<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 7, 1996
REGISTRATION STATEMENT NO. 033-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
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)
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 number, including area code,
of registrants' principal executive offices)
---------------------
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. / /
REGISTRATION FEE
<TABLE>
<CAPTION>
=======================================================================================================================
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE(2)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
% Senior Subordinated Notes due
2006.................................... $200,000,000(2) 100% $200,000,000(2) $68,966
- -----------------------------------------------------------------------------------------------------------------------
% Senior Subordinated Discount
Notes due 2006.......................... (2) (2) (2) (2)
- -----------------------------------------------------------------------------------------------------------------------
Guarantee(3).............................. (4) (4) (4) (3)
=======================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) Of the $500 million Proposed Maximum Aggregate Offering Price of the
securities to be offered by the Prospectus constituting part of this
Registration Statement, $300,000,000 aggregate principal amount of debt
securities of the registrants was previously registered pursuant to
Registration Statement No. 033-52627 for offering on a continuous or delayed
basis pursuant to Rule 415 under the Securities Act. A filing fee of
$103,448 associated with such securities was previously paid with such
earlier registration statement, and the Amount of Registration Fee set forth
above is net of the fee previously paid.
(3) MESA Inc., the parent of Mesa Operating Co., is registering a guarantee of
the payment of the principal of, premium, if any, and interest on the Notes
being registered hereby. Pursuant to Rule 457(n) under the Securities Act of
1933, as amended, no separate registration fee is required with respect to
such guarantee.
(4) No separate consideration will be received from the purchasers of the Notes
with respect to the guarantee.
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.
================================================================================
<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 MAY 7, 1996
PROSPECTUS
MESA OPERATING CO. LOGO
$325,000,000 % SENIOR SUBORDINATED NOTES DUE 2006
$ % SENIOR SUBORDINATED DISCOUNT NOTES DUE 2006
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 December 31, 1995, 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 $307.9 million, representing the initial
borrowings under the $500 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 13 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," "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 , 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
its affiliates 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.
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 pre-tax
net present value, discounted at 10%, of approximately $1.0 billion.
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.
3
<PAGE> 5
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 was the sole high bidder for one block and a participating
high bidder for five additional blocks covering 28,000 acres for a total of
$500,000. Acceptance of these bids is subject to governmental approval.
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 pre-tax
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.
- 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.
4
<PAGE> 6
- High Degree of Operational Control. Mesa operates over 90% of the wells
in which it has working interests, 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 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.
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.
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").
5
<PAGE> 7
- Execution of New Credit Facility. The Company will enter into a new seven
year, $500 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 December 31, 1995) 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 repay a portion of the borrowings incurred under the New Credit
Facility at the First Closing.
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 December 31,
1995. See "Use of Proceeds" for additional detail.
<TABLE>
<CAPTION>
AMOUNTS
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
SOURCES
New Credit Facility (a)(b)................................ $ 307.9
Senior Subordinated Notes................................. 325.0
Discount Notes............................................ 175.0
Preferred Stock........................................... 265.0
Cash and investments (c).................................. 253.1
---------
Total sources........................................... $ 1,326.0
=========
USES
Repayment of HCLP Secured Notes (b)....................... $ 504.7
Repayment of Existing Credit Facility (a)................. 61.1
Redemption of 12 3/4% Secured Discount Notes due 1998..... 617.4
Redemption of 12 3/4% Discount Notes due 1996............. 39.7
Redemption of 13 1/2% Subordinated Notes due 1999......... 7.6
Transaction expenses...................................... 35.0
Accrued interest.......................................... 60.5
---------
Total uses.............................................. $ 1,326.0
=========
</TABLE>
- ---------------
(a) Reflects initial borrowings under the $500 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) Does not include a prepayment premium upon early retirement of the Secured
Notes (the "HCLP Secured Notes") of Hugoton Capital Limited Partnership
("HCLP"), a subsidiary of the Company. The actual amount of the prepayment
premium to be paid, if any, will depend on several factors, including the
outcome of Mesa's current negotiations with the holders of the HCLP Secured
Notes. To the extent that Mesa is required to pay a prepayment premium, the
initial borrowings under the New Credit Facility would be increased by the
amount of such premium.
(c) Includes approximately $148.1 million in cash and cash investments, $38.3
million in investments, $57.7 million in restricted cash of HCLP and $9.0
million of refundable prepaid interest, as included in the Parent's
Consolidated Balance Sheet as of December 31, 1995. This represents
substantially all of Mesa's cash and cash investments, investments and
restricted cash balances at December 31, 1995.
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, each
holder of the Notes will have the right to require
the Company to repurchase all or a portion of such
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). See
"Description of the Notes -- Repurchase at the
Option of Holders -- Change of Control."
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 December 31, 1995, on a pro forma
basis after giving effect to the Recapitalization
and the application of the proceeds thereof, would
have been approximately $307.9 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. 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"),
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, oil and NGL prices and
certain risks associated with an investment in the Notes offered hereby.
9
<PAGE> 11
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. 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
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 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 December 31, 1995.
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 Financial Statements of the Company would be
substantially the same as those of the Parent.
10
<PAGE> 12
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1991 1992 1993 1994 1995
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Natural gas................................................ $ 169.9 $ 157.6 $ 141.8 $ 139.6 $ 129.6
Natural gas liquids........................................ 62.0 59.7 61.4 72.7 75.3
Oil and condensate......................................... 16.1 18.7 12.4 7.9 19.6
Other...................................................... 1.5 1.1 6.6 8.5 10.5
------ ------ ------ ------ ------
Total revenues............................................... 249.5 237.1 222.2 228.7 235.0
------ ------ ------ ------ ------
Costs and expenses:
Lease operating............................................ 46.9 43.9 51.8 52.7 51.8
Production and other taxes................................. 18.9 18.6 20.4 21.3 18.4
Exploration charges........................................ 4.7 10.0 2.7 5.2 6.6
General and administrative................................. 27.8 24.5 25.2 28.5 26.8
Depreciation, depletion and amortization................... 117.1 113.9 100.1 92.3 83.4
------ ------ ------ ------ ------
Total costs and expenses..................................... 215.4 210.9 200.2 200.0 187.0
------ ------ ------ ------ ------
Operating income............................................. 34.1 26.2 22.0 28.7 48.0
Net interest expense (a)..................................... (134.3) (129.9) (131.3) (131.3) (132.7)
Other income (b)............................................. 21.0 14.5 6.9 19.2 27.1
------ ------ ------ ------ ------
Net loss..................................................... $ (79.2) $ (89.2) $ (102.4) $ (83.4) $ (57.6)
====== ====== ====== ====== ======
Net loss per common share.................................... $ (2.05) $ (2.31) $ (2.61) $ (1.42) $ (0.90)
====== ====== ====== ====== ======
OTHER FINANCIAL DATA:
EBITDA (c)................................................... $ 155.9 $ 150.1 $ 124.8 $ 126.2 $ 138.0
Net cash interest expense (d)................................ 130.9 126.1 78.0 47.8 90.4
Capital expenditures......................................... 31.9 69.2 29.6 32.6 42.3
Ratios:
EBITDA to net interest expense............................. 1.2x 1.2x 1.0x 1.0x 1.0x
EBITDA to net cash interest expense........................ 1.2x 1.2x 1.6x 2.6x 1.5x
Earnings to fixed charges (e).............................. NM NM NM NM NM
Total debt to EBITDA....................................... 8.4x 8.6x 10.0x 9.7x 9.0x
Pro Forma:
EBITDA (c)................................................. $ 145.0
Net interest expense (b)................................... 84.2
Net cash interest expense (d).............................. 60.0
Pro Forma Ratios:
EBITDA to net interest expense............................. 1.7x
EBITDA to net cash interest expense........................ 2.4x
Earnings to fixed charges (e).............................. NM
Total debt to EBITDA....................................... 5.6x
BALANCE SHEET DATA (END OF PERIOD):
Cash and investments (f)..................................... $ 260.3 $ 169.1 $ 150.0 $ 162.5 $ 187.4
Total assets................................................. 1,832.8 1,676.5 1,533.4 1,484.0 1,464.7
Long term debt, including current maturities................. 1,310.7 1,286.2 1,241.3 1,223.3 1,236.7
Stockholders' equity......................................... 273.6 184.4 112.1 124.6 67.0
Pro forma:
Cash and investments....................................... 1.0
Long term debt, including current maturities............... 813.2
Stockholders' equity....................................... 304.6
</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 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 $3.0 million and were inadequate to cover fixed charges and preferred
dividends by $24.8 million.
(f) At December 31, 1995, cash and investments includes $149.1 million of cash
and cash investments and $38.3 million of investments.
11
<PAGE> 13
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, BEFORE TAX(B):
Gross...................................................... $2,599.0 $2,408.0 $2,306.2 $2,225.8 $2,449.8
Discounted at 10%.......................................... 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.
12
<PAGE> 14
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," "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 $813 million and
stockholders' equity of approximately $305 million at December 31, 1995. 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. 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 $2.1 million. See "Unaudited Pro Forma Financial Information." Upon
consummation of the Recapitalization, annual interest expense is expected to be
approximately $90 million initially, with approximately $65 million payable
annually in cash during the first five years, which amounts will vary based on
outstanding borrowings and interest rates under the New Credit Facility and the
accretion of 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
13
<PAGE> 15
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 December 31, 1995, 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
$307.9 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 have sufficient capital to carry on its business and will be
able to pay its debts as they mature. See, however,
14
<PAGE> 16
"-- 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. There can be no
assurance, however, that such 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. Thus, if a Change of Control were to occur, Mesa may
not have the 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.
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
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.
15
<PAGE> 17
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. As of , 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, 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
16
<PAGE> 18
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-life reserve base
through infill drilling of its Hugoton reserves, additions to its compression
and gathering system and pipeline interconnects, and the construction and
expansion of gas processing plants. 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 Coast 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
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.
17
<PAGE> 19
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.
18
<PAGE> 20
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 $484 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
December 31, 1995. 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
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
SOURCES
New Credit Facility(a)(b)........................................ $ 307.9
Senior Subordinated Notes........................................ 325.0
Discount Notes................................................... 175.0
Preferred Stock.................................................. 265.0
Cash and investments(c).......................................... 253.1
---------
Total sources.................................................. $ 1,326.0
=========
USES
Repayment of HCLP Secured Notes(b)(d)............................ $ 504.7
Repayment of Existing Credit Facility (e)........................ 61.1
Redemption of 12 3/4% Secured Discount Notes due June 30, 1998... 617.4
Redemption 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
Fees and expenses relating to the Offering....................... 16.0
Other fees and expenses relating to the Recapitalization(f)...... 19.0
Accrued interest................................................. 60.5
---------
Total uses..................................................... $ 1,326.0
=========
</TABLE>
- ---------------
(a) Reflects initial borrowings under the $500.0 million New Credit Facility.
Does not include approximately $11.4 million in letters of credit to be
outstanding.
(b) Does not include a prepayment premium upon early retirement of the HCLP
Secured Notes. The actual amount of the prepayment premium to be paid, if
any, will depend on several factors, including the outcome of Mesa's current
negotiations with the holders of the HCLP Secured Notes. To the extent that
Mesa is required to pay a prepayment premium, the initial borrowings under
the New Credit Facility would be increased by the amount of such premium.
(c) Includes approximately $148.1 million in cash and cash investments, $38.3
million in investments, $57.7 million in restricted cash of HCLP and $9.0
million of refundable prepaid interest as included in the Parent's
Consolidated Balance Sheets as of December 31, 1995. This represents
substantially all of Mesa's cash and cash investments, investments and
restricted cash at December 31, 1995.
(d) 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 December 31, 1995 bear
interest at fixed rates ranging from 8.8% to 11.3% per annum (weighted
average 10.31%).
(e) 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% (8.25% at December 31, 1995). At December 31, 1995, the Existing
Credit Facility also supported letters of credit totaling $11.4 million that
are not included in the table above.
(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."
19
<PAGE> 21
CAPITALIZATION
The following table sets forth the historical consolidated cash and
investments, current maturities of long term debt and capitalization of the
Parent as of December 31, 1995, 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
December 31, 1995. 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 DECEMBER 31, 1995
--------------------------
HISTORICAL AS ADJUSTED
---------- -----------
(DOLLARS IN MILLIONS,
EXCEPT SHARE DATA)
<S> <C> <C>
Cash and investments (a)...................................................... $ 187.4 $ 1.0
======== =========
Current maturities of long term debt (b)...................................... $ 101.4 $ 5.3
-------- ---------
Long term debt:
HCLP Secured Notes.......................................................... 470.8 --
Existing Credit Facility.................................................... 38.6 --
12 3/4% Secured Discount Notes due 1998..................................... 618.5 --
Other debt.................................................................. 7.4 --
New Credit Facility......................................................... -- 307.9
Senior Subordinated Notes offered hereby.................................... -- 325.0
Discount Notes offered hereby............................................... -- 175.0
-------- ---------
Total long term debt (net of current maturities).......................... 1,135.3 807.9
-------- ---------
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) (c)........................................................ -- 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) (c)........................................................ -- 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.................................................. 399.0 647.8
Accumulated deficit......................................................... (332.6) (345.0)
-------- ---------
Total stockholders' equity................................................ 67.0 304.6
-------- ---------
Total capitalization.................................................... $1,303.7 $ 1,117.8
======== =========
</TABLE>
- ---------------
(a) Includes approximately $149.1 million in cash and cash investments and $38.3
million in investments.
(b) Consists of $33.9 million relating to the HCLP Secured Notes, $22.5 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) 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.
20
<PAGE> 22
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
Statement of Operations gives 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
December 31, 1995. 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.
21
<PAGE> 23
PRO FORMA BALANCE SHEET
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
----------------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash investments................................ $ 149.1 $ (148.1)(a) $ 1.0
Investments.............................................. 38.3 (38.3)(a) --
Accounts receivable and other............................ 49.3 -- 49.3
-------- --------- ---------
Total current assets................................... 236.7 (186.4) 50.3
-------- --------- ---------
Property, plant and equipment, net......................... 1,082.7 -- 1,082.7
-------- --------- ---------
Other assets:
Restricted cash of subsidiary partnership................ 57.7 (57.7)(b) --
Refundable prepaid interest.............................. 9.0 (9.0)(c) --
Debt issuance costs...................................... 13.3 6.7(d) 20.0
Gas balancing receivable................................. 56.0 -- 56.0
Other.................................................... 9.3 -- 9.3
-------- --------- ---------
Total other assets..................................... 145.3 (60.0) 85.3
-------- --------- ---------
Total assets......................................... $1,464.7 $ (246.4) $ 1,218.3
======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities on long term debt..................... $ 101.4 $ (96.1)(e) $ 5.3
Accounts payable and accrued liabilities................. 31.0 -- 31.0
Interest payable......................................... 60.5 (60.5)(e) --
-------- --------- ---------
Total current liabilities.............................. 192.9 (156.6) 36.3
-------- --------- ---------
Long term debt............................................. 1,135.3 (327.4)(e) 807.9
-------- --------- ---------
Deferred revenue and other liabilities..................... 69.5 -- 69.5
-------- --------- ---------
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...................................... (332.6) (12.4)(g) (345.0)
-------- --------- ---------
Total stockholders' equity............................. 67.0 237.6 304.6
-------- --------- ---------
Total liabilities and stockholders' equity........... $1,464.7 $ (246.4) $ 1,218.3
======== ========= =========
</TABLE>
(See Notes to Pro Forma Financial Statements)
22
<PAGE> 24
PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <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 (7.0)(h) 19.8
Depletion, depreciation and amortization...... 83.4 -- 83.4
-------- ------- -------
Total costs and expenses........................ 187.0 (7.0) 180.0
-------- ------- -------
Operating income................................ 48.0 7.0 55.0
-------- ------- -------
Other income (expense):
Interest income............................... 15.9 (15.5)(i) 0.4
Interest expense.............................. (148.6) 64.0(j) (84.6)
Investment gains.............................. 18.4 -- 18.4
Other......................................... 8.7 -- 8.7
-------- ------- -------
Total other income (expense).................... (105.6) 48.5 (57.1)
-------- ------- ------
Net loss before Preferred Stock dividends....... (57.6) 55.5 (2.1)
-------- ------- -------
Preferred Stock dividends....................... -- (21.9)(k) (21.9)
-------- ------- -------
Net loss available to the common stockholders... $ (57.6) $ 33.6 $ (24.0)
======== ======= =======
Net loss per common share....................... $ (0.90) $ (0.37)
======== =======
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 $ 7.0 $ 145.0
======== ======= =======
</TABLE>
(See Notes to Pro Forma Financial Statements)
23
<PAGE> 25
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 December 31, 1995 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 $6.7 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 $13.3 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." Pro forma long
term debt does not include any borrowings under the New Credit Facility that
may be required to fund a prepayment premium under the terms of the HCLP
Secured Notes.
(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 charge of $13.3 million of unamortized debt issuance costs
associated with the debt to be repaid and/or refinanced, net of an
approximately $0.9 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
termination of personnel from the total of 385 that were employed at
December 31, 1995, and a significant downsizing of the natural gas vehicle
equipment business. Prior to the Recapitalization, Mesa's financial
condition required personnel both to manage Mesa's business and the proposal
solicitation process which resulted in the Recapitalization. As a result of
the Recapitalization, it will no longer be necessary to maintain these
employment levels.
As a result of the Recapitalization, expenses associated with certain
litigation and proxy solicitations in 1995 involving Mesa and a group of
dissident stockholders are included as an adjustment to the Pro Forma
Statement of Operations. See "Business -- Legal Proceedings -- Settlement
with WDB Group."
Following is a summary of the general and administrative expense pro forma
adjustment:
<TABLE>
<CAPTION>
AMOUNT OF
G&A PRO FORMA ADJUSTMENT ADJUSTMENT
------------------------------------------------------ --------------------
(DOLLARS IN
MILLIONS)
<S> <C>
Personnel reductions.................................. $4.0
Natural gas vehicles.................................. 0.9
Stockholder litigation costs.......................... 2.0
Other................................................. 0.1
------
Total............................................... $7.0
======
</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 by an additional $3.0 million
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.
24
<PAGE> 26
(j) Reflects the reduction of interest expense as a result of the
Recapitalization. Interest expense adjustments include the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
Interest expense on existing debt........................................... $(145.5)
Interest expense on the New Credit Facility (assumed 7.0% average rate)..... 22.1
Interest expense on the Senior Subordinated Notes (assumed 11.0% rate)...... 36.8
Interest expense on the Discount Notes (assumed 12 1/4% rate)............... 22.6
----------
Total adjustment.......................................................... $ 64.0
==========
</TABLE>
Interest expense on existing debt does not include approximately $3.1
million of the interest portion of the administrative fee charged by CIG in
connection with Mesa's West Panhandle field operations. Interest expense on
the New Credit Facility, Senior Subordinated Notes and Discount Notes does
not include amortization of debt issuance costs of $0.6 million, $1.0
million and $0.6 million, respectively. The effects of fluctuations of
0.125% and 0.250% in 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.
(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.
25
<PAGE> 27
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 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 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 audited 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
financial statements of the Company and its subsidiaries will be substantially
the same as those of the Parent and its subsidiaries.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1991 1992 1993 1994 1995
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Natural gas...................................................... $ 169.9 $ 157.6 $ 141.8 $ 139.6 $ 129.6
Natural gas liquids.............................................. 62.0 59.7 61.4 72.7 75.3
Oil and condensate............................................... 16.1 18.7 12.4 7.9 19.6
Other............................................................ 1.5 1.1 6.6 8.5 10.5
------ ------ ------ ------ ------
Total revenues..................................................... 249.5 237.1 222.2 228.7 235.0
------ ------ ------ ------ ------
Costs and expenses:
Lease operating.................................................. 46.9 43.9 51.8 52.7 51.8
Production and other taxes....................................... 18.9 18.6 20.4 21.3 18.4
Exploration charges.............................................. 4.7 10.0 2.7 5.2 6.6
General and administrative....................................... 27.8 24.5 25.2 28.5 26.8
Depreciation, depletion and amortization......................... 117.1 113.9 100.1 92.3 83.4
------ ------ ------ ------ ------
Total costs and expenses........................................... 215.4 210.9 200.2 200.0 187.0
------ ------ ------ ------ ------
Operating income................................................... 34.1 26.2 22.0 28.7 48.0
Net interest expense (a)........................................... (134.3) (129.9) (131.3) (131.3) (132.7)
Other income (b)................................................... 21.0 14.5 6.9 19.2 27.1
------ ------ ------ ------ ------
Net loss........................................................... $ (79.2) $ (89.2) $ (102.4) $ (83.4) $ (57.6)
====== ====== ====== ====== ======
Net loss per common share.......................................... $ (2.05) $ (2.31) $ (2.61) $ (1.42) $ (0.90)
====== ====== ====== ====== ======
OTHER FINANCIAL DATA:
EBITDA (c)......................................................... $ 155.9 $ 150.1 $ 124.8 $ 126.2 $ 138.0
Net cash interest expense (d)...................................... 130.9 126.1 78.0 47.8 90.4
Capital expenditures............................................... 31.9 69.2 29.6 32.6 42.3
Ratios:
EBITDA to net interest expense................................... 1.2x 1.2x 1.0x 1.0x 1.0x
EBITDA to net cash interest expense.............................. 1.2x 1.2x 1.6x 2.6x 1.5x
Earnings to fixed charges(e)..................................... NM NM NM NM NM
Total debt to EBITDA............................................. 8.4x 8.6x 10.0x 9.7x 9.0x
BALANCE SHEET DATA (END OF PERIOD):
Cash and investments (f)........................................... $ 260.3 $ 169.1 $ 150.0 $ 162.5 $ 187.4
Total assets....................................................... 1,832.8 1,676.5 1,533.4 1,484.0 1,464.7
Long term debt, including current maturities....................... 1,310.7 1,286.2 1,241.3 1,223.3 1,236.7
Stockholders' equity............................................... 273.6 184.4 112.1 124.6 67.0
</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 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 December 31, 1995, cash and investments includes $149.1 million of cash
and cash investments and $38.3 million of investments.
26
<PAGE> 28
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 has a highly leveraged capital structure with long term debt, including
current maturities, totaling approximately $1.2 billion at December 31, 1995.
See Note 4 of Notes to Consolidated Financial Statements for a detailed
discussion of Mesa's debt. Mesa's current financial forecasts indicate, assuming
no changes in its capital structure and that no significant transactions are
completed, that cash generated by operating activities, together with available
cash and investment balances, will not be sufficient for Mesa to satisfy all of
its required debt principal and interest obligations in 1996.
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.
The expected reduction of annual cash interest expense is based on the
following assumptions: (i) initial borrowings under the New Credit Facility of
approximately $375 million, which gives effect to the occurrence of the First
Closing and Second Closing as of June 30, 1996, based on assumed cash balances
at such date and assuming that a prepayment premium is not paid on the HCLP
Secured Notes at such time; 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 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. If Mesa had been required to pay a full prepayment premium on
the HCLP Secured Notes as of May 6, 1996, the amount of such premium would have
been approximately $50 million.
Management believes that cash from operating activities, together with the
approximately $125 million of availability under the $500 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 foreseeable future
following the Recapitalization.
The successful completion of the Recapitalization is expected to position
Mesa to 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 utilize its existing NOLs would be limited to approximately $11
million to $15 million per year ("Annual NOL
27
<PAGE> 29
Limitation"). 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 restriction.
FIRST QUARTER 1996 RESULTS
On April 22, 1996, Mesa reported net income of $1.1 million, or $.02 per
share, for the first quarter of 1996 compared with a net loss of $7.9 million,
or $.12 per share, for the first quarter of 1995. Mesa reported first quarter
revenues of $80.6 million and operating income of $25.3 million in 1996 compared
with revenues of $62.2 million and operating income of $16.0 million in 1995.
Mesa's first quarter 1996 results reflect higher natural gas and natural gas
liquids production and significantly higher natural gas and natural gas liquids
prices. Mesa also reported gains of $8.8 million from its investments in energy
futures and securities in the first quarter of 1996 compared to $4.6 million for
the same period in 1995. The 1996 results include a non-cash impairment totaling
$6.8 million associated with the adoption of Statement of Financial Accounting
Standards No. 121 relating to impairment of long lived assets.
RESULTS OF OPERATIONS
The following table presents a summary of the results of operations of Mesa
for the years indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
---------------------------
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>
28
<PAGE> 30
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
======= ======= =======
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."
29
<PAGE> 31
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.
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>
30
<PAGE> 32
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. Depreciation, depletion and amortization ("DD&A")
expense, which is calculated quarterly on a unit-of-production basis, 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 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.
31
<PAGE> 33
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........................................................... 3.1 (3.9) 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. As of
,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.
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.
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<PAGE> 34
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.
In March 1995 the Financial Accounting Standards Board (the "FASB") issued
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. (See Note 1 to the
Consolidated Financial Statements of the Parent included elsewhere in this
Prospectus for discussion of this accounting standard.)
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 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.
33
<PAGE> 35
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 pre-tax net present value, discounted at 10%, of
approximately $1.0 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 pre-tax
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.
- 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. Mesa operates over 90% of the wells
in which it has working interests, 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 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.
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<PAGE> 36
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, 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 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,
35
<PAGE> 37
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 63% of the present value of estimated future net cash flows
before income taxes, 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 before income taxes,
determined in accordance with Commission guidelines. Production from the West
Panhandle properties 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
36
<PAGE> 38
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 was the sole high bidder for one block and a
participating high bidder for five additional blocks covering 28,000 acres in
the most recent federal lease sale in the Gulf of Mexico. Mesa bid $500,000 for
its share of the six blocks, five of which are located in an area where Mesa has
producing interests. Acceptance of these bids is subject to governmental
approval.
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.
37
<PAGE> 39
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. 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 an
independent petroleum engineering firm. In accordance with a long-term debt
agreement, the independent petroleum engineering firm 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 such independent
engineers 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. The independent
engineers' December 31, 1995 reserve estimates for the Hugoton field reflect a
downward revision from prior estimates by such engineers 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 the independent engineers' 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
the independent petroleum engineering firm's report referred to above and Mesa's
internal reserve estimates, DNR requested another independent engineering firm
(the "Due Diligence Engineering Firm") 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. The Due Diligence Engineering Firm 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.
The net reserves (on an MMcfe basis) derived from the data concerning gross
gas reserves provided in the Due Diligence Engineering Firm'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
38
<PAGE> 40
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.
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
39
<PAGE> 41
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.
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.
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<PAGE> 42
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 mid-West. 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.
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
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<PAGE> 43
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 a liquefied natural gas 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%).
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<PAGE> 44
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 -- Costs and Expenses."
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.
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<PAGE> 45
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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<PAGE> 46
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 endusers. 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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<PAGE> 47
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
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<PAGE> 48
decision was 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 due March 7, 1996. 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.
47
<PAGE> 49
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 Lawsuit
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.
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
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<PAGE> 50
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 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
49
<PAGE> 51
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.
50
<PAGE> 52
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; 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, 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>
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<PAGE> 53
Mr. Pickens and Mr. Cain are the sole directors of the Company. Effective
May 31, 1996, Mr. Cain will retire as Mesa's President and Chief Operating
Officer.
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." Mr. Rainwater and Ms. Moore are
married to each other. The following table sets forth the name, age and
five-year employment history of Mr. Rainwater, Ms. Moore, Mr. Hersh and Mr.
Smith:
<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>
52
<PAGE> 54
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; 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.
Paul W. Cain, age 57................... January 1992 - Present, Director, President and Chief
Operating Officer of Mesa; August 1986 - December 1991,
President and Chief Operating Officer of Pickens Operating
Co.; Director of Bicoastal Corporation.
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. Cain, Mr. Gardner and Mr. Ballew hold the same positions at
the Company that they hold at the Parent. Effective May 31, 1996, Mr. Cain will
retire as Mesa's President and Chief Operating Officer and Mr. Pickens will
assume Mr. Cain's duties.
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<PAGE> 55
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(3)
Chairman of the Board of 1994 675,000 175,000 -- 200,000 1,094,500(4)
Directors and Chief 1993 675,000 0 -- 275,000 114,750
Executive Officer
Paul W. Cain,................. 1995 400,020 0 -- 0 22,165(5)
President and Chief 1994 400,020 150,000 -- 150,000 93,503
Operating Officer 1993 400,020 225,000 -- 100,000 106,253
Dennis E. Fagerstone,......... 1995 199,980 50,000 -- 0 14,663(6)
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(7)
Vice President and Chief 1994(8) 92,095 60,000 -- 135,000 25,856
Financial Officer 1993 -- -- -- -- --
Andrew J. Littlefair,......... 1995 139,980 40,000 -- 0 11,163(9)
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 Internal
Revenue Code (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) 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.
(4) 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 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.
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<PAGE> 56
(5) 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.
(6) 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.
(7) 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.
(8) Mr. Gardner became an officer of Mesa in June 1994.
(9) 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.
55
<PAGE> 57
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.
56
<PAGE> 58
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.
57
<PAGE> 59
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
58
<PAGE> 60
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 per 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.
59
<PAGE> 61
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 April 30, 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 BEFORE THE SHARES OWNED AFTER THE SALE OF SERIES B
SALE OF SERIES B PREFERRED STOCK AND THE RIGHTS OFFERING(1)
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 68.8% 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 April 30, 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
60
<PAGE> 62
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.
CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information as of April 30, 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 BEFORE SHARES OWNED AFTER THE SALE OF SERIES B
THE SALE OF SERIES B PREFERRED STOCK AND THE RIGHTS OFFERING(1)
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."
61
<PAGE> 63
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.
62
<PAGE> 64
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
, 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 , 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. As of the date of the
Indentures, the Company has no Material Restricted Subsidiaries. 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 certain
circumstances 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 a 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 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
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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 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
December 31, 1995 would have been approximately $307.9 million, representing the
initial borrowings under the $500 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. 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, Person
or entity 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 Notes, such Indenture and the Guarantees,
(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, Person or entity (including a Subsidiary that is not a Subsidiary
Guarantor) in a transaction that does not violate any of the covenants in the
Indentures or a sale or other disposition of all of the capital stock of a
Subsidiary Guarantor to any corporation, Person or entity (including a
Subsidiary that is not a Subsidiary Guarantor), by way of merger, consolidation
or otherwise, then such Subsidiary Guarantor (in the event of a sale or other
disposition, by way of such a merger, consolidation or otherwise, of all of the
capital stock of such Subsidiary Guarantor) or the corporation, Person or entity
acquiring the property (in the event of a sale or other disposition of all or
substantially all of the assets of such Subsidiary Guarantor) will be released
from and relieved of any obligations under its Guarantees; provided, if such
acquiring corporation, Person or entity 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."
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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 Unrestricted Subsidiary that
ceases to be an Unrestricted Subsidiary and, thereafter, is 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 will be the office of the Trustees 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 further, that such redemption shall
occur within 60 days after the date of the closing of the related sale of such
Equity Interests.
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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, 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"). 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 will comply with the
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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.
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 (including a Change of Control under the Indentures)
would 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, there can be no assurance that the Company would have
available funds sufficient to first satisfy its obligations under the Credit
Agreement or other agreements relating to Senior Debt, if accelerated, and then
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.
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.
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 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
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<PAGE> 69
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 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 or lenders 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. 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 or lenders
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. Upon completion of such Asset Sale Offer,
any remaining Excess Proceeds that were the subject of such Asset Sale Offer may
be used for general corporate purposes and will no longer be considered "Excess
Proceeds" for purposes of this paragraph.
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 contain 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 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.
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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 or (b) 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 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
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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 held by any of the
Company's (or any of its Subsidiaries') employees pursuant to any management
equity subscription agreement or stock option agreement; 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 covenant
"Restricted Payments" and the applicable provisions of the second paragraph of
the covenant "Restricted Payments," as appropriate. 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.
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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) $500 million and (2) the Borrowing Base; (c) the
guarantee by any Subsidiary Guarantor of any Indebtedness that is permitted by
the Indentures to be incurred by the Company; (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) the Parent is not the obligor on such Indebtedness and, 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 to 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) in addition to Indebtedness under any Credit Facility, Indebtedness of the
Company or any Subsidiary Guarantor under letters of credit or borrowed money
obligations, or in lieu of or in addition to such letters of credit or borrowed
money, guarantees of such Indebtedness or other obligations of the Company or
any Subsidiary Guarantor by any other Subsidiary Guarantor or the Company, as
applicable, related to any Permitted Marketing Transaction; provided, that in
the event that such Indebtedness is guaranteed by the Company or any Subsidiary
Guarantor, then either (1) the Person with which the Company or such Subsidiary
Guarantor has contracts to sell 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 to the Company or such Subsidiary Guarantor 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 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
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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 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 or the property or assets of the Person 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
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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, 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."
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
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 Affiliate
Transaction 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 complies with clause (i) above
and (b) such transaction or series of related transactions shall have been
approved by a resolution adopted by a majority of the independent directors of
the Company (which resolution shall be conclusive evidence of compliance with
this provision) and (iv) with respect to a transaction or series of transactions
involving payments of $15,000,000 or more in the aggregate, the Company delivers
an Officers' Certificate to the Trustees certifying that (a) such transaction or
series of related transactions complies with clause (i) above, (b) such
Affiliate
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Transaction or series of related transactions shall have been approved by a
resolution adopted by a majority of the independent directors of the Board of
Directors of the Company and (c) the Company shall have received the written
opinion of a firm of investment bankers nationally recognized in the United
States that such Affiliate Transaction 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 or
(7) any transaction relating to the disposition of the Company's Investment in
MEV.
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 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
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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
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 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 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 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) 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 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.
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. 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 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.
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
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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 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 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 and
its Subsidiaries 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 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 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
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<PAGE> 78
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, 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 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 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 Article 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.
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<PAGE> 79
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
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 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, % 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 or
interest payment dates, 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 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) % 50% 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 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>
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<PAGE> 80
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. which 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 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 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.
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"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 (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
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<PAGE> 82
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.
"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 $500 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.
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<PAGE> 83
"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 Indentures 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 debt 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 $12,900,000, together with all
accrued and unpaid interest thereon and all premiums payable with respect
thereto.
"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
financing), (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(c), (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.
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"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 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.
"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), (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
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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 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
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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 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
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the time outstanding, 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 utilized 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 or Senior Debt 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 or governmental charges or 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 or other like Liens arising in the ordinary
course of business, (ix) pre-judgment 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
or rental payments and for compliance with the terms of such leases, (xiv) Liens
constituting survey exceptions, encumbrances, easements, or reservations of, or
rights to others for, rights-of-way, zoning or other restrictions as to the use
of real properties, and minor defects of title which, in the case of any of the
foregoing, were not incurred or created to 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.
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"Permitted Marketing Transaction" means (i) a transaction in which the
Company or any Subsidiary 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 that
Person or another 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
Guarantor of hydrocarbons for which the Company or any 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 payable under the
documentation governing such Indebtedness and reasonable 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 Indentures, 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, (a) any Indebtedness of the Company to any of its Subsidiaries or other
Affiliates, or (b) any Indebtedness that is incurred in violation of the
Indentures (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.
"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).
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"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.
"Subordinated Indebtedness" means any Indebtedness of the Company (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.
"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.
"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.
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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
material domestic subsidiaries and will be secured by a pledge of all of the
capital stock of the direct and indirect subsidiaries of the Company and a first
priority security interest in other tangible and intangible assets representing
at least 85% of Mesa's total assessed collateral value, which assets will
include all of Mesa's West Panhandle and Hugoton properties.
The New Credit Facility will be a seven year revolving credit facility for
an aggregate of up to $500 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 50% of the entire amount 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 $500 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. Mesa will 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. 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 and
reduction of the total commitment 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), (ii)
100% of the net proceeds of the incurrence of certain indebtedness by Mesa and
(iii) 100% of the net proceeds of any sale or other disposition by Mesa of any
assets (subject to certain collateral substitution provisions). 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. Initially, the borrowing base will be $500 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.
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.
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 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.
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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.
Mesa must also use its reasonable best efforts to cause the Series A
Preferred Stock and the shares of Common Stock issuable upon conversion thereof
to be approved for listing on the New York Stock Exchange prior to the Second
Closing Date and to cause the Rights to be approved for trading thereon prior to
commencement of the Rights Offering.
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 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. The Preferred Stock is redeemable in whole or in part at the option
of the Parent at any time after the tenth anniversary of the original issue date
and must be redeemed on June 30, 2008. In either case, the redemption price will
be equal to the stated value of the shares being redeemed, plus all accrued but
unpaid dividends, and will be payable 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 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 (initially $2.26 per
share). 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 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.
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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. Except as otherwise indicated, statements of legal conclusion
regarding tax treatments, tax effects or tax consequences that are set forth in
this section reflect the opinion of Baker & Botts, L.L.P., counsel for the 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.
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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.
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.
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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 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.
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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 , 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).
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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
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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.
97
<PAGE> 99
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MESA Inc. Consolidated Financial Statements for the Years Ended December 31, 1995,
and 1994
Report of Independent Public Accountants...................................................... F-2
Consolidated Statements of Operations......................................................... F-3
Consolidated Balance Sheets................................................................... F-4
Consolidated Statements of Cash Flows......................................................... F-5
Consolidated Statements of Changes in Stockholders' Equity.................................... F-6
Notes to Consolidated Financial Statements.................................................... F-7
Supplemental Financial Data................................................................... F-28
</TABLE>
F-1
<PAGE> 100
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
F-2
<PAGE> 101
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-3
<PAGE> 102
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-4
<PAGE> 103
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-5
<PAGE> 104
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-6
<PAGE> 105
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-7
<PAGE> 106
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-8
<PAGE> 107
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-9
<PAGE> 108
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-10
<PAGE> 109
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-11
<PAGE> 110
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-12
<PAGE> 111
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-13
<PAGE> 112
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-14
<PAGE> 113
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-15
<PAGE> 114
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-16
<PAGE> 115
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.
(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.
F-17
<PAGE> 116
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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.
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
F-18
<PAGE> 117
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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>
F-19
<PAGE> 118
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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 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
F-20
<PAGE> 119
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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%.
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%).
F-21
<PAGE> 120
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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"). 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 an approximate 99% limited partnership interest
in HCLP. MHC owns cash and securities, an approximate 1% 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 general partner interest of HCLP. (See discussion below for
1994 changes in subsidiaries and HCLP ownership.) HCLP owns substantially all of
the Company's Hugoton field natural gas properties and is liable for the HCLP
Secured Notes (see Note 4). The assets and cash flows of HCLP 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. MOC and the Company are liable for the Credit
Agreement, the 13 1/2% subordinated notes and the Discount Notes. Mesa Capital
Corp. ("Mesa Capital"), a wholly owned financing subsidiary of MOC, is also an
obligor under the 13 1/2% subordinated notes and the Discount Notes. 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.
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.
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 approximately 19%) 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 99% of the limited partnership interest in HCLP, and
all of MHC's intercompany debt to MOC which was outstanding at December 31,
1993, was eliminated.
F-22
<PAGE> 121
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following are condensed consolidating financial statements of MESA Inc.,
HCLP, MOC, and the Company's other subsidiaries combined (in millions):
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>
<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>
F-23
<PAGE> 122
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
<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>
F-24
<PAGE> 123
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>
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>
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>
F-25
<PAGE> 124
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>
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>
<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>
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.
F-26
<PAGE> 125
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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.
(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.
F-27
<PAGE> 126
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-28
<PAGE> 127
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-29
<PAGE> 128
<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-30
<PAGE> 129
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-31
<PAGE> 130
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................................ 13
Use of Proceeds............................. 19
Capitalization.............................. 20
Unaudited Pro Forma Financial Information... 21
Selected Historical Financial Data.......... 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 27
Business.................................... 34
Management.................................. 51
Executive Compensation...................... 54
Security Ownership of Certain Beneficial
Owners and Management..................... 60
Description of the Notes.................... 63
Description of the New Credit Facility...... 89
Description of the Stock Purchase Agreement
and the Rights Offering................... 90
Certain Federal Income Tax Considerations... 92
Underwriting................................ 94
Legal Matters............................... 94
Experts..................................... 94
Additional Information...................... 95
Incorporation of Certain Documents by
Reference................................. 95
Glossary of Selected Oil and Gas Terms...... 96
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
LOGO
CHASE SECURITIES INC.
BT SECURITIES CORPORATION
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MERRILL LYNCH & CO.
, 1996
<PAGE> 131
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........................................................................... 30,500
Printing and engraving expenses.................................................... *
Accounting fees and expenses....................................................... *
Blue Sky fees and expenses......................................................... *
Legal fees and expenses............................................................ *
Trustee fees and expenses.......................................................... *
Rating agency fees................................................................. *
Miscellaneous...................................................................... *
--------
Total..................................................................... *
========
</TABLE>
- ---------------
*To be provided by amendment
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> 132
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> 133
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
<TABLE>
<C> <S>
+1.1 Form of Underwriting Agreement.
+4.1 Form of Senior Subordinated Note Indenture among Mesa Operating Co., MESA Inc. and
, as trustee.
+4.2 Form of Senior Subordinated Discount Note Indenture among Mesa Operating Co., MESA Inc. and
, as trustee.
+5 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.
+23.3 Consent of Baker & Botts, L.L.P. (included in Exhibit 5 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>
- ---------------
+ To be filed by amendment.
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> 134
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 7th day of May, 1996.
MESA OPERATING CO.
By: /s/ BOONE PICKENS
------------------------------
Boone Pickens,
Chief Executive Officer
POWER OF ATTORNEY
The undersigned directors and executive officers of Mesa Operating Co.
hereby constitute and appoint Stephen K. Gardner and William D. Ballew, and each
of them, with full power to act without the other and with full power of
substitution and resubstitution, our true and lawful attorneys-in-fact with full
power to execute in our name and behalf in the capacities indicated below any
and all amendments (including post-effective amendments and amendments thereto)
to this Registration Statement and to file the same, with all exhibits thereto
and other documents in connection therewith with the Securities and Exchange
Commission and hereby ratify and confirm all that such attorneys-in-fact, or
either of them, or their substitutes shall lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement 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 and Chief Executive Officer May 7, 1996
- ------------------------------------------------- (Principal Executive Officer)
Boone Pickens
/s/ PAUL W. CAIN Director, President and Chief May 7, 1996
- ------------------------------------------------- Operating Officer
Paul W. Cain
/s/ STEPHEN K. GARDNER Vice President and Chief Financial May 7, 1996
- ------------------------------------------------- Officer (Principal Financial
Stephen K. Gardner Officer)
/s/ WILLIAM D. BALLEW Controller (Principal Accounting May 7, 1996
- ------------------------------------------------- Officer)
William D. Ballew
</TABLE>
II-4
<PAGE> 135
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 7th day of May, 1996.
MESA Inc.
By: /s/ BOONE PICKENS
------------------------------
Boone Pickens,
Chief Executive Officer
POWER OF ATTORNEY
The undersigned directors and executive officers of MESA Inc. hereby
constitute and appoint Stephen K. Gardner and William D. Ballew, and each of
them, with full power to act without the other and with full power of
substitution and resubstitution, our true and lawful attorneys-in-fact with full
power to execute in our name and behalf in the capacities indicated below any
and all amendments (including post-effective amendments and amendments thereto)
to this Registration Statement and to file the same, with all exhibits thereto
and other documents in connection therewith with the Securities and Exchange
Commission and hereby ratify and confirm all that such attorneys-in-fact, or
either of them, or their substitutes shall lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement 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 Chief Executive Officer and May 7, 1996
- ------------------------------------------------- Chairman of the Board of
Boone Pickens Directors (Principal
Executive Officer)
/s/ PAUL W. CAIN President, Chief Operating May 7, 1996
- ------------------------------------------------- Officer and Director
Paul W. Cain
/s/ STEPHEN K. GARDNER Vice President and Chief May 7, 1996
- ------------------------------------------------- Financial Officer (Principal
Stephen K. Gardner Financial Officer)
/s/ WILLIAM D. BALLEW Controller (Principal May 7, 1996
- ------------------------------------------------- Accounting Officer)
William D. Ballew
Director
- -------------------------------------------------
John S. Herrington
/s/ WALES H. MADDEN, JR. Director May 7, 1996
- -------------------------------------------------
Wales H. Madden, Jr.
Director
- -------------------------------------------------
Dorn Parkinson
Director
- -------------------------------------------------
Joel L. Reed
/s/ FAYEZ S. SAROFIM Director May 7, 1996
- -------------------------------------------------
Fayez S. Sarofim
/s/ ROBERT L. STILLWELL Director May 7, 1996
- -------------------------------------------------
Robert L. Stillwell
</TABLE>
II-5
<PAGE> 136
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
, as trustee.
+4.2 Form of Senior Subordinated Discount Note Indenture among Mesa Operating Co., MESA Inc. and
, as trustee.
+5 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.
+23.3 Consent of Baker & Botts, L.L.P. (included in Exhibit 5 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>
- ---------------
+ To be filed by amendment.
<PAGE> 1
EXHIBIT 12
MESA INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
The following computation of the ratio of earnings to fixed charges for the
years ended December 31, 1991, 1992, 1993, 1994 and 1995 represent the actual
results of Mesa's operations for those periods.
The column entitled "As Adjusted for the Recapitalization" includes data for
Mesa after giving effect to the Recapitalization as if such Recapitalization had
occurred on January 1, 1995.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
1995
--------------------------
AS ADJUSTED
FOR THE
1991 1992 1993 1994 ACTUAL RECAPITALIZATION
-------- -------- --------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS:
Net loss............................... $(79,163) $(89,232) $(102,448) $(83,353) $(57,568) $ (2,081)
Adjustments:
Interest expense..................... 150,770 143,392 142,002 144,757 148,630 84,660
-------- -------- -------- --------- -------- --------
Total earnings......................... $ 71,607 $ 54,160 $ 39,554 $ 61,404 $ 91,062 $ 82,579
======== ======== ======== ========= ======== ========
Fixed charges
Interest capitalized................. $ -- $ 2,365 $ 2,884 $ 104 $ 908 $ 908
Interest expense..................... 150,770 143,392 142,002 144,757 148,630 84,660
-------- -------- -------- --------- -------- --------
Total fixed charges.................... $150,770 $145,757 $ 144,886 $144,861 $149,538 $ 85,567
======== ======== ======== ========= ======== ========
Ratio of earnings to fixed charges..... NM NM NM NM NM NM
======== ======== ======== ========= ======== ========
Preferred dividend requirements........ $ 21,845
========
Total fixed charges and preferred
dividends............................ $107,412
========
Ratio of earnings to combined fixed
charges and preferred dividends...... NM
========
Amount by which fixed charges exceed
earnings............................. $ 79,163 $ 91,597 $ 105,332 $ 83,457 $ 58,476 $ 2,988
======== ======== ======== ========= ======== ========
Amount by which combined fixed charges
and preferred dividends exceed
earnings............................. $ 24,833
========
</TABLE>
<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
May 7, 1996
