstanding Notes.
The Notes outstanding at any time are all the Notes
authenticated by the Trustee except for those cancelled by it, those delivered
to it for cancellation, those reductions in the interest in a Global Note
effected by the Trustee in accordance with the provisions hereof, and those
described in this Section as not outstanding. Except as set forth in Section
2.9 hereof, a Note does not cease to be outstanding because the Company or an
Affiliate of the Company holds the Note.
If a Note is replaced pursuant to Section 2.7 hereof, it
ceases to be outstanding unless the Trustee receives proof satisfactory to it
that the replaced Note is held by a bona fide purchaser.
If the principal amount of any Note is considered paid under
Section 4.1 hereof, it ceases to be outstanding and interest on it ceases to
accrue. Notes will also cease to be outstanding for certain purposes hereunder
as provided in Article 8 hereof.
If the Paying Agent (other than the Company, the Parent, a
Subsidiary or an Affiliate of any thereof) holds, on a redemption date or
maturity date, money sufficient to pay Notes
<PAGE> 28
28
payable on that date, then on and after that date such Notes shall be deemed to
be no longer outstanding and shall cease to accrue interest.
Section 2.9. Treasury Notes.
In determining whether the Holders of the required principal
amount of Notes have concurred in any direction, waiver or consent, Notes owned
by the Company, the Parent, any Subsidiary Guarantor, or by any Affiliate of
the Company, the Parent or any Subsidiary Guarantor, shall be considered as
though not outstanding, except that for the purposes of determining whether the
Trustee shall be protected in relying on any such direction, waiver or consent,
only Notes that a Trustee actually knows are registered in the names of the
Company, the Parent, any Subsidiary Guarantor or any of their Affiliates or are
certified as such by the Company in an Officer's Certificate delivered to the
Trustee shall be so disregarded.
When the Company, the Parent, any Subsidiary Guarantor or any
of their Affiliates repurchases or otherwise acquires Notes, the Company shall
notify the Trustee, in writing, of the aggregate principal amount of such Notes
so repurchased or otherwise acquired. The Trustee may require an Officer's
Certificate listing Notes owned by the Company, the Parent, any Subsidiary
Guarantor or any of their Affiliates.
Section 2.10. CUSIP Number.
The Company in issuing the Notes may use a "CUSIP" number, and
if so, the Trustee shall use the CUSIP number in notices of redemption or
exchange as a convenience to Holders; provided that any such notice may state
that no representation is made as to the correctness or accuracy of the CUSIP
number printed in the notice or on the Notes and that reliance may be placed
only on the other identification numbers printed on the Notes.
Section 2.11. Cancellation.
The Company at any time may deliver Notes to the Trustee for
cancellation. The Registrar and Paying Agent shall forward to the Trustee any
Notes surrendered to them for registration of transfer, exchange or payment.
The Trustee and no one else shall cancel all Notes surrendered for registration
of transfer, exchange, payment, replacement or cancellation and shall destroy
cancelled Notes (subject to the record retention requirement of the Exchange
Act). Certification of the destruction of all cancelled Notes shall be
delivered to the Company. The Company may not issue new Notes to replace Notes
that it has paid or that have been delivered to the Trustee for cancellation.
<PAGE> 29
29
Section 2.12. Defaulted Interest.
If the Company defaults in a payment of interest on the Notes,
it shall pay the defaulted interest in any lawful manner plus, to the extent
lawful, interest payable on the defaulted interest, to the Persons who are
Holders on a subsequent special record date, in each case at the rate provided
in the Notes and in Section 4.1 hereof. The Company shall notify the Trustee
in writing of the amount of defaulted interest proposed to be paid on each Note
and the date of the proposed payment. The Company shall fix or cause to be
fixed each such special record date and payment date, provided that no such
special record date shall be less than 10 days prior to the related payment
date for such defaulted interest. At least 15 days before the special record
date, the Company (or, upon the written request of the Company, the Trustee in
the name and at the expense of the Company) shall mail or cause to be mailed to
Holders a notice that states the special record date, the related payment date
and the amount of such interest to be paid.
Section 2.13. Book-Entry Provisions for Global Notes.
(a) The Global Notes initially shall (i) be registered in the
name of Cede & Co., as the nominee of The Depository Trust Company, (ii) be
delivered to the Registrar as custodian for such Depository and (iii) bear
legends as set forth in Exhibit B.
(b) Members of, or participants in, the Depository ("Agent
Members") shall have no rights under this Indenture with respect to any Global
Note held on their behalf by the Depository, or the Registrar or the Trustee as
its custodian, or under the Global Note, and the Depository may be treated by
the Company, the Trustee and any agent of the Company or the Trustee as the
absolute owner of the Global Note for all purposes whatsoever. Notwithstanding
the foregoing, nothing herein shall prevent the Company, the Trustee or any
agent of the Company or the Trustee from giving effect to any written
certification, proxy or other authorization furnished by the Depository or
impair, as between the Depository and its Agent Members, the operation of
customary practices governing the exercise of the rights of a Holder of any
Note.
(c) Transfers of Global Notes shall be limited to transfers
in whole, but not in part, to the Depository, its successors or their
respective nominees. Interests of beneficial owners in the Global Notes may be
transferred or exchanged for Certificated Notes in accordance with the rules
and procedures of the Depository. In addition, Certificated Notes shall be
transferred to all beneficial owners in exchange for their beneficial interests
in Global Notes if (i) the Company notifies the Registrar that the Depository
is unwilling or unable to continue as Depository for any Global Note and a
successor Depository is not appointed by the Company within 90 days of such
notice or (ii) the Company, at its option, notifies the Registrar
<PAGE> 30
30
in writing that it elects to cause the issuance of Notes in definitive form
under the Indenture or (iii) an Event of Default has occurred and is continuing
and the Registrar has received a request from the Depository to issue
Certificated Notes.
(d) In connection with any transfer or exchange of a portion
of the beneficial interest in any Global Note to beneficial owners pursuant to
paragraph (c), the Registrar shall (if one or more Certificated Notes are to be
issued) reflect on its books and records the date and a decrease in the
principal amount of the Global Note in an amount equal to the principal amount
of the beneficial interest in the Global Note to be transferred, and the
Company shall execute, and the Trustee shall authenticate and deliver, one or
more Certificated Notes of like tenor and amount.
(e) In connection with the transfer of Global Notes as an
entirety to beneficial owners pursuant to the second sentence of paragraph (c),
the Global Notes shall be deemed to be surrendered to the Trustee for
cancellation, and the Company shall execute, and the Trustee shall authenticate
and deliver, to each beneficial owner identified by the Depository in exchange
for its beneficial interest in the Global Notes, an equal aggregate principal
amount of Certificated Notes of authorized denominations.
(f) The Holder of any Global Note may grant proxies and
otherwise authorize any person, including Agent Members and persons that may
hold interests through Agent Members, to take any action which a Holder is
entitled to take under this Indenture or the Notes.
ARTICLE 3
REDEMPTION AND PREPAYMENT
Section 3.1. Notices to Trustee.
If the Company elects to redeem Notes pursuant to the optional
redemption provisions of Section 3.7 hereof, then it shall furnish to the
Trustee, at least 30 days but not more than 60 days before a redemption date,
an Officers' Certificate setting forth (i) the paragraph of the Notes and/or
Section of this Indenture pursuant to which the redemption shall occur, (ii)
the redemption date, (iii) the principal amount of Notes to be redeemed and
(iv) the redemption price.
Section 3.2. Selection of Notes to Be Redeemed.
If less than all of the Notes are to be redeemed at any time,
selection of Notes for redemption shall be made by the Trustee in compliance
with the requirements of the principal national securities exchange, if any, on
which the Notes are listed, or, if the Notes are not so listed, on a pro rata
basis,
<PAGE> 31
31
by lot or by such method as the Trustee shall deem fair and appropriate;
provided that no Notes of $1,000 or less shall be redeemed in part. In the
event of partial redemption by lot, the particular Notes to be redeemed shall
be selected, unless otherwise provided herein, not less than 30 nor more than
60 days prior to the redemption date by the Trustee from the outstanding Notes
not previously called for redemption.
The Trustee shall promptly notify the Company in writing of
the Notes selected for redemption and, in the case of any Note selected for
partial redemption, the principal amount thereof to be redeemed. Notes and
portions of Notes selected shall be in amounts of $1,000 or whole multiples of
$1,000; except that if all of the Notes of a Holder are to be redeemed, the
entire outstanding amount of Notes held by such Holder, even if not a multiple
of $1,000, shall be redeemed. A new Note in principal amount equal to the
unredeemed portion thereof shall be issued in the name of the Holder thereof
upon cancellation of the original Note. On and after the redemption date,
unless the Company defaults in payment of the redemption price, interest ceases
to accrue on Notes or portions of them called for redemption. Except as
provided in this Section 3.2, provisions of this Indenture that apply to Notes
called for redemption also apply to portions of Notes called for redemption.
Section 3.3. Notice of Redemption.
Subject to the provisions of Section 3.9 hereof, at least 30
days but not more than 60 days before a redemption date, the Company shall mail
or cause to be mailed, by first class mail, a notice of redemption to each
Holder of Notes to be redeemed at such Holder's registered address.
The notice shall identify the Notes to be redeemed and shall
state:
(a) the redemption date;
(b) the redemption price;
(c) if any Note is being redeemed in part, the portion of
the principal amount of such Note to be redeemed and that, after the redemption
date upon surrender of such Note, a new Note or Notes in principal amount equal
to the unredeemed portion shall be issued upon cancellation of the original
Note;
(d) the name and address of the Paying Agent;
(e) that Notes called for redemption must be surrendered
to the Paying Agent to collect the redemption price;
(f) that, unless the Company defaults in making such
redemption payment, interest on Notes called for redemption cease to accrue on
and after the redemption date;
<PAGE> 32
32
(g) the paragraph of the Notes and/or Section of this
Indenture pursuant to which the Notes called for redemption are being redeemed;
and
(h) that no representation is made as to the correctness
or accuracy of the CUSIP number, if any, listed in such notice or printed on
the Notes.
At the Company's request and expense, the Trustee shall give
the notice of redemption in the Company's name; provided, however, that the
Company shall have delivered to the Trustee, at least 45 days prior to the
redemption date, an Officers' Certificate requesting that the Trustee give such
notice and setting forth the information to be stated in such notice as
provided in the preceding paragraph.
Section 3.4. Effect of Notice of Redemption.
Once notice of redemption is mailed in accordance with Section
3.3 hereof, Notes called for redemption become irrevocably due and payable on
the redemption date at the redemption price. A notice of redemption may not be
conditional.
Section 3.5. Deposit of Redemption Price.
On or prior to the redemption date, the Company shall deposit
with the Trustee or with the Paying Agent money sufficient to pay the
redemption price of and accrued interest on all Notes to be redeemed on that
date. The Trustee or the Paying Agent shall promptly return to the Company any
money deposited with the Trustee or the Paying Agent by the Company in excess
of the amounts necessary to pay the redemption price of and accrued interest
on, all Notes to be redeemed.
If the Company complies with the provisions of the preceding
paragraph, on and after the redemption date, interest shall cease to accrue on
the Notes or the portions of Notes called for redemption. If a Note is
redeemed on or after an interest record date but on or prior to the related
interest payment date, then any accrued and unpaid interest shall be paid to
the Person in whose name such Note was registered at the close of business on
such record date. If any Note called for redemption shall not be so paid upon
surrender for redemption because of the failure of the Company to comply with
the preceding paragraph, interest shall be paid on the unpaid principal, from
the redemption date until such principal is paid, and to the extent lawful on
any interest not paid on such unpaid principal, in each case at the rate
provided in the Notes and in Section 4.1 hereof.
Section 3.6. Notes Redeemed in Part.
Upon surrender of a Note that is redeemed in part, the Company
shall issue and, upon the receipt of a written
<PAGE> 33
33
authentication order of the Company signed by two Officers of the Company, the
Trustee shall authenticate for the Holder at the expense of the Company a new
Note equal in principal amount to the unredeemed portion of the Note
surrendered.
Section 3.7. Optional Redemption.
(a) Except as set forth in clause (b) of this Section
3.7, the Company shall not have the option to redeem the Notes pursuant to this
Section 3.7 prior to _______, 2001. From and after _______, 2001, the Company
shall have the option to redeem the Notes, in whole or in part, at the
redemption prices (expressed as percentages of principal amount) set forth
below plus accrued and unpaid interest thereon to the applicable redemption
date, if redeemed during the twelve-month period beginning on _________ of each
of the years indicated below:
<TABLE>
<CAPTION>
Percentage of
Year Principal Amount
---- ----------------
<S> <C>
2001 . . . . . . . . . . . . . . . . . . . . . . . . ______%
2002 . . . . . . . . . . . . . . . . . . . . . . . . . ______%
2003 . . . . . . . . . . . . . . . . . . . . . . . . ______%
2004 and thereafter . . . . . . . . . . . . . . . . . 100.000%
</TABLE>
(b) Notwithstanding the provisions of clause (a) of this
Section 3.7, at any time prior to ________, 1999, the Company may, at its
option, on any one or more occasions, redeem up to [$ amount equal to 33 1/3%]
million in aggregate principal amount of Notes at a redemption price of ____%
of the principal amount thereof, plus accrued and unpaid interest thereon to
the redemption date with the net proceeds of sales of Equity Interests (other
than Disqualified Stock) in the Company or Parent; provided that at least [$
amount equal to 66 2/3%] million in aggregate principal amount of Notes remains
outstanding immediately after the occurrence of such redemption; and provided,
further, that such redemption shall occur within 60 days of the date after the
closing of the related sale of such Equity Interests.
(c) Any redemption pursuant to this Section 3.7 shall be
made pursuant to the provisions of Sections 3.1 through 3.6 hereof.
Section 3.8. Mandatory Redemption.
Except as set forth under Sections 4.10 and 4.13 hereof, the
Company shall not be required to make mandatory redemption or sinking fund
payments with respect to the Notes.
<PAGE> 34
34
Section 3.9. Offer to Purchase By Application of Excess
Proceeds.
In the event that, pursuant to Section 4.10 hereof, the
Company shall be required to commence an offer to all Holders of Notes and all
holders of the Discount Notes and, to the extent required by the terms thereof,
to all holders or lenders of other Pari Passu Indebtedness, to purchase Notes
and Discount Notes and any such Pari Passu Indebtedness (an "Asset Sale
Offer"), it shall follow the procedures specified below.
The Asset Sale Offer shall remain open for a period of 20
Business Days following its commencement and no longer, except to the extent
that a longer period is required by applicable law (the "Offer Period"). No
later than five Business Days after the termination of the Offer Period (the
"Purchase Date"), the Company shall purchase the principal amount of Notes
required to be purchased pursuant to Section 4.10 hereof, giving effect to any
related offer for Pari Passu Indebtedness pursuant to Section 4.10, (the "Offer
Amount") or, if less than the Offer Amount has been tendered, all Notes
tendered in response to the Asset Sale Offer. Payment for any Notes so
purchased shall be made in the same manner as interest payments are made.
If the Purchase Date is on or after an interest record date
and on or before the related interest payment date, any accrued and unpaid
interest shall be paid to the Person in whose name a Note is registered at the
close of business on such record date, and no additional interest shall be
payable to Holders who tender Notes pursuant to the Asset Sale Offer.
Upon the commencement of an Asset Sale Offer, the Company
shall send, by first class mail, a notice to the Trustee and each of the
Holders. The notice shall contain all instructions and materials necessary to
enable such Holders to tender Notes pursuant to the Asset Sale Offer. The
Asset Sale Offer shall be made to all Holders. The notice, which shall govern
the terms of the Asset Sale Offer, shall state:
(a) that the Asset Sale Offer is being made pursuant to
this Section 3.9 and Section 4.10 hereof and the length of time the
Asset Sale Offer shall remain open;
(b) the Offer Amount, the purchase price and the Purchase
Date;
(c) that any Note not tendered or accepted for payment
shall continue to accrue interest;
(d) that, unless the Company defaults in making such
payment, any Note accepted for payment pursuant to the Asset Sale
Offer shall cease to accrue interest after the Purchase Date;
<PAGE> 35
35
(e) that Holders electing to have a Note purchased
pursuant to an Asset Sale Offer may only elect to have all of such
Note purchased and may not elect to have only a portion of such Note
purchased;
(f) that Holders electing to have a Note purchased
pursuant to any Asset Sale Offer shall be required to surrender the
Note, with the form entitled "Option of Holder to Elect Purchase" on
the reverse of the Note completed, or transfer by book-entry transfer,
to the Company, a Depository, if appointed by the Company, or a Paying
Agent at the address specified in the notice at least three Business
Days before the Purchase Date;
(g) that Holders shall be entitled to withdraw their
election if the Company, the Depository or the Paying Agent, as the
case may be, receives, not later than the expiration of the Offer
Period, a telegram, telex, facsimile transmission or letter setting
forth the name of the Holder, the principal amount of the Note the
Holder delivered for purchase and a statement that such Holder is
withdrawing his election to have such Note purchased;
(h) that, if the aggregate principal amount of Notes
surrendered by Holders exceeds the Offer Amount, the Company shall
select the Notes to be purchased on a pro rata basis (with such
adjustments as may be deemed appropriate by the Company so that only
Notes in denominations of $1,000, or integral multiples thereof, shall
be purchased) in the manner provided in Section 4.10; and
(i) that Holders whose Notes were purchased only in part
shall be issued new Notes equal in principal amount to the unpurchased
portion of the Notes surrendered (or transferred by book-entry
transfer).
On or before the Purchase Date, the Company shall, to the
extent lawful, accept for payment, on a pro rata basis to the extent necessary,
the Offer Amount of Notes or portions thereof tendered pursuant to the Asset
Sale Offer, or if less than the Offer Amount has been tendered, all Notes
tendered, and shall deliver to the Trustee an Officers' Certificate stating
that such Notes or portions thereof were accepted for payment by the Company in
accordance with the terms of this Section 3.9. The Company, the Depository or
the Paying Agent, as the case may be, shall promptly (but in any case not later
than five days after the Purchase Date) mail or deliver to each tendering
Holder an amount equal to the purchase price of the Notes tendered by such
Holder and accepted by the Company for purchase, and the Company shall promptly
issue a new Note, and the Trustee, upon receipt of a written authentication
order of the Company signed by two Officers of the Company shall authenticate
and mail or deliver such new Note to such Holder, in a principal amount equal
to any unpurchased portion of the Note surrendered. Any Note not so
<PAGE> 36
36
accepted shall be promptly mailed or delivered by the Company to the Holder
thereof. The Company shall publicly announce the results of the Asset Sale
Offer on the Purchase Date.
Other than as specifically provided in this Section 3.9, any
purchase pursuant to this Section 3.9 shall be made pursuant to the provisions
of Sections 3.1 through 3.6 hereof.
ARTICLE 4
COVENANTS
Section 4.1. Payment of Notes.
The Company shall pay or cause to be paid the principal of,
premium, if any, and interest on the Notes on the dates and in the manner
provided in the Notes. Principal, premium, if any, and interest shall be
considered paid on the date due if the Paying Agent, if other than the Parent,
the Company or a Subsidiary thereof, holds as of 10:00 a.m. Eastern Time on the
due date money deposited by the Company in immediately available funds and
designated for and sufficient to pay all principal, premium, if any, and
interest then due.
The Company shall pay interest (including post-petition
interest in any proceeding under any Bankruptcy Law) on overdue principal at
the rate equal to 1% per annum in excess of the then applicable interest rate
on the Notes to the extent lawful; it shall pay interest (including
post-petition interest in any proceeding under any Bankruptcy Law) on overdue
installments of interest (without regard to any applicable grace period) at the
same rate to the extent lawful.
Section 4.2. Maintenance of Office or Agency.
The Company shall maintain in the Borough of Manhattan, the
City of New York, an office or agency (which may be an office of the Trustee or
an affiliate of the Trustee, Registrar or co-registrar) where principal,
premium, if any, and interest on the Notes will be paid and where Notes may be
surrendered for registration of transfer or for exchange and where notices and
demands to or upon the Company in respect of the Notes and this Indenture may
be served. The Company shall give prompt written notice to the Trustee of the
location, and any change in the location, of such office or agency. If at any
time the Company shall fail to maintain any such required office or agency or
shall fail to furnish the Trustee with the address thereof, such presentations,
surrenders, notices and demands may be made or served at the Corporate Trust
Office of the Trustee.
The Company may also from time to time designate one or more
other offices or agencies where the Notes may be presented or surrendered for
any or all such purposes and may from time to time rescind such designations;
provided, however, that no such
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37
designation or rescission shall in any manner relieve the Company of its
obligation to maintain an office or agency in the Borough of Manhattan, the
City of New York for such purposes. The Company shall give prompt written
notice to the Trustee of any such designation or rescission and of any change
in the location of any such other office or agency.
The Company hereby designates the following office of an
Affiliate of the Trustee as one such office or agency of the Company in
accordance with Section 2.3: Harris Trust Company of New York, 77 Water
Street, New York, New York 10005.
Section 4.3. Reports.
(a) To the extent permitted by the Exchange Act, the
Company shall file with the Commission and provide, within 15 days after such
filing, the Trustee and Holders and prospective Holders (upon request) with the
annual reports and the information, documents and other reports that are
specified in Sections 13 and 15(d) of the Exchange Act. In the event that the
Company is not permitted to file such reports, documents and information with
the Commission, the Company will provide substantially similar information to
the Trustees, the Holders and prospective Holders (upon request) as if the
Company were subject to the reporting requirements of Section 13 or 15(d) of
the Exchange Act. The Company shall at all times comply with TIA Section
314(a)
(b) The Company shall be deemed to have satisfied the
provisions of Section 4.3(a) if the Parent files and provides reports,
documents and information of the types otherwise so required, in each case
within the applicable time periods, and the Company is not required to file
such reports, documents and information separately under the applicable rules
and regulations of the Commission (after giving effect to any exemptive relief)
because of the filings by the Parent.
Section 4.4. Compliance Certificate.
(a) Each of the Parent and the Company shall deliver to
the Trustee, within 90 days after the end of each fiscal year, an Officers'
Certificate stating that a review of the activities of the Parent and its
Subsidiaries and the Company and its Subsidiaries, as the case may be, during
the preceding fiscal year has been made under the supervision of the signing
Officers with a view to determining whether the Parent or the Company, as the
case may be, has kept, observed, performed and fulfilled its obligations under
this Indenture, and further stating, as to each such Officer signing such
certificate, that to the best of his or her knowledge the Parent or the
Company, as the case may be, has kept, observed, performed and fulfilled each
and every covenant contained in this Indenture and is not in default in the
performance or observance of any of the terms, provisions and conditions of
this Indenture (or, if a Default or Event of
<PAGE> 38
38
Default shall have occurred, describing all such Defaults or Events of Default
of which he or she may have knowledge and what action the Parent or the
Company, as the case may be, is taking or proposes to take with respect
thereto) and that to the best of his or her knowledge no event has occurred and
remains in existence by reason of which payments on account of the principal
of, premium, if any, or interest on the Notes is prohibited or if such event
has occurred, a description of the event and what action the Parent or the
Company, as the case may be, is taking or proposes to take with respect
thereto. As of the date hereof, each of the Parent's and the Company's fiscal
year ends on December 31 of each calendar year. In the event the Company
changes its fiscal year, it shall promptly notify the Trustee of such change.
(b) So long as not contrary to the then current
recommendations of the American Institute of Certified Public Accountants, the
fiscal year-end financial statements delivered pursuant to Section 4.3(a) above
shall be accompanied by a written statement of the Parent's or the Company's,
as the case may be, independent public accountants (who shall be a firm of
established national reputation) that in making the examination necessary for
certification of such financial statements, nothing has come to their attention
that would lead them to believe that the Company has violated any provisions of
Article 4 or Article 5 hereof or, if any such violation has occurred,
specifying the nature and period of existence thereof, it being understood that
such accountants shall not be liable directly or indirectly to any Person for
any failure to obtain knowledge of any such violation.
(c) The Company shall, so long as any of the Notes are
outstanding, deliver to the Trustee, within five Business Days of any Officer
becoming aware of any Default or Event of Default, an Officers' Certificate
specifying such Default or Event of Default and what action the Company is
taking or proposes to take with respect thereto.
Section 4.5. Taxes.
The Company shall pay, and shall cause each of its
Subsidiaries to pay, prior to delinquency all material taxes, assessments, and
governmental levies except such as are contested in good faith and by
appropriate proceedings or where the failure to effect such payment is not
adverse in any material respect to the Holders of the Notes.
Section 4.6. Stay, Extension and Usury Laws.
Each of the Company, the Parent and the Subsidiary Guarantors
covenants (to the extent that it may lawfully do so) that it shall not at any
time insist upon, plead, or in any manner whatsoever claim or take the benefit
or advantage of, any stay, extension or usury law wherever enacted, now or at
any time
<PAGE> 39
39
hereafter in force, that may affect the covenants or the performance of this
Indenture; and each of the Company, the Parent and the Subsidiary Guarantors
(to the extent that it may lawfully do so) hereby expressly waives all benefit
or advantage of any such law, and covenants that it shall not, by resort to any
such law, hinder, delay or impede the execution of any power herein granted to
the Trustee, but shall suffer and permit the execution of every such power as
though no such law has been enacted.
Section 4.7. Restricted Payments.
The Company shall not and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any other payment or distribution on account of the Company's
Equity Interests (including, without limitation, any payment to holders of the
Company's Equity Interests in connection with any merger or consolidation
involving the Company) or to the direct or indirect holders of the Company's
Equity Interests in their capacity as such (other than dividends or
distributions (a) payable in Equity Interests (other than Disqualified Stock)
of the Company, (b) to the extent necessary to permit the Parent to pay
overhead, tax liabilities,, legal, accounting or other professional fees and
expenses and any fees and expenses associated with registration statements
filed with the Commission and subsequent ongoing public reporting requirements,
in each case to the extent actually incurred by the Parent in connection with
acting as a holding company for the Company and its Subsidiaries or (c) to the
extent necessary to permit the Parent to perform its obligations to pay fees,
expenses and indemnification under Sections [5.4, 5.5 5.15, 8.3, 9.2 and 9.3]
of the Stock Purchase Agreement; (ii) purchase, redeem, defease or otherwise
acquire or retire for value any Equity Interests of the Company or any direct
or indirect parent or other Affiliate of the Company that is not a Wholly Owned
Restricted Subsidiary of the Company; (iii) make any principal payment on, or
purchase, redeem, defease or otherwise acquire or retire for value any
Indebtedness that is subordinated to the Notes, except any scheduled principal
payment or sinking fund payment or at final maturity; or (iv) make any
Restricted Investment (all such payments and other actions set forth in clauses
(i) through (iv) above being collectively referred to as "Restricted
Payments"), unless, at the time of and after giving effect to such Restricted
Payment:
(a) no Default or Event of Default shall have occurred
and be continuing or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted
Payment and after giving pro forma effect thereto as if such
Restricted Payment had been made at the beginning of the applicable
four-quarter period, have been permitted to incur at least $1.00 of
additional Indebtedness pursuant to the
<PAGE> 40
40
Fixed Charge Coverage Ratio test set forth in the first paragraph of
Section 4.9 hereof; and
(c) such Restricted Payment, together with the aggregate
of all other Restricted Payments made by the Company and its
Restricted Subsidiaries after the date of this Indenture (excluding
Restricted Payments permitted by clauses (2), (3), (5) and (6) of the
next succeeding paragraph), is less than the sum of (i) 50% of the
Consolidated Net Income of the Company for the period (taken as one
accounting period) from the beginning of the first month after the
date of this Indenture to the end of the Company's most recently ended
fiscal quarter for which internal financial statements are available
at the time of such Restricted Payment (or, if such Consolidated Net
Income for such period is a deficit, less 100% of such deficit), plus
(ii) 100% of the aggregate net cash proceeds received by the Company
since the date of this Indenture (A) as capital contributions to the
Company (other than from a Subsidiary of the Company or from the
Rights Offering or the Standby Commitment) and (B) from the issue,
sale or exercise since the date of this Indenture of Equity Interests
in the Company or the Parent or of debt securities of the Company or
the Parent that have been converted into or exchanged for such Equity
Interests (other than Equity Interests (or convertible debt
securities) sold to a Subsidiary of the Company and other than
Disqualified Stock or debt securities that have been converted into
Disqualified Stock), plus (iii) to the extent that any Restricted
Investment that was made after the date of this Indenture is sold for
cash or otherwise liquidated or repaid for cash, the lesser of (A) the
net proceeds of such sale, liquidation or repayment and (B) the
initial amount of such Restricted Investment, plus (iv) the amount
equal to the net reduction in Investments in Unrestricted Subsidiaries
resulting from (A) payments of dividends or interest or other
transfers of assets to the Company or any Restricted Subsidiary from
Unrestricted Subsidiaries, (B) the redesignation of Unrestricted
Subsidiaries as Restricted Subsidiaries or (C) the receipt of proceeds
by the Company or any Restricted Subsidiary from the sale or other
disposition of any portion of any Investment in an Unrestricted
Subsidiary not to exceed the amount of Investments previously made by
the Company or any Restricted Subsidiary in such Unrestricted
Subsidiary, which amount was included in the calculation of the amount
of Restricted Payments.
The foregoing provisions shall not prohibit (1) the payment of
any dividend within 60 days after the date of declaration thereof, if at said
date of declaration such payment would have complied with the provisions of
this Indenture and such dividend (a) shall be deemed paid on the date of such
date of declaration for purposes of clauses (a) and (b) in the next preceding
paragraph and (b) shall be included in the
<PAGE> 41
41
determination of Restricted Payments pursuant to clause (c) of the preceding
paragraph only when declared and not when paid; (2) the redemption, repurchase,
retirement or other acquisition of any Equity Interests of the Company in
exchange for, or out of the proceeds of, the substantially concurrent sale
(other than to a Subsidiary of the Company) of other Equity Interests of the
Company (other than any Disqualified Stock); provided that the amount of any
such net cash proceeds that are utilized for any such redemption, repurchase,
retirement or other acquisition shall be excluded from clause (c)(ii) of the
preceding paragraph; (3) the defeasance, redemption or repurchase of
Subordinated Indebtedness with the net cash proceeds from an incurrence of
subordinated Permitted Refinancing Debt or the substantially concurrent sale
(other than to a Subsidiary of the Company) of Equity Interests of the Company
or the Parent (other than Disqualified Stock); provided that the amount of any
such net cash proceeds that are utilized for any such redemption, repurchase,
retirement or other acquisition shall be excluded from clause (c)(ii) of the
preceding paragraph; (4) the repurchase, redemption or other acquisition or
retirement for value of any Equity Interests of the Company, the Parent or any
Subsidiary of the Company (x) held by any of the Company's (or any of its
Subsidiaries') employees pursuant to any management equity subscription
agreement, stock option agreement or any other agreement with such employee, or
(y) in connection with a tender offer to eliminate odd lots of such Equity
Interests; provided that the aggregate price paid for all such repurchased,
redeemed, acquired or retired Equity Interests shall not exceed $2.0 million in
any fiscal year (plus the aggregate cash proceeds received by the Company
during such fiscal year from any issuance of Equity Interests by the Company or
the Parent to any Permitted Investors or employee of the Company or any of its
Subsidiaries); and provided further that no Default or Event of Default shall
have occurred and be continuing immediately after such transaction; (5)
repurchases of Equity Interests deemed to occur upon exercise of stock options
if such Equity Interests represent a portion of the exercise price of such
options; (6) the defeasance, redemption, repurchase or repayment of the
Existing Debt if any of the Existing Debt is subordinated to the Notes.
The amount of all Restricted Payments (other than cash) shall
be the fair market value (as determined in good faith by a resolution of the
Board of Directors of the Company set forth in an Officers' Certificate
delivered to the Trustee, which determination shall be conclusive evidence of
compliance with this provision) on the date of the Restricted Payment of the
asset(s) proposed to be transferred by the Company or the applicable Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment. Not later
than ten days after the date of making any Restricted Payment, the Company
shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by this Section 4.7 were computed.
<PAGE> 42
42
In computing Consolidated Net Income for purposes of this
Section 4.7, (i) the Company shall use audited financial statements for the
portion of the relevant period for which audited financial statements are
available on the date of determination and unaudited financial statements and
other current financial data based on the books and records of the Company for
the remaining portion of such period and (ii) the Company shall be permitted to
rely in good faith on the financial statements and other financial data derived
from the books and records of the Company that are available on the date of
determination. If the Company makes a Restricted Payment which, at the time of
the making of such Restricted Payment, would on the good faith determination of
the Company be permitted under the requirements of this Indenture, such
Restricted Payment shall be deemed to have been made in compliance with this
Indenture notwithstanding any subsequent adjustments made in good faith to the
Company's financial statements affecting Consolidated Net Income of the Company
for any period.
The Board of Directors may designate any Restricted Subsidiary
to be an Unrestricted Subsidiary if such designation would not cause a Default.
For purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash)
in the Subsidiary so designated shall be deemed to be Restricted Payments at
the time of such designation and shall reduce the amount available for
Restricted Payments under clause (c) of the first paragraph of this covenant
and/or the applicable provisions of the second paragraph of this covenant, as
appropriate. All such outstanding Investments shall be deemed to constitute
Investments in an amount equal to the fair market value of such Investments at
the time of such designation. Such designation shall only be permitted if such
Restricted Payment would be permitted at such time and if such Restricted
Subsidiary otherwise meets the definition of an Unrestricted Subsidiary.
Section 4.8. Dividend and Other Payment Restrictions
Affecting Subsidiaries.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause
or suffer to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to (i)(x) pay dividends or make any other
distributions to the Company or any of its Restricted Subsidiaries (1) on its
Capital Stock or (2) with respect to any other interest or participation in, or
measured by, its profits, or (y) pay any indebtedness owed by it to the Company
or any of its Restricted Subsidiaries, (ii) make loans or advances to the
Company or any of its Restricted Subsidiaries or (iii) transfer any of its
properties or assets to the Company or any of its Restricted Subsidiaries,
except for such encumbrances or restrictions existing under or by reason of (a)
the Credit Agreement as in effect as of the date of this Indenture, and any
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43
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings thereof or any other Credit Facility,
provided that such amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements, refinancings or other Credit
Facilities are no more restrictive with respect to such dividend and other
payment restrictions than those contained in the Credit Agreement as in effect
on the date of this Indenture, (b) this Indenture and the Discount Notes
Indenture and the Notes and the Discount Notes, (c) applicable law, (d) any
instrument governing Indebtedness or Capital Stock of a Person acquired by the
Company or any of its Restricted Subsidiaries as in effect at the time of such
acquisition (except, in the case of Indebtedness, to the extent such
Indebtedness was incurred in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any Person,
or the properties or assets of any Person, other than the Person and its
Subsidiaries, or the property or assets of the Person and its Subsidiaries, so
acquired, provided that, in the case of Indebtedness, such Indebtedness was
permitted by the terms of this Indenture to be incurred, (e) by reason of
customary non-assignment provisions in leases entered into in the ordinary
course of business and consistent with past practices, (f) capital leases and
purchase money obligations for property leased or acquired in the ordinary
course of business that impose restrictions of the nature described in clause
(iii) above on the property so leased or acquired, (g) restrictions in the form
of Liens which are not prohibited pursuant to Section 4.12 and which are
customary limitations on the transfer of collateral and customary restrictions
contained in stock purchase agreements or asset sales agreements limiting the
transfer of assets pending the closing of the sale or (h) Permitted Refinancing
Debt, provided that the restrictions contained in the agreements governing such
Permitted Refinancing Debt are no more restrictive than those contained in the
agreements governing the Indebtedness being refinanced.
Section 4.9. Incurrence of Indebtedness and Issuance of
Disqualified Stock.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly, create incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and the Company shall not and shall not
permit any of its Restricted Subsidiaries to, issue any Disqualified Stock;
provided, however, subject to the limitations set forth below, the Company and
the Subsidiary Guarantors may incur Indebtedness (including Acquired Debt) or
issue shares of Disqualified Stock if:
(i) the Fixed Charge Coverage Ratio for the Company's
most recently ended four full fiscal quarters for
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44
which internal financial statements are available immediately
preceding the date on which such additional Indebtedness is incurred
or such Disqualified Stock is issued would have been at least 2.5 to
1, determined on a pro forma basis as set forth in the definition of
Fixed Charge Coverage Ratio; and
(ii) no Default or Event of Default shall have occurred
and be continuing at the time such additional Indebtedness is incurred
or such Disqualified Stock is issued or would occur as a consequence
of the incurrence of the additional Indebtedness or the issuance of
the Disqualified Stock.
Notwithstanding the foregoing, this Indenture shall not
prohibit any of the following (collectively, "Permitted Indebtedness"): (a)
the Indebtedness evidenced by the Notes and the Discount Notes; (b) the
incurrence by the Company of Indebtedness pursuant to Credit Facilities, so
long as the aggregate principal amount of all Indebtedness outstanding under
all Credit Facilities does not, at any one time, exceed the greater of (1) $500
million or (2) the Borrowing Base; (c) the guarantee by any Restricted
Subsidiary (including any Subsidiary Guarantor) of any Indebtedness that is
permitted by this Indenture to be incurred by the Company; provided that such
Subsidiary, if not a Subsidiary Guarantor, becomes a Subsidiary Guarantor
hereunder; (d) all Indebtedness of the Company and its Restricted Subsidiaries
in existence as of the date of the Indenture after giving effect to the
Recapitalization and the application of the proceeds thereof; (e) intercompany
Indebtedness between or among the Company, the Parent and any of the Company's
Restricted Subsidiaries; provided, however, that (i) if the Company is the
obligor on such Indebtedness, such Indebtedness is expressly subordinate to the
payment in full of all Obligations with respect to the Notes and (ii)(A) any
subsequent issuance or transfer of Equity Interests that results in any such
Indebtedness being held by a Person other than the Company, the Parent or a
Restricted Subsidiary and (B) any sale or other transfer of any such
Indebtedness to a Person that is not the Company, the Parent or a Restricted
Subsidiary shall be deemed, in each case, to constitute an incurrence of such
Indebtedness by the Company or such Restricted Subsidiary, as the case may be;
(f) Indebtedness of the Company or any Restricted Subsidiary related to any
Permitted marketing Transaction including, without limitation, under letters of
credit or guarantees of Indebtedness or other obligations of a party to a
Permitted Marketing Transaction, provided, that in the event that the Company
or any Restricted Subsidiary guarantees such Indebtedness or other obligations
of another party, then either (1) the Person who is obligated to purchase
hydrocarbons from such party has an investment grade credit rating from S&P or
Moody's, or in lieu thereof, a Person guaranteeing the payment of such
obligated Person has an investment grade credit rating from S&P or Moody's or
(2) such Person posts, or has posted for it, a
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45
letter of credit in favor of the Company or such Subsidiary Guarantor with
respect to all of such Person's obligations under such contracts, (g) in
addition to Indebtedness under any Credit Facility, Indebtedness in connection
with one or more standby letters of credit, guarantees, performance bonds or
other reimbursement obligations, in each case, issued in the ordinary course of
business and not in connection with the borrowing of money or the obtaining of
advances or credit (other than advances or credit on open account, includible
in current liabilities, for goods and services in the ordinary course of
business and on terms and conditions which are customary in the Oil and Gas
Business, and other than the extension of credit represented by such letter of
credit guarantee or performance bond itself), not to exceed in the aggregate at
any given time outstanding 5.0% of Total Assets; (h) Indebtedness under
Interest Rate Hedging Agreements entered into for the purpose of limiting
interest rate risks, provided that the obligations under such agreements are
related to payment obligations on Indebtedness otherwise permitted by the terms
of this covenant and that the aggregate notional principal amount of such
agreements does not exceed 105% of the principal amount of the Indebtedness to
which such agreements relate; (i) Indebtedness under Oil and Gas Hedging
Contracts, provided that such contracts were entered into in the ordinary
course of business for the purpose of limiting risks that arise in the ordinary
course of business of the Company and its Subsidiaries; (j) the incurrence by
the Company and Subsidiary Guarantors of Indebtedness not otherwise permitted
to be incurred pursuant to this paragraph, provided that the aggregate
principal amount (or accreted value, as applicable) of all Indebtedness
incurred pursuant to this clause (j), together with all Permitted Refinancing
Debt incurred pursuant to clause (k) of this paragraph in respect of
Indebtedness previously incurred pursuant to this clause (j), does not exceed
$25.0 million at any one time outstanding; (k) Permitted Refinancing Debt
incurred in exchange for, or the net proceeds of which are used to refinance,
extend, renew, replace, defease or refund, Indebtedness that was permitted by
this Indenture to be incurred (including Indebtedness previously incurred
pursuant to this clause (k)); or (l) production imbalances arising in the
ordinary course of business and consistent with past practices.
Section 4.10. Asset Sales.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries (other than MEV) to, engage in an Asset Sale unless (i)
the Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (as determined in good faith by a resolution of the Board of Directors of
the Company set forth in an Officers' Certificate delivered to the Trustee,
which determination shall be conclusive evidence of compliance with this
provision) of the assets or Equity Interests issued or sold or otherwise
disposed of and (ii) at least 80% of the consideration therefor received by the
Company or such
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Restricted Subsidiary (after deducting expenses associated with such asset
sale) is in the form of cash, Cash Equivalents, oil and gas properties owned or
held by another Person which are to be used in the Oil and Gas Business of the
Company or its Restricted Subsidiaries or any combination thereof; provided
that the amount of (x) any liabilities (as shown on the Company's or such
Restricted Subsidiary's most recent balance sheet or, with respect to plugging
and abandonment obligations and other similar liabilities, in the notes
thereto), of the Company or any Restricted Subsidiary (other than contingent
liabilities and liabilities that are by their terms subordinated to the Notes
or any guarantee thereof) that are assumed by the transferee of any such assets
pursuant to a customary novation agreement that releases the Company or such
Restricted Subsidiary from further liability and (y) any Liquid Securities
received by the Company or any such Restricted Subsidiary from such transferee
that are converted by the Company or such Restricted Subsidiary into cash
within 180 days after the closing such Asset Sale, shall be deemed to be cash
for purposes of this provision to the extent of the liabilities assumed or cash
received.
Within 360 days after the receipt of any Net Proceeds from an
Asset Sale, the Company may apply such Net Proceeds, at its option, for one or
more of the following purposes: (a) to reduce Senior Debt, (b) to make
Permitted Business Investments, (c) to acquire controlling interests in other
Oil and Gas Businesses to the extent such Investments are not Permitted
Business Investments, (d) to make capital expenditures in respect of the
Company's or its Restricted Subsidiaries' Oil and Gas Business, and (e) to
purchase assets that are used or useful in the Oil and Gas Business. Pending
the final application of any such Net Proceeds, the Company may temporarily
reduce Senior Debt that is revolving debt or otherwise invest such Net Proceeds
in any manner that is not prohibited by this Indenture. Any Net Proceeds from
Asset Sales that are not applied or invested as provided in the first sentence
of this paragraph shall (after the expiration of the periods specified in this
paragraph) be deemed to constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $10.0
million, the Company shall make an Asset Sale Offer to purchase the maximum
principal amount of Notes and any other Pari Passu Indebtedness to which the
Asset Sale Offer applies that may be purchased out of the Excess Proceeds, at
an offer price in cash in an amount equal to, in the case of the Notes or any
such Pari Passu Indebtedness 100% of the principal amount thereof plus accrued
and unpaid interest thereon to the date of purchase or, in the case of the
Discount Notes, prior to ________ __, 2001, 100% of the accreted value thereof
on the date of purchase and thereafter, 100% of the principal amount of the
Discount Notes, plus after ______ __, 2001, accrued but unpaid interest
thereon, if any, to the date of purchase, or, in the case of any other discount
Pari Passu Indebtedness, 100% of the accreted value thereof on the date of
purchase, in each case, in accordance with
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the procedures set forth in Section 3.9 hereof or the agreements governing Pari
Passu Indebtedness, as applicable. To the extent that the aggregate amount (or
accreted value, as the case may be) of Notes and Pari Passu Indebtedness
tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the
Company may use any remaining Excess Proceeds for general corporate purposes
and will no longer be considered "Excess Proceeds" for the purposes of this
Section 4.10. If the sum of (i) the aggregate principal amount of Notes
surrendered by Holders thereof, (ii) the aggregate accreted value (or, if after
_______ __, 2001, the principal amount) of the Discount Notes surrendered by
the holders thereof, and (iii) the aggregate principal amount or accreted
value, as the case may be, of other Pari Passu Indebtedness surrendered by
holders or lenders thereof, exceeds the amount of Excess Proceeds, the Trustee
and the trustee or other lender representatives for the Pari Passu Indebtedness
Trustee shall select the Notes and other Pari Passu Indebtedness to be
purchased on a pro rata basis, based on the aggregate principal amount (or
accreted value, as applicable) thereof surrendered in such Asset Sale Offer.
Section 4.11. Transactions with Affiliates.
The Company shall not, and shall not permit any of its
Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into or make or amend any contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any of
its Affiliates (each of the foregoing, an "Affiliate Transaction"), unless (i)
such Affiliate Transaction is on terms that are no less favorable to the
Company or such Subsidiary, as the case may be, than would be available in a
comparable transaction by the Company or such Subsidiary in arm's length
dealings with an unrelated third party or, in the event no comparable
transaction with an unaffiliated Person is available, on terms that are fair
from a financial point of view to the Company or such Subsidiary, as the case
may be, (ii) with respect to an Affiliate Transaction or series of related
Affiliate Transactions involving in excess of $1,000,000 in the aggregate, the
Company delivers an Officers' Certificate to the Trustee certifying that such
Affiliate Transaction complies with clause (i) above, (iii) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
payments in excess of $5,000,000 but less than $15,000,000 in the aggregate,
the Company delivers an Officer's Certificate to the Trustee certifying that
(a) such Affiliate Transaction or series of related Affiliate Transactions
complies with clause (i) above and (b) such Affiliate Transaction or series of
related Affiliate Transactions has been approved by a resolution adopted by a
majority of the members of the Board of Directors of the Company who are
disinterested with respect to such Affiliate Transaction or series of related
Affiliate Transactions (which resolution shall be conclusive evidence of
compliance with this provision) and (iv) with respect to any
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Affiliate Transaction or series of related Affiliate Transactions involving
payments of $15,000,000 or more in the aggregate, (A) the Company delivers an
Officer's Certificate certifying that (a) such Affiliate Transaction or series
of related Affiliate Transactions complies with clause (i) above and (b) such
Affiliate Transaction has been approved by a resolution adopted by a majority
of the members of the Board of Directors of the Company who are disinterested
with respect to such Affiliate Transaction and (B) the Company shall have
received a written opinion of a firm of investment bankers nationally
recognized in the United States that such Affiliate Transaction or series of
related Affiliate Transactions is fair from a financial point of view to the
Company or such Subsidiary (which resolution and fairness opinion shall be
conclusive evidence of compliance with this provision), provided, however, that
the foregoing shall not apply to (1) the Recapitalization, the payment of fees,
expenses and indemnifications under Sections 5.4, 5.5, 5.15, 8.3, 9.2 and 9.3
of the Stock Purchase Agreement or any transaction effected pursuant to the
terms of the Series A Preferred Stock or Series B Preferred Stock as in effect
on the date of this Indenture [to be furthered specified], (2) Permitted
Investments and Restricted Payments that are permitted by Section 4.7 hereof,
(3) loans or advances to officers, directors and employees of the Company or
any Subsidiary made in the ordinary course of business and consistent with past
practices of the Company and its Subsidiaries not to exceed in the aggregate at
any one time outstanding $2.5 million, (4) the payment of reasonable and
customary regular fees to directors of the Company or any of its Subsidiaries
who are not employees of the Company or any Subsidiary, (5) any indemnification
or similar payment made to any director or officer (A) in accordance with the
corporate charter or by-laws of the Company or any Subsidiary, (B) under any
agreement or (C) under applicable law, (6) obligations of the Company or any
Subsidiary under employee compensation and other benefit arrangements entered
into or provided for in the ordinary course of business, (7) any transaction
relating to the disposition of the Company's Investment in MEV or (8) any
transaction among the Company and its Restricted Subsidiaries.
Section 4.12. Liens.
The Company shall not, and shall not permit any of its
Subsidiaries to, create, incur, assume or otherwise cause or suffer to exist or
become effective any Lien (other than Permitted Liens) upon any of its property
or assets, now owned or hereafter acquired securing Indebtedness (other than
Senior Debt), unless prior to or contemporaneously therewith the Notes are
directly secured equally and ratably, provided that (i) if such secured
Indebtedness is Pari Passu Indebtedness, the Lien securing such Pari Passu
Indebtedness shall be subordinate and junior to, or pari passu with, the Lien
securing the Notes and (ii) if such secured Indebtedness is Subordinated
Indebtedness, the Lien securing such Subordinated Indebtedness shall be
subordinate and junior to the Lien securing the Notes at least to
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the same extent as such Subordinated Indebtedness is subordinated to the Notes.
Section 4.13. Offer to Repurchase Upon Change of Control.
(a) Upon the occurrence of a Change of Control, each
Holder of Notes shall have the right to require the Company to repurchase all
or any part (equal to $1,000 or an integral multiple thereof) of such Holder's
Notes pursuant to the offer described below (the "Change of Control Offer") at
an offer price in cash equal to 101% of the aggregate principal amount thereof
plus accrued and unpaid interest if any, thereon to the date of purchase (the
"Change of Control Payment"). Within 30 days following any Change of Control,
the Company shall mail a notice to each Holder stating: (1) describing the
transaction or transactions that constitute the Change of Control and (2) that
the Change of Control Offer is being made pursuant to this Section 4.13 and
that all Notes tendered shall be accepted for payment; (3) the purchase price
and the purchase date described below (the "Change of Control Payment Date");
(4) that any Note not tendered shall continue to accrue interest, if any; (5)
that, unless the Company defaults in the payment of the Change of Control
Payment, all Notes accepted for payment pursuant to the Change of Control Offer
shall cease to accrue interest, if any, after the Change of Control Payment
Date; (6) that Holders electing to have any Notes purchased pursuant to a
Change of Control Offer shall be required to surrender the Notes, with the form
entitled "Option of Holder to Elect Purchase" on the reverse of the Notes
completed, to the Paying Agent at the address specified in the notice prior to
the close of business on the third Business Day preceding the Change of Control
Payment Date; (7) that Holders shall be entitled to withdraw their election if
the Paying Agent receives, not later than the close of business on the second
Business Day preceding the Change of Control Payment Date, a telegram, telex,
facsimile transmission or letter setting forth the name of the Holder, the
principal amount of Notes delivered for purchase, and a statement that such
Holder is withdrawing his election to have the Notes purchased; and (8) that
Holders whose Notes are being purchased only in part shall be issued new Notes
equal in principal amount to the unpurchased portion of the Notes surrendered,
which unpurchased portion must be equal to $1,000 in principal amount or an
integral multiple thereof. The Company, the Parent and each Subsidiary
Guarantor shall comply with the requirements of Rule 14e-1 under the Exchange
Act and any other securities laws and regulations thereunder to the extent such
laws and regulations are applicable to such party in connection with the
repurchase of the Notes as a result of a Change of Control.
(b) On a Business Day that is no earlier than 30 days nor
later than 60 days from the date that the Company mails or causes to be mailed
notice of the Change of Control to the Holders (the "Change of Control Payment
Date"), the Company
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shall, to the extent lawful, (i) accept for payment all Notes or portions
thereof properly tendered pursuant to the Change of Control Offer, (ii) deposit
with the Paying Agent an amount equal to the Change of Control Payment in
respect of all Notes or portions thereof so tendered and (iii) deliver or cause
to be delivered to the Trustee the Notes so accepted together with an Officers'
Certificate stating the aggregate principal amount of Notes or portions thereof
being purchased by the Company. The Paying Agent shall promptly mail to each
Holder of Notes so tendered the Change of Control Payment for such Notes, and
the Trustee shall promptly authenticate and mail (or cause to be transferred by
book entry) to each Holder a new Note equal in principal amount to any
unpurchased portion of the Notes surrendered, if any; provided that each such
new Note shall be in a principal amount of $1,000 or an integral multiple
thereof. The Company shall publicly announce the results of the Change of
Control Offer on or as soon as practicable after the Change of Control Payment
Date.
The Change of Control provisions described above shall be
applicable whether or not any other provisions of this Indenture are
applicable.
The Company shall not be required to make a Change of Control
Offer upon a Change of Control if a third party makes the Change of Control
Offer in the manner, at the times and otherwise in compliance with the
requirements set forth in this Section 4.13 and purchases all Notes (or
portions thereof) validly tendered and not withdrawn under such Change of
Control Offer.
Section 4.14. Additional Subsidiary Guarantees.
In the event that the Company or any of its Restricted
Subsidiaries shall acquire or create a Material Restricted Subsidiary after the
date of this Indenture, such newly acquired or created Material Restricted
Subsidiary shall be deemed to make the guarantee set forth in Section 11.1 and
the Company shall cause such Material Restricted Subsidiary to evidence such
guarantee in the manner set forth in Section 11.2. Notwithstanding the
foregoing, this Section 4.14 shall not apply to any newly acquired or created
Subsidiary that has been properly designated as an Unrestricted Subsidiary in
accordance with this Indenture for so long as it continues to constitute an
Unrestricted Subsidiary.
Section 4.15. Corporate Existence.
Subject to Article 5 hereof, the Company, the Parent and the
Restricted Subsidiaries shall do or cause to be done all things necessary to
preserve and keep in full force and effect (i) its corporate existence, and the
corporate, partnership or other existence of each of the Restricted
Subsidiaries, in accordance with the respective organizational documents (as
the same may be amended from time to time) of the Company or any such
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Restricted Subsidiary and (ii) the rights (charter, partnership agreement and
statutory), licenses and franchises of the Company, the Parent and the
Restricted Subsidiaries; provided, however, that the Company, the Parent and
the Restricted Subsidiaries shall not be required to preserve any such right,
license or franchise, or the corporate, partnership or other existence of any
of the Restricted Subsidiaries, if the Board of Directors of the relevant
Person shall determine that the preservation thereof is no longer desirable in
the conduct of the business of the Company and the Restricted Subsidiaries,
taken as a whole, and that the loss thereof is not adverse in any material
respect to the Holders of the Notes.
Section 4.16. No Senior Subordinated Debt.
Notwithstanding the provisions of Section 4.9 hereof, (i) the
Company shall not incur, create, issue, assume, guarantee or otherwise become
liable for any Indebtedness that is subordinate or junior in right of payment
to any Senior Debt and senior in any respect in right of payment to the Notes
and (ii) the Parent and the Subsidiary Guarantors shall not directly or
indirectly incur, create, issue, assume, guarantee or otherwise become liable
for any Indebtedness that is subordinate or junior in right of payment to any
guarantees issued in respect of Senior Debt and senior in any respect in right
of payment to the Guarantees; provided, however, that the foregoing limitations
shall not apply to distinctions between categories of Indebtedness that exist
by reason of any Liens arising or created in respect of some but not all such
Indebtedness.
Section 4.17. Business Activities.
The Company and the Parent shall not, and shall not permit any
Subsidiary to, engage in any material respect in any business other than the
Oil and Gas Business.
ARTICLE 5
SUCCESSORS
Section 5.1. Merger, Consolidation, or Sale of
Substantially All Assets.
The Company shall not consolidate or merge with or into
(whether or not the Company is the surviving corporation), or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets, in one or more related transactions, to another Person,
and the Company may not permit any of its Restricted Subsidiaries to enter into
any such transaction or series of transactions if such transaction or series of
transactions would, in the aggregate, result in a sale, assignment, transfer,
lease, conveyance, or other disposition of all or substantially all of the
properties or assets of the Company to another Person, unless (i) the Company
is the
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surviving corporation of any such consolidation or merger or (a) the Person
formed by or surviving any such consolidation or merger (if other than the
Company) or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made (the "Surviving Entity") is a
corporation organized or existing under the laws of the United States, any
state thereof or the District of Columbia and (b) such Surviving Entity assumes
all the obligations of the Company under the Notes and the Indenture pursuant
to a supplemented indenture in a form reasonably satisfactory to the Trustee;
(ii) immediately before and after giving effect to such transaction no Default
or Event of Default exists; (iii) immediately after giving effect to such
transaction on a pro forma basis (and treating any Indebtedness not previously
an obligation of the Company or any Subsidiary Guarantor which becomes the
obligation of the Company or any Subsidiary Guarantor as a result of such
transaction as having been incurred at the time of such transaction), the
Consolidated Net Worth of the Company or the Surviving Entity (if the Company
is not the continuing obligor under this Indenture) is equal to or greater than
the Consolidated Net Worth of the Company immediately prior to such transaction
and (iv) except in the case of a merger of the Company with or into a Wholly
Owned Restricted Subsidiary of the Company, the Company or Surviving Entity (if
the Company is not the continuing obligor under the Indenture) will, at the
time of such transaction and after giving pro forma effect thereto as if such
transaction had occurred at the beginning of the applicable four-quarter
period, be permitted to incur at least $1.00 of additional Indebtedness
pursuant to the test set forth in the first paragraph of Section 4.9 hereof.
Notwithstanding the foregoing clauses (iii) and (iv), (a) any Restricted
Subsidiary may consolidate with, merge into or transfer all or part of its
properties and assets to the Company and (b) the Company may merge with an
Affiliate incorporated solely for the purpose of reincorporating in another
jurisdiction.
Section 5.2. Successor Corporation Substituted.
Upon any consolidation or merger, or any sale, assignment,
transfer, lease, conveyance or other disposition of all or substantially all of
the assets of the Company in accordance with Section 5.1 hereof, the Surviving
Entity shall succeed to, and be substituted for (so that from and after the
date of such consolidation, merger, sale, lease, conveyance or other
disposition, the provisions of this Indenture referring to the "Company" shall
refer instead to the Surviving Entity and not to the Company), and may exercise
every right and power of the Company under this Indenture with the same effect
as if such successor Person had been named as the Company herein; provided,
however, that the predecessor Company shall not be relieved from the obligation
to pay the principal of and interest on the Notes except in the case of a sale
of all of the Company's assets that meets the requirements of Section 5.1
hereof.
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ARTICLE 6
DEFAULTS AND REMEDIES
Section 6.1. Events of Default.
An "Event of Default" occurs if:
(1) the Company defaults in the payment of interest, if
any, on the Notes when the same becomes due and payable and the
Default continues for a period of 30 days, whether or not such payment
is prohibited by the provisions of Article 10 hereof;
(2) the Company defaults in the payment of the principal
of or premium, if any, on the Notes or the Discount Notes when the
same become due and payable at maturity, upon redemption or otherwise,
whether or not such payment is prohibited by the provisions of Article
10 hereof or of Article 10 of the Discount Note Indenture, as the case
may be;
(3) the Company fails to observe or perform any covenant,
condition or agreement on the part of the Company to be observed or
performed pursuant to Article 5 hereof.
(4) the Company fails to observe or perform any covenant,
condition or agreement on the part of the Company to be observed or
performed pursuant to Sections 4.3, 4.7, 4.8, 4.9, 4.10, 4.11, 4.12,
4.13, 4.14, 4.16 and 4.17 hereof and the Default continues for the
period and after the notice specified below;
(5) the Company fails to comply with any of its other
agreements or covenants in, or provisions of, the Notes or this
Indenture and the Default continues for consecutive days after the
notice specified below;
(6) except as permitted herein, any Guarantee shall be held
in any judicial proceeding to be unenforceable or invalid or shall
cease for any reason to be in full force and effect or the Parent or a
Subsidiary Guarantor, or any Person acting on behalf of the Parent or
a Subsidiary Guarantor, shall deny or disaffirm the Parent's or such
Subsidiary Guarantor's obligation under its Guarantee;
(7) the Parent fails to issue Preferred Stock for gross
proceeds in the amount of $132 million pursuant to the Rights Offering
and Standby Commitment or either thereof within 90 days following the
original date of issuance of the Notes.
(8) a default occurs under any mortgage, indenture or
instrument under which there may be issued or by which there may be
secured or evidenced any Indebtedness for money
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borrowed by the Company or any Subsidiary Guarantor, whether such
Indebtedness now exists or shall be created hereafter, which default
(a) is caused by a failure to pay such Indebtedness prior to the
expiration of the grace period after final maturity (a "Payment
Default") or (b) results in the acceleration of such Indebtedness
prior to its final maturity and, in each case, the principal amount of
any such Indebtedness, together with the principal amount of any other
such Indebtedness under which there is then existing a Payment Default
or the maturity of which has been so accelerated, aggregates $10.0
million or more; provided, that if any such default is cured or waived
or any such acceleration rescinded, or such Indebtedness is repaid,
within a period of 10 days from the continuation of such default
beyond the applicable grace period or the occurrence of such
acceleration, as the case may be, such Event of Default under the
Indenture and any consequential acceleration of the Notes shall be
automatically rescinded;
(9) a final judgment or order or final judgments or
orders are rendered against the Company or any Restricted Subsidiary
that are unsatisfied and that require the payment of money, either
individually or in an aggregate amount, that is more than $10.0
million over the coverage under applicable insurance policies and
either (a) a creditor has commenced an enforcement proceeding upon
such judgment (other than a judgement that is stayed by reason of
pending appeal or otherwise) or (b) a 60-day period transpired during
which a stay of such judgment, order, judgements or orders (by reason
of pending appeal or otherwise) was not in effect;
(10) the Company, the Parent or any Subsidiary Guarantor
pursuant to or within the meaning of any Bankruptcy Law:
(a) commences a voluntary case or proceeding,
(b) consents to the entry of an order for relief
against it in an involuntary case or proceeding,
(c) consents to the appointment of a Custodian of
it or for all or substantially all of its property or
(d) makes a general assignment for the benefit of
its creditors; or
(11) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that:
(a) is for relief against the Company, the Parent
or any Subsidiary Guarantor, in an involuntary case or
proceeding,
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(b) appoints a Custodian of the Company, the
Parent or any Subsidiary Guarantor, or for all or
substantially all of the property of the Company, the Parent
or any Subsidiary Guarantor, or
(c) orders the liquidation of the Company, the
Parent or any Subsidiary Guarantor, and in each case the order
or decree remains unstayed and in effect for 60 consecutive
days.
The term "Custodian" means any receiver, trustee, assignee,
liquidator or similar official under any Bankruptcy Law.
A Default under clause (4) is not an Event of Default until
the Trustee notifies the Company, or the Holders of at least 25% in aggregate
principal amount of the then outstanding Notes notify the Company and the
Trustee, of the Default and the Company does not cure the Default within 30
consecutive days after receipt of the notice. A Default under clause (5) is
not an Event of Default until the Trustee notifies the Company, or the Holders
of at least 25% in aggregate principal amount of the then outstanding Notes
notify the Company and the Trustee, of the Default and the Company does not
cure the Default within 60 days after receipt of the notice. The notice must
specify the Default, demand that it be remedied and state that the notice is a
"Notice of Default."
Section 6.2. Acceleration.
If an Event of Default (other than an Event of Default
specified in clauses (10) and (11) of Section 6.1 hereof) relating to the
Company, the Parent or any Subsidiary Guarantor occurs and is continuing, the
Trustee by notice to the Company, or the Holders of at least 25% in principal
amount of the then outstanding Notes by written notice to the Company and the
Trustee, may declare the unpaid principal amount of and any accrued and unpaid
interest on all the Notes to be due and payable immediately. If payment of the
Notes is accelerated because of an Event of Default, the Company or the Trustee
shall notify the holders of Designated Senior Debt of such acceleration. Upon
such declaration the principal and interest shall be due and payable
immediately; provided, however, that so long as any Designated Senior Debt or
any commitment therefor is outstanding, any such notice or declaration shall
not become effective until the earlier of (a) five Business Days after such
notice is delivered to the representative for the Designated Senior Debt or (b)
the acceleration of any Designated Senior Debt and thereafter, payments on the
Notes pursuant to this Article 6 shall be made only to the extent permitted
pursuant to Article 10 herein. Notwithstanding the foregoing, if any Event of
Default specified in clause (10) or (11) of Section 6.1 hereof relating to the
Company, the Parent, or any Subsidiary Guarantor occurs,
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such an amount shall ipso facto become and be immediately due and payable
without any declaration or other act or notice on the part of the Trustee or
any Holder.
After a declaration of acceleration under this Indenture, but
before a judgment or decree for payment of principal, premium, if any, and
interest on the Notes due under this Article 6 has been obtained by the
Trustee, Holders of a majority in principal amount of the then outstanding
Notes by written notice to the Company and the Trustee may rescind an
acceleration and its consequences if (i) the Company, the Parent or any
Subsidiary Guarantor has paid or deposited with the Trustee a sum sufficient to
pay (a) all sums paid or advanced by the Trustee under this Indenture and the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel and (b) all overdue interest on the Notes, if any, (ii)
the rescission would not conflict with any judgment or decree of a court of
competent jurisdiction and (iii) all existing Events of Default (except
nonpayment of principal, premium, if any, or interest that has become due
solely because of the acceleration) have been cured or waived.
Section 6.3. Other Remedies.
If an Event of Default occurs and is continuing, the Trustee
may pursue any available remedy to collect the payment of principal, premium,
if any, and interest on the Notes or to enforce the performance of any
provision of the Notes or this Indenture.
The Trustee may maintain a proceeding even if it does not
possess any of the Notes or does not produce any of them in the proceeding. A
delay or omission by the Trustee or any Holder of a Note in exercising any
right or remedy accruing upon an Event of Default shall not impair the right or
remedy or constitute a waiver of or acquiescence in the Event of Default. All
remedies are cumulative to the extent permitted by law.
Section 6.4. Waiver of Past Defaults.
Holders of not less than a majority in aggregate principal
amount of the Notes then outstanding by notice to the Trustee may on behalf of
the Holders of all of the Notes waive an existing Default or Event of Default
and its consequences hereunder, except a continuing Default or Event of Default
in the payment of principal of, premium and Liquidated Damages, if any, or
interest on, the Notes (including in connection with an offer to purchase)
(provided, however, that the Holders of a majority in aggregate principal
amount of the then outstanding Notes may rescind an acceleration and its
consequences, including any related payment default that resulted from such
acceleration). Upon any such waiver, such Default shall cease to exist, and
any Event of Default arising therefrom shall be deemed to have been cured for
every purpose of this Indenture; but no such waiver
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shall extend to any subsequent or other Default or impair any right consequent
thereon.
Section 6.5. Control by Majority.
Holders of a majority in principal amount of the then
outstanding Notes may direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee or exercising any
trust or power conferred on it. However, the Trustee may refuse to follow any
direction that conflicts with law or this Indenture that the Trustee determines
may be unduly prejudicial to the rights of other Holders of Notes or that may
involve the Trustee in personal liability it being understood that (pursuant to
Section 7.1) the Trustee shall have no duty to ascertain whether or not such
actions or forebearances are unduly prejudicial to such holders.
Section 6.6. Limitation on Suits.
A Holder of a Note may pursue a remedy with respect to this
Indenture or the Notes only if:
(a) the Holder of a Note gives to the Trustee written
notice of a continuing Event of Default;
(b) the Holders of at least 25% in principal amount of
the then outstanding Notes make a written request to the Trustee to
pursue the remedy;
(c) such Holder of a Note or Holders of Notes offer and,
if requested, provide to the Trustee indemnity satisfactory to the
Trustee against any loss, liability or expense;
(d) the Trustee does not comply with the request within
60 days after receipt of the request and the offer and, if requested,
the provision of indemnity; and
(e) during such 60-day period the Holders of a majority
in principal amount of the then outstanding Notes do not give the
Trustee a direction inconsistent with the request.
A Holder of a Note may not use this Indenture to prejudice the rights of
another Holder of a Note or to obtain a preference or priority over another
Holder of a Note.
Section 6.7. Rights of Holders of Notes to Receive
Payment.
Notwithstanding any other provision of this Indenture, the
right of any Holder of a Note to receive payment of principal, premium, if any,
and interest on the Note, on or after the respective due dates expressed in the
Note (including in
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connection with an offer to purchase), or to bring suit for the enforcement of
any such payment on or after such respective dates, shall not be impaired or
affected without the consent of such Holder.
Section 6.8. Collection Suit by Trustee.
If an Event of Default specified in Section 6.1(1) or (2)
occurs and is continuing, the Trustee is authorized to recover judgment in its
own name and as trustee of an express trust against the Company, the Parent or
any Subsidiary Guarantor for the whole amount of principal of, premium, if any,
and interest remaining unpaid on the Notes and interest on overdue principal
and, to the extent lawful, interest and such further amount as shall be
sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel.
Section 6.9. Trustee May File Proofs of Claim.
The Trustee is authorized to file such proofs of claim and
other papers or documents as may be necessary or advisable in order to have the
claims of the Trustee (including any claim for the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel)
and the Holders of the Notes allowed in any judicial proceedings relative to
the Company, the Parent or any of the Subsidiary Guarantors (or any other
obligor upon the Notes), its creditors or its property and shall be entitled
and empowered to collect, receive and distribute any money or other property
payable or deliverable on any such claims and any custodian in any such
judicial proceeding is hereby authorized by each Holder to make such payments
to the Trustee, and in the event that the Trustee shall consent to the making
of such payments directly to the Holders, to pay to the Trustee any amount due
to it for the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel, and any other amounts due the Trustee
under Section 7.7 hereof. To the extent that the payment of any such
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, and any other amounts due the Trustee under Section 7.7 hereof out
of the estate in any such proceeding, shall be denied for any reason, payment
of the same shall be secured by a Lien on, and shall be paid out of, any and
all distributions, dividends, money, securities and other properties that the
Holders may be entitled to receive in such proceeding whether in liquidation or
under any plan of reorganization or arrangement or otherwise. Nothing herein
contained shall be deemed to authorize the Trustee to authorize or consent to
or accept or adopt on behalf of any Holder any plan of reorganization,
arrangement, adjustment or composition affecting the Notes or the rights of any
Holder, or to authorize the Trustee to vote in respect of the claim of any
Holder in any such proceeding provided, however, that the Trustee may, on
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behalf of the Holders, vote for the election of a trustee in bankruptcy or
similar official and may be a member of the creditor's committee.
Section 6.10. Priorities.
If the Trustee collects any money pursuant to this Article, it
shall pay out the money in the following order:
First: to the Trustee, its agents and attorneys for amounts
due under Sections 6.8 and 7.7 hereof, including payment of all compensation,
expense and liabilities incurred, and all advances made, by the Trustee and the
costs and expenses of collection;
Second: to Holders of Notes for amounts due and unpaid on the
Notes for principal, premium, if any, and accrued interest, ratably, without
preference or priority of any kind, according to the amounts due and payable on
the Notes for principal, premium, if any, and accrued interest, as the case may
be, respectively; and
Third: to the Company or to such party as a court of
competent jurisdiction shall direct.
The Trustee may fix a record date and payment date for any
payment to Holders of Notes pursuant to this Section 6.10.
Section 6.11. Undertaking for Costs.
In any suit for the enforcement of any right or remedy under
this Indenture or in any suit against the Trustee for any action taken or
omitted by it as a Trustee, a court in its discretion may require the filing by
any party litigant in the suit of an undertaking to pay the costs of the suit,
and the court in its discretion may assess reasonable costs, including
reasonable attorneys' fees, against any party litigant in the suit, having due
regard to the merits and good faith of the claims or defenses made by the party
litigant. This Section does not apply to a suit by the Trustee, a suit by a
Holder of a Note pursuant to Section 6.7 hereof, or a suit by Holders of more
than 10% in principal amount of the then outstanding Notes.
ARTICLE 7
TRUSTEE
Section 7.1. Duties of Trustee.
(a) If an Event of Default has occurred and is
continuing, the Trustee shall exercise such of the rights and powers vested in
it by this Indenture, and use the same degree of care and skill in its
exercise, as a prudent man would exercise or use under the circumstances in the
conduct of his own
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affairs.
(b) Except during the continuance of an Event of Default:
(i) the duties of the Trustee shall be determined
solely by the express provisions of this Indenture and the Trustee
need perform only those duties that are specifically set forth in this
Indenture and no others, and no implied covenants or obligations shall
be read into this Indenture against the Trustee; and
(ii) in the absence of bad faith on its part, the
Trustee may conclusively rely, as to the truth of the statements and
the correctness of the opinions expressed therein, upon any notices,
requests, statements, certificates or opinions furnished to the
Trustee and conforming to the requirements of this Indenture.
However, the Trustee shall examine the certificates and opinions to
determine whether or not they conform to the requirements of this
Indenture.
(c) The Trustee may not be relieved from liabilities for
its own negligent action, its own negligent failure to act, or its own willful
misconduct, except that:
(i) this paragraph does not limit the effect of
paragraph (b) of this Section;
(ii) the Trustee shall not be liable for any error of
judgment made in good faith by a Responsible Officer, unless it is
proved that the Trustee was negligent in ascertaining the pertinent
facts; and
(iii) the Trustee shall not be liable with respect to any
action it takes or omits to take in good faith in accordance with a
direction received by it pursuant to Section 6.5 hereof.
(d) Whether or not therein expressly so provided, every
provision of this Indenture that in any way relates to the Trustee is subject
to paragraphs (a), (b), and (c) of this Section.
(e) No provision of this Indenture shall require the
Trustee to expend or risk its own funds or incur any liability. The Trustee
shall be under no obligation to exercise any of its rights and powers under
this Indenture at the request of any Holders, unless such Holder shall have
furnished to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
(f) The Trustee shall not be liable for interest on any
money received by it except as the Trustee may agree in
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writing with the Company. Money held in trust by the Trustee need not be
segregated from other funds except to the extent required by law.
Section 7.2. Rights of Trustee.
(a) The Trustee may conclusively rely upon any document
believed by it to be genuine and to have been signed or presented by the proper
Person. The Trustee need not investigate any fact or matter stated in the
document.
(b) Before the Trustee acts or refrains from acting, it
may require an Officers' Certificate or an Opinion of Counsel or both. The
Trustee shall not be liable for any action it takes or omits to take in good
faith in reliance on such Officers' Certificate or Opinion of Counsel. The
Trustee may consult with counsel and the written advice of such counsel or any
Opinion of Counsel shall be full and complete authorization and protection from
liability in respect of any action taken, suffered or omitted by it hereunder
in good faith and in reliance thereon.
(c) The Trustee may act through its attorneys and agents
and shall not be responsible for the misconduct or negligence of any agent
appointed with due care.
(d) The Trustee shall not be liable for any action it
takes or omits to take in good faith that it believes to be authorized or
within the rights or powers conferred upon it by this Indenture.
(e) Unless otherwise specifically provided in this
Indenture, any demand, request, direction or notice from the Company, the
Parent or any Subsidiary Guarantor shall be sufficient if signed by an Officer
of the Company, the Parent or such Subsidiary Guarantor.
(f) The Trustee shall be under no obligation to exercise
any of the rights or powers vested in it by this Indenture at the request or
direction of any of the Holders unless such Holders shall have furnished to the
Trustee reasonable security or indemnity against the costs, expenses and
liabilities that might be incurred by it in compliance with such request or
direction.
(g) Except with respect to Sections 4.1 and 4.4 hereof,
the Trustee shall have no duty to inquire as to the performance of the
Company's and the Parent's covenants in Article 4 hereof. In addition, the
Trustee shall not be deemed to have knowledge of any Default or Event of
Default except (i) any Event of Default occurring pursuant to Sections 4.1, 4.4
and 6.1(1) or (2) hereof or (ii) any Default or Event of Default of which the
Trustee shall have received written notification or obtained actual knowledge.
For the purposes of this clause (g) only, "actual knowledge" shall mean the
actual fact or statement
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of knowing, without any duty to make investigation with regard thereto.
(h) The Trustee shall not be required to give any bond or
surety in respect of the performance of its powers and duties hereunder.
(i) the Trustee shall not be bound to ascertain or inquire as
to the performance or observance of any covenants, conditions, or agreements on
the part of the Company, except as otherwise set forth herein, but the Trustee
may require of the Company full information and advice as to the performance of
the covenants, conditions and agreements contained herein and shall be entitled
in connection herewith to examine the books, records and premises of the
Company.
(j) The permissive rights of the Trustee perform the acts
enumerated in this Indenture shall not be construed as a duty and the Trustee
shall not be answerable for other than its negligence or willful misconduct.
Section 7.3. Individual Rights of Trustee.
The Trustee in its individual or any other capacity may become
the owner or pledgee of Notes and may otherwise deal with the Company, the
Parent, the Subsidiary Guarantors or any Affiliate of the Company or the Parent
with the same rights it would have if it were not Trustee. However, in the
event that the Trustee acquires any conflicting interest it must eliminate such
conflict within 90 days, apply to the Commission for permission to continue as
trustee or resign. Any Agent may do the same with like rights and duties. The
Trustee is also subject to Sections 7.10 and 7.11 hereof.
Section 7.4. Trustee's Disclaimer.
The Trustee shall not be responsible for and makes no
representation as to the validity or adequacy of this Indenture, the Notes, or
the Guarantees, it shall not be accountable for the Company's use of the
proceeds from the Notes or any money paid to the Company or upon the Company's
direction under any provision of this Indenture, it shall not be responsible
for the use or application of any money received by any Paying Agent other than
the Trustee, and it shall not be responsible for any statement or recital
herein or in any certificate delivered pursuant hereto or any statement in the
Notes or any other document in connection with the sale of the Notes or
pursuant to this Indenture other than its certificate of authentication.
Section 7.5. Notice of Defaults.
If a Default or Event of Default occurs and is continuing and
if it is actually known to the Trustee, the Trustee shall mail to Holders of
Notes a notice of the Default or
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Event of Default within 90 days after it occurs. Except in the case of a
Default or Event of Default in payment of principal of, premium, if any, or
interest on, any Note, the Trustee may withhold the notice if and so long as a
committee of its Responsible Officers in good faith determines that withholding
the notice is in the interests of the Holders of the Notes.
Section 7.6. Reports by Trustee to Holders of the Notes.
Within 60 days after each May 15 beginning with the May 15,
1997 following the date of this Indenture, and for so long as Notes remain
outstanding, the Trustee shall mail to the Holders of the Notes a brief report
dated as of such reporting date that complies with TIA Section 313(a) (but if
no event described in TIA Section 313(a) has occurred within the twelve months
preceding the reporting date, no report need be transmitted). The Trustee also
shall comply with TIA Section 313(b)(2) and transmit by mail all reports as
required by TIA Section 313(c).
A copy of each report at the time of its mailing to the
Holders of Notes shall be mailed to the Parent and the Company and filed with
the Commission and each stock exchange on which the Notes are listed in
accordance with TIA Section 313(d). The Company shall promptly notify the
Trustee when the Notes are listed on any stock exchange.
Section 7.7. Compensation and Indemnity.
The Company, the Parent and the Subsidiary Guarantors shall
pay to the Trustee from time to time reasonable compensation for its acceptance
of this Indenture and services hereunder, including, without limitation,
extraordinary services such as default administration. The Trustee's
compensation shall not be limited by any law on compensation of a trustee of an
express trust. The Company, the Parent and the Subsidiary Guarantors shall
reimburse the Trustee promptly upon request for all reasonable disbursements,
advances and expenses incurred or made by it in addition to the compensation
for its services. Such expenses shall include the reasonable compensation,
disbursements and expenses of the Trustee's agents and counsel.
The Company, the Parent and the Subsidiary Guarantors shall
indemnify the Trustee against any and all losses, liabilities or expenses
incurred by it arising out of or in connection with the acceptance or
administration of its duties under this Indenture, including the costs and
expenses of enforcing this Indenture against the Company, the Parent and the
Subsidiary Guarantors (including this Section 7.7) and investigating or
defending itself against any claim (whether asserted by the Company, the
Parent, the Subsidiary Guarantors or any Holder or any other person) or
liability in connection with the exercise or performance of any of its powers
or duties hereunder, except to the extent any such loss, liability or
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expense may be attributable to its negligence or bad faith. The Trustee shall
notify the Company, the Parent and the Subsidiary Guarantors promptly of any
claim for which it may seek indemnity. Failure by the Trustee to so notify the
Company, the Parent and the Subsidiary Guarantors shall not relieve the
Company, the Parent and the Subsidiary Guarantors of their obligations
hereunder. The Company, the Parent and the Subsidiary Guarantors shall defend
the claim and the Trustee shall cooperate in the defense. The Trustee may have
separate counsel and the Company, the Parent and the Subsidiary Guarantors
shall pay the reasonable fees and expenses of such counsel. The Company, the
Parent and the Subsidiary Guarantors need not pay for any settlement made
without their consent, which consent shall not be unreasonably withheld.
The obligations of the Company, the Parent and the Subsidiary
Guarantors under this Section 7.7 are joint and several and shall survive the
satisfaction and discharge of this Indenture.
To secure the Company's, the Parent's and the Subsidiary
Guarantors' payment obligations in this Section, the Trustee shall have a Lien
prior to the Notes on all money or property held or collected by the Trustee,
except that held in trust to pay principal and interest on particular Notes.
Such Lien shall survive the satisfaction and discharge of this Indenture.
When the Trustee incurs expenses or renders services after an
Event of Default specified in Section 6.1(10) or (11) hereof occurs, the
expenses and the compensation for the services (including the fees and expenses
of its agents and counsel) are intended to constitute expenses of
administration under any Bankruptcy Law.
The Trustee shall comply with the provisions of TIA Section
313(b)(2) to the extent applicable.
Section 7.8. Replacement of Trustee.
A resignation or removal of the Trustee and appointment of a
successor Trustee shall become effective only upon the successor Trustee's
acceptance of appointment as provided in this Section.
The Trustee may resign in writing at any time and be
discharged from the trust hereby created by so notifying the Company. The
Holders of Notes of a majority in principal amount of the then outstanding
Notes may remove the Trustee by so notifying the Trustee and the Company in
writing. The Company may remove the Trustee if:
(a) the Trustee fails to comply with Section 7.10 hereof;
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(b) the Trustee is adjudged a bankrupt or an insolvent or
an order for relief is entered with respect to the Trustee under any
Bankruptcy Law;
(c) a Custodian or public officer takes charge of the
Trustee or its property; or
(d) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in
the office of Trustee for any reason, the Company shall promptly appoint a
successor Trustee. Within one year after the successor Trustee takes office,
the Holders of a majority in principal amount of the then outstanding Notes may
appoint a successor Trustee to replace the successor Trustee appointed by the
Company.
If a successor Trustee does not take office within 60 days
after the retiring Trustee resigns or is removed, the retiring Trustee, the
Company, or the Holders of Notes of at least 10% in principal amount of the
then outstanding Notes may petition any court of competent jurisdiction for the
appointment of a successor Trustee.
If the Trustee, after written request by any Holder of a Note
who has been a Holder of a Note for at least six months, fails to comply with
Section 7.10, such Holder of a Note may petition any court of competent
jurisdiction for the removal of the Trustee and the appointment of a successor
Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon, the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to Holders of the Notes. The retiring Trustee shall promptly
transfer all property held by it as Trustee to the successor Trustee, provided
all sums owing to the Trustee hereunder have been paid and subject to the Lien
provided for in Section 7.7 hereof. Notwithstanding replacement of the Trustee
pursuant to this Section 7.8, the Company's obligations under Section 7.7
hereof shall continue for the benefit of the retiring Trustee.
Section 7.9. Successor Trustee by Merger, etc.
If the Trustee consolidates, merges or converts into, or
transfers all or substantially all of its corporate trust business to, another
corporation, the successor corporation without any further act shall be the
successor Trustee.
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Section 7.10. Eligibility; Disqualification.
There shall at all times be a Trustee hereunder that is a
corporation organized and doing business under the laws of the United States of
America or of any state thereof that is authorized under such laws to exercise
corporate trustee power, that is subject to supervision or examination by
federal or state authorities and that has a combined capital and surplus of at
least $50 million as set forth in its most recent published annual report of
condition.
This Indenture shall always have a Trustee who satisfies the
requirements of TIA Section 310(a)(1), (2) and (5). The Trustee is subject to
TIA Section 310(b).
Section 7.11. Preferential Collection of Claims Against
Company.
The Trustee is subject to TIA Section 311(a), excluding any
creditor relationship listed in TIA Section 311(b). A Trustee who has
resigned or been removed shall be subject to TIA Section 311(a) to the extent
indicated therein.
ARTICLE 8
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Section 8.1. Option to Effect Legal Defeasance or Covenant
Defeasance.
The Company may, at the option of its Board of Directors
evidenced by a resolution set forth in an Officers' Certificate, at any time,
elect to have either Section 8.2 or 8.3 hereof be applied to all outstanding
Notes upon compliance with the conditions set forth below in this Article 8.
Section 8.2. Legal Defeasance and Discharge.
Upon the Company's exercise under Section 8.1 hereof of the
option applicable to this Section 8.2, the Company and the Parent and the
Subsidiary Guarantors shall, subject to the satisfaction of the conditions set
forth in Section 8.4 hereof, be deemed to have been discharged from their
obligations with respect to all outstanding Notes and the Guarantees thereof on
the date the conditions set forth below are satisfied (hereinafter, "Legal
Defeasance"). For this purpose, Legal Defeasance means that the Company shall
be deemed to have paid and discharged the entire Indebtedness represented by
the outstanding Notes, which shall thereafter be deemed to be "outstanding"
only for the purposes of Section 8.5 hereof and the other Sections of this
Indenture referred to in (a) and (b) below, and to have satisfied all its other
obligations under such Notes and this Indenture (and the Trustee, on demand of
and at the expense of the Company, shall execute proper instruments
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acknowledging the same), except for the following provisions which shall
survive until otherwise terminated or discharged hereunder: (a) the rights of
Holders of outstanding Notes to receive payments in respect of the principal
of, premium, if any, and interest on such Notes when such payments are due from
the trust fund described in Section 8.4 hereof, and as more fully set forth in
such Section, (b) the Company's obligations with respect to such Notes under
Article 2 and Section 4.2 hereof, (c) the rights, powers, trusts, duties and
immunities of the Trustee hereunder and the Company's obligations in connection
therewith and (d) this Article 8. Subject to compliance with this Article 8,
the Company may exercise its option under this Section 8.2 notwithstanding the
prior exercise of its option under Section 8.3 hereof.
Section 8.3. Covenant Defeasance.
Upon the Company's exercise under Section 8.1 hereof of the
option applicable to this Section 8.3, the Company, the Parent and the
Subsidiary Guarantors shall, subject to the satisfaction of the conditions set
forth in Section 8.4 hereof, be released from their obligations under the
covenants contained in Sections 4.5, 4.7, 4.8, 4.9, 4.10, 4.11, 4.12, 4.13,
4.14, 4.16 and 4.17 hereof and in clause (iv) of Section 5.1 and the covenants
contained in the Guarantees with respect to the outstanding Notes on and after
the date the conditions set forth below are satisfied (hereinafter, "Covenant
Defeasance"), and the Notes shall thereafter be deemed not "outstanding" for
the purposes of any compliance certificate, direction, waiver, consent or
declaration or act of Holders (and the consequences of any thereof) in
connection with such covenants, but shall continue to be deemed "outstanding"
for all other purposes hereunder (it being understood that such Notes shall not
be deemed outstanding for accounting purposes). For this purpose, Covenant
Defeasance means that, with respect to the outstanding Notes, the Company may
omit to comply with and shall have no liability in respect of any term,
condition or limitation set forth in any such covenant, whether directly or
indirectly, by reason of any reference elsewhere herein to any such covenant or
by reason of any reference in any such covenant to any other provision herein
or in any other document and such omission to comply shall not constitute a
Default or an Event of Default under Section 6.1 hereof, but, except as
specified above, the remainder of this Indenture, such Notes and such
Guarantees shall be unaffected thereby. In addition, upon the Company's
exercise under Section 8.1 hereof of the option applicable to this Section 8.3
hereof, subject to the satisfaction of the conditions set forth in Section 8.4
hereof, Sections [6.1(8) through 6.1(9)] hereof shall not constitute Events of
Default.
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Section 8.4. Conditions to Legal or Covenant Defeasance.
The following shall be the conditions to the application of either Section
8.2 or 8.3 hereof to the outstanding Notes:
In order to exercise either Legal Defeasance or Covenant Defeasance:
(a) the Company or the Parent must irrevocably deposit
with the Trustee, in trust, for the benefit of the Holders of the Notes, cash
in United States dollars, non-callable Government Securities, or a combination
thereof, in such amounts as will be sufficient, in the opinion of a nationally
recognized firm of independent public accountants, to pay the principal of,
premium, if any, and interest, on the outstanding Notes on the stated maturity
or on the applicable redemption date, as the case may be, and the Company must
specify whether the Notes are being defeased to maturity or to a particular
redemption date;
(b) in the case of an election under Section 8.2 hereof,
the Company or the Parent shall have delivered to the Trustee an Opinion of
Counsel in the United States reasonably acceptable to the Trustee confirming
that (A) the Company or the Parent has received from, or there has been
published by, the Internal Revenue Service a ruling or (B) since the date of
this Indenture, there has been a change in the applicable federal income tax
law, in either case to the effect that, and based thereon such Opinion of
Counsel shall confirm that, the Holders of the outstanding Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Legal Defeasance had not occurred;
(c) in the case of an election under Section 8.3 hereof,
the Company or the Parent shall have delivered to the Trustee an Opinion of
Counsel in the United States reasonably acceptable to the Trustee confirming
that the Holders of the outstanding Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such Covenant Defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred;
(d) no Default or Event of Default shall have occurred
and be continuing on the date of such deposit (other than a Default or Event of
Default resulting from the borrowing of funds to be applied to such deposit) or
insofar as Section 6.1(10) or 6.1(11) hereof is concerned, at any time in the
period ending on the 91st day after the date of deposit;
(e) such Legal Defeasance or Covenant Defeasance shall
not result in a breach or violation of, or constitute a default
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under, any material agreement or instrument (other than this Indenture) to
which the Company, the Parent or any of their respective Subsidiaries is a
party or by which the Company, the Parent or any of their respective
Subsidiaries is bound; and
(f) the Company and the Parent shall have delivered to
the Trustee an Officers' Certificate and an Opinion of Counsel, each stating
that all conditions precedent provided for or relating to the Legal Defeasance
or the Covenant Defeasance have been complied with.
Section 8.5. Deposited Money and Government Securities to
be Held in Trust; Other Miscellaneous Provisions.
Subject to Section 8.6 hereof, all money and non-callable
Government Securities (including the proceeds thereof) deposited with the
Trustee (or other qualifying trustee, collectively for purposes of this Section
8.5, the "Trustee") pursuant to Section 8.4 hereof in respect of the
outstanding Notes shall be held in trust and applied by the Trustee, in
accordance with the provisions of such Notes and this Indenture, to the
payment, either directly or through any Paying Agent (including the Company
acting as Paying Agent) as the Trustee may determine, to the Holders of such
Notes of all sums due and to become due thereon in respect of principal,
premium, if any, and interest, but such money need not be segregated from other
funds except to the extent required by law.
The Company, the Parent and the Subsidiary Guarantors shall
pay and indemnify the Trustee against any tax, fee or other charge imposed on
or assessed against the cash or non-callable Government Securities deposited
pursuant to Section 8.4 hereof or the principal and interest received in
respect thereof other than any such tax, fee or other charge which by law is
for the account of the Holders of the outstanding Notes.
Anything in this Article 8 to the contrary notwithstanding,
the Trustee shall deliver or pay to the Company from time to time upon the
request of the Company any money or non-callable Government Securities held by
it as provided in Section 8.4 hereof which, in the opinion of a nationally
recognized firm of independent public accountants expressed in a written
certification thereof delivered to the Trustee (which may be the opinion
delivered under Section 8.4(a) hereof), are in excess of the amount thereof
that would then be required to be deposited to effect an equivalent Legal
Defeasance or Covenant Defeasance.
Section 8.6. Repayment to Company.
Any money deposited with the Trustee or any Paying Agent, or
then held by the Company, in trust for the payment of the principal of,
premium, if any, or interest on any Note and remaining unclaimed for two years
after such principal, premium,
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if any, or interest has become due and payable shall be paid to the Company on
its request or (if then held by the Company) shall be discharged from such
trust; and the Holder of such Note shall thereafter, as a general creditor,
look only to the Company for payment thereof, and all liability of the Trustee
or such Paying Agent with respect to such trust money, and all liability of the
Company as trustee thereof, shall thereupon cease; provided, however, that the
Trustee or such Paying Agent, before being required to make any such repayment,
may at the expense of the Company cause to be published once, in the New York
Times and The Wall Street Journal (national edition), notice that such money
remains unclaimed and that, after a date specified therein, which shall not be
less than 30 days from the date of such notification or publication, any
unclaimed balance of such money then remaining shall be repaid to the Company.
Section 8.7. Reinstatement.
If the Trustee or Paying Agent is unable to apply any United
States dollars or non-callable Government Securities in accordance with Section
8.2 or 8.3 hereof, as the case may be, by reason of any order or judgment of
any court or governmental authority enjoining, restraining or otherwise
prohibiting such application, then the obligations of the Company, the Parent
and the Subsidiary Guarantors under this Indenture, the Notes and the
Guarantees shall be revived and reinstated as though no deposit had occurred
pursuant to Section 8.2 or 8.3 hereof, as the case may be; provided, however,
that if the Company, the Parent or any Subsidiary Guarantor makes any payment
of principal of, premium, if any, or interest on any Note following the
reinstatement of its obligations, the Company, the Parent or such Subsidiary
Guarantor shall be subrogated to the rights of the Holders of such Notes to
receive such payment from the money held by the Trustee or Paying Agent.
ARTICLE 9
AMENDMENT, SUPPLEMENT AND WAIVER
Section 9.1. Without Consent of Holders of Notes.
Notwithstanding Section 9.2 of this Indenture, the Company,
the Parent, the Subsidiary Guarantors and the Trustee may amend or supplement
this Indenture, the Notes or the Guarantees without the consent of any Holder
of a Note:
(a) to cure any ambiguity, defect or inconsistency;
(b) to provide for uncertificated Notes in addition to or
in place of certificated Notes;
(c) to provide for the assumption of the Company's
obligations to the Holders of the Notes in the case of a merger or
consolidation pursuant to Article 5 hereof;
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(d) to make any change that would provide any additional
rights or benefits to the Holders of the Notes or that does not
adversely affect the legal rights hereunder of any Holder of the Note;
or
(e) to comply with requirements of the Commission in
order to effect or maintain the qualification of this Indenture under
the TIA.
Upon the request of the Company accompanied by a resolution of
the Board of Directors of the Company, the Parent and each of the Subsidiary
Guarantors, as the case may be, authorizing the execution of any such amended
or supplemental indenture, and upon receipt by the Trustee of the documents
described in Section 7.2 hereof, the Trustee shall join with the Company, the
Parent and the Subsidiary Guarantors in the execution of any amended or
supplemental indenture authorized or permitted by the terms of this Indenture
and to make any further appropriate agreements and stipulations that may be
therein contained, but the Trustee shall not be obligated to enter into such
amended or supplemental Indenture that affects its own rights, duties or
immunities under this Indenture or otherwise.
Section 9.2. With Consent of Holders of Notes.
Except as provided below in this Section 9.2, the Company, the
Parent, the Subsidiary Guarantors and the Trustee may amend or supplement this
Indenture, the Notes and the Guarantees with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or a
tender offer or exchange offer for the Notes), and, subject to Sections 6.4 and
6.7 hereof, any existing Default or Event of Default (other than a Default or
Event of Default in the payment of the principal of, premium, if any, or
interest on the Notes, except a payment default resulting from an acceleration
that has been rescinded) or compliance with any provision of this indenture,
the Notes or the Guarantees may be waived with the consent of the Holders of a
majority in principal amount of the then outstanding Notes (including, without
limitation, consents obtained in connection with a purchase of, or tender offer
or exchange offer for the Notes).
Notwithstanding the foregoing, without the consent of at least
66 2/3% in aggregate principal amount of the Notes then outstanding (including
consents obtained in connection with a purchase of, or tender offer or exchange
offer for, Notes), no waiver or amendment to this Indenture may make any change
in the provisions of Sections 3.9, 4.10 and 4.13 hereof that adversely affect
the rights of any Holder of Notes. In addition, any amendment to the
provisions of Article 10 of this Indenture shall require the consent of the
Holders of at least 66 2/3% in aggregate principal amount of the Notes then
outstanding if such amendment would adversely affect the rights of Holders of
Notes provided
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that, no amendment may be made to the provisions of Article 10 of this
Indenture that adversely affects the rights of any holder of Senior Debt then
outstanding unless the holders of such Senior Debt (or any group or
representative thereof authorized to consent) consent to such change.
Subject to Sections 6.4 and 6.7 hereof, the Holders of a
majority in aggregate principal amount of the Notes then outstanding may waive
compliance in a particular instance by the Company, the Parent or any
Subsidiary Guarantor with any provision of this Indenture, the Notes or the
Guarantees. However, without the consent of each Holder affected, an amendment
or waiver may not (with respect to any Notes held by a non-consenting Holder):
(a) reduce the principal amount of Notes whose Holders
must consent to an amendment, supplement or waiver;
(b) reduce the principal of or change the fixed maturity
of any Note or alter the provisions with respect to the redemption of
the Notes (except as provided above with respect to Sections 3.9, 4.10
and 4.13 hereof);
(c) reduce the rate of or change the time for payment of
interest on any Note;
(d) waive a Default or Event of Default in the payment of
principal of or premium, if any, or interest on the Notes (except a
rescission of acceleration of the Notes by the Holders of at least a
majority in aggregate principal amount of the Notes and a waiver of
the payment default that resulted from such acceleration);
(e) make any Note payable in money other than that stated
in the Notes;
(f) make any change in the provisions of this Indenture
relating to waivers of past Defaults or the rights of Holders of Notes
to receive payments of principal of premium if any, or interest on the
Notes; or
(g) make any change in the foregoing amendment and waiver
provisions.
Upon the request of the Company accompanied by a resolution of
the Board of Directors of the Company and each of the Subsidiary Guarantors, as
the case may be, authorizing the execution of any such amended or supplemental
indenture, and upon the filing with the Trustee of evidence satisfactory to the
Trustee of the consent of the Holders of Notes as aforesaid, and upon receipt
by the Trustee of the documents described in Section 7.2 hereof, the Trustee
shall join with the Company, the Parent and the Subsidiary Guarantors in the
execution of such amended or supplemental indenture unless such amended or
supplemental
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indenture affects the Trustee's own rights, duties or immunities under this
indenture or otherwise, in which case the Trustee may in its discretion, but
shall not be obligated to, enter into such amended or supplemental indenture.
It shall not be necessary for the consent of the Holders of
Notes under this Section 9.2 to approve the particular form of any proposed
amendment or waiver, but it shall be sufficient if such consent approves the
substance thereof.
After an amendment, supplement or waiver under this Section
becomes effective, the Company shall mail to the Holders of Notes affected
thereby a notice briefly describing the amendment, supplement or waiver. Any
failure of the Company to mail such notice, or any defect therein, shall not,
however, in any way impair or affect the validity of any such amended or
supplemental indenture or waiver.
Section 9.3. Compliance with Trust Indenture Act.
Every amendment or supplement to this Indenture or the Notes
shall be set forth in an amended or supplemental Indenture that complies with
the TIA as then in effect.
Section 9.4. Revocation and Effect of Consents.
Until an amendment, supplement or waiver becomes effective, a
consent to it by a Holder of a Note is a continuing consent by the Holder of a
Note and every subsequent Holder of a Note or portion of a Note that evidences
the same debt as the consenting Holder's Note, even if notation of the consent
is not made on any Note. However, any such Holder of a Note or subsequent
Holder of a Note may revoke the consent as to its Note if the Trustee receives
written notice of revocation before the date the waiver, supplement or
amendment becomes effective. An amendment, supplement or waiver becomes
effective in accordance with its terms and thereafter binds every Holder.
Section 9.5. Notation on or Exchange of Notes.
The Trustee may place an appropriate notation about an
amendment, supplement or waiver on any Note thereafter authenticated. The
Company in exchange for all Notes may issue and the Trustee shall authenticate
new Notes that reflect the amendment, supplement or waiver.
Failure to make the appropriate notation or issue a new Note
shall not affect the validity and effect of such amendment, supplement or
waiver.
Section 9.6. Trustee to Sign Amendment, etc.
The Trustee shall sign any amended or supplemental indenture
authorized pursuant to this Article 9 if the amendment
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or supplement does not adversely affect the rights, duties, liabilities or
immunities of the Trustee. None of the Company, the Parent or any Subsidiary
Guarantor may sign an amendment or supplemental Indenture until its respective
Board of Directors approves it. In executing any amended or supplemental
indenture, the Trustee shall be entitled to receive and (subject to Section
7.1) shall be fully protected in relying upon, an Officer's Certificate and an
Opinion of Counsel stating that the execution of such amended or supplemental
indenture is authorized or permitted by this Indenture and that there has been
compliance with all conditions precedent.
ARTICLE 10
SUBORDINATION
Section 10.1. Agreement to Subordinate.
The Company agrees, and each Holder by accepting a Note
agrees, that the Indebtedness evidenced by the Note, including, but not limited
to, the payment of principal of, premium, if any, and interest on the Note, and
any other payment Obligation of the Company in respect of the Note is
subordinated in right of payment, to the extent and in the manner provided in
this Article, to the prior payment in full in cash of all Senior Debt (whether
outstanding on the date hereof or hereafter created, incurred, assumed or
guaranteed), and that the subordination is for the benefit of the Holders of
Senior Debt.
Section 10.2. Certain Definitions.
"Bankruptcy Law" means title 11, U.S. Code or any similar
Federal or state law for the relief of debtors.
"Designated Senior Debt" means (i) the Credit Agreement and
(ii) any other Senior Debt permitted under this Indenture the principal amount
of which is $25 million or more and that has been designated by the Company as
"Designated Senior Debt."
"Representative" means the indenture trustee or other trustee,
agent or representative for any Senior Debt.
"Senior Debt" means (i) Indebtedness of the Company or any
Subsidiary of the Company under or in respect of any Credit Facility whether
for principal, interest (including interest accruing after the filing of a
petition initiating any proceeding pursuant to any Bankruptcy Law, whether or
not the claim for such interest is allowed as a claim in such proceeding),
reimbursement obligations, fees, commissions, expenses, indemnities or other
amounts and (ii) any other Indebtedness permitted under the terms of this
Indenture, unless the instrument under which such Indebtedness is incurred
expressly provides that it is on a parity with or subordinated in right of
payment to the Notes. Notwithstanding anything to the contrary in the
foregoing
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sentence, Senior Debt will not include (w) any Indebtedness of the Company to
any of its Subsidiaries or other Affiliates, or (x) any Indebtedness that is
incurred in violation of this Indenture (other than Indebtedness under any
Credit Agreement or any other Credit Facility that is incurred on the basis of
a representation by the Company to the applicable lenders that it is permitted
to incur such Indebtedness under this Indenture).
A "distribution" may consist of cash, securities or other
property, by set-off or otherwise.
All Designated Senior Debt now or hereafter existing and all
other Obligations relating thereto shall not be deemed to have been paid in
full unless the holders or owners thereof shall have received payment in full
in cash (or other form of payment consented to by the holders of Designated
Senior Debt) with respect to such Designated Senior Debt and all other
Obligations with respect thereto.
Section 10.3. Liquidation; Dissolution; Bankruptcy.
Upon any payment or distribution of property as securities to
creditors of the Company in a liquidation or dissolution of the Company or in a
bankruptcy, reorganization, insolvency, receivership or similar proceeding
relating to the Company or its property, or in an assignment for the benefit of
creditors or any marshalling of the Company's assets and liabilities:
(1) the holders of Senior Debt shall be entitled to
receive payment in full in cash of all Obligations due in respect of
such Senior Debt (including interest after the commencement of any
such proceeding at the rate specified in the applicable Senior Debt,
whether or not a claim for such interest would be allowed in such
proceeding) before the Holders of Notes shall be entitled to receive
any payment with respect to the Notes (except that Holders of Notes
may receive payments made from any defeasance trust created pursuant
to Section 8.1 hereof); and
(2) until all Obligations with respect to Senior Debt (as
provided in subsection (1) above) are paid in full in cash, any
distribution to which the Holders of Notes would be entitled shall be
made to holders of Senior Debt (except that Holders of Notes may
receive payments made from any defeasance trust created pursuant to
Section 8.1 hereof).
Under the circumstances described in this Section 10.3, the
Company or any receiver, trustee in bankruptcy, liquidating trustee, agent or
other similar person making any payment or distribution of cash or other
property is authorized or instructed to make any payment or distribution to
which the Holders of the Notes would otherwise be entitled (other than the
securities and payments made from any defeasance trust referred
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to in the second parenthetical clause of each of clauses (1) and (2) above,
which shall be delivered or paid to the Holders of Notes as set forth in such
clauses) directly to the holders of the Senior Debt (pro rata to such holders
on the basis of the respective amounts of Senior Debt held by such holders) or
their representatives, or to any trustee or trustees under any other indenture
pursuant to which any such Senior Debt may have been issued, as their
respective interests appear, to the extent necessary to pay all such Senior
Debt in full, in cash or cash equivalents after giving effect to any concurrent
payment, distribution or provision therefor to or for the holders of such
Senior Debt.
To the extent any payment of Senior Debt (whether by or on
behalf of the Company, as proceeds of security or enforcement of any right of
setoff or otherwise) is declared to be fraudulent or preferential, set aside or
required to be paid to any receiver, trustee in bankruptcy, liquidating
trustee, agent or other similar Person under any bankruptcy, insolvency,
receivership, fraudulent conveyance or similar law, then if such payment is
recovered by, or paid over to, such receiver, trustee in bankruptcy,
liquidating trustee, agent or other similar Person, the Senior Debt or part
thereof originally intended to be satisfied shall be deemed to be reinstated
and outstanding as if such payment had not occurred. To the extent the
obligation to repay any Senior Debt is declared to be fraudulent, invalid or
otherwise set aside under any bankruptcy, insolvency, receivership, fraudulent
conveyance or similar law, then the obligation so declared fraudulent, invalid
or otherwise set aside (and all other amounts that would come due with respect
thereto had such obligation not been so affected) shall be deemed to be
reinstated and outstanding as Senior Debt for all purposes hereof as if such
declaration, invalidity or setting aside had not occurred.
Section 10.4. Default on Designated Senior Debt.
The Company may not make any payment (whether by redemption,
purchase, retirement, defeasance or otherwise) to the Trustee or any Holder in
respect of Obligations with respect to the Notes and may not acquire from the
Trustee or any Holder any Notes for cash or property (other than payments and
other distributions made from any defeasance trust created pursuant to Section
8.1 hereof) until all principal and other Obligations with respect to the
Senior Debt have been paid in full if:
(i) a default in the payment of any principal or other
Obligations with respect to Designated Senior Debt occurs; or
(ii) a default, other than a payment default, on
Designated Senior Debt occurs and is continuing that then permits, or
with the giving of notice or passage of time or both (unless cured or
waived) would permit, holders of the
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Designated Senior Debt as to which such default relates to accelerate
its maturity and the Trustee receives a notice of the default (a
"Payment Blockage Notice") from a Person who is a representative of
the holders of any Designated Senior Debt. If the Trustee receives
any such Payment Blockage Notice, no subsequent Payment Blockage
Notice shall be effective for purposes of this Section unless and
until 360 days shall have elapsed since the date of commencement of
the payment blockage period resulting from the immediately prior
Payment Blockage Notice. No nonpayment default in respect of any
Designated Senior Debt that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Trustee shall be, or be
made, the basis for a subsequent Payment Blockage Notice.
The Company shall resume payments on and distributions in
respect of the Notes and may acquire them upon:
(1) in the case of a default referred to in Section
10.4(i) hereof the date upon which the default is cured or waived, or
(2) in the case of a default referred to in Section
10.4(ii) hereof, the earliest of (1) the date on which such nonpayment
default is cured or waived, (2) the date the applicable Payment
Blockage Notice is retracted by written notice to the Trustee from the
Person who is a representative of the holders of any Designated Senior
Debt and (3) 179 days after the date on which the applicable Payment
Blockage Notice is received unless (A) any of the events described in
Section 10.4(i) hereof has occurred and is continuing or (B) a Default
or Event of Default under Section 6.1(10) and (11) has occurred,
if this Article otherwise permits the payment, distribution or acquisition at
the time of such payment or acquisition.
Section 10.5. Acceleration of Notes.
If payment of the Notes is accelerated because of an Event of
Default, the Company shall promptly notify holders of Senior Debt of the
acceleration.
Section 10.6. When Distribution Must Be Paid Over.
In the event that the Trustee or any Holder receives any
payment of any Obligations with respect to the Notes at a time when the Trustee
or such Holder, as applicable, has actual knowledge that such payment is
prohibited by Section 10.3 or Section 10.4 hereof, such payment shall be held
by the Trustee or such Holder, in trust for the benefit of, and shall be paid
forthwith over and delivered, upon written request, to, the holders of Senior
Debt as their interests may appear or their Representative under the indenture
or other agreement (if any)
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pursuant to which such Senior Debt may have been issued, as their respective
interests may appear, for application to the payment of all Obligations with
respect to Senior Debt remaining unpaid to the extent necessary to pay such
Obligations in full in accordance with their terms, after giving effect to any
concurrent payment or distribution to or for the holders of Senior Debt.
With respect to the holders of Senior Debt, the Trustee
undertakes to perform only such obligations on the part of the Trustee as are
specifically set forth in this Article 10, and no implied covenants or
obligations with respect to the holders of Senior Debt shall be read into this
Indenture against the Trustee. The Trustee shall not be deemed to owe any
fiduciary duty to the holders of Senior Debt, and shall not be liable to any
such holders if the Trustee shall pay over or distribute to or on behalf of
Holders of Notes or the Company or any other Person money or assets to which
any holders of Senior Debt shall be entitled by virtue of this Article 10,
except if such payment is made as a result of the willful misconduct or gross
negligence of the Trustee.
Section 10.7. Notice by Company.
The Company shall promptly notify the Trustee and the Paying
Agent of any facts known to the Company that would cause a payment of any
Obligations with respect to the Notes to violate this Article, but failure to
give such notice shall not affect the subordination of the Notes to the Senior
Debt as provided in this Article.
Section 10.8. Subrogation.
After all Senior Debt is paid in full and until the Notes are
paid in full, Holders of Notes shall be subrogated (equally and ratably with
all other Indebtedness pari passu with the Notes including, but not limited to,
the Discount Notes) to the rights of holders of Senior Debt to receive
distributions applicable to Senior Debt to the extent that distributions
otherwise payable to the Holders of Notes have been applied to the payment of
Senior Debt. A distribution made under this Article to holders of Senior Debt
that otherwise would have been made to Holders of Notes is not, as between the
Company and Holders of Notes, a payment by the Company on the Notes.
Section 10.9. Relative Rights.
This Article defines the relative rights of Holders of Notes
and holders of Senior Debt. Nothing in this Indenture shall:
(1) impair, as between the Company and Holders of Notes,
the obligation of the Company, which is absolute and
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unconditional, to pay principal of and interest on the Notes in
accordance with their terms;
(2) affect the relative rights of Holders of Notes and
creditors of the Company other than their rights in relation to
holders of Senior Debt; or
(3) prevent the Trustee or any Holder from exercising its
available remedies upon a Default or Event of Default, subject to the
rights of holders and owners of Senior Debt to receive distributions
and payments otherwise payable to Holders of Notes.
If the Company fails because of this Article to pay principal
of or interest on a Note on the due date, the failure is still a Default or
Event of Default.
Section 10.10. Subordination May Not Be Impaired by Company.
No right of any present or future holders of any Senior Debt
to enforce subordination as provided in this Article Ten will at any time in
any way be prejudiced or impaired by any act or failure to act on the part of
the Company or by any act or failure to act, in good faith, by any such holder,
or by any noncompliance by the Company with the terms of this Indenture,
regardless of any knowledge thereof that any such holder of Senior Debt may
have or otherwise be charged with. The provisions of this Article Ten are
intended to be for the benefit of, and shall be enforceable directly by, the
holders of Senior Debt.
Section 10.11. Distribution or Notice to Representative.
Whenever a distribution is to be made or a notice given to
holders of Senior Debt, the distribution may be made and the notice given to
their Representative.
Upon any payment or distribution of assets of the Company
referred to in this Article 10, the Trustee and the Holders of Notes shall be
entitled to rely upon any order or decree made by any court of competent
jurisdiction or upon any certificate of such Representative or of the
liquidating trustee or agent or other Person making any distribution to the
Trustee or to the Holders of Notes for the purpose of ascertaining the Persons
entitled to participate in such distribution, the holders of the Senior Debt
and other Indebtedness of the Company, the amount thereof or payable thereon,
the amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this Article 10.
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Section 10.12. Rights of Trustee and Paying Agent.
Notwithstanding the provisions of this Article 10 or any other
provision of this Indenture, the Trustee shall not be charged with knowledge of
the existence of any facts that would prohibit the making of any payment or
distribution by the Trustee, and the Trustee and the Paying Agent may continue
to make payments on the Notes, unless the Trustee shall have received at its
Corporate Trust Office at least two Business Days prior to the date of such
payment written notice of facts that would cause the payment of any Obligations
with respect to the Notes to violate this Article, which notice shall
specifically refer to Section 10.4 hereof. Only the Company or a
Representative may give the notice. Nothing in this Article 10 shall impair
the claims of, or payments to, the Trustee under or pursuant to Section 7.7
hereof.
The Trustee in its individual or any other capacity may hold
Senior Debt with the same rights it would have if it were not Trustee. Any
Agent may do the same with like rights.
Section 10.13. Authorization to Effect Subordination.
Each holder by the Holder's acceptance thereof authorizes and
directs the Trustee on the Holder's behalf to take such action as may be
necessary or appropriate to effectuate the subordination as provided in this
Article 10, and appoints the Trustee to act as the Holder's attorney-in-fact
for any and all such purposes. If the Trustee does not file a proper proof of
claim or proof of debt in the form required in any proceeding referred to in
Section 6.9 hereof at least 30 days before the expiration of the time to file
such claim, each lender under the Credit Agreement is hereby authorized to file
an appropriate claim for and on behalf of the Holders of the Notes.
Section 10.14. Amendments.
No amendment may be made to the provisions of this Article 10
that adversely affects the rights of any holder of Senior Debt then outstanding
unless the holders of such Senior Debt (or any group or Representative
authorized to give a consent) consent to such change.
Section 10.15. No Waiver of Subordination Provisions.
Without in any way limiting the generality of Section 10.9 of
this Indenture, the holders of Senior Debt may, at any time and from time to
time, without the consent of or notice to the Trustee or the Holders, without
incurring responsibility to the Holders and without impairing or releasing the
subordination provided in this Article Ten or the obligations hereunder of the
Holders to the holders of Senior Debt, do any one or more of the following:
(a) change the manner, place or terms of payment or extend the time of payment
of, or renew or alter, Senior Debt or
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any instrument evidencing the same or any agreement under which Senior Debt is
outstanding or secured; (b) sell, exchange, release or otherwise deal with any
property pledged, mortgaged or otherwise securing Senior Debt; (c) release any
Person liable in any manner for the collection of Senior Debt; and (d) exercise
or refrain from exercising any rights against the Company and any other Person.
ARTICLE 11
THE GUARANTEES
Section 11.1. The Guarantees.
Each of the Parent and the Subsidiary Guarantors hereby,
jointly and severally, unconditionally guarantees to each Holder of a Note
authenticated and delivered by the Trustee and to the Trustee and its
successors and assigns, irrespective of the validity and enforceability of this
Indenture, the Notes or the obligations of the Company hereunder or thereunder,
that: (a) the principal of and premium and interest, on the Notes shall be
promptly paid in full when due, whether at maturity, by acceleration,
redemption or otherwise, and interest on the overdue principal of and interest
on premium and interest, on the Notes, if any, if lawful, and all other
obligations of the Company to the Holders or the Trustee hereunder or
thereunder shall be promptly paid in full or performed, all in accordance with
the terms hereof and thereof; and (b) in case of any extension of time of
payment or renewal of any Notes or any of such other obligations, that the same
shall be promptly paid in full when due or performed in accordance with the
terms of the extension or renewal, whether at stated maturity, by acceleration
or otherwise. Failing payment when due of any amount so guaranteed or any
performance so guaranteed for whatever reason, the Parent and the Subsidiary
Guarantors shall be jointly and severally obligated to pay the same
immediately. The Parent and the Subsidiary Guarantors hereby agree that their
obligations hereunder shall be unconditional, irrespective of the validity,
regularity or enforceability of the Notes or this Indenture, the absence of any
action to enforce the same, any waiver or consent by any Holder with respect to
any provisions hereof or thereof, the recovery of any judgment against the
Company, any action to enforce the same or any other circumstance which might
otherwise constitute a legal or equitable discharge or defense of a guarantor.
Each of the Parent and the Subsidiary Guarantors hereby waives diligence,
presentment, demand of payment, filing of claims with a court in the event of
insolvency or bankruptcy of the Company, any right to require a proceeding
first against the Company, protest, notice and all demands whatsoever and
covenant that this Guarantee shall not be discharged except by complete
performance of the obligations contained in the Notes and this Indenture. If
any Holder or the Trustee is required by any court or otherwise to return to
the Company, the Parent or the Subsidiary Guarantors, or any Custodian,
Trustee, liquidator
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or other similar official acting in relation to either the Company, the Parent
or the Subsidiary Guarantors, any amount paid by either to the Trustee or such
Holder, this Guarantee, to the extent theretofore discharged, shall be
reinstated in full force and effect. Each of the Parent and the Subsidiary
Guarantors agrees that it shall not be entitled to any right of subrogation in
relation to the Holders of Notes in respect of any obligations guaranteed
hereby until payment in full of all obligations guaranteed hereby. Each of the
Parent and the Subsidiary Guarantors further agrees that, as between the
Guarantors, on the one hand, and the Holders and the Trustee, on the other
hand, (x) the maturity of the obligations guaranteed hereby may be accelerated
as provided in Article 6 for the purposes of this Guarantee, notwithstanding
any stay, injunction or other prohibition preventing such acceleration in
respect of the obligations guaranteed hereby and (y) in the event of any
declaration of acceleration of such obligations as provided in Article 6, such
obligations (whether or not due and payable) shall forthwith become due and
payable by the Parent and the Subsidiary Guarantors for the purpose of this
Guarantee. The Parent and the Subsidiary Guarantors shall have the right to
seek contribution from any Guarantor not paying so long as the exercise of such
right does not impair the rights of the Holders under the Guarantees.
Section 11.2. Execution and Delivery Guarantees.
(i) To evidence its Guarantee set forth in Section 11.1, each
of the Parent and the Subsidiary Guarantors hereby agrees that a notation of
such Guarantee substantially in the form of Exhibit C shall be endorsed by an
officer of the Parent or such Subsidiary Guarantor on each Note authenticated
and delivered by the Trustee, that this Indenture shall be executed on behalf
of the Parent or such Subsidiary Guarantor by its President or one of its Vice
Presidents and attested to by an Officer and that the Parent or such Subsidiary
Guarantor shall deliver to the Trustee an Opinion of Counsel that the foregoing
have been duly authorized, executed and delivered by the Parent or such
Subsidiary Guarantor and that such Guarantee is a valid and legally binding
obligation of Parent or such Subsidiary Guarantor, enforceable against such
Guarantor in accordance with its terms.
Each of the Parent and each Subsidiary Guarantor hereby agrees
that its Guarantee set forth in Section 11.1 shall remain in full force and
effect notwithstanding any failure to endorse on each Note a notation of such
Guarantee.
If an Officer whose signature is on this Indenture or on the
applicable Guarantee no longer holds that office at the time the Trustee
authenticates the Note on which such Guarantee is endorsed, such Guarantee
shall be valid nevertheless.
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The delivery of any Note by the Trustee, after the
authentication thereof hereunder, shall constitute due delivery of the
Guarantees set forth in this Indenture on behalf of the Parent and the
Subsidiary Guarantors.
Section 11.3. Parent and Subsidiary Guarantors May
Consolidate, etc., on Certain Terms.
Neither the Parent nor any Subsidiary Guarantor may
consolidate with or merge with or into, another corporation or Person other
than the Parent, the Company, or another Subsidiary Guarantor, unless:
(a) subject to the provisions of Section 11.4 hereof, the
Person formed by or surviving any such consolidation or merger assumes
all the obligations of the Parent or such Subsidiary Guarantor, as the
case may be, pursuant to a supplemental indenture in form reasonably
satisfactory to the Trustee in respect of the Notes, this Indenture
and the Parent's or such Subsidiary Guarantor's Guarantee;
(b) immediately after giving effect to such transaction,
no Default or Event of Default exists; and
(c) such transaction does not violate any of Sections
4.3, 4.7, 4.8, 4.9, 4.10, 4.11, 4.12, 4.13, 4.14, 4.16 and 4.17.
Notwithstanding the foregoing, none of the Parent or the Subsidiary Guarantors
shall be permitted to consolidate with or merge with or into (whether or not
such Guarantor is the surviving Person), another corporation, Person or entity
pursuant to the preceding sentence if such consolidation or merger would not be
permitted by Section 5.1 hereof.
In case of any such consolidation or merger and upon the
assumption by the successor corporation, by supplemental indenture, executed
and delivered to the Trustee and satisfactory in form to the Trustee, of the
Guarantee endorsed upon the Notes and the due and punctual performance of all
of the covenants and conditions of this Indenture to be performed by the Parent
or such Subsidiary Guarantor, such successor corporation shall succeed to and
be substituted for the Parent or such Subsidiary Guarantor with the same effect
as if it had been named herein as a Parent or a Subsidiary Guarantor. Such
successor corporation thereupon may cause to be signed any or all of the
Guarantees to be endorsed upon all of the Notes issuable hereunder which
theretofore shall not have been signed by the Company and delivered to the
Trustee. All the Guarantees so issued shall in all respects have the same
legal rank and benefit under this Indenture as the Guarantees theretofore and
thereafter issued in accordance with the terms of this Indenture as though all
of such Guarantees had been issued at the date of the execution hereof.
<PAGE> 84
84
Except as set forth in Articles 4 and 5 hereof, nothing
contained in this Indenture or in any of the Notes shall prevent any
consolidation or merger of the Parent or any Subsidiary Guarantor with or into
the Company, the Parent or another Subsidiary Guarantor, or shall prevent any
sale or conveyance of the property of the Parent or any Subsidiary Guarantor as
an entirety or substantially as an entirety to the Company, the Parent or any
Subsidiary Guarantor.
Section 11.4. Releases of Guarantees.
In the event of a sale or other disposition of all or
substantially all of the assets of any Subsidiary Guarantor or a sale or other
disposition (including, without limitation, by foreclosure) of all of the
capital stock of any Subsidiary Guarantor, to any corporation or other Person
(including a Subsidiary that is not a Subsidiary Guarantor) by way of merger,
consolidation, or otherwise, in a transaction that does not violate any of the
covenants of this Indenture, then such Subsidiary Guarantor shall be released
and relieved of any obligations under its Guarantee and such acquiring or other
Person, if other than the Parent or a Subsidiary Guarantor shall have no
obligation to assume or otherwise become liable under such Guarantee; provided,
if such acquiring corporation or other Person is other than the Company or a
Wholly Owned Restricted Subsidiary, that the Net Proceeds of such sale or other
disposition are applied in accordance with Section 4.10 hereof. Upon delivery
by the Company to the Trustee of an Officers' Certificate and an Opinion of
Counsel to the effect that such sale or other disposition was made by the
Company in accordance with the provisions of this Indenture, including without
limitation Section 4.10, the Trustee shall execute any documents reasonably
required in order to evidence the release of any Subsidiary Guarantor from its
obligations under its Guarantee.
Any Subsidiary Guarantor not released from its obligations
under its Guarantee shall remain liable for the full amount of principal of and
interest on the Notes and for the other obligations of the Parent and any
Subsidiary Guarantor under this Indenture as provided in this Article 11.
Any Subsidiary Guarantor that is designated an Unrestricted
Subsidiary in accordance with the terms of this Indenture shall be released
from and relieved of its obligations under its Guarantee and any Restricted
Subsidiary that becomes a Material Restricted Subsidiary and any Unrestricted
Subsidiary that ceases to be an Unrestricted Subsidiary and, thereafter,
becomes a Material Restricted Subsidiary shall be required to execute a
Guarantee in accordance with the terms of this Indenture.
<PAGE> 85
85
Section 11.5. Limitation on Subsidiary Guarantor Liability.
For purposes hereof, each Subsidiary Guarantor's liability
shall be that amount from time to time equal to the aggregate liability of such
Subsidiary Guarantor thereunder, but shall be limited to the lesser of (i) the
aggregate amount of the Obligations of the Company under the Notes and this
Indenture and (ii) the amount, if any, which would not have (A) rendered such
Subsidiary Guarantor "insolvent" (as such term is defined in the federal
Bankruptcy Law and in the Debtor and Creditor Law of the State of New York) or
(B) left it with unreasonably small capital at the time its Guarantee of the
Notes was entered into, after giving effect to the incurrence of existing
Indebtedness immediately prior to such time; provided that, it shall be a
presumption in any lawsuit or other proceeding in which such Subsidiary
Guarantor is a party that the amount guaranteed pursuant to its Guarantee is
the amount set forth in clause (i) above unless any creditor, or representative
of creditors of such Subsidiary Guarantor, or debtor in possession or trustee
in bankruptcy of such Subsidiary Guarantor, otherwise proves in such a lawsuit
that the aggregate liability of such Subsidiary Guarantor is limited to the
amount set forth in clause (ii). In making any determination as to the
solvency or sufficiency of capital of a Subsidiary Guarantor in accordance with
the previous sentence, the right of such Subsidiary Guarantor to contribution
from other Subsidiary Guarantors and the Parent and any other rights such
Subsidiary Guarantor may have, contractual or otherwise, shall be taken into
account.
Section 11.6. "Trustee" to Include Paying Agent.
In case at any time any Paying Agent other than the Trustee
shall have been appointed by the Company and be then acting hereunder, the term
"Trustee" as used in this Article 11 shall in such case (unless the context
shall otherwise require) be construed as extending to and including such Paying
Agent within its meaning as fully and for all intents and purposes as if such
Paying Agent were named in this Article 11 in place of the Trustee.
Section 11.7. Subordination of Guarantees.
The obligations of each of the Parent and the Subsidiary
Guarantors under its Guarantee pursuant to this Article 11 shall be junior and
subordinated to Indebtedness of the Parent or the Subsidiary Guarantor, as the
case may be, to the same extent and in the same manner as the Notes are junior
and subordinated to Senior Debt of the Company. For the purposes of the
foregoing sentence, the Trustee and the Holders shall have the right to receive
and/or retain payments by any of the Guarantors only at such times as they may
receive and/or retain payments in respect of the Notes pursuant to this
Indenture, including Article 10 hereof.
<PAGE> 86
86
ARTICLE 12
MISCELLANEOUS
Section 12.1. Trust Indenture Act Controls.
If any provision of this Indenture limits, qualifies or
conflicts with the duties imposed by TIA Section 318(c), the imposed duties
shall control. If any provisions of this Indenture modifies or excludes any
provision of the TIA that may be so modified or excluded, the letter provision
shall be deemed to apply to this Indenture as so modified or excluded, as the
case may be.
Section 12.2. Notices.
Any notice or communication by the Company, the Parent or the
Subsidiary Guarantors or the Trustee to the others is duly given if in writing
and delivered in Person or mailed by first class mail (registered or certified,
return receipt requested), telecopier or overnight air courier guaranteeing
next day delivery, to the others' address:
If to the Company, the Parent or any Subsidiary Guarantor:
Mesa Operating Co.
1400 Williams Square West
5205 North O'Connor Boulevard
Irving, Texas 75039
Telecopier No.: (214) 444-9001
Attention: Chief Financial Officer
With a copy to:
Baker & Botts, LLP
2001 Ross Avenue
700 Trammell Crow Center
Dallas, Texas 75201-2980
Telecopier No.: 914-953-6503
Attention: Carlos A. Fieco
If to the Trustee:
Harris Trust and Savings Bank
311 West Monroe Street
12th Floor
Chicago, Illinois 60606
Telecopier No.: (312) 461-3525
Attention: Indenture Trust Department
The Company, the Parent or any Subsidiary Guarantor or the
Trustee, by notice to the others may designate additional or different
addresses for subsequent notices or communications.
<PAGE> 87
87
All notices and communications (other than those sent to
Holders) shall be deemed to have been duly given: at the time delivered by
hand, if personally delivered; five Business Days after being deposited in the
mail, postage prepaid, if mailed; when receipt acknowledged, if by telecopy;
and the next Business Day after timely delivery to the courier, if sent by
overnight air courier guaranteeing next day delivery.
Any notice or communication to a Holder shall be mailed by
first class mail, certified or registered, return receipt requested, or by
overnight air courier guaranteeing next day delivery to its address shown on
the register kept by the Registrar. Any notice or communication shall also be
so mailed to any Person described in TIA Section 313(c), to the extent
required by the TIA. Failure to mail a notice or communication to a Holder or
any defect in it shall not affect its sufficiency with respect to other
Holders.
If a notice or communication is mailed in the manner provided
above within the time prescribed, it is duly given, whether or not the
addressee receives it.
If the Company, the Parent or any Subsidiary Guarantor mails a
notice or communication to Holders, it shall mail a copy to the Trustee and
each Agent at the same time.
Section 12.3. Communication by Holders of Notes with Other
Holders of Notes.
Holders may communicate pursuant to TIA Section 312(b) with
other Holders with respect to their rights under this Indenture or the Notes.
The Company, the Parent, the Subsidiary Guarantors, the Trustee, the Registrar
and anyone else shall have the protection of TIA Section 312(c).
Section 12.4. Certificate and Opinion as to Conditions
Precedent.
Upon any request or application by the Company, the Parent or
any Subsidiary Guarantor to the Trustee to take any action under this
Indenture, the Company, the Parent or such Subsidiary Guarantor, as the case
may be, shall furnish to the Trustee:
(a) an Officers' Certificate in form and substance
reasonably satisfactory to the Trustee (which shall include the
statements set forth in Section 12.5 hereof) stating that, in the
opinion of the signers, all conditions precedent and covenants, if
any, provided for in this Indenture relating to the proposed action
have been complied with; and
(b) an Opinion of Counsel in form and substance
reasonably satisfactory to the Trustee (which shall include
<PAGE> 88
88
the statements set forth in Section 12.5 hereof) stating that, in the
opinion of such counsel, all such conditions precedent and covenants
have been complied with.
Section 12.5. Statements Required in Certificate or
Opinion.
Each certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture (other than a certificate
provided pursuant to TIA Section 314(a)(4)) shall comply with the provisions
of TIA Section 314(e) and shall include:
(a) a statement that the Person making such certificate
or opinion has read such covenant or condition;
(b) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(c) a statement that, in the opinion of such Person, he
or she has made such examination or investigation as is necessary to
enable him or her to express an informed opinion as to whether or not
such covenant or condition has been complied with; and
(d) a statement as to whether or not, in the opinion of
such Person, such condition or covenant has been complied with.
Section 12.6. Rules by Trustee and Agents.
The Trustee may make reasonable rules for action by or at a
meeting of Holders. The Registrar or Paying Agent may make reasonable rules
and set reasonable requirements for its functions.
Section 12.7. No Personal Liability of Directors, Officers,
Employees and Stockholders.
No director, officer, employee, incorporator or stockholder of
the Company, as such, shall have any liability for any obligations of the
Company under the Notes or this Indenture or for any claim based on, in respect
of, or by reason of, such obligations or their creation. Each Holder of Notes,
by accepting a Note, waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the Notes. Such waiver
may not be effective to waive liabilities under the federal securities laws and
it is the view of the Commission that such a waiver is against public policy.
<PAGE> 89
89
Section 12.8. Governing Law.
THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE
USED TO CONSTRUE THIS INDENTURE, THE NOTES AND THE GUARANTEES.
Section 12.9. No Adverse Interpretation of Other
Agreements.
This Indenture may not be used to interpret any other
indenture, loan or debt agreement of the Company, the Parent or their
respective Subsidiaries or of any other Person. Any such indenture, loan or
debt agreement may not be used to interpret this Indenture and the Guarantees.
Section 12.10. Successors.
All agreements of the Company, the Parent and each Subsidiary
Guarantor in this Indenture, the Notes and the Guarantees shall bind its
respective successors. All agreements of the Trustee in this Indenture shall
bind its successors.
Section 12.11. Severability.
In case any provision in this Indenture or in the Notes shall
be invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
Section 12.12. Counterpart Originals.
The parties may sign any number of copies of this Indenture.
Each signed copy shall be an original, but all of them together represent the
same agreement.
Section 12.13. Table of Contents, Headings, Etc.
The Table of Contents, Cross-Reference Table and Headings of
the Articles and Sections of this Indenture have been inserted for convenience
of reference only, are not to be considered a part of this Indenture and shall
in no way modify or restrict any of the terms or provisions hereof.
[Signatures on following page]
<PAGE> 90
90
SIGNATURES
Dated as of
____ _________, 1996
Mesa Inc.
Attest: By
---------------------------------
Name:
-----------------------------
Title:
-----------------------------
Mesa Operating Co.
Attest: By
--------------------------------
Name:
----------------------------
Title:
----------------------------
Harris Trust and Savings Bank, as
Trustee
Attest: By
--------------------------------
Name:
----------------------------
Title:
----------------------------
<PAGE> 91
================================================================================
EXHIBIT A
(Face of Note)
___% Senior Subordinated Notes due 2006
No. $__________
MESA OPERATING CO.
promises to pay to
or registered assigns,
the principal sum of
Dollars on _______, 2006.
Interest Payment Dates: ______ and ________
Record Dates: _________ and __________
Dated: _______________, 1996
MESA OPERATING CO.
By:_______________________
Name:
Title:
Cusip Number:
By:_______________________
Name:
Title:
This is one of the Notes referred
to in the within-mentioned (SEAL)
Indenture:
[_______________________],
as Trustee
By:____________________________
================================================================================
A-1
<PAGE> 92
(Back of Note)
_____% Senior Subordinated Note due 2006
Capitalized terms used herein shall have the meanings
assigned to them in the Indenture referred to below unless otherwise indicated.
1. Interest. Mesa Operating Co., a Delaware corporation
(the "Company"), promises to pay interest on the principal amount of this Note
at the rate of _____% per annum, which interest shall be payable in cash
semiannually in arrears on _____ and ______, or if any such day is not a
Business Day, on the next succeeding Business Day (each an "Interest Payment
Date"); provided that the first Interest Payment Date shall be ____________,
1996. Interest on the Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from the date of
original issuance. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
2. Method of Payment. On each Interest Payment Date the
Company will pay interest to the Person who is the Holder of record of this
Note as of the close of business on the ______ or ______________ immediately
preceding such Interest Payment Date, even if this Note is cancelled after such
record date and on or before such Interest Payment Date, except as provided in
Section 2.12 of the Indenture with respect to defaulted interest. Principal,
premium if any and interest on this Note will be payable at the office or
agency of the Company maintained for such purpose within the City and State of
New York or, at the option of the Company, payment of interest, may be made by
check mailed to the Holder of this Note at its address set forth in the
register of Holders of Notes; provided that all payments with respect to the
Global Notes and definitive Notes having an aggregate principal amount of $5.0
million or more the Holders of which have given wire transfer instructions to
the Company at least 10 Business Days prior to the applicable payment date will
be required to be made by wire transfer of immediately available funds to the
accounts specified by the Holders thereof. Such payment shall be in such coin
or currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts.
3. Paying Agent and Registrar. Initially, Harris Trust
and Savings Bank, the Trustee under the Indenture, will act as Paying Agent and
Registrar. The Company may change any Paying Agent or Registrar without notice
to any Holder. The Company, MESA Inc. (the "Parent") or any Subsidiary
Guarantor or any other of the Company's or Parent's Subsidiaries may act in any
such capacity.
A-2
<PAGE> 93
4. Indenture. The Company issued the Notes under an
Indenture dated as of _____________, 1996 ("Indenture") among the Company, the
Parent and the Trustee. The terms of the Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (15 U.S. Code Sections 77aaa-77bbbb). The
Notes are subject to all such terms, and Holders are referred to the Indenture
and such Act for a statement of such terms. The Notes are general unsecured
obligations of the Company equal in an aggregate principal amount to
$325,000,000 and will mature on ______, 2006.
5. Optional Redemption.
(a) The Notes are not redeemable at the Company's option
prior to __________, 2001. From and after ____, 2001, the Notes will be
subject to redemption at the option of the Company, in whole or in part, upon
not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below plus accrued and
unpaid interest thereon to the applicable redemption date, if redeemed during
the twelve-month period beginning on ____________ of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . %
-------
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . %
-------
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . %
-------
2004 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . 100.000%
</TABLE>
(b) Notwithstanding the provisions of clause (a) of this
Paragraph 5, prior to ____________, 1999 the Company may, at its option, on any
one or more occasions, redeem up to [$ amount equal to 33 1/2%] million in
aggregate principal amount of Notes at a redemption price equal to [_______]%
of the principal amount thereof, plus accrued and unpaid interest, if any,
thereon to the redemption date, with the net proceeds of sales of Equity
Interests (other than Disqualified Stock) of the Company or Parent; provided
that at least [$ amount equal to 66-2/3%] million in aggregate principal amount
of Notes must remain outstanding immediately after the occurrence of such
redemption; and provided, further, that any such redemption shall occur within
60 days after the date of the closing of the related sale of such Equity
Interests.
6. Mandatory Redemption.
Except as set forth in paragraph 7 below, the Company shall
not be required to make mandatory redemption or sinking fund payments with
respect to the Notes.
A-3
<PAGE> 94
7. Repurchase at Option of Holder.
(a) Upon the occurrence of a Change of Control, each
Holder of Notes shall have the right to require the Company to repurchase all
or any part (equal to $1,000 or an integral multiple thereof) of such Holder's
Notes pursuant to the offer described below (the "Change of Control Offer") at
an offer price in cash equal to 101% of the aggregate principal amount thereof
plus accrued and unpaid interest, if any, thereon to the date of purchase (the
"Change of Control Payment"). The right of the Holders of the Notes to require
the Company to repurchase such Notes upon a Change of Control may not be waived
by the Trustee without the approval of the Holders of the Notes required by
Section 9.2 of the Indenture. Within 30 days following any Change of Control,
the Company will mail a notice to each Holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
Notes pursuant to the procedures required by the Indenture and described in
such notice. The Change of Control Payment shall be made on a business day not
less than 30 days nor more than 60 days after such notice is mailed. The
Parent, the Company and each Subsidiary Guarantor will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Notes as a result of a
Change of Control.
(b) If the Company or a Restricted Subsidiary consummates
any Asset Sales permitted by the Indenture, when the aggregate amount of Excess
Proceeds exceeds $10.0 million, the Company shall make an Asset Sale Offer to
purchase the maximum principal amount of Notes and any other Pari Passu
Indebtedness to which the Asset Sale Offer applies that may be purchased out of
the Excess Proceeds, at an offer price in cash in an amount equal to, in the
case of the Notes or any such Pari Passu Indebtedness, 100% of the principal
amount thereof, plus accrued and unpaid interest thereon to the date of
purchase or, in the case of the Discount Notes, prior to ______ 2001, 100% of
the accreted value thereof on the date of purchase and, thereafter, 100% of the
principal amount of the Discount Notes, plus, after _________, 2001, accrued
but unpaid interest thereon, if any, to the date of purchase or, in the case of
any other discount Pari Passu Indebtedness, 100% of the accreted value thereof
on the date of purchase, in each case, in accordance with the procedures set
forth in Section 3.9 of the Indenture or the agreements governing the Pari
Passu Indebtedness, as applicable. To the extent that the aggregate principal
amount (or accreted value, as the case may be) of Notes, and Pari Passu
Indebtedness tendered pursuant to an Asset Sale Offer is less than the Excess
Proceeds, the Company may use any remaining Excess Proceeds for general
corporate purposes. If the sum of (i) the aggregate principal amount of Notes
surrendered by Holders thereof and (ii) the aggregate principal amount or
accreted value, as the case may be,
A-4
<PAGE> 95
of Pari Passu Indebtedness surrendered by holders or lenders thereof exceeds
the amount of Excess Proceeds, the Trustee and the Trustee for the Discount
Notes shall select the Notes and the other Pari Passu Indebtedness to be
purchased on a pro rata basis, based on the aggregate principal amount (or
accreted value, as applicable) thereof surrendered in such Asset Sale Offer.
[Upon completion of such Asset Sale Offer, the amount of Excess Proceeds shall
be reset at zero.]
8. Notice of Redemption. Notice of redemption will be
mailed at least 30 days but not more than 60 days before the redemption date to
each Holder whose Notes are to be redeemed at its registered address. Notes in
denominations larger than $1,000 may be redeemed in part but only in whole
multiples of $1,000, unless all of the Notes held by a Holder are to be
redeemed. On and after the redemption date interest ceases to accrue on Notes
or on the aggregate principal amount of the Notes called for redemption, as the
case may be.
9. Denominations, Transfer, Exchange. The Notes are in
registered form without coupons in minimum denominations of $1,000 and integral
multiples of $1,000. The transfer of Notes may be registered and Notes may be
exchanged as provided in the Indenture. The Registrar and the Trustee may
require a Holder, among other things, to furnish appropriate endorsements and
transfer documents and the Company may require a Holder to pay any taxes and
fees required by law or permitted by the Indenture. The Company need not
exchange or register the transfer of any Note or portion of a Note selected for
redemption, except for the unredeemed portion of any Note being redeemed in
part. Also, it need not exchange or register the transfer of any Note for a
period of 15 days before a selection of Notes to be redeemed or during the
period between a record date and the corresponding Interest Payment Date.
10. Persons Deemed Owners. The registered Holder of a
Note may be treated as its owner for all purposes.
11. Amendment, Supplement and Waiver. Subject to certain
exceptions, the Indenture or the Notes may be amended or supplemented with the
consent of the Holders of at least a majority in principal amount of the Notes
then outstanding (including, without limitation, consents obtained in
connection with a purchase of, or the tender offer or exchange offer for, such
Notes), and any existing Default or Event of Default under, or compliance with
any provision of the Indenture or the Notes may be waived with the consent of
the Holders of a majority in principal amount of the then outstanding Notes.
Without the consent of any Holder of a Note, the Indenture or the Notes may be
amended or supplemented to cure any ambiguity, defect or inconsistency, to
provide for uncertificated Notes in addition to or in place of certificated
Notes, to provide for the assumption of the Company's obligations to Holders of
the Notes in case of a
A-5
<PAGE> 96
merger or consolidation, to make any change that would provide any additional
rights or benefits to the Holders of the Notes or that does not adversely
affect the legal rights under the Indenture of any such Holder, or to comply
with the requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
12. Defaults and Remedies. Events of Default include:
(i) default for 30 consecutive days in the payment when due of interest on the
Notes (whether or not prohibited by the provisions of Article 10 of the
Indenture); (ii) default in payment when due of the principal of or premium, if
any, on the Notes (whether or not prohibited by the provisions of Article 10 of
the Indenture); (iii) failure by the Company to comply with the provisions of
Article 5 of the Indenture; (iv) failure by the Company for 30 consecutive days
after notice from the Trustee or the Holders of at least 25% in aggregate
principal amount of the Notes then outstanding to comply with the provisions of
Sections 4.3, 4.7, 4.8, 4.9, 4.10, 4.11, 4.12, 4.13, 4.14, 4.16, and 4.17 of
the Indenture; (v) failure by the Company for 60 consecutive days after notice
from the Trustee or the Holders of at least 25% in aggregate principal amount
of the Notes then outstanding to comply with any of its other agreements or
covenants in, or provisions of, this Note or in the Indenture; (vi) except as
permitted by the Indenture, any Guarantee shall be held in any judicial
proceeding to be unenforceable or invalid or shall cease for any reason to be
in full force and effect or the Parent or a Subsidiary Guarantor or any Person
acting on behalf of the Parent or a Subsidiary such Guarantor, shall deny or
disaffirm the Parent's or such Subsidiary Guarantor's obligations under its
Guarantee; (vii) the failure by the Parent to issue Preferred Stock for gross
proceeds in the amount of $132.0 million pursuant to the Rights Offering and
Standby Commitment or either thereof within 90 days following the date of
issuance of the Notes; (viii) default under any mortgage, indenture or
instrument under which there may be issued or by which there may be secured or
evidenced any Indebtedness for money borrowed by the Company or any Subsidiary
Guarantor whether such Indebtedness or guarantee now exists, or is created
after the date of the Indenture, which default (a) is caused by a failure to
pay principal of or premium, if any, or interest on such Indebtedness prior to
the expiration of the grace period provided in such Indebtedness on the date of
such default (a "Payment Default") or (b) results in the acceleration of such
Indebtedness prior to its final maturity and, in each case, the principal
amount of any such Indebtedness, together with the principal amount of any
other such Indebtedness under which there is then existing a Payment Default or
the maturity of which has been so accelerated, aggregates $10.0 million or more
provided, that if any such default is cured or waived or any such acceleration
rescinded, or such Indebtedness is repaid, within a period of 10 days from the
continuation of such default beyond the applicable grace period or the
occurrence of such acceleration, as the case may be, such Event of Default
A-6
<PAGE> 97
under the Indentures and any consequential acceleration of the Notes shall be
automatically rescinded; (ix) a final judgment or order or final judgments or
orders are rendered against the Company or any Restricted Subsidiary that are
unsatisfied and that require the payment in money, either individually or in an
aggregate amount, that is more than $10.0 million over the coverage under
applicable insurance policies and either (a) a creditor has commenced an
enforcement proceeding upon such judgment (other than a judgment that is stayed
by reason of pending appeal or otherwise) or (b) a 60-day period transpired
during which a stay of such judgment, order, judgments or orders (by reason of
pending appeal or otherwise) was not in effect; and (x) certain events of
bankruptcy or insolvency with respect to the Company, the Parent or any
Subsidiary Guarantor. If any Event of Default (other than an Event of Default
described in clause (x) above) occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency with respect to the Company, the Parent or any
Subsidiary Guarantor, all outstanding Notes will become due and payable without
further action or notice. Holders of the Notes may not enforce the Indenture
or the Notes except as provided in the Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the then outstanding
Notes may direct the Trustee in its exercise of any trust or power. The
Trustee may withhold from Holders of the Notes notice of any continuing Default
or Event of Default (except a Default or Event of Default relating to the
payment of principal or interest) if it determines that withholding notice is
in their interest. The Holders of a majority in aggregate principal amount of
the Notes then outstanding by notice to the Trustee may on behalf of the
Holders of all of the Notes waive any existing Default or Event of Default and
its consequences under the Indenture except a continuing Default or Event of
Default in the payment of interest or premium on, or the principal of, the
Notes. The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required, within 5
Business days after becoming aware of any Default or Event of Default, to
deliver to the Trustee a statement specifying such Default or Event of Default.
13. Trustee Dealings with Company. The Indenture
contains certain limitations on the rights of the Trustee, should it become a
creditor of the Company, 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 Trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest it must eliminate such
conflict within 90 days, apply to the Commission for permission to continue or
resign.
A-7
<PAGE> 98
14. No Recourse Against Others. No director, officer,
employee, incorporator or stockholder of the Company, as such, shall have any
liability for any obligations of the Company under the Notes or the Indenture
or for any claim based on, in respect of, or by reason of, such obligations or
their creation. Each Holder of Notes, by accepting a Note, waives and releases
all such liability. The waiver and release are part of the consideration for
issuance of the Notes. Such waiver may not be effective to waive liabilities
under the federal securities laws and it is the view of the Commission that
such a waiver is against public policy.
15. Authentication. This Note shall not be valid until
authenticated by the manual signature of the Trustee or an authenticating
agent.
16. Abbreviations. Customary abbreviations may be used
in the name of a Holder or an assignee, such as: TEN COM (= tenants in
common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with
right of survivorship and not as tenants in common), CUST (= Custodian), and
U/G/M/A (= Uniform Gifts to Minors Act.
17. CUSIP Numbers. Pursuant to a recommendation
promulgated by the Committee on Uniform Security Identification Procedures, the
Company has caused CUSIP numbers to be printed on the Notes and the Trustee may
use CUSIP numbers in notices of redemption as a convenience to Holders. No
representation is made as to the accuracy of such numbers either as printed on
the Notes or as contained in any notice of redemption and reliance may be
placed only on the other identification numbers placed thereon.
The Company will furnish to any Holder upon written request
and without charge a copy of the Indenture. Requests may be made to:
Mesa Operating Co.
1400 Williams Square West
5205 North O'Connor Boulevard
Irving, Texas 75039
Telecopier No.: (214) 444-9001
Attention: [Secretary]
[NOTE: THE FORM OF GUARANTEE ATTACHED AS EXHIBIT C TO THE INDENTURE IS TO BE
ATTACHED TO THIS NOTE.]
A-8
<PAGE> 99
ASSIGNMENT FORM
To assign this Security, fill in the form below: (I) or (we) assign
and transfer this Security to
- --------------------------------------------------------------------------------
(Insert assignee's Social Security or tax I.D. No.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
and irrevocably appoint --------------------------------------------------------
agent to transfer this Security on the books of the Company. The agent may
substitute another to act for him.
- --------------------------------------------------------------------------------
Date:
------------------
Your Signature:
-------------------------------------------------
(Sign exactly as your name appears on the face of this Security)
Signature Guarantee:*
-------------------------------------------
__________________________________
*/ Participant in a recognized Signature Guarantee Medallion Program (or
other signature guarantor acceptable to the Trustee).
A-9
<PAGE> 100
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the
Company pursuant to Section 4.10 or 4.13 of the Indenture, check the box below:
[ ] Section 4.10 [ ] Section 4.13
If you want to elect to have only part of the Note purchased
by the Company pursuant to Section 4.10 or Section 4.13 of the Indenture, state
the amount you elect to have purchased: $______________
Date:
------------------
Your Signature:
------------------------------------------------
(Sign exactly as your name appears on the face of this Security
Signature Guarantee:*
------------------------------------------
__________________________________
*/ Participant in a recognized Signature Guarantee Medallion Program (or
other signature guarantor acceptable to the Trustee).
A-10
<PAGE> 101
EXHIBIT B
(Form of Legend for Global Note)
Unless and until it is exchanged in whole or in part for Notes in
definitive form, this Note may not be transferred except as a whole by the
Depository to a nominee of the Depository or by a nominee of the Depository to
the Depository or another nominee of the Depository or by the Depository or any
such nominee to a successor Depository or a nominee of such successor
Depository. Unless this certificate is presented by an authorized
representative of The Depository Trust Company (55 Water Street, New York, New
York) ("DTC"), to the issuer or its agent for registration of transfer,
exchange or payment, and any certificate issued is registered in the name of
Cede & Co. or such other name as may be requested by an authorized
representative of DTC (and any payment is made to Cede & Co. or such other
entity as may be requested by an authorized representative of DTC), ANY
TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON
IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an
interest herein.
B-1
<PAGE> 102
SCHEDULE OF EXCHANGES OF DEFINITIVE NOTES
[to be attached to Global Note]
The following exchanges of a part of this Global Note for
definitive Notes have been made:
<TABLE>
<CAPTION>
Principal Amount of
Amount of decrease in Amount of increase in this Global Note Signature of authorized
Principal Amount Principal Amount following such officer of Trustee
Date of Exchange of this Global Note of this Global Note decrease (or increase) or Note Custodian
---------------- ------------------- ------------------- ---------------------- -----------------
<S> <C> <C> <C> <C>
</TABLE>
B-2
<PAGE> 103
EXHIBIT C
Guarantee
Each of the Parent and the Subsidiary Guarantors, if any,
hereby, jointly and severally, unconditionally guarantees to each Holder of a
Note authenticated and delivered by the Trustee and to the Trustee and its
successors and assigns, irrespective of the validity and enforceability of this
Indenture, the Notes or the obligations of the Company hereunder or thereunder,
that: (a) the principal of and premium and interest on the Notes shall be
promptly paid in full when due, whether at maturity, by acceleration,
redemption or otherwise, and interest on the overdue principal of and interest
on premium and interest on the Notes, if any, if lawful, and all other
obligations of the Company to the Holders or the Trustee hereunder or
thereunder shall be promptly paid in full or performed, all in accordance with
the terms hereof and thereof; and (b) in case of any extension of time of
payment or renewal of any Notes or any of such other obligations, that same
shall be promptly paid in full when due or performed in accordance with the
terms of the extension or renewal, whether at stated maturity, by acceleration
or otherwise. Failing payment when due of any amount so guaranteed or any
performance so guaranteed for whatever reason, the Parent and the Subsidiary
Guarantors shall be jointly and severally obligated to pay the same
immediately.
The obligations of the Parent and the Subsidiary Guarantors to
the Holders of Notes and to the Trustee pursuant to this Guarantee and the
Indenture are expressly set forth in Article 11 of the Indenture, and reference
is hereby made to such Indenture for the precise terms of this Guarantee. The
terms of Article 11 of the Indenture are incorporated herein by reference.
This is a continuing Guarantee and shall remain in full force
and effect and shall be binding upon each of the Parent and the Subsidiary
Guarantors and its respective successors and assigns to the extent set forth in
the Indenture until full and final payment of all of the Company's Obligations
under the Notes and the Indenture and shall inure to the benefit of the Trustee
and the Holders of Notes and their successors and assigns and, in the event of
any transfer or assignment of rights by any Holder of Notes or the Trustee, the
rights and privileges herein conferred upon that party shall automatically
extend to and be vested in such transferee or assignee, all subject to the
terms and conditions hereof. Notwithstanding the foregoing, any Subsidiary
Guarantor that satisfies the provisions of Section 11.4 of the Indenture shall
be released of its obligations hereunder. This is a Guarantee of payment and
not a guarantee of collection.
This Guarantee shall not be valid or obligatory for any
purpose until the certificate of authentication on the Note upon which this
Guarantee is noted shall have been executed by the Trustee under the Indenture
by the manual signature of one of its authorized officers.
C-1
<PAGE> 104
For purposes hereof, each Subsidiary Guarantor's liability
will be that amount from time to time equal to the aggregate liability of such
Subsidiary Guarantor hereunder but shall be limited to the lesser of (i) the
aggregate amount of the obligations of the Company under the Notes and the
Indenture and (ii) the amount, if any, which would not have (A) rendered such
Subsidiary Guarantor "insolvent" (as such term is defined in the federal
Bankruptcy Law and in the Debtor and Creditor law of the State of New York) or
(B) left it with unreasonably small capital at the time its Guarantee of the
Notes was entered into, after giving effect to the incurrence of existing
Indebtedness immediately prior to such time; provided that, it shall be a
presumption in any lawsuit or other proceeding in which such Subsidiary
Guarantor is a party that the amount guaranteed pursuant to its Guarantee is
the amount set forth in clause (i) above unless any creditor, or representative
of creditors of such Subsidiary Guarantor, or debtor in possession or trustee
in bankruptcy of such Guarantor, otherwise proves in such a lawsuit that the
aggregate liability of such Subsidiary Guarantor is limited to the amount set
forth in clause (ii). The Indenture provides that, in making any determination
as to the solvency or sufficiency of capital of a Subsidiary Guarantor in
accordance with the previous sentence, the right of such Subsidiary Guarantor
to contribution from other Subsidiary Guarantors and the Parent and any other
rights such Subsidiary Guarantor may have, contractual or otherwise, shall be
taken into account.
Capitalized terms used herein have the same meanings given in
the Indenture unless otherwise indicated.
MESA INC.,
a Texas corporation
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
[ANY SUBSIDIARY GUARANTORS]
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
C-2
<PAGE> 105
ST&B Draft
6/20/96
================================================================================
MESA OPERATING CO.
As Issuer
MESA INC.
As a Guarantor
[__]% SENIOR SUBORDINATED NOTES DUE 2006
__________________
INDENTURE
Dated as of ________ __, 1996
__________________
__________________
HARRIS TRUST AND SAVINGS BANK
As Trustee
__________________
================================================================================
<PAGE> 106
CROSS-REFERENCE TABLE*
<TABLE>
<CAPTION>
Trust Indenture Indenture
Act Section Section
<S> <C> <C>
310 (a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10
(a)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(a)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(a)(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
311 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.11
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.11
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
312 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.3
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.3
313 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6
(b)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.7
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6; 12.2
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6
314 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3; 12.2
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.4
(c)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.4
(c)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3-10.5
(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.5
(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
315 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5; 12.2
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1
(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.11
316 (a)(last sentence) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.9
(a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5
(a)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.7
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.12
317 (a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.8
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.9
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4
318 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.1
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.1
</TABLE>
_____________
N.A. means not applicable.
*This Cross-Reference Table is not part of the Indenture.
<PAGE> 107
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE 1
DEFINITIONS AND INCORPORATION
BY REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2. Other Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 1.3. Incorporation By Reference of Trust Indenture Act . . . . . . . . . . . . . . . . . . . . . 22
Section 1.4. Rules of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ARTICLE 2
THE NOTES . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 2.1. Form and Dating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 2.2. Execution and Authentication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 2.3. Registrar and Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 2.4. Paying Agent to Hold Money in Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 2.5. Holder Lists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 2.6. Transfer and Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 2.7. Replacement Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 2.8. Outstanding Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 2.9. Treasury Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 2.10. CUSIP Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 2.11. Cancellation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 2.12. Defaulted Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 2.13. Book-Entry Provisions for Global Notes . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE 3
REDEMPTION AND PREPAYMENT . . . . . . . . . . . . . . . . . . . . . 30
Section 3.1. Notices to Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 3.2. Selection of Notes to Be Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 3.3. Notice of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 3.4. Effect of Notice of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 3.5. Deposit of Redemption Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 3.6. Notes Redeemed in Part . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 3.7. Optional Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 3.8. Mandatory Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 3.9. Offer to Purchase By Application of Excess Proceeds . . . . . . . . . . . . . . . . . . . . 34
ARTICLE 4
COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 4.1. Payment of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 4.2. Maintenance of Office or Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 4.3. Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Section 4.4. Compliance Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Section 4.5. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
</TABLE>
i
<PAGE> 108
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Section 4.6. Stay, Extension and Usury Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 4.8. Dividend and Other Payment Restrictions Affecting Subsidiaries . . . . . . . . . . . . . . 42
Section 4.9. Incurrence of Indebtedness and Issuance of Disqualified Stock . . . . . . . . . . . . . . . 43
Section 4.10. Asset Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Section 4.11. Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Section 4.12. Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Section 4.13. Offer to Repurchase Upon Change of Control . . . . . . . . . . . . . . . . . . . . . . . . 49
Section 4.14. Additional Subsidiary Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Section 4.15. Corporate Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Section 4.16. No Senior Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Section 4.17. Business Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
ARTICLE 5
SUCCESSORS . . . . . . . . . . . . . . . . . . . . . . . . . 51
Section 5.1. Merger, Consolidation, or Sale of Substantially All Assets . . . . . . . . . . . . . . . . 51
Section 5.2. Successor Corporation Substituted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
ARTICLE 6
DEFAULTS AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . 53
Section 6.1. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Section 6.2. Acceleration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Section 6.3. Other Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Section 6.4. Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Section 6.5. Control by Majority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Section 6.6. Limitation on Suits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Section 6.7. Rights of Holders of Notes to Receive Payment . . . . . . . . . . . . . . . . . . . . . . . 57
Section 6.8. Collection Suit by Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Section 6.9. Trustee May File Proofs of Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Section 6.10. Priorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Section 6.11. Undertaking for Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
ARTICLE 7
TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Section 7.1. Duties of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Section 7.2. Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Section 7.3. Individual Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Section 7.4. Trustee's Disclaimer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Section 7.5. Notice of Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Section 7.6. Reports by Trustee to Holders of the Notes . . . . . . . . . . . . . . . . . . . . . . . . 63
Section 7.7. Compensation and Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Section 7.8. Replacement of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Section 7.9. Successor Trustee by Merger, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Section 7.10. Eligibility; Disqualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
</TABLE>
ii
<PAGE> 109
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Section 7.11. Preferential Collection of Claims Against Company . . . . . . . . . . . . . . . . . . . . . 66
ARTICLE 8
LEGAL DEFEASANCE AND COVENANT DEFEASANCE . . . . . . . . . . . . . . . . . . 66
Section 8.1. Option to Effect Legal Defeasance or Covenant Defeasance . . . . . . . . . . . . . . . . . 66
Section 8.2. Legal Defeasance and Discharge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Section 8.3. Covenant Defeasance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Section 8.4. Conditions to Legal or Covenant Defeasance . . . . . . . . . . . . . . . . . . . . . . . . 68
Section 8.5. Deposited Money and Government Securities to be Held in Trust; Other Miscellaneous
Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Section 8.6. Repayment to Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Section 8.7. Reinstatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
ARTICLE 9
AMENDMENT, SUPPLEMENT AND WAIVER . . . . . . . . . . . . . . . . . . . . 70
Section 9.1. Without Consent of Holders of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Section 9.2. With Consent of Holders of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Section 9.3. Compliance with Trust Indenture Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Section 9.4. Revocation and Effect of Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Section 9.5. Notation on or Exchange of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Section 9.6. Trustee to Sign Amendment, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
ARTICLE 10
SUBORDINATION . . . . . . . . . . . . . . . . . . . . . . . . 74
Section 10.1. Agreement to Subordinate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Section 10.2. Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Section 10.3. Liquidation; Dissolution; Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Section 10.4. Default on Designated Senior Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Section 10.5. Acceleration of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Section 10.6. When Distribution Must Be Paid Over . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Section 10.7. Notice by Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Section 10.8. Subrogation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Section 10.9. Relative Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Section 10.10. Subordination May Not Be Impaired by Company . . . . . . . . . . . . . . . . . . . . . . . 79
Section 10.11. Distribution or Notice to Representative . . . . . . . . . . . . . . . . . . . . . . . . . 79
Section 10.12. Rights of Trustee and Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Section 10.13. Authorization to Effect Subordination . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Section 10.14. Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Section 10.15. No Waiver of Subordination Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
</TABLE>
iii
<PAGE> 110
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE 11
THE GUARANTEES . . . . . . . . . . . . . . . . . . . . . . . . 81
Section 11.1. The Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Section 11.2. Execution and Delivery Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Section 11.3. Parent and Subsidiary Guarantors May Consolidate, etc., on Certain Terms . . . . . . . . . 83
Section 11.4. Releases of Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Section 11.5. Limitation on Subsidiary Guarantor Liability . . . . . . . . . . . . . . . . . . . . . . . 85
Section 11.6. "Trustee" to Include Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Section 11.7. Subordination of Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
ARTICLE 12
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . 86
Section 12.1. Trust Indenture Act Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Section 12.2. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Section 12.3. Communication by Holders of Notes with Other Holders of Notes . . . . . . . . . . . . . . . 87
Section 12.4. Certificate and Opinion as to Conditions Precedent . . . . . . . . . . . . . . . . . . . . 87
Section 12.5. Statements Required in Certificate or Opinion . . . . . . . . . . . . . . . . . . . . . . . 88
Section 12.6. Rules by Trustee and Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Section 12.7. No Personal Liability of Directors, Officers, Employees and Stockholders . . . . . . . . . 88
Section 12.8. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Section 12.9. No Adverse Interpretation of Other Agreements . . . . . . . . . . . . . . . . . . . . . . . 89
Section 12.10. Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Section 12.11. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Section 12.12. Counterpart Originals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Section 12.13. Table of Contents, Headings, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
</TABLE>
EXHIBITS
Exhibit A FORM OF NOTE
Exhibit B FORM OF LEGEND FOR GLOBAL NOTE
Exhibit C FORM OF GUARANTEE
iv
<PAGE> 1
INDENTURE dated as of _____ __, 1996 among Mesa Operating Co.,
Inc., a Delaware corporation (the "Company"), as issuer, MESA INC., a Texas
Corporation (the "Parent"), as a guarantor and Harris Trust and Savings Bank,
as trustee (the "Trustee").
The Company, the Parent and the Trustee agree as follows for
the benefit of each other and for the equal and ratable benefit of the Holders
of the [__]% Senior Subordinated Discount Notes due 2006 of the Company (the
"Notes"):
ARTICLE 1
DEFINITIONS AND INCORPORATION
BY REFERENCE
Section 1.1. Definitions.
"Accreted Value" with respect to any Note means, as of the
date of issuance of the Notes, [___] % of the offering price of the stated
principal amount of such Note, and as of any date after such date of issuance
and prior to [_______], 2001 as of which the Accreted Value is being calculated
(the "Accreted Value Calculation Date") (a) if the Accreted Value Calculation
Date is a [______] or [______] interest payment date, the percentage of the
stated principal amount of such Note as of such date as shown in the table
below or (b) if the Accreted Value Calculation Date is not a [______] or
[_______], an amount equal to the sum of (i) the Accreted Value of such Note as
of the [_______] or [_______], as the case may be, immediately preceding the
Accreted Value Calculation Date, plus (ii) the accrued amortization of the
original issue discount from (but excluding) such immediately preceding
[_______] or [_______] to (and including) the Accreted Value Calculation Date,
calculated as the product of (x) [______] % of annual coupon rate of the
Accreted Value of such Note as of such immediately proceeding [_______] or
[_______] and (y) a fraction, the numerator of which is the number of days from
(but excluding) such immediately preceding [_______] or [_______] to (and
including) the Accreted Value Calculation Date (assuming a 360-day year of
twelve 30-day months), and the denominator of which is 180. The Accreted Value
of each Note as of each [_______] and [_______] prior to [_______], 2001 shall
be an amount in dollars equal to a percentage of the stated principal amount of
such Note as set forth below:
<TABLE>
<CAPTION>
Payment Date Payment Date
------------ ------------
<S> <C> <C>
1996 % %
1997 % %
1998 % %
1999 % %
2000 % %
2001 % %
</TABLE>
<PAGE> 2
On and after _________, 2001, the Accreted Value of each Note
shall be equal to 100% of the stated principal amount thereof.
"Acquired Debt" means, with respect to any specified Person or
any Subsidiary of such Person (i) Indebtedness of any other Person existing at
the time such other Person is merged with or into or became a Subsidiary of
such specified Person, including, without limitation, Indebtedness incurred in
connection with, or in contemplation of, such other Person merging with or into
or becoming a Subsidiary of such specified Person, and (ii) Indebtedness
secured by a Lien encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling,"
"controlled by" and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such Person,
whether through the ownership of voting securities, by agreement or otherwise;
provided that beneficial ownership of 10% or more of the voting securities of a
Person shall be deemed to be control; further provided, however, that in no
event shall any limited partner of DNR that is a beneficial owner (within the
meaning of Rule 13d-3 under the Exchange Act) of less than 10% of the aggregate
voting power of the Capital Stock of the Company or the Parent be deemed to be
an Affiliate of the Company or the Parent.
"Agent" means any Registrar, Paying Agent or co-registrar.
"Asset Sale" means (i) the sale, lease, conveyance or other
disposition (but excluding the creation of a Lien) by the Company or any of its
Restricted Subsidiaries of any assets including, without limitation, by way of
a sale and leaseback; provided that the sale, lease, conveyance or other
disposition of all or substantially all of the assets of the Company and its
Subsidiaries taken as a whole shall be governed by Sections 4.13 and/or 5.1
hereof and not by Section 4.10 hereof), and (ii) the issue or sale by the
Company or any of its Restricted Subsidiaries of Equity Interests of any of the
Company's Subsidiaries (including the sale by a Restricted Subsidiary of Equity
Interests in an Unrestricted Subsidiary), in the case of either clause (i) or
(ii), whether in a single transaction or a series of related transactions (a)
that have a fair market value in excess of $5.0 million or (b) for net proceeds
in excess of $5.0 million. Notwithstanding the foregoing, the following shall
not be deemed to be Asset Sales: (1) a transfer of assets by the Company to a
Restricted Subsidiary of the Company or by a Restricted Subsidiary of the
Company to the Company or to another
<PAGE> 3
3
Restricted Subsidiary of the Company (in the case of a transfer to a Subsidiary
that is not a Wholly Owned Restricted Subsidiary, transfers will be excluded
from this definition only to the extent of the Company's or the Restricted
Subsidiary's interest in such Subsidiary after giving effect to such transfer),
(2) an issuance of Equity Interests by a Restricted Subsidiary of the Company
to the Company or to another Restricted Subsidiary of the Company (in the case
of an issuance of Equity Interests to a Subsidiary that is not a Wholly Owned
Restricted Subsidiary, issuances will be excluded from this definition only to
the extent of the Company's or the Restricted Subsidiary's interest in such
Subsidiary after giving effect to such issuance), (3) a Permitted Investment or
Restricted Payment that is permitted by Section 4.7, (4) the abandonment,
farm-out, lease or sublease of undeveloped oil and gas properties in the
ordinary course of business, (5) the trade or exchange by the Company or any
Restricted Subsidiary of the Company of any oil and gas property owned or held
by the Company or such Restricted Subsidiary for any oil and gas property owned
or held by another Person, which the Board of Directors of the Company
determines in good faith to be of approximately equivalent value, (6) the sale
or transfer of hydrocarbons or other mineral products or other inventory or
surplus or obsolete equipment in the ordinary course of business or (7) sale of
hydrocarbons pursuant to Permitted Marketing Obligations.
"Attributable Debt" in respect of a sale and leaseback
transaction means, at the time of determination, the present value (discounted
at the rate of interest implicit in such transaction, determined in accordance
with GAAP) of the obligation of the lessee for net rental payments during the
remaining term of the lease included in such sale and leaseback transaction
(including any period for which such lease has been extended to the extent the
lease payments during such extension period are required to be capitalized on a
balance sheet in accordance with GAAP).
"Bankruptcy Code" means Title 11 of the United States Code,
as amended.
"Board of Directors" means the Board of Directors of the
Company or the Parent, as applicable, or any authorized committee of such Board
of Directors.
"Borrowing Base" means, as of any date, the aggregate amount
of borrowing availability as of such date under all Credit Facilities that
determine availability on the basis of a borrowing base or other asset-based
calculation, provided that in no event shall the Borrowing Base exceed $600.0
million.
"Business Day" means any day other than a Legal Holiday.
<PAGE> 4
4
"Capital Lease Obligation" means, at the time any
determination thereof is to be made, the amount of the liability in respect of
a capital lease that would at such time be required to be capitalized on a
balance sheet in accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation,
corporate stock, (ii) in the case of an association or business entity, any and
all shares, interests, participations, rights or other equivalents (however
designated) of corporate stock, (iii) in the case of a partnership, partnership
interests (whether general or limited) and (iv) any other interest or
participation that confers on a Person the right to receive a share of the
profits and losses of, or distributions of assets of, the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii)
securities issued or directly and fully guaranteed or insured by the United
States government or any agency or instrumentality thereof having maturities of
not more than six months from the date of acquisition, (iii) certificates of
deposit and eurodollar time deposits with maturities of six months or less from
the date of acquisition, bankers' acceptances with maturities not exceeding six
months and overnight bank deposits, in each case with any lender party to the
Credit Agreement or with any domestic commercial bank having capital and
surplus in excess of $500 million and a Thompson Bank Watch Rating of "B" or
better, (iv) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (ii) and (iii) above
entered into with any financial institution meeting the qualifications
specified in clause (iii) above, (v) commercial paper having a rating of at
least P1 from Moody's or a rating of at least A1 from S&P and (vi) money market
mutual or similar funds having assets in excess of $100,000,000.
"Change of Control" means the occurrence of any of the
following: (i) the sale, lease, transfer, conveyance or other disposition
(other than by way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the assets of the Company and its
Subsidiaries taken as a whole or the Parent and its Subsidiaries taken as a
whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange
Act) other than a Permitted Investor, (ii) the adoption by the shareholders of
the Company or the Parent of a plan relating to the liquidation or dissolution
of the Company or the Parent, (iii) after no shares of the Series B Preferred
Stock remain outstanding (a) Continuing Directors cease for any reason to
constitute a majority of the members of the Board of Directors of the Company
or the Parent for a period of two consecutive years or (b) an event or series
of events by which any person or other entity, other than a Permitted Investor,
or any group of Persons or other entities acting in concert as a partnership or
other group, other than a group of Permitted Investors, shall, as a result of a
tender or exchange offer, open market purchases,
<PAGE> 5
5
privately negotiated purchases, merger, consolidation or otherwise, have become
the beneficial owner (within the meaning of rule 13d-3 under the Exchange Act)
of 35% or more of the aggregate voting power of the then outstanding Capital
Stock of the Parent having the right to elect directors under ordinary
circumstances.
"Closing Date" the date of the closing of the sale of the
Notes offered pursuant to the Offering.
"Commission" means the Securities and Exchange Commission.
"Consolidated Cash Flow" means, with respect to any Person for
any period, the Consolidated Net Income of such Person and its Restricted
Subsidiaries for such period plus (i) an amount equal to any extraordinary loss
plus any net loss realized in connection with an Asset Sale (together with any
related provision for taxes), to the extent such losses were included in
computing such Consolidated Net Income, plus (ii) provision for taxes based on
income or profits of such Person and its Restricted Subsidiaries for such
period, to the extent that such provision for taxes was included in computing
such Consolidated Net Income, plus (iii) consolidated interest expense of such
Person and its Restricted Subsidiaries for such period, whether paid or accrued
(including, without limitation, amortization of original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Interest Rate Hedging Agreements), to the extent that any such expense was
included in computing such Consolidated Net Income, plus (iv) depreciation,
depletion and amortization expenses (including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash expenses that were
paid in a prior period) for such Person and its Restricted Subsidiaries for
such period to the extent that such depreciation, depletion and amortization
expenses were included in computing such Consolidated Net Income, plus (v)
exploration expenses for such Person and its Restricted Subsidiaries for such
period to the extent such exploration expenses were included in computing such
Consolidated Net Income, plus (vi) other non-cash charges (excluding any such
non-cash charge to the extent that it represents an accrual of or reserve for
cash charges in any future period or amortization of a prepaid cash expense
that was paid in a prior period) of such Person and its Restricted Subsidiaries
for such period to the extent that such other noncash charges were included in
computing such Consolidated Net Income, in each case, on a consolidated basis
and determined in accordance with GAAP. Notwithstanding the foregoing, the
provision for taxes on the income or profits of, and the depreciation,
depletion and amortization, exploration
<PAGE> 6
6
and other non-cash charges and expenses of, a Restricted Subsidiary of the
referent Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent (and in same proportion) that the Net
Income of such Restricted Subsidiary was included in calculating the
Consolidated Net Income of such Person and only if a corresponding amount would
be permitted at the date of determination to be dividended to the Company by
such Restricted Subsidiary without prior governmental approval (that has not
been obtained), and without direct or indirect restriction pursuant to the
terms of its charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules and governmental regulations applicable to that
Restricted Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any Person
for any period, the aggregate of the Net Income of such Person and its
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that (i) the Net Income (but not loss) of any Person that
is not a Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Restricted Subsidiary
thereof, (ii) the Net Income of any Restricted Subsidiary shall be excluded to
the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (that
has not been obtained) or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to that Restricted Subsidiary or its
stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition
shall be excluded and (iv) the cumulative effect of a change in accounting
principles shall be excluded. Notwithstanding the foregoing, for the purpose
of Section 4.8 only, there shall be excluded from Consolidated Net Income any
dividends or other distributions paid in cash by Unrestricted Subsidiaries to
the referent Person or a Restricted Subsidiary thereof to the extent such
dividend or other distributions increase the amount of Restricted Payments
pursuant to Subsection 4.8(c)(iv)(A).
"Consolidated Net Worth" means the total of the amounts shown
on the balance sheet of the Company and its consolidated Restricted
Subsidiaries, determined on a consolidated basis in accordance with GAAP, as of
the end of the most recent fiscal quarter of the Company ending prior to the
taking of any action for the purpose of which the determination is being made
and for which financial statements are available (but in no event ending more
than 135 days prior to the taking of such action), as (i) the par or stated
value of all outstanding Capital Stock of the Company, plus (ii) paid-in
capital or capital surplus relating to such Capital Stock, plus (iii) any
retained earnings or earned
<PAGE> 7
7
surplus, less (a) any accumulated deficit and (b) any amounts attributable to
Disqualified Stock.
"Continuing Directors" means, as of any date of determination,
any member of the Board of Directors of the Company or the Parent, as the case
may be, who (i) was a member of such Board of Directors immediately after the
first date on which no shares of Series B Preferred Stock were outstanding or
(ii) was nominated for election or elected to such Board of Directors with the
approval of (a) a majority of the Continuing Directors who were members of such
Board at the time of such nomination or election or (b) a majority of those
directors who were previously approved by Continuing Directors.
"Corporate Trust Office of the Trustee" shall be at the
address of the Trustee specified in Section 12.2 hereof or such other
address as to which the Trustee may give notice to the Company.
"Credit Agreement" means that certain Credit Agreement, dated
as of ___________, 1996, by and among the Company, the Parent, The Chase
Manhattan Bank, N.A. as administrative agent and as a lender, Bankers Trust, as
syndication agent and as a lender, Societe Generale, as documentation agent and
as a lender and certain banks, financial institutions and other entities, as
lenders, providing for up to $500.0 million of Indebtedness, including any
related notes, letters of credit issued thereunder, guarantees, collateral
documents, instruments and agreements executed in connection therewith, and in
each case as amended, restated, modified, renewed, refunded, increased,
replaced or refinanced, in whole or in part, from time to time, whether or not
with the same lenders or agents.
"Credit Facilities" means, with respect to the Company, one or
more debt facilities (including, without limitation, the Credit Agreement) or
commercial paper facilities with banks or other lenders providing for revolving
credit loans, term loans, production payment financing, receivables financing
(including through the sale of receivables to such lenders or to special
purpose entities formed to borrow from such lenders against such receivables)
or letters of credit, in each case, as amended, restated, modified, renewed,
refunded, increased replaced or refinanced in whole or in part from time to
time.
"Default" means any event that is or with the passage of time
or the giving of notice or both would be an Event of Default.
"Depository" means, with respect to the Notes issued in the
form of one or more Global Notes, The Depository Trust Company or another
Person designated as Depository by the Company, which must be a clearing
agency registered under the Exchange Act.
<PAGE> 8
8
"Designated Senior Debt" means (i) the Credit Agreement and
(ii) any other Senior Debt permitted under this Indenture the principal amount
of which is $25 million or more and that has been designated by the Company as
"Designated Senior Debt."
"Disqualified Stock" means any Capital Stock that, by its
terms (or by the terms of any security into which it is convertible or for
which it is exchangeable), or upon the happening of any event, (i) matures or
is mandatorily redeemable for cash, pursuant to a sinking fund obligation or
otherwise, or redeemable for cash at the option of the Holder thereof, in whole
or in part, on or prior to the date that is 91 days after the date on which the
Notes mature, or (ii) requires the payment of cash dividends or other cash
distributions on or prior to the date that is 91 days after the date on which
the Notes mature.
"DNR" means DNR-MESA Holdings, L.P., a Delaware limited
partnership.
"Dollar-Denominated Production Payments" means production
payment obligations recorded as liabilities in accordance with GAAP, together
with all undertakings and obligations in connection therewith.
"Equity Interests" means Capital Stock and all warrants,
options or other rights to acquire Capital Stock (but excluding any debt
security that is convertible into, or exchangeable for, Capital Stock) and,
with respect to any employee benefit plans, stock appreciation rights.
"Exchange Act" means the Securities Exchange Act of 1934,
as amended.
"Existing Debt" means Indebtedness of the Parent and its
Subsidiaries in existence after giving effect to the application of the
proceeds of the Recapitalization on the Closing Date, in an aggregate principal
amount not to exceed $12,900,000, together with all accrued and unpaid interest
thereon and all premiums payable with respect thereto until such amounts are
repaid.
"Fixed Charge Coverage Ratio" means with respect to any Person
for any period, the ratio of the Consolidated Cash Flow of such Person for such
period to the Fixed Charges of such Person for such period. In the event that
the Company or any of its Restricted Subsidiaries incurs, assumes, Guarantees,
redeems or pays any Indebtedness (other than revolving credit borrowings) or
issues or redeems Disqualified Stock subsequent to the commencement of the
period for which the Fixed Charge Coverage Ratio is being calculated but prior
to the date on which the calculation of the Fixed Charge Coverage Ratio is made
(the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be
calculated giving pro forma effect to such incurrence, assumption, guarantee or
redemption or payment of Indebtedness,
<PAGE> 9
9
or such issuance or redemption of Disqualified Stock, as if the same had
occurred at the beginning of the applicable four-quarter reference period. In
addition, for purposes of making the computation referred to above, (i)
acquisitions that have been made by the Company or any of its Restricted
Subsidiaries, including through mergers or consolidations and including any
related financing transactions, during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date
(including, without limitation, any acquisition to occur on the Calculation
Date) shall be deemed to have occurred on the first day of the four-quarter
reference period and Consolidated Cash Flow for such reference period shall be
calculated without giving effect to clause (iii) of the proviso set forth in
the definition of Consolidated Net Income, (ii) the net proceeds of
Indebtedness incurred or Disqualified Stock issued by the Company or any of its
Restricted Subsidiaries pursuant to the first paragraph of Section 4.9 hereof
during the four-quarter reference period or subsequent to such reference period
and on or prior to the Calculation Date shall be deemed to have been received
by the Company or any such Restricted Subsidiary on the first day of the
four-quarter reference period and applied to its intended use on such date,
(iii) the Consolidated Cash Flow attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded and (iv) the Fixed Charges
attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of prior to the Calculation Date, shall
be excluded, but only to the extent that the obligations giving rise to such
Fixed Charges shall not be obligations of the referent Person or any of its
Restricted Subsidiaries following the Calculation Date.
"Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) the consolidated interest expense
of such Person and its Restricted Subsidiaries for such period, whether paid or
accrued (including, without limitation, amortization of original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees incurred in respect of letter of credit
or bankers' acceptance financings; (ii) the consolidated interest expense of
such Person and its Restricted Subsidiaries that was capitalized during such
period, (iii) any interest expense on Indebtedness of another Person that is
guaranteed by such Person or any of its Restricted Subsidiaries or secured by a
Lien on assets of such Person or any of its Restricted Subsidiaries (whether or
not such guarantee or Lien is called upon) and (iv) all cash dividend payments
(and non-cash dividend payments (unless paid in Equity Interests which are not
Disqualified Stock) in the case of a Person that is a Restricted Subsidiary) on
any series of preferred stock of such Person or any of its Restricted
Subsidiaries owned by Persons
<PAGE> 10
10
other than the Company or a Restricted Subsidiary. For purposes of the
definition of Fixed Charges, (i) interest on a Capital Lease Obligation shall
be deemed to accrue at an interest rate reasonably determined by the Board of
Directors of such Person (as evidenced by a resolution of the Board of
Directors of the Company) to be the rate of interest implicit in such Capital
Lease Obligation in accordance with GAAP, (ii) interest on Indebtedness that is
determined on a fluctuating basis shall be deemed to have accrued at a fixed
rate per annum equal to the rate of interest of such Indebtedness in effect on
the date Fixed Charges are being calculated, subject to the proviso in clause
(iii), (iii) interest on Indebtedness that may optionally be determined at an
interest rate based upon a factor of a prime or similar rate, a eurocurrency
interbank offered rate, or other rate, shall be deemed to have been based upon
the rate actually chosen, or, if none, then based upon such optional rate
chosen as the Company may designate, (provided, that for the period following
the date on which the rate actually chosen ceases to be in effect, the Company
may designate an optional rate other than that actually chosen, which optional
rate shall be deemed to accrue at a fixed per annum equal to the rate of
interest on such optional rate in effect on the date Fixed Charges are being
calculated) and (iv) Fixed Charges shall be increased or reduced by the net
cost (including amortization of discount) or benefit associated with
obligations under Interest Rate Hedging Agreements attributable to such period.
"GAAP" means generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as have been approved by a significant segment
of the accounting profession, which are in effect from time to time.
"Government Securities" means securities that are (a) direct
obligations of the United States of America for the timely payment of which its
full faith and credit is pledged or (b) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States
of America the timely payment of which is unconditionally guaranteed as a full
faith and credit obligation by the United States of America, which, in either
case, are not callable or redeemable at the option of the issuer thereof, and
shall also include a depository receipt issued by a bank (as defined in Section
3(a)(2) of the Securities Act), as custodian with respect to any such
Government Security or a specific payment of principal of or interest on any
such Government Security held by such custodian for the account of the holder
of such depository receipt; provided, that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to
the holder of such depository receipt from any amount received by the custodian
in respect of the Government Security or the specific payment of
<PAGE> 11
11
principal of or interest on the Government Security evidenced by such
depository receipt.
"guarantee" means a guarantee (other than by endorsement of
negotiable instruments for collection in the ordinary course of business),
direct or indirect, in any manner (including, without limitation, letters of
credit and reimbursement agreements in respect thereof), of all or any part of
any Indebtedness.
"Guarantee" means each of the Guarantees of the Notes by the
Parent and Subsidiary Guarantor hereunder.
"Guarantors" means each of (i) the Parent, and (ii) any
Restricted Subsidiary of the Company that executes a Guarantee in accordance
with the provisions of this Indenture, and, in each case, their respective
successors and assigns.
"Holder" means a Person in whose name a Note is registered on
the Registrar's books.
"Indebtedness" means, with respect to any Person, without
duplication, (a) any indebtedness of such Person, whether or not contingent,
(i) in respect of borrowed money, (ii) evidenced by bonds, notes, debentures or
similar instruments, (iii) evidenced by letters of credit (or reimbursement
agreements in respect thereof) or banker's acceptances, (iv) representing
Capital Lease Obligations, (v) representing the balance deferred and unpaid of
the purchase price of any property, except any such balance that constitutes an
accrued expense or trade payable, (vi) representing any obligations in respect
of Interest Rate Hedging Agreements or Oil and Gas Hedging Contracts, and (vii)
in respect of any Production Payment, (b) all indebtedness of others of the
type referred to in clauses (a), (c), (d) or (e) secured by a Lien on any asset
of such Person (whether or not such indebtedness is assumed by such Person,
except that the amount of such indebtedness not assumed shall be deemed to be
the lesser of the value of such asset and the amount of such indebtedness so
secured), (c) obligations of such Person in respect of production imbalances
and (d) Attributable Debt of such Person, (e) Acquired Debt of such Person and
(f) to the extent not otherwise included in the foregoing, the guarantee by
such Person of any indebtedness of any other Person, of the type referred to in
the preceding clauses (a), (c), (d) or (e).
"Indenture" means this Indenture, as amended or supplemented
from time to time.
"Interest Rate Hedging Agreements" means, with respect to any
Person, the obligations of such Person under (i) interest rate swap agreements,
interest rate cap agreements and interest rate collar agreements and (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in interest rates.
<PAGE> 12
12
"Investments" means, with respect to any Person, all
investments by such Person (including investments by such Person in Affiliates)
in the form of direct or indirect loans (including guarantees of Indebtedness
or other obligations, but excluding trade credit and other ordinary course
advances customarily made in the Oil and Gas Business), advances or capital
contributions (excluding commission, travel and similar advances to officers
and employees made in the ordinary course of business), purchases or other
acquisitions for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP; provided that
the following shall not constitute Investments: (i) an acquisition of assets,
Equity Interests or other securities by the Company for consideration
consisting of Equity Interests (other than Disqualified Stock) in the Company,
(ii) Interest Rate Hedging Agreements entered into in accordance with the
limitations set forth in clause (h) of the definition of "Permitted
Indebtedness" set forth in Section 4.9 hereof and (iii) Oil and Gas Hedging
Contracts entered into in accordance with the limitations set forth in clause
(i) of the definition of "Permitted Indebtedness" set forth in Section 4.9
hereof and (iv) Permitted Marketing Transactions. If the Company or any
Restricted Subsidiary of the Company sells or otherwise disposes of any Equity
Interests of any direct or indirect Restricted Subsidiary of the Company (other
than MEV) such that, after giving effect to any such sale or disposition, such
Person is no longer a Subsidiary of the Company, the Company shall be deemed to
have made an Investment on the date of any such sale or disposition equal to
the fair market value of the Equity Interests of such Subsidiary not sold or
disposed of.
"Legal Holiday" means a Saturday, a Sunday or a day on which
banking institutions in the City of New York, the City of Chicago or at a place
of payment are authorized by law, regulation or executive order to remain
closed. If a payment date is a Legal Holiday at a place of payment, payment
may be made at that place on the next succeeding day that is not a Legal
Holiday, and no interest shall accrue for the intervening period.
"Lien" means, with respect to any asset, any mortgage, lien,
pledge, charge, security interest or encumbrance of any kind in respect of such
asset, whether or not filed, recorded or otherwise perfected under applicable
law (including any conditional sale or other title retention agreement, any
lease in the nature thereof, any option or other agreement to sell or give a
security interest in and any filing of or agreement to give any financing
statement under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Liquid Securities" means securities (i) of an issuer that is
not an Affiliate of the Company and (ii) that are publicly traded on the New
York Stock Exchange, the American Stock Exchange or the Nasdaq National Market;
provided, that securities meeting the requirements of clauses (i) and (ii)
above
<PAGE> 13
13
shall be treated as Liquid Securities from the date of receipt thereof until
the earlier of (x) the date on which such securities are sold or exchanged for
cash or cash equivalents and (y) 180 days following the date of the closing of
the Asset Sale in connection with which such Liquid Securities were received.
In the event such securities are not sold or exchanged for cash or cash
equivalents within such 180-day period, for purposes of determining whether the
transaction pursuant to which the Company or a Restricted Subsidiary received
the securities was in compliance with the provisions of Section 4.10 hereof,
such securities shall be deemed not to have been Liquid Securities at any time.
"Material Restricted Subsidiary" means any Restricted
Subsidiary of the Company, which, as of the relevant date of determination,
would be a "significant subsidiary" as defined in Reg. Section 230.405
promulgated pursuant to the Securities Act as in effect on the date of issuance
of the Notes, assuming the Company is the "registrant" referred to in such
definition, except that the 10% amounts referred to in such definition shall be
deemed to be 5%.
"MEV" means Mesa Environmental Ventures Co. and its
Subsidiaries
"Moody's" means Moody's Investors Service, Inc. and its
successors.
"Net Income" means, with respect to any Person, the net income
(loss) of such Person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends, excluding, however, (i) any
gain or loss, together with any related provision for taxes on such gain or
loss, realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b)
the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain or
loss, together with any related provision for taxes on such extraordinary or
nonrecurring gain or loss.
"Net Proceeds" means the aggregate cash proceeds received by
the Company or any of its Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any cash received upon the sale or other
disposition of Liquid Securities or any other any non-cash consideration
received in any Asset Sale, but excluding cash amounts placed in escrow, until
such amounts are released to the Company), net of the direct costs relating to
such Asset Sale (including, without limitation, legal, accounting and
investment banking fees and expenses, and sales commissions) and any relocation
expenses incurred as a result thereof, taxes paid or payable as a result
thereof (after taking into account any available tax credits or
<PAGE> 14
14
deductions and any tax sharing arrangements), amounts paid to minority interest
holders, amounts required to be applied to the repayment of Indebtedness (other
than Indebtedness under any Credit Facility) secured by a Lien on the asset or
assets that were the subject of such Asset Sale and any reserve for adjustment
in respect of the sale price of such asset or assets established in accordance
with GAAP and any reserve established for future liabilities.
"Non-Recourse Debt" means Indebtedness (i) as to which neither
the Company nor any of its Restricted Subsidiaries (a) provides any guarantee
or credit support of any kind (including any undertaking, guarantee, indemnity
or agreement or instrument that would constitute Indebtedness) or (b) is
directly or indirectly liable (as a guarantor or otherwise); (ii) no default
with respect to which (including any rights that the holders thereof may have
to take enforcement action against an Unrestricted Subsidiary) would permit
(upon notice, lapse of time or both) any holder of any other Indebtedness of
the Company or any of its Restricted Subsidiaries to declare a default on such
other Indebtedness or cause the payment thereof to be accelerated or payable
prior to its stated maturity; and (iii) the explicit terms of which provide
that there is no recourse against any of the assets of the Company or its
Restricted Subsidiaries.
"Note Custodian" means the Trustee or the Registrar, as
custodian with respect to the Notes in global form, or any successor entity
thereto or any entity acting as custodian with respect to Notes in global form.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Offering" means the offering of the Notes by the Company.
"Officer" means, with respect to any Person, the Chairman of
the Board, the Chief Executive Officer, the President, the Chief Operating
Officer, the Chief Financial Officer, the Treasurer, any Assistant Treasurer,
the Controller, the Secretary, the Assistant Secretary or any Vice-President of
such Person.
"Officers' Certificate" means a certificate signed on behalf
of the Company, by two Officers of the Company, one of whom must be the
principal executive officer, the principal financial officer, the treasurer or
the principal accounting officer of the Company, that meets the requirements of
Section 12.5 hereof.
"Oil and Gas Business" means (i) the acquisition, exploration,
exploitation, development, operation and disposition
<PAGE> 15
15
of interests in oil, gas and other hydrocarbon properties, (ii) the gathering,
marketing, treating, processing, storage, 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,
storage, transportation or marketing of oil, gas and other minerals and
products produced in association therewith and (iv) any activity that is
ancillary or necessary or desirable to facilitate the activities described in
clauses (i) through (iii) of this definition.
"Oil and Gas Hedging Contracts" means any oil and gas purchase
or hedging agreement, and other agreement or arrangement, in each case, that is
designed to provide protection against oil and gas price fluctuations.
"Opinion of Counsel" means an opinion from legal counsel who
is reasonably acceptable to the Trustee, that meets the requirements of Section
12.5 hereof. The counsel may be an employee of or counsel to the Company, the
Parent, any Subsidiary Guarantor or the Trustee.
"Pari Passu Indebtedness" means indebtedness which ranks pari
passu in right of payment to the Notes, including the Senior Subordinated
Notes.
"Permitted Business Investments" means investments made in the
ordinary course of, and of a nature that is or shall have become customary in,
the Oil and Gas Business as a means of actively exploiting, exploring for,
acquiring, developing, processing, gathering, marketing or transporting oil and
gas through agreements, transactions, interests or arrangements which permit
one to share risks or costs, comply with regulatory requirements regarding
local ownership or satisfy other objectives customarily achieved through the
conduct of Oil and Gas Business jointly with third parties, including, without
limitation, (i) ownership interests in oil and gas properties, processing
facilities, gathering systems or ancillary real property interests and (ii)
Investments in the form of or pursuant to operating agreements, processing
agreements, farm-in agreements, farm-out agreements, development agreements,
area of mutual interest agreements, unitization agreements, pooling agreements,
joint bidding agreements, service contracts, joint venture agreements,
partnership agreements (whether general or limited), limited liability company
agreements, subscription agreements, stock purchase agreements and other
similar agreements with third parties.
"Permitted Investments" means (a) any Investment in the
Company or in a Restricted Subsidiary of the Company; (b) any Investment in
Cash Equivalents or securities issued or directly and fully guaranteed or
insured by the United States government or any agency or instrumentality
thereof having maturities of not more than one year from the date of
acquisition; (c) any
<PAGE> 16
16
Investment by the Company or any Restricted Subsidiary of the Company in a
Person if, as a result of such Investment and any related transactions that at
the time of such Investment are contractually mandated to occur, (i) such
Person becomes a Restricted Subsidiary of the Company or (ii) such Person is
merged, consolidated or amalgamated with or into, or transfers or conveys all
or substantially all of its assets to, or is liquidated into, the Company or a
Restricted Subsidiary of the Company; (d) any Investment made as a result of
the receipt of non-cash consideration from an Asset Sale that was made pursuant
to and in compliance with Section 4.10 hereof; (e) other Investments having an
aggregate fair market value (measured on the date each such Investment was made
and without giving effect to subsequent changes in value), when taken together
with all other Investments made pursuant to this clause (e) that are at the
time outstanding (net of repayments, dividends and distributions received with
respect to such Investments), not to exceed $37.5 million; (f) Permitted
Business Investments; (g) any Investment acquired by the Company in exchange
for Equity Interests in the Company or the Parent (other than Disqualified
Stock); (h) Investments in Unrestricted Subsidiaries with net cash proceeds
contributed to the common equity capital of the Company or a Restricted
Subsidiary since the date of this Indenture, provided that the amount of any
such net cash proceeds that are used for any such Investment shall be excluded
from clause (c)(ii) of the first paragraph of Section 4.7 hereof and (i)
Investments received in connection with any good faith settlement of a
bankruptcy proceeding.
"Permitted Investor" means any Person who is or was (i) a
holder of Shares of the Series B Preferred Stock or (ii) an Affiliate of a
Person described in the immediately preceding clause (i).
"Permitted Liens" means (i) Liens securing Senior Debt under
the Credit Agreement, (ii) Liens securing Indebtedness of a Subsidiary and
Liens securing Senior Debt, in each case, that is outstanding on the date of
issuance of the Notes (after giving effect to the Recapitalization and the use
of the proceeds therefrom) and Liens securing Senior Debt that is permitted by
the terms of the Indentures to be incurred, (iii) Liens in favor of the Company
or any Restricted Subsidiary, (iv) Liens on property or assets existing at the
time of acquisition thereof by the Company or any Subsidiary of the Company and
Liens on property or assets of a Subsidiary existing at the time it became a
Subsidiary; provided, that such Liens were in existence prior to the
contemplation of the acquisition and do not extend to any property or assets
other than the acquired property or assets or the property or assets of the
acquired Subsidiary, (v) Liens incurred or deposits made in the ordinary course
of business in connection with workers' compensation, unemployment insurance or
other kinds of social security, or to secure the payment or performance of
tenders, statutory or regulatory obligations, surety or appeal bonds, bids,
leases, government contracts and
<PAGE> 17
17
other contracts (other than for borrowed money), performance and
return-of-money bonds or other obligations of a like nature incurred in the
ordinary course of business (including, without limitation, lessee or operator
obligations under statutes, governmental regulations or instruments related to
the ownership, exploration and production of oil, gas and minerals on state or
federal lands or waters), (vi) Liens existing on the date of the Indentures
(after giving effect to the Recapitalization and the use of proceeds
therefrom), (vii) Liens for taxes, assessments and governmental charges and
claims that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded; provided,
that any reserve or other appropriate provision as shall be required in
conformity with GAAP shall have been made therefor, (viii) statutory liens of
landlords, mechanics, suppliers, vendors, warehousemen, carriers and other like
Liens arising in the ordinary course of business, (ix) pre-judgment Liens and
judgment Liens not giving rise to an Event of Default so long as any
appropriate legal proceeding that may have been duly initiated for the review
of such judgment shall not have been finally terminated or the period within
which such proceeding may be initiated shall not have expired, (x) Liens on, or
related to, properties or assets to secure all or part of the costs incurred in
the ordinary course of the Oil and Gas Business for the exploration, drilling,
development, production, processing, transportation, marketing or storage or
operation thereof and to support trade letters of credit and bankers'
acceptances issued or created in the ordinary course of business, (xi) Liens
encumbering pipelines or pipeline facilities that arise under operation of law,
(xii) Liens arising under operating agreements, joint venture agreements,
partnership agreements, oil and gas leases, farm-out agreements, division
orders, contracts for the sale, transportation or exchange of oil or natural
gas, unitization and pooling declarations and agreements, area of mutual
interest agreements and other agreements that are customary in the Oil and Gas
Business, (xiii) Liens reserved in oil and gas mineral leases for bonus and
rental payments and for compliance with the terms of such leases, (xiv) Liens
constituting survey exceptions, encumbrances, easements, and reservations of,
and rights to others for, rights-of-way, zoning and other restrictions as to
the use of real properties, and minor defects of title which, in the case of
any of the foregoing, do not secure the payment of borrowed money, and in the
aggregate do not materially adversely affect the value of the assets of the
Company and its Restricted Subsidiaries, taken as a whole, or materially impair
the use of such properties for the purposes for which such properties are held
by the Company or such Subsidiaries, (xv) Liens not otherwise permitted by
clauses (i) through (xiv) that are incurred in the ordinary course of business
of the Company or any Subsidiary of the Company with respect to obligations
that do not exceed $5.0 million at any one time outstanding, (xvi) Liens on
assets of Unrestricted Subsidiaries that secure Non-Recourse Debt of
Unrestricted Subsidiaries, (xvii) any interest or title of a lessor under any
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18
Capital Lease Obligation and (xviii) purchase money Liens; provided, however,
that (a) the related purchase money Indebtedness shall not be secured by any
property or assets of the Company or any Restricted Subsidiary other than the
property and assets so acquired and the proceeds thereof and (b) the Lien
securing such Indebtedness shall be created no later than 10 days after such
acquisition.
"Permitted Marketing Transaction" means (i) a transaction in
which the Company or any Subsidiary of the Parent either (a) establishes a
position using New York Mercantile Exchange Crude Oil or Natural Gas Futures
contracts to purchase hydrocarbons for future delivery to it or (b) purchases
or commits to purchase hydrocarbons for future delivery to it, and
contemporaneous with such purchase transaction either (1) establishes one or
more positions using New York Mercantile Exchange Crude Oil or Natural Gas
Futures contracts to resell at a date subsequent to such delivery date or (2)
enters into a contract with a Person to resell at a date subsequent to such
delivery date, a similar aggregate quantity and quality of hydrocarbons as so
purchased by the Company or such Subsidiary, as applicable, at an aggregate
price greater than the Indebtedness incurred for the hydrocarbons so purchased
by the Company or such Subsidiary or (ii) any other purchase by the Company or
any Subsidiary of the Parent of hydrocarbons for which the Company or such
Subsidiary has contracts to sell.
"Permitted Refinancing Debt" means any Indebtedness of the
Company or any of its Restricted Subsidiaries issued in exchange for, or the
net proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness (other than Indebtedness incurred under a Credit
Facility) of the Company or any of its Restricted Subsidiaries; provided that:
(i) the principal amount (or accreted value, if applicable) of such Permitted
Refinancing Debt does not exceed the principal amount (or accreted value, if
applicable) of the Indebtedness so extended, refinanced, renewed, replaced,
defeased or refunded, plus the amount of premiums and prepayment penalties and
other amounts required to be paid to the holders of such Debt in connection
therewith and reasonable fees and expenses incurred in connection therewith;
(ii) such Permitted Refinancing Indebtedness has a final maturity date on or
later than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of, the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the
Notes, such Permitted Refinancing Debt has a final maturity date later than the
final maturity date of, and is subordinated in right of payment to, the Notes
on terms at least to the same extent as the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness
is incurred either by the Company or by the Restricted Subsidiary who is the
obligor on the
<PAGE> 19
19
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"Person" means any individual, corporation, partnership,
limited liability company, joint venture, association, joint-stock company,
trust, unincorporated organization, government or any agency or political
subdivision thereof or any other entity.
"Preferred Stock" means the collective reference to the Series
A Preferred Stock and the Series B Preferred Stock.
"Production Payments" means Dollar-Denominated Production
Payments and Volumetric Production Payments, collectively.
"Recapitalization" means the use of the net proceeds by the
Parent and the Company from (i) the sale of the Notes and the Senior
Subordinated Notes, (ii) the credit facility pursuant to the Credit Agreement,
(iii) the sale of the Series B Preferred Stock pursuant to the Stock Purchase
Agreement and (iv) the sale of the Series A Preferred Stock pursuant to the
Rights Offering along with cash and investment balances of the Parent and the
Company to repay and/or refinance substantially all of the Parent's, the
Company's and their respective Subsidiaries' outstanding Indebtedness.
"Repurchase Offer" means an offer made by the Company to
purchase all or any portion of a Holder's Notes pursuant to Section 4.10 or
4.13 hereof.
"Responsible Officer" when used with respect to the Trustee,
means any officer within the Corporate Trust Department of the Trustee (or any
successor group of the Trustee) or any other officer of the Trustee customarily
performing functions similar to those performed by any of the above designated
officers and also means, with respect to a particular corporate trust matter,
any other officer to whom such matter is referred because of his knowledge of
and familiarity with the particular subject.
"Restricted Investment" means an Investment other than a
Permitted Investment.
"Restricted Subsidiary" means any direct or indirect
Subsidiary of the Company that is not an Unrestricted Subsidiary.
"Rights Offering" means the rights offering by the Parent
whereby it will distribute to holders of its common stock transferrable rights
to purchase a pro rata portion of approximately 58,400,000 shares of Series A
Preferred Stock.
"S&P" means Standard & Poor's Ratings Group and its
successors.
<PAGE> 20
20
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Subordinated Notes" means the ___% Senior Subordinated
Notes issued by the Company due ___________, 2006.
"Senior Subordinated Notes Indenture" means the Indenture
dated as of _____ __, 1996 among the Company, the Parent and Harris Trust and
Savings Banks, as trustee, pursuant to which the Senior Subordinated Notes were
issued, as the same may be amended, supplemented or otherwise modified from
time to time.
"Series A Preferred Stock" means the Series A 8% Cumulative
Convertible Preferred Stock of the Parent.
"Series B Preferred Stock" means the Series B 8% Cumulative
Convertible Preferred Stock of the Parent.
"Standby Commitment" means the standby commitment provided by
DNR pursuant to which it will purchase additional shares of Series B Preferred
Stock equal to the number of shares of Series A Preferred Stock, if any, not
purchased in the Rights Offering.
"Stated Price" means, with respect to any 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 [________], 2001 or (ii) 100% of the principal
amount thereof plus accrued but unpaid interest thereon to the date of
determination, if such date is after [________], 2001, and in the cases, and
only the cases, of an optional redemption effected pursuant to the provisions
of Sections 3.7 and 4.13, the premium (if any) payable pursuant to such
Sections, as applicable.
"Stock Purchase Agreement" means the Stock Purchase Agreement
dated April 26, 1996 between the Parent and DNR, as the same may be amended,
supplemented, or otherwise modified from time to time.
"Subordinated Indebtedness" means any Indebtedness of the
Company or any Restricted Subsidiary (whether outstanding on the date of the
issuance of the Notes or thereafter incurred) which is subordinated or junior
in right of payment to the Notes pursuant to a written agreement.
"Subsidiary" means, with respect to any Person, (i) any
corporation, association or other business entity of which more than 50% of the
total voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or indirectly,
by such Person or one or more of the other Subsidiaries of that Person (or a
combination thereof) and (ii) any partnership (a)
<PAGE> 21
21
the sole general partner or the managing general partner of which is such
Person or a Subsidiary of such Person or (b) the only general partners of which
are such Person or of one or more Subsidiaries of such Person (or any
combination thereof).
"Subsidiary Guarantors" means any Restricted Subsidiary of the
Company that executes a Guarantee in accordance with the provisions of this
Indenture and any successor or assign of such Subsidiary that becomes obligated
under any Guarantee pursuant to this Indenture.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C.
Sections 77aaa-77bbbb) as in effect on the date on which this Indenture is
qualified under the TIA.
"Total Assets" means, with respect to the Company, the total
consolidated assets of the Company and its Restricted Subsidiaries, as shown on
the most recent balance sheet of the Company.
"Trustee" means the party named as such in the preamble to
this Indenture until a successor replaces it in accordance with the applicable
provisions of this Indenture and thereafter means the successor serving
hereunder.
"Unrestricted Subsidiary" means (i) any Subsidiary of the
Company which at the time of determination shall be an Unrestricted Subsidiary
(as designated by the Board of Directors of the Company, as provided below) and
(ii) any subsidiary of an Unrestricted Subsidiary. The Board of Directors of
the Company may designate any Subsidiary of the Company (including any newly
acquired or newly formed Subsidiary or a Person becoming a Subsidiary through
merger or consolidation or Investment therein) to be an Unrestricted Subsidiary
only if: (a) such Subsidiary does not own any Capital Stock of, or own or hold
any Lien on any property of, any other Subsidiary of the Company which is not a
Subsidiary of the Subsidiary to be so designated or otherwise an Unrestricted
Subsidiary; (b) all the Indebtedness of such Subsidiary shall at the date of
designation, and will at all times thereafter consist of, Non-Recourse Debt;
(c) the Company certifies that such designation was permitted by Section 4.7;
(d) such Subsidiary, either alone or in the aggregate with all other
Unrestricted Subsidiaries, does not operate, directly or indirectly, all or
substantially all of the business of the Company and the Subsidiaries; (e) such
Subsidiary does not, directly or indirectly, own any Indebtedness of or Equity
Interest in, and has no Investments in, the Company or any Restricted
Subsidiary; (f) such Subsidiary is a Person with respect to which neither the
Company nor any of its Restricted Subsidiaries has any direct or indirect
obligation (1) to subscribe for additional Equity Interests or (2) to maintain
or preserve such Person's financial condition or to cause such Person to
achieve any specified levels of operating results; and (g) on the date such
Subsidiary is designated an Unrestricted
<PAGE> 22
22
Subsidiary, such Subsidiary is not a party to any agreement, contract,
arrangement or understanding with the Company or any Restricted Subsidiary with
terms substantially less favorable to the Company than those that might have
been obtained from Persons who are not Affiliates of the Company and (h) the
Board of Directors of the Company shall have made a determination (as set forth
in the resolution approving such designation, creation or purchase) that the
designation, creation and operation of the Unrestricted Subsidiary is not
reasonably expected to materially and adversely affect the financial condition,
business, or operations of the Company and its Restricted Subsidiaries taken
together as a whole (which resolution shall be conclusive evidence of
compliance with this provision). Any such designation by the Board of
Directors of the Company shall be evidenced to the Trustee by filing with the
Trustee a resolution of the Board of Directors of the Company giving effect to
such designation and an Officer's Certificate certifying that such designation
complied with the foregoing conditions. If, at any time, any Unrestricted
Subsidiary would fail to meet the foregoing requirements as an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the Indenture and any Indebtedness of such Subsidiary shall be
deemed to be incurred as of such date. The Board of Directors of the Company
may designate any Unrestricted Subsidiary to be a Restricted Subsidiary;
provided, that immediately after giving effect to such designation, no Default
or Event of Default shall have occurred and be continuing or would occur as a
consequence thereof and the Company could incur at least $1.00 of additional
Indebtedness (excluding Permitted Indebtedness) pursuant to Section 4.9 on a
pro forma basis taking into account such designation.
"Volumetric Production Payments" means production payment
obligations recorded as deferred revenue in accordance with GAAP, together with
all undertakings and obligations in connection therewith.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the sum
of the products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" means, with respect to
any Person, a Restricted Subsidiary of such Person, all of the outstanding
Capital Stock or other ownership interests of which (other than directors'
qualifying shares) are owned, directly or indirectly, by such Person or by one
or more Wholly Owned Restricted Subsidiaries of such Person.
<PAGE> 23
23
Section 1.2. Other Definitions.
<TABLE>
<CAPTION>
Defined in
Term Section
<S> <C>
"Affiliate Transaction" . . . . . . . . . . . . . . . . . . . 4.11
"Asset Sale Offer" . . . . . . . . . . . . . . . . . . . . . . 3.9
"Bankruptcy Law" . . . . . . . . . . . . . . . . . . . . . . . 10.2
"Change of Control Offer" . . . . . . . . . . . . . . . . . . 4.13
"Change of Control Payment" . . . . . . . . . . . . . . . . . 4.13
"Change of Control Payment Date" . . . . . . . . . . . . . . . 4.13
"Closing Date" . . . . . . . . . . . . . . . . . . . . . . . . 2.1
"Covenant Defeasance" . . . . . . . . . . . . . . . . . . . . 8.3
"Custodian" . . . . . . . . . . . . . . . . . . . . . . . . . 6.1
"Designated Senior Debt" . . . . . . . . . . . . . . . . . . . 10.2
"DTC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3
"Event of Default" . . . . . . . . . . . . . . . . . . . . . . 6.1
"Excess Proceeds" . . . . . . . . . . . . . . . . . . . . . . 4.10
"Global Note Holder" . . . . . . . . . . . . . . . . . . . . . 2.1
"incur" . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.9
"Legal Defeasance" . . . . . . . . . . . . . . . . . . . . . . 8.2
"Notice of Default" . . . . . . . . . . . . . . . . . . . . . 6.1
"Offer Amount" . . . . . . . . . . . . . . . . . . . . . . . . 3.9
"Offer Period" . . . . . . . . . . . . . . . . . . . . . . . . 3.9
"Paying Agent" . . . . . . . . . . . . . . . . . . . . . . . . 2.3
"Payment Blockage Notice" . . . . . . . . . . . . . . . . . . 10.4
"Payment Default" . . . . . . . . . . . . . . . . . . . . . . 6.1
"Permitted Indebtedness" . . . . . . . . . . . . . . . . . . . 4.9
"Purchase Date" . . . . . . . . . . . . . . . . . . . . . . . 3.9
"Registrar" . . . . . . . . . . . . . . . . . . . . . . . . . 2.3
"Restricted Payments" . . . . . . . . . . . . . . . . . . . . 4.7
"Senior Debt" . . . . . . . . . . . . . . . . . . . . . . . . 10.2
</TABLE>
Section 1.3. Incorporation By Reference of Trust Indenture
Act.
Whenever this Indenture refers to a provision of the TIA, the
provision is incorporated by reference in and made a part of this Indenture.
The following TIA terms used in this Indenture have the
following meanings:
"indenture securities" means the Notes;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the
Trustee;
"obligor" with respect to the Notes means the Company and with
respect to the Guarantees means the Parent and any Subsidiary
Guarantor and any successor obligor upon the Notes and the Guarantees,
respectively.
<PAGE> 24
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All other terms used in this indenture that are defined by the
TIA, defined by TIA reference to another statute or defined by rule enacted by
the Commission under the TIA have the meanings so assigned to them.
Section 1.4. Rules of Construction.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the
meaning assigned to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) words in the singular include the plural, and in
the plural include the singular;
(5) provisions apply to successive events and
transactions; and
(6) references to sections of or rules under the
Securities Act shall be deemed to include substitute, replacement of
successor sections or rules adopted by the Commission from time to
time.
ARTICLE 2
THE NOTES
Section 2.1. Form and Dating.
The Notes and the Trustee's certificate of authentication
shall be substantially in the form of Exhibit A hereto. The Guarantees of the
Parent and the Subsidiary Guarantors, if any, shall be substantially in the
form of Exhibit C hereto, the terms of which are incorporated in and made part
of this indenture. The Notes may have notations, legends or endorsements
required by law, stock exchange rule or usage. Each Note shall be dated the
date of its issuance and shall show the date of its authentication. The Notes
will be fully registered and only in denominations of $1,000 principal amount
(at maturity) and integral multiples of $1,000 in excess thereof.
The Notes offered and sold may be issued initially in the form
of one or more fully registered Global Notes, with, or on behalf of, The
Depository Trust Company and registered in the name of Cede & Co., as nominee
of the Depository (such nominee being referred to herein as the "Global Note
Holder"), or will remain in the custody of the Registrar pursuant to the Fast
Balance Certificate Agreement between the Depository and the Registrar and
shall bear the legend set forth as Exhibit B. Except as set forth in Section
2.6, the Global Notes may be
<PAGE> 25
25
transferred, in whole and not in part, only to another nominee of the
Depository or to a successor of the Depository or its nominee.
The terms and provisions contained in the Notes shall
constitute, and are hereby expressly made, a part of this Indenture and the
Company, Parent, any Subsidiary Guarantor and the Trustee, by their execution
and delivery of this Indenture, expressly agree to such terms and provisions
and (as to the Trustee, to the extent such terms and provisions pertain to the
Trustee) to be bound thereby.
Notes issued in global form shall be substantially in the form
of Exhibit A attached hereto (including the legend on Exhibit B). Notes issued
in certificated form shall be substantially in the form of Exhibit A attached
hereto (but without including the legend on Exhibit B). Each Global Note shall
represent such of the outstanding Notes as shall be specified therein and each
shall provide that it shall represent the aggregate amount of outstanding Notes
from time to time endorsed thereon and that the aggregate amount of outstanding
Notes represented thereby may from time to time be reduced or increased, as
appropriate, to reflect exchanges and redemptions. Any endorsement of a Global
Note to reflect the amount of any increase or decrease in the amount of
outstanding Notes represented thereby shall be made by the Trustee or the Note
Custodian, at the direction of the Trustee, in accordance with instructions
given by the Holder thereof as required by Section 2.6 hereof.
Section 2.2. Execution and Authentication.
Two Officers shall sign the Notes for the Company by manual or
facsimile signature. The Company's seal shall be reproduced on the Notes and
may be in facsimile form.
If an Officer whose signature is on a Note no longer holds
that office at the time a Note is authenticated, the Note shall nevertheless be
valid.
A Note shall not be valid until authenticated by the manual
signature of the Trustee. The signature shall be conclusive evidence that the
Note has been authenticated under this Indenture.
The Trustee shall, upon a written order of the Company signed
by two Officers, authenticate Notes for original issue up to the aggregate
principal amount (at maturity) of $[_________]. The aggregate principal amount
(at maturity) of Notes outstanding at any time may not exceed $[_________],
except as provided in Section 2.7 hereof.
The Trustee may appoint an authenticating agent acceptable to
the Company to authenticate Notes. An
<PAGE> 26
26
authenticating agent may authenticate Notes whenever the Trustee may do so.
Each reference in this Indenture to authentication by the Trustee includes
authentication by such agent. An authenticating agent has the same rights as
an Agent to deal with the Company or an Affiliate of the Company.
Section 2.3. Registrar and Paying Agent.
The Company shall maintain an office or agency in the Borough
of Manhattan, The City of New York where (i) Notes may be presented for
registration of transfer or for exchange ("Registrar") and (ii) Notes may be
presented for payment ("Paying Agent"). The Registrar shall keep a register of
the Notes and of their transfer and exchange. The Company may appoint one or
more co-registrars and one or more additional paying agents. The term
"Registrar" includes any co-registrar and the term "Paying Agent" includes any
additional paying agent. The Company may change any Paying Agent or Registrar
without notice to any Holder. The Company shall notify the Trustee in writing
of the name and address of any Agent not a party to this Indenture. If the
Company fails to appoint or maintain another entity as Registrar or Paying
Agent, the Trustee shall act as such. The Company or any of its Subsidiaries
may act as Paying Agent or Registrar.
The Company initially appoints The Depository Trust Company
("DTC")to act as Depository with respect to the Global Notes.
The Company initially appoints the Trustee to act as the
Registrar and Paying Agent and to act as Note Custodian with respect to the
Global Notes.
Section 2.4. Paying Agent to Hold Money in Trust.
The Company shall require each Paying Agent, including the
Trustee (who shall be deemed to have agreed by its execution of this
Indenture), to agree in writing that the Paying Agent shall hold in trust for
the benefit of Holders or the Trustee (unless the Paying Agent is the Trustee,
in which case it shall hold in trust for the Holders) all money held by the
Paying Agent for the payment of the Stated Price of or interest on the Notes,
and shall notify the Trustee of any default by the Company, the Parent or any
Subsidiary Guarantor in making any such payment. While any such default
continues, the Trustee may require a Paying Agent to pay all money held by it
to the Trustee. The Company at any time may require a Paying Agent to pay all
money held by it to the Trustee. Upon payment over to the Trustee, the Paying
Agent (if other than the Company, the Parent or a Subsidiary) shall have no
further liability for the money. If the Company, the Parent or a Subsidiary
acts as Paying Agent, it shall segregate and hold in a separate trust fund for
the benefit of the Holders all money held by it as Paying Agent. Upon any
bankruptcy or reorganization proceedings relating to the Company,
<PAGE> 27
27
the Parent or a Subsidiary Guarantor, the Trustee shall serve as sole Paying
Agent for the Notes.
Section 2.5. Holder Lists.
The Trustee shall preserve in as current a form as is
reasonably practicable the most recent list available to it of the names and
addresses of all Holders and shall otherwise comply with TIA Section 312(a).
If the Trustee is not the Registrar, the Company, the Parent and/or the
Subsidiary Guarantors shall furnish to the Trustee at least seven Business Days
before each interest payment date and at such other times as the Trustee may
request in writing, a list in such form and as of such date as the Trustee may
reasonably require of the names and addresses of the Holders of Notes and the
Company, the Parent and the Subsidiary Guarantors shall otherwise comply with
TIA Section
312(a).
Section 2.6. Transfer and Exchange.
Subject to the provisions of Section 2.13, when Notes are
presented to the Registrar with a request to register the transfer of such
Notes or to exchange such Notes for an equal principal amount of Notes of other
authorized denominations, the Registrar shall register the transfer or make the
exchange as requested if its requirements for such transaction are met;
provided, however, that the Notes surrendered for transfer or exchange shall be
duly endorsed or accompanied by a written instrument of transfer duly executed
by the Holder thereof (or his attorney duly authorized in writing) in form
satisfactory to the Company and to the Registrar. In order to permit
registrations of transfers and exchanges, the Company shall execute and the
Trustee shall authenticate Notes at the Registrar's written request. No
service charge shall be made for any registration of transfer or exchange or of
redemption, but the Company may, by notice to the Trustee, require payment of a
sum sufficient to cover any transfer tax or similar governmental charge payable
in connection therewith (other than any such transfer taxes or other
governmental charge payable upon exchanges or transfers pursuant to Sections
2.2, 2.3, 3.6, 3.7(b) or 3.9). The Registrar shall not be required to register
the transfer of or exchange of any Note (i) during a period beginning at the
opening of business 15 days before the mailing of a notice of redemption of
Notes and ending at the close of business on the day of such mailing and (ii)
selected for redemption in whole or in part pursuant to Article Three, except
the unredeemed portion of any Note being redeemed in part.
Prior to due presentment for the registration of a transfer of
any Note, the Trustee, any Agent and the Company may deem and treat the Person
in whose name any Note is registered as the absolute owner of such Note for the
purpose of receiving payment of principal of and interest on such Notes, and
neither the Trustee, any Agent nor the Company shall be affected by notice to
the contrary.
<PAGE> 28
28
Section 2.7. Replacement Notes.
If any mutilated Note is surrendered to the Trustee, or the
Company and the Trustee receive evidence to their satisfaction of the
destruction, loss or theft of any Note, the Company shall issue and the
Trustee, upon the receipt of a written authentication order of the Company
signed by two Officers of the Company, shall authenticate a replacement Note if
the Trustee's requirements are met. If required by the Trustee or the Company,
an indemnity bond must be supplied by the Holder that is sufficient in the
judgment of the Trustee and the Company to protect the Company, the Trustee,
any Agent and any authenticating agent from any loss that any of them may
suffer if a Note is replaced. The Company and the Trustee may charge for its
expenses in replacing a Note.
Every replacement Note is an additional obligation of the
Company and shall be entitled to all of the benefits of this Indenture equally
and proportionately with all other Notes duly issued hereunder.
Section 2.8. Outstanding Notes.
The Notes outstanding at any time are all the Notes
authenticated by the Trustee except for those cancelled by it, those delivered
to it for cancellation, those reductions in the interest in a Global Note
effected by the Trustee in accordance with the provisions hereof, and those
described in this Section as not outstanding. Except as set forth in Section
2.9 hereof, a Note does not cease to be outstanding because the Company or an
Affiliate of the Company holds the Note.
If a Note is replaced pursuant to Section 2.7 hereof, it
ceases to be outstanding unless the Trustee receives proof satisfactory to it
that the replaced Note is held by a bona fide purchaser.
If the principal amount of any Note is considered paid under
Section 4.1 hereof, it ceases to be outstanding and interest on it ceases to
accrue. Notes will also cease to be outstanding for certain purposes hereunder
as provided in Article 8 hereof.
If the Paying Agent (other than the Company, the Parent, a
Subsidiary or an Affiliate of any thereof) holds, on a redemption date or
maturity date, money sufficient to pay the Stated Price of Notes payable on
that date, then on and after that date such Notes shall be deemed to be no
longer outstanding and shall cease to accrue interest.
<PAGE> 29
29
Section 2.9. Treasury Notes.
In determining whether the Holders of the required principal
amount (at maturity) of Notes have concurred in any direction, waiver or
consent, Notes owned by the Company, the Parent, any Subsidiary Guarantor, or
by any Affiliate of the Company, the Parent or any Subsidiary Guarantor, shall
be considered as though not outstanding, except that for the purposes of
determining whether the Trustee shall be protected in relying on any such
direction, waiver or consent, only Notes that a Trustee actually knows are
registered in the names of the Company, the Parent, any Subsidiary Guarantor or
any of their Affiliates or are certified as such by the Company in an Officer's
Certificate delivered to the Trustee shall be so disregarded.
When the Company, the Parent, any Subsidiary Guarantor or any
of their Affiliates repurchases or otherwise acquires Notes, the Company shall
notify the Trustee, in writing, of the aggregate principal amount of such Notes
so repurchased or otherwise acquired. The Trustee may require an Officer's
Certificate listing Notes owned by the Company, the Parent, any Subsidiary
Guarantor or any of their Affiliates.
Section 2.10. CUSIP Number.
The Company in issuing the Notes may use a "CUSIP" number, and
if so, the Trustee shall use the CUSIP number in notices of redemption or
exchange as a convenience to Holders; provided that any such notice may state
that no representation is made as to the correctness or accuracy of the CUSIP
number printed in the notice or on the Notes and that reliance may be placed
only on the other identification numbers printed on the Notes.
Section 2.11. Cancellation.
The Company at any time may deliver Notes to the Trustee for
cancellation. The Registrar and Paying Agent shall forward to the Trustee any
Notes surrendered to them for registration of transfer, exchange or payment.
The Trustee and no one else shall cancel all Notes surrendered for registration
of transfer, exchange, payment, replacement or cancellation and shall destroy
cancelled Notes (subject to the record retention requirement of the Exchange
Act). Certification of the destruction of all cancelled Notes shall be
delivered to the Company. The Company may not issue new Notes to replace Notes
that it has paid or that have been delivered to the Trustee for cancellation.
Section 2.12. Defaulted Interest.
If the Company defaults in a payment of interest on the Notes,
it shall pay the defaulted interest in any lawful manner
<PAGE> 30
30
plus, to the extent lawful, interest payable on the defaulted interest, to the
Persons who are Holders on a subsequent special record date, in each case at
the rate provided in the Notes and in Section 4.1 hereof. The Company shall
notify the Trustee in writing of the amount of defaulted interest proposed to
be paid on each Note and the date of the proposed payment. The Company shall
fix or cause to be fixed each such special record date and payment date,
provided that no such special record date shall be less than 10 days prior to
the related payment date for such defaulted interest. At least 15 days before
the special record date, the Company (or, upon the written request of the
Company, the Trustee in the name and at the expense of the Company) shall mail
or cause to be mailed to Holders a notice that states the special record date,
the related payment date and the amount of such interest to be paid.
Section 2.13. Book-Entry Provisions for Global Notes.
(a) The Global Notes initially shall (i) be registered in the
name of Cede & Co., as the nominee of The Depository Trust Company, (ii) be
delivered to the Registrar as custodian for such Depository and (iii) bear
legends as set forth in Exhibit B.
(b) Members of, or participants in, the Depository ("Agent
Members") shall have no rights under this Indenture with respect to any Global
Note held on their behalf by the Depository, or the Trustee as its custodian,
or under the Global Note, and the Depository may be treated by the Company, the
Trustee and any agent of the Company or the Trustee as the absolute owner of
the Global Note for all purposes whatsoever. Notwithstanding the foregoing,
nothing herein shall prevent the Company, the Trustee or any agent of the
Company or the Trustee from giving effect to any written certification, proxy
or other authorization furnished by the Depository or impair, as between the
Depository and its Agent Members, the operation of customary practices
governing the exercise of the rights of a Holder of any Note.
(c) Transfers of Global Notes shall be limited to transfers
in whole, but not in part, to the Depository, its successors or their
respective nominees. Interests of beneficial owners in the Global Notes may be
transferred or exchanged for Certificated Notes in accordance with the rules
and procedures of the Depository. In addition, Certificated Notes shall be
transferred to all beneficial owners in exchange for their beneficial interests
in Global Notes if (i) the Company notifies the Registrar that the Depository
is unwilling or unable to continue as Depository for any Global Note and a
successor Depository is not appointed by the Company within 90 days of such
notice or (ii) the Company, at its option, notifies the Registrar in writing
that it elects to cause the issuance of Notes in definitive form under the
Indenture or (iii) an Event of Default has occurred and is continuing and the
Registrar has received a request from the Depository to issue Certificated
Notes.
<PAGE> 31
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(d) In connection with any transfer or exchange of a portion
of the beneficial interest in any Global Note to beneficial owners pursuant to
paragraph (c), the Registrar shall (if one or more Certificated Notes are to be
issued) reflect on its books and records the date and a decrease in the
principal amount of the Global Note in an amount equal to the principal amount
of the beneficial interest in the Global Note to be transferred, and the
Company shall execute, and the Trustee shall authenticate and deliver, one or
more Certificated Notes of like tenor and amount.
(e) In connection with the transfer of Global Notes as an
entirety to beneficial owners pursuant to the second sentence of paragraph (c),
the Global Notes shall be deemed to be surrendered to the Trustee for
cancellation, and the Company shall execute, and the Trustee shall authenticate
and deliver, to each beneficial owner identified by the Depository in exchange
for its beneficial interest in the Global Notes, an equal aggregate principal
amount of Certificated Notes of authorized denominations.
(f) The Holder of any Global Note may grant proxies and
otherwise authorize any person, including Agent Members and persons that may
hold interests through Agent Members, to take any action which a Holder is
entitled to take under this Indenture or the Notes.
ARTICLE 3
REDEMPTION AND PREPAYMENT
Section 3.1. Notices to Trustee.
If the Company elects to redeem Notes pursuant to the optional
redemption provisions of Section 3.7 hereof, then it shall furnish to the
Trustee, at least 30 days but not more than 60 days before a redemption date,
an Officers' Certificate setting forth (i) the paragraph of the Notes and/or
Section of this Indenture pursuant to which the redemption shall occur, (ii)
the redemption date, (iii) the principal amount of Notes to be redeemed and
(iv) the redemption price.
Section 3.2. Selection of Notes to Be Redeemed.
If less than all of the Notes are to be redeemed at any time,
selection of Notes for redemption shall be made by the Trustee in compliance
with the requirements of the principal national securities exchange, if any, on
which the Notes are listed, or, if the Notes are not so listed, on a pro rata
basis, by lot or by such method as the Trustee shall deem fair and appropriate;
provided that no Notes of $1,000 or less shall be redeemed in part. In the
event of partial redemption by lot, the particular Notes to be redeemed shall
be selected, unless otherwise provided herein, not less than 30 nor more than
60 days
<PAGE> 32
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prior to the redemption date by the Trustee from the outstanding Notes not
previously called for redemption.
The Trustee shall promptly notify the Company in writing of
the Notes selected for redemption and, in the case of any Note selected for
partial redemption, the principal amount (at maturity) thereof to be redeemed.
Notes and portions of Notes selected shall be in amounts of $1,000 principal
amount (at maturity) or whole multiples of $1,000; except that if all of the
Notes of a Holder are to be redeemed, the entire outstanding amount of Notes
held by such Holder, even if not a multiple of $1,000, shall be redeemed. A
new Note in principal amount (at maturity) equal to the unredeemed portion
thereof shall be issued in the name of the Holder thereof upon cancellation of
the original Note. On and after the redemption date, unless the Company
defaults in payment of the redemption price, interest ceases to accrete or
accrue, as the case may be, on Notes or portions of them called for redemption.
Except as provided in this Section 3.2, provisions of this Indenture that apply
to Notes called for redemption also apply to portions of Notes called for
redemption.
Section 3.3. Notice of Redemption.
Subject to the provisions of Section 3.9 hereof, at least 30
days but not more than 60 days before a redemption date, the Company shall mail
or cause to be mailed, by first class mail, a notice of redemption to each
Holder of Notes to be redeemed at such Holder's registered address.
The notice shall identify the Notes to be redeemed and shall
state:
(a) the redemption date;
(b) the redemption price;
(c) if any Note is being redeemed in part, the portion of
the principal amount (at maturity) of such Note to be redeemed and
that, after the redemption date upon surrender of such Note, a new
Note or Notes having an Accreted Value (as of a specified date) and
principal amount (at maturity) equal to the unredeemed portion of the
Accreted Value (as of such specified date) and principal amount (at
maturity) thereof, respectively, shall be issued upon cancellation of
the original Note;
(d) the name and address of the Paying Agent;
(e) that Notes called for redemption must be surrendered
to the Paying Agent to collect the redemption price;
<PAGE> 33
33
(f) that, unless the Company defaults in making such
redemption payment, interest on Notes called for redemption cease to
accrete or accrue, as the case may be, on and after the redemption
date;
(g) the paragraph of the Notes and/or Section of this
Indenture pursuant to which the Notes called for redemption are being
redeemed; and
(h) that no representation is made as to the correctness
or accuracy of the CUSIP number, if any, listed in such notice or
printed on the Notes.
At the Company's request and expense, the Trustee shall give
the notice of redemption in the Company's name; provided, however, that the
Company shall have delivered to the Trustee, at least 45 days prior to the
redemption date, an Officers' Certificate requesting that the Trustee give such
notice and setting forth the information to be stated in such notice as
provided in the preceding paragraph.
Section 3.4. Effect of Notice of Redemption.
Once notice of redemption is mailed in accordance with Section
3.3 hereof, Notes called for redemption become irrevocably due and payable on
the redemption date at the redemption price. A notice of redemption may not be
conditional.
Section 3.5. Deposit of Redemption Price.
On or prior to the redemption date, the Company shall deposit
with the Trustee or with the Paying Agent money sufficient to pay the
redemption price of and accrued interest, if any, on all Notes to be redeemed
on that date. The Trustee or the Paying Agent shall promptly return to the
Company any money deposited with the Trustee or the Paying Agent by the Company
in excess of the amounts necessary to pay the redemption price of and accrued
interest, if any, on, all Notes to be redeemed.
If the Company complies with the provisions of the preceding
paragraph, on and after the redemption date, interest shall cease to accrete or
accrue, as the case may be, on the Notes or the portions of Notes called for
redemption. If a Note is redeemed on or after an interest record date but on
or prior to the related interest payment date, then any accrued and unpaid
interest shall be paid to the Person in whose name such Note was registered at
the close of business on such record date. If any Note called for redemption
shall not be so paid upon surrender for redemption because of the failure of
the Company to comply with the preceding paragraph, interest shall accrete or
be paid on the unpaid principal, from the redemption date until such principal
is paid, and to the extent lawful on any interest not paid on such unpaid
principal, in each case at the rate provided in the Notes and in Section 4.1
hereof.
<PAGE> 34
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Section 3.6. Notes Redeemed in Part.
Upon surrender of a Note that is redeemed in part, the Company
shall issue and, upon the receipt of a written authentication order of the
Company signed by two Officers of the Company, the Trustee shall authenticate
for the Holder at the expense of the Company a new Note having an Accreted
Value (as of the redemption date) and principal amount (at maturity) equal to
the unredeemed portion of the Note surrendered.
Section 3.7. Optional Redemption.
(a) Except as set forth in clause (b) of this Section
3.7, the Company shall not have the option to redeem the Notes pursuant to this
Section 3.7 prior to _______, 2001. From and after _______, 2001, the Company
shall have the option to redeem the Notes, in whole or in part, at the
redemption prices (expressed as percentages of principal amount) set forth
below plus accrued and unpaid interest thereon from ________, 2001 to the
applicable redemption date, if redeemed during the twelve-month period
beginning on _________ of each of the years indicated below:
<TABLE>
<CAPTION>
Percentage of
Year Principal Amount
---- ----------------
<S> <C>
2001 . . . . . . . . . . . . . . . . . . . . . . . . ______%
2002 . . . . . . . . . . . . . . . . . . . . . . . . . ______%
2003 . . . . . . . . . . . . . . . . . . . . . . . . ______%
2004 and thereafter . . . . . . . . . . . . . . . . . 100.000%
</TABLE>
(b) Notwithstanding the provisions of clause (a) of this
Section 3.7, at any time prior to ________, 1999, the Company may, at its
option, on any one or more occasions, redeem up to [$ amount equal to 33 1/3%]
million of the original aggregate principal amount of Notes at a redemption
price of ____% of the Accreted Value (at the redemption date) thereof, with the
net proceeds of sales of Equity Interests (other than Disqualified Stock) in
the Company or Parent; provided that at least [$ amount equal to 66 2/3%]
million of the original aggregate principal amount of Notes remains outstanding
immediately after the occurrence of such redemption; and provided, further,
that such redemption shall occur within 60 days of the date after the closing
of the related sale of such Equity Interests.
(c) Any redemption pursuant to this Section 3.7 shall be
made pursuant to the provisions of Sections 3.1 through 3.6 hereof.
<PAGE> 35
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Section 3.8. Mandatory Redemption.
Except as set forth under Sections 4.10 and 4.13 hereof, the
Company shall not be required to make mandatory redemption or sinking fund
payments with respect to the Notes.
Section 3.9. Offer to Purchase By Application of
Excess Proceeds.
In the event that, pursuant to Section 4.10 hereof, the
Company shall be required to commence an offer to all Holders of Notes and, to
the extent required by the terms thereof, to all holders or lenders of other
Pari Passu Indebtedness, to purchase Notes and any such Pari Passu Indebtedness
(an "Asset Sale Offer"), it shall follow the procedures specified below.
The Asset Sale Offer shall remain open for a period of 20
Business Days following its commencement and no longer, except to the extent
that a longer period is required by applicable law (the "Offer Period"). No
later than five Business Days after the termination of the Offer Period (the
"Purchase Date"), the Company shall purchase the principal amount of Notes
required to be purchased pursuant to Section 4.10 hereof, giving effect to any
related offer for Pari Passu Indebtedness pursuant to Section 4.10, (the "Offer
Amount") or, if less than the Offer Amount has been tendered, all Notes
tendered in response to the Asset Sale Offer. Payment for any Notes so
purchased shall be made in the same manner as interest payments are made.
If the Purchase Date is on or after an interest record date
and on or before the related interest payment date, any accrued and unpaid
interest shall be paid to the Person in whose name a Note is registered at the
close of business on such record date, and no additional interest shall be
payable to Holders who tender Notes pursuant to the Asset Sale Offer.
Upon the commencement of an Asset Sale Offer, the Company
shall send, by first class mail, a notice to the Trustee and each of the
Holders. The notice shall contain all instructions and materials necessary to
enable such Holders to tender Notes pursuant to the Asset Sale Offer. The
Asset Sale Offer shall be made to all Holders. The notice, which shall govern
the terms of the Asset Sale Offer, shall state:
(a) that the Asset Sale Offer is being made pursuant to
this Section 3.9 and Section 4.10 hereof and the length of time the
Asset Sale Offer shall remain open;
(b) the Offer Amount, the purchase price and the Purchase
Date;
(c) that any Note not tendered or accepted for payment
shall continue to accrue interest;
<PAGE> 36
36
(d) that, unless the Company defaults in making such
payment, any Note accepted for payment pursuant to the Asset Sale
Offer shall cease to accrete or accrue interest, as the case may be,
after the Purchase Date;
(e) that Holders electing to have a Note purchased
pursuant to an Asset Sale Offer may only elect to have all of such
Note purchased and may not elect to have only a portion of such Note
purchased;
(f) that Holders electing to have a Note purchased
pursuant to any Asset Sale Offer shall be required to surrender the
Note, with the form entitled "Option of Holder to Elect Purchase" on
the reverse of the Note completed, or transfer by book-entry transfer,
to the Company, a Depository, if appointed by the Company, or a Paying
Agent at the address specified in the notice at least three Business
Days before the Purchase Date;
(g) that Holders shall be entitled to withdraw their
election if the Company, the Depository or the Paying Agent, as the
case may be, receives, not later than the expiration of the Offer
Period, a telegram, telex, facsimile transmission or letter setting
forth the name of the Holder, the principal amount of the Note the
Holder delivered for purchase and a statement that such Holder is
withdrawing his election to have such Note purchased;
(h) that, if the aggregate Accreted Value or principal
amount, as the case may be, of Notes surrendered by Holders exceeds
the Offer Amount, the Company shall select the Notes to be purchased
on a pro rata basis (with such adjustments as may be deemed
appropriate by the Company so that only Notes in denominations of
$1,000 in principal amount at maturity, or integral multiples thereof,
shall be purchased) in the manner provided in Section 4.10; and
(i) that Holders whose Notes were purchased only in part
shall be issued new Notes equal in principal amount to the unpurchased
portion of the Notes surrendered (or transferred by book-entry
transfer).
On or before the Purchase Date, the Company shall, to the
extent lawful, accept for payment, on a pro rata basis to the extent necessary,
the Offer Amount of Notes or portions thereof tendered pursuant to the Asset
Sale Offer, or if less than the Offer Amount has been tendered, all Notes
tendered, and shall deliver to the Trustee an Officers' Certificate stating
that such Notes or portions thereof were accepted for payment by the Company in
accordance with the terms of this Section 3.9. The Company, the Depository or
the Paying Agent, as the case may be, shall promptly (but in any case not later
than five days after the Purchase Date) mail or deliver to each tendering
Holder an amount equal to the purchase price of the Notes tendered by such
<PAGE> 37
37
Holder and accepted by the Company for purchase, and the Company shall promptly
issue a new Note, and the Trustee, upon receipt of a written authentication
order of the Company signed by two Officers of the Company shall authenticate
and mail or deliver such new Note to such Holder, in a principal amount equal
to any unpurchased portion of the Note surrendered. Any Note not so accepted
shall be promptly mailed or delivered by the Company to the Holder thereof.
The Company shall publicly announce the results of the Asset Sale Offer on the
Purchase Date.
Other than as specifically provided in this Section 3.9, any
purchase pursuant to this Section 3.9 shall be made pursuant to the provisions
of Sections 3.1 through 3.6 hereof.
ARTICLE 4
COVENANTS
Section 4.1. Payment of Notes.
The Company shall pay or cause to be paid the principal of,
premium, if any, and interest on the Notes on the dates and in the manner
provided in the Notes. Principal, premium, if any, and interest shall be
considered paid on the date due if the Paying Agent, if other than the Parent,
the Company or a Subsidiary thereof, holds as of 10:00 a.m. Eastern Time on the
due date money deposited by the Company in immediately available funds and
designated for and sufficient to pay all such amounts then due.
The Company shall pay interest (including post-petition
interest in any proceeding under any Bankruptcy Law) on overdue principal at
the rate equal to 1% per annum in excess of the then applicable interest rate
on the Notes to the extent lawful; it shall pay interest (including
post-petition interest in any proceeding under any Bankruptcy Law) on overdue
installments of interest (without regard to any applicable grace period) at the
same rate to the extent lawful.
Section 4.2. Maintenance of Office or Agency.
The Company shall maintain in the Borough of Manhattan, the
City of New York, an office or agency (which may be an office of the Trustee or
an affiliate of the Trustee, Registrar or co-registrar) where principal,
premium, if any, and interest on the Notes will be paid and where Notes may be
surrendered for registration of transfer or for exchange and where notices and
demands to or upon the Company in respect of the Notes and this Indenture may
be served. The Company shall give prompt written notice to the Trustee of the
location, and any change in the location, of such office or agency. If at any
time the Company shall fail to maintain any such required office or agency or
shall fail to furnish the Trustee with the address thereof, such
<PAGE> 38
38
presentations, surrenders, notices and demands may be made or served at the
Corporate Trust Office of the Trustee.
The Company may also from time to time designate one or more
other offices or agencies where the Notes may be presented or surrendered for
any or all such purposes and may from time to time rescind such designations;
provided, however, that no such designation or rescission shall in any manner
relieve the Company of its obligation to maintain an office or agency in the
Borough of Manhattan, the City of New York for such purposes. The Company
shall give prompt written notice to the Trustee of any such designation or
rescission and of any change in the location of any such other office or
agency.
The Company hereby designates the following office of an
Affiliate of the Trustee as one such office or agency of the Company in
accordance with Section 2.3: Harris Trust Company of New York, 77 Water
Street, New York, New York 10005.
Section 4.3. Reports.
(a) To the extent permitted by the Exchange Act, the
Company shall file with the Commission and provide, within 15 days after such
filing, the Trustee and Holders and prospective Holders (upon request) with the
annual reports and the information, documents and other reports that are
specified in Sections 13 and 15(d) of the Exchange Act. In the event that the
Company is not permitted to file such reports, documents and information with
the Commission, the Company will provide substantially similar information to
the Trustees, the Holders and prospective Holders (upon request) as if the
Company were subject to the reporting requirements of Section 13 or 15(d) of
the Exchange Act. The Company shall at all times comply with TIA Section
314(a)
(b) The Company shall be deemed to have satisfied the
provisions of Section 4.3(a) if the Parent files and provides reports,
documents and information of the types otherwise so required, in each case
within the applicable time periods, and the Company is not required to file
such reports, documents and information separately under the applicable rules
and regulations of the Commission (after giving effect to any exemptive relief)
because of the filings by the Parent.
Section 4.4. Compliance Certificate.
(a) Each of the Parent and the Company shall deliver to
the Trustee, within 90 days after the end of each fiscal year, an Officers'
Certificate stating that a review of the activities of the Parent and its
Subsidiaries and the Company and its Subsidiaries, as the case may be, during
the preceding fiscal year has been made under the supervision of the signing
Officers with a view to determining whether the Parent or the Company, as the
case may be, has kept, observed, performed and fulfilled its
<PAGE> 39
39
obligations under this Indenture, and further stating, as to each such Officer
signing such certificate, that to the best of his or her knowledge the Parent
or the Company, as the case may be, has kept, observed, performed and fulfilled
each and every covenant contained in this Indenture and is not in default in
the performance or observance of any of the terms, provisions and conditions of
this Indenture (or, if a Default or Event of Default shall have occurred,
describing all such Defaults or Events of Default of which he or she may have
knowledge and what action the Parent or the Company, as the case may be, is
taking or proposes to take with respect thereto) and that to the best of his or
her knowledge no event has occurred and remains in existence by reason of which
payments on account of the principal of, premium, if any, or interest on the
Notes is prohibited or if such event has occurred, a description of the event
and what action the Parent or the Company, as the case may be, is taking or
proposes to take with respect thereto. As of the date hereof, each of the
Parent's and the Company's fiscal year ends on December 31 of each calendar
year. In the event the Company changes its fiscal year, it shall promptly
notify the Trustee of such change.
(b) So long as not contrary to the then current
recommendations of the American Institute of Certified Public Accountants, the
fiscal year-end financial statements delivered pursuant to Section 4.3(a) above
shall be accompanied by a written statement of the Parent's or the Company's,
as the case may be, independent public accountants (who shall be a firm of
established national reputation) that in making the examination necessary for
certification of such financial statements, nothing has come to their attention
that would lead them to believe that the Company has violated any provisions of
Article 4 or Article 5 hereof or, if any such violation has occurred,
specifying the nature and period of existence thereof, it being understood that
such accountants shall not be liable directly or indirectly to any Person for
any failure to obtain knowledge of any such violation.
(c) The Company shall, so long as any of the Notes are
outstanding, deliver to the Trustee, within five Business Days of any Officer
becoming aware of any Default or Event of Default, an Officers' Certificate
specifying such Default or Event of Default and what action the Company is
taking or proposes to take with respect thereto.
Section 4.5. Taxes.
The Company shall pay, and shall cause each of its
Subsidiaries to pay, prior to delinquency all material taxes, assessments, and
governmental levies except such as are contested in good faith and by
appropriate proceedings or where the failure to effect such payment is not
adverse in any material respect to the Holders of the Notes.
<PAGE> 40
40
Section 4.6. Stay, Extension and Usury Laws.
Each of the Company, the Parent and the Subsidiary Guarantors
covenants (to the extent that it may lawfully do so) that it shall not at any
time insist upon, plead, or in any manner whatsoever claim or take the benefit
or advantage of, any stay, extension or usury law wherever enacted, now or at
any time hereafter in force, that may affect the covenants or the performance
of this Indenture; and each of the Company, the Parent and the Subsidiary
Guarantors (to the extent that it may lawfully do so) hereby expressly waives
all benefit or advantage of any such law, and covenants that it shall not, by
resort to any such law, hinder, delay or impede the execution of any power
herein granted to the Trustee, but shall suffer and permit the execution of
every such power as though no such law has been enacted.
Section 4.7. Restricted Payments.
The Company shall not and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any other payment or distribution on account of the Company's
Equity Interests (including, without limitation, any payment to holders of the
Company's Equity Interests in connection with any merger or consolidation
involving the Company) or to the direct or indirect holders of the Company's
Equity Interests in their capacity as such (other than dividends or
distributions (a) payable in Equity Interests (other than Disqualified Stock)
of the Company, (b) to the extent necessary to permit the Parent to pay
overhead, tax liabilities,, legal, accounting or other professional fees and
expenses and any fees and expenses associated with registration statements
filed with the Commission and subsequent ongoing public reporting requirements,
in each case to the extent actually incurred by the Parent in connection with
acting as a holding company for the Company and its Subsidiaries or (c) to the
extent necessary to permit the Parent to perform its obligations to pay fees,
expenses and indemnification under Sections [5.4, 5.5, 5.15, 8.3, 9.2 and 9.3]
of the Stock Purchase Agreement; (ii) purchase, redeem, defease or otherwise
acquire or retire for value any Equity Interests of the Company or any direct
or indirect parent or other Affiliate of the Company that is not a Wholly Owned
Restricted Subsidiary of the Company; (iii) make any principal payment on, or
purchase, redeem, defease or otherwise acquire or retire for value any
Indebtedness that is subordinated to the Notes, except any scheduled principal
payment or sinking fund payment or at final maturity; or (iv) make any
Restricted Investment (all such payments and other actions set forth in clauses
(i) through (iv) above being collectively referred to as "Restricted
Payments"), unless, at the time of and after giving effect to such Restricted
Payment:
<PAGE> 41
41
(a) no Default or Event of Default shall have occurred
and be continuing or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted
Payment and after giving pro forma effect thereto as if such
Restricted Payment had been made at the beginning of the applicable
four-quarter period, have been permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio
test set forth in the first paragraph of Section 4.9 hereof; and
(c) such Restricted Payment, together with the aggregate
of all other Restricted Payments made by the Company and its
Restricted Subsidiaries after the date of this Indenture (excluding
Restricted Payments permitted by clauses (2), (3), (5) and (6) of the
next succeeding paragraph), is less than the sum of (i) 50% of the
Consolidated Net Income of the Company for the period (taken as one
accounting period) from the beginning of the first month after the
date of this Indenture to the end of the Company's most recently ended
fiscal quarter for which internal financial statements are available
at the time of such Restricted Payment (or, if such Consolidated Net
Income for such period is a deficit, less 100% of such deficit), plus
(ii) 100% of the aggregate net cash proceeds received by the Company
since the date of this Indenture (A) as capital contributions to the
Company (other than from a Subsidiary of the Company or from the
Rights Offering or the Standby Commitment) and (B) from the issue,
sale or exercise since the date of this Indenture of Equity Interests
in the Company or the Parent or of debt securities of the Company or
the Parent that have been converted into or exchanged for such Equity
Interests (other than Equity Interests (or convertible debt
securities) sold to a Subsidiary of the Company and other than
Disqualified Stock or debt securities that have been converted into
Disqualified Stock), plus (iii) to the extent that any Restricted
Investment that was made after the date of this Indenture is sold for
cash or otherwise liquidated or repaid for cash, the lesser of (A) the
net proceeds of such sale, liquidation or repayment and (B) the
initial amount of such Restricted Investment, plus (iv) the amount
equal to the net reduction in Investments in Unrestricted Subsidiaries
resulting from (A) payments of dividends or interest or other
transfers of assets to the Company or any Restricted Subsidiary from
Unrestricted Subsidiaries, (B) the redesignation of Unrestricted
Subsidiaries as Restricted Subsidiaries or (C) the receipt of proceeds
by the Company or any Restricted Subsidiary from the sale or other
disposition of any portion of any Investment in an Unrestricted
Subsidiary not to exceed the amount of Investments previously made by
the Company or any Restricted Subsidiary in such Unrestricted
Subsidiary, which
<PAGE> 42
42
amount was included in the calculation of the amount of Restricted
Payments.
The foregoing provisions shall not prohibit (1) the payment of
any dividend within 60 days after the date of declaration thereof, if at said
date of declaration such payment would have complied with the provisions of
this Indenture and such dividend (a) shall be deemed paid on the date of such
date of declaration for purposes of clauses (a) and (b) in the next preceding
paragraph and (b) shall be included in the determination of Restricted Payments
pursuant to clause (c) of the preceding paragraph only when declared and not
when paid; (2) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of the Company in exchange for, or out of the proceeds of,
the substantially concurrent sale (other than to a Subsidiary of the Company)
of other Equity Interests of the Company (other than any Disqualified Stock);
provided that the amount of any such net cash proceeds that are utilized for
any such redemption, repurchase, retirement or other acquisition shall be
excluded from clause (c)(ii) of the preceding paragraph; (3) the defeasance,
redemption or repurchase of Subordinated Indebtedness with the net cash
proceeds from an incurrence of subordinated Permitted Refinancing Debt or the
substantially concurrent sale (other than to a Subsidiary of the Company) of
Equity Interests of the Company or the Parent (other than Disqualified Stock);
provided that the amount of any such net cash proceeds that are utilized for
any such redemption, repurchase, retirement or other acquisition shall be
excluded from clause (c)(ii) of the preceding paragraph; (4) the repurchase,
redemption or other acquisition or retirement for value of any Equity Interests
of the Company, the Parent or any Subsidiary of the Company (x) held by any of
the Company's (or any of its Subsidiaries') employees pursuant to any
management equity subscription agreement, stock option agreement or any other
agreement with such employee, or (y) in connection with a tender offer to
eliminate odd lots of such Equity Interests; provided that the aggregate price
paid for all such repurchased, redeemed, acquired or retired Equity Interests
shall not exceed $2.0 million in any fiscal year (plus the aggregate cash
proceeds received by the Company during such fiscal year from any issuance of
Equity Interests by the Company or the Parent to any Permitted Investors or
employee of the Company or any of its Subsidiaries); and provided further that
no Default or Event of Default shall have occurred and be continuing
immediately after such transaction; (5) repurchases of Equity Interests deemed
to occur upon exercise of stock options if such Equity Interests represent a
portion of the exercise price of such options; (6) the defeasance, redemption,
repurchase or repayment of the Existing Debt if any of the Existing Debt is
subordinated to the Notes.
The amount of all Restricted Payments (other than cash) shall
be the fair market value (as determined in good faith by a resolution of the
Board of Directors of the Company set forth in an Officers' Certificate
delivered to the Trustee, which
<PAGE> 43
43
determination shall be conclusive evidence of compliance with this provision)
on the date of the Restricted Payment of the asset(s) proposed to be
transferred by the Company or the applicable Restricted Subsidiary, as the case
may be, pursuant to the Restricted Payment. Not later than ten days after the
date of making any Restricted Payment, the Company shall deliver to the Trustee
an Officers' Certificate stating that such Restricted Payment is permitted and
setting forth the basis upon which the calculations required by this Section
4.7 were computed.
In computing Consolidated Net Income for purposes of this
Section 4.7, (i) the Company shall use audited financial statements for the
portion of the relevant period for which audited financial statements are
available on the date of determination and unaudited financial statements and
other current financial data based on the books and records of the Company for
the remaining portion of such period and (ii) the Company shall be permitted to
rely in good faith on the financial statements and other financial data derived
from the books and records of the Company that are available on the date of
determination. If the Company makes a Restricted Payment which, at the time of
the making of such Restricted Payment, would on the good faith determination of
the Company be permitted under the requirements of this Indenture, such
Restricted Payment shall be deemed to have been made in compliance with this
Indenture notwithstanding any subsequent adjustments made in good faith to the
Company's financial statements affecting Consolidated Net Income of the Company
for any period.
The Board of Directors may designate any Restricted Subsidiary
to be an Unrestricted Subsidiary if such designation would not cause a Default.
For purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash)
in the Subsidiary so designated shall be deemed to be Restricted Payments at
the time of such designation and shall reduce the amount available for
Restricted Payments under clause (c) of the first paragraph of this covenant
and/or the applicable provisions of the second paragraph of this covenant, as
appropriate. All such outstanding Investments shall be deemed to constitute
Investments in an amount equal to the fair market value of such Investments at
the time of such designation. Such designation shall only be permitted if such
Restricted Payment would be permitted at such time and if such Restricted
Subsidiary otherwise meets the definition of an Unrestricted Subsidiary.
Section 4.8. Dividend and Other Payment Restrictions
Affecting Subsidiaries.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause
or suffer to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to (i)(x) pay dividends or make any other
<PAGE> 44
44
distributions to the Company or any of its Restricted Subsidiaries (1) on its
Capital Stock or (2) with respect to any other interest or participation in, or
measured by, its profits, or (y) pay any indebtedness owed by it to the Company
or any of its Restricted Subsidiaries, (ii) make loans or advances to the
Company or any of its Restricted Subsidiaries or (iii) transfer any of its
properties or assets to the Company or any of its Restricted Subsidiaries,
except for such encumbrances or restrictions existing under or by reason of (a)
the Credit Agreement as in effect as of the date of this Indenture, and any
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings thereof or any other Credit Facility,
provided that such amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements, refinancings or other Credit
Facilities are no more restrictive with respect to such dividend and other
payment restrictions than those contained in the Credit Agreement as in effect
on the date of this Indenture, (b) this Indenture and the Senior Subordinated
Notes Indenture and the Notes and the Senior Subordinated Notes, (c) applicable
law, (d) any instrument governing Indebtedness or Capital Stock of a Person
acquired by the Company or any of its Restricted Subsidiaries as in effect at
the time of such acquisition (except, in the case of Indebtedness, to the
extent such Indebtedness was incurred in connection with or in contemplation of
such acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person and
its Subsidiaries, or the property or assets of the Person and its Subsidiaries,
so acquired, provided that, in the case of Indebtedness, such Indebtedness was
permitted by the terms of this Indenture to be incurred, (e) by reason of
customary non-assignment provisions in leases entered into in the ordinary
course of business and consistent with past practices, (f) capital leases and
purchase money obligations for property leased or acquired in the ordinary
course of business that impose restrictions of the nature described in clause
(iii) above on the property so leased or acquired, (g) restrictions in the form
of Liens which are not prohibited pursuant to Section 4.12 and which are
customary limitations on the transfer of collateral and customary restrictions
contained in stock purchase agreements or asset sales agreements limiting the
transfer of assets pending the closing of the sale or (h) Permitted Refinancing
Debt, provided that the restrictions contained in the agreements governing such
Permitted Refinancing Debt are no more restrictive than those contained in the
agreements governing the Indebtedness being refinanced.
Section 4.9. Incurrence of Indebtedness and Issuance of
Disqualified Stock.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly, create incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to
<PAGE> 45
45
(collectively, "incur") any Indebtedness (including Acquired Debt) and the
Company shall not and shall not permit any of its Restricted Subsidiaries to,
issue any Disqualified Stock; provided, however, subject to the limitations set
forth below, the Company and the Subsidiary Guarantors may incur Indebtedness
(including Acquired Debt) or issue shares of Disqualified Stock if:
(i) the Fixed Charge Coverage Ratio for the Company's
most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on
which such additional Indebtedness is incurred or such Disqualified
Stock is issued would have been at least 2.5 to 1, determined on a pro
forma basis as set forth in the definition of Fixed Charge Coverage
Ratio; and
(ii) no Default or Event of Default shall have occurred
and be continuing at the time such additional Indebtedness is incurred
or such Disqualified Stock is issued or would occur as a consequence
of the incurrence of the additional Indebtedness or the issuance of
the Disqualified Stock.
Notwithstanding the foregoing, this Indenture shall not
prohibit any of the following (collectively, "Permitted Indebtedness"): (a)
the Indebtedness evidenced by the Notes and the Senior Subordinated Notes; (b)
the incurrence by the Company of Indebtedness pursuant to Credit Facilities, so
long as the aggregate principal amount of all Indebtedness outstanding under
all Credit Facilities does not, at any one time, exceed the greater of (1) $500
million or (2) the Borrowing Base; (c) the guarantee by any Restricted
Subsidiary (including any Subsidiary Guarantor) of any Indebtedness that is
permitted by this Indenture to be incurred by the Company; provided that such
Subsidiary, if not a Subsidiary Guarantor, becomes a Subsidiary Guarantor
hereunder; (d) all Indebtedness of the Company and its Restricted Subsidiaries
in existence as of the date of the Indenture after giving effect to the
Recapitalization and the application of the proceeds thereof; (e) intercompany
Indebtedness between or among the Company, the Parent and any of the Company's
Restricted Subsidiaries; provided, however, that (i) if the Company is the
obligor on such Indebtedness, such Indebtedness is expressly subordinate to the
payment in full of all Obligations with respect to the Notes and (ii)(A) any
subsequent issuance or transfer of Equity Interests that results in any such
Indebtedness being held by a Person other than the Company, the Parent or a
Restricted Subsidiary and (B) any sale or other transfer of any such
Indebtedness to a Person that is not the Company, the Parent or a Restricted
Subsidiary shall be deemed, in each case, to constitute an incurrence of such
Indebtedness by the Company or such Restricted Subsidiary, as the case may be;
(f) Indebtedness of the Company or any Restricted Subsidiary related to any
Permitted marketing Transaction
<PAGE> 46
46
including, without limitation, under letters of credit or guarantees of
Indebtedness or other obligations of a party to a Permitted Marketing
Transaction, provided, that in the event that the Company or any Restricted
Subsidiary guarantees such Indebtedness or other obligations of another party,
then either (1) the Person who is obligated to purchase hydrocarbons from such
party has an investment grade credit rating from S&P or Moody's, or in lieu
thereof, a Person guaranteeing the payment of such obligated Person has an
investment grade credit rating from S&P or Moody's or (2) such Person posts, or
has posted for it, a letter of credit in favor of the Company or such
Subsidiary Guarantor with respect to all of such Person's obligations under
such contracts, (g) in addition to Indebtedness under any Credit Facility,
Indebtedness in connection with one or more standby letters of credit,
guarantees, performance bonds or other reimbursement obligations, in each case,
issued in the ordinary course of business and not in connection with the
borrowing of money or the obtaining of advances or credit (other than advances
or credit on open account, includible in current liabilities, for goods and
services in the ordinary course of business and on terms and conditions which
are customary in the Oil and Gas Business, and other than the extension of
credit represented by such letter of credit guarantee or performance bond
itself), not to exceed in the aggregate at any given time outstanding 5.0% of
Total Assets; (h) Indebtedness under Interest Rate Hedging Agreements entered
into for the purpose of limiting interest rate risks, provided that the
obligations under such agreements are related to payment obligations on
Indebtedness otherwise permitted by the terms of this covenant and that the
aggregate notional principal amount of such agreements does not exceed 105% of
the principal amount of the Indebtedness to which such agreements relate; (i)
Indebtedness under Oil and Gas Hedging Contracts, provided that such contracts
were entered into in the ordinary course of business for the purpose of
limiting risks that arise in the ordinary course of business of the Company and
its Subsidiaries; (j) the incurrence by the Company and Subsidiary Guarantors
of Indebtedness not otherwise permitted to be incurred pursuant to this
paragraph, provided that the aggregate principal amount (or accreted value, as
applicable) of all Indebtedness incurred pursuant to this clause (j), together
with all Permitted Refinancing Debt incurred pursuant to clause (k) of this
paragraph in respect of Indebtedness previously incurred pursuant to this
clause (j), does not exceed $25.0 million at any one time outstanding; (k)
Permitted Refinancing Debt incurred in exchange for, or the net proceeds of
which are used to refinance, extend, renew, replace, defease or refund,
Indebtedness that was permitted by this Indenture to be incurred (including
Indebtedness previously incurred pursuant to this clause (k)); or (l)
production imbalances arising in the ordinary course of business and consistent
with past practices.
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Section 4.10. Asset Sales.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries (other than MEV) to, engage in an Asset Sale unless (i)
the Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (as determined in good faith by a resolution of the Board of Directors of
the Company set forth in an Officers' Certificate delivered to the Trustee,
which determination shall be conclusive evidence of compliance with this
provision) of the assets or Equity Interests issued or sold or otherwise
disposed of and (ii) at least 80% of the consideration therefor received by the
Company or such Restricted Subsidiary (after deducting expenses associated with
such asset sale) is in the form of cash, Cash Equivalents, oil and gas
properties owned or held by another Person which are to be used in the Oil and
Gas Business of the Company or its Restricted Subsidiaries or any combination
thereof; provided that the amount of (x) any liabilities (as shown on the
Company's or such Restricted Subsidiary's most recent balance sheet or, with
respect to plugging and abandonment obligations and other similar liabilities,
in the notes thereto), of the Company or any Restricted Subsidiary (other than
contingent liabilities and liabilities that are by their terms subordinated to
the Notes or any guarantee thereof) that are assumed by the transferee of any
such assets pursuant to a customary novation agreement that releases the
Company or such Restricted Subsidiary from further liability and (y) any Liquid
Securities received by the Company or any such Restricted Subsidiary from such
transferee that are converted by the Company or such Restricted Subsidiary into
cash within 180 days after the closing such Asset Sale, shall be deemed to be
cash for purposes of this provision to the extent of the liabilities assumed or
cash received.
Within 360 days after the receipt of any Net Proceeds from an
Asset Sale, the Company may apply such Net Proceeds, at its option, for one or
more of the following purposes: (a) to reduce Senior Debt, (b) to make
Permitted Business Investments, (c) to acquire controlling interests in other
Oil and Gas Businesses to the extent such Investments are not Permitted
Business Investments, (d) to make capital expenditures in respect of the
Company's or its Restricted Subsidiaries' Oil and Gas Business, and (e) to
purchase assets that are used or useful in the Oil and Gas Business. Pending
the final application of any such Net Proceeds, the Company may temporarily
reduce Senior Debt that is revolving debt or otherwise invest such Net Proceeds
in any manner that is not prohibited by this Indenture. Any Net Proceeds from
Asset Sales that are not applied or invested as provided in the first sentence
of this paragraph shall (after the expiration of the periods specified in this
paragraph) be deemed to constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $10.0
million, the Company shall make an Asset Sale Offer to
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48
purchase the maximum principal amount of Notes and any other Pari Passu
Indebtedness to which the Asset Sale Offer applies that may be purchased out of
the Excess Proceeds, at an offer price in cash in an amount equal to, in the
case of any such Pari Passu Indebtedness, 100% of the principal amount thereof,
plus accrued and unpaid interest thereon to the date of purchase or, in the
case of the Notes, prior to ________ __, 2001, 100% of the Accreted Value
thereof on the date of purchase and thereafter, 100% of the principal amount of
the Notes, plus after ______ __, 2001, accrued but unpaid interest thereon, if
any, to the date of purchase, or, in the case of any other discount Pari Passu
Indebtedness, 100% of the accreted value thereof on the date of purchase, in
each case, in accordance with the procedures set forth in Section 3.9 hereof or
the agreements governing the Pari Passu Indebtedness, as applicable. To the
extent that the aggregate amount (or accreted value, as the case may be) of
Notes and Pari Passu Indebtedness tendered pursuant to an Asset Sale Offer is
less than the Excess Proceeds, the Company may use any remaining Excess
Proceeds for general corporate purposes and will no longer be considered
"Excess Proceeds" for the purposes of this Section 4.10. If the sum of (i) the
aggregate Accreted Value (or, if after _______ __, 2001, the principal amount)
of the Notes surrendered by the Holders thereof, and (ii) the aggregate
principal amount or accreted value, as the case may be, of other Pari Passu
Indebtedness surrendered by holders or lenders thereof, exceeds the amount of
Excess Proceeds, the Trustee and the trustee or other lender representatives
for the Pari Passu Indebtedness shall select the Notes and other Pari Passu
Indebtedness to be purchased on a pro rata basis, based on the aggregate
principal amount (or accreted value, as applicable) thereof surrendered in such
Asset Sale Offer.
Section 4.11. Transactions with Affiliates.
The Company shall not, and shall not permit any of its
Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into or make or amend any contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any of
its Affiliates (each of the foregoing, an "Affiliate Transaction"), unless (i)
such Affiliate Transaction is on terms that are no less favorable to the
Company or such Subsidiary, as the case may be, than would be available in a
comparable transaction by the Company or such Subsidiary in arm's length
dealings with an unrelated third party or, in the event no comparable
transaction with an unaffiliated Person is available, on terms that are fair
from a financial point of view to the Company or such Subsidiary, as the case
may be, (ii) with respect to an Affiliate Transaction or series of related
Affiliate Transactions involving in excess of $1,000,000 in the aggregate, the
Company delivers an Officers' Certificate to the Trustee certifying that such
Affiliate Transaction complies with clause (i) above, (iii) with respect to any
Affiliate Transaction or series of related Affiliate Transactions
<PAGE> 49
49
involving payments in excess of $5,000,000 but less than $15,000,000 in the
aggregate, the Company delivers an Officer's Certificate to the Trustee
certifying that (a) such Affiliate Transaction or series of related Affiliate
Transactions complies with clause (i) above and (b) such Affiliate Transaction
or series of related Affiliate Transactions has been approved by a resolution
adopted by a majority of the members of the Board of Directors of the Company
who are disinterested with respect to such Affiliate Transaction or series of
related Affiliate Transactions (which resolution shall be conclusive evidence
of compliance with this provision) and (iv) with respect to any Affiliate
Transaction or series of related Affiliate Transactions involving payments of
$15,000,000 or more in the aggregate, (A) the Company delivers an Officer's
Certificate certifying that (a) such Affiliate Transaction or series of related
Affiliate Transactions complies with clause (i) above and (b) such Affiliate
Transaction has been approved by a resolution adopted by a majority of the
members of the Board of Directors of the Company who are disinterested with
respect to such Affiliate Transaction and (B) the Company shall have received a
written opinion of a firm of investment bankers nationally recognized in the
Untied States that such Affiliate Transaction or series of related Affiliate
Transactions is fair from a financial point of view to the Company or such
Subsidiary (which resolution and fairness opinion shall be conclusive evidence
of compliance with this provision), provided, however, that the foregoing shall
not apply to (1) the Recapitalization, the payment of fees, expenses and
indemnifications under Sections 5.4, 5.5, 5.15, 8.3, 9.2 and 9.3 of the Stock
Purchase Agreement or any transaction effected pursuant to the terms of the
Series A Preferred Stock or Series B Preferred Stock as in effect on the date
of this Indenture [to be furthered specified], (2) Permitted Investments and
Restricted Payments that are permitted by Section 4.7 hereof, (3) loans or
advances to officers, directors and employees of the Company or any Subsidiary
made in the ordinary course of business and consistent with past practices of
the Company and its Subsidiaries not to exceed in the aggregate at any one time
outstanding $2.5 million, (4) the payment of reasonable and customary regular
fees to directors of the Company or any of its Subsidiaries who are not
employees of the Company or any Subsidiary, (5) any indemnification or similar
payment made to any director or officer (A) in accordance with the corporate
charter or by-laws of the Company or any Subsidiary, (B) under any agreement or
(C) under applicable law, (6) obligations of the Company or any Subsidiary
under employee compensation and other benefit arrangements entered into or
provided for in the ordinary course of business, (7) any transaction relating
to the disposition of the Company's Investment in MEV or (8) any transaction
among the Company and its Restricted Subsidiaries.
Section 4.12. Liens.
The Company shall not, and shall not permit any of its
Subsidiaries to, create, incur, assume or otherwise cause or
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50
suffer to exist or become effective any Lien (other than Permitted Liens) upon
any of its property or assets, now owned or hereafter acquired securing
Indebtedness (other than Senior Debt), unless prior to or contemporaneously
therewith the Notes are directly secured equally and ratably, provided that (i)
if such secured Indebtedness is Pari Passu Indebtedness, the Lien securing such
Pari Passu Indebtedness shall be subordinate and junior to, or pari passu with,
the Lien securing the Notes and (ii) if such secured Indebtedness is
Subordinated Indebtedness, the Lien securing such Subordinated Indebtedness
shall be subordinate and junior to the Lien securing the Notes at least to the
same extent as such Subordinated Indebtedness is subordinated to the Notes.
Section 4.13. Offer to Repurchase Upon Change of Control.
(a) Upon the occurrence of a Change of Control, each
Holder of Notes shall have the right to require the Company to repurchase all
or any part (equal to $1,000 or an integral multiple thereof) of such Holder's
Notes pursuant to the offer described below (the "Change of Control Offer") at
an offer price in cash equal to prior to ______, 2001, 101% of the Accreted
Value of the Notes on the date of purchase and, on ______, 2001 and thereafter,
101% of the aggregate principal amount thereof plus accrued and unpaid interest
if any, thereon to the date of purchase (the "Change of Control Payment").
Within 30 days following any Change of Control, the Company shall mail a notice
to each Holder stating: (1) describing the transaction or transactions that
constitute the Change of Control and (2) that the Change of Control Offer is
being made pursuant to this Section 4.13 and that all Notes tendered shall be
accepted for payment; (3) the purchase price and the purchase date described
below (the "Change of Control Payment Date"); (4) that any Note not tendered
shall continue to accrete or accrue interest, as the case may be, if any; (5)
that, unless the Company defaults in the payment of the Change of Control
Payment, all Notes accepted for payment pursuant to the Change of Control Offer
shall cease to accrue interest, if any, after the Change of Control Payment
Date; (6) that Holders electing to have any Notes purchased pursuant to a
Change of Control Offer shall be required to surrender the Notes, with the form
entitled "Option of Holder to Elect Purchase" on the reverse of the Notes
completed, to the Paying Agent at the address specified in the notice prior to
the close of business on the third Business Day preceding the Change of Control
Payment Date; (7) that Holders shall be entitled to withdraw their election if
the Paying Agent receives, not later than the close of business on the second
Business Day preceding the Change of Control Payment Date, a telegram, telex,
facsimile transmission or letter setting forth the name of the Holder, the
principal amount of Notes delivered for purchase, and a statement that such
Holder is withdrawing his election to have the Notes purchased; and (8) that
Holders whose Notes are being purchased only in part shall be issued new Notes
equal in principal amount
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51
to the unpurchased portion of the Notes surrendered, which unpurchased portion
must be equal to $1,000 in principal amount at maturity or an integral multiple
thereof. The Company, the Parent and each Subsidiary Guarantor shall comply
with the requirements of Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable to such party in connection with the repurchase of
the Notes as a result of a Change of Control.
(b) On a Business Day that is no earlier than 30 days nor
later than 60 days from the date that the Company mails or causes to be mailed
notice of the Change of Control to the Holders (the "Change of Control Payment
Date"), the Company shall, to the extent lawful, (i) accept for payment all
Notes or portions thereof properly tendered pursuant to the Change of Control
Offer, (ii) deposit with the Paying Agent an amount equal to the Change of
Control Payment in respect of all Notes or portions thereof so tendered and
(iii) deliver or cause to be delivered to the Trustee the Notes so accepted
together with an Officers' Certificate stating the aggregate principal amount
(or Accreted Value, if applicable) of Notes or portions thereof being purchased
by the Company. The Paying Agent shall promptly mail to each Holder of Notes
so tendered the Change of Control Payment for such Notes, and the Trustee shall
promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder a new Note equal in principal amount to any unpurchased portion of
the Notes surrendered, if any; provided that each such new Note shall be in a
principal amount of $1,000 or an integral multiple thereof. The Company shall
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
The Change of Control provisions described above shall be
applicable whether or not any other provisions of this Indenture are
applicable.
The Company shall not be required to make a Change of Control
Offer upon a Change of Control if a third party makes the Change of Control
Offer in the manner, at the times and otherwise in compliance with the
requirements set forth in this Section 4.13 and purchases all Notes (or
portions thereof) validly tendered and not withdrawn under such Change of
Control Offer.
Section 4.14. Additional Subsidiary Guarantees.
In the event that the Company or any of its Restricted
Subsidiaries shall acquire or create a Material Restricted Subsidiary after the
date of this Indenture, such newly acquired or created Material Restricted
Subsidiary shall be deemed to make the guarantee set forth in Section 11.1 and
the Company shall cause such Material Restricted Subsidiary to evidence such
guarantee in the manner set forth in Section 11.2. Notwithstanding the
foregoing, this Section 4.14 shall not apply
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to any newly acquired or created Subsidiary that has been properly designated
as an Unrestricted Subsidiary in accordance with this Indenture for so long as
it continues to constitute an Unrestricted Subsidiary.
Section 4.15. Corporate Existence.
Subject to Article 5 hereof, the Company, the Parent and the
Restricted Subsidiaries shall do or cause to be done all things necessary to
preserve and keep in full force and effect (i) its corporate existence, and the
corporate, partnership or other existence of each of the Restricted
Subsidiaries, in accordance with the respective organizational documents (as
the same may be amended from time to time) of the Company or any such
Restricted Subsidiary and (ii) the rights (charter, partnership agreement and
statutory), licenses and franchises of the Company, the Parent and the
Restricted Subsidiaries; provided, however, that the Company, the Parent and
the Restricted Subsidiaries shall not be required to preserve any such right,
license or franchise, or the corporate, partnership or other existence of any
of the Restricted Subsidiaries, if the Board of Directors of the relevant
Person shall determine that the preservation thereof is no longer desirable in
the conduct of the business of the Company and the Restricted Subsidiaries,
taken as a whole, and that the loss thereof is not adverse in any material
respect to the Holders of the Notes.
Section 4.16. No Senior Subordinated Debt.
Notwithstanding the provisions of Section 4.9 hereof, (i) the
Company shall not incur, create, issue, assume, guarantee or otherwise become
liable for any Indebtedness that is subordinate or junior in right of payment
to any Senior Debt and senior in any respect in right of payment to the Notes
and (ii) the Parent and the Subsidiary Guarantors shall not directly or
indirectly incur, create, issue, assume, guarantee or otherwise become liable
for any Indebtedness that is subordinate or junior in right of payment to any
guarantees issued in respect of Senior Debt and senior in any respect in right
of payment to the Guarantees; provided, however, that the foregoing limitations
shall not apply to distinctions between categories of Indebtedness that exist
by reason of any Liens arising or created in respect of some but not all such
Indebtedness.
Section 4.17. Business Activities.
The Company and the Parent shall not, and shall not permit any
Subsidiary to, engage in any material respect in any business other than the
Oil and Gas Business.
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ARTICLE 5
SUCCESSORS
Section 5.1. Merger, Consolidation, or Sale of
Substantially All Assets.
The Company shall not consolidate or merge with or into
(whether or not the Company is the surviving corporation), or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets, in one or more related transactions, to another Person,
and the Company may not permit any of its Restricted Subsidiaries to enter into
any such transaction or series of transactions if such transaction or series of
transactions would, in the aggregate, result in a sale, assignment, transfer,
lease, conveyance, or other disposition of all or substantially all of the
properties or assets of the Company to another Person, unless (i) the Company
is the surviving corporation of any such consolidation or merger or (a) the
Person formed by or surviving any such consolidation or merger (if other than
the Company) or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made (the "Surviving Entity") is a
corporation organized or existing under the laws of the United States, any
state thereof or the District of Columbia and (b) such Surviving Entity assumes
all the obligations of the Company under the Notes and the Indenture pursuant
to a supplemented indenture in a form reasonably satisfactory to the Trustee;
(ii) immediately before and after giving effect to such transaction no Default
or Event of Default exists; (iii) immediately after giving effect to such
transaction on a pro forma basis (and treating any Indebtedness not previously
an obligation of the Company or any Subsidiary Guarantor which becomes the
obligation of the Company or any Subsidiary Guarantor as a result of such
transaction as having been incurred at the time of such transaction), the
Consolidated Net Worth of the Company or the Surviving Entity (if the Company
is not the continuing obligor under this Indenture) is equal to or greater than
the Consolidated Net Worth of the Company immediately prior to such transaction
and (iv) except in the case of a merger of the Company with or into a Wholly
Owned Restricted Subsidiary of the Company, the Company or Surviving Entity (if
the Company is not the continuing obligor under the Indenture) will, at the
time of such transaction and after giving pro forma effect thereto as if such
transaction had occurred at the beginning of the applicable four-quarter
period, be permitted to incur at least $1.00 of additional Indebtedness
pursuant to the test set forth in the first paragraph of Section 4.9 hereof.
Notwithstanding the foregoing clauses (iii) and (iv), (a) any Restricted
Subsidiary may consolidate with, merge into or transfer all or part of its
properties and assets to the Company and (b) the Company may merge with an
Affiliate incorporated solely for the purpose of reincorporating in another
jurisdiction.
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Section 5.2. Successor Corporation Substituted.
Upon any consolidation or merger, or any sale, assignment,
transfer, lease, conveyance or other disposition of all or substantially all of
the assets of the Company in accordance with Section 5.1 hereof, the Surviving
Entity shall succeed to, and be substituted for (so that from and after the
date of such consolidation, merger, sale, lease, conveyance or other
disposition, the provisions of this Indenture referring to the "Company" shall
refer instead to the Surviving Entity and not to the Company), and may exercise
every right and power of the Company under this Indenture with the same effect
as if such successor Person had been named as the Company herein; provided,
however, that the predecessor Company shall not be relieved from the obligation
to pay the principal of and interest on the Notes except in the case of a sale
of all of the Company's assets that meets the requirements of Section 5.1
hereof.
ARTICLE 6
DEFAULTS AND REMEDIES
Section 6.1. Events of Default.
An "Event of Default" occurs if:
(1) the Company defaults in the payment of interest, if
any, on the Notes when the same becomes due and payable and the
Default continues for a period of 30 days, whether or not such payment
is prohibited by the provisions of Article 10 hereof;
(2) the Company defaults in the payment of the Stated
Price of or premium, if any, on the Notes when the same become due and
payable at maturity, upon redemption or otherwise, whether or not such
payment is prohibited by the provisions of Article 10 hereof or of
Article 10 of the Senior Subordinated Note Indenture, as the case may
be;
(3) the Company fails to observe or perform any covenant,
condition or agreement on the part of the Company to be observed or
performed pursuant to Article 5 hereof.
(4) the Company fails to observe or perform any covenant,
condition or agreement on the part of the Company to be observed or
performed pursuant to Sections 4.3, 4.7, 4.8, 4.9, 4.10, 4.11, 4.12,
4.13, 4.14, 4.16 and 4.17 hereof and the Default continues for the
period and after the notice specified below;
(5) the Company fails to comply with any of its other
agreements or covenants in, or provisions of, the Notes or this
Indenture and the Default continues for consecutive days after the
notice specified below;
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(6) except as permitted herein, any Guarantee shall be
held in any judicial proceeding to be unenforceable or invalid or shall
cease for any reason to be in full force and effect or the Parent or a
Subsidiary Guarantor, or any Person acting on behalf of the Parent or
a Subsidiary Guarantor, shall deny or disaffirm the Parent's or such
Subsidiary Guarantor's obligation under its Guarantee;
(7) the Parent fails to issue Preferred Stock for gross
proceeds in the amount of $132 million pursuant to the Rights Offering
and Standby Commitment or either thereof within 90 days following the
original date of issuance of the Notes.
(8) a default occurs under any mortgage, indenture or
instrument under which there may be issued or by which there may be
secured or evidenced any Indebtedness for money borrowed by the
Company or any Subsidiary Guarantor, whether such Indebtedness now
exists or shall be created hereafter, which default (a) is caused by a
failure to pay such Indebtedness prior to the expiration of the grace
period after final maturity (a "Payment Default") or (b) results in
the acceleration of such Indebtedness prior to its final maturity and,
in each case, the principal amount of any such Indebtedness, together
with the principal amount of any other such Indebtedness under which
there is then existing a Payment Default or the maturity of which has
been so accelerated, aggregates $10.0 million or more; provided, that
if any such default is cured or waived or any such acceleration
rescinded, or such Indebtedness is repaid, within a period of 10 days
from the continuation of such default beyond the applicable grace
period or the occurrence of such acceleration, as the case may be,
such Event of Default under the Indenture and any consequential
acceleration of the Notes shall be automatically rescinded;
(9) a final judgment or order or final judgments or
orders are rendered against the Company or any Restricted Subsidiary
that are unsatisfied and that require the payment of money, either
individually or in an aggregate amount, that is more than $10.0
million over the coverage under applicable insurance policies and
either (a) a creditor has commenced an enforcement proceeding upon
such judgement (other than a judgement that is stayed by reason of
pending appeal or otherwise) or (b) a 60-day period transpired during
which a stay of such judgment, order, judgements or orders (by reason
of pending appeal or otherwise) was not in effect;
(10) the Company, the Parent or any Subsidiary Guarantor
pursuant to or within the meaning of any Bankruptcy Law:
(a) commences a voluntary case or proceeding,
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(b) consents to the entry of an order for relief
against it in an involuntary case or proceeding,
(c) consents to the appointment of a Custodian of
it or for all or substantially all of its property, or
(d) makes a general assignment for the benefit of
its creditors; or
(11) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that:
(a) is for relief against the Company, the Parent
or any Subsidiary Guarantor, in an involuntary case or
proceeding,
(b) appoints a Custodian of the Company, the
Parent or any Subsidiary Guarantor, or for all or
substantially all of the property of the Company, the Parent
or any Subsidiary Guarantor, or
(c) orders the liquidation of the Company, the
Parent or any Subsidiary Guarantor,
and in each case the order or decree remains unstayed and in effect
for 60 consecutive days.
The term "Custodian" means any receiver, trustee, assignee,
liquidator or similar official under any Bankruptcy Law.
A Default under clause (4) is not an Event of Default until
the Trustee notifies the Company, or the Holders of at least 25% in aggregate
principal amount at stated maturity of the then outstanding Notes notify the
Company and the Trustee, of the Default and the Company does not cure the
Default within 30 consecutive days after receipt of the notice. A Default
under clause (5) is not an Event of Default until the Trustee notifies the
Company, or the Holders of at least 25% in aggregate principal amount at stated
maturity of the then outstanding Notes notify the Company and the Trustee, of
the Default and the Company does not cure the Default within 60 days after
receipt of the notice. The notice must specify the Default, demand that it be
remedied and state that the notice is a "Notice of Default."
Section 6.2. Acceleration.
If an Event of Default (other than an Event of Default
specified in clauses (10) and (11) of Section 6.1 hereof) relating to the
Company, the Parent or any Subsidiary Guarantor occurs and is continuing, the
Trustee by notice to the Company, or the Holders of at least 25% in principal
amount of the then outstanding Notes by written notice to the Company and the
Trustee, may declare the unpaid principal amount of and any
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accrued and unpaid interest on all the Notes, or if such are Event of Default
shall occur prior to __________, 2001, the Accreted Value of the Notes, to be
due and payable immediately. If payment of the Notes is accelerated because of
an Event of Default, the Company or the Trustee shall notify the holders of
Designated Senior Debt of such acceleration. Upon such declaration such
principal (or, if prior to __________, 2001, Accreted Value) and interest shall
be due and payable immediately; provided, however, that so long as any
Designated Senior Debt or any commitment therefor is outstanding, any such
notice or declaration shall not become effective until the earlier of (a) five
Business Days after such notice is delivered to the representative for the
Designated Senior Debt or (b) the acceleration of any Designated Senior Debt
and thereafter, payments on the Notes pursuant to this Article 6 shall be made
only to the extent permitted pursuant to Article 10 herein. Notwithstanding
the foregoing, if any Event of Default specified in clause (10) or (11) of
Section 6.1 hereof relating to the Company, the Parent, or any Subsidiary
Guarantor occurs, such an amount shall ipso facto become and be immediately due
and payable without any declaration or other act or notice on the part of the
Trustee or any Holder.
After a declaration of acceleration under this Indenture, but
before a judgment or decree for payment of the money due on the Notes under
this Article 6 has been obtained by the Trustee, Holders of a majority in
aggregate principal amount or Accreted Value, as the case may be, of the then
outstanding Notes by written notice to the Company and the Trustee may rescind
an acceleration and its consequences if (i) the Company, the Parent or any
Subsidiary Guarantor has paid or deposited with the Trustee a sum sufficient to
pay (a) all sums paid or advanced by the Trustee under this Indenture and the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel and (b) all overdue interest on the Notes, if any, (ii)
the rescission would not conflict with any judgment or decree of a court of
competent jurisdiction and (iii) all existing Events of Default (except
nonpayment of principal, premium, if any, or interest that has become due
solely because of the acceleration) have been cured or waived.
Section 6.3. Other Remedies.
If an Event of Default occurs and is continuing, the Trustee
may pursue any available remedy to collect the payment of principal, premium,
if any, and interest on the Notes or to enforce the performance of any
provision of the Notes or this Indenture.
The Trustee may maintain a proceeding even if it does not
possess any of the Notes or does not produce any of them in the proceeding. A
delay or omission by the Trustee or any Holder of a Note in exercising any
right or remedy accruing upon an Event of Default shall not impair the right or
remedy or
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constitute a waiver of or acquiescence in the Event of Default. All remedies
are cumulative to the extent permitted by law.
Section 6.4. Waiver of Past Defaults.
Holders of not less than a majority in aggregate principal
amount of the Notes then outstanding by notice to the Trustee may on behalf of
the Holders of all of the Notes waive an existing Default or Event of Default
and its consequences hereunder, except a continuing Default or Event of Default
in the payment of principal of, premium and Liquidated Damages, if any, or
interest on, the Notes (including in connection with an offer to purchase)
(provided, however, that the Holders of a majority in aggregate principal
amount of the then outstanding Notes may rescind an acceleration and its
consequences, including any related payment default that resulted from such
acceleration). Upon any such waiver, such Default shall cease to exist, and
any Event of Default arising therefrom shall be deemed to have been cured for
every purpose of this Indenture; but no such waiver shall extend to any
subsequent or other Default or impair any right consequent thereon.
Section 6.5. Control by Majority.
Holders of a majority in principal amount of the then
outstanding Notes may direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee or exercising any
trust or power conferred on it. However, the Trustee may refuse to follow any
direction that conflicts with law or this Indenture that the Trustee determines
may be unduly prejudicial to the rights of other Holders of Notes or that may
involve the Trustee in personal liability, it being understood that (subject to
Section 7.1) the Trustee shall have no duty to ascertain whether or not such
actions or forebearances are unduly prejudicial to such holders.
Section 6.6. Limitation on Suits.
A Holder of a Note may pursue a remedy with respect to this
Indenture or the Notes only if:
(a) the Holder of a Note gives to the Trustee written
notice of a continuing Event of Default;
(b) the Holders of at least 25% in principal amount of
the then outstanding Notes make a written request to the Trustee to
pursue the remedy;
(c) such Holder of a Note or Holders of Notes offer and,
if requested, provide to the Trustee indemnity satisfactory to the
Trustee against any loss, liability or expense;
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(d) the Trustee does not comply with the request within
60 days after receipt of the request and the offer and, if requested,
the provision of indemnity; and
(e) during such 60-day period the Holders of a majority
in principal amount of the then outstanding Notes do not give the
Trustee a direction inconsistent with the request.
A Holder of a Note may not use this Indenture to prejudice the rights of
another Holder of a Note or to obtain a preference or priority over another
Holder of a Note.
Section 6.7. Rights of Holders of Notes to Receive
Payment.
Notwithstanding any other provision of this Indenture, the
right of any Holder of a Note to receive payment of principal, premium, if any,
and interest on the Note, on or after the respective due dates expressed in the
Note (including in connection with an offer to purchase), or to bring suit for
the enforcement of any such payment on or after such respective dates, shall
not be impaired or affected without the consent of such Holder.
Section 6.8. Collection Suit by Trustee.
If an Event of Default specified in Section 6.1(1) or (2)
occurs and is continuing, the Trustee is authorized to recover judgment in its
own name and as trustee of an express trust against the Company, the Parent or
any Subsidiary Guarantor for the whole amount of principal of, premium, if any,
and interest remaining unpaid on the Notes and interest on overdue principal
and, to the extent lawful, interest and such further amount as shall be
sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel.
Section 6.9. Trustee May File Proofs of Claim.
The Trustee is authorized to file such proofs of claim and
other papers or documents as may be necessary or advisable in order to have the
claims of the Trustee (including any claim for the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel)
and the Holders of the Notes allowed in any judicial proceedings relative to
the Company, the Parent or any of the Subsidiary Guarantors (or any other
obligor upon the Notes), its creditors or its property and shall be entitled
and empowered to collect, receive and distribute any money or other property
payable or deliverable on any such claims and any custodian in any such
judicial proceeding is hereby authorized by each Holder to make such payments
to the Trustee, and in the event that the Trustee shall consent to the
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making of such payments directly to the Holders, to pay to the Trustee any
amount due to it for the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel, and any other amounts due the
Trustee under Section 7.7 hereof. To the extent that the payment of any such
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, and any other amounts due the Trustee under Section 7.7 hereof out
of the estate in any such proceeding, shall be denied for any reason, payment
of the same shall be secured by a Lien on, and shall be paid out of, any and
all distributions, dividends, money, securities and other properties that the
Holders may be entitled to receive in such proceeding whether in liquidation or
under any plan of reorganization or arrangement or otherwise. Nothing herein
contained shall be deemed to authorize the Trustee to authorize or consent to
or accept or adopt on behalf of any Holder any plan of reorganization,
arrangement, adjustment or composition affecting the Notes or the rights of any
Holder, or to authorize the Trustee to vote in respect of the claim of any
Holder in any such proceeding; provided, however, that the Trustee may, on
behalf of the Holders, vote for the election of a trustee in bankruptcy or
similar official and may be a member of the creditors' committee.
Section 6.10. Priorities.
If the Trustee collects any money pursuant to this Article, it
shall pay out the money in the following order:
First: to the Trustee, its agents and attorneys for amounts
due under Sections 6.8 and 7.7 hereof, including payment of all
compensation, expense and liabilities incurred, and all advances made,
by the Trustee and the costs and expenses of collection;
Second: to Holders of Notes for amounts due and unpaid on the
Notes for principal, premium, if any, and accrued interest, ratably,
without preference or priority of any kind, according to the amounts
due and payable on the Notes for principal, premium, if any, and
accrued interest, as the case may be, respectively; and
Third: to the Company or to such party as a court of
competent jurisdiction shall direct.
The Trustee may fix a record date and payment date for any
payment to Holders of Notes pursuant to this Section 6.10.
Section 6.11. Undertaking for Costs.
In any suit for the enforcement of any right or remedy under
this Indenture or in any suit against the Trustee for any action taken or
omitted by it as a Trustee, a court in its discretion may require the filing by
any party litigant in the
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suit of an undertaking to pay the costs of the suit, and the court in its
discretion may assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in the suit, having due regard to the merits and
good faith of the claims or defenses made by the party litigant. This Section
does not apply to a suit by the Trustee, a suit by a Holder of a Note pursuant
to Section 6.7 hereof, or a suit by Holders of more than 10% in principal
amount of the then outstanding Notes.
ARTICLE 7
TRUSTEE
Section 7.1. Duties of Trustee.
(a) If an Event of Default has occurred and is
continuing, the Trustee shall exercise such of the rights and powers vested in
it by this Indenture, and use the same degree of care and skill in its
exercise, as a prudent man would exercise or use under the circumstances in the
conduct of his own affairs.
(b) Except during the continuance of an Event of Default:
(i) the duties of the Trustee shall be determined
solely by the express provisions of this Indenture and the Trustee
need perform only those duties that are specifically set forth in this
Indenture and no others, and no implied covenants or obligations shall
be read into this Indenture against the Trustee; and
(ii) in the absence of bad faith on its part, the
Trustee may conclusively rely, as to the truth of the statements and
the correctness of the opinions expressed therein, upon any notices,
requests, statements, certificates or opinions furnished to the
Trustee and conforming to the requirements of this Indenture.
However, the Trustee shall examine the certificates and opinions to
determine whether or not they conform to the requirements of this
Indenture.
(c) The Trustee may not be relieved from liabilities for
its own negligent action, its own negligent failure to act, or its own willful
misconduct, except that:
(i) this paragraph does not limit the effect of
paragraph (b) of this Section;
(ii) the Trustee shall not be liable for any error of
judgment made in good faith by a Responsible Officer, unless it is
proved that the Trustee was negligent in ascertaining the pertinent
facts; and
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(iii) the Trustee shall not be liable with respect to any
action it takes or omits to take in good faith in accordance with a
direction received by it pursuant to Section 6.5 hereof.
(d) Whether or not therein expressly so provided, every
provision of this Indenture that in any way relates to the Trustee is subject
to paragraphs (a), (b), and (c) of this Section.
(e) No provision of this Indenture shall require the
Trustee to expend or risk its own funds or incur any liability. The Trustee
shall be under no obligation to exercise any of its rights and powers under
this Indenture at the request of any Holders, unless such Holder shall have
furnished to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
(f) The Trustee shall not be liable for interest on any
money received by it except as the Trustee may agree in writing with the
Company. Money held in trust by the Trustee need not be segregated from other
funds except to the extent required by law.
Section 7.2. Rights of Trustee.
(a) The Trustee may conclusively rely upon any document
believed by it to be genuine and to have been signed or presented by the proper
Person. The Trustee need not investigate any fact or matter stated in the
document.
(b) Before the Trustee acts or refrains from acting, it
may require an Officers' Certificate or an Opinion of Counsel or both. The
Trustee shall not be liable for any action it takes or omits to take in good
faith in reliance on such Officers' Certificate or Opinion of Counsel. The
Trustee may consult with counsel and the written advice of such counsel or any
Opinion of Counsel shall be full and complete authorization and protection from
liability in respect of any action taken, suffered or omitted by it hereunder
in good faith and in reliance thereon.
(c) The Trustee may act through its attorneys and agents
and shall not be responsible for the misconduct or negligence of any agent
appointed with due care.
(d) The Trustee shall not be liable for any action it
takes or omits to take in good faith that it believes to be authorized or
within the rights or powers conferred upon it by this Indenture.
(e) Unless otherwise specifically provided in this
Indenture, any demand, request, direction or notice from the Company, the
Parent or any Subsidiary Guarantor shall be
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sufficient if signed by an Officer of the Company, the Parent or such
Subsidiary Guarantor.
(f) The Trustee shall be under no obligation to exercise
any of the rights or powers vested in it by this Indenture at the request or
direction of any of the Holders unless such Holders shall have furnished to the
Trustee reasonable security or indemnity against the costs, expenses and
liabilities that might be incurred by it in compliance with such request or
direction.
(g) Except with respect to Sections 4.1 and 4.4 hereof,
the Trustee shall have no duty to inquire as to the performance of the
Company's and the Parent's covenants in Article 4 hereof. In addition, the
Trustee shall not be deemed to have knowledge of any Default or Event of
Default except (i) any Event of Default occurring pursuant to Sections 4.1, 4.4
and 6.1(1) or (2) hereof or (ii) any Default or Event of Default of which the
Trustee shall have received written notification or obtained actual knowledge.
For the purposes of this clause (g) only, "actual knowledge" shall mean the
actual fact or statement of knowing, without any duty to make investigation
with regard thereto.
(h) The Trustee shall not be required to give any bond or
surety in respect of the performance of its powers and duties hereunder.
(i) the Trustee shall not be bound to ascertain or inquire as
to the performance or observance of any covenants, conditions, or agreements on
the part of the Company, except as otherwise set forth herein, but the Trustee
may require of the Company full information and advice as to the performance of
the covenants, conditions and agreements contained herein and shall be entitled
in connection herewith to examine the books, records and premises of the
Company.
(j) The permissive rights o the Trustee perform the acts
enumerated in this Indenture shall not be construed as a duty and the Trustee
shall not be answerable for other than its negligence or willful misconduct.
Section 7.3. Individual Rights of Trustee.
The Trustee in its individual or any other capacity may become
the owner or pledgee of Notes and may otherwise deal with the Company, the
Parent, the Subsidiary Guarantors or any Affiliate of the Company or the Parent
with the same rights it would have if it were not Trustee. However, in the
event that the Trustee acquires any conflicting interest it must eliminate such
conflict within 90 days, apply to the Commission for permission to continue as
trustee or resign. Any Agent may do the same with like rights and duties. The
Trustee is also subject to Sections 7.10 and 7.11 hereof.
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Section 7.4. Trustee's Disclaimer.
The Trustee shall not be responsible for and makes no
representation as to the validity or adequacy of this Indenture, the Notes, or
the Guarantees, it shall not be accountable for the Company's use of the
proceeds from the Notes or any money paid to the Company or upon the Company's
direction under any provision of this Indenture, it shall not be responsible
for the use or application of any money received by any Paying Agent other than
the Trustee, and it shall not be responsible for any statement or recital
herein or in any certificate delivered pursuant hereto or any statement in the
Notes or any other document in connection with the sale of the Notes or
pursuant to this Indenture other than its certificate of authentication.
Section 7.5. Notice of Defaults.
If a Default or Event of Default occurs and is continuing and
if it is actually known to the Trustee, the Trustee shall mail to Holders of
Notes a notice of the Default or Event of Default within 90 days after it
occurs. Except in the case of a Default or Event of Default in payment of
principal of, premium, if any, or interest on, any Note, the Trustee may
withhold the notice if and so long as a committee of its Responsible Officers
in good faith determines that withholding the notice is in the interests of the
Holders of the Notes.
Section 7.6. Reports by Trustee to Holders of the Notes.
Within 60 days after each May 15 beginning with the May 15,
1997 following the date of this Indenture, and for so long as Notes remain
outstanding, the Trustee shall mail to the Holders of the Notes a brief report
dated as of such reporting date that complies with TIA Section 313(a) (but if
no event described in TIA Section 313(a) has occurred within the twelve months
preceding the reporting date, no report need be transmitted). The Trustee also
shall comply with TIA Section 313(b)(2) and transmit by mail all reports as
required by TIA Section 313(c).
A copy of each report at the time of its mailing to the
Holders of Notes shall be mailed to the Parent and the Company and filed with
the Commission and each stock exchange on which the Notes are listed in
accordance with TIA Section 313(d). The Company shall promptly notify the
Trustee when the Notes are listed on any stock exchange.
Section 7.7. Compensation and Indemnity.
The Company, the Parent and the Subsidiary Guarantors shall
pay to the Trustee from time to time reasonable compensation for its acceptance
of this Indenture and services hereunder, including, without limitation,
extraordinary services such as default administration. The Trustee's
compensation shall
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not be limited by any law on compensation of a trustee of an express trust.
The Company, the Parent and the Subsidiary Guarantors shall reimburse the
Trustee promptly upon request for all reasonable disbursements, advances and
expenses incurred or made by it in addition to the compensation for its
services. Such expenses shall include the reasonable compensation,
disbursements and expenses of the Trustee's agents and counsel.
The Company, the Parent and the Subsidiary Guarantors shall
indemnify the Trustee against any and all losses, liabilities or expenses
incurred by it arising out of or in connection with the acceptance or
administration of its duties under this Indenture, including the costs and
expenses of enforcing this Indenture against the Company, the Parent and the
Subsidiary Guarantors (including this Section 7.7) and investigating or
defending itself against any claim (whether asserted by the Company, the
Parent, the Subsidiary Guarantors or any Holder or any other person) or
liability in connection with the exercise or performance of any of its powers
or duties hereunder, except to the extent any such loss, liability or expense
may be attributable to its negligence or bad faith. The Trustee shall notify
the Company, the Parent and the Subsidiary Guarantors promptly of any claim for
which it may seek indemnity. Failure by the Trustee to so notify the Company,
the Parent and the Subsidiary Guarantors shall not relieve the Company, the
Parent and the Subsidiary Guarantors of their obligations hereunder. The
Company, the Parent and the Subsidiary Guarantors shall defend the claim and
the Trustee shall cooperate in the defense. The Trustee may have separate
counsel and the Company, the Parent and the Subsidiary Guarantors shall pay the
reasonable fees and expenses of such counsel. The Company, the Parent and the
Subsidiary Guarantors need not pay for any settlement made without their
consent, which consent shall not be unreasonably withheld.
The obligations of the Company, the Parent and the Subsidiary
Guarantors under this Section 7.7 are joint and several and shall survive the
satisfaction and discharge of this Indenture.
To secure the Company's, the Parent's and the Subsidiary
Guarantors' payment obligations in this Section, the Trustee shall have a Lien
prior to the Notes on all money or property held or collected by the Trustee,
except that held in trust to pay principal and interest on particular Notes.
Such Lien shall survive the satisfaction and discharge of this Indenture.
When the Trustee incurs expenses or renders services after an
Event of Default specified in Section 6.1(10) or (11) hereof occurs, the
expenses and the compensation for the services (including the fees and expenses
of its agents and counsel) are intended to constitute expenses of
administration under any Bankruptcy Law.
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The Trustee shall comply with the provisions of TIA Section
313(b)(2) to the extent applicable.
Section 7.8. Replacement of Trustee.
A resignation or removal of the Trustee and appointment of a
successor Trustee shall become effective only upon the successor Trustee's
acceptance of appointment as provided in this Section.
The Trustee may resign in writing at any time and be
discharged from the trust hereby created by so notifying the Company. The
Holders of Notes of a majority in principal amount, of the then outstanding
Notes may remove the Trustee by so notifying the Trustee and the Company in
writing. The Company may remove the Trustee if:
(a) the Trustee fails to comply with Section 7.10 hereof;
(b) the Trustee is adjudged a bankrupt or an insolvent or
an order for relief is entered with respect to the Trustee under any
Bankruptcy Law;
(c) a Custodian or public officer takes charge of the
Trustee or its property; or
(d) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in
the office of Trustee for any reason, the Company shall promptly appoint a
successor Trustee. Within one year after the successor Trustee takes office,
the Holders of a majority in principal amount of the then outstanding Notes may
appoint a successor Trustee to replace the successor Trustee appointed by the
Company.
If a successor Trustee does not take office within 60 days
after the retiring Trustee resigns or is removed, the retiring Trustee, the
Company, or the Holders of Notes of at least 10% in principal amount of the
then outstanding Notes may petition any court of competent jurisdiction for the
appointment of a successor Trustee.
If the Trustee, after written request by any Holder of a Note
who has been a Holder of a Note for at least six months, fails to comply with
Section 7.10, such Holder of a Note may petition any court of competent
jurisdiction for the removal of the Trustee and the appointment of a successor
Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon, the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all
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the rights, powers and duties of the Trustee under this Indenture. The
successor Trustee shall mail a notice of its succession to Holders of the
Notes. The retiring Trustee shall promptly transfer all property held by it as
Trustee to the successor Trustee, provided all sums owing to the Trustee
hereunder have been paid and subject to the Lien provided for in Section 7.7
hereof. Notwithstanding replacement of the Trustee pursuant to this Section
7.8, the Company's obligations under Section 7.7 hereof shall continue for the
benefit of the retiring Trustee.
Section 7.9. Successor Trustee by Merger, etc.
If the Trustee consolidates, merges or converts into, or
transfers all or substantially all of its corporate trust business to, another
corporation, the successor corporation without any further act shall be the
successor Trustee.
Section 7.10. Eligibility; Disqualification.
There shall at all times be a Trustee hereunder that is a
corporation organized and doing business under the laws of the United States of
America or of any state thereof that is authorized under such laws to exercise
corporate trustee power, that is subject to supervision or examination by
federal or state authorities and that has a combined capital and surplus of at
least $50 million as set forth in its most recent published annual report of
condition.
This Indenture shall always have a Trustee who satisfies the
requirements of TIA Section 310(a)(1), (2) and (5). The Trustee is subject to
TIA Section 310(b).
Section 7.11. Preferential Collection of Claims
Against Company.
The Trustee is subject to TIA Section 311(a), excluding any
creditor relationship listed in TIA Section 311(b). A Trustee who has
resigned or been removed shall be subject to TIA Section 311(a) to the extent
indicated therein.
ARTICLE 8
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Section 8.1. Option to Effect Legal Defeasance or Covenant
Defeasance.
The Company may, at the option of its Board of Directors
evidenced by a resolution set forth in an Officers' Certificate, at any time,
elect to have either Section 8.2 or 8.3 hereof be applied to all outstanding
Notes upon compliance with the conditions set forth below in this Article 8.
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Section 8.2. Legal Defeasance and Discharge.
Upon the Company's exercise under Section 8.1 hereof of the
option applicable to this Section 8.2, the Company and the Parent and the
Subsidiary Guarantors shall, subject to the satisfaction of the conditions set
forth in Section 8.4 hereof, be deemed to have been discharged from their
obligations with respect to all outstanding Notes and the Guarantees thereof on
the date the conditions set forth below are satisfied (hereinafter, "Legal
Defeasance"). For this purpose, Legal Defeasance means that the Company shall
be deemed to have paid and discharged the entire Indebtedness represented by
the outstanding Notes, which shall thereafter be deemed to be "outstanding"
only for the purposes of Section 8.5 hereof and the other Sections of this
Indenture referred to in (a) and (b) below, and to have satisfied all its other
obligations under such Notes and this Indenture (and the Trustee, on demand of
and at the expense of the Company, shall execute proper instruments
acknowledging the same), except for the following provisions which shall
survive until otherwise terminated or discharged hereunder: (a) the rights of
Holders of outstanding Notes to receive payments in respect of the principal
of, premium, if any, and interest on such Notes when such payments are due from
the trust fund described in Section 8.4 hereof, and as more fully set forth in
such Section, (b) the Company's obligations with respect to such Notes under
Article 2 and Section 4.2 hereof, (c) the rights, powers, trusts, duties and
immunities of the Trustee hereunder and the Company's obligations in connection
therewith and (d) this Article 8. Subject to compliance with this Article 8,
the Company may exercise its option under this Section 8.2 notwithstanding the
prior exercise of its option under Section 8.3 hereof.
Section 8.3. Covenant Defeasance.
Upon the Company's exercise under Section 8.1 hereof of the
option applicable to this Section 8.3, the Company, the Parent and the
Subsidiary Guarantors shall, subject to the satisfaction of the conditions set
forth in Section 8.4 hereof, be released from their obligations under the
covenants contained in Sections 4.5, 4.7, 4.8, 4.9, 4.10, 4.11, 4.12, 4.13,
4.14, 4.16 and 4.17 hereof and in clause (iv) of Section 5.1 and the covenants
contained in the Guarantees with respect to the outstanding Notes on and after
the date the conditions set forth below are satisfied (hereinafter, "Covenant
Defeasance"), and the Notes shall thereafter be deemed not "outstanding" for
the purposes of any compliance certificate, direction, waiver, consent or
declaration or act of Holders (and the consequences of any thereof) in
connection with such covenants, but shall continue to be deemed "outstanding"
for all other purposes hereunder (it being understood that such Notes shall not
be deemed outstanding for accounting purposes). For this purpose, Covenant
Defeasance means that, with respect to the outstanding Notes, the Company may
omit to comply with and shall have no
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liability in respect of any term, condition or limitation set forth in any such
covenant, whether directly or indirectly, by reason of any reference elsewhere
herein to any such covenant or by reason of any reference in any such covenant
to any other provision herein or in any other document and such omission to
comply shall not constitute a Default or an Event of Default under Section 6.1
hereof, but, except as specified above, the remainder of this Indenture, such
Notes and such Guarantees shall be unaffected thereby. In addition, upon the
Company's exercise under Section 8.1 hereof of the option applicable to this
Section 8.3 hereof, subject to the satisfaction of the conditions set forth in
Section 8.4 hereof, Sections 6.1(8) and 6.1(9) hereof shall not constitute
Events of Default.
Section 8.4. Conditions to Legal or Covenant Defeasance.
The following shall be the conditions to the application of either Section
8.2 or 8.3 hereof to the outstanding Notes:
In order to exercise either Legal Defeasance or Covenant Defeasance:
(a) the Company or the Parent must irrevocably deposit
with the Trustee, in trust, for the benefit of the Holders of the
Notes, cash in United States dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if
any, and interest, on the outstanding Notes on the stated maturity or
on the applicable redemption date, as the case may be, and the Company
must specify whether the Notes are being defeased to maturity or to a
particular redemption date;
(b) in the case of an election under Section 8.2 hereof,
the Company or the Parent shall have delivered to the Trustee an
Opinion of Counsel in the United States reasonably acceptable to the
Trustee confirming that (A) the Company or the Parent has received
from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of this Indenture, there has been a
change in the applicable federal income tax law, in either case to the
effect that, and based thereon such Opinion of Counsel shall confirm
that, the Holders of the outstanding Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been
the case if such Legal Defeasance had not occurred;
(c) in the case of an election under Section 8.3 hereof,
the Company or the Parent shall have delivered to the Trustee an
Opinion of Counsel in the United States
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reasonably acceptable to the Trustee confirming that the Holders of
the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Covenant Defeasance
and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such
Covenant Defeasance had not occurred;
(d) no Default or Event of Default shall have occurred
and be continuing on the date of such deposit (other than a Default or
Event of Default resulting from the borrowing of funds to be applied
to such deposit) or insofar as Section 6.1(10) or 6.1(11) hereof is
concerned, at any time in the period ending on the 91st day after the
date of deposit;
(e) such Legal Defeasance or Covenant Defeasance shall
not result in a breach or violation of, or constitute a default under,
any material agreement or instrument (other than this Indenture) to
which the Company, the Parent or any of their respective Subsidiaries
is a party or by which the Company, the Parent or any of their
respective Subsidiaries is bound; and
(f) the Company and the Parent shall have delivered to
the Trustee an Officers' Certificate and an Opinion of Counsel, each
stating that all conditions precedent provided for or relating to the
Legal Defeasance or the Covenant Defeasance have been complied with.
Section 8.5. Deposited Money and Government Securities to
be Held in Trust; Other Miscellaneous Provisions.
Subject to Section 8.6 hereof, all money and non-callable
Government Securities (including the proceeds thereof) deposited with the
Trustee (or other qualifying trustee, collectively for purposes of this Section
8.5, the "Trustee") pursuant to Section 8.4 hereof in respect of the
outstanding Notes shall be held in trust and applied by the Trustee, in
accordance with the provisions of such Notes and this Indenture, to the
payment, either directly or through any Paying Agent (including the Company
acting as Paying Agent) as the Trustee may determine, to the Holders of such
Notes of all sums due and to become due thereon in respect of principal,
premium, if any, and interest, but such money need not be segregated from other
funds except to the extent required by law.
The Company, the Parent and the Subsidiary Guarantors shall
pay and indemnify the Trustee against any tax, fee or other charge imposed on
or assessed against the cash or non-callable Government Securities deposited
pursuant to Section 8.4 hereof or the principal and interest received in
respect thereof other than any such tax, fee or other charge which by law is
for the account of the Holders of the outstanding Notes.
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Anything in this Article 8 to the contrary notwithstanding,
the Trustee shall deliver or pay to the Company from time to time upon the
request of the Company any money or non-callable Government Securities held by
it as provided in Section 8.4 hereof which, in the opinion of a nationally
recognized firm of independent public accountants expressed in a written
certification thereof delivered to the Trustee (which may be the opinion
delivered under Section 8.4(a) hereof), are in excess of the amount thereof
that would then be required to be deposited to effect an equivalent Legal
Defeasance or Covenant Defeasance.
Section 8.6. Repayment to Company.
Any money deposited with the Trustee or any Paying Agent, or
then held by the Company, in trust for the payment of the principal of,
premium, if any, or interest on any Note and remaining unclaimed for two years
after such principal, premium, if any, or interest has become due and payable
shall be paid to the Company on its request or (if then held by the Company)
shall be discharged from such trust; and the Holder of such Note shall
thereafter, as a general creditor, look only to the Company for payment
thereof, and all liability of the Trustee or such Paying Agent with respect to
such trust money, and all liability of the Company as trustee thereof, shall
thereupon cease; provided, however, that the Trustee or such Paying Agent,
before being required to make any such repayment, may at the expense of the
Company cause to be published once, in the New York Times and The Wall Street
Journal (national edition), notice that such money remains unclaimed and that,
after a date specified therein, which shall not be less than 30 days from the
date of such notification or publication, any unclaimed balance of such money
then remaining shall be repaid to the Company.
Section 8.7. Reinstatement.
If the Trustee or Paying Agent is unable to apply any United
States dollars or non-callable Government Securities in accordance with Section
8.2 or 8.3 hereof, as the case may be, by reason of any order or judgment of
any court or governmental authority enjoining, restraining or otherwise
prohibiting such application, then the obligations of the Company, the Parent
and the Subsidiary Guarantors under this Indenture, the Notes and the
Guarantees shall be revived and reinstated as though no deposit had occurred
pursuant to Section 8.2 or 8.3 hereof, as the case may be; provided, however,
that if the Company, the Parent or any Subsidiary Guarantor makes any payment
of principal of, premium, if any, or interest on any Note following the
reinstatement of its obligations, the Company, the Parent or such Subsidiary
Guarantor shall be subrogated to the rights of the Holders of such Notes to
receive such payment from the money held by the Trustee or Paying Agent.
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ARTICLE 9
AMENDMENT, SUPPLEMENT AND WAIVER
Section 9.1. Without Consent of Holders of Notes.
Notwithstanding Section 9.2 of this Indenture, the Company,
the Parent, the Subsidiary Guarantors and the Trustee may amend or supplement
this Indenture, the Notes or the Guarantees without the consent of any Holder
of a Note:
(a) to cure any ambiguity, defect or inconsistency;
(b) to provide for uncertificated Notes in addition to or
in place of certificated Notes;
(c) to provide for the assumption of the Company's
obligations to the Holders of the Notes in the case of a merger or
consolidation pursuant to Article 5 hereof;
(d) to make any change that would provide any additional
rights or benefits to the Holders of the Notes or that does not
adversely affect the legal rights hereunder of any Holder of the Note;
or
(e) to comply with requirements of the Commission in
order to effect or maintain the qualification of this Indenture under
the TIA.
Upon the request of the Company accompanied by a resolution of
the Board of Directors of the Company, the Parent and each of the Subsidiary
Guarantors, as the case may be, authorizing the execution of any such amended
or supplemental indenture, and upon receipt by the Trustee of the documents
described in Section 7.2 hereof, the Trustee shall join with the Company, the
Parent and the Subsidiary Guarantors in the execution of any amended or
supplemental indenture authorized or permitted by the terms of this Indenture
and to make any further appropriate agreements and stipulations that may be
therein contained, but the Trustee shall not be obligated to enter into such
amended or supplemental Indenture that affects its own rights, duties or
immunities under this Indenture or otherwise.
Section 9.2. With Consent of Holders of Notes.
Except as provided below in this Section 9.2, the Company, the
Parent, the Subsidiary Guarantors and the Trustee may amend or supplement this
Indenture, the Notes and the Guarantees with the consent of the Holders of at
least a majority in aggregate principal amount of the Notes then outstanding
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for the Notes), and, subject to Sections
6.4 and 6.7 hereof, any existing Default or Event of Default (other than a
Default or Event of Default in the payment of the principal of, premium, if
any, or
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interest on the Notes, except a payment default resulting from an acceleration
that has been rescinded) or compliance with any provision of this indenture,
the Notes or the Guarantees may be waived with the consent of the Holders of a
majority in principal amount of the then outstanding Notes (including, without
limitation, consents obtained in connection with a purchase of, or tender offer
or exchange offer for the Notes).
Notwithstanding the foregoing, without the consent of at least
66 2/3% in aggregate principal amount of the Notes then outstanding (including
consents obtained in connection with a purchase of, or tender offer or exchange
offer for, Notes), no waiver or amendment to this Indenture may make any change
in the provisions of Sections 3.9, 4.10 and 4.13 hereof that adversely affect
the rights of any Holder of Notes. In addition, any amendment to the
provisions of Article 10 of this Indenture shall require the consent of the
Holders of at least 66 2/3% in aggregate principal amount of the Notes then
outstanding if such amendment would adversely affect the rights of Holders of
Notes; provided that, no amendment may be made to the provisions of Article 10
of this Indenture that adversely affects the rights of any holder of Senior
Debt then outstanding unless the holders of such Senior Debt (or any group or
representative thereof authorized to consent) consent to such change.
Subject to Sections 6.4 and 6.7 hereof, the Holders of a
majority in aggregate principal amount of the Notes then outstanding may waive
compliance in a particular instance by the Company, the Parent or any
Subsidiary Guarantor with any provision of this Indenture, the Notes or the
Guarantees. However, without the consent of each Holder affected, an amendment
or waiver may not (with respect to any Notes held by a non-consenting Holder):
(a) reduce the principal amount of Notes whose Holders
must consent to an amendment, supplement or waiver;
(b) reduce the principal of or change the fixed maturity
of any Note or alter the provisions with respect to the redemption of
the Notes (except as provided above with respect to Sections 3.9, 4.10
and 4.13 hereof);
(c) reduce the rate of or change the time for payment of
interest on any Note;
(d) waive a Default or Event of Default in the payment of
principal of or premium, if any, or interest on the Notes (except a
rescission of acceleration of the Notes by the Holders of at least a
majority in aggregate principal amount of the Notes and a waiver of
the payment default that resulted from such acceleration);
(e) make any Note payable in money other than that stated
in the Notes;
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(f) make any change in the provisions of this Indenture
relating to waivers of past Defaults or the rights of Holders of Notes
to receive payments of principal of premium if any, or interest on the
Notes; or
(g) make any change in the foregoing amendment and waiver
provisions.
Upon the request of the Company accompanied by a resolution of
the Board of Directors of the Company and each of the Subsidiary Guarantors, as
the case may be, authorizing the execution of any such amended or supplemental
indenture, and upon the filing with the Trustee of evidence satisfactory to the
Trustee of the consent of the Holders of Notes as aforesaid, and upon receipt
by the Trustee of the documents described in Section 7.2 hereof, the Trustee
shall join with the Company, the Parent and the Subsidiary Guarantors in the
execution of such amended or supplemental indenture unless such amended or
supplemental indenture affects the Trustee's own rights, duties or immunities
under this indenture or otherwise, in which case the Trustee may in its
discretion, but shall not be obligated to, enter into such amended or
supplemental indenture.
It shall not be necessary for the consent of the Holders of
Notes under this Section 9.2 to approve the particular form of any proposed
amendment or waiver, but it shall be sufficient if such consent approves the
substance thereof.
After an amendment, supplement or waiver under this Section
becomes effective, the Company shall mail to the Holders of Notes affected
thereby a notice briefly describing the amendment, supplement or waiver. Any
failure of the Company to mail such notice, or any defect therein, shall not,
however, in any way impair or affect the validity of any such amended or
supplemental indenture or waiver.
Section 9.3. Compliance with Trust Indenture Act.
Every amendment or supplement to this Indenture or the Notes
shall be set forth in an amended or supplemental Indenture that complies with
the TIA as then in effect.
Section 9.4. Revocation and Effect of Consents.
Until an amendment, supplement or waiver becomes effective, a
consent to it by a Holder of a Note is a continuing consent by the Holder of a
Note and every subsequent Holder of a Note or portion of a Note that evidences
the same debt as the consenting Holder's Note, even if notation of the consent
is not made on any Note. However, any such Holder of a Note or subsequent
Holder of a Note may revoke the consent as to its Note if the Trustee receives
written notice of revocation before the date the waiver, supplement or
amendment becomes effective. An
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amendment, supplement or waiver becomes effective in accordance with its terms
and thereafter binds every Holder.
Section 9.5. Notation on or Exchange of Notes.
The Trustee may place an appropriate notation about an
amendment, supplement or waiver on any Note thereafter authenticated. The
Company in exchange for all Notes may issue and the Trustee shall authenticate
new Notes that reflect the amendment, supplement or waiver.
Failure to make the appropriate notation or issue a new Note
shall not affect the validity and effect of such amendment, supplement or
waiver.
Section 9.6. Trustee to Sign Amendment, etc.
The Trustee shall sign any amended or supplemental indenture
authorized pursuant to this Article 9 if the amendment or supplement does not
adversely affect the rights, duties, liabilities or immunities of the Trustee.
None of the Company, the Parent or any Subsidiary Guarantor may sign an
amendment or supplemental Indenture until its respective Board of Directors
approves it. In executing any amended or supplemental indenture, the Trustee
shall be entitled to receive and (subject to Section 7.1) shall be fully
protected in relying upon, an Officer's Certificate and an Opinion of Counsel
stating that the execution of such amended or supplemental indenture is
authorized or permitted by this Indenture and that there has been compliance
with all conditions precedent.
ARTICLE 10
SUBORDINATION
Section 10.1. Agreement to Subordinate.
The Company agrees, and each Holder by accepting a Note
agrees, that the Indebtedness evidenced by the Note, including, but not limited
to, the payment of principal of, premium, if any, and interest on the Note, and
any other payment Obligation of the Company in respect of the Note is
subordinated in right of payment, to the extent and in the manner provided in
this Article, to the prior payment in full in cash of all Senior Debt (whether
outstanding on the date hereof or hereafter created, incurred, assumed or
guaranteed), and that the subordination is for the benefit of the Holders of
Senior Debt.
Section 10.2. Certain Definitions.
"Bankruptcy Law" means title 11, U.S. Code or any similar
Federal or state law for the relief of debtors.
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"Designated Senior Debt" means (i) the Credit Agreement and
(ii) any other Senior Debt permitted under this Indenture the principal amount
of which is $25 million or more and that has been designated by the Company as
"Designated Senior Debt."
"Representative" means the indenture trustee or other trustee,
agent or representative for any Senior Debt.
"Senior Debt" means (i) Indebtedness of the Company or any
Subsidiary of the Company under or in respect of any Credit Facility whether
for principal, interest (including interest accruing after the filing of a
petition initiating any proceeding pursuant to any Bankruptcy Law, whether or
not the claim for such interest is allowed as a claim in such proceeding),
reimbursement obligations, fees, commissions, expenses, indemnities or other
amounts and (ii) any other Indebtedness permitted under the terms of this
Indenture, unless the instrument under which such Indebtedness is incurred
expressly provides that it is on a parity with or subordinated in right of
payment to the Notes. Notwithstanding anything to the contrary in the
foregoing sentence, Senior Debt will not include (w) any Indebtedness of the
Company to any of its Subsidiaries or other Affiliates, or (x) any Indebtedness
that is incurred in violation of this Indenture (other than Indebtedness under
any Credit Agreement or any other Credit Facility that is incurred on the basis
of a representation by the Company to the applicable lenders that it is
permitted to incur such Indebtedness under this Indenture).
A "distribution" may consist of cash, securities or other
property, by set-off or otherwise.
All Designated Senior Debt now or hereafter existing and all
other Obligations relating thereto shall not be deemed to have been paid in
full unless the holders or owners thereof shall have received payment in full
in cash (or other form of payment consented to by the holders of Designated
Senior Debt) with respect to such Designated Senior Debt and all other
Obligations with respect thereto.
Section 10.3. Liquidation; Dissolution; Bankruptcy.
Upon any payment or distribution of property or securities to
creditors of the Company in a liquidation or dissolution of the Company or in a
bankruptcy, reorganization, insolvency, receivership or similar proceeding
relating to the Company or its property, or in an assignment for the benefit of
creditors or any marshalling of the Company's assets and liabilities:
(1) the holders of Senior Debt shall be entitled to
receive payment in full in cash of all Obligations due in respect of
such Senior Debt (including interest after the commencement of any
such proceeding at the rate specified in the applicable Senior Debt,
whether or not a claim for such
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interest would be allowed in such proceeding) before the Holders of
Notes shall be entitled to receive any payment with respect to the
Notes (except that Holders of Notes may receive payments made from any
defeasance trust created pursuant to Section 8.1 hereof); and
(2) until all Obligations with respect to Senior Debt (as
provided in subsection (1) above) are paid in full in cash, any
distribution to which the Holders of Notes would be entitled shall be
made to holders of Senior Debt (except that Holders of Notes may
receive payments made from any defeasance trust created pursuant to
Section 8.1 hereof).
Under the circumstances described in this Section 10.3, the
Company or any receiver, trustee in bankruptcy, liquidating trustee, agent or
other similar person making any payment or distribution of cash or other
property is authorized or instructed to make any payment or distribution to
which the Holders of the Notes would otherwise be entitled (other than the
securities and payments made from any defeasance trust referred to in the
second parenthetical clause of each of clauses (1) and (2) above, which shall
be delivered or paid to the Holders of Notes as set forth in such clauses)
directly to the holders of the Senior Debt (pro rata to such holders on the
basis of the respective amounts of Senior Debt held by such holders) or their
representatives, or to any trustee or trustees under any other indenture
pursuant to which any such Senior Debt may have been issued, as their
respective interests appear, to the extent necessary to pay all such Senior
Debt in full, in cash or cash equivalents after giving effect to any concurrent
payment, distribution or provision therefor to or for the holders of such
Senior Debt.
To the extent any payment of Senior Debt (whether by or on
behalf of the Company, as proceeds of security or enforcement of any right of
setoff or otherwise) is declared to be fraudulent or preferential, set aside or
required to be paid to any receiver, trustee in bankruptcy, liquidating
trustee, agent or other similar Person under any bankruptcy, insolvency,
receivership, fraudulent conveyance or similar law, then if such payment is
recovered by, or paid over to, such receiver, trustee in bankruptcy,
liquidating trustee, agent or other similar Person, the Senior Debt or part
thereof originally intended to be satisfied shall be deemed to be reinstated
and outstanding as if such payment had not occurred. To the extent the
obligation to repay any Senior Debt is declared to be fraudulent, invalid or
otherwise set aside under any bankruptcy, insolvency, receivership, fraudulent
conveyance or similar law, then the obligation so declared fraudulent, invalid
or otherwise set aside (and all other amounts that would come due with respect
thereto had such obligation not been so affected) shall be deemed to be
reinstated and outstanding as Senior Debt for all purposes hereof as if such
declaration, invalidity or setting aside had not occurred.
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Section 10.4. Default on Designated Senior Debt.
The Company may not make any payment (whether by redemption,
purchase, retirement, defeasance or otherwise) to the Trustee or any Holder in
respect of Obligations with respect to the Notes and may not acquire from the
Trustee or any Holder any Notes for cash or property (other than payments and
other distributions made from any defeasance trust created pursuant to Section
8.1 hereof) until all principal and other Obligations with respect to the
Senior Debt have been paid in full if:
(i) a default in the payment of any principal or other
Obligations with respect to Designated Senior Debt occurs; or
(ii) a default, other than a payment default, on
Designated Senior Debt occurs and is continuing that then permits, or
with the giving of notice or passage of time or both (unless cured or
waived) would permit, holders of the Designated Senior Debt as to
which such default relates to accelerate its maturity and the Trustee
receives a notice of the default (a "Payment Blockage Notice") from a
Person who is a representative of the holders of any Designated Senior
Debt. If the Trustee receives any such Payment Blockage Notice, no
subsequent Payment Blockage Notice shall be effective for purposes of
this Section unless and until 360 days shall have elapsed since the
date of commencement of the payment blockage period resulting from the
immediately prior Payment Blockage Notice. No nonpayment default in
respect of any Designated Senior Debt that existed or was continuing
on the date of delivery of any Payment Blockage Notice to the Trustee
shall be, or be made, the basis for a subsequent Payment Blockage
Notice.
The Company shall resume payments on and distributions in
respect of the Notes and may acquire them upon:
(1) in the case of a default referred to in Section
10.4(i) hereof the date upon which the default is cured or waived, or
(2) in the case of a default referred to in Section
10.4(ii) hereof, the earliest of (1) the date on which such nonpayment
default is cured or waived, (2) the date the applicable Payment
Blockage Notice is retracted by written notice to the Trustee from the
Person who is a representative of the holders of any Designated Senior
Debt and (3) 179 days after the date on which the applicable Payment
Blockage Notice is received unless (A) any of the events described in
Section 10.4(i) hereof has occurred and is continuing or (B) a Default
or Event of Default under Section 6.1(10) and (11) has occurred,
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if this Article otherwise permits the payment, distribution or acquisition at
the time of such payment or acquisition.
Section 10.5. Acceleration of Notes.
If payment of the Notes is accelerated because of an Event of
Default, the Company shall promptly notify holders of Senior Debt of the
acceleration.
Section 10.6. When Distribution Must Be Paid Over.
In the event that the Trustee or any Holder receives any
payment of any Obligations with respect to the Notes at a time when the Trustee
or such Holder, as applicable, has actual knowledge that such payment is
prohibited by Section 10.3 or Section 10.4 hereof, such payment shall be held
by the Trustee or such Holder, in trust for the benefit of, and shall be paid
forthwith over and delivered, upon written request, to, the holders of Senior
Debt as their interests may appear or their Representative under the indenture
or other agreement (if any) pursuant to which such Senior Debt may have been
issued, as their respective interests may appear, for application to the
payment of all Obligations with respect to Senior Debt remaining unpaid to the
extent necessary to pay such Obligations in full in accordance with their
terms, after giving effect to any concurrent payment or distribution to or for
the holders of Senior Debt.
With respect to the holders of Senior Debt, the Trustee
undertakes to perform only such obligations on the part of the Trustee as are
specifically set forth in this Article 10, and no implied covenants or
obligations with respect to the holders of Senior Debt shall be read into this
Indenture against the Trustee. The Trustee shall not be deemed to owe any
fiduciary duty to the holders of Senior Debt, and shall not be liable to any
such holders if the Trustee shall pay over or distribute to or on behalf of
Holders of Notes or the Company or any other Person money or assets to which
any holders of Senior Debt shall be entitled by virtue of this Article 10,
except if such payment is made as a result of the willful misconduct or gross
negligence of the Trustee.
Section 10.7. Notice by Company.
The Company shall promptly notify the Trustee and the Paying
Agent of any facts known to the Company that would cause a payment of any
Obligations with respect to the Notes to violate this Article, but failure to
give such notice shall not affect the subordination of the Notes to the Senior
Debt as provided in this Article.
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Section 10.8. Subrogation.
After all Senior Debt is paid in full and until the Notes are
paid in full, Holders of Notes shall be subrogated (equally and ratably with
all other Indebtedness pari passu with the Notes including, but not limited to,
the Senior Subordinated Notes) to the rights of holders of Senior Debt to
receive distributions applicable to Senior Debt to the extent that
distributions otherwise payable to the Holders of Notes have been applied to
the payment of Senior Debt. A distribution made under this Article to holders
of Senior Debt that otherwise would have been made to Holders of Notes is not,
as between the Company and Holders of Notes, a payment by the Company on the
Notes.
Section 10.9. Relative Rights.
This Article defines the relative rights of Holders of Notes
and holders of Senior Debt. Nothing in this Indenture shall:
(1) impair, as between the Company and Holders of Notes,
the obligation of the Company, which is absolute and unconditional, to
pay the Stated Price of and interest on the Notes in accordance with
their terms;
(2) affect the relative rights of Holders of Notes and
creditors of the Company other than their rights in relation to
holders of Senior Debt; or
(3) prevent the Trustee or any Holder from exercising its
available remedies upon a Default or Event of Default, subject to the
rights of holders and owners of Senior Debt to receive distributions
and payments otherwise payable to Holders of Notes.
If the Company fails because of this Article to pay the Stated
Price of or interest on a Note on the due date, the failure is still a Default
or Event of Default.
Section 10.10. Subordination May Not Be Impaired by Company.
No right of any present or future holders of any Senior Debt
to enforce subordination as provided in this Article Ten will at any time in
any way be prejudiced or impaired by any act or failure to act on the part of
the Company or by any act or failure to act, in good faith, by any such holder,
or by any noncompliance by the Company with the terms of this Indenture,
regardless of any knowledge thereof that any such holder of Senior Debt may
have or otherwise be charged with. The provisions of this Article Ten are
intended to be for the benefit of, and shall be enforceable directly by, the
holders of Senior Debt.
<PAGE> 81
81
Section 10.11. Distribution or Notice to Representative.
Whenever a distribution is to be made or a notice given to
holders of Senior Debt, the distribution may be made and the notice given to
their Representative.
Upon any payment or distribution of assets of the Company
referred to in this Article 10, the Trustee and the Holders of Notes shall be
entitled to rely upon any order or decree made by any court of competent
jurisdiction or upon any certificate of such Representative or of the
liquidating trustee or agent or other Person making any distribution to the
Trustee or to the Holders of Notes for the purpose of ascertaining the Persons
entitled to participate in such distribution, the holders of the Senior Debt
and other Indebtedness of the Company, the amount thereof or payable thereon,
the amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this Article 10.
Section 10.12. Rights of Trustee and Paying Agent.
Notwithstanding the provisions of this Article 10 or any other
provision of this Indenture, the Trustee shall not be charged with knowledge of
the existence of any facts that would prohibit the making of any payment or
distribution by the Trustee, and the Trustee and the Paying Agent may continue
to make payments on the Notes, unless the Trustee shall have received at its
Corporate Trust Office at least two Business Days prior to the date of such
payment written notice of facts that would cause the payment of any Obligations
with respect to the Notes to violate this Article, which notice shall
specifically refer to Section 10.4 hereof. Only the Company or a
Representative may give the notice. Nothing in this Article 10 shall impair
the claims of, or payments to, the Trustee under or pursuant to Section 7.7
hereof.
The Trustee in its individual or any other capacity may hold
Senior Debt with the same rights it would have if it were not Trustee. Any
Agent may do the same with like rights.
Section 10.13. Authorization to Effect Subordination.
Each holder by the Holder's acceptance thereof authorizes and
directs the Trustee on the Holder's behalf to take such action as may be
necessary or appropriate to effectuate the subordination as provided in this
Article 10, and appoints the Trustee to act as the Holder's attorney-in-fact
for any and all such purposes. If the Trustee does not file a proper proof of
claim or proof of debt in the form required in any proceeding referred to in
Section 6.9 hereof at least 30 days before the expiration of the time to file
such claim, each lender under the Credit Agreement is hereby authorized to file
an appropriate claim for and on behalf of the Holders of the Notes.
<PAGE> 82
82
Section 10.14. Amendments.
No amendment may be made to the provisions of this Article 10
that adversely affects the rights of any holder of Senior Debt then outstanding
unless the holders of such Senior Debt (or any group or Representative
authorized to give a consent) consent to such change.
Section 10.15. No Waiver of Subordination Provisions.
Without in any way limiting the generality of Section 10.9 of
this Indenture, the holders of Senior Debt may, at any time and from time to
time, without the consent of or notice to the Trustee or the Holders, without
incurring responsibility to the Holders and without impairing or releasing the
subordination provided in this Article Ten or the obligations hereunder of the
Holders to the holders of Senior Debt, do any one or more of the following:
(a) change the manner, place or terms of payment or extend the time of payment
of, or renew or alter, Senior Debt or any instrument evidencing the same or any
agreement under which Senior Debt is outstanding or secured; (b) sell,
exchange, release or otherwise deal with any property pledged, mortgaged or
otherwise securing Senior Debt; (c) release any Person liable in any manner for
the collection of Senior Debt; and (d) exercise or refrain from exercising any
rights against the Company and any other Person.
ARTICLE 11
THE GUARANTEES
Section 11.1. The Guarantees.
Each of the Parent and the Subsidiary Guarantors hereby,
jointly and severally, unconditionally guarantees to each Holder of a Note
authenticated and delivered by the Trustee and to the Trustee and its
successors and assigns, irrespective of the validity and enforceability of this
Indenture, the Notes or the obligations of the Company hereunder or thereunder,
that: (a) the Stated Price of and premium and interest, on the Notes shall be
promptly paid in full when due, whether at maturity, by acceleration,
redemption or otherwise, and interest on the overdue principal of and interest
on premium and interest, on the Notes, if any, if lawful, and all other
obligations of the Company to the Holders or the Trustee hereunder or
thereunder shall be promptly paid in full or performed, all in accordance with
the terms hereof and thereof; and (b) in case of any extension of time of
payment or renewal of any Notes or any of such other obligations, that the same
shall be promptly paid in full when due or performed in accordance with the
terms of the extension or renewal, whether at stated maturity, by acceleration
or otherwise. Failing payment when due of any amount so guaranteed or any
performance so guaranteed for whatever reason, the Parent and the Subsidiary
Guarantors shall be jointly and
<PAGE> 83
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severally obligated to pay the same immediately. The Parent and the Subsidiary
Guarantors hereby agree that their obligations hereunder shall be
unconditional, irrespective of the validity, regularity or enforceability of
the Notes or this Indenture, the absence of any action to enforce the same, any
waiver or consent by any Holder with respect to any provisions hereof or
thereof, the recovery of any judgment against the Company, any action to
enforce the same or any other circumstance which might otherwise constitute a
legal or equitable discharge or defense of a guarantor. Each of the Parent and
the Subsidiary Guarantors hereby waives diligence, presentment, demand of
payment, filing of claims with a court in the event of insolvency or bankruptcy
of the Company, any right to require a proceeding first against the Company,
protest, notice and all demands whatsoever and covenant that this Guarantee
shall not be discharged except by complete performance of the obligations
contained in the Notes and this Indenture. If any Holder or the Trustee is
required by any court or otherwise to return to the Company, the Parent or the
Subsidiary Guarantors, or any Custodian, Trustee, liquidator or other similar
official acting in relation to either the Company, the Parent or the Subsidiary
Guarantors, any amount paid by either to the Trustee or such Holder, this
Guarantee, to the extent theretofore discharged, shall be reinstated in full
force and effect. Each of the Parent and the Subsidiary Guarantors agrees that
it shall not be entitled to any right of subrogation in relation to the Holders
of Notes in respect of any obligations guaranteed hereby until payment in full
of all obligations guaranteed hereby. Each of the Parent and the Subsidiary
Guarantors further agrees that, as between the Guarantors, on the one hand, and
the Holders and the Trustee, on the other hand, (x) the maturity of the
obligations guaranteed hereby may be accelerated as provided in Article 6 for
the purposes of this Guarantee, notwithstanding any stay, injunction or other
prohibition preventing such acceleration in respect of the obligations
guaranteed hereby and (y) in the event of any declaration of acceleration of
such obligations as provided in Article 6, such obligations (whether or not due
and payable) shall forthwith become due and payable by the Parent and the
Subsidiary Guarantors for the purpose of this Guarantee. The Parent and the
Subsidiary Guarantors shall have the right to seek contribution from any
Guarantor not paying so long as the exercise of such right does not impair the
rights of the Holders under the Guarantees.
Section 11.2. Execution and Delivery Guarantees.
(i) To evidence its Guarantee set forth in Section 11.1, each
of the Parent and the Subsidiary Guarantors hereby agrees that a notation of
such Guarantee substantially in the form of Exhibit C shall be endorsed by an
officer of the Parent or such Subsidiary Guarantor on each Note authenticated
and delivered by the Trustee, that this Indenture shall be executed on behalf
of the Parent or such Subsidiary Guarantor by its President or one of its Vice
Presidents and attested to by an
<PAGE> 84
84
Officer and that the Parent or such Subsidiary Guarantor shall deliver to the
Trustee an Opinion of Counsel that the foregoing have been duly authorized,
executed and delivered by the Parent or such Subsidiary Guarantor and that such
Guarantee is a valid and legally binding obligation of Parent or such
Subsidiary Guarantor, enforceable against such Guarantor in accordance with its
terms.
Each of the Parent and each Subsidiary Guarantor hereby agrees
that its Guarantee set forth in Section 11.1 shall remain in full force and
effect notwithstanding any failure to endorse on each Note a notation of such
Guarantee.
If an Officer whose signature is on this Indenture or on the
applicable Guarantee no longer holds that office at the time the Trustee
authenticates the Note on which such Guarantee is endorsed, such Guarantee
shall be valid nevertheless.
The delivery of any Note by the Trustee, after the
authentication thereof hereunder, shall constitute due delivery of the
Guarantees set forth in this Indenture on behalf of the Parent and the
Subsidiary Guarantors.
Section 11.3. Parent and Subsidiary Guarantors May
Consolidate, etc., on Certain Terms.
Neither the Parent nor any Subsidiary Guarantor may
consolidate with or merge with or into, another corporation or Person other
than the Parent, the Company, or another Subsidiary Guarantor, unless:
(a) subject to the provisions of Section 11.4 hereof, the
Person formed by or surviving any such consolidation or merger assumes
all the obligations of the Parent or such Subsidiary Guarantor, as the
case may be, pursuant to a supplemental indenture in form reasonably
satisfactory to the Trustee in respect of the Notes, this Indenture
and the Parent's or such Subsidiary Guarantor's Guarantee;
(b) immediately after giving effect to such transaction,
no Default or Event of Default exists; and
(c) such transaction does not violate any of Sections
4.3, 4.7, 4.8, 4.9, 4.10, 4.11, 4.12, 4.13, 4.14, 4.16 and 4.17.
Notwithstanding the foregoing, none of the Parent or the Subsidiary Guarantors
shall be permitted to consolidate with or merge with or into (whether or not
such Guarantor is the surviving Person), another corporation, Person or entity
pursuant to the preceding sentence if such consolidation or merger would not be
permitted by Section 5.1 hereof.
<PAGE> 85
85
In case of any such consolidation or merger and upon the
assumption by the successor corporation, by supplemental indenture, executed
and delivered to the Trustee and satisfactory in form to the Trustee, of the
Guarantee endorsed upon the Notes and the due and punctual performance of all
of the covenants and conditions of this Indenture to be performed by the Parent
or such Subsidiary Guarantor, such successor corporation shall succeed to and
be substituted for the Parent or such Subsidiary Guarantor with the same effect
as if it had been named herein as a Parent or a Subsidiary Guarantor. Such
successor corporation thereupon may cause to be signed any or all of the
Guarantees to be endorsed upon all of the Notes issuable hereunder which
theretofore shall not have been signed by the Company and delivered to the
Trustee. All the Guarantees so issued shall in all respects have the same
legal rank and benefit under this Indenture as the Guarantees theretofore and
thereafter issued in accordance with the terms of this Indenture as though all
of such Guarantees had been issued at the date of the execution hereof.
Except as set forth in Articles 4 and 5 hereof, nothing
contained in this Indenture or in any of the Notes shall prevent any
consolidation or merger of the Parent or any Subsidiary Guarantor with or into
the Company, the Parent or another Subsidiary Guarantor, or shall prevent any
sale or conveyance of the property of the Parent or any Subsidiary Guarantor as
an entirety or substantially as an entirety to the Company, the Parent or any
Subsidiary Guarantor.
Section 11.4. Releases of Guarantees.
In the event of a sale or other disposition of all or
substantially all of the assets of any Subsidiary Guarantor or a sale or other
disposition (including, without limitation, by foreclosure) of all of the
capital stock of any Subsidiary Guarantor, to any corporation or other Person
(including a Subsidiary that is not a Subsidiary Guarantor) by way of merger,
consolidation, or otherwise, in a transaction that does not violate any of the
covenants of this Indenture, then such Subsidiary Guarantor shall be released
and relieved of any obligations under its Guarantee and such acquiring or other
Person, if other than the Parent or a Subsidiary Guarantor shall have no
obligation to assume or otherwise become liable under such Guarantee; provided,
if such acquiring corporation or other Person is other than the Company or a
Wholly Owned Restricted Subsidiary, that the Net Proceeds of such sale or other
disposition are applied in accordance with Section 4.10 hereof. Upon delivery
by the Company to the Trustee of an Officers' Certificate and an Opinion of
Counsel to the effect that such sale or other disposition was made by the
Company in accordance with the provisions of this Indenture, including without
limitation Section 4.10, the Trustee shall execute any documents reasonably
required in order to evidence the release of any Subsidiary Guarantor from its
obligations under its Guarantee.
<PAGE> 86
86
Any Subsidiary Guarantor not released from its obligations
under its Guarantee shall remain liable for the full amount of principal of and
interest on the Notes and for the other obligations of the Parent and any
Subsidiary Guarantor under this Indenture as provided in this Article 11.
Any Subsidiary Guarantor that is designated an Unrestricted
Subsidiary in accordance with the terms of this Indenture shall be released
from and relieved of its obligations under its Guarantee and any Restricted
Subsidiary that becomes a Material Restricted Subsidiary and any Unrestricted
Subsidiary that ceases to be an Unrestricted Subsidiary and, thereafter,
becomes a Material Restricted Subsidiary shall be required to execute a
Guarantee in accordance with the terms of this Indenture.
Section 11.5. Limitation on Subsidiary Guarantor Liability.
For purposes hereof, each Subsidiary Guarantor's liability
shall be that amount from time to time equal to the aggregate liability of such
Subsidiary Guarantor thereunder, but shall be limited to the lesser of (i) the
aggregate amount of the Obligations of the Company under the Notes and this
Indenture and (ii) the amount, if any, which would not have (A) rendered such
Subsidiary Guarantor "insolvent" (as such term is defined in the federal
Bankruptcy Law and in the Debtor and Creditor Law of the State of New York) or
(B) left it with unreasonably small capital at the time its Guarantee of the
Notes was entered into, after giving effect to the incurrence of existing
Indebtedness immediately prior to such time; provided that, it shall be a
presumption in any lawsuit or other proceeding in which such Subsidiary
Guarantor is a party that the amount guaranteed pursuant to its Guarantee is
the amount set forth in clause (i) above unless any creditor, or representative
of creditors of such Subsidiary Guarantor, or debtor in possession or trustee
in bankruptcy of such Subsidiary Guarantor, otherwise proves in such a lawsuit
that the aggregate liability of such Subsidiary Guarantor is limited to the
amount set forth in clause (ii). In making any determination as to the
solvency or sufficiency of capital of a Subsidiary Guarantor in accordance with
the previous sentence, the right of such Subsidiary Guarantor to contribution
from other Subsidiary Guarantors and the Parent and any other rights such
Subsidiary Guarantor may have, contractual or otherwise, shall be taken into
account.
Section 11.6. "Trustee" to Include Paying Agent.
In case at any time any Paying Agent other than the Trustee
shall have been appointed by the Company and be then acting hereunder, the term
"Trustee" as used in this Article 11 shall in such case (unless the context
shall otherwise require) be construed as extending to and including such Paying
Agent within its meaning as fully and for all intents and purposes as
<PAGE> 87
87
if such Paying Agent were named in this Article 11 in place of the Trustee.
Section 11.7. Subordination of Guarantees.
The obligations of each of the Parent and the Subsidiary
Guarantors under its Guarantee pursuant to this Article 11 shall be junior and
subordinated to Indebtedness of the Parent or the Subsidiary Guarantor, as the
case may be, to the same extent and in the same manner as the Notes are junior
and subordinated to Senior Debt of the Company. For the purposes of the
foregoing sentence, the Trustee and the Holders shall have the right to receive
and/or retain payments by any of the Guarantors only at such times as they may
receive and/or retain payments in respect of the Notes pursuant to this
Indenture, including Article 10 hereof.
ARTICLE 12
MISCELLANEOUS
Section 12.1. Trust Indenture Act Controls.
If any provision of this Indenture limits, qualifies or
conflicts with the duties imposed by TIA Section 318(c), the imposed duties
shall control. If any provisions of this Indenture modifies or excludes any
provision of the TIA that may be so modified or excluded, the letter provision
shall be deemed to apply to this Indenture as so modified or excluded, as the
case may be.
Section 12.2. Notices.
Any notice or communication by the Company, the Parent or the
Subsidiary Guarantors or the Trustee to the others is duly given if in writing
and delivered in Person or mailed by first class mail (registered or certified,
return receipt requested), telecopier or overnight air courier guaranteeing
next day delivery, to the others' address:
If to the Company, the Parent or any Subsidiary Guarantor:
Mesa Operating Co.
1400 Williams Square West
5205 North O'Connor Boulevard
Irving, Texas 75039
Telecopier No.: (214) 444-9001
Attention: Chief Financial Officer
<PAGE> 88
88
With a copy to:
Baker & Botts, LLP
2001 Ross Avenue
700 Trammell Crow Center
Dallas, Texas 75201-2980
Telecopier No.: 914-953-6503
Attention: Carlos A. Fiero
If to the Trustee:
Harris Trust and Savings Bank
311 West Monroe Street
12th Floor
Chicago, Illinois 60606
Telecopier No.: (312) 461-3525
Attention: Indenture Trust Division
The Company, the Parent or any Subsidiary Guarantor or the
Trustee, by notice to the others may designate additional or different
addresses for subsequent notices or communications.
All notices and communications (other than those sent to
Holders) shall be deemed to have been duly given: at the time delivered by
hand, if personally delivered; five Business Days after being deposited in the
mail, postage prepaid, if mailed; when receipt acknowledged, if by telecopy;
and the next Business Day after timely delivery to the courier, if sent by
overnight air courier guaranteeing next day delivery.
Any notice or communication to a Holder shall be mailed by
first class mail, certified or registered, return receipt requested, or by
overnight air courier guaranteeing next day delivery to its address shown on
the register kept by the Registrar. Any notice or communication shall also be
so mailed to any Person described in TIA Section 313(c), to the extent
required by the TIA. Failure to mail a notice or communication to a Holder or
any defect in it shall not affect its sufficiency with respect to other
Holders.
If a notice or communication is mailed in the manner provided
above within the time prescribed, it is duly given, whether or not the
addressee receives it.
If the Company, the Parent or any Subsidiary Guarantor mails a
notice or communication to Holders, it shall mail a copy to the Trustee and
each Agent at the same time.
Section 12.3. Communication by Holders of Notes with Other Holders of Notes.
Holders may communicate pursuant to TIA Section 312(b) with
other Holders with respect to their rights under this Indenture or the Notes.
The Company, the Parent, the Subsidiary
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89
Guarantors, the Trustee, the Registrar and anyone else shall have the
protection of TIA Section 312(c).
Section 12.4. Certificate and Opinion as to
Conditions Precedent.
Upon any request or application by the Company, the Parent or
any Subsidiary Guarantor to the Trustee to take any action under this
Indenture, the Company, the Parent or such Subsidiary Guarantor, as the case
may be, shall furnish to the Trustee:
(a) an Officers' Certificate in form and substance
reasonably satisfactory to the Trustee (which shall include the
statements set forth in Section 12.5 hereof) stating that, in the
opinion of the signers, all conditions precedent and covenants, if
any, provided for in this Indenture relating to the proposed action
have been complied with; and
(b) an Opinion of Counsel in form and substance
reasonably satisfactory to the Trustee (which shall include the
statements set forth in Section 12.5 hereof) stating that, in the
opinion of such counsel, all such conditions precedent and covenants
have been complied with.
Section 12.5. Statements Required in Certificate or
Opinion.
Each certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture (other than a certificate
provided pursuant to TIA Section 314(a)(4)) shall comply with the provisions
of TIA Section 314(e) and shall include:
(a) a statement that the Person making such certificate
or opinion has read such covenant or condition;
(b) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(c) a statement that, in the opinion of such Person, he
or she has made such examination or investigation as is necessary to
enable him or her to express an informed opinion as to whether or not
such covenant or condition has been complied with; and
(d) a statement as to whether or not, in the opinion of
such Person, such condition or covenant has been complied with.
<PAGE> 90
90
Section 12.6. Rules by Trustee and Agents.
The Trustee may make reasonable rules for action by or at a
meeting of Holders. The Registrar or Paying Agent may make reasonable rules
and set reasonable requirements for its functions.
Section 12.7. No Personal Liability of Directors, Officers,
Employees and Stockholders.
No director, officer, employee, incorporator or stockholder of
the Company, as such, shall have any liability for any obligations of the
Company under the Notes or this Indenture or for any claim based on, in respect
of, or by reason of, such obligations or their creation. Each Holder of Notes,
by accepting a Note, waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the Notes. Such waiver
may not be effective to waive liabilities under the federal securities laws and
it is the view of the Commission that such a waiver is against public policy.
Section 12.8. Governing Law.
THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE
USED TO CONSTRUE THIS INDENTURE, THE NOTES AND THE GUARANTEES.
Section 12.9. No Adverse Interpretation of Other
Agreements.
This Indenture may not be used to interpret any other
indenture, loan or debt agreement of the Company, the Parent or their
respective Subsidiaries or of any other Person. Any such indenture, loan or
debt agreement may not be used to interpret this Indenture and the Guarantees.
Section 12.10. Successors.
All agreements of the Company, the Parent and each Subsidiary
Guarantor in this Indenture, the Notes and the Guarantees shall bind its
respective successors. All agreements of the Trustee in this Indenture shall
bind its successors.
Section 12.11. Severability.
In case any provision in this Indenture or in the Notes shall
be invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
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91
Section 12.12. Counterpart Originals.
The parties may sign any number of copies of this Indenture.
Each signed copy shall be an original, but all of them together represent the
same agreement.
Section 12.13. Table of Contents, Headings, Etc.
The Table of Contents, Cross-Reference Table and Headings of
the Articles and Sections of this Indenture have been inserted for convenience
of reference only, are not to be considered a part of this Indenture and shall
in no way modify or restrict any of the terms or provisions hereof.
[Signatures on following page]
<PAGE> 92
92
SIGNATURES
Dated as of
____ _________, 1996
Mesa Inc.
Attest: By________________________________
Name:_____________________________
__________________________ Title:____________________________
Mesa Operating Co.
Attest: By________________________________
__________________________ Name:_____________________________
Title:____________________________
Harris Trust and Savings Bank, as
Trustee
Attest: By________________________________
__________________________ Name:_____________________________
Title:____________________________
<PAGE> 93
================================================================================
EXHIBIT A
(Face of Note)
THIS NOTE HAS BEEN ISSUED WITH ORIGINAL ISSUE DISCOUNT FOR PURPOSES OF SECTIONS
1271-1275 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED. THE ISSUE PRICE,
AMOUNT OF ORIGINAL ISSUE DISCOUNT, ISSUE DATE AND YIELD TO MATURITY OF THE
NOTES MAY BE OBTAINED BY CONTACTING THE ISSUER'S INVESTORS RELATIONS DEPT.,
TELEPHONE NO. [(214) 969-2200].
___% Senior Subordinated Discount Notes due 2006
No. $________
MESA OPERATING CO.
promises to pay to
or registered assigns,
the principal sum of
Dollars on _______, 2006.
Interest Payment Dates: ______ and ________
Record Dates: _________ and __________
This Note shall not bear interest prior to _______, 2001. From
_______, 1996 through _______, 2001, the Accreted Value of this Note will
increase as specified on the reverse side hereof.
Dated: _______________, 1996
MESA OPERATING CO.
By:_______________________
Name:
Title:
Cusip Number:
By:_______________________
Name:
Title:
A-1
<PAGE> 94
This is one of the Notes referred
to in the within-mentioned (SEAL)
Indenture:
[_______________________],
as Trustee
By:____________________________
================================================================================
A-2
<PAGE> 95
(Back of Note)
_____% Senior Subordinated Discount Note due 2006
Capitalized terms used herein shall have the meanings
assigned to them in the Indenture referred to below unless otherwise indicated.
1. Interest. This Note shall not bear interest prior to
__________, 2001; however, the Accreted Value of the Note will increase from
______, 1996 through _________, 2001 at a rate of ____% per annum, compounded
semi- annually on _____ and ______ of each year. From and after ______, 1996,
Mesa Operating Co., a Delaware corporation (the "Company"), promises to pay
interest on the stated principal amount of this Note at the rate of _____% per
annum, which interest shall be payable in cash semiannually in arrears on _____
and ______, or if any such day is not a Business Day, on the next succeeding
Business Day (each an "Interest Payment Date"); provided that the first
Interest Payment Date shall be ____________, 2001. Interest on the Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from _______, 2001. Interest will be computed on the
basis of a 360-day year comprised of twelve 30-day months.
2. Method of Payment. On each Interest Payment Date the
Company will pay interest to the Person who is the Holder of record of this
Note as of the close of business on the ______ or ______________ immediately
preceding such Interest Payment Date, even if this Note is cancelled after such
record date and on or before such Interest Payment Date, except as provided in
Section 2.12 of the Indenture with respect to defaulted interest. Principal,
premium if any and interest on this Note will be payable at the office or
agency of the Company maintained for such purpose within the City and State of
New York or, at the option of the Company, payment of interest may be made by
check mailed to the Holder of this Note at its address set forth in the
register of Holders of Notes; provided that all payments with respect to the
Global Notes and definitive Notes having an aggregate principal amount of $5.0
million or more the Holders of which have given wire transfer instructions to
the Company at least 10 Business Days prior to the applicable payment date will
be required to be made by wire transfer of immediately available funds to the
accounts specified by the Holders thereof. Such payment shall be in such coin
or currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts.
3. Paying Agent and Registrar. Initially, Harris Trust
and Savings Bank, the Trustee under the Indenture, will act as Paying Agent and
Registrar. The Company may change any Paying
A-3
<PAGE> 96
Agent or Registrar without notice to any Holder. The Company, MESA Inc. (the
"Parent") or any Subsidiary Guarantor or any other of the Company's or Parent's
Subsidiaries may act in any such capacity.
4. Indenture. The Company issued the Notes under an
Indenture dated as of _____________, 1996 ("Indenture") among the Company, the
Parent and the Trustee. The terms of the Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (15 U.S. Code Sections 77aaa-77bbbb). The
Notes are subject to all such terms, and Holders are referred to the Indenture
and such Act for a statement of such terms. The Notes are general unsecured
obligations of the Company and are limited to $[ ] in aggregate
principal amount (at maturity) and will mature on ______, 2006.
5. Optional Redemption.
(a) The Notes are not redeemable at the Company's option
prior to __________, 2001. From and after ______, 2001, the Notes will be
subject to redemption at the option of the Company, in whole or in part, upon
not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below plus accrued and
unpaid interest thereon from ________, 2001 to the applicable redemption date,
if redeemed during the twelve-month period beginning on ____________ of the
years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . %
-------
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . %
-------
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . %
-------
2004 and thereafter . . . . . . . . . . . 100.000%
</TABLE>
(b) Notwithstanding the provisions of clause (a) of this
Paragraph 5, prior to ____________, 1999 the Company may, at its option, on any
one or more occasions, redeem up to [$ amount equal to 33 1/3%] million of the
original aggregate principal amount of Notes at a redemption price equal to
[_______]% of the Accreted Value (at the redemption date) thereof, with the net
proceeds of sales of Equity Interests (other than Disqualified Stock) of the
Company or Parent; provided that at least [$ amount equal to 66-2/3%] million
of the original aggregate principal amount of Notes must remain outstanding
immediately after the occurrence of such redemption; and provided, further,
that any such redemption shall occur within 60 days of the date after the
closing of the related sale of such Equity Interests.
"Accreted Value" with respect to any Note means, as of the
date of issuance of the Notes, [___] % of the offering price of the stated
principal amount of such Note, and as of any date
A-4
<PAGE> 97
after such date of issuance and prior to [_______], 2001 as of which the
Accreted Value is being calculated (the "Accreted Value Calculation Date") (a)
if the Accreted Value Calculation Date is [______] or [______] interest payment
dates, the percentage of the stated principal amount of such Note as of such
date as shown in the table below or (b) if the Accreted Value Calculation Date
is not [_______] or [_______], an amount equal to the sum of (i) the Accreted
Value of such Note as of [_______] or [_______], as the case may be,
immediately preceding the Accreted Value Calculation Date, plus (ii) the
accrued amortization of the original issue discount from (but excluding) such
immediately preceding [_______] or [_______] to (and including) the Accreted
Value Calculation Date, calculated as the product of (x) [______] % of annual
coupon rate of the Accreted Value of such Note as of such immediately
proceeding [_______] or [_______] and (y) a fraction, the numerator of which is
the number of days from (but excluding) such immediately preceding [_______] or
[_______] to (and including) the Accreted Value Calculation Date (assuming a
360-day year of twelve 30-day months), and the denominator of which is 180.
The Accreted Value of each Note as of each [_______] and [_______] prior to
[______ ], 2001 shall be an amount in dollars equal to a percentage of the
stated principal amount of such Note as set forth below:
<TABLE>
<CAPTION>
Payment Date Payment Date
------------ ------------
<S> <C> <C>
1996 % %
1997 % %
1998 % %
1999 % %
2000 % %
2001 % %
</TABLE>
On and after __________, 2001, the Accreted Value of each Note
shall be equal to 100% of the stated principal amount thereof.
6. Mandatory Redemption.
Except as set forth in paragraph 7 below, the Company shall
not be required to make mandatory redemption or sinking fund payments with
respect to the Notes.
7. Repurchase at Option of Holder.
(a) Upon the occurrence of a Change of Control, each
Holder of Notes shall have the right to require the Company to repurchase all
or any part (equal to $1,000 or an integral multiple thereof) of such Holder's
Notes pursuant to the offer described below (the "Change of Control Offer") at
an offer price in cash equal to prior to ______, 2001, 101% of the Accreted
Value of the Notes on the date of purchase and, on ______, 2001 and thereafter,
101% of the aggregate principal amount thereof plus accrued and unpaid
interest, if any, thereon to the date of
A-5
<PAGE> 98
purchase (the "Change of Control Payment"). The right of the Holders of the
Notes to require the Company to repurchase such Notes upon a Change of Control
may not be waived by the Trustee without the approval of the Holders of the
Notes required by Section 9.2 of the Indenture. Within 30 days following any
Change of Control, the Company will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase Notes pursuant to the procedures required by the Indenture and
described in such notice. The Change of Control Payment shall be made on a
business day not less than 30 days nor more than 60 days after such notice is
mailed. The Parent, the Company and each Subsidiary Guarantor will comply with
the requirements of Rule 14e-1 under the Exchange Act and any other securities
laws and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Notes as a result of a
Change of Control.
(b) If the Company or a Restricted Subsidiary consummates
any Asset Sales permitted by the Indenture, when the aggregate amount of Excess
Proceeds exceeds $10.0 million, the Company shall make an Asset Sale Offer to
purchase the maximum principal amount of Notes and any other Pari Passu
Indebtedness to which the Asset Sale Offer applies that may be purchased out of
the Excess Proceeds, at an offer price in cash in an amount equal to, in the
case of any such Pari Passu Indebtedness, 100% of the principal amount thereof,
plus accrued and unpaid interest thereon to the date of purchase or, in the
case of the Notes, prior to ______ 2001, 100% of the Accreted Value thereof on
the date of purchase and, thereafter, 100% of the principal amount of the
Notes, plus, after _________, 2001, accrued but unpaid interest thereon, if
any, to the date of purchase or, in the case of any other discount Pari Passu
Indebtedness, 100% of the accreted value thereof on the date of purchase, in
each case, in accordance with the procedures set forth in Section 3.9 of the
Indenture or the agreements governing the Pari Passu Indebtedness, as
applicable. To the extent that the aggregate principal amount (or accreted
value, as the case may be) of Notes and Pari Passu Indebtedness tendered
pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company
may use any remaining Excess Proceeds for general corporate purposes. If the
sum of (i) the aggregate Accreted Value (or, if after [_____], 2001, the
principal amount) of Notes surrendered by Holders thereof and (ii) the
aggregate principal amount or accreted value, as the case may be, of other Pari
Passu Indebtedness surrendered by holders or lenders thereof exceeds the amount
of Excess Proceeds, the Trustee and the Trustee or other lender representative
for the Pari Passu Indebtedness shall select the Notes and the other Pari Passu
Indebtedness to be purchased on a pro rata basis, based on the aggregate
principal amount (or accreted value, as applicable) thereof surrendered in such
Asset Sale Offer. [Upon completion of such Asset Sale Offer, the amount of
Excess Proceeds shall be reset at zero].
A-6
<PAGE> 99
8. Notice of Redemption. Notice of redemption will be
mailed at least 30 days but not more than 60 days before the redemption date to
each Holder whose Notes are to be redeemed at its registered address. Notes in
denominations larger than $1,000 may be redeemed in part but only in whole
multiples of $1,000, unless all of the Notes held by a Holder are to be
redeemed. On and after the redemption date interest ceases to accrue on Notes
or on the aggregate principal amount of the Notes called for redemption, as the
case may be.
9. Denominations, Transfer, Exchange. The Notes are in
registered form without coupons and only in denominations of $1,000 principal
amount (at maturity) and integral multiples of $1,000. The transfer of Notes
may be registered and Notes may be exchanged as provided in the Indenture. The
Registrar and the Trustee may require a Holder, among other things, to furnish
appropriate endorsements and transfer documents and the Company may require a
Holder to pay any taxes and fees required by law or permitted by the Indenture.
The Company need not exchange or register the transfer of any Note or portion
of a Note selected for redemption, except for the unredeemed portion of any
Note being redeemed in part. Also, it need not exchange or register the
transfer of any Note for a period of 15 days before a selection of Notes to be
redeemed or during the period between a record date and the corresponding
Interest Payment Date.
10. Persons Deemed Owners. The registered Holder of a
Note may be treated as its owner for all purposes.
11. Amendment, Supplement and Waiver. Subject to certain
exceptions, the Indenture or the Notes may be amended or supplemented with the
consent of the Holders of at least a majority in principal amount of the Notes
then outstanding (including, without limitation, consents obtained in
connection with a purchase of, or the tender offer or exchange offer for, such
Notes), and any existing Default or Event of Default under, or compliance with
any provision of the Indenture or the Notes may be waived with the consent of
the Holders of a majority in principal amount of the then outstanding Notes.
Without the consent of any Holder of a Note, the Indenture or the Notes may be
amended or supplemented to cure any ambiguity, defect or inconsistency, to
provide for uncertificated Notes in addition to or in place of certificated
Notes, to provide for the assumption of the Company's obligations to Holders of
the Notes in case of a merger or consolidation, to make any change that would
provide any additional rights or benefits to the Holders of the Notes or that
does not adversely affect the legal rights under the Indenture of any such
Holder, or to comply with the requirements of the Commission in order to effect
or maintain the qualification of the Indenture under the Trust Indenture Act.
12. Defaults and Remedies. Events of Default include:
(i) default for 30 consecutive days in the payment when due of
A-7
<PAGE> 100
interest on the Notes (whether or not prohibited by the provisions of Article
10 of the Indenture; (ii) default in payment when due of the Stated Price of or
premium, if any, on the Notes (whether or not prohibited by the provisions of
Article 10 of the Indenture); (iii) failure by the Company to comply with the
provisions of Article 5 of the Indenture; (iv) failure by the Company for 30
consecutive days after notice from the Trustee or the Holders of at least 25%
in aggregate principal amount at stated maturity of the Notes then outstanding
to comply with the provisions of Sections 4.3, 4.7, 4.8, 4.9, 4.10, 4.11, 4.12,
4.13, 4.14, 4.16 and 4.17 of the Indenture; (v) failure by the Company for 60
consecutive days after notice from the Trustee or the Holders of at least 25%
in aggregate principal amount at stated maturity of the Notes then outstanding
to comply with any of its other agreements or covenants in, or provisions of,
this Note or in the Indenture; (vi) except as permitted by the Indenture, any
Guarantee shall be held in any judicial proceeding to be unenforceable or
invalid or shall cease for any reason to be in full force and effect or the
Parent or a Subsidiary Guarantor or any Person acting on behalf of the Parent
or a Subsidiary Guarantor, shall deny or disaffirm the Parent's or such
Subsidiary Guarantor's obligation under its Guarantee; (vii) the failure by the
Parent to issue Preferred Stock for gross proceeds in the amount of $132
million pursuant to the Rights Offering and Standby Commitment or either
thereof within 90 days following the date of issuance of the Notes; (viii)
default under any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any Indebtedness for money
borrowed by the Company or any Subsidiary Guarantor whether such Indebtedness
or guarantee now exists, or is created after the date of the Indenture, which
default (a) is caused by a failure to pay principal of or premium, if any, or
interest on such Indebtedness prior to the expiration of the grace period
provided in such Indebtedness on the date of such default (a "Payment Default")
or (b) results in the acceleration of such Indebtedness prior to its final
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under which
there is then existing a Payment Default or the maturity of which has been so
accelerated, aggregates $10.0 million or more provided, that if any such
default is cured or waived or any such acceleration rescinded, or such
Indebtedness is repaid, within a period of 10 days from the continuation of
such default beyond the applicable grace period or the occurrence of such
acceleration, as the case may be, such Event of Default under the Indentures
and any consequential acceleration of the Notes shall be automatically
rescinded; (ix) a final judgment or order or final judgments or orders are
rendered against the Company or any Restricted Subsidiary that are unsatisfied
and that require the payment in money, either individually or in an aggregate
amount, that is more than $10.0 million over the coverage under applicable
insurance policies and either (a) a creditor has commenced an enforcement
proceeding upon such judgment (other
A-8
<PAGE> 101
than a judgment that is stayed by reason of pending appeal or otherwise) or (b)
a 60-day period transpired during which a stay of such judgment, order,
judgments or orders (by reason of pending appeal or otherwise) was not in
effect; and (x) certain events of bankruptcy or insolvency with respect to the
Company, the Parent or any Subsidiary Guarantor. If any Event of Default
(other than an Event of Default described in clause (x) above) occurs and is
continuing, the Trustee or the Holders of at least 25% in principal amount of
the then outstanding Notes may declare all the Notes to be due and payable
immediately. Notwithstanding the foregoing, in the case of an Event of Default
arising from certain events of bankruptcy or insolvency with respect to the
Company, the Parent or any Subsidiary Guarantor, all outstanding Notes will
become due and payable without further action or notice. Holders of the Notes
may not enforce the Indenture or the Notes except as provided in the Indenture.
Subject to certain limitations, Holders of a majority in principal amount at
stated maturity of the then outstanding Notes may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from Holders of the
Notes notice of any continuing Default or Event of Default (except a Default or
Event of Default relating to the payment of principal or interest) if it
determines that withholding notice is in their interest. The Holders of a
majority in aggregate principal amount at stated maturity of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest or premium on, or the principal of, the Notes. The Company is
required to deliver to the Trustee annually a statement regarding compliance
with the Indenture, and the Company is required, within 5 Business days after
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
"Stated Price" means, with respect to any 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 [________], 2001 or (ii) 100% of the principal
amount thereof plus accrued but unpaid interest thereon to the date of
determination, if such date is after [________], 2001, and in the cases, and
only the cases, of an optional redemption effected pursuant to the provisions
of Sections 3.7 and 4.13 of the Indenture, the premium (if any) payable
pursuant to such Sections, as applicable.
13. Trustee Dealings with Company. The Indenture
contains certain limitations on the rights of the Trustee, should it become a
creditor of the Company, 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 Trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest it must eliminate such
conflict
A-9
<PAGE> 102
within 90 days, apply to the Commission for permission to continue or resign.
14. No Recourse Against Others. No director, officer,
employee, incorporator or stockholder of the Company, as such, shall have any
liability for any obligations of the Company under the Notes or the Indenture
or for any claim based on, in respect of, or by reason of, such obligations or
their creation. Each Holder of Notes, by accepting a Note, waives and releases
all such liability. The waiver and release are part of the consideration for
issuance of the Notes. Such waiver may not be effective to waive liabilities
under the federal securities laws and it is the view of the Commission that
such a waiver is against public policy.
15. Authentication. This Note shall not be valid until
authenticated by the manual signature of the Trustee or an authenticating
agent.
16. Abbreviations. Customary abbreviations may be used
in the name of a Holder or an assignee, such as: TEN COM (= tenants in
common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with
right of survivorship and not as tenants in common), CUST (= Custodian), and
U/G/M/A (= Uniform Gifts to Minors Act.
17. CUSIP Numbers. Pursuant to a recommendation
promulgated by the Committee on Uniform Security Identification Procedures, the
Company has caused CUSIP numbers to be printed on the Notes and the Trustee may
use CUSIP numbers in notices of redemption as a convenience to Holders. No
representation is made as to the accuracy of such numbers either as printed on
the Notes or as contained in any notice of redemption and reliance may be
placed only on the other identification numbers placed thereon.
The Company will furnish to any Holder upon written request
and without charge a copy of the Indenture. Requests may be made to:
Mesa Operating Co.
1400 Williams Square West
5205 North O'Connor Boulevard
Irving, Texas 75039
Telecopier No.: (214) 444-9001
Attention: [Secretary]
[NOTE: THE FORM OF GUARANTEE ATTACHED AS EXHIBIT C TO THE INDENTURE IS TO BE
ATTACHED TO THIS NOTE.]
A-10
<PAGE> 103
ASSIGNMENT FORM
To assign this Security, fill in the form below: (I) or (we) assign
and transfer this Security to
- --------------------------------------------------------------------------------
(Insert assignee's Social Security or tax I.D. No.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
and irrevocably appoint ________________________________________________________
agent to transfer this Security on the books of the Company. The agent may
substitute another to act for him.
Date:
------------
Your Signature: ______________________________
(Sign exactly as your name appears on the
face of this Security)
Signature Guarantee:*_________________________
__________________________________
*/ Participant in a recognized Signature Guarantee Medallion Program (or
other signature guarantor acceptable to the Trustee).
A-11
<PAGE> 104
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the
Company pursuant to Section 4.10 or 4.13 of the Indenture, check the box below:
[ ] Section 4.10 [ ] Section 4.13
If you want to elect to have only part of the Note purchased
by the Company pursuant to Section 4.10 or Section 4.13 of the Indenture, state
the principal amount at maturity you elect to have purchased: $______________
Date: Your Signature:
(Sign exactly as your name appears on the
face of this Security)
Signature Guarantee:*_________________________
__________________________________
*/ Participant in a recognized Signature Guarantee Medallion Program (or
other signature guarantor acceptable to the Trustee).
A-12
<PAGE> 105
EXHIBIT B
(Form of Legend for Global Note)
Unless and until it is exchanged in whole or in part for Notes in
definitive form, this Note may not be transferred except as a whole by the
Depository to a nominee of the Depository or by a nominee of the Depository to
the Depository or another nominee of the Depository or by the Depository or any
such nominee to a successor Depository or a nominee of such successor
Depository. Unless this certificate is presented by an authorized
representative of The Depository Trust Company (55 Water Street, New York, New
York) ("DTC"), to the issuer or its agent for registration of transfer,
exchange or payment, and any certificate issued is registered in the name of
Cede & Co. or such other name as may be requested by an authorized
representative of DTC (and any payment is made to Cede & Co. or such other
entity as may be requested by an authorized representative of DTC), ANY
TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON
IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an
interest herein.
B-1
<PAGE> 106
SCHEDULE OF EXCHANGES OF DEFINITIVE NOTES
[To be attached to Global Note]
The following exchanges of a part of this Global Note for
definitive Notes have been made:
<TABLE>
<CAPTION>
Principal Amount of
Amount of decrease in Amount of increase in this Global Note Signature of authorized
Principal Amount Principal Amount following such officer of Trustee
Date of Exchange of this Global Note of this Global Note decrease (or increase) or Note Custodian
---------------- ------------------- ------------------- ---------------------- -----------------
<S> <C> <C> <C> <C>
</TABLE>
B-2
<PAGE> 107
EXHIBIT C
Guarantee
Each of the Parent and the Subsidiary Guarantors, if any, hereby,
jointly and severally, unconditionally guarantees to each Holder of a Note
authenticated and delivered by the Trustee and to the Trustee and its successors
and assigns, irrespective of the validity and enforceability of this Indenture,
the Notes or the obligations of the Company hereunder or thereunder, that: (a)
the Stated Price of and premium and interest on the Notes shall be promptly paid
in full when due, whether at maturity, by acceleration, redemption or otherwise,
and interest on the overdue principal of and interest on premium and interest on
the Notes, if any, if lawful, and all other obligations of the Company to the
Holders or the Trustee hereunder or thereunder shall be promptly paid in full or
performed, all in accordance with the terms hereof and thereof; and (b) in case
of any extension of time of payment or renewal of any Notes or any of such other
obligations, that same shall be promptly paid in full when due or performed in
accordance with the terms of the extension or renewal, whether at stated
maturity, by acceleration or otherwise. Failing payment when due of any amount
so guaranteed or any performance so guaranteed for whatever reason, the Parent
and the Subsidiary Guarantors shall be jointly and severally obligated to pay
the same immediately.
The obligations of the Parent and the Subsidiary Guarantors to the
Holders of Notes and to the Trustee pursuant to this Guarantee and the
Indenture are expressly set forth in Article 11 of the Indenture, and reference
is hereby made to such Indenture for the precise terms of this Guarantee. The
terms of Article 11 of the Indenture are incorporated herein by reference.
This is a continuing Guarantee and shall remain in full force and
effect and shall be binding upon each of the Parent and the Subsidiary
Guarantors and its respective successors and assigns to the extent set forth in
the Indenture until full and final payment of all of the Company's Obligations
under the Notes and the Indenture and shall inure to the benefit of the Trustee
and the Holders of Notes and their successors and assigns and, in the event of
any transfer or assignment of rights by any Holder of Notes or the Trustee, the
rights and privileges herein conferred upon that party shall automatically
extend to and be vested in such transferee or assignee, all subject to the terms
and conditions hereof. Notwithstanding the foregoing, any Subsidiary Guarantor
that satisfies the provisions of Section 11.4 of the Indenture shall be released
of its obligations hereunder. This is a Guarantee of payment and not a
guarantee of collection.
This Guarantee shall not be valid or obligatory for any purpose until
the certificate of authentication on the Note upon which this Guarantee is noted
shall have been executed by the Trustee under the Indenture by the manual
signature of one of its authorized officers.
C-1
<PAGE> 108
For purposes hereof, each Subsidiary Guarantor's
liability will be that amount from time to time equal to the aggregate
liability of such Subsidiary Guarantor hereunder but shall be limited
to the lesser of (i) the aggregate amount of the obligations of the
Company under the Notes and the Indenture and (ii) the amount, if any,
which would not have (A) rendered such Subsidiary Guarantor
"insolvent" (as such term is defined in the federal Bankruptcy Law and
in the Debtor and Creditor law of the State of New York) or (B) left
it with unreasonably small capital at the time its Guarantee of the
Notes was entered into, after giving effect to the incurrence of
existing Indebtedness immediately prior to such time; provided that,
it shall be a presumption in any lawsuit or other proceeding in which
such Subsidiary Guarantor is a party that the amount guaranteed
pursuant to its Guarantee is the amount set forth in clause (i) above
unless any creditor, or representative of creditors of such Subsidiary
Guarantor, or debtor in possession or trustee in bankruptcy of such
Guarantor, otherwise proves in such a lawsuit that the aggregate
liability of such Subsidiary Guarantor is limited to the amount set
forth in clause (ii). The Indenture provides that, in making any
determination as to the solvency or sufficiency of capital of a
Subsidiary Guarantor in accordance with the previous sentence, the
right of such Subsidiary Guarantor to contribution from other
Subsidiary Guarantors and the Parent and any other rights such
Subsidiary Guarantor may have, contractual or otherwise, shall be
taken into account.
Capitalized terms used herein have the same meanings given in
the Indenture unless otherwise indicated.
MESA, INC.,
a Texas corporation
By:_____________________________________
Name:___________________________________
Title:__________________________________
[ANY SUBSIDIARY GUARANTORS]
By:_____________________________________
Name:___________________________________
Title:__________________________________
C-2
<PAGE> 109
ST&B Draft
6/20/96
================================================================================
MESA OPERATING CO.
As Issuer
MESA, INC.
As a Guarantor
[__]% SENIOR SUBORDINATED DISCOUNT NOTES DUE 2006
__________________
INDENTURE
Dated as of ________ __, 1996
__________________
__________________
HARRIS TRUST AND SAVINGS BANK
As Trustee
__________________
================================================================================
<PAGE> 110
CROSS-REFERENCE TABLE*
<TABLE>
<CAPTION>
Trust Indenture Indenture
Act Section Section
<S> <C> <C>
310 (a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10
(a)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(a)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(a)(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
311 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.11
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.11
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
312 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.3
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.3
313 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6
(b)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.7
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6; 12.2
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6
314 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3; 12.2
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.4
(c)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.4
(c)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3-10.5
(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.5
(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
315 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5; 12.2
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1
(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.11
316 (a)(last sentence) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.9
(a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5
(a)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.7
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.12
317 (a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.8
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.9
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4
318 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.1
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.1
</TABLE>
_____________
N.A. means not applicable.
*This Cross-Reference Table is not part of the Indenture.
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ARTICLE 1
DEFINITIONS AND INCORPORATION
BY REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2. Other Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 1.3. Incorporation By Reference of Trust
Indenture Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 1.4. Rules of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
ARTICLE 2
THE NOTES . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 2.1. Form and Dating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 2.2. Execution and Authentication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 2.3. Registrar and Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 2.4. Paying Agent to Hold Money in Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 2.5. Holder Lists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 2.6. Transfer and Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 2.7. Replacement Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 2.8. Outstanding Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 2.9. Treasury Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 2.10. CUSIP Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 2.11. Cancellation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 2.12. Defaulted Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 2.13. Book-Entry Provisions for Global Notes . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ARTICLE 3
REDEMPTION AND PREPAYMENT . . . . . . . . . . . . . . . . . . . . . 31
Section 3.1. Notices to Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 3.2. Selection of Notes to Be Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 3.3. Notice of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 3.4. Effect of Notice of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 3.5. Deposit of Redemption Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 3.6. Notes Redeemed in Part . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 3.7. Optional Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 3.8. Mandatory Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Section 3.9. Offer to Purchase By Application of
Excess Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
ARTICLE 4
COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . 37
Section 4.1. Payment of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Section 4.2. Maintenance of Office or Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Section 4.3. Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 4.4. Compliance Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
</TABLE>
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Section 4.5. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Section 4.6. Stay, Extension and Usury Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Section 4.7. Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Section 4.8. Dividend and Other Payment Restrictions
Affecting Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Section 4.9. Incurrence of Indebtedness and Issuance
of Disqualified Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Section 4.10. Asset Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Section 4.11. Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Section 4.12. Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Section 4.13. Offer to Repurchase Upon Change of
Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Section 4.14. Additional Subsidiary Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Section 4.15. Corporate Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Section 4.16. No Senior Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Section 4.17. Business Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
ARTICLE 5
SUCCESSORS . . . . . . . . . . . . . . . . . . . . . . . . . 53
Section 5.1. Merger, Consolidation, or Sale of
Substantially All Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Section 5.2. Successor Corporation Substituted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
ARTICLE 6
DEFAULTS AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . 54
Section 6.1. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Section 6.2. Acceleration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Section 6.3. Other Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Section 6.4. Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Section 6.5. Control by Majority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Section 6.6. Limitation on Suits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Section 6.7. Rights of Holders of Notes to Receive
Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Section 6.8. Collection Suit by Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Section 6.9. Trustee May File Proofs of Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Section 6.10. Priorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Section 6.11. Undertaking for Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
ARTICLE 7
TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Section 7.1. Duties of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Section 7.2. Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Section 7.3. Individual Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Section 7.4. Trustee's Disclaimer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Section 7.5. Notice of Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Section 7.6. Reports by Trustee to Holders of the
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Section 7.7. Compensation and Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Section 7.8. Replacement of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Section 7.9. Successor Trustee by Merger, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
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Section 7.10. Eligibility; Disqualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Section 7.11. Preferential Collection of Claims
Against Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
ARTICLE 8
LEGAL DEFEASANCE AND COVENANT DEFEASANCE . . . . . . . . . . . . . . . . . . 68
Section 8.1. Option to Effect Legal Defeasance
or Covenant Defeasance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Section 8.2. Legal Defeasance and Discharge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Section 8.3. Covenant Defeasance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Section 8.4. Conditions to Legal or Covenant
Defeasance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Section 8.5. Deposited Money and Government
Securities to be Held in Trust;
Other Miscellaneous Provisions . . . . . . . . . . . . . . . . . . . . . . . . 70
Section 8.6. Repayment to Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Section 8.7. Reinstatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
ARTICLE 9
AMENDMENT, SUPPLEMENT AND WAIVER . . . . . . . . . . . . . . . . . . . . 72
Section 9.1. Without Consent of Holders of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Section 9.2. With Consent of Holders of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Section 9.3. Compliance with Trust Indenture Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Section 9.4. Revocation and Effect of Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Section 9.5. Notation on or Exchange of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Section 9.6. Trustee to Sign Amendment, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
ARTICLE 10
SUBORDINATION . . . . . . . . . . . . . . . . . . . . . . . . 75
Section 10.1. Agreement to Subordinate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Section 10.2. Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Section 10.3. Liquidation; Dissolution; Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Section 10.4. Default on Designated Senior Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Section 10.5. Acceleration of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Section 10.6. When Distribution Must Be Paid Over . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Section 10.7. Notice by Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Section 10.8. Subrogation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Section 10.9. Relative Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Section 10.10. Subordination May Not Be Impaired
by Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Section 10.11. Distribution or Notice to
Representative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Section 10.12. Rights of Trustee and Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Section 10.13. Authorization to Effect Subordination . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Section 10.14. Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Section 10.15. No Waiver of Subordination Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
</TABLE>
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ARTICLE 11
THE GUARANTEES . . . . . . . . . . . . . . . . . . . . . . . . 82
Section 11.1. The Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Section 11.2. Execution and Delivery Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Section 11.3. Parent and Subsidiary Guarantors May
Consolidate, etc., on Certain Terms . . . . . . . . . . . . . . . . . . . . . . . 84
Section 11.4. Releases of Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Section 11.5. Limitation on Subsidiary Guarantor
Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Section 11.6. "Trustee" to Include Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Section 11.7. Subordination of Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
ARTICLE 12
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . 87
Section 12.1. Trust Indenture Act Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Section 12.2. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Section 12.3. Communication by Holders of
Notes with Other Holders of Notes . . . . . . . . . . . . . . . . . . . . . . . . 89
Section 12.4. Certificate and Opinion as to
Conditions Precedent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Section 12.5. Statements Required in Certificate
or Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Section 12.6. Rules by Trustee and Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Section 12.7. No Personal Liability of Directors,
Officers, Employees and Stockholders . . . . . . . . . . . . . . . . . . . . . 90
Section 12.8. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Section 12.9. No Adverse Interpretation of Other
Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Section 12.10. Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Section 12.11. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Section 12.12. Counterpart Originals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Section 12.13. Table of Contents, Headings, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
</TABLE>
EXHIBITS
Exhibit A FORM OF NOTE
Exhibit B FORM OF LEGEND FOR GLOBAL NOTE
Exhibit C FORM OF GUARANTEE
iv
<PAGE> 1
EXHIBIT 5
BAKER & BOTTS
AUSTIN L.L.P
HOUSTON 2001 ROSS AVENUE
MOSCOW DALLAS, TEXAS 75201-2980
NEW YORK TELEPHONE: (214) 953-6500
WASHINGTON, D.C. fACSIMILE: (214) 953-6503
June 20, 1996
Mesa Operating Co.
MESA Inc.
1400 Williams Square West
5205 North O'Connor Boulevard
Irving, Texas 75039
Ladies and Gentlemen:
As set forth in the Registration Statement on Form S-3
(Registration No. 333-03281) (as amended through the date hereof, the
"Registration Statement") filed with the Securities and Exchange Commission by
Mesa Operating Co., a Delaware corporation ("MOC"), as issuer, and MESA Inc.,
a Texas corporation ("MESA" and, together with MOC, the "Companies"), as
guarantor, under the Securities Act of 1933, as amended, relating to (i)
$325,000,000 aggregate principal amount of % Senior Subordinated Notes
due 2006 and approximately $175,000,000 initial accreted value of
% Senior Subordinated Discount Notes due 2006 of MOC (together, the
"Notes") and (ii) the guarantees of the payment of the principal of, premium,
if any, and interest on the Notes by MESA (the "Guarantees"), certain legal
matters in connection with the Notes and the Guarantees are being passed upon
for you by us. The Notes and the Guarantees are to be issued and sold pursuant
to indentures (the "Indentures") between the Companies and Harris Trust and
Savings Bank, as trustee (the "Trustee"), and an underwriting agreement between
the Companies and Chase Securities Inc., BT Securities Corporation, Donaldson
Lufkin & Jenrette Securities Corporation and Merrill Lynch, Pierce, Fenner &
Smith Incorporated, as representatives of the several underwriters named
therein (the "Underwriting Agreement"). At your request, this opinion of
counsel is being furnished to you for filing as Exhibit 5 to the Registration
Statement.
As a basis for the opinions hereinafter expressed, where
applicable, we have examined and relied upon, among other items, the original
or copies certified to our satisfaction of (i) the Certificate or Articles of
Incorporation and Bylaws, each as amended to date, of the Companies; (ii) the
originals, or copies certified or otherwise identified to us, of corporate
records of the Companies, including minute books, as furnished to us by the
Companies, and records of the corporate proceedings of the Companies with
respect to the offering of the Notes and the Guarantees; (iii) the Registration
Statement, including all amendments thereto filed to date and all exhibits
thereto; (iv) the forms of the Indentures; (v) the Underwriting Agreement; (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 Companies with
respect to the accuracy of the factual matters contained in such certificates.
In our examination of the foregoing documents, we have assumed the genuineness
of all signatures and the authenticity of
<PAGE> 2
Mesa Operating Co. -2- June 20, 1996
MESA Inc.
all documents submitted to us as originals, the conformity to original
documents of all documents submitted to us as certified or photostatic copies
and the authenticity of the originals of such latter documents.
On the basis of the foregoing and such other investigation as
we have deemed necessary, and subject to the assumptions, qualifications,
limitations and exceptions set forth herein, we are of the opinion that:
1. MOC is a corporation duly incorporated and validly
existing under the laws of the State of Delaware
2. MESA is a corporation duly incorporated and validly
existing under the laws of the State of Texas.
3. The Notes have been duly authorized by all necessary
corporate action on the part of MOC and, when duly executed and delivered by
MOC and authenticated by the Trustee, all in accordance with the Indentures and
the Underwriting Agreement, and payment of the consideration for the Notes and
the Guarantees provided for in the Underwriting Agreement has been made, the
Notes will be legally issued and will constitute binding obligations of MOC.
4. The Guarantees have been duly authorized by all
necessary corporate action on the part of MESA and, when duly executed and
delivered by MESA and authenticated by the Trustee, all in accordance with the
Indentures and the Underwriting Agreement, and payment of the consideration for
the Notes and the Guarantees provided for in the Underwriting Agreement has
been made, the Guarantees will be legally issued and will constitute binding
obligations of MESA.
Robert L. Stillwell, a partner of this Firm, is member of the
Board of Directors of the Company and owns 26,500 shares of MESA's common
stock.
The opinions set forth above are limited to matters governed
by the General Corporation Law of the State of Delaware and the laws of the
State of Texas, as in effect on the date hereof.
<PAGE> 3
Mesa Operating Co. -3- June 20, 1996
MESA Inc.
We hereby consent to the filing of this opinion as Exhibit 5
to the Registration Statement and to the references to our Firm under the
caption "Legal Matters" in the Prospectus included in such Registration
Statement.
Very truly yours,
BAKER & BOTTS, L.L.P.
<PAGE> 1
EXHIBIT 8
BAKER & BOTTS
AUSTIN L.L.P
HOUSTON 2001 ROSS AVENUE
MOSCOW DALLAS, TEXAS 75201-2980
NEW YORK TELEPHONE: (214) 953-6500
WASHINGTON, D.C. FACSIMILE: (214) 953-6503
June 11, 1996
MESA Inc.
Mesa Operating Co.
1400 Williams Square West
5205 North O'Connor Boulevard
Irving, Texas 75039
Ladies and Gentlemen:
As our opinion concerning the U.S. federal income tax
consequences of the purchase, ownership and disposition of the Notes that are
described (and defined) in Registration Statement No. 333-03281 to be filed by
Mesa Operating Co. and MESA Inc. with the Securities and Exchange Commission
(the "Registration Statement"), we incorporate in their entirety all statements
of legal conclusion contained in the Registration Statement under the caption
"Certain Federal Income Tax Considerations," 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 Federal Income Tax Considerations" therein.
Very truly yours,
BAKER & BOTTS, L.L.P.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our firm) included in or made a part of this
Registration Statement and to the incorporation by reference in this
Registration Statement of our report dated March 6, 1996, included in Mesa
Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Houston, Texas
June 20, 1996
<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM T-1
Statement of Eligibility
Under the Trust Indenture Act of 1939
of a Corporation Designated to Act as Trustee
Check if an Application to Determine Eligibility
of a Trustee Pursuant to Section 305(b)(2) ______
HARRIS TRUST AND SAVINGS BANK
(Name of Trustee)
Illinois 36-1194448
(State of Incorporation) (I.R.S. Employer Identification No.)
111 West Monroe Street, Chicago, Illinois 60603
(Address of principal executive offices)
Judith Bartolini, Harris Trust and Savings Bank,
311 West Monroe Street, Chicago, Illinois, 60606
312-461-2527 phone 312-461-3525 facsimile
(Name, address and telephone number for agent for service)
MESA OPERATING CO.
(Name of Obligor)
MESA INC.
(Name of Guarantor)
Delaware 75-2516853
Texas 75-2394500
(State of Incorporation) (I.R.S. Employer Identification
No.)
1400 Williams Square West
5205 North O'Connor Boulevard
Irving TX 75039-3746
(Address of principal executive offices)
Senior Subordinated Notes due 2006
(Title of indenture securities)
<PAGE> 2
1. GENERAL INFORMATION. Furnish the following information as to the
Trustee:
(a) Name and address of each examining or supervising authority to which
it is subject.
Commissioner of Banks and Trust Companies, State of Illinois,
Springfield, Illinois; Chicago Clearing House Association, 164
West Jackson Boulevard, Chicago, Illinois; Federal Deposit
Insurance Corporation, Washington, D.C.; The Board of
Governors of the Federal Reserve System,Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Harris Trust and Savings Bank is authorized to exercise
corporate trust powers.
2. AFFILIATIONS WITH OBLIGOR. If the Obligor is an affiliate of the
Trustee, describe each such affiliation.
The Obligor is not an affiliate of the Trustee.
3. thru 15.
NO RESPONSE NECESSARY
16. LIST OF EXHIBITS.
1. A copy of the articles of association of the Trustee is now in
effect which includes the authority of the trustee to commence
business and to exercise corporate trust powers.
A copy of the Certificate of Merger dated April 1, 1972 between
Harris Trust and Savings Bank, HTS Bank and Harris Bankcorp, Inc.
which constitutes the articles of association of the Trustee as
now in effect and includes the authority of the Trustee to
commence business and to exercise corporate trust powers was
filed in connection with the Registration Statement of Louisville
Gas and Electric Company, File No. 2-44295, and is incorporated
herein by reference.
2. A copy of the existing by-laws of the Trustee.
A copy of the existing by-laws of the Trustee was filed in
connection with the Registration Statement of C-Cube Microsystems
Inc., File No. 33-97166, and is incorporated herein by
reference.
3. The consents of the Trustee required by Section 321(b) of the
Act.
(included as Exhibit A on page 2 of this statement)
4. A copy of the latest report of condition of the Trustee published
pursuant to law or the requirements of its supervising or
examining authority.
(included as Exhibit B on page 3 of this statement)
1
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the Trustee,
HARRIS TRUST AND SAVINGS BANK, a corporation organized and existing under the
laws of the State of Illinois, has duly caused this statement of eligibility to
be signed on its behalf by the undersigned, thereunto duly authorized, all in
the City of Chicago, and State of Illinois, on the 13th day of June, 1996.
HARRIS TRUST AND SAVINGS BANK
By: /s/ J. Bartolini
------------------------------
J. Bartolini
Vice President
EXHIBIT A
The consents of the trustee required by Section 321(b) of the Act.
Harris Trust and Savings Bank, as the Trustee herein named, hereby consents
that reports of examinations of said trustee by Federal and State authorities
may be furnished by such authorities to the Securities and Exchange Commission
upon request therefor.
HARRIS TRUST AND SAVINGS BANK
By: /s/ J. Bartolini
------------------------------
J. Bartolini
Vice President
2
<PAGE> 4
EXHIBIT B
Attached is a true and correct copy of the statement of condition of Harris
Trust and Savings Bank as of March 31, 1996, as published in accordance with a
call made by the State Banking Authority and by the Federal Reserve Bank of the
Seventh Reserve District.
[HARRIS BANK LOGO]
Harris Trust and Savings Bank
111 West Monroe Street
Chicago, Illinois 60603
of Chicago, Illinois, And Foreign and Domestic Subsidiaries, at the close of
business on March 31, 1996, a state banking institution organized and operating
under the banking laws of this State and a member of the Federal Reserve
System. Published in accordance with a call made by the Commissioner of Banks
and Trust Companies of the State of Illinois and by the Federal Reserve Bank of
this District.
Bank's Transit Number 71000288
<TABLE>
<CAPTION>
THOUSANDS
ASSETS OF DOLLARS
<S> <C> <C>
Cash and balances due from depository institutions:
Non-interest bearing balances and currency and coin............................. $971,800
Interest bearing balances....................................................... $508,198
Securities:........................................................................... $0
a. Held-to-maturity securities $2,925,091
b. Available-for-sale securities
Federal funds sold and securities purchased under agreements to resell in
domestic offices of the bank and of its Edge and Agreement
subsidiaries, and in IBF's:
Federal funds sold.............................................................. $304,450
Securities purchased under agreements to resell................................. $0
Loans and lease financing receivables:
Loans and leases, net of unearned income........................................ $7,653,290
LESS: Allowance for loan and lease losses...................................... $97,833
---------------
Loans and leases, net of unearned income, allowance, and reserve
(item 4.a minus 4.b)............................................................ $7,555,457
Assets held in trading accounts....................................................... $107,161
Premises and fixed assets (including capitalized leases).............................. $139,122
Other real estate owned............................................................... $203
Investments in unconsolidated subsidiaries and associated companies................... $200
Customer's liability to this bank on acceptances outstanding.......................... $71,355
Intangible assets..................................................................... $18,251
Other assets.......................................................................... $474,460
---------------------
TOTAL ASSETS $13,075,748
=====================
</TABLE>
3
<PAGE> 5
<TABLE>
<CAPTION>
LIABILITIES
<S> <C> <C>
Deposits:
In domestic offices...................................................................... $4,830,361
Non-interest bearing.................................................................... $2,390,307
Interest bearing........................................................................ $2,440,054
In foreign offices, Edge and Agreement subsidiaries, and IBF's........................... $2,990,031
Non-interest bearing.................................................................... $71,451
Interest bearing........................................................................ $2,918,580
Federal funds purchased and securities sold under agreements to repurchase in domestic
offices of the bank and of its Edge and Agreement subsidiaries, and in IBF's:
Federal funds purchased.................................................................. $882,146
Securities sold under agreements to repurchase........................................... $2,020,913
Trading Liabilities $66,711
Other borrowed money:.........................................................................
a. With remaining maturity of one year or less $11,520
b. With remaining maturity of more than one year $897,852
Bank's liability on acceptances executed and outstanding $71,355
Subordinated notes and debentures............................................................. $295,000
Other liabilities............................................................................. $186,774
------------------------
TOTAL LIABILITIES $12,252,663
========================
</TABLE>
<TABLE>
<CAPTION>
EQUITY CAPITAL
<S> <C>
Common stock.................................................................................. $100,000
Surplus....................................................................................... $275,000
a. Undivided profits and capital reserves.................................................... $470,392
b. Net unrealized holding gains (losses) on available-for-sale securities ($22,307)
------------------------
TOTAL EQUITY CAPITAL $823,085
========================
Total liabilities, limited-life preferred stock, and equity capital........................... $13,075,748
========================
</TABLE>
I, Steve Neudecker, Vice President of the above-named bank, do hereby
declare that this Report of Condition has been prepared in conformance with the
instructions issued by the Board of Governors of the Federal Reserve System and
is true to the best of my knowledge and belief.
STEVE NEUDECKER
4/30/96
We, the undersigned directors, attest to the correctness of this
Report of Condition and declare that it has been examined by us and, to the
best of our knowledge and belief, has been prepared in conformance with the
instructions issued by the Board of Governors of the Federal Reserve System and
the Commissioner of Banks and Trust Companies of the State of Illinois and is
true and correct.
EDWARD W. LYMAN,
ALAN G. McNALLY,
MARIBETH S. RAHE
Directors.
4
<PAGE> 6
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM T-1
Statement of Eligibility
Under the Trust Indenture Act of 1939
of a Corporation Designated to Act as Trustee
Check if an Application to Determine Eligibility
of a Trustee Pursuant to Section 305(b)(2) ______
HARRIS TRUST AND SAVINGS BANK
(Name of Trustee)
Illinois 36-1194448
(State of Incorporation) (I.R.S. Employer Identification
No.)
111 West Monroe Street, Chicago, Illinois 60603
(Address of principal executive offices)
Judith Bartolini, Harris Trust and Savings Bank,
311 West Monroe Street, Chicago, Illinois, 60606
312-461-2527 phone 312-461-3525 facsimile
(Name, address and telephone number for agent for service)
MESA OPERATING CO.
(Name of Obligor)
MESA INC.
(Name of Guarantor)
Delaware 75-2516853
Texas 75-2394500
(State of Incorporation) (I.R.S. Employer Identification
No.)
1400 Williams Square West
5205 North O'Connor Boulevard
Irving TX 75039-3746
(Address of principal executive offices)
Senior Subordinated Discount Notes due 2006
(Title of indenture securities)
<PAGE> 7
1. GENERAL INFORMATION. Furnish the following information as to the
Trustee:
(a) Name and address of each examining or supervising authority to which
it is subject.
Commissioner of Banks and Trust Companies, State of Illinois,
Springfield, Illinois; Chicago Clearing House Association, 164
West Jackson Boulevard, Chicago, Illinois; Federal Deposit
Insurance Corporation, Washington, D.C.; The Board of Governors
of the Federal Reserve System,Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Harris Trust and Savings Bank is authorized to exercise
corporate trust powers.
2. AFFILIATIONS WITH OBLIGOR. If the Obligor is an affiliate of the
Trustee, describe each such affiliation.
The Obligor is not an affiliate of the Trustee.
3. thru 15.
NO RESPONSE NECESSARY
16. LIST OF EXHIBITS.
1. A copy of the articles of association of the Trustee is now in
effect which includes the authority of the trustee to commence
business and to exercise corporate trust powers.
A copy of the Certificate of Merger dated April 1, 1972 between
Harris Trust and Savings Bank, HTS Bank and Harris Bankcorp,
Inc. which constitutes the articles of association of the
Trustee as now in effect and includes the authority of the
Trustee to commence business and to exercise corporate trust
powers was filed in connection with the Registration Statement
of Louisville Gas and Electric Company, File No. 2-44295, and
is incorporated herein by reference.
2. A copy of the existing by-laws of the Trustee.
A copy of the existing by-laws of the Trustee was filed in connection
with the Registration Statement of C-Cube Microsystems Inc., File No.
33-97166, and is incorporated herein by reference.
3. The consents of the Trustee required by Section 321(b) of the Act.
(included as Exhibit A on page 2 of this statement)
4. A copy of the latest report of condition of the Trustee published
pursuant to law or the requirements of its supervising or examining
authority.
(included as Exhibit B on page 3 of this statement)
1
<PAGE> 8
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the Trustee,
HARRIS TRUST AND SAVINGS BANK, a corporation organized and existing under the
laws of the State of Illinois, has duly caused this statement of eligibility to
be signed on its behalf by the undersigned, thereunto duly authorized, all in
the City of Chicago, and State of Illinois, on the 13th day of June, 1996.
HARRIS TRUST AND SAVINGS BANK
By: /s/ J. Bartolini
-------------------------------
J. Bartolini
Vice President
EXHIBIT A
The consents of the trustee required by Section 321(b) of the Act.
Harris Trust and Savings Bank, as the Trustee herein named, hereby consents
that reports of examinations of said trustee by Federal and State authorities
may be furnished by such authorities to the Securities and Exchange Commission
upon request therefor.
HARRIS TRUST AND SAVINGS BANK
By: /s/ J. Bartolini
-------------------------------
J. Bartolini
Vice President
2
<PAGE> 9
EXHIBIT B
Attached is a true and correct copy of the statement of condition of Harris
Trust and Savings Bank as of March 31, 1996, as published in accordance with a
call made by the State Banking Authority and by the Federal Reserve Bank of the
Seventh Reserve District.
[HARRIS BANK LOGO]
Harris Trust and Savings Bank
111 West Monroe Street
Chicago, Illinois 60603
of Chicago, Illinois, And Foreign and Domestic Subsidiaries, at the close of
business on March 31, 1996, a state banking institution organized and operating
under the banking laws of this State and a member of the Federal Reserve
System. Published in accordance with a call made by the Commissioner of Banks
and Trust Companies of the State of Illinois and by the Federal Reserve Bank of
this District.
Bank's Transit Number 71000288
<TABLE>
<CAPTION>
THOUSANDS
ASSETS OF DOLLARS
<S> <C> <C>
Cash and balances due from depository institutions:
Non-interest bearing balances and currency and coin............................. $971,800
Interest bearing balances....................................................... $508,198
Securities:...........................................................................
a. Held-to-maturity securities $0
b. Available-for-sale securities $2,925,091
Federal funds sold and securities purchased under agreements to resell in
domestic offices of the bank and of its Edge and Agreement
subsidiaries, and in IBF's:
Federal funds sold.............................................................. $304,450
Securities purchased under agreements to resell................................. $0
Loans and lease financing receivables:
Loans and leases, net of unearned income........................................ $7,653,290
LESS: Allowance for loan and lease losses...................................... $97,833
---------------
Loans and leases, net of unearned income, allowance, and reserve
(item 4.a minus 4.b)............................................................ $7,555,457
Assets held in trading accounts....................................................... $107,161
Premises and fixed assets (including capitalized leases).............................. $139,122
Other real estate owned............................................................... $203
Investments in unconsolidated subsidiaries and associated companies................... $200
Customer's liability to this bank on acceptances outstanding.......................... $71,355
Intangible assets..................................................................... $18,251
Other assets.......................................................................... $474,460
---------------------
TOTAL ASSETS
$13,075,748
=====================
</TABLE>
3
<PAGE> 10
<TABLE>
<CAPTION>
LIABILITIES
<S> <C> <C>
Deposits:
In domestic offices...................................................................... $4,830,361
Non-interest bearing.................................................................... $2,390,307
Interest bearing........................................................................ $2,440,054
In foreign offices, Edge and Agreement subsidiaries, and IBF's........................... $2,990,031
Non-interest bearing.................................................................... $71,451
Interest bearing........................................................................ $2,918,580
Federal funds purchased and securities sold under agreements to repurchase in domestic
offices of the bank and of its Edge and Agreement subsidiaries, and in IBF's:
Federal funds purchased.................................................................. $882,146
Securities sold under agreements to repurchase........................................... $2,020,913
Trading Liabilities $66,711
Other borrowed money:.........................................................................
a. With remaining maturity of one year or less $897,852
b. With remaining maturity of more than one year $11,520
Bank's liability on acceptances executed and outstanding $71,355
Subordinated notes and debentures............................................................. $295,000
Other liabilities............................................................................. $186,774
------------------------
TOTAL LIABILITIES $12,252,663
========================
</TABLE>
<TABLE>
<CAPTION>
EQUITY CAPITAL
<S> <C>
Common stock.................................................................................. $100,000
Surplus....................................................................................... $275,000
a. Undivided profits and capital reserves.................................................... $470,392
b. Net unrealized holding gains (losses) on available-for-sale securities ($22,307)
------------------------
TOTAL EQUITY CAPITAL $823,085
========================
Total liabilities, limited-life preferred stock, and equity capital........................... $13,075,748
========================
</TABLE>
I, Steve Neudecker, Vice President of the above-named bank, do hereby
declare that this Report of Condition has been prepared in conformance with the
instructions issued by the Board of Governors of the Federal Reserve System and
is true to the best of my knowledge and belief.
STEVE NEUDECKER
4/30/96
We, the undersigned directors, attest to the correctness of this
Report of Condition and declare that it has been examined by us and, to the
best of our knowledge and belief, has been prepared in conformance with the
instructions issued by the Board of Governors of the Federal Reserve System and
the Commissioner of Banks and Trust Companies of the State of Illinois and is
true and correct.
EDWARD W. LYMAN,
ALAN G. McNALLY,
MARIBETH S. RAHE
Directors.
4
