<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 10, 1996
REGISTRATION STATEMENT NO. 333-03281
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
MESA OPERATING CO., ISSUER
MESA INC., GUARANTOR
(Exact name of registrants as specified in charters)
<TABLE>
<S> <C>
DELAWARE 75-2516853
TEXAS 75-2394500
(States or other jurisdictions of (I.R.S. Employer
incorporation or organization) Identification Nos.)
STEPHEN K. GARDNER
1400 WILLIAMS SQUARE WEST 1400 WILLIAMS SQUARE WEST
5205 NORTH O'CONNOR BOULEVARD 5205 NORTH O'CONNOR BOULEVARD
IRVING, TEXAS 75039 IRVING, TEXAS 75039
(214) 444-9001 (214) 444-9001
(Address, including zip code, and telephone (Name, address, including zip code,
number, including area code, of registrants' and telephone number, including
principal executive offices) area code, of agent for service)
</TABLE>
---------------------
Copies to:
<TABLE>
<S> <C>
STEPHEN A. MASSAD GARY L. SELLERS
BAKER & BOTTS, L.L.P. SIMPSON THACHER & BARTLETT
ONE SHELL PLAZA, 910 LOUISIANA 425 LEXINGTON AVENUE
HOUSTON, TEXAS 77002 NEW YORK, NEW YORK 10017
(713) 229-1475 (212) 455-2000
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
IF THE ONLY SECURITIES BEING REGISTERED ON THIS FORM ARE BEING OFFERED
PURSUANT TO DIVIDEND OR INTEREST REINVESTMENT PLANS, PLEASE CHECK THE FOLLOWING
BOX. / /
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED ON
A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF
1933, OTHER THAN SECURITIES OFFERED ONLY IN CONNECTION WITH DIVIDEND OR INTEREST
REINVESTMENT PLANS, CHECK THE FOLLOWING BOX. / /
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING
PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT, PLEASE CHECK THE FOLLOWING BOX
AND LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER
EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING. / /
---------------
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(C)
UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING. / /
---------------
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434,
PLEASE CHECK THE FOLLOWING BOX. / /
The Prospectus constituting part of this Registration Statement is a
combined prospectus as permitted by Rule 429(a) under the Securities Act of
1933, as amended, and also relates to a Registration Statement on Form S-3
(Registration Statement No. 033-52627) filed by MESA Inc. and Mesa Operating Co.
and declared effective on November 2, 1994.
------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
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<PAGE> 2
***************************************************************************
* *
* Information contained herein is subject to completion or amendment. A *
* registration statement relating to these securities has been filed *
* with the Securities and Exchange Commission. These securities may not *
* be sold nor may offers to buy be accepted prior to the time the *
* registration statement becomes effective. This Prospectus shall not *
* constitute an offer to sell or the solicitation of an offer to buy *
* nor shall there be any sale of these securities in any State in which *
* such offer, solicitation or sale would be unlawful prior to *
* registration or qualification under the securities laws of any such *
* State. *
* *
***************************************************************************
SUBJECT TO COMPLETION, DATED JUNE 10, 1996
PROSPECTUS
<TABLE>
<S> <C> <C>
MESA OPERATING CO.
$325,000,000 % SENIOR SUBORDINATED NOTES DUE 2006
$ % SENIOR SUBORDINATED DISCOUNT NOTES DUE 2006 [MESA LOGO]
</TABLE>
The % Senior Subordinated Notes due 2006 (the "Senior Subordinated Notes")
and the % Senior Subordinated Discount Notes due 2006 (the "Discount Notes"
and, together with the Senior Subordinated Notes, the "Notes"), are being
offered (the "Offering") by Mesa Operating Co. (the "Company"). The Notes will
be guaranteed on a senior subordinated basis by MESA Inc. (the "Parent"), of
which the Company is a wholly owned subsidiary, and by certain future
subsidiaries of the Company.
Interest on the Senior Subordinated Notes will be payable in cash semiannually
in arrears on and of each year, commencing on ,
1996. The Discount Notes are being issued at a substantial discount from their
principal amount at maturity. The Discount Notes will accrete in value until
, 2001 at a rate of % per annum, compounded semiannually. Cash
interest will not accrue on the Discount Notes prior to , 2001.
Thereafter, cash interest on the Discount Notes will accrue at a rate of %
per annum, and will be payable semi-annually in arrears on and
of each year, commencing , 2001. The Notes will be
redeemable at the option of the Company at any time on or after 2001,
at the redemption prices set forth herein, together with, as applicable, accrued
and unpaid interest, if any, to the date of redemption. Prior to ,
1999, up to 33 1/3% of the original aggregate principal amount of the Senior
Subordinated Notes will be redeemable at the option of the Company from the net
proceeds of certain sales of Equity Interests (as defined) of the Company or the
Parent, at a price of % of the principal amount of the Senior Subordinated
Notes, together with accrued and unpaid interest, if any, to the date of
redemption. In addition, prior to , 1999, up to 33 1/3% of the
original aggregate principal amount of the Discount Notes will be redeemable at
the option of the Company from the net proceeds of certain sales of Equity
Interests of the Company or the Parent, at a price of % of the Accreted
Value (as defined) of the Discount Notes. See "Description of the
Notes -- Optional Redemption." Upon the occurrence of a Change of Control (as
defined), each holder of Notes may require the Company to repurchase all or a
portion of such holder's Notes at 101% of the aggregate principal amount
thereof, together with accrued and unpaid interest, if any, to the date of
repurchase (or at 101% of the Accreted Value thereof at such date, as
applicable). See "Description of the Notes."
The proceeds of the Offering, together with the initial borrowings under the New
Credit Facility (as defined), proceeds from the sale of Preferred Stock (as
defined) described herein and existing cash balances, will be used to repay
and/or refinance substantially all of the existing debt of Mesa (as defined).
See "Use of Proceeds."
The Notes will be general, unsecured obligations of the Company and will be
subordinated in right of payment to all existing and future Senior Debt (as
defined) of the Company. As of March 31, 1996, after giving pro forma effect to
the Recapitalization (as defined) and the application of the net proceeds
therefrom, the aggregate principal amount of the Company's outstanding Senior
Debt would have been approximately $349.2 million, representing the initial
borrowings under the $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," "Unaudited Pro Forma Financial Information," "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Capital
Resources and Liquidity" and Notes 2 and 4 to the Consolidated Financial
Statements of the Parent located elsewhere herein regarding Mesa's financial
position and liquidity, the amount of and its ability to make debt service
payments, its strategic alternatives, financial instrument covenant compliance,
cost reduction efforts and other matters, are forward-looking statements.
Although Mesa believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. Important factors that could cause actual results to
differ materially from Mesa's expectations ("Cautionary Statements") are
disclosed in this Prospectus, including without limitation in conjunction with
the forward-looking statements included in this Prospectus. All subsequent
written and oral forward-looking statements attributable to Mesa or persons
acting on its behalf are expressly qualified in their entirety by the Cautionary
Statements.
SPECIAL MEETING
Unless the context otherwise requires, statements in this Prospectus assume
that all elements of the Recapitalization described herein that are subject to
shareholder approval will be approved by the shareholders of the Parent at a
special meeting of the holders of the Parent's common stock ("Common Stock") to
be held on June 25, 1996 (the "Special Meeting"). The share numbers and related
data contained in this Registration Statement do not give effect to a proposed
1-for-4 reverse stock split with respect to the outstanding shares of Common
Stock (and the related effect on the number and price of the shares of Preferred
Stock to be issued in the Recapitalization) that will be submitted for the
approval of shareholders at the Special Meeting.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus or incorporated by reference in this Prospectus.
Unless the context otherwise requires, the term "Mesa" means MESA Inc. and its
subsidiaries taken as a whole and includes the Parent's predecessors. Quantities
stated as equivalent natural gas reserves are based on a factor of six thousand
cubic feet of natural gas per barrel of liquids. Certain terms relating to the
oil and gas business and used herein are defined in the "Glossary of Selected
Oil and Gas Terms" included elsewhere in this Prospectus. Certain capitalized
terms relating to the Notes are defined in "Description of the Notes."
THE COMPANY
OVERVIEW
Mesa is one of the largest independent oil and gas companies in the United
States, with approximately 1.9 Tcfe of proved reserves as of December 31, 1995.
Approximately 95% of Mesa's reserves are concentrated in the Hugoton field in
southwest Kansas and the West Panhandle field in Texas. These fields, which are
part of one contiguous reservoir, are considered to be among the premier natural
gas properties in the United States and are characterized by long lived reserves
and stable production. Despite operating under significant capital constraints
since 1990, Mesa has maintained a large, concentrated and efficiently managed
asset base.
On April 26, 1996, Mesa entered into a Stock Purchase Agreement with
DNR-MESA Holdings, L.P., a Texas limited partnership ("DNR") whose sole general
partner is Rainwater, Inc., a company owned by Richard E. Rainwater (together,
"Rainwater"). The agreement contemplates that Mesa will issue $265 million in
new equity and will repay and/or refinance substantially all of its $1.2 billion
of existing debt (the "Recapitalization," as more specifically described below).
The Notes being offered hereby are an integral part of the Recapitalization.
The Recapitalization will enhance Mesa's ability to compete in the oil and
gas industry by substantially increasing its cash flow available for investment
and improving its ability to attract capital, which will increase Mesa's ability
to pursue investment opportunities. Specifically, Mesa's financial condition
will improve significantly as a result of the Recapitalization due to (i) a
significant reduction in total debt outstanding, (ii) a reduction in annual cash
interest expense of approximately $75 million, (iii) the implementation of a
cost savings program designed to reduce annual general and administrative and
other operating overhead expenses by approximately $10 million and (iv) the
extension of maturities on its long term debt, which will eliminate Mesa's
present liquidity concerns.
CONTROL OF MESA
In connection with the Recapitalization, DNR will obtain the right to
nominate and elect a majority of Mesa's Board of Directors so long as DNR and/or
its affiliates own Series B Preferred Stock (as defined) and meet certain
minimum stock ownership requirements. Mesa expects to benefit from the DNR board
representatives' operational, managerial, transactional and financial expertise,
and believes that Rainwater will be an important strategic partner in the future
success of Mesa.
DNR intends to implement an orderly transition and succession plan for
Mesa's senior management. Such plans are being developed.
RESERVES
Approximately 65% of Mesa's total equivalent proved reserves are natural gas
and the balance are principally natural gas liquids ("NGLs") which are extracted
from natural gas. Approximately 95% of Mesa's proved reserves are developed. The
estimated future net cash flows before income taxes from Mesa's proved reserves,
as of December 31, 1995, aggregated approximately $2.4 billion and had a net
present value, discounted at 10%, of approximately $1 billion. See
"Business -- Properties."
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
3
<PAGE> 5
reservoir characteristics, including thicker productive zones, higher porosity
and higher permeability. Management believes that, as a result, Mesa's Hugoton
properties will have a longer productive life and higher natural gas recoveries
than properties located in other parts of the Hugoton field.
Mesa has working interests in approximately 1,100 wells in the Hugoton
field, 950 of which it operates, and royalty interests in approximately 300
additional wells. Mesa's Hugoton properties are capable of producing over 230
MMcf of natural gas per day. Over the past several years, Mesa has concentrated
its efforts on fully developing its existing long lived reserve base. In the
Hugoton field, these efforts have included infill drilling, installing
additional compression and gathering facilities and the construction of the
Satanta processing plant. The Satanta plant has the ability to extract a greater
quantity of NGLs per Mcf of natural gas than the plant it replaced, and has the
added ability to reject nitrogen, recover helium and produce liquefied natural
gas ("LNG").
West Panhandle Field. Mesa's other principal asset is its interest in the
West Panhandle field, which is located in the Texas panhandle. Mesa's West
Panhandle properties contain approximately 600 Bcfe of proved reserves. Natural
gas from these properties is produced from approximately 600 wells, all of which
are operated by Mesa, on over 185,000 net acres. Mesa's West Panhandle field
production is processed through Mesa's Fain processing plant, and is governed by
an agreement between Mesa and Colorado Interstate Gas Company ("CIG"). Since
1994, Mesa's entitlement to its share of West Panhandle gas production has been
limited by certain provisions of an agreement with CIG. Beginning in 1997, such
limitations will expire, subject to certain seasonal and daily entitlements of
CIG.
In the West Panhandle field, development activities over the last six years
have included 357 well workovers and redrilling projects, the addition of
compression and the expansion of processing facilities. In addition, Mesa has
identified approximately 120 locations that have additional production potential
from new areas or deeper zones that it plans to redrill over a three year period
beginning in early 1996. Mesa is also currently expanding the Fain plant to
increase processing capacity and NGL recoveries. As a result of these activities
and the expiration of its contractual production limitation, Mesa expects to
increase its share of production from the West Panhandle field from 1997 onward.
Gulf of Mexico Properties. Beginning in late 1994, Mesa began to direct a
greater portion of its capital spending towards exploration and development in
the Gulf of Mexico. Since that time, Mesa has successfully completed 17 out of
19 wells. Through December 31, 1995, Mesa's Gulf of Mexico activities have added
51 Bcfe of proved reserves. As a result, Mesa's offshore production increased by
approximately 50% on an Mcfe basis from 1994 to 1995. Offshore production gains
have continued into 1996, with first quarter offshore production having
increased on an Mcfe basis by approximately 23% over fourth quarter 1995 levels.
Because Mesa has existing production facilities offshore, it has been able to
bring new wells on production quickly and at a lower cost than could be achieved
otherwise. Mesa owns interests in 45 blocks in the Gulf of Mexico, covering
approximately 200,000 acres. Application of 3-D seismic technology to Mesa's
substantial Gulf of Mexico acreage represents a significant future opportunity
to increase reserves and cash flow. At the April 1996 federal lease sale in the
Gulf of Mexico, Mesa purchased six blocks covering 28,000 acres for a total of
$500,000.
BUSINESS STRENGTHS
Mesa believes it has certain strengths that provide it with significant
competitive advantages, including the following:
-- Long Reserve Life. Mesa's properties have an estimated reserve life,
calculated by dividing total proved reserves by annual production, of
approximately 15 years, which is among the longest reserve lives of any
domestic oil and gas company. As a result of the long lived nature of its
properties, Mesa has lower reinvestment requirements to maintain reserve
quantities, production levels and values than many of its competitors.
The net present value of Mesa's proved reserves has exhibited
considerable stability over the last five years, ranging from
approximately $1.2 billion to approximately $1.0 billion on a pre-tax
basis and from $0.9 billion to $1.0 billion on an after tax basis.
-- 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. Over 90% of Mesa's production and
reserves are attributable to wells operated by Mesa, which provides Mesa
with control over the amount and timing of capital and operating
expenditures. Mesa also owns and operates all of the processing
facilities and a substantial majority of the gathering assets that
service its onshore production. Control over these assets reduces
operating expenses and enhances operational flexibility. These factors
provide Mesa with significant operating advantages, such as the ability
to (i) shift production into the heating season, when prices are
generally higher, (ii) vary the recovery of NGLs to optimize its revenue
mix, (iii) avoid production curtailments due to capacity constraints and
(iv) reduce abandonment pressures for its wells, which should increase
ultimate recoverable reserves.
- - Low Cost Operator. Mesa's reserves are primarily recovered from low
pressure, shallow, geographically concentrated gas fields. Consequently,
production costs are low and averaged $0.57 per Mcfe of production in
1995.
- - Expertise in Midcontinent and Gulf of Mexico. The Midcontinent, where the
Hugoton and West Panhandle fields are located, and the Gulf of Mexico are
two of the most prolific gas producing regions in the United States.
Mesa's personnel have substantial operational expertise and experience in
the oil and gas industry, particularly with respect to the technical
challenges of these regions. Mesa's operations and exploration staff has
extensive experience with the federal, state and local agencies with
responsibility for these regions. This experience provides a significant
base upon which to expand Mesa's operations as cash flow and additional
capital become available for investment following the Recapitalization.
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 March 31, 1996) with funds from the following sources: (i) the
proceeds from the sale of Series B Preferred Stock to DNR, (ii)
borrowings under the New Credit Facility, (iii) the issuance of the Notes
offered hereby, and (iv) cash and investments balances. The closing of
the foregoing transactions will occur concurrently (the "First Closing").
The New Credit Facility, the issuance of the Notes and the application of
the net proceeds therefrom are referred to herein as the "Debt
Refinancing."
SECOND CLOSING
-- Rights Offering. After the First Closing, the Parent will conduct a
rights offering (the "Rights Offering") whereby it will distribute to the
holders of its Common Stock transferable rights (the "Rights") to
purchase a pro rata portion of an aggregate of approximately $132 million
of Series A 8% Cumulative Convertible Preferred Stock of the Parent (the
"Series A Preferred Stock" and, together with the Series B Preferred
Stock, the "Preferred Stock").
-- DNR Standby Commitment. DNR will provide a standby commitment (the
"Standby Commitment") pursuant to which it will purchase additional
shares of Series B Preferred Stock equal to the number of shares of
Series A Preferred Stock, if any, not purchased in the Rights Offering,
such purchase to occur concurrently with the closing of the Rights
Offering (the "Second Closing"). DNR's obligation to purchase additional
shares of Series B Preferred Stock pursuant to the Standby Commitment
will be secured by a bank letter of credit in favor of Mesa. A
substantial portion of the funds received at the Second Closing will be
used to reduce borrowings under the New Credit Facility.
As used herein, the term "Recapitalization" refers to the purchase by DNR of
shares of Series B Preferred Stock, the Debt Refinancing and the Rights
Offering.
The Parent is a holding company with no independent operations. The Parent
currently operates primarily through three wholly owned subsidiaries, including
the Company. Immediately prior to the First Closing, the other two subsidiaries
will be merged or liquidated into the Company, which will thereafter be the
Parent's only significant direct or indirect subsidiary.
Mesa maintains its principal executive offices at 1400 Williams Square West,
5205 North O'Connor Boulevard, Irving, Texas 75039, where its telephone number
is (214) 444-9001.
The Parent's Common Stock is listed on the New York Stock Exchange under the
symbol "MXP."
6
<PAGE> 8
SOURCES AND USES OF FUNDS
The following table sets forth the proposed sources and uses of the proceeds
of the Recapitalization, after giving effect to the First Closing and the Second
Closing, assuming the Recapitalization had been completed as of March 31, 1996.
See "Use of Proceeds" for additional detail.
<TABLE>
<CAPTION>
AMOUNTS
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
SOURCES
New Credit Facility (a).................................................... $ 349.2
Senior Subordinated Notes.................................................. 325.0
Discount Notes............................................................. 175.0
Preferred Stock............................................................ 265.0
Cash and investments (b)................................................... 219.9
--------
Total sources............................................................ $ 1,334.1
========
USES
Repayment of HCLP Secured Notes (c)........................................ $ 492.3
Repayment of Existing Credit Facility (a).................................. 51.1
Redemption of 12 3/4% Secured Discount Notes due 1998...................... 617.4
Repayment of 12 3/4% Discount Notes due 1996............................... 39.7
Redemption of 13 1/2% Subordinated Notes due 1999.......................... 7.6
Prepayment premium with respect to HCLP Secured Notes (c).................. 64.0
Transaction expenses (d)................................................... 35.0
Accrued interest........................................................... 27.0
--------
Total uses............................................................... $ 1,334.1
========
</TABLE>
- ---------------
(a) Reflects initial borrowings under the $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) Includes approximately $114.8 million in cash and cash investments, $40.0
million in investments, $56.5 million in restricted cash of Hugoton Capital
Limited Partnership ("HCLP"), a subsidiary of the Company, and $8.7 million
of refundable prepaid interest, as shown on the Parent's Consolidated
Balance Sheet as of March 31, 1996. This represents substantially all of
Mesa's cash and cash investments, investments and restricted cash at March
31, 1996.
(c) The amount of the prepayment premium that will be due upon early retirement
of the Secured Notes (the "HCLP Secured Notes") of HCLP is based on
prevailing interest rates as of the date of repayment. Such premium would
have totaled approximately $64.0 million on March 31, 1996 and approximately
$54.6 million on June 7, 1996.
(d) Represents expenses attributable to the Recapitalization, including
approximately $16.0 million attributable to the sale of the Notes.
7
<PAGE> 9
THE OFFERING
ISSUER..................... Mesa Operating Co.
SECURITIES OFFERED......... $325 million aggregate principal amount of %
Senior Subordinated Notes due 2006 and % Senior
Subordinated Discount Notes due 2006 issued at a
discount to their aggregate principal amount to
generate gross proceeds to the Company of
approximately $175 million.
MATURITY DATE.............. , 2006.
INTEREST PAYMENT DATES..... Interest will accrue on the Senior Subordinated
Notes from the date of original issuance at an
annual rate of % and will be payable
semiannually in arrears on and
of each year, commencing , 1996.
The Discount Notes will be issued at a substantial
discount to their aggregate principal amount. See
"Certain Federal Income Tax Considerations." The
Discount Notes will accrete in value until
, 2001 at a rate of % per annum,
compounded semiannually, to an aggregate principal
amount of $ million. Cash interest will not
accrue on the Discount Notes prior to ,
2001. Thereafter, interest will accrue at the rate
of % per annum and will be payable semiannually
in arrears on and of each
year, commencing on , 2001. The
effective yield of the Discount Notes is % per
annum (computed on a semiannual bond equivalent
basis).
MANDATORY REDEMPTION....... None.
OPTIONAL REDEMPTION........ Except as described below, the Notes are not
redeemable at the Company's option prior to
, 2001. After , 2001, the
Notes will be subject to redemption at the option
of the Company, in whole or in part, at the
redemption prices set forth herein, plus accrued
and unpaid interest thereon to the applicable
redemption date.
Prior to , 1999, up to 33 1/3% of the
original aggregate principal amount of the Senior
Subordinated Notes will be redeemable at the option
of the Company on any one or more occasions from
the net proceeds of sales of Equity Interests
(other than Disqualified Stock) in the Company or
the Parent, at a redemption price equal to % of
the principal amount of the Senior Subordinated
Notes, together with accrued and unpaid interest
thereon to the redemption date; provided, that at
least 66 2/3% of the original aggregate principal
amount of the Senior Subordinated Notes remains
outstanding immediately after the occurrence of
such redemption; and provided further, that such
redemption shall occur within 60 days after the
date of the closing of the related sale of such
Equity Interests. See "Description of the Notes --
Optional Redemption."
In addition, prior to , 1999, up to
33 1/3% of the original aggregate principal amount
at maturity of the Discount Notes will be
redeemable at the option of the Company on any one
or more occasions from the net proceeds of sales of
Equity Interests (other than Disqualified Stock) in
the Company or the Parent, at a redemption price
equal to % of the Accreted Value of the
Discount Notes at the date of redemption; provided,
that at least 66 2/3% of the original aggregate
principal amount at maturity of the Discount Notes
remains outstanding immediately after the
occurrence of such redemption; and provided
further, that such redemption shall occur within 60
days after the date of the closing of the related
sale of such Equity Interests. See "Description of
the Notes -- Optional Redemption."
8
<PAGE> 10
CHANGE OF CONTROL.......... Upon the occurrence of a Change of Control, the
Company will be required to offer to repurchase all
or a portion of each Holder's Notes, at an offer
price in cash equal to 101% of the aggregate
principal amount of such Notes, plus accrued and
unpaid interest, if any, thereon to the date of
repurchase (or 101% of the Accreted Value at such
date, as applicable), and to repurchase all Notes
tendered pursuant to such offer. The Company will
not be required to make such an offer upon the
occurrence of a Change of Control if a third party
makes an offer, which meets the requirements
otherwise applicable to the Company, to purchase
all of the Notes and such third party purchases all
Notes tendered pursuant to such offer. The Credit
Agreement will prohibit the Company from
repurchasing any Notes pursuant to a Change of
Control offer prior to the repayment in full of the
Senior Debt under the Credit Agreement. If a Change
of Control were to occur, the Company may not have
sufficient available funds to purchase all Notes
tendered pursuant to the Change of Control offer
after first satisfying its obligations under the
Credit Agreement or other Senior Debt that may then
be outstanding, if accelerated. If a default
occurs, the applicable trustee or holders of at
least 25% in principal amount of the Notes then
outstanding may declare the principal of and the
accrued and unpaid interest or the Accreted Value
of the Notes, as applicable, to be due and payable
immediately. However, such repayment would be
subject to certain subordination provisions in the
Indentures. See "Risk Factors -- Financial and
Transaction Risks -- Repurchase of Notes Upon
Subsequent Change of Control" and "-- Subordination
of the Notes and Guarantees" and "Description of
the Notes -- Repurchase at the Option of
Holders -- Change of Control," and "-- Events of
Default and Remedies."
RANKING.................... The Notes will be general, unsecured obligations of
the Company, will be subordinated in right of
payment to all existing and future Senior Debt of
the Company, which includes borrowings under the
New Credit Facility and any other permitted
indebtedness which does not expressly provide that
it is on a parity with or subordinated in right of
payment to the Notes. The claims of the holders of
the Notes will be subordinated to Senior Debt,
which, as of March 31, 1996, on a pro forma basis
after giving effect to the Recapitalization and the
application of the proceeds thereof, would have
been approximately $349.2 million, representing the
initial borrowings under the New Credit Facility.
See "Capitalization," "Description of the
Notes -- Subordination" and "Description of the New
Credit Facility."
GUARANTEES................. The Company's payment obligations under the Notes
will be jointly, severally and unconditionally
guaranteed on a senior subordinated basis (the
"Guarantees") by the Parent and each future
Material Restricted Subsidiary of the Company. As
of the date of the Indentures, the Company has no
Material Restricted Subsidiaries. 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,
9
<PAGE> 11
enter into certain transactions with affiliates,
dispose of certain assets, incur liens securing
pari passu or subordinated indebtedness of the
Company and engage in mergers and consolidations.
See "Description of the Notes -- Certain
Covenants."
USE OF PROCEEDS............ The net proceeds from the issuance of the Notes
offered hereby, together with the net proceeds from
the sale of shares of Series B Preferred Stock to
DNR, the initial borrowings under the New Credit
Facility, the net proceeds of the Rights Offering
and existing cash and investment balances, will be
used to repay and/or refinance substantially all of
Mesa's existing indebtedness. See "Use of
Proceeds."
---------------------
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in connection with an investment in the Notes offered hereby,
including information regarding Mesa's highly leveraged capital structure and
continuing losses, the uncertainty of natural gas and NGL prices and certain
risks associated with an investment in the Notes offered hereby.
10
<PAGE> 12
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth summary historical consolidated financial
data with respect to Mesa for the periods ended and as of the dates indicated.
The summary historical consolidated statement of operations data for the years
ended December 31, 1993, 1994 and 1995 and the historical consolidated balance
sheet data as of December 31, 1994 and 1995 are derived from the audited
Consolidated Financial Statements of the Parent included elsewhere in this
Prospectus. The summary historical consolidated statement of operations data for
the years ended December 31, 1991 and 1992 and the summary historical
consolidated balance sheet data as of December 31, 1991, 1992 and 1993 are
derived from audited Consolidated Financial Statements of the Parent that are
not included in this Prospectus. The summary historical consolidated statement
of operations data for the three months ended March 31, 1995 and March 31, 1996
and the summary historical consolidated balance sheet data as of March 31, 1996
are derived from unaudited consolidated financial statements of the Parent. This
information should be read in conjunction with the Consolidated Financial
Statements of the Parent and the notes thereto appearing elsewhere in this
Prospectus and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." See "Selected Historical Financial Data."
The following table also sets forth certain unaudited summary pro forma
financial data of Mesa for the periods ended and as of the dates indicated. The
unaudited summary pro forma statement of operations data give effect to the
Recapitalization as if the Recapitalization had occurred on January 1, 1995. The
unaudited summary pro forma balance sheet data give effect to the
Recapitalization as if the Recapitalization had occurred on March 31, 1996. See
"Use of Proceeds." The unaudited summary pro forma financial data does not
purport to represent what Mesa's results of operations or financial condition
would actually have been had the Recapitalization been consummated as of such
dates or to project Mesa's results of operations or financial condition for any
future period or as of any future date. The unaudited summary pro forma
financial data should be read in conjunction with the Unaudited Pro Forma
Financial Information and the notes thereto. See "Unaudited Pro Forma Financial
Information" and the separate historical Consolidated Financial Statements of
the Parent and notes thereto appearing elsewhere in this Prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Parent is a holding company with no independent operations. The Parent
currently operates primarily through three wholly owned subsidiaries, including
the Company. Immediately prior to the First Closing, the other two subsidiaries
will be merged or liquidated into the Company, which will thereafter be the
Parent's only significant direct or indirect subsidiary. Accordingly, following
the First Closing, the Consolidated Financial Statements of the Company would be
substantially the same as those of the Parent.
11
<PAGE> 13
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Natural gas........................... $ 169.9 $ 157.6 $ 141.8 $ 139.6 $ 129.6 $ 35.9 $ 50.6
Natural gas liquids................... 62.0 59.7 61.4 72.7 75.3 18.2 23.1
Oil and condensate.................... 16.1 18.7 12.4 7.9 19.6 5.4 4.4
Other................................. 1.5 1.1 6.6 8.5 10.5 2.7 2.5
-------- -------- -------- -------- -------- -------- --------
Total revenues.......................... 249.5 237.1 222.2 228.7 235.0 62.2 80.6
-------- -------- -------- -------- -------- -------- --------
Costs and expenses:
Lease operating....................... 46.9 43.9 51.8 52.7 51.8 12.6 13.6
Production and other taxes............ 18.9 18.6 20.4 21.3 18.4 4.7 5.4
Exploration charges................... 4.7 10.0 2.7 5.2 6.6 1.3 .5
General and administrative............ 27.8 24.5 25.2 28.5 26.8 6.6 5.6
Depreciation, depletion and
amortization........................ 117.1 113.9 100.1 92.3 83.4 21.0 30.2
-------- -------- -------- -------- -------- -------- --------
Total costs and expenses................ 215.4 210.9 200.2 200.0 187.0 46.2 55.3
-------- -------- -------- -------- -------- -------- --------
Operating income........................ 34.1 26.2 22.0 28.7 48.0 16.0 25.3
Net interest expense (a)................ (134.3) (129.9) (131.3) (131.3) (132.7) (32.8) (34.5)
Other income (b)........................ 21.0 14.5 6.9 19.2 27.1 8.9 10.3
-------- -------- -------- -------- -------- -------- --------
Net income (loss)....................... $ (79.2) $ (89.2) $ (102.4) $ (83.4) $ (57.6) $ (7.9) $ 1.1
======== ======== ======== ======== ======== ======== ========
Net income (loss) per common share...... $ (2.05) $ (2.31) $ (2.61) $ (1.42) $ (0.90) $ (.12) $ .02
======== ======== ======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
EBITDA (c).............................. $ 155.9 $ 150.1 $ 124.8 $ 126.2 $ 138.0 $ 38.3 $ 56.0
Cash flows from operating activities.... 35.0 (28.4) 32.5 48.6 69.2 29.2 (2.2)
Cash flows from investing activities.... 399.7 (17.0) 37.5 (40.3) (41.4) (10.3) (10.0)
Cash flows from financing activities.... (310.3) (29.5) (88.5) (3.6) (22.1) 2.2 (21.2)
Net cash interest expense (d)........... 130.9 126.1 78.0 47.8 90.4 12.4 34.0
Capital expenditures.................... 31.9 69.2 29.6 32.6 42.3 7.0 9.8
Ratios:
EBITDA to net interest expense........ 1.2x 1.2x 1.0x 1.0x 1.0x 1.2x 1.6x
EBITDA to net cash interest expense... 1.2x 1.2x 1.6x 2.6x 1.5x 3.1x 1.7x
Earnings to fixed charges (e)......... NM NM NM NM NM NM 1.0x
Total debt to EBITDA.................. 8.4x 8.6x 10.0x 9.7x 9.0x NM NM
Pro Forma:
EBITDA (c)............................ $ 143.0 57.2
Net interest expense (b).............. 87.1 22.5
Net cash interest expense (d)......... 62.9 16.0
Pro Forma Ratios:
EBITDA to net interest expense........ 1.6x 2.5x
EBITDA to net cash interest expense... 2.3x 3.6x
Earnings to fixed charges (e)......... NM 1.4x
BALANCE SHEET DATA (END OF PERIOD):
Cash and investments (f)................ $ 260.3 $ 169.1 $ 150.0 $ 162.5 $ 187.4 $ 155.8
Total assets............................ 1,832.8 1,676.5 1,533.4 1,484.0 1,464.7 1,409.1
Long term debt, including current
maturities............................ 1,310.7 1,286.2 1,241.3 1,223.3 1,236.7 1,214.3
Stockholders' equity.................... 273.6 184.4 112.1 124.6 67.0 68.1
Pro forma:
Cash and investments.................. 1.0
Long term debt, including current
maturities.......................... 854.5
Stockholders' equity.................. 242.2
</TABLE>
- ---------------
(a) Net interest expense represents total interest expense less interest income.
(b) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Operations -- Other Income (Expense)" for
additional detail.
(c) EBITDA represents operating income plus exploration charges and
depreciation, depletion and amortization expense. EBITDA is not presented as
an indicator of Mesa's operating performance or as a measure of liquidity.
(d) During the periods presented, certain of Mesa's total interest expense
consisted of non-cash amortization of debt issuance costs and of accretion
of interest on certain discount notes. Such accreted interest was added to
the balance of the discount notes rather than paid in cash. Net cash
interest expense reflects net interest expense less amortization of debt
issuance costs and accretion of interest on discount notes.
(e) For the purpose of determining the ratio of earnings to fixed charges,
earnings are defined as net loss plus fixed charges. Fixed charges consist
of interest expense and capitalized interest. Earnings were inadequate to
cover fixed charges for the three month period ended March 31, 1995 by
$7.9 million and for each of the years ended December 31, 1991 through
December 31, 1995 by $79.2 million, $91.6 million, $105.3 million, $83.5
million and $58.5 million, respectively. For the year ended December 31,
1995, on a pro forma basis, earnings were inadequate to cover fixed charges
by $7.9 million and were inadequate to cover fixed charges and preferred
dividends by $29.7 million.
(f) At March 31, 1996, cash and investments includes $115.8 million of cash and
cash investments and $40.0 million of investments.
12
<PAGE> 14
SUMMARY RESERVE AND PRODUCTION DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1991 1992 1993 1994 1995
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C> <C>
PROVED RESERVES(A)(B):
Natural gas (Bcf).......................................... 1,368.0 1,276.0 1,202.4 1,303.2 1,218.0
Natural gas liquids (MMBbls)............................... 79.3 80.1 79.2 84.4 101.9
Oil and condensate (MMBbls)................................ 4.0 7.3 3.3 5.0 9.5
Natural gas equivalents (Bcfe)............................. 1,867.3 1,800.4 1,697.1 1,839.8 1,886.5
Percentage proved developed................................ 98% 95% 96% 96% 95%
PRODUCTION DATA:
Natural gas (Bcf).......................................... 108.5 89.5 79.8 82.3 77.3
Natural gas liquids (MMBbls)............................... 4.7 4.8 5.1 6.9 6.6
Oil and condensate (MMBbls)................................ 0.8 1.0 0.7 0.5 1.2
Natural gas equivalents (Bcfe)............................. 141.5 124.5 114.5 127.1 123.9
PRICES AT DECEMBER 31(B):
Natural gas (per Mcf)...................................... $ 1.83 $ 1.94 $ 2.14 $ 1.66 $ 1.95
Natural gas liquids (per Bbl).............................. 14.57 12.34 10.97 12.98 11.87
FUTURE NET CASH FLOWS(B):
After tax.................................................. $2,204.2 $2,105.5 $2,066.2 $2,014.8 $2,152.8
Discounted at 10%, after tax............................... 995.2 1,037.2 986.9 934.2 966.2
Before tax................................................. 2,599.0 2,408.0 2,306.2 2,225.8 2,449.8
Discounted at 10%, before tax.............................. 1,181.0 1,167.7 1,068.7 988.3 1,040.4
RESERVE LIFE INDEX (YEARS)(C)................................ 13.2 14.5 14.8 14.5 15.2
RESERVE ADDITIONS (BCFE):
Extensions and discoveries................................. 10.1 82.6 9.8 9.2 48.5
Acquisitions............................................... 1.5 0.6 0.2 0.8 1.0
Revisions(a)............................................... (119.6) (6.3) 25.8 259.8 121.2
-------- -------- -------- -------- --------
Net additions (reductions)................................. (108.0) 76.9 35.8 269.8 170.7
======== ======== ======== ======== ========
RESERVE REPLACEMENT(D):
Total...................................................... (76)% 62% 31% 212% 138%
Total, excluding revisions................................. 8% 67% 9% 8% 40%
COSTS INCURRED:
Acquisition................................................ $ 5.4 $ 0.1 $ 0.1 $ 3.0 $ 0.4
Exploration................................................ 7.9 15.2 2.7 5.2 8.2
Development................................................ 12.4 6.9 2.4 14.0 14.6
-------- -------- -------- -------- --------
Total acquisition, exploration and development........... 25.7 22.2 5.2 22.2 23.2
Facilities................................................. 10.3 49.5 24.1 11.5 15.7
-------- -------- -------- -------- --------
Total costs incurred..................................... $ 36.0 $ 71.7 $ 29.3 $ 33.7 $ 38.9
======== ======== ======== ======== ========
FINDING COSTS (PER MCFE)(E):
Total...................................................... $ NM $ 0.93 $ 0.82 $ 0.12 $ 0.23
Total, excluding revisions and facilities.................. 2.22 0.27 0.52 2.22 0.47
PER MCFE DATA:
Total revenue.............................................. $ 1.76 $ 1.90 $ 1.88 $ 1.73 $ 1.81
Production costs(f)........................................ 0.47 0.50 0.63 0.58 0.57
-------- -------- -------- -------- --------
Gross margin(g)............................................ 1.29 1.40 1.25 1.15 1.24
General and administrative expense......................... 0.20 0.20 0.22 0.23 0.22
-------- -------- -------- -------- --------
Gross profit(h)............................................ $ 1.09 $ 1.20 $ 1.03 $ 0.92 $ 1.02
======== ======== ======== ======== ========
</TABLE>
- ---------------
(a) As of December 31, 1991, 1992 and 1993, the proved oil and gas reserves for
substantially all of Mesa's properties were estimated by independent
petroleum engineering consultants. Estimates of proved reserves as of
December 31, 1994 and 1995 were prepared by Mesa's internal reserve
engineers. See "Business -- Reserves."
(b) Proved reserves and future net cash flows were estimated in accordance with
Securities and Exchange Commission (the "Commission") guidelines. Prices at
December 31 in each of the years 1991 through 1995 were used in the
calculation of proved reserves and future net cash flows and were held
constant through the periods of estimated production, except as otherwise
provided by contract, in accordance with Commission guidelines.
(c) The reserve life index is calculated as proved reserves divided by annual
production, both on a Bcfe basis.
(d) Reserve replacement is calculated as reserve additions (reductions) divided
by annual production, both on a Bcfe basis. See "Business -- Reserves."
(e) Finding costs are calculated as costs incurred divided by reserve additions
(reductions). The average five year finding costs for the period ended
December 31, 1995 were $.47 per Mcfe from all sources and $.60 per Mcfe from
all sources excluding revisions and facilities. See "Business -- Reserves."
(f) Production costs includes lease operating expenses and production and other
taxes.
(g) Gross margin is calculated as total revenue less production costs.
(h) Gross profit is calculated as gross margin less general and administrative
expense.
13
<PAGE> 15
RISK FACTORS
Prospective investors should consider carefully the following factors
relating to the business of Mesa and the Offering, together with the information
and financial data set forth elsewhere in this Prospectus, prior to making an
investment decision.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical fact included in this Prospectus,
including without limitation, the statements under "Prospectus Summary," "Risk
Factors -- Financial and Transaction Risks -- High Leverage," "Unaudited Pro
Forma Financial Information," "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Capital Resources and Liquidity" and
Notes 2 and 4 to the Consolidated Financial Statements of the Parent located
elsewhere herein regarding Mesa's financial position and liquidity, the amount
of and its ability to make debt service payments, its strategic alternatives,
financial instrument covenant compliance, cost reduction efforts and other
matters, are forward-looking statements. Although Mesa believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct.
Important factors that could cause actual results to differ materially from
Mesa's expectations are disclosed in this Prospectus, including without
limitation in conjunction with the forward-looking statements included in this
Prospectus. All subsequent written and oral forward-looking statements
attributable to Mesa or persons acting on its behalf are expressly qualified in
their entirety by the Cautionary Statements.
FINANCIAL AND TRANSACTION RISKS
High Leverage
Although completion of the Recapitalization will result in a significant
reduction of debt, Mesa will continue to be highly leveraged. After giving
effect to the consummation of the Recapitalization and the application of the
net proceeds therefrom, Mesa would have had total pro forma long term
indebtedness (including current maturities) of approximately $854.5 million and
stockholders' equity of approximately $242.2 million at March 31, 1996. See
"Capitalization" and "Unaudited Pro Forma Financial Information."
Mesa's level of indebtedness following the Recapitalization will have
several important effects on its future operations, including that (i) a
substantial portion of Mesa's cash flow from operations will be dedicated to the
payment of interest on its indebtedness and will not be available for other
purposes, (ii) the covenants contained in the New Credit Facility and in the
Indentures will require Mesa to meet certain financial tests and other
restrictions, will limit its ability to borrow additional funds, to grant liens
and to dispose of assets and will affect Mesa's flexibility in planning for and
reacting to changes in its business, including possible acquisition activities,
and (iii) Mesa's ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions, general corporate purposes
or other purposes may be impaired.
Mesa's ability to meet its debt service obligations and to reduce its total
indebtedness will be dependent upon Mesa's future performance, which will be
subject to oil and gas prices, Mesa's level of production and general economic
conditions and to financial, business and other factors affecting the operations
of Mesa, many of which are beyond its control. There can be no assurance that
Mesa's future performance will not be adversely affected by such changes in oil
and gas prices and/or production nor by such economic conditions and/or
financial, business and other factors.
History of Losses
Mesa had net losses of $79.2 million, $89.2 million, $102.4 million, $83.4
million and $57.6 million for the years ended December 31, 1991, 1992, 1993,
1994 and 1995, respectively. Although Mesa reported net income of $1.1 million
for the first quarter of 1996, Mesa expects to report a net loss for the year.
Giving effect to the Recapitalization and the application of the proceeds
therefrom to repay and/or refinance substantially all of Mesa's existing
indebtedness as if the Recapitalization and application of the proceeds had
occurred on January 1, 1995, Mesa's pro forma net loss (before preferred stock
dividends) for the year ended December 31, 1995 would have been $7.0 million and
pro forma net income for the three months ended March 31, 1996 would have been
$8.6 million. See "Unaudited Pro Forma Financial Information." In the first year
following consummation of the Recapitalization, annual interest expense is
expected to be approximately
14
<PAGE> 16
$90 million, with approximately $65 million payable in cash, which amounts are
expected in subsequent years to vary based on outstanding borrowings and
interest rates under the New Credit Facility and the accretion of interest on
the Discount Notes. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The 8% dividend on the Preferred Stock
will be paid in kind(with additional shares of Preferred Stock) rather than in
cash for the first four years following issuance. Notwithstanding the
improvements in Mesa's capital structure and financial flexibility expected to
result from the Recapitalization, Mesa may continue to incur net losses and, to
the extent that natural gas prices are low, such losses may be substantial. See
"-- Business and Industry Risks -- Volatility of Natural Gas and NGL Prices."
Accountants' Going Concern Qualification
Mesa believes the successful completion of the Recapitalization will
position it to continue as a going concern and to pursue its business
strategies. Mesa's independent public accountants' report on the consolidated
financial statements of Mesa for the year ended December 31, 1995 was dated
March 6, 1996. This report included a discussion of Mesa's financial condition
and liquidity issues and expressed substantial doubt about Mesa's ability to
continue as a going concern. As the Recapitalization had not been completed as
of the date of their report, the independent public accountants did not consider
the effects of the Recapitalization in their assessment of Mesa's ability to
continue as a going concern.
Subordination of the Notes and Guarantees
The Notes and Guarantees will be subordinated in right of payment to all
existing and future Senior Debt of the Company, which includes all indebtedness
under the New Credit Facility. As of March 31, 1996, after giving pro forma
effect to the Recapitalization and the application of the net proceeds
therefrom, the Company would have had Senior Debt aggregating approximately $350
million (excluding $11.4 million in letters of credit) and would have had up to
an additional approximately $150 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."
15
<PAGE> 17
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, "-- 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. Because the Notes will be subordinate in right of
payment to the indebtedness outstanding under the New Credit Facility and all
other existing and future Senior Debt, absent a waiver the New Credit Facility
and any such other Senior Debt would be paid in full prior to any repurchase of
the Notes upon a Change of Control. Mesa may not have sufficient financial
resources to repay all of the outstanding Senior Debt, the Notes and the other
indebtedness that would become payable upon the occurrence of such Change of
Control. The failure of the Company to repurchase the Notes as required under
the Indentures upon a Change of Control will give the Trustees and the Holders
of the Notes certain rights to declare the principal of and accrued but unpaid
interest on the Notes or, in the case of the Discount Notes prior to
, 2001, the Accreted Value of such Discount Notes, to be due and payable
immediately. See "Description of the Notes -- Events of Defaults and Remedies."
BUSINESS AND INDUSTRY RISKS
Volatility of Natural Gas and NGL Prices
Revenues generated from Mesa's operations are highly dependent upon the
sales prices of, and demand for, natural gas and NGLs. Historically, the markets
for natural gas and NGLs have been volatile and are likely to continue to be
volatile in the future. Prices for natural gas and NGLs are subject to wide
fluctuation in
16
<PAGE> 18
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.
The availability of a ready market for Mesa's natural gas and NGL production
also depends on a number of factors, including the demand for and supply of
natural gas and NGLs and the proximity of reserves to, and the capacity of, oil
and gas gathering systems, pipelines or trucking and terminal facilities.
Use and Risks of Hedging Transactions and Speculative Investments
In order to manage its exposure to price risks in the marketing of its oil
and natural gas, Mesa has in the past and may in the future enter into oil and
natural gas futures contracts on the New York Mercantile Exchange ("NYMEX"),
fixed price delivery contracts and financial swaps as hedging devices. While
intended to reduce the effects of volatility of the price of oil and natural
gas, such transactions may limit potential gains by Mesa if oil and natural gas
prices were to rise substantially over the price established by the hedge. In
addition, such transactions may expose Mesa to the risk of financial loss in
certain circumstances, including instances in which (i) production is less than
expected, (ii) there is a widening of price differentials between delivery
points for Mesa's production and Henry Hub (in the case of NYMEX futures
contracts) or delivery points required by fixed price delivery contracts to the
extent they differ from those of Mesa's production, (iii) Mesa's customers or
the counterparties to its futures contracts fail to purchase or deliver the
contracted quantities of oil or natural gas or (iv) a sudden, unexpected event
materially impacts oil or natural gas prices. Mesa also invests from time to
time in oil and gas or other futures contracts which are not intended to be
hedges of its oil and gas production. Following the Recapitalization,
speculative investments in energy futures contracts, which in prior periods have
been profitable, are expected to be limited. After May 7, 1996, Mesa had no open
speculative positions in energy futures contracts. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Results of
Operations" and "-- Other" and Note 3 of Notes to the Parent's Consolidated
Financial Statements appearing elsewhere in this Prospectus.
Reserves and Future Net Cash Flows
Information relating to Mesa's proved oil and gas reserves is based upon
engineering estimates. Reserve engineering is a subjective process of estimating
the recovery from underground accumulations of oil and natural gas that cannot
be measured in an exact manner, and the accuracy of any reserve estimate is a
function of the quality of available data and of engineering and geological
interpretation and judgment. Estimates of economically recoverable oil and gas
reserves and of future net cash flows necessarily depend upon a number of
variable factors and assumptions, such as historical production from the area
compared with production from other producing areas, the assumed effects of
regulations by governmental agencies and assumptions concerning future oil and
gas prices, future operating costs, severance and excise taxes, development
costs and workover and remedial costs, all of which may in fact vary
considerably from actual results. Because all reserve estimates are to some
degree speculative, the quantities of oil and natural gas that are ultimately
recovered, production and operation costs, the amount and timing of future
development expenditures and future oil and natural gas sales prices may all
vary from those assumed in these estimates and such variances may be material.
In addition, different reserve engineers may make different estimates of reserve
quantities and cash flows based upon the same available data. See
"Business -- Reserves."
The present values of estimated future net cash flows referred to in this
Prospectus should not be construed as the current market value of the estimated
proved oil and gas reserves attributable to Mesa's properties. In accordance
with applicable requirements of the Commission, the estimated discounted future
net cash flows from proved reserves are generally based on prices and costs as
of the date of the estimate,
17
<PAGE> 19
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 economic life of such properties resulting from changes in product
prices. In addition, the upward revisions at year end 1994 reflect a change by
Mesa to the use of reserve estimates prepared by Mesa's internal reserve
engineers instead of estimates prepared by an independent petroleum engineering
firm. See "Business -- Reserves." Any downward revisions in the future could
adversely affect Mesa's financial condition, borrowing base under the New Credit
Facility, future prospects and market value of its securities.
Replacement of Reserves
Mesa's future performance depends in part upon its ability to acquire, find
and develop additional oil and gas reserves that are economically recoverable.
Without successful acquisition, development or exploration activities, Mesa's
reserves will decline. No assurances can be given that Mesa will be able to
acquire or find and develop additional reserves on an economic basis.
Mesa's business is capital intensive and, to maintain its asset base of
proved oil and gas reserves, a significant amount of cash flow from operations
must be reinvested in property acquisitions, development or exploration
activities. To the extent cash flow from operations is reduced and external
sources of capital become limited or unavailable, Mesa's ability to make the
necessary capital investments to maintain or expand its asset base would be
impaired. Without such investment, Mesa's oil and gas reserves would decline.
In recent years, the majority of Mesa's capital expenditures have been
dedicated to developing and upgrading its existing long lived reserve base
through infill drilling of its Hugoton reserves, additions to its compression
and gathering system and pipeline interconnects, and the construction and
expansion of gas processing plants. Relatively modest expenditures have been
made to explore for, develop or acquire new reserve additions. In order to
increase reserves and production, Mesa must continue its development and
exploration drilling program or undertake other replacement activities.
Following completion of the Recapitalization, Mesa's strategy will include
increasing its reserve base through acquisitions of producing properties and
continued exploitation of its existing properties. The successful acquisition of
producing properties requires an assessment of recoverable reserves, future oil
and gas prices and operating costs, potential environmental and other
liabilities and other factors. Such assessments are necessarily inexact and
their accuracy inherently uncertain. There can be no assurance that Mesa's
acquisition activities and exploration and development projects will result in
increases in reserves. Mesa's operations may be curtailed, delayed or canceled
as a result of lack of adequate capital and other factors, such as title
problems, weather, compliance with governmental regulations or price controls,
mechanical difficulties or shortages or delays in the delivery of equipment.
Furthermore, while Mesa's revenues may increase if prevailing gas and oil prices
increase significantly, Mesa's finding costs for additional reserves could also
increase. In addition, the costs of exploration and development may materially
exceed initial estimates. For a discussion of Mesa's reserves, see
"Business -- Properties" and "-- Reserves."
Operating Hazards; Limited Insurance Coverage
Mesa's operations are subject to hazards and risks inherent in drilling for
and production and transportation of natural gas and oil, such as fires, natural
disasters, explosions, encountering formations with abnormal pressures,
blowouts, cratering, pipeline ruptures and spills, any of which can result in
loss of hydrocarbons, environmental pollution, personal injury claims, and other
damage to properties of Mesa and others. These risks could result in substantial
losses to Mesa due to injury and loss of life, severe damage to and destruction
of property and equipment, pollution and other environmental damage and
suspension of
18
<PAGE> 20
operations. Moreover, Mesa's Gulf of Mexico offshore operations are subject to a
variety of operating risks peculiar to the marine environment, such as
hurricanes or other adverse weather conditions, to more extensive governmental
regulation, including regulations that may, in certain circumstances, impose
strict liability for pollution damage, and to interruption or termination of
operations by governmental authorities based on environmental or other
considerations.
As protection against operating hazards, Mesa maintains insurance coverage
against some, but not all, potential losses. Mesa's coverages include, but are
not limited to, operator's extra expense, physical damage on certain assets,
employer's liability, comprehensive general liability, automobile, workers'
compensation and loss of production income insurance and limited coverage for
sudden environmental damages, but Mesa does not believe that insurance coverage
for environmental damages that occur over time is available at a reasonable
cost. Moreover, Mesa does not believe that insurance coverage for the full
potential liability that could be caused by sudden environmental damages is
available at a reasonable cost. Accordingly, Mesa may be subject to liability or
may lose substantial portions of its properties in the event of environmental
damages. The occurrence of an event that is not fully covered by insurance could
have an adverse impact on Mesa's financial condition and results of operations.
Governmental Regulation
General. Mesa's operations are affected from time to time in varying degrees
by political developments and federal and state laws and regulations. In
particular, oil and natural gas production, operations and economics are or have
been affected by price controls, taxes and other laws relating to the oil and
natural gas industry, by changes in such laws and by changes in administrative
regulations. Mesa cannot predict how existing laws and regulations may be
interpreted by enforcement agencies or court rulings, whether additional laws
and regulations will be adopted, or the effect such changes may have on its
business or financial condition. See "Business -- Regulation and Prices."
Environmental. Mesa's operations are subject to numerous laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. These laws and regulations
require the acquisition of a permit before drilling commences, restrict the
types, quantities and concentration of various substances that can be released
into the environment in connection with drilling and production activities,
limit or prohibit drilling activities on certain lands lying within wilderness,
wetlands and other protected areas, and impose substantial liabilities for
pollution which might result from Mesa's operations. Moreover, the recent trend
toward stricter standards in environmental legislation and regulation is likely
to continue. For instance, legislation has been proposed in Congress from time
to time that would reclassify certain crude oil and natural gas exploration and
production wastes as "hazardous wastes" which would make the reclassified wastes
subject to much more stringent handling, disposal and clean-up requirements. If
such legislation were to be enacted, it could have a significant impact on the
operating costs of Mesa, as well as the oil and gas industry in general.
Initiatives to further regulate the disposal of crude oil and natural gas wastes
are also pending in certain states, and these various initiatives could have a
similar impact on Mesa. Mesa could incur substantial costs to comply with
environmental laws and regulations. In addition to compliance costs, government
entities and other third parties may assert substantial liabilities against
owners and operators of oil and gas properties for oil spills, discharge of
hazardous materials, remediation and clean-up costs and other environmental
damages, including damages caused by previous property owners. The imposition of
any such liabilities on Mesa could have a material adverse effect on Mesa's
financial condition and results of operations.
The Oil Pollution Act of 1990 imposes a variety of regulations on
"responsible parties" related to the prevention of oil spills. The
implementation of new, or the modification of existing, environmental laws or
regulations, including regulations promulgated pursuant to the Oil Pollution Act
of 1990, could have a material adverse impact on Mesa. See
"Business -- Regulation and Prices -- Environmental Matters."
Competition
Mesa operates in the highly competitive areas of natural gas and oil
production, development and exploration with other companies. Factors affecting
Mesa's ability to compete in the marketplace include the availability of funds
and information relating to a property, the standards established by Mesa for
the minimum projected return on investment, the availability of alternate fuel
sources and the intermediate transportation of gas. Mesa's competitors include
major integrated oil companies and a substantial number of independent energy
companies, many of which may have substantially larger financial resources,
staffs and facilities than Mesa.
19
<PAGE> 21
USE OF PROCEEDS
The total proceeds from the Recapitalization are estimated to be
approximately $1.1 billion (including net proceeds from the Offering estimated
at $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
March 31, 1996. For a description of the New Credit Facility, the Stock Purchase
Agreement, the Preferred Stock and the Rights Offering, see "Description of the
New Credit Facility" and "Description of the Stock Purchase Agreement and the
Rights Offering."
<TABLE>
<CAPTION>
AMOUNTS
---------------------
<S> <C>
(DOLLARS IN MILLIONS)
SOURCES
New Credit Facility(a)................................................... $ 349.2
Senior Subordinated Notes................................................ 325.0
Discount Notes........................................................... 175.0
Preferred Stock.......................................................... 265.0
Cash and investments(b).................................................. 219.9
--------
Total sources.......................................................... $ 1,334.1
========
USES
Repayment of HCLP Secured Notes(c)....................................... $ 492.3
Repayment of Existing Credit Facility (d)................................ 51.1
Redemption of 12 3/4% Secured Discount Notes due June 30, 1998........... 617.4
Repayment of 12 3/4% Discount Notes due June 30, 1996.................... 39.7
Redemption of 13 1/2% Subordinated Notes due May 1, 1999................. 7.6
Prepayment premium with respect to HCLP Secured Notes (e)................ 64.0
Fees and expenses relating to the Offering............................... 16.0
Other fees and expenses relating to the Recapitalization(f).............. 19.0
Accrued interest......................................................... 27.0
--------
Total uses............................................................. $ 1,334.1
========
</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) Includes approximately $114.8 million in cash and cash investments, $40.0
million in investments, $56.5 million in restricted cash of HCLP and $8.7
million of refundable prepaid interest as shown on the Parent's Consolidated
Balance Sheets as of March 31, 1996. This represents substantially all of
Mesa's cash and cash investments, investments and restricted cash at March
31, 1996.
(c) The HCLP Secured Notes were issued by HCLP in 1991, are secured by Mesa's
Hugoton field properties and are due in semiannual installments through
August 2012. The HCLP Secured Notes outstanding at March 31, 1996 bear
interest at fixed rates ranging from 9.05% to 11.3% per annum (weighted
average 10.35%).
(d) Mesa's Existing Credit Facility is secured by a first lien on the West
Panhandle field properties held by the Company, the Parent's equity interest
in the Company and a 76% limited partnership interest in HCLP and is due in
various installments through June 1997. The Existing Credit Facility bears
interest at the lesser of a Eurodollar rate plus 2 1/2% or the prime rate
plus 1/2% (7.92% at March 31, 1996). At March 31, 1996, the Existing Credit
Facility also supported letters of credit totaling $11.4 million that are
not included in the table above.
(e) The amount of the prepayment premium that will be due upon early retirement
of the HCLP Secured Notes is based on prevailing interest rates as of the
date of repayment. Such premium would have totaled approximately $64.0
million on March 31, 1996 and approximately $54.6 million on June 7, 1996.
(f) Includes $9.3 million payable to DNR pursuant to the Stock Purchase
Agreement. See "Description of the Stock Purchase Agreement and the Rights
Offering."
20
<PAGE> 22
CAPITALIZATION
The following table sets forth the unaudited historical consolidated cash
and investments, current maturities of long term debt and capitalization of the
Parent as of March 31, 1996, as adjusted to give effect to (i) the
Recapitalization and the application of the proceeds thereof (assuming proceeds
of $1.1 billion and assuming that all Rights are exercised in full) as described
under "Use of Proceeds," and (ii) certain amendments to the Parent's articles of
incorporation increasing the authorized capital stock, as if such
Recapitalization had been consummated and such amendments had been effected on
March 31, 1996. This table should be read in conjunction with the Consolidated
Financial Statements of the Parent and the related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
--------------------------
HISTORICAL AS ADJUSTED
---------- -----------
(DOLLARS IN MILLIONS,
EXCEPT SHARE DATA)
<S> <C> <C>
Cash and investments (a)...................................................... $ 155.8 $ 1.0
======== ========
Current maturities of long term debt (b)...................................... $ 92.5 $ 5.3
-------- --------
Long term debt:
HCLP Secured Notes.......................................................... 457.3 --
Existing Credit Facility (c)................................................ 38.6 --
12 3/4% Secured Discount Notes due 1998..................................... 618.4 --
Other debt.................................................................. 7.4 --
New Credit Facility (c)..................................................... -- 349.2
Senior Subordinated Notes offered hereby.................................... -- 325.0
Discount Notes offered hereby............................................... -- 175.0
-------- --------
Total long term debt (net of current maturities).......................... 1,121.7 849.2
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized, historical;
500,000,000 shares authorized, as adjusted
Series A Preferred Stock, 140,000,000 shares authorized, 58,407,080 shares
issued and outstanding, as adjusted (liquidation preference of
$132,000,000) (d)........................................................ -- 0.6
Series B Preferred Stock, 140,000,000 shares authorized, 58,849,557 shares
issued and outstanding, as adjusted (liquidation preference of
$133,000,000) (d)........................................................ -- 0.6
Series A Junior Participating Preferred Stock, 1,000,000 shares
authorized, no shares issued and outstanding, historical and as
adjusted................................................................. -- --
Common stock, $.01 par value, 100,000,000 shares authorized, historical;
600,000,000 shares authorized, as adjusted; 64,050,009 shares issued and
outstanding, historical and as adjusted................................... 0.6 0.6
Additional paid-in capital (e).............................................. 399.0 647.8
Accumulated deficit (f)..................................................... (331.5) (407.4)
-------- --------
Total stockholders' equity................................................ 68.1 242.2
-------- --------
Total capitalization.................................................... $1,282.3 $ 1,096.7
======== ========
</TABLE>
- ---------------
(a) Includes approximately $115.8 million in cash and cash investments and $40.0
million in investments.
(b) Consists of $35.0 million relating to the HCLP Secured Notes, $12.5 million
relating to the Existing Credit Facility, $39.7 million relating to the
12 3/4% Discount Notes due 1996 and $5.3 million of other debt.
(c) Reflects initial borrowings under the $500 million New Credit Facility.
Amounts under the New Credit Facility and Mesa's Existing Credit Facility do
not include approximately $11.4 million in letters of credit that are and
will continue to be outstanding.
(d) To the extent Rights are not exercised, the number of shares of Series A
Preferred Stock to be issued will decrease and the number of shares of
Series B Preferred Stock to be issued will increase by the same amount.
(e) The increase in additional paid-in capital represents the gross proceeds
from the sale of Preferred Stock of $265.0 million, less $1.2 million of
stated capital attributable to the Preferred Stock and less $15.0 million in
expenses related to the equity issuance.
(f) The increase in the amount of the accumulated deficit of $75.9 million
represents the sum of (i) a $64.0 million prepayment premium on the HCLP
Secured Notes plus (ii) the write-off of approximately $12.6 million of
unamortized debt issuance costs related to debt being repaid and/or
refinanced, less (iii) a $.7 million gain on the extinguishment of existing
long term debt.
21
<PAGE> 23
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited condensed consolidated pro forma financial
information (the "Pro Forma Financial Statements") is based on the historical
Consolidated Financial Statements of the Parent included elsewhere in this
Prospectus, adjusted to give effect to the Recapitalization. The Pro Forma
Statements of Operations give effect to the Recapitalization as if the
Recapitalization had occurred on January 1, 1995 and the Pro Forma Balance Sheet
gives effect to the Recapitalization as if the Recapitalization had occurred on
March 31, 1996. In addition, the Pro Forma Financial Statements give effect to
certain reductions in general and administrative expenses. See Note (h) below.
The Recapitalization is more fully described elsewhere in this Prospectus.
The Pro Forma Financial Statements should be read in conjunction with the
historical Consolidated Financial Statements of the Parent and the related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus. The Pro Forma
Financial Statements do not purport to represent what Mesa's results of
operations or financial condition would actually have been had the
Recapitalization been consummated and the reduction in general and
administrative expenses been achieved on the above indicated dates, or to
project Mesa's results of operations or financial condition for any future
period or as of any future date.
22
<PAGE> 24
PRO FORMA BALANCE SHEET
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
----------------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash investments................................ $ 115.8 $ (114.8)(a) $ 1.0
Investments.............................................. 40.0 (40.0)(a) --
Accounts receivable and other............................ 47.1 -- 47.1
-------- --------- --------
Total current assets................................... 202.9 (154.8) 48.1
-------- --------- --------
Property, plant and equipment, net......................... 1,062.0 -- 1,062.0
-------- --------- --------
Other assets:
Restricted cash of subsidiary partnership................ 56.5 (56.5)(b) --
Refundable prepaid interest.............................. 8.7 (8.7)(c) --
Debt issuance costs...................................... 12.6 7.4(d) 20.0
Gas balancing receivable................................. 58.1 -- 58.1
Other.................................................... 8.3 -- 8.3
-------- --------- --------
Total other assets..................................... 144.2 (57.8) 86.4
-------- --------- --------
Total assets......................................... $1,409.1 $ (212.6) $ 1,196.5
======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities on long term debt..................... $ 92.5 $ (87.2)(e) $ 5.3
Accounts payable and accrued liabilities................. 30.7 -- 30.7
Interest payable......................................... 26.9 (26.9)(e) --
-------- --------- --------
Total current liabilities.............................. 150.1 (114.1) 36.0
-------- --------- --------
Long term debt............................................. 1,121.8 (272.6)(e) 849.2
-------- --------- --------
Deferred revenue and other liabilities..................... 69.1 -- 69.1
-------- --------- --------
Stockholders' equity:
Series A Preferred Stock................................. -- 0.6(f) 0.6
Series B Preferred Stock................................. -- 0.6(f) 0.6
Common Stock............................................. 0.6 -- 0.6
Additional paid-in capital............................... 399.0 248.8(f) 647.8
Accumulated deficit...................................... (331.5) (75.9)(g) (407.4)
-------- --------- --------
Total stockholders' equity............................. 68.1 174.1 242.2
-------- --------- --------
Total liabilities and stockholders' equity........... $1,409.1 $ (212.6) $ 1,196.5
======== ========= ========
</TABLE>
(See Notes to Pro Forma Financial Statements)
23
<PAGE> 25
PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------------------
RECAPITALIZATION G&A
HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ---------------- ----------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Natural gas................................ $ 129.6 $ -- $ -- $ 129.6
Natural gas liquids........................ 75.3 -- -- 75.3
Oil and condensate......................... 19.6 -- -- 19.6
Other...................................... 10.5 -- -- 10.5
------- ------ ------
Total revenues............................... 235.0 -- -- 235.0
------- ------ ------
Costs and expenses:
Lease operating............................ 51.8 -- -- 51.8
Production and other taxes................. 18.4 -- -- 18.4
Exploration charges........................ 6.6 -- -- 6.6
General and administrative................. 26.8 -- (5.0)(h) 21.8
Depletion, depreciation and amortization... 83.4 -- -- 83.4
------- ------ ------
Total costs and expenses..................... 187.0 -- (5.0) 182.0
------- ------ ------
Operating income............................. 48.0 -- 5.0 53.0
------- ------ ------
Other income (expense):
Interest income............................ 15.9 (15.5)(i) -- 0.4
Interest expense........................... (148.6) 61.1(j) -- (87.5)
Investment gains........................... 18.4 -- -- 18.4
Other...................................... 8.7 -- -- 8.7
------- ------ ------
Total other income (expense)................. (105.6) 45.6 -- (60.0)
------- ------ ------
Net loss before Preferred Stock dividends.... (57.6) 45.6 5.0 (7.0)
------- ------ ------
Preferred Stock dividends.................... -- (21.9)(k) -- (21.9)
------- ------ ------
Net loss available to the common
stockholders............................... $ (57.6) $ 23.7 $ 5.0 $ (28.9)
======= ====== ======
Net loss per common share.................... $ (0.90) $ (0.45)
=======
Average shares outstanding:
Common..................................... 64.1 -- -- 64.1
Series A Preferred Stock................... -- 60.2 -- 60.2
Series B Preferred Stock................... -- 60.6 -- 60.6
Other Data:
EBITDA(l)................................ $ 138.0 $ -- $ 5.0 $ 143.0
======= ====== ======
</TABLE>
(See Notes to Pro Forma Financial Statements)
24
<PAGE> 26
PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1996
-------------------------------------------------------------
RECAPITALIZATION G&A
HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ---------------- ----------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Natural gas................................... $ 50.6 $ -- $ -- $ 50.6
Natural gas liquids........................... 23.1 -- -- 23.1
Oil and condensate............................ 4.4 -- -- 4.4
Other......................................... 2.5 -- -- 2.5
------ ------ ----- -------
Total revenues.................................. 80.6 -- -- 80.6
------ ------ ----- -------
Costs and expenses:
Lease operating............................... 13.6 -- -- 13.6
Production and other taxes.................... 5.4 -- -- 5.4
Exploration charges........................... 0.5 -- -- .5
General and administrative.................... 5.6 -- (1.2)(h) 4.4
Depletion, depreciation and amortization...... 30.2 -- -- 30.2
------ ------ ----- -------
Total costs and expenses........................ 55.3 -- (1.2) 54.1
------ ------ ----- -------
Operating income................................ 25.3 -- 1.2 26.5
------ ------ ----- -------
Other income (expense):
Interest income............................... 3.2 (3.1)(i) -- 0.1
Interest expense.............................. (37.7) 15.1(j) -- (22.6)
Investment gains.............................. 8.8 -- -- 8.8
Other......................................... 1.5 -- -- 1.5
------ ------ ----- -------
Total other income (expense).................... (24.2) 12.0 -- (12.2)
------ ------ ----- -------
Net income before Preferred Stock dividends..... 1.1 12.0 1.2 14.3
------ ------ ----- -------
Preferred Stock dividends....................... -- (5.7)(k) -- (5.7)
------ ------ ----- -------
Net income available to the common
stockholders.................................. $ 1.1 $ 6.3 $ 1.2 $ 8.6
====== ====== ===== =======
Primary income per common share................. $ .02 $ .13
====== =======
Fully diluted income per common share........... $ .07
Average shares outstanding: =======
Common........................................ 64.1 64.1
Series A Preferred Stock...................... -- 63.2 63.2
Series B Preferred Stock...................... -- 63.7 63.7
Other Data:
EBITDA(l)................................... $ 56.0 $ -- $ 1.2 $ 57.2
====== ====== ===== =======
</TABLE>
(See Notes to Pro Forma Financial Statements)
25
<PAGE> 27
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(a) The pro forma adjustments assume that substantially all cash and investment
balances are utilized as a source of funds in the Recapitalization.
(b) Represents the balance as of March 31, 1996 of a restricted cash balance
within HCLP that is available to supplement cash flows from HCLP's
properties in the event such cash flows are not sufficient to fund required
interest and principal payments on the HCLP Secured Notes. Such restricted
cash will be available to repay the HCLP Secured Notes in connection with
the Recapitalization.
(c) Represents the amount to be refunded under a guaranteed investment contract
entered into upon issuance of the HCLP Secured Notes.
(d) The debt issuance cost adjustment of $7.4 million consists of approximately
$20.0 million related to the Notes offered hereby and the New Credit
Facility (primarily fees to underwriters, banks, investment advisors and
DNR), net of a charge of approximately $12.6 million representing
unamortized debt issuance costs associated with the debt to be repaid and/or
refinanced.
(e) Reflects the repayment and/or refinancing of substantially all of Mesa's
existing debt, including accrued interest, as a result of the
Recapitalization. See "Use of Proceeds" and "Capitalization."
(f) The Series A and Series B Preferred Stock are reflected at par value with
the remaining proceeds, net of issuance costs, reflected in additional
paid-in capital.
(g) Reflects a nonrecurring charge of $64.0 million related to a prepayment
premium to be paid on the redemption of the HCLP Secured Notes and the write
off of $12.6 million of unamortized debt issuance costs associated with the
debt to be repaid and/or refinanced, net of an approximately $0.7 million
gain associated with the extinguishment of the existing long term debt.
(h) In conjunction with the Recapitalization and the concurrent change of
control of the Board, Mesa has committed to reducing its staff and
eliminating certain departments and activities. This adjustment reflects the
elimination of 74 positions from the total of 385 at December 31, 1995, and
a significant downsizing of the natural gas vehicle equipment business.
Following is a summary of the general and administrative expense pro forma
adjustment:
<TABLE>
<CAPTION>
AMOUNT OF ADJUSTMENT
-----------------------------------------
YEAR ENDED THREE MONTHS ENDED
G&A PRO FORMA ADJUSTMENT DECEMBER 31, 1995 MARCH 31, 1996
----------------------------------------------------- ------------------ -------------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Personnel reductions................................. $3.6 $ 1.0
Natural gas vehicles................................. 1.4 0.2
------
Total.............................................. $5.0 $ 1.2
======
</TABLE>
In addition to the general and administrative adjustment shown above,
management believes that it will be able to reduce general and
administrative and operating overhead expenses in excess of those amounts
reflected in the pro forma adjustment (up to $5.0 million of additional
annual reductions) subsequent to the Recapitalization. This additional
amount is not reflected as an adjustment in the Pro Forma Statement of
Operations.
(i) Substantially all interest income associated with cash investments,
investments and restricted cash is eliminated on a pro forma basis to
reflect the use of substantially all such balances to effect the
Recapitalization.
26
<PAGE> 28
(j) Reflects the reduction of interest expense as a result of the
Recapitalization. Interest expense adjustments include the following:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED
1995 MARCH 31, 1996
------------ --------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Interest expense on existing debt.............................. $145.5 $ 36.8
Interest expense on the New Credit Facility (assumed 7.0%
average annual rate)......................................... (25.0) (6.3)
Interest expense on the Senior Subordinated Notes (assumed
11.0% annual rate)........................................... (36.8) (9.2)
Interest expense on the Discount Notes (assumed 12 1/4% annual
rate)........................................................ (22.6) (6.2)
------------ ------
Total adjustment............................................. $ 61.1 $ 15.1
=========== ============
</TABLE>
Interest expense on existing debt does not include approximately $3.1
million for the year ended December 31, 1995 and $0.9 million for the three
months ended March 31, 1996 representing the interest portion of the
administrative fee charged by CIG in connection with Mesa's West Panhandle
field operations. The effects of fluctuations of 0.125% and 0.250% in annual
interest rates in respect of the New Credit Facility on pro forma interest
expense would have been $0.4 million and $0.8 million, respectively, for the
year ended December 31, 1995 and $0.1 million and $0.2 million,
respectively, for the three months ended March 31, 1996.
(k) Reflects the pro forma adjustment for an 8% dividend on the Preferred Stock
payable quarterly in additional shares of Preferred Stock for at least the
first four years after issuance.
(l) EBITDA represents operating income plus exploration charges and
depreciation, depletion and amortization expense. EBITDA is not presented as
an indicator of Mesa's operating performance nor as a measure of liquidity.
27
<PAGE> 29
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected financial information of Mesa as of
the dates and for the periods indicated. The selected historical consolidated
statement of operations data for the three months ended March 31, 1995 and 1996
and for the years ended December 31, 1993, 1994 and 1995 and the historical
consolidated balance sheet data as of March 31, 1996 and as of December 31, 1994
and 1995 are derived from the Consolidated Financial Statements of the Parent
included elsewhere in this Prospectus. The selected historical consolidated
statement of operations data for the years ended December 31, 1991 and 1992 and
the selected historical consolidated balance sheet data as of December 31, 1991,
1992 and 1993 are derived from consolidated financial statements of the Parent
that are not included in this Prospectus. This table should be read in
conjunction with the Consolidated Financial Statements of the Parent and related
notes thereto included elsewhere in this Prospectus and "Management's Discussion
and Analysis of Financial Condition and Results of Operations." After the
Recapitalization, it is expected that the consolidated financial statements of
the Company and its subsidiaries will be substantially the same as those of the
Parent and its subsidiaries.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- ------ --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Natural gas.................................. $ 169.9 $ 157.6 $ 141.8 $ 139.6 $ 129.6 $ 35.9 $ 50.6
Natural gas liquids.......................... 62.0 59.7 61.4 72.7 75.3 18.2 23.1
Oil and condensate........................... 16.1 18.7 12.4 7.9 19.6 5.4 4.4
Other........................................ 1.5 1.1 6.6 8.5 10.5 2.7 2.5
------ ------ ------ ------ ------ ------ --------
Total revenues................................. 249.5 237.1 222.2 228.7 235.0 62.2 80.6
------ ------ ------ ------ ------ ------ --------
Costs and expenses:
Lease operating.............................. 46.9 43.9 51.8 52.7 51.8 12.6 13.6
Production and other taxes................... 18.9 18.6 20.4 21.3 18.4 4.7 5.4
Exploration charges.......................... 4.7 10.0 2.7 5.2 6.6 1.3 .5
General and administrative................... 27.8 24.5 25.2 28.5 26.8 6.6 5.6
Depreciation, depletion and amortization..... 117.1 113.9 100.1 92.3 83.4 21.0 30.2
------ ------ ------ ------ ------ ------ --------
Total costs and expenses....................... 215.4 210.9 200.2 200.0 187.0 46.2 55.3
------ ------ ------ ------ ------ ------ --------
Operating income............................... 34.1 26.2 22.0 28.7 48.0 16.0 25.3
Net interest expense (a)....................... (134.3) (129.9) (131.3) (131.3) (132.7) (32.8) (34.5)
Other income (b)............................... 21.0 14.5 6.9 19.2 27.1 8.9 10.3
------ ------ ------ ------ ------ ------ --------
Net income (loss).............................. $ (79.2) $ (89.2) $ (102.4) $ (83.4) $ (57.6) $ (7.9) $ 1.1
====== ====== ====== ====== ====== ====== ========
Net income (loss) per common share............. $ (2.05) $ (2.31) $ (2.61) $ (1.42) $ (0.90) $ (.12) $ .02
====== ====== ====== ====== ====== ====== ========
OTHER FINANCIAL DATA:
EBITDA (c)..................................... $ 155.9 $ 150.1 $ 124.8 $ 126.2 $ 138.0 38.3 56.0
Cash flows from operating activities........... 35.0 (28.4) 32.5 48.6 69.2 29.2 (2.2)
Cash flows from investing activities........... 399.7 (17.0) 37.5 (40.3) (41.4) (10.3) (10.0)
Cash flows from financing activities........... (310.3) (29.5) (88.5) (3.6) (22.1) 2.2 (21.2)
Net cash interest expense (d).................. 130.9 126.1 78.0 47.8 90.4 12.4 34.0
Capital expenditures........................... 31.9 69.2 29.6 32.6 42.3 7.0 9.8
Ratios:
EBITDA to net interest expense............... 1.2x 1.2x 1.0x 1.0x 1.0x 1.2x 1.6x
EBITDA to net cash interest expense.......... 1.2x 1.2x 1.6x 2.6x 1.5x 3.1x 1.7x
Earnings to fixed charges(e)................. NM NM NM NM NM NM 1.0x
Total debt to EBITDA......................... 8.4x 8.6x 10.0x 9.7x 9.0x NM NM
BALANCE SHEET DATA (END OF PERIOD):
Cash and investments (f)....................... $ 260.3 $ 169.1 $ 150.0 $ 162.5 $ 187.4 $ 155.8
Total assets................................... 1,832.8 1,676.5 1,533.4 1,484.0 1,464.7 1,409.1
Long term debt, including current maturities... 1,310.7 1,286.2 1,241.3 1,223.3 1,236.7 1,214.3
Stockholders' equity........................... 273.6 184.4 112.1 124.6 67.0 68.1
</TABLE>
- ---------------
(a) Net interest expense represents total interest expense less interest income.
(b) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Operations -- Other Income (Expense)" for
additional detail.
(c) EBITDA represents operating income plus exploration charges and
depreciation, depletion and amortization expense. EBITDA is not presented as
an indicator of Mesa's operating performance or as a measure of liquidity.
(d) During the periods presented, certain of Mesa's total interest expense
consisted of non-cash amortization of debt issuance costs and of accretion
of interest on certain discount notes. Such accreted interest was added to
the balance of the discount notes rather than paid in cash. Net cash
interest expense reflects net interest expense less amortization of debt
issuance costs and accretion of interest on discount notes.
(e) For the purpose of determining the ratio of earnings to fixed charges,
earnings are defined as net loss plus fixed charges. Fixed charges consist
of interest expense and capitalized interest. Earnings were inadequate to
cover
fixed charges for the three month period ended March 31, 1995 by $7.9
million, and for each of the years ended December 31, 1991 through December
31, 1995 by $79.2 million, $91.6 million, $105.3 million, $83.5 million and
$58.5 million, respectively.
(f) At March 31, 1996, cash and investments includes $115.8 million of cash and
cash investments and $40.0 million of investments.
28
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the Consolidated
Financial Statements of the Parent and the related notes thereto included
elsewhere in this Prospectus.
CAPITAL RESOURCES AND LIQUIDITY
Mesa is highly leveraged with over $1.2 billion of long-term debt, including
current maturities. See Note 4 of Notes to Consolidated Financial Statements for
a detailed discussion of Mesa's debt. As a result of improved results of
operations in the first quarter of 1996, Mesa now expects that cash generated by
its operations, together with available cash and investment balances, will be
sufficient to fund the debt principal and interest obligations due by June 30,
1996. In addition, if the obligations under the Existing Credit Facility are
accelerated and become due in the second half of 1996 in the event Mesa breaches
the tangible adjusted equity covenant (see Note 4 of Notes to Consolidated
Financial Statements), Mesa expects to have sufficient cash to repay those
obligations. However, whether Mesa would have sufficient cash to pay both those
obligations and the interest payments on the Secured Discount Notes due at
December 31, 1996 would depend upon results of operations for the remainder of
1996. Mesa will make decisions regarding payments on its debt as such payments
come due, taking into account the status of the Recapitalization at such times.
The Recapitalization will enhance Mesa's ability to compete in the oil and
gas industry by substantially increasing its cash flow available for investment
and improving its ability to attract capital, which will increase its ability to
pursue investment opportunities. Specifically, Mesa's financial condition will
improve significantly as a result of the Recapitalization due to (i) a
significant reduction in total debt outstanding, (ii) a reduction in annual cash
interest expense of approximately $75 million, (iii) the implementation of a
cost savings program designed to initially reduce annual general and
administrative and other operating overhead expenses by approximately $10
million, and (iv) the extension of maturities on its long term debt, which will
eliminate Mesa's present liquidity concerns.
The expected reduction of annual cash interest expense is based on the
following assumptions: (i) average borrowings outstanding under the New Credit
Facility following the Second Closing of approximately $350 million, excluding
letters of credit, and (ii) annual interest rates of approximately 7% under the
New Credit Facility, 11% under the new senior subordinated notes and 12 1/4%
under the new senior subordinated discount notes. Actual borrowings and interest
rates under the New Credit Facility will fluctuate over time and will affect
Mesa's actual cash interest expense.
Management believes that cash from operating activities, together with as
much as $150 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 next several years following the
Recapitalization.
The successful completion of the Recapitalization is expected to position
Mesa to operate and continue as a going concern and to pursue its business
strategies. The consolidated financial statements of Mesa do not include any
adjustments reflecting any treatment other than going concern accounting.
If the Recapitalization is not completed, Mesa will pursue other
alternatives to address its liquidity issues and financial condition, including
pursuing other merger and sale transactions, the possibility of seeking to
restructure its balance sheet by negotiating with its current debt holders or
seeking protection from its creditors under the federal Bankruptcy Code.
NET OPERATING LOSS CARRYFORWARDS OF MESA
At December 31, 1995, Mesa had approximately $470 million of unused net
operating loss ("NOL") carryforwards. The issuance of Series B Preferred Stock
to DNR pursuant to the Stock Purchase Agreement will cause the NOL carryforward
limitations of Section 382 of the Internal Revenue Code of 1986, as amended (the
"Code"), to apply to Mesa's NOL carryforwards. As a result, Mesa's ability to
carry forward its existing NOLs to offset future income and gain (other than
unrealized gain inherent in Mesa's assets at the time of issuance of the Series
B Preferred Stock to DNR) will be limited. The impact of this limitation cannot
be predicted with any certainty because the amount of the limitation will depend
on the value of the Common Stock and on interest rates in effect at the time of
issuance of the Series B Preferred Stock to DNR. However, based on recent Common
Stock trading prices of $3 to $4 per share and on current interest rates, Mesa's
ability to
29
<PAGE> 31
utilize its existing NOLs would be limited to approximately $11 million to $15
million per year ("Annual NOL Limitation"). As a result of the restriction on
the utilization of the NOLs, a portion of the NOLs may expire before Mesa is
able to utilize them. Any unused Annual NOL Limitation as well as any tax
operating losses which might be generated after the issuance of the Series B
Preferred Stock will carry forward for use in future years without regard to the
limitation in amount described above.
RESULTS OF OPERATIONS
First Quarter 1995 Compared to First Quarter 1996
Mesa reported net income of $1.1 million in the first quarter of 1996
compared with a net loss of $7.9 million in the first quarter of 1995.
The following table presents a summary of the results of operations of Mesa
for the three months ended March 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Revenues..................................................................... $ 62.2 $ 80.6
Operating and administrative costs........................................... (25.2) (25.1)
Depreciation, depletion and amortization..................................... (21.0) (30.2)
------- -------
- -
Operating income............................................................. 16.0 25.3
Interest expense, net of interest income..................................... (32.8) (34.5)
Other........................................................................ 8.9 10.3
------- -------
- -
Net income (loss)............................................................ $ (7.9) $ 1.1
======== ========
</TABLE>
Revenues
The table below presents, for the three months ended March 31, 1995 and
1996, the revenues, production and average prices received from sales of natural
gas, natural gas liquids and oil and condensate.
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Revenues (in millions):
Natural gas............................................................ $ 35.9 $ 50.6
Natural gas liquids.................................................... 18.2 23.1
Oil and condensate..................................................... 5.4 4.4
------- -------
Total........................................................... $ 59.5 $ 78.1
======= =======
Natural Gas Production (MMcf):
Hugoton................................................................ 12,699 12,855
West Panhandle......................................................... 4,927 5,471
Gulf of Mexico......................................................... 2,245 3,697
Other.................................................................. 4 88
------- -------
Total........................................................... 19,875 22,111
======= =======
Natural Gas Liquids Production (MBbls):
Hugoton................................................................ 930 869
West Panhandle......................................................... 696 840
Gulf of Mexico......................................................... 13 12
Other.................................................................. 1 2
------- -------
Total........................................................... 1,640 1,723
======= =======
Oil and Condensate Production (MBbls):
Hugoton................................................................ -- --
West Panhandle......................................................... 16 34
Gulf of Mexico......................................................... 292 198
Other.................................................................. 14 12
------- -------
Total........................................................... 322 244
======= =======
Weighted average sales price:
Natural gas (per Mcf).................................................. $ 1.71* $ 2.26
Natural gas liquids (per Bbl).......................................... $ 11.18 $ 13.82
Oil and condensate (per Bbl)........................................... $ 16.51 $ 17.61
</TABLE>
- ---------------
* Includes the effects of hedging activities. See below.
30
<PAGE> 32
Mesa's natural gas production increased in the first quarter of 1996
compared with the same period of 1995 due to a weather-related increase in
demand in the West Panhandle field and increased production in the Gulf of
Mexico as a result of successful drilling in 1995. Natural gas liquids
production increased slightly in the first quarter of 1996 compared to the first
quarter of 1995 in proportion to higher natural gas production in the West
Panhandle field. In the first quarter of 1996 oil and condensate production
decreased compared to the same period of 1995 due to natural decline in the Gulf
of Mexico oil properties.
Natural gas prices in first quarter of 1996 were substantially higher than
in the first quarter of 1995 due to a colder 1995/1996 winter. Natural gas
liquids and oil and condensate prices were also higher due to the colder
weather.
Approximately 85 percent of Mesa's 1996 natural gas production was sold at
market prices. The remaining 15 percent was sold under a fixed-price contract.
When circumstances warrant, Mesa hedges its production. Amortization of deferred
gains and losses from hedging activities are included in natural gas revenues
when the hedged production occurs. In the first quarter of 1995, Mesa recognized
as natural gas revenues $4.9 million of hedge gains. Mesa did not hedge any of
its first quarter 1996 production. The following table shows the effect of
hedging activities on Mesa's natural gas prices:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
---------------
1995 1996
----- -----
<S> <C> <C>
Natural gas prices (per Mcf):
Actual price received for production........................................ $1.47 $2.26
Effect of hedging activities................................................ .24 --
----- -----
Average price............................................................... $1.71 $2.26
===== =====
</TABLE>
Costs and Expenses
Mesa's aggregate costs and expenses increased by approximately 20% in the
first quarter of 1996 compared to the same period in 1995 due primarily to
increased depreciation, depletion and amortization expenses ("DD&A") resulting
from a non-recurring impairment. Lease operating expenses increased marginally
due to increased production. Production and other taxes increased 14% due to
increased production and higher natural gas prices. Exploration charges
decreased reflecting lower seismic costs. General and administrative expenses
were lower primarily due to a reduction in employee benefit expenses and lower
outside consultant costs. DD&A, which is calculated quarterly on a
unit-of-production basis, was higher by 44% primarily due to impairment of
long-lived assets of approximately $6.8 million in accordance with the adoption
of a new accounting requirement (SFAS No. 121) and higher production in the
first quarter of 1996.
Other Income (Expense)
Interest income and interest expense in the first quarter of 1996 were not
materially different from such income and expense during the same period in 1995
as average cash balances and aggregate debt outstanding were not materially
different.
Results of operations for the three months ended March 31, 1995 and 1996
include certain items which are either non-recurring or are not directly
associated with Mesa's oil and gas producing operations. The following table
sets forth the amounts of such items for the periods indicated (in millions):
<TABLE>
<CAPTION>
1995 1996
---- -----
<S> <C> <C>
Gains from investments......................................................... $4.6 $ 8.8
Gains from collections from Bicoastal Corporation.............................. 4.6 2.5
Other.......................................................................... (.3) (1.0)
-----
--
------
Total Other Income.................................................... $8.9 $10.3
======= ======
</TABLE>
The gains from investments relate to Mesa's investments in marketable
securities and energy futures contracts, which include NYMEX futures contracts,
commodity price swaps and options that are not accounted for as hedges of future
production. Mesa's investments in marketable securities and futures contracts
are valued at market prices at each reporting date with gains and losses
included in the statement of operations for such reporting period whether or not
such gains or losses have been realized.
31
<PAGE> 33
The gains from collection of interest from Bicoastal Corporation relate to a
note receivable from such company, which was in bankruptcy. Mesa's claims in the
bankruptcy exceeded its recorded receivable. As of March 31, 1996, Mesa had
collected the full amount of its allowed claim plus a portion of the interest
due on such claims. Mesa does not expect any future amounts received from such
company to be significant.
Years Ended December 31, 1993, 1994 and 1995
The following table presents a summary of the results of operations of Mesa
for the years indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1993 1994 1995
------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Revenues.................................................. $ 222.2 $ 228.7 $ 235.0
Operating and administrative costs........................ (100.1) (107.7) (103.6)
Depreciation, depletion and amortization.................. (100.1) (92.3) (83.4)
----- ----- -----
Operating income.......................................... 22.0 28.7 48.0
----- ----- -----
Interest expense, net of interest income.................. (131.3) (131.3) (132.7)
Other..................................................... 6.9 19.2 27.1
----- ----- -----
Net loss.................................................. $(102.4) $ (83.4) $ (57.6)
===== ===== =====
</TABLE>
Revenues, Production and Average Price Data
The table below presents, for the years indicated, the revenues, production
and average prices received from sales of natural gas, natural gas liquids and
oil and condensate.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Revenues (in millions):
Natural gas............................................. $ 141.8 $ 139.6 $ 129.6
Natural gas liquids..................................... 61.4 72.7 75.3
Oil and condensate...................................... 12.4 7.9 19.6
------- ------- -------
Total............................................ $ 215.6 $ 220.2 $ 224.5
======= ======= =======
Natural Gas Production (MMcf):
Hugoton................................................. 47,476 51,986 48,871
West Panhandle.......................................... 23,786 22,983 20,357
Gulf of Mexico.......................................... 8,517 7,359 8,073
Other................................................... 41 11 11
------- ------- -------
Total............................................ 79,820 82,339 77,312
======= ======= =======
Natural Gas Liquids Production (MBbls):
Hugoton................................................. 1,481 3,430 3,524
West Panhandle.......................................... 3,480 3,423 2,994
Gulf of Mexico.......................................... 81 53 48
Other................................................... 8 5 5
------- ------- -------
Total............................................ 5,050 6,911 6,571
======= ======= =======
Oil and Condensate Production (MBbls):
Hugoton................................................. 104 -- --
West Panhandle.......................................... 153 164 118
Gulf of Mexico.......................................... 352 337 1,025
Other................................................... 129 45 52
------- ------- -------
Total............................................ 738 546 1,195
======= ======= =======
</TABLE>
32
<PAGE> 34
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Weighted average sales prices:
Natural gas (per Mcf)
Hugoton................................................. $ 1.78 $ 1.57 $ 1.32
West Panhandle.......................................... 1.72 1.80 1.83
Gulf of Mexico.......................................... 2.08 1.81 1.59
Other................................................... .85 1.29 .54
------- ------- -------
Average(a)....................................... $ 1.79 $ 1.67 $ 1.65
======= ======= =======
Natural gas liquids (per Bbl)
Hugoton................................................. $ 12.35 $ 10.03 $ 10.76
West Panhandle.......................................... 12.04 11.06 12.33
Gulf of Mexico.......................................... 12.61 11.52 11.37
Other................................................... 10.51 8.58 8.77
------- ------- -------
Average.......................................... $ 12.14 $ 10.55 $ 11.48
======= ======= =======
Oil and condensate (per Bbl)
Hugoton................................................. $ 18.21 $ -- $ --
West Panhandle.......................................... 15.04 13.38 14.13
Gulf of Mexico.......................................... 16.69 15.18 16.57
Other................................................... 17.08 14.43 16.48
------- ------- -------
Average.......................................... $ 16.63 $ 14.58 $ 16.32
======= ======= =======
</TABLE>
- ---------------
(a) Includes the effects of hedging activities. See "-- Natural Gas Prices."
The increase in total revenues from sales of natural gas, NGLs, and oil and
condensate from 1994 to 1995 is primarily attributable to increased oil and
condensate production in 1995, increased liquids prices in 1995 and
approximately $12.7 million of natural gas hedge gains recognized in 1995. These
factors offset the decrease in natural gas and natural gas liquids production
and the lower market prices for natural gas production in 1995. The increase in
revenues from 1993 to 1994 was primarily due to increased natural gas and
natural gas liquids production in 1994, partially offset by the decrease in
prices from 1993 to 1994.
Natural gas revenues decreased from 1993 to 1994 and from 1994 to 1995. In
1995 production was lower in both the Hugoton and West Panhandle fields due to
timing and duration of equipment maintenance and weather-related reduction in
demand, respectively. Total natural gas production increased from 1993 to 1994
primarily due to higher allowables in the Hugoton field partially offset by
slightly lower West Panhandle and Gulf of Mexico production. Average natural gas
prices were slightly lower in 1995 than in 1994. Prices received for market
price-based production were $.22 per Mcf (14%) lower in 1995, at $1.33 per Mcf.
Mesa's hedge gains increased the reported prices for such production by $.20 per
Mcf to $1.53 Mcf. The lower market prices were the result of the continuing
surplus of natural gas supply. Average natural gas prices reported were 7% lower
in 1994 than in 1993 due to generally lower market prices. See "-- Natural Gas
Prices."
NGL revenues increased in 1995 compared to 1994. Hugoton field NGL
production was slightly higher despite lower natural gas production reflecting
improved yields from Mesa's Satanta plant. West Panhandle field NGL production
decreased in 1995 in proportion to the lower natural gas production. The lower
production was offset by higher average prices in 1995 due to improved market
conditions for NGLs. NGL production increased from 1993 to 1994 as a result of
increases in Hugoton field liquids production. In the third quarter of 1993 the
Satanta plant in the Hugoton field was completed. The plant, which is capable of
processing up to 250 MMcf of natural gas per day, replaced Mesa's older Ulysses
natural gas processing plant which could process up to 160 MMcf per day. The
Satanta plant has the ability to extract a greater quantity of NGLs per Mcf of
natural gas, reject nitrogen, recover helium and produce LNG.
Oil and condensate revenues increased approximately 150% from 1994 to 1995.
Gulf of Mexico production was up over 200% due to successful drilling in late
1994. Average oil and condensate prices were also higher in 1995 by $1.74 per
Bbl. Prior to the resumption of drilling in the Gulf of Mexico in 1994, Mesa's
oil and condensate production had been on a decline.
33
<PAGE> 35
West Panhandle production is governed by the terms of a contract with CIG.
See "-- Production Allocation Agreement."
Mesa's production from the Hugoton field is affected by the allowables set
for the entire field and by the portion of allowables allocated to Mesa's wells.
See "Business -- Production -- Hugoton Field."
Natural Gas Prices
Substantially all of Mesa's natural gas production is sold under short term
or long term sales contracts. Approximately 80% of Mesa's annual natural gas
sales, whether or not such sales are governed by a contract, are at market
prices. The following table shows Mesa's natural gas production sold under fixed
price contracts and production sold at market prices:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Natural Gas Production (MMcf):
Sold under fixed price contracts................................. 19,467 13,935 15,212
Sold at market prices............................................ 60,353 68,404 62,100
------ ------ ------
Total production................................................. 79,820 82,339 77,312
====== ====== ======
Percent sold at market prices.................................... 76% 83% 80%
</TABLE>
In addition to its fixed price contracts, Mesa will, when circumstances
warrant, hedge the price received for its market-sensitive production through
natural gas futures contracts. The following table shows the effects of Mesa's
fixed price contracts and hedging activities on its natural gas prices:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Average Natural Gas Prices (per Mcf):
Fixed price contracts.............................................. $ 1.94 $ 2.16 $ 2.12
===== ===== =====
Market prices received............................................. $ 1.75 $ 1.55 $ 1.33
Hedge gains (losses)............................................... (.01) .01 .20
----- ----- -----
Total market prices.............................................. $ 1.74 $ 1.56 $ 1.53
===== ===== =====
Total average prices................................................. $ 1.79 $ 1.67 $ 1.65
===== ===== =====
</TABLE>
Gains and losses from hedging activities are included in natural gas
revenues when the applicable hedged natural gas is produced. Mesa recognized
gains from hedging activities of $12.7 million in 1995 and $895,000 in 1994, and
losses of $324,000 in 1993.
Costs and Expenses
Mesa's aggregate costs and expenses declined by approximately 7% from 1994
to 1995. Lease operating expenses declined marginally due to decreased
production. Production and other taxes decreased 14% from 1994 to 1995 due to
decreased production in the Hugoton and West Panhandle fields and lower tax
rates for Hugoton field production in 1995. See "Business -- Production Costs."
Exploration charges in 1995 were greater than in 1994, reflecting increased
exploration activities in the Gulf of Mexico, and consist primarily of
exploratory dry-hole expense. General and administrative ("G&A") expenses were
lower in 1995 than in 1994 primarily due to lower legal expenses and a reduction
in employee benefit expenses. DD&A expense was lower in 1995 than in 1994
primarily due to lower equivalent production in 1995, oil and gas reserve
increases in the Hugoton and West Panhandle fields in the fourth quarters of
1994 and 1995, and additional reserve discoveries in the Gulf of Mexico in 1994
and 1995. (See "Supplemental Financial Data" in the notes to the Consolidated
Financial Statements of the Parent located elsewhere in this Prospectus for a
discussion of oil and gas reserves.)
Mesa's aggregate costs and expenses declined marginally from 1993 to 1994.
Lease operating expenses increased by 2% as a result of higher operating costs
associated with Mesa's Satanta plant and higher Hugoton field production. See
"Business -- Production Costs." Exploration charges in 1994 were greater than in
1993, reflecting Mesa's increased exploration activities in the Gulf of Mexico,
and resulted primarily from the
34
<PAGE> 36
purchase of 3-D seismic data. G&A expenses were higher in 1994 than in 1993
primarily due to litigation expenses associated with Mesa's defense of a royalty
lawsuit in the West Panhandle field. See "Business -- Legal Proceedings." DD&A
expense was lower in 1994 compared to 1993. DD&A expense reflects the 1994
reserve increases in the Hugoton and West Panhandle fields and reserve
discoveries in the Gulf of Mexico. (See "Supplemental Financial Data" in the
notes to the Consolidated Financial Statements of the Parent located elsewhere
in this Prospectus.)
Other Income (Expense)
Interest expense in 1995 was not materially different from 1994 and 1993 as
average aggregate debt outstanding did not materially change.
Interest income increased from $10.7 million in 1993 to $13.5 million in
1994 and $15.9 million in 1995 as a result of higher average cash balances and
higher average interest rates earned on these cash balances in 1994 and 1995.
Results of operations for the years 1993, 1994, and 1995 include certain
items which are either non-recurring or are not directly associated with Mesa's
oil and gas producing operations. The following table sets forth the amounts of
such items:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Gains from investments.......................................... $ 4.0 $ 6.7 $18.4
Gains from collections from Bicoastal Corporation............... 18.5 16.6 6.4
Gains on dispositions of oil and gas properties................. 9.6 -- --
Litigation settlement........................................... (42.8) -- --
Gain from adjustment of contingency reserve..................... 24.0 -- --
Expense of debt exchange transaction............................ (9.7) -- --
Other........................................................... 3.3 (4.1) 2.3
---- --- ---
Total other income............................................ $ 6.9 $19.2 $27.1
==== === ===
</TABLE>
The gains from investments relate to Mesa's investments in marketable
securities and energy futures contracts, which include NYMEX futures contracts,
commodity price swaps and options that are not accounted for as hedges of future
production. Mesa's investments in marketable securities and futures contracts
are valued at market prices at each reporting date with gains and losses
included in the statement of operations for such reporting period whether or not
such gains or losses have been realized. At December 31, 1995, Mesa had
recognized but not realized approximately $7.6 million of gains primarily
associated with open positions in natural gas futures contracts. After May 7,
1996, Mesa had no open speculative positions in energy futures contracts.
The gains from collection of interest from Bicoastal Corporation relate to a
note receivable from such company, which was in bankruptcy. Mesa's claims in the
bankruptcy exceeded its recorded receivable. As of year-end 1995, Mesa had
collected the full amount of its allowed claim plus a portion of the interest
due on such claims. The gains on dispositions of oil and gas properties relate
primarily to 1993 sales of oil producing properties in the deep Hugoton and
Rocky Mountain areas for approximately $26 million.
The litigation settlement charge relates to Mesa's 1994 settlement of a
lawsuit with Unocal Corporation ("Unocal"). The litigation related to a 1985
investment in Unocal by Mesa's predecessor, Mesa Petroleum Co. ("Original
Mesa"), and certain other defendants. The plaintiffs had sought to recover
alleged "short-swing profits" plus interest totaling over $150 million pursuant
to Section 16(b) of the Exchange Act. In early 1994 Mesa and the other
defendants reached a settlement with the plaintiffs and agreed to pay $47.5
million to Unocal, of which Mesa's share was $42.8 million. Mesa issued
additional secured discount notes with a face amount of $48.2 million to fund
its share of the settlement.
In the fourth quarter of 1993, Mesa completed a settlement with the Internal
Revenue Service (the "IRS") resolving all tax issues relating to the 1984
through 1987 tax returns of Original Mesa. Mesa had previously established
contingency reserves for the IRS claims and certain other contingent liabilities
in excess of the actual and estimated liabilities. As a result of the settlement
with the IRS and the resolution and revaluation of certain other contingent
liabilities, Mesa recorded a net gain of $24 million in the fourth quarter of
1993.
35
<PAGE> 37
The debt exchange expense relates to costs associated with Mesa's $600
million debt exchange transaction completed in 1993.
Production Allocation Agreement
Effective January 1, 1991, Mesa entered into the Production Allocation
Agreement (as amended, the "PAA") with CIG, which allocates 77% of reserves and
production from the West Panhandle field to Mesa and 23% to CIG. During 1993,
1994 and 1995, Mesa produced and sold 74%, 69%, and 71%, respectively, of total
production from the field; the balance of field production was sold by CIG. Mesa
records its 77% ownership interest in natural gas production as revenue. The
difference between the net value of production sold by Mesa and the net value of
its 77% entitlement is accrued as a gas balancing receivable. The revenues and
costs associated with such accrued production are included in results of
operations.
The following table presents the incremental effect on production and
results of operations from entitlement production recorded in excess of actual
sales as a result of the PAA:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------- JANUARY 1, 1991
1993 1994 1995 TO DATE
----- ----- ----- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Revenues accrued................................. $ 5.1 $ 8.7 $ 4.3 $ 58.7
Costs and expenses accrued....................... (1.1) (3.1) (1.6) (16.1)
----- ----- ----- -------
Recorded to receivable........................... 4.0 5.6 2.7 42.6
----- ----- ----- -------
Depreciation, depletion and amortization......... (1.2) (3.7) (1.7) (25.2)
----- ----- ----- -------
Total................................... $ 2.8 $ 1.9 $ 1.0 $ 17.4
===== ===== ===== ============
Production accrued:
Natural gas (MMcf)............................. 740 2,386 1,155 15,887
Natural gas liquids (MBbls).................... 106 355 171 2,275
</TABLE>
At December 31, 1995, the long term gas balancing receivable from CIG, net
of accrued costs, relating to the PAA was $42.6 million, which is included in
"Other assets" in Mesa's consolidated balance sheet. The provisions of the PAA
allow for periodic and ultimate cash balancing to occur. The PAA also provides
that CIG may not take in excess of its 23% share of ultimate production.
OTHER
See "Business -- Legal Proceedings" and Note 9 to the Consolidated Financial
Statements of the Parent included elsewhere in this Prospectus for information
regarding the status of certain pending litigation.
Mesa recognizes its ownership interest in natural gas production as revenue.
Actual production quantities sold may be different from Mesa's ownership share
of production in a given period. Mesa records these differences as gas balancing
receivables or as deferred revenue. Net gas balancing underproduction
represented approximately 5.4% of total equivalent production for the three
months ended March 31, 1996 compared to 2.6% for the same period of 1995, and
represented approximately 2% of total equivalent production for the year ended
December 31, 1995, compared with 5% during the same period in 1994 and 3% in
1993. The gas balancing receivable or deferred revenue component of natural gas
and natural gas liquids revenues in future periods is dependent on future rates
of production, field allowables and the amount of production taken by Mesa or by
its joint interest partners.
Mesa invests from time to time in marketable equity and other securities, as
well as in energy-related commodity futures contracts, which include NYMEX
futures contracts, price swaps and options. Mesa also enters into natural gas
futures contracts as a hedge against natural gas price fluctuations.
Management does not anticipate that inflation will have a significant effect
on Mesa's operations.
36
<PAGE> 38
BUSINESS
GENERAL
Mesa is one of the largest independent oil and gas companies in the United
States, with approximately 1.9 Tcfe of proved reserves as of December 31, 1995.
Approximately 95% of Mesa's reserves are concentrated in the Hugoton field in
southwest Kansas and the West Panhandle field in Texas. These fields, which are
part of one contiguous reservoir, are considered to be among the premier natural
gas properties in the United States and are characterized by long lived reserves
and stable production. Despite operating under significant capital constraints
since 1990, Mesa has maintained a large, concentrated and efficiently managed
asset base.
Approximately 65% of Mesa's total equivalent proved reserves are natural gas
and the balance are principally NGLs. Approximately 95% of Mesa's proved
reserves are developed. The estimated future net cash flows before income taxes
from Mesa's proved reserves, as of December 31, 1995, aggregated approximately
$2.4 billion and had a 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. Over 90% of Mesa's production and
reserves are attributable to wells operated by Mesa, which provides Mesa
with control over the amount and timing of capital and operating
expenditures. Mesa also owns and operates all of the processing
facilities and a substantial majority of the gathering assets that
service its onshore production. Control over these assets reduces
operating expenses and enhances operational flexibility. These factors
provide Mesa with significant operating advantages, such as the ability
to (i) shift production into the heating season, when prices are
generally higher, (ii) vary the recovery of NGLs to optimize its revenue
mix, (iii) avoid production curtailments due to capacity constraints and
(iv) reduce abandonment pressures for its wells, which should increase
ultimate recoverable reserves.
-- Low Cost Operator. Mesa's reserves are primarily recovered from low
pressure, shallow gas fields. Consequently, production costs are low and
averaged $0.57 per Mcfe of production in 1995.
-- Expertise in Midcontinent and Gulf of Mexico. The Midcontinent, where the
Hugoton and West Panhandle fields are located, and the Gulf of Mexico are
two of the most prolific gas producing regions in the United States.
Mesa's personnel have substantial operational expertise and experience in
the oil and gas industry, particularly with respect to the technical
challenges of these regions. Mesa's operations and exploration staff has
extensive experience with the federal, state and local agencies with
responsibility for these regions. This experience provides a significant
base upon which to expand Mesa's operations as cash flow and additional
capital become available for investment following the Recapitalization.
37
<PAGE> 39
BUSINESS STRATEGY
Following the Recapitalization, Mesa intends to position itself as a leading
independent oil and gas exploration and production company by implementing the
following primary strategies:
-- Balanced Reserve Growth. Mesa plans to increase reserves and cash flow by
pursuing a balanced strategy of blending property acquisitions with
development drilling and exploration. In pursuit of its strategy, Mesa
intends to target (i) strategic property acquisitions that complement
Mesa's existing asset base, (ii) long term development projects that
provide a stable and low risk portfolio of reinvestment opportunities and
(iii) limited exposure to higher risk exploration activities.
-- Exploitation of Existing Assets. Mesa will continue to focus on
exploiting its existing asset base by undertaking projects related to
development drilling, expansion of gathering systems, increased
compression, enhancement of processing facilities and value added
marketing activities.
-- Reduction in Costs. Mesa intends to maintain a low cost structure to
maximize free cash flow available for investment. To this end, Mesa has
already implemented the first steps of a program designed to reduce
annual general and administrative and other operating overhead expenses
by approximately $10 million.
-- Increased Financial Flexibility. After completion of the
Recapitalization, Mesa's financial flexibility will increase
substantially. Mesa is committed to maintaining financial flexibility to
enable it to access various forms of capital in order to successfully
execute its growth strategy.
PROPERTIES
Approximately 95% of Mesa's proved reserves are concentrated in the Hugoton
field of southwest Kansas and the West Panhandle field of Texas. The two fields
are each part of a reservoir that extends from southwest Kansas, through the
Oklahoma panhandle and into the Texas panhandle. These fields, which produce gas
from depths of 3,500 feet or less, are characterized by stable, long lived, low
cost production. Mesa's other properties are primarily in the Gulf of Mexico and
the Rocky Mountains.
The following table summarizes the estimated proved reserves and estimated
future cash flows associated with Mesa's oil and gas properties as of December
31, 1995, as estimated in accordance with Commission guidelines, by major areas
of operation:
<TABLE>
<CAPTION>
GULF
WEST OF
HUGOTON PANHANDLE MEXICO OTHER TOTAL
---------- --------- ------ ------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Proved reserves:
Natural gas (MMcf)......................... 863,939 283,218 38,317 32,555 1,218,029
Natural gas liquids (MBbls)................ 56,720 45,041 122 14 101,897
Oil (MBbls)................................ -- 6,817 2,303 401 9,521
Natural gas equivalents (MMcfe)............ 1,204,259 594,366 52,867 35,045 1,886,537
% Developed................................ 100% 90% 77% 41% 95%
% Natural Gas.............................. 72% 48% 72% 93% 65%
% of Total................................. 64% 32% 3% 1% 100%
Future net cash flows........................ $1,481 $603 $43 $26 $2,153
Present value of future net cash flows,
discounted at 10%.......................... $614 $307 $42 $3 $966
Future net cash flows, before income taxes... $1,693 $683 $42 $32 $2,450
Present value of future net cash flows,
before income taxes, discounted at 10%..... $ 658 $332 $41 $ 9 $1,040
</TABLE>
In recent years Mesa has concentrated its efforts on fully developing its
existing long lived reserve base and expanding its opportunities to sell its
production into as many markets with as few restrictions, such as those imposed
by long term contracts, as possible. In the Hugoton field, these efforts have
included infill drilling (i.e., drilling an additional well on each 640-acre
spacing unit), installing additional compression and gathering facilities, and
the construction of the Satanta natural gas processing plant, which has the
ability to extract a greater quantity of NGLs per Mcf of natural gas, reject
nitrogen, recover helium and produce LNG. Two significant gas sales contracts
related to Hugoton production expired in May 1995, giving Mesa over 200 MMcf
38
<PAGE> 40
per day of uncommitted deliverability available for sale after that date. Mesa
now has the flexibility to sell its Hugoton production under short term
contracts or on a swing or peak basis. In the West Panhandle field, development
activities have included well workovers and deepenings/redrills, adding
compression facilities, and the expansion and upgrading of natural gas
processing facilities to process greater quantities of natural gas and recover
helium. In addition, Mesa restructured its contractual arrangements in the West
Panhandle field to more clearly define its right to production and to create the
ability to sell gas outside of a restricted market area to a greater number of
potential customers. Since 1994 Mesa has directed approximately 60% of its
capital spending towards exploration and development in the Gulf of Mexico.
Mesa has maintained a large geological and geophysical database covering the
Midcontinent and other areas where it has historically operated. Following the
Recapitalization, Mesa intends to exploit its database and consider selective
acquisitions of producing properties with development and exploration potential
in the Texas Panhandle, the Hugoton field, and other areas of the Midcontinent
and Gulf of Mexico regions.
Hugoton Field
The Hugoton field in southwest Kansas is the largest producing gas field in
the continental United States. Mesa's Hugoton properties represent approximately
13% of the proved reserves in the field and are located on over 230,000 net
acres, covering approximately 400 square miles. Mesa's properties are
concentrated in the center of the field and thus benefit from better reservoir
characteristics, including thicker productive zones, higher porosity and higher
permeability. Management believes that, as a result, Mesa's Hugoton properties
will have a longer productive life and higher natural gas recoveries than
properties located in other parts of the Hugoton field. Mesa has working
interests in approximately 1,100 wells in the Hugoton field, 950 of which it
operates, and royalty interests in approximately 300 additional wells. Mesa owns
substantially all of the gathering and processing facilities which service its
production from the Hugoton field and which allow Mesa to control the
production, gathering, processing and sale of its gas to various major
intrastate and interstate pipelines through its direct interconnects.
Mesa's Hugoton properties are capable of producing more than 230 MMcf of wet
gas per day (i.e., gas production at the wellhead before processing and before
reduction for royalties). Substantially all of Mesa's Hugoton production is
processed through its Satanta plant. After processing, on a peak production day,
Mesa has available to market over 150 MMcf of residue (processed) gas and 13
MBbls of NGLs. Production in the Hugoton field is subject to allowables set by
state regulators. Mesa estimates that, for the last year, it and other major
producers in the Hugoton field have produced at full capacity in the Hugoton
field and expects such practice to continue. See "-- Production -- Hugoton
Field."
Mesa's Hugoton properties accounted for approximately 64% of its equivalent
proved reserves and 64% of the present value of estimated future net cash flows
determined as of December 31, 1995, in accordance with Commission guidelines.
The Hugoton properties accounted for approximately 48%, 53%, and 47% of Mesa's
oil and gas revenues for the years ended December 31, 1993, 1994, and 1995,
respectively. The percentage of revenues from the Hugoton field has been less
than the percentage of equivalent proved reserves due primarily to the longer
life of the Hugoton properties compared to Mesa's other properties. See
"-- Production -- Hugoton Field."
West Panhandle Field
The West Panhandle properties are located in the central panhandle region of
Texas. Natural gas from these properties is produced from approximately 600
wells, all of which Mesa operates, on over 185,000 net acres. All of Mesa's West
Panhandle production is processed through Mesa's Fain natural gas processing
plant.
Mesa's West Panhandle reserves are owned and produced pursuant to contracts
with CIG, originally executed in 1928 by predecessors of both companies. The
PAA, an amendment to these contracts, allocates 77% of the production from the
West Panhandle field properties to Mesa and 23% to CIG, effective as of January
1, 1991. Under the associated agreements, Mesa operates the wells and production
equipment and CIG owns and operates the gathering system by which Mesa's
production is transported to the Fain plant. CIG also performs certain
administrative functions. Each party reimburses the other for certain costs and
expenses incurred for the joint account.
As of December 31, 1995, Mesa's West Panhandle properties represented
approximately 32% of Mesa's equivalent proved reserves, and approximately 32% of
the present value of estimated future net cash flows, determined in accordance
with Commission guidelines. Production from the West Panhandle properties
39
<PAGE> 41
accounted for approximately 40%, 36%, and 33% of Mesa's oil and gas revenues for
the years ended December 31, 1993, 1994, and 1995, respectively. Although the
West Panhandle properties are long lived, the percentage of Mesa's revenues
represented by West Panhandle production has been greater than the percentage of
equivalent proved reserves represented by such properties. This is a result of
higher gas prices received under a sales contract for approximately 29% of
Mesa's West Panhandle residue gas production, as well as the higher yield of
NGLs extracted from West Panhandle natural gas as compared to Hugoton natural
gas.
The Fain plant is capable of processing up to 120 MMcf of natural gas per
day. West Panhandle field natural gas contains a high quantity of NGLs. As a
result, processing this gas yields relatively greater liquids volumes than
recoveries typically realized in other natural gas fields. For example, on a
peak day, Mesa can extract approximately 12 MBbls of NGLs at its Fain plant from
an inlet gas volume of 120 MMcf.
In the last six years Mesa has deepened, redrilled, or reworked 357 wells in
the West Panhandle field, adding reserves, and increasing deliverability. Mesa
has also identified approximately 120 locations that have additional production
potential from new areas or deeper zones that it plans to redrill over a three
year period beginning in early 1996. These drilling locations target reserves in
deeper portions of the reservoirs not currently reached by existing wells. Mesa
has commenced the drilling program to develop these reserves in anticipation of
its contractual right to increase its share of West Panhandle production in 1997
and thereafter. See "-- Production -- West Panhandle Production."
Gulf of Mexico
Mesa's Gulf of Mexico properties are located offshore Texas and Louisiana.
Mesa has operated in the Gulf of Mexico since 1970 and has produced
approximately 425 Bcfe (net to Mesa's interest). Mesa currently owns interests
in 45 blocks in the Gulf of Mexico. As of December 31, 1995, these properties
had an estimated 53 Bcfe of remaining proved reserves. In addition, Mesa has
over 100,000 miles of two-dimensional ("2-D") seismic data and approximately 400
square miles of 3-D seismic data in the Gulf of Mexico. Mesa has an office in
Lafayette, Louisiana, to oversee production from its Gulf of Mexico properties.
Mesa's working interests in seven of its 45 blocks are subject to a net profits
interest owned by the Mesa Offshore Trust.
Over the last five years, Mesa has evaluated a number of its offshore
producing properties utilizing well information, 2-D seismic and production
data, combined with 3-D seismic surveys to identify further development and
exploration potential. Mesa currently has 11 3-D seismic surveys under analysis.
New well locations were identified on five producing leases in 1995 and one
exploratory block was acquired based upon interpretation of 3-D seismic data.
Since late 1994, Mesa has successfully completed 17 out of 19 wells drilled in
the Gulf of Mexico based on 3-D seismic surveys. In the aggregate, Mesa incurred
net capital costs of $36 million during this period and, through December 31,
1995, has added approximately 51 Bcfe of proved oil and gas reserves. Mesa
intends to continue its evaluation and identification of additional prospects
for drilling in 1996, depending on the success of its program and other factors.
Because it has existing infrastructure and production facilities on these
properties, Mesa expects that it will be able to bring its successful wells
on-line more quickly and at lower development costs than have been typical for
offshore production.
In April 1996, Mesa purchased six blocks covering 28,000 acres in the most
recent federal lease sale in the Gulf of Mexico. Mesa paid $500,000 for its
share of the six blocks, five of which are located in an area where Mesa has
producing interests.
Other
Mesa's other producing properties are located in the Rocky Mountain area of
the United States, which accounted for less than 1% of Mesa's total production
in 1995.
Mesa's non-oil and gas tangible properties include buildings, leasehold
improvements, and office equipment, primarily in Amarillo, Dallas, and Fort
Worth, Texas, and certain other assets. Non-oil and gas tangible properties
represent less than 2% of the net book value of Mesa's properties.
40
<PAGE> 42
RESERVES
The following table summarizes Mesa proved reserves, as estimated in
accordance with the Commission guidelines, associated with Mesa's oil and gas
properties as of December 31, 1991, 1992, 1993, 1994 and 1995 by total reserves
and reserve components.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------------
1991 1992 1993 1994 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Natural gas (MMcf)................. 1,367,968 1,276,049 1,202,444 1,303,187 1,218,029
Natural gas liquids (MBbls)........ 79,269 80,124 79,150 84,397 101,897
Oil and condensate (MBbls)......... 3,956 7,268 3,296 5,031 9,521
Natural gas equivalents (MMcfe).... 1,867,318 1,800,401 1,697,120 1,839,755 1,886,537
</TABLE>
The proved reserve estimates set forth above for 1994 and 1995 were prepared
by Mesa's internal reserve engineers. Oil and gas reserve quantities estimated
as of December 31, 1995, reflect a net increase over 1994, after production, of
approximately 171 Bcfe of natural gas. Equivalent natural gas reserves increased
in each of Mesa's major production areas. Increases in Hugoton field reserves
reflect alignment of the assumptions used in preparing the proved reserve
estimates with Mesa's practice of recovering ethane at the Satanta plant. In
previous years Hugoton proved reserve estimates were prepared assuming that Mesa
would not recover ethane which resulted in slightly higher natural gas volumes,
lower NGL volumes and lower total equivalent volumes than if ethane recovery
were assumed. The decision as to whether or not to recover ethane is based on
the relative value of ethane as a liquid versus the energy-equivalent value of
such ethane if left in the residue natural gas stream. In the future, if
economic conditions warrant, Mesa may revise proved reserves to reflect any
changes in such relative values. In the West Panhandle field, reserves were
revised upward to reflect the development drilling results over the past year
and the planned upgrade of the Fain plant for a higher rate of liquids recovery
per Mcf of gas produced from the field. In the Gulf of Mexico, reserve additions
resulted from exploratory and development drilling in 1994 and 1995.
Prior to 1994 Mesa's proved reserve estimates were prepared by DeGolyer &
MacNaughton, an independent petroleum engineering firm ("D&M"). In accordance
with a long term debt agreement, D&M prepared proved reserve estimates as of
December 31, 1995, covering Mesa's Hugoton properties in the manner and to the
extent required by the debt agreement. Their report will not be used for
purposes other than those prescribed in the debt agreement. As in prior years,
the Hugoton field reserve estimates prepared by D&M are less than those of
Mesa's engineers due to the independent engineers' different interpretation of
well-test pressure and cumulative production data related to Mesa's Hugoton
field properties. Subsequent to the change in field rules in 1994 allowing
higher production rates, Mesa's wells have been producing at or near capacity
and shut-in periods prior to testing have been brief. As a result, well-test
pressures have been generally lower than those measured prior to the field rule
changes. Mesa believes the historical pressures are more accurate and therefore
the pressure data used in its internal reserve estimates reflect only pressure
data recorded prior to the higher production rates. D&M reserve estimates are
based on well-test pressures that include the more recent data. D&M's December
31, 1995 reserve estimates for the Hugoton field reflect a downward revision
from prior estimates by D&M and, as a result, such estimates were approximately
25% less than Mesa's estimates of Hugoton field reserves as of December 31,
1995. See Note 4 to the Consolidated Financial Statements of the Parent located
elsewhere in this Prospectus for additional discussion of D&M's reserve report.
In connection with the due diligence conducted by DNR prior to entering into
the Stock Purchase Agreement, and in order to understand the differences between
D&M's report referred to above and Mesa's internal reserve estimates, DNR
requested another independent engineering firm, Williamson Petroleum
Consultants, Inc. ("Williamson"), to make an independent evaluation of the
projected gross proved gas reserves attributable to the Hugoton and West
Panhandle properties in which Mesa had an interest as of December 31, 1995. The
evaluation was based on limited data and abbreviated procedures, and did not
constitute a complete engineering estimate of such reserves. The projected gross
proved gas reserves contained in the evaluation were then used by Mesa's
internal reserve engineers in order to derive estimates of net reserves,
including NGLs, and associated economic projections using abbreviated computer
models at the summary level that could be compared to Mesa's estimates set forth
in the table above. Williamson subsequently reviewed the results of the
procedures performed by Mesa's internal reserve engineers, and concluded that
such procedures and associated estimates were reasonable and consistent and
incorporated techniques used and accepted in the oil and gas industry.
41
<PAGE> 43
The net reserves (on an MMcfe basis) derived from the data concerning gross
gas reserves provided in Williamson's evaluation were approximately 89% of the
net reserves (on an MMcfe basis) contained in Mesa's internal estimates of the
reserves attributable to Mesa's Hugoton and West Panhandle properties as of
December 31, 1995. The present value of the estimated future net cash flows
discounted at 10%, before income taxes, of such net reserves, as so derived, was
approximately 97% of the present value of the estimated future net cash flows
contained in Mesa's internal estimates of the reserves attributable to Mesa's
Hugoton and West Panhandle properties as of December 31, 1995. The difference in
net reserves is primarily due to differing opinions concerning the reserves that
could be recovered from such properties in the later years of the life of such
reserves, which are beyond the term of the Notes.
Information relating to Mesa's proved oil and gas reserves is based upon
engineering estimates. Estimates of economically recoverable oil and gas
reserves and of future net revenues depend upon a number of factors and
assumptions, such as historical production performance, the assumed effects of
regulations by governmental agencies and assumptions concerning future oil and
gas prices, future operating costs, severance and excise taxes, development
costs and workover costs, all of which may in fact vary considerably from actual
future conditions. The accuracy of any reserve estimate is a function of the
quality of the available data, of engineering and geological interpretation and
of subjective judgment. For these reasons, estimates of the economically
recoverable quantities of oil and gas reserves attributable to any particular
group of properties, classifications of such reserves based on risk of recovery
and estimates of the future net revenues expected therefrom prepared by
different engineers or by the same engineers at different times may vary
materially. Actual production, revenues, and expenditures with respect to Mesa's
reserves will likely vary from estimates, and such variances may be material.
See "Risk Factors -- Business and Industry Risks -- Reserves and Future Net Cash
Flows."
Each year, Mesa files reserve estimates as of the end of the preceding
fiscal year with the Energy Information Administration of the Department of
Energy (the "EIA"). Mesa's reserve estimates as of December 31, 1995, filed with
the EIA did not vary from those estimates contained herein by more than 5% as
described above.
The estimated quantities of proved oil and gas reserves, the standardized
measure of future net cash flows from proved oil and gas reserves (the
"Standardized Measure") and the changes in the Standardized Measure for each of
the three years in the period ended December 31, 1995, are included under
"Supplemental Financial Data" in the notes to the Consolidated Financial
Statements of the Company located elsewhere in this Prospectus.
PRODUCTION
Mesa's Hugoton and West Panhandle fields are both mature reservoirs that are
substantially developed and have long life production profiles. Natural gas
production is subject to numerous state and federal laws and Federal Energy
Regulatory Commission (the "FERC") regulations. See "-- Regulation and Prices."
Certain other factors affecting production in Mesa's various fields are
discussed in greater detail below.
Hugoton Field
The Kansas Corporation Commission (the "KCC") is the state regulatory agency
that regulates oil and gas production in Kansas. One of the KCC's most important
responsibilities is the determination of market demand (allowables) for the
Hugoton field and the allocation of allowables among the more than 9,000 wells
in the field.
Twice each year, the KCC sets the fieldwide allowable production at a level
estimated to be necessary to meet the Hugoton market demand for the summer and
winter production periods. The fieldwide allowable is then allocated among
individual wells determined by a series of calculations that are principally
based on each well's pressure, deliverability and acreage. The allowables
assigned to individual wells are affected by the relative production, testing,
and drilling practices of all producers in the field, as well as the relative
pressure and deliverability performance of each well.
Generally, fieldwide allowables are influenced by overall gas market supply
and demand in the United States as well as specific nominations for gas from the
parties who produce or purchase gas from the field. Since 1987, fieldwide
allowables have increased in each year except 1991. The total field allowable in
1995 was 619 Bcf of wellhead gas.
42
<PAGE> 44
In 1994 the KCC issued an order establishing new field rules which modified
the formulas used to allocate allowables among wells in the Chase formation
portion of the Hugoton field. The standard pressure used in each well's
calculated deliverability was reduced by 35%, greatly benefitting Mesa's high
deliverability wells. Also, the new rules assign a 30% greater allowable to 640
acre units with infill wells than to similar units without infill wells.
Substantially all of Mesa's Hugoton infill wells have been drilled. Mesa's share
of the allowables from the field increased from approximately 10% in late 1993
to approximately 14% after the new field rules were implemented in 1994. Mesa's
share of the field allowable averaged 14.3% in 1995. Mesa estimates that it and
the other major producers in the Hugoton field produced at or near full capacity
in 1995 and Mesa expects such practice to continue.
Mesa's net Hugoton field production decreased to approximately 70 Bcfe in
1995 compared with 73 Bcfe in 1994 as a result of changes in timing and duration
of equipment maintenance in 1995. Mesa expects its Hugoton field production will
decline slightly from 1995 levels each year through 1998. Beginning in 1999,
Mesa expects annual production declines will reach the historical levels of 8%
to 10% as a result of normal depletion.
Excluding reserve acquisitions, Mesa has invested over $138 million in
capital expenditures in its Hugoton properties since 1986 to drill 382 infill
wells, to construct the Satanta plant and related facilities, and to upgrade
gathering and compression facilities, production equipment and pipeline
interconnects in order to increase production capacity and marketing
flexibility. Mesa expects future capital expenditures for the maintenance of
production to be substantially lower.
West Panhandle Field
Mesa's production of wet gas from the West Panhandle field is governed by
the PAA and other contracts with CIG. Mesa was entitled to take wet gas
production up to a maximum of 32 Bcf in 1995. Mesa actually took 29 Bcf
primarily due to a weather-related decrease in demand in 1995. Mesa will again
be entitled to take wet gas production up to a maximum of 32 Bcf during 1996.
After deductions for processing and royalties, Mesa expects that 32 Bcf of wet
gas production will result in annual net production volumes of approximately 21
Bcf of residue gas and 3 MMBbls of NGLs. Beginning in 1997 Mesa will have the
right to take and market as much gas as it can produce, subject to specific CIG
seasonal and daily entitlements as provided for under the contracts. Assuming
continuation of existing economic and operating conditions, Mesa expects its
existing West Panhandle properties will be able to produce an average of 35 Bcf
of wet gas per year for sale in the years 1997 through 2000.
The PAA contains provisions which allocate 77% of ultimate production after
January 1, 1991 to Mesa and 23% to CIG. As a result, Mesa records 77% of total
annual West Panhandle production as sales, regardless of whether Mesa's actual
deliveries are greater or less than the 77% share. The difference between Mesa's
77% entitlement and the amount of production actually sold by Mesa to its
customers is recorded monthly as production revenue with corresponding accruals
for operating costs, production taxes, depreciation, depletion and amortization,
and gas balancing receivables. At December 31, 1995, Mesa had cumulative
production which was less than its 77% entitlement since January 1, 1991, and a
long-term gas balancing receivable of $42.6 million was recorded in Mesa's
balance sheet in other assets. In future years, as Mesa sells to customers more
than its 77% entitlement share of field production, this receivable will be
realized.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Operations -- Production Allocation Agreement."
NATURAL GAS PROCESSING
Mesa processes its natural gas production for the extraction of NGLs and
helium to enhance the market value of the gas stream. In recent years Mesa has
made substantial capital investments to enhance its natural gas processing and
helium extraction capabilities in the Hugoton and West Panhandle fields. Mesa
owns and operates its processing facilities, which allows Mesa to (i) capture
the processing margin for itself, as third-party processing agreements generally
available in the industry result in retention of a significant portion of the
processing margin by the contract processor, (ii) control the quality of the
residue gas stream, permitting it to deliver gas directly to pipelines for sales
to local distribution companies, marketing companies and end users, and (iii)
realize value from premium products such as crude helium. Mesa believes that the
ability to control its production stream from the wellhead through its
processing facilities to disposition at central delivery points enhances its
marketing opportunities and competitive position in the industry.
43
<PAGE> 45
Through its natural gas processing plants, Mesa extracts raw NGLs and crude
helium from the wet natural gas stream. The NGLs are then transported and
fractionated into their constituent hydrocarbons such as ethane, propane, normal
butane, isobutane, and natural gasolines. The NGLs and crude helium are then
sold pursuant to contracts providing for market-based prices.
Satanta Natural Gas Processing Plant
The Satanta plant has the capacity to process 250 MMcf of natural gas per
day, and enables Mesa to extract NGLs from substantially all of the gas produced
from its Hugoton field properties as well as third party producers' gas (to date
third-party gas production has been minimal). The Satanta plant also has the
ability to extract helium from the gas stream. In 1995 the Satanta plant
averaged 191 MMcf per day of inlet gas and produced a daily average of 10.9
MBbls of NGLs, 671 Mcf of crude helium and 144 MMcf of residue natural gas.
Fain Natural Gas Processing Plant
Wet gas produced from the West Panhandle field contains a high quantity of
NGLs, yielding relatively greater NGL volumes than realized from most other
natural gas fields. The Fain plant has inlet capacity of 120 MMcf per day. In
1995 the Fain plant averaged 81 MMcf per day of inlet gas and produced a daily
average of 8.1 MBbls of NGLs and condensate, 53 Mcf of crude helium and 61 MMcf
of residue natural gas.
Mesa plans to expand the Fain plant to process additional natural gas
production which Mesa expects to take beginning in 1997 and to process certain
third-party natural gas. Mesa also plans to upgrade the Fain plant to recover
additional liquids from the natural gas stream due to richer gas in the field.
SALES AND MARKETING
Following the processing of wet gas, Mesa sells the dry (or residue) natural
gas, helium, condensate and NGLs pursuant to various short term and long term
sales contracts. Substantially all of Mesa's gas and NGL sales are made at
market prices, with the exception of certain West Panhandle field volumes. Due
to a number of market forces, including the seasonal demand for natural gas,
both sales volumes from Mesa's properties and sales prices received vary on a
seasonal basis. Sales volumes and price realizations for natural gas are
generally higher during the first and fourth quarters of each calendar year.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Operations -- Revenues" for a table showing
production and prices by area for the past three years.
Hugoton Gas Sales Contracts
A substantial portion of Mesa's Hugoton field production was subject to two
gas purchase contracts with Western Resources, Inc. ("WRI") and Missouri Gas
Energy ("MGE") which expired in May 1995. The expiration of these contracts
gives Mesa over 200 MMcf per day of uncommitted natural gas production available
to sell on an uninterruptible basis under various short term, long term and peak
day contracts to a substantial number of purchasers in the Midwest. Under the
contracts, WRI and MGE had the right to purchase 19.9 Bcf during the first five
months of 1995 at market prices. In 1995 WRI and MGE together purchased 20.7 Bcf
of gas from Mesa at an average price of $1.44 per Mcf under these contracts.
Since June 1, 1995, gas previously subject to the WRI and MGE contracts has been
sold to multiple purchasers including WRI and MGE under short term contracts at
market prices.
Mesa's efforts to maximize its annual production and to direct natural gas
sales to the most favorable markets available are consistent with regulatory and
contractual requirements. Mesa sells its Hugoton field production to marketers,
pipelines, local distribution companies and end-users, generally at market
prices.
West Panhandle Gas Sales Contracts
Most of Mesa's West Panhandle field residue natural gas is sold pursuant to
gas purchase contracts with two major customers in the Texas Panhandle area.
44
<PAGE> 46
Approximately 9 Bcf per year of residue natural gas is sold to a gas utility
that serves residential and commercial customers in Amarillo, Texas, under the
terms of a long term agreement dated January 2, 1993, which supersedes the
original contract that had been in effect since 1949. The agreement contains a
pricing formula for the five year period from 1993 through 1997 whereby 70% of
the volumes sold to the gas utility are sold at fixed prices and the other 30%
of volumes sold are priced at a regional market index based on spot prices plus
$.10 per Mcf. The fixed portion of the price formula was $2.85 per Mcf in 1994,
$2.99 per Mcf in 1995 and escalates to $3.21 per Mcf in 1996 and $3.45 per Mcf
in 1997. Prices for 1998 and beyond will be determined by renegotiation. Mesa
provides the gas utility the right to take as much gas as Mesa can produce and
deliver on a given day, including a right to the residue gas volumes required to
meet the seasonal needs of its residential and commercial customers. The average
price received by Mesa for natural gas sales to the gas utility in 1995 was
$2.55 per Mcf.
Through 1995, Mesa's principal industrial customer for West Panhandle field
gas was an intrastate pipeline company which serves various markets, including
an electric power generation facility near Amarillo. In 1990 Mesa entered into a
five year contract with the pipeline company to supply gas to the power
generation facility. The contract provided for a minimum annual volume of 8.4
Bcf in 1995 at a fixed price per MMBtu of $1.70 in 1995. Mesa periodically made
sales to the pipeline company in excess of the minimum volumes specified in the
contract at market prices. In 1995 Mesa sold approximately 9.3 Bcf of residue
natural gas to the pipeline for an average price of $1.63 per Mcf. This contract
expired on December 31, 1995.
Effective January 1, 1996, Mesa entered into a four year contract with a
marketing company, an affiliate of the intrastate pipeline company, which serves
the local electric power generation facility and various other markets within
and outside Amarillo, Texas. The contract provides for the sale of Mesa's West
Panhandle field gas which is in excess of the volumes sold to the gas utility
and other existing industrial customers. The price for gas sold under this
contract is a regional market index determined monthly based on spot prices plus
$0.02 per MMBtu.
Other industrial customers purchase natural gas from Mesa under short to
intermediate term contracts. These sales totaled approximately 3.5 Bcf in 1995.
Prior to 1993, Mesa's right to sell natural gas produced from the West
Panhandle field was based, in part, upon contractual requirements to serve
customers in Amarillo, Texas, and its environs. An amendment to the PAA in 1993
removed this restriction, and Mesa now has the right to market its production
elsewhere. Mesa believes that the right to market production outside the
Amarillo area will ensure that Mesa receives competitive terms for its West
Panhandle field production. Through 1999, Mesa's West Panhandle field production
is under contract to customers as described above.
NGL, Helium and LNG Sales
NGL production from both the Satanta and Fain plants are sold by component
pursuant to a seven year contractual arrangement with Mapco Oil and Gas Company,
a major transporter and marketer of NGLs, at the greater of Midcontinent or Gulf
Coast prices at the time of sale. Crude helium is sold to an industrial gas
company under a fifteen year agreement that provides for annual price
adjustments based on market prices.
Mesa has formed an LNG production and marketing joint venture, Mesa-Pacific
LNG Joint Venture, L.L.C. ("Mesa Pacific"), with Pacific Enterprises, the parent
company of Southern California Gas Company, in an effort to profit from the
increasing use of LNG as a transportation fuel. Mesa Pacific purchases LNG from
Mesa and then markets the product to fleet operators. Mesa produces LNG at its
Satanta plant and is reviewing plans to add LNG production capabilities at the
Fain plant.
Major Customers
In 1995 revenues include sales to Mapco Petroleum, Inc. ("Mapco") of $75.0
million (34.4%) and WRI of $21.9 million (10.0%). In 1994 revenues included
sales to Mapco of $70.9 million (31.4%), WRI of $37.4 million (16.6%), and
Energas Company of $22.8 million (10.1%). In 1993 revenues included sales to
Mapco of $60.2 million (27.5%), WRI of $51.8 million (23.6%) and Natural Gas
Clearinghouse of $23.1 million (10.5%). Because of the availability of the spot
market for natural gas and NGL sales and Mesa's ability to deliver its
production to numerous geographic markets, Mesa believes that the loss of any
one or more of its major customers would not have a material adverse effect on
Mesa's financial condition or results of operations.
45
<PAGE> 47
PRODUCTION COSTS
The table below presents Mesa's total production costs (lease operating
expenses and production and other taxes) by area of operation for each of the
last three years:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1993 1994 1995
------------------ ----------------- -----------------
TOTAL PER MCFE TOTAL PER MCFE TOTAL PER MCFE
------ -------- ----- -------- ----- --------
(DOLLARS IN MILLIONS, EXCEPT PER MCFE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Lease operating expense:
Hugoton..................................... $ 10.0 $ .18 $12.6 $ .17 $12.7 $ .18
West Panhandle.............................. 29.9 .66 28.4 .64 28.4 .73
Gulf Coast.................................. 11.0 .99 11.1 1.15 9.8 .68
Other....................................... .9 1.03 .6 2.00 .9 2.57
----- ----- -----
51.8 .45 52.7 .41 51.8 .42
----- ----- -----
Production and other taxes:
Hugoton..................................... 15.4 .27 17.5 .24 15.0 .21
West Panhandle.............................. 4.6 .10 3.1 .07 3.2 .08
Gulf Coast.................................. .1 .01 .1 .01 .1 .00
Other....................................... .3 .30 .6 2.04 .1 .42
----- ----- -----
20.4 .18 21.3 .17 18.4 .15
----- ----- -----
Total production costs........................ $ 72.2 $ .63 $74.0 $ .58 $70.2 $ .57
===== ===== =====
</TABLE>
Mesa's lease operating expenses consist of lease maintenance, gathering and
processing costs and have a significant fixed-cost component. As a result, the
production cost per Mcfe in the table above is affected by changes in the volume
of oil and gas produced. Production tax rates in Kansas, where Mesa's Hugoton
field properties are located, are assessed on wellhead value. These rates were
reduced from 7% in 1993 to 6% in 1994 and 5% in 1995. In 1993 West Panhandle
field taxes included a one-time adjustment related to prior years' production.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Operations."
DRILLING ACTIVITIES
The following table shows the results of Mesa's drilling activities for the
last five years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1991 1992 1993 1994 1995
------------- ------------- ------------- ------------- -------------
GROSS NET GROSS NET GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exploratory wells:
Productive................ 6 4.7 5 4.1 -- -- -- -- 1 .3
Dry....................... 1 .2 1 .4 1 1.0 -- -- 4 4.0
Development wells:
Productive................ 26 10.9 22 16.5 43 29.1 31 24.5 20 14.0
Dry....................... -- -- -- -- -- -- 1 .8 -- --
-- -- -- -- --
---- ---- ---- ---- ----
Total....................... 33 15.8 28 21.0 44 30.1 32 25.3 25 18.3
== ==== == ==== == ==== == ==== == ====
</TABLE>
At December 31, 1995, Mesa was participating in the drilling of one gross
(.25 net) well. Of the four gross exploratory wells drilled in 1995 that were
dry, two were in the Gulf of Mexico and two were in the Rocky Mountain region.
46
<PAGE> 48
PRODUCING ACREAGE AND WELLS, UNDEVELOPED ACREAGE
Mesa's ownership of oil and gas acreage held by production, producing wells
and undeveloped oil and gas acreage as of December 31, 1995, is set forth in the
following table:
<TABLE>
<CAPTION>
UNDEVELOPED
PRODUCING ACREAGE PRODUCING WELLS ACREAGE
------------------- ----------------- -----------------
GROSS NET GROSS NET GROSS NET
------- ------- ----- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Onshore U.S.:
Kansas................................. 258,818 231,278 1,387 988.9 5,280 5,280
Texas.................................. 241,354 185,654 601 452.4 480 156
Wyoming................................ 11,477 4,365 2 -- 14,926 9,391
North Dakota........................... 4,661 3,532 20 3.8 3,932 2,572
Other.................................. 2,597 2,139 13 1.3 22,012 11,573
------- ------- ----- ------- ------ ------
Total onshore................... 518,907 426,968 2,023 1,446.4 46,630 28,972
------- ------- ----- ------- ------ ------
Offshore U.S.:
Louisiana.............................. 87,024 45,710 189 39.7 20,210 19,898
Texas.................................. 73,808 18,848 59 10.1 17,280 17,280
------- ------- ----- ------- ------ ------
Total offshore.................. 160,832 64,558 248 49.8 37,490 37,178
------- ------- ----- ------- ------ ------
Total acreage............................ 679,739 491,526 2,271 1,496.2 84,120 66,150
======= ======= ===== ======= ====== ======
</TABLE>
Mesa has interests in 2,092 gross (1,473.5 net) producing gas wells and 179
gross (22.7 net) producing oil wells in the United States. Mesa also owns
approximately 84,632 net acres of producing minerals and 42,964 net acres of
nonproducing minerals in the United States.
COMPETITION
The oil and gas business is highly competitive in the search for,
acquisition of, and sale of oil and gas. Mesa's competitors in these endeavors
include the major oil and gas companies, independent oil and gas concerns and
individual producers and operators, as well as major pipeline companies, many of
which have financial resources greatly in excess of Mesa's. Mesa believes that
its competitive position is affected by, among other things, price, contract
terms, and quality of service.
Mesa is one of the largest owners of natural gas reserves in the United
States. Production from Mesa's properties has access to a substantial portion of
the major metropolitan markets in the United States through numerous pipelines
and other purchasers. Mesa is not dependent upon any single purchaser or small
group of purchasers.
Mesa believes that its competitive position is enhanced by its substantial
long-life reserve holdings and related deliverability, its flexibility to sell
such reserves in a diverse number of markets and its ability to produce its
reserves at a low cost.
REGULATION AND PRICES
Mesa's operations are affected from time to time in varying degrees by
political developments and federal, state, and local laws and regulations. In
particular, oil and gas production operations and economics are, or in the past
have been, affected by price controls, taxes, conservation, safety,
environmental, and other laws relating to the petroleum industry, by changes in
such laws and by constantly changing administrative regulations.
Price Regulations
In the recent past, maximum selling prices for certain categories of oil,
gas, condensate and NGLs were subject to federal regulation. In 1981 all federal
price controls over sales of crude oil, condensate and NGLs were lifted.
Effective January 1, 1993, the Natural Gas Wellhead Decontrol Act (the
"Decontrol Act") deregulated natural gas prices for all "first sales" of natural
gas, which includes all sales by Mesa of its own production. As a result, all
sales of Mesa's domestically produced oil, gas, condensate and NGLs may be sold
at market prices, unless otherwise committed by contract.
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<PAGE> 49
Natural Gas Regulation
Historically, interstate pipeline companies generally acted as wholesale
merchants by purchasing natural gas from producers and reselling the gas to
local distribution companies and large end users. Commencing in late 1985, the
FERC issued a series of orders that have had a major impact on interstate
natural gas pipeline operations, services, and rates, and thus have
significantly altered the marketing and price of natural gas. The FERC's key
rule making action, Order No. 636 ("Order 636"), issued in April 1992, required
each interstate pipeline to, among other things, "unbundle" its traditional
bundled sales services and create and make available on an open and
nondiscriminatory basis numerous constituent services (such as gathering
services, storage services, firm and interruptible transportation services, and
standby sales and gas balancing services), and to adopt a new rate making
methodology to determine appropriate rates for those services. To the extent the
pipeline company or its sales affiliate makes gas sales as a merchant in the
future, it does so pursuant to private contracts in direct competition with all
other sellers, such as Mesa; however, pipeline companies and their affiliates
were not required to remain "merchants" of gas, and most of the interstate
pipeline companies have become "transporters only." In subsequent orders, the
FERC largely affirmed the major features of Order 636 and denied a stay of the
implementation of the new rules pending judicial review. By the end of 1994, the
FERC had concluded the Order 636 restructuring proceedings, and, in general,
accepted rate filings implementing Order 636 on every major interstate pipeline.
However, even through the implementation of Order 636 on individual interstate
pipelines is essentially complete, many of the individual pipeline restructuring
proceedings, as well as Order 636 itself and the regulations promulgated
thereunder, are subject to pending appellate review and could possibly be
changed as a result of future court orders. Mesa cannot predict whether the
FERC's orders will be affirmed on appeal or what the effects will be on its
business.
In recent years the FERC also has pursued a number of other important policy
initiatives which could significantly affect the marketing of natural gas. Some
of the more notable of these regulatory initiatives include (i) a series of
orders in individual pipeline proceedings articulating a policy of generally
approving the voluntary divestiture of interstate pipeline owned gathering
facilities by interstate pipelines to their affiliates (the so-called "spin
down" of previously regulated gathering facilities to the pipeline's
nonregulated affiliate), (ii) the completion of a rule making involving the
regulation of pipelines with marketing affiliates under Order No. 497, (iii) the
FERC's ongoing efforts to promulgate standards for pipeline electronic bulletin
boards and electronic data exchange, (iv) a generic inquiry into the pricing of
interstate pipeline capacity, (v) efforts to refine the FERC's regulations
controlling operation of the secondary market for released pipeline capacity,
and (vi) a policy statement regarding market based rates and other
non-cost-based rates for interstate pipeline transmission and storage capacity.
Several of these initiatives are intended to enhance competition in natural gas
markets, although some, such as "spin downs," may have the adverse effect of
increasing the cost of doing business on some in the industry as a result of the
monopolization of those facilities by their new, unregulated owners. The FERC
has attempted to address some of these concerns in its orders authorizing such
"spin downs," but it remains to be seen what effect these activities will have
on access to markets and the cost to do business. As to all of these recent FERC
initiatives, the ongoing, or, in some instances, preliminary evolving nature of
these regulatory initiatives makes it impossible at this time to predict their
ultimate impact on Mesa's business.
Mesa owns, directly or indirectly, certain natural gas facilities that it
believes meet the traditional tests the FERC has used to establish a company's
status as a gatherer not subject to FERC jurisdiction under the Natural Gas Act
of 1938 (the "NGA"). Moreover, recent orders of the FERC have been more liberal
in their reliance upon or use of the traditional tests, such that in many
instances, what was once classified as "transmission" may now be classified as
"gathering." Mesa transports its own gas through these facilities. Mesa also
transports certain of its gas through gathering facilities owned by others,
including interstate pipelines. With respect to item (i) in the preceding
paragraph, on May 27, 1994, the FERC issued orders in the context of the "spin
off" or "spin down" of interstate pipeline owned gathering facilities. A "spin
off" is a FERC-approved sale of such facilities to a non-affiliate. A "spin
down" is the transfer by the interstate pipeline of its gathering facilities to
an affiliate. A number of spin offs and spin-downs have been approved by the
FERC and implemented. The FERC held that it retains jurisdiction over gathering
provided by interstate pipelines, but that it generally does not have
jurisdiction over pipeline gathering affiliates, except in the event of
affiliate abuse (such as actions by the affiliate undermining open and
nondiscriminatory access to the interstate pipeline). These orders require
nondiscriminatory access for all sources of supply, prohibit the tying of
pipeline transportation service to any service provided by the pipeline's
gathering affiliate, and require the new gathering company to submit a "default"
contract if a satisfactory contract cannot be mutually agreed upon by the
interstate pipeline and its existing customers. Several petitions for rehearing
of the FERC's May 27, 1994,
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<PAGE> 50
orders were filed. On November 30, 1994, the FERC issued a series of rehearing
orders largely affirming the May 27, 1994, orders. The FERC clarified that
"default" contracts are intended to serve only as a transition mechanism to
prevent arbitrary termination of gathering service to existing customers. Also,
the FERC now requires interstate pipelines to not only seek authority under
Section 7(b) of the NGA to abandon certificated facilities, but also to seek
authority under Section 4 of the NGA to terminate service from both certificated
and uncertificated facilities. On December 31, 1994, an appeal was filed with
the U.S. Court of Appeals for the D.C. Circuit to overturn three of the FERC's
November 30, 1994, orders. Mesa cannot predict what the ultimate effect of the
FERC's orders pertaining to gathering will have on its production and marketing,
or whether the Appellate Court will affirm the FERC's orders on these matters.
State and Other Regulation
All of the jurisdictions in which Mesa owns producing oil and gas properties
have statutory provisions regulating the exploration for and production of crude
oil and natural gas. Such regulation includes requiring permits for the drilling
of wells, maintaining bonding requirements in order to drill or operate wells,
and relating to the location of wells, the method of drilling and casing wells,
the surface use and restoration of properties upon which wells are drilled and
the plugging and abandoning of wells. Mesa's operations are also subject to
various conservation laws and regulations. These include the regulation of the
size of drilling and spacing units or proration units and the density of wells
which may be drilled and the unitization or pooling of oil and gas properties.
In this regard, some states allow the forced pooling or integration of tracts to
facilitate exploration while other states rely on voluntary pooling of lands and
leases. In addition, state conservation laws establish maximum rates of
production from oil and natural gas wells, generally prohibit the venting or
flaring of natural gas and impose certain requirements regarding the ratability
of production. Some states, such as Texas, Oklahoma, and Kansas, have, in recent
years, reviewed and substantially revised methods previously used to make
monthly determinations of allowable rates of production from fields and
individual wells. See "-- Production" for a discussion of recent changes to
Mesa's allowables in the Hugoton field. The effect of these regulations is to
limit the amounts of oil and natural gas Mesa can produce from its wells, and to
limit the number of wells or the location at which Mesa can drill.
State regulation of gathering facilities generally includes various safety,
environmental, and in some circumstances, non-discriminatory take requirements,
but does not generally entail rate regulation. Natural gas gathering has
received greater regulatory scrutiny at both the state and federal levels in the
wake of the interstate pipeline restructuring under Order 636. For example,
Oklahoma recently enacted a prohibition against discriminatory gathering rates,
and certain Texas and Kansas regulatory officials have expressed interest in
evaluating similar rules in their respective states.
Federal Royalty Matters
By a letter dated May 3, 1993, directed to thousands of producers holding
interests in federal leases, the United States Department of the Interior (the
"DOI") announced its interpretation of existing federal leases to require the
payment of royalties on past natural gas contract settlements which were entered
into in the 1980s and 1990s to resolve, among other things, take-or-pay and
minimum take claims by producers against pipelines and other buyers. The DOI's
letter set forth various theories of liability, all founded on the DOI's
interpretation of the term "gross proceeds" as used in federal leases and
pertinent federal regulations. In an effort to ascertain the amount of such
potential royalties, the DOI sent a letter to producers on June 18, 1993,
requiring producers to provide all data on all natural gas contract settlements,
regardless of whether gas produced from federal leases was involved in the
settlement. Mesa received a copy of this information demand letter. In response
to the DOI's action, in July 1993 various industry associations and others filed
suit in the United States District Court for the Northern District of West
Virginia seeking an injunction to prevent the collection of royalties on natural
gas contract settlement amounts under the DOI's theories. The lawsuit, styled
"Independent Petroleum Association v. Babbitt," was transferred to the United
States District Court in Washington, D.C. On June 14, 1995, the Court issued a
ruling in this case holding that royalties are payable to the United States on
gas contract settlement proceeds in accordance with the Minerals Management
Service's May 3, 1993, letter to producers. This ruling was appealed and is now
pending in the D.C. Circuit Court of Appeals. The DOI's claim in a bankruptcy
proceeding against a producer based upon an interstate pipeline's earlier
buy-out of the producer's gas sale contract was rejected by the federal
Bankruptcy Court in Lexington, Kentucky, in a proceeding styled "Century
Offshore Management Corp." While the facts of the Court's decision do not
involve all of the DOI's theories, the Court found on those at issue that DOI's
theories were without legal merit, and the Court's reasoning suggests that the
DOI's other claims are similarly deficient. This decision was
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<PAGE> 51
upheld in the District Court and is now on appeal in the Sixth Circuit Court of
Appeals. Because both the "Independent Petroleum Association v. Babbitt" and
"Century Offshore Management Corp." decisions have been appealed, and because of
the complex nature of the calculations necessary to determine potential
additional royalty liability under the DOI's theories, it is impossible to
predict what, if any, additional or different royalty obligation the DOI may
assert or ultimately be entitled to recover with respect to any of Mesa's prior
natural gas contract settlements.
Environmental Matters
Mesa's operations are subject to numerous federal, state, and local laws and
regulations controlling the discharge of materials into the environment or
otherwise relating to the protection of the environment, including the
Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), also known as the "Federal Superfund Law." Such laws and
regulations, among other things, impose absolute liability upon the lessee under
a lease for the cost of clean up of pollution resulting from a lessee's
operations, subject the lessee to liability for pollution damages, may require
suspension or cessation of operations in affected areas, and impose restrictions
on the injection of liquids into subsurface aquifers that may contaminate
groundwater. Mesa maintains insurance against costs of clean-up operations, but
it is not fully insured against all such risks. A serious incident of pollution
may, as it has in the past, also result in the DOI requiring lessees under
federal leases to suspend or cease operation in the affected area. In addition,
the recent trend toward stricter standards in environmental legislation and
regulation may continue. For instance, legislation has been proposed in Congress
from time to time that would reclassify certain oil and gas production wastes as
"hazardous wastes" which would make the reclassified exploration and production
wastes subject to much more stringent handling, disposal, and clean up
requirements. If such legislation were to be enacted, it could have a
significant impact on Mesa's operating costs, as well as the oil and gas
industry in general. State initiatives to further regulate the disposal of oil
and gas wastes are also pending in certain states, and these various initiatives
could have a similar impact on Mesa.
The Oil Pollution Act of 1990 ("OPA") and regulations thereunder impose a
variety of regulations on "responsible parties" (which include owners and
operators of offshore facilities) related to the prevention of oil spills and
liability for damages resulting from such spills in United States waters. In
addition, OPA imposes ongoing requirements on responsible parties, including
proof of financial responsibility to cover at least some costs in a potential
spill. On August 25, 1993, the Minerals Management Service (the "MMS") published
an advance notice of its intention to adopt a rule under OPA that would require
owners and operators of offshore oil and gas facilities to establish $150
million in financial responsibility. Under the proposed rule, financial
responsibility could be established through insurance, guaranty, indemnity,
surety bond, letter of credit, qualification as a self insurer, or a combination
thereof. There is substantial uncertainty as to whether insurance companies or
underwriters will be willing to provide coverage under OPA because the statute
provides for direct lawsuits against insurers who provide financial
responsibility coverage, and most insurers have strongly protested this
requirement. The financial tests or other criteria that will be used to judge
self-insurance are also uncertain. As a result of the strong opposition to the
$150 million financial responsibility requirement in its present form, the DOI
has decided not to implement the OPA until some time in 1996. While there has
been discussion in the United States Congress about amending the financial
responsibility requirements of the OPA, such action has not been undertaken to
date. Mesa cannot predict the final form of the financial responsibility rule
that will be adopted by the MMS, but such rule has the potential to result in
the imposition of substantial additional annual costs on Mesa or otherwise have
material adverse effects on Mesa's operations in the Gulf of Mexico.
Under current federal regulations concerning offshore operations, the MMS is
authorized to require lessees to post supplemental bonds to cover their
potential leasehold abandonment costs. By letter dated November 9, 1995, Mesa
was advised by the MMS that it does not qualify for a waiver from supplemental
bond requirements and that Mesa may be required to post supplemental bonds
covering its potential obligations with respect to offshore operations. On
December 8, 1995, the MMS published a Notice of Proposed Rule-making in which
the MMS proposed to further clarify and update its Outer Continental Shelf
operational bond requirements. Comments with respect to this proposed rule
making were initially due March 7, 1996, subsequently extended to May 6, 1996.
Mesa submitted a "Guarantee of Abandonment of Liability Responsibility" to the
MMS on April 26, 1996 in response to discussions of this matter with the MMS and
in lieu of posting any supplemental bonds. Mesa cannot predict the final form of
the financial responsibility rule that will be adopted by the MMS or whether the
MMS will require it to post supplemental bonds, but such rule or requirement has
the potential to result in substantial additional annual costs to Mesa or
otherwise have material adverse effects on Mesa's operation in the Gulf of
Mexico.
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In 1993 a number of companies in New Mexico, including Mesa, were named in a
preliminary information request from the Environmental Protection Agency (the
"EPA") as persons who may be potentially responsible for costs incurred in
connection with the Lee Acres Landfill site. Although Mesa did not directly
dispose of any materials at the site, it may have contracted to transport
materials from its operations with certain trucking companies also named in the
information request. To the extent any materials produced by Mesa may have been
transported to the site, Mesa believes that such materials were rainwater and/or
water produced from natural gas wells, which Mesa believes are exempt or
excluded from the definitions of "hazardous waste" or "hazardous substance"
under applicable federal environmental laws, although the EPA may assert a
contrary position. Since submitting its response to the information request in
April 1994, Mesa has not received any additional inquiries or information from
the EPA concerning the site, including whether Mesa is, in fact, asserted to be
a responsible party for the site or what potential liability, if any, Mesa may
face in connection with this matter.
Mesa is not involved in any other administrative or judicial proceedings
arising under federal, state, or local environmental protection laws and
regulations which would have a material adverse effect on Mesa's financial
position or results of operations.
LEGAL PROCEEDINGS
Masterson 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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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
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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.
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MANAGEMENT
DIRECTORS
The following table sets forth each person currently serving on Mesa's Board
of Directors, (i) his name and age, (ii) the period during which he has served
as a director, and (iii) his principal occupation over the last five years
(including other directorships and business experience):
<TABLE>
<CAPTION>
NAME AND AGE BUSINESS EXPERIENCE OVER PAST FIVE YEARS
- --------------------------------------- --------------------------------------------------------------
<S> <C>
Boone Pickens, age 68.................. January 1992 - Present, Chairman of the Board of Directors and
Chief Executive Officer of Mesa; June 1, 1996 - Present,
President and Chief Operating Officer of Mesa; October 1985 -
December 1991, General Partner of the Partnership and Chief
Executive Officer and Director of Pickens Operating Co. (the
corporate general partner of the Partnership); 1964 - January
1987, Chairman of the Board, President, and founder of
Original Mesa.
Paul W. Cain, age 57................... January 1992 - Present, Director of Mesa; January 1992 - May
1996, President and Chief Operating Officer of Mesa; August
1986 - December 1991, President and Chief Operating Officer of
Pickens Operating Co.; Director of Bicoastal Corporation.
John S. Herrington, age 56............. January 1992 - Present, Director of Mesa; December 1991 -
Present, personal investments and real estate activities; May
1990 - November 1991, Chairman of the Board of Harcourt Brace
Jovanovich, Inc. (publishing); May 1989 - May 1990, Director
of Harcourt Brace Jovanovich, Inc.; February 1985 - January
1989, Secretary of the Department of Energy of the United
States.
Wales H. Madden, Jr, age 68............ January 1992 - Present, Director of Mesa; December 1985 -
December 1991, Member of the Advisory Committee of the
Partnership; 1964 - January 1987, Director of Original Mesa;
self-employed attorney and businessman for more than the last
five years; Director of Boatmen's First National Bank of
Amarillo.
Dorn Parkinson, age 49................. May 1995 - Present, Director of Mesa; April 1986 - Present,
President of Washington Corporations (principal businesses of
Washington Corporations and its affiliates include rail
transport, mining, ship berthing, environmental remediation,
interstate trucking, and the repair and sale of machinery and
equipment); January 1995 - Present, Chairman of the Board of
Washington Construction Group, Inc. (heavy construction and
contract mining); July 1993 - October 1994, President and
Chief Operating Officer of Washington Construction Group,
Inc.; Director of Washington Construction Group, Inc.
Joel L. Reed, age 45................... September 1995 - Present, Director of Mesa; August 1994 -
Present, partner with Batchelder & Partners, Inc.; October
1984 - July 1994, various capacities including Chief Financial
Officer, President and Chief Executive Officer of Wagner and
Brown, Ltd. and affiliates (privately owned company consisting
of companies engaged in energy, real estate, manufacturing,
agribusiness and investment services); Director of Magnetic
Delivered Therapeutics.
Fayez S. Sarofim, age 67............... January 1992 - Present, Director of Mesa; Chairman of the
Board and President of Fayez Sarofim & Co. (investment
adviser) for more than the last five years; Director of
Teledyne, Inc., Unitrin, Inc., Argonaut Group, Inc., and
Imperial Holly Corporation.
Robert L. Stillwell, age 59............ January 1992 - Present, Director of Mesa; December 1985 -
December 1991, Member of the Advisory Committee of the
Partnership; 1969 - January 1987, Director of Original Mesa;
Partner in the law firm of Baker & Botts, L.L.P., for more
than the last five years.
</TABLE>
54
<PAGE> 56
Mr. Pickens is the sole director of the Company.
Mr. Parkinson and David H. Batchelder were elected to Mesa's Board of
Directors pursuant to an agreement dated April 1, 1995, between Mesa and Dennis
R. Washington, the beneficial owner of approximately 4.5% of the outstanding
Common Stock. Mr. Batchelder subsequently resigned from the Board and was
succeeded by Mr. Reed pursuant to the terms of the WDB Settlement Agreement
described above under "Business -- Legal Proceedings -- Settlement with WDB
Group."
DNR NOMINEES TO THE BOARD OF DIRECTORS
Assuming completion of the Recapitalization, the size of the Board of
Directors will be reduced from eight members to seven members as provided in the
Stock Purchase Agreement. The Stock Purchase Agreement contemplates that, at
such time, all but three of Mesa's current directors will resign as directors
and Richard E. Rainwater, Darla D. Moore, Kenneth A. Hersh and Philip B. Smith
will be elected by DNR to fill the four seats on the Board to which the holders
of the Series B Preferred Stock will be entitled. See "Description of the Stock
Purchase Agreement and the Rights Offering."
The Board has nominated Mr. Pickens, Mr. Herrington and Mr. Stillwell to
stand for election to the Board at Mesa's 1996 annual meeting of stockholders,
assuming that the First Closing occurs. Mr. Cain, Mr. Madden and Mr. Sarofim
have tendered letters of resignation from the Board to be effective as of the
date of the First Closing. Mr. Parkinson and Mr. Reed have advised Mesa that
they have not determined whether they will resign as directors upon the
occurrence of the First Closing. In the event that Mr. Parkinson and/or Mr. Reed
does not resign as of the First Closing, it is anticipated that Mr. Herrington
and/or Mr. Stillwell would also resign from the Board effective as of the First
Closing; however, Mr. Herrington and/or Mr. Stillwell would resume his position
as a director on the Board upon his reelection at the 1996 annual meeting of
stockholders and would succeed to the Board seats held by Mr. Parkinson and Mr.
Reed from the First Closing to the annual meeting.
The following table sets forth the name, age and five-year employment
history of Mr. Rainwater, Ms. Moore, Mr. Hersh and Mr. Smith. Mr. Rainwater and
Ms. Moore are married to each other.
<TABLE>
<CAPTION>
NAME AND AGE BUSINESS EXPERIENCE OVER PAST FIVE YEARS
- --------------------------------------- --------------------------------------------------------------
<S> <C>
Richard E. Rainwater, age 51........... 1986 - Present, independent investor and sole shareholder and
Director of Rainwater, Inc.; 1970-1986, chief investment
advisor to the Bass family of Texas; 1994 - Present, founder
and Chairman of the Board of Crescent Real Estate Equities,
Inc.; 1992, co-founder of Mid Ocean Limited; 1987, co-founder
of Columbia Hospital Corporation (predecessor to Columbia/HCA
Healthcare Corporation); 1986, founder of ENSCO International,
Inc.
Darla D. Moore, age 41................. 1994 - Present, private investment activities and chief
executive officer and Director of Rainwater, Inc.; 1989-1994,
Managing Director of Chemical Bank, Restructuring and
Reorganization Unit and Retail Industries Group; Director of
Magellan Health Services, Inc.; Trustee of George Washington
University.
Kenneth A. Hersh, age 33............... 1994 - Present, chief investment officer and Director of
Rainwater, Inc. and co-manager of investment activities of
Natural Gas Partners investment funds; 1989-1994, co-manager
of investment activities of Natural Gas Partners, L.P.; 1985-
1987, Morgan Stanley & Co. investment banking division, energy
group; Director of Tide West Oil Company and HS Resources,
Inc.
Philip B. Smith, age 45................ 1991 - Present, Director, President and Chief Executive
Officer of Tide West Oil Company; 1986-1991, Senior Vice
President of Mega Natural Gas Company; 1980-1986, executive
positions with two small exploration and production companies;
1976-1980, various positions with Samson Resources Company;
1974-1976, production engineer with Texaco, Inc.
</TABLE>
55
<PAGE> 57
EXECUTIVE OFFICERS
The following table sets forth the name, age, and five-year employment
history of each of Mesa's current executive officers:
<TABLE>
<CAPTION>
NAME AND AGE BUSINESS EXPERIENCE OVER PAST FIVE YEARS
- --------------------------------------- --------------------------------------------------------------
<S> <C>
Boone Pickens, age 68.................. January 1992 - Present, Chairman of the Board of Directors and
Chief Executive Officer of Mesa; June 1, 1996 - Present,
President and Chief Operating Officer of Mesa; October 1985 -
December 1991, General Partner of the Partnership and Chief
Executive Officer and Director of Pickens Operating Co.; 1964
-January 1987, Chairman of the Board, President, and founder
of Original Mesa.
Dennis E. Fagerstone, age 47........... January 1992 - Present, Vice President-Exploration and
Production of Mesa; May 1991 - December 1991, Vice President -
Exploration and Production of Pickens Operating Co.; June 1988
-May 1991, Vice President-Operations of Pickens Operating Co.
Stephen K. Gardner, age 36............. June 1994 - Present, Vice President and Chief Financial
Officer of Mesa; January 1992 - May 1994, Vice President of
BTC Partners Inc. (financial consultant to the Company); May
1988 - December 1991, Financial Analyst of BTC Partners, Inc.;
June 1987 - April 1988, Financial Analyst of the Partnership;
Director of Bicoastal Corporation.
Andrew J. Littlefair, age 35........... January 1992 - Present, Vice President-Public Affairs of Mesa;
August 1987 - December 1991, Assistant to the General Partner
of the Partnership; January 1984 - August 1987, Staff
Assistant to the President of the United States, Washington,
D.C.
William D. Ballew, age 38.............. January 1992 - Present, Controller of Mesa; May 1991 -
December 1991, Controller of the Partnership; January 1991 -
May 1991, Manager - Accounting of Pickens Operating Co.;
December 1988 - December 1990, Assistant to the Controller of
Pickens Operating Co.; July 1986 - December 1988, Audit
Manager for Price Waterhouse, Dallas, Texas.
</TABLE>
Mr. Pickens, Mr. Gardner and Mr. Ballew hold the same positions at the
Company that they hold at the Parent. Mr. Ballew will terminate his employment
with the Company effective June 30, 1996.
56
<PAGE> 58
EXECUTIVE COMPENSATION
The table set forth below contains certain information regarding
compensation earned by, awarded to, or paid to the Chief Executive Officer and
the other four most highly compensated executive officers of Mesa for services
rendered to Mesa during the years 1993, 1994 and 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS-NUMBER
---------------------------------------- OF SHARES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS/SARS COMPENSATION(2)
- ------------------------------ ----- --------- --------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Boone Pickens,................ 1995 $ 675,000 $ 0 $ -- 0 $ 35,914(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(6) 1993 400,020 225,000 -- 100,000 106,253
Dennis E. Fagerstone,......... 1995 199,980 50,000 -- 0 14,663(7)
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(8)
Vice President and Chief 1994(9) 92,095 60,000 -- 135,000 25,856
Financial Officer 1993 -- -- -- -- --
Andrew J. Littlefair,......... 1995 139,980 40,000 -- 0 11,163(10)
Vice President -- Public 1994 115,980 100,000 -- 85,000 36,717
Affairs 1993 115,980 75,000 -- 25,000 32,467
</TABLE>
- ---------------
(1) Apart from the compensation set forth in the summary compensation table and
under the plans and pursuant to the transactions described below, other
compensation paid for services during the years ended December 31, 1995,
1994, and 1993, respectively, to each individual named in the summary
compensation table aggregated less than 10% of the total salary and bonus
reported for such individual in the summary compensation table, or $50,000,
if lower.
(2) Except as reflected in other notes, "All Other Compensation" consists of
the following items. First, Mesa maintains an Employees Premium Plan and a
Profit Sharing Plan, both of which are retirement plans (the "Retirement
Plans"), for all employees (see separate discussion below). Mesa declared
contributions to the Retirement Plans of 5% of each employee's compensation
in 1995 and 17% of each employee's compensation in 1994 and 1993. However,
total employer contributions to the Retirement Plans for the account of a
participant in any calendar year are limited as specified by the Code and
the Retirement Plans. See "Limitation on Contributions to Benefit Plans"
below. The maximum annual amount of employer contributions to a
participant's accounts in the Retirement Plans totaled $7,500 in 1995,
$25,500 in 1994, and $30,000 in 1993. Second, to the extent that 5% of an
employee's total compensation exceeded $7,500 in 1995, that 17% of an
employee's total compensation exceeded $25,500 in 1994 (in both cases, all
employees with total compensation in excess of $150,000), and that 17% of
an employee's total compensation exceeded $30,000 in 1993 (all employees
with total compensation in excess of $176,470), Mesa, as a matter of
policy, paid the excess amount in cash to such employee. Third, in 1995
there was a reallocation to participant accounts of forfeitures in the
Profit Sharing Plan from unvested balances in the accounts of employees who
terminated during 1994.
(3) 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.
57
<PAGE> 59
(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) Mr. Cain retired as Mesa's President and Chief Operating Officer effective
May 31, 1996.
(7) Includes the following: a $7,500 Retirement Plans contribution; a $2,164
reallocation of forfeitures in the Profit Sharing Plan; a $4,999 payment in
lieu of a Retirement Plans contribution in excess of the contribution
limitation as described in Note 2 above.
(8) Includes the following: a $7,500 Retirement Plans contribution; a $2,164
reallocation of forfeitures in the Profit Sharing Plan; a $3,251 payment in
lieu of a Retirement Plans contribution in excess of the contribution
limitation as described in Note 2 above.
(9) Mr. Gardner became an officer of Mesa in June 1994.
(10) Includes the following: a $7,500 Retirement Plans contribution; a $2,164
reallocation of forfeitures in the Profit Sharing Plan; a $1,499 payment in
lieu of a Retirement Plans contribution in excess of the contribution
limitation as described in Note 2 above.
EMPLOYEES PREMIUM AND PROFIT SHARING PLANS
Mesa maintains the Retirement Plans for the benefit of its employees. Each
year, Mesa is required to contribute to the Employees Premium Plan 5% of the
total compensation (as defined in the plan) paid to participants and may also
contribute up to 12% of total compensation (as defined) to the Profit Sharing
Plan. In previous years, Mesa had declared contributions of 17% to the
Retirement Plans. In 1995 Mesa declared contributions of 5% to the Retirement
Plans.
Participants become 30% vested in their account balances in the Retirement
Plans after three years of service and 40% vested after four years of service.
Participants become vested an additional 20% for each additional year of service
through year seven. Effective December 31, 1991, in conjunction with the
conversion of the Partnership to corporate form, all participants were fully
vested in their account balances in the Retirement Plans as of that date as a
result of certain property dispositions consummated in 1990 and 1991.
Participants remain fully vested in their 1991 balances, but contributions in
1992 and later years under the Retirement Plans are subject to the vesting
schedule described above.
Prior years of service with Mesa's predecessors are counted in the vesting
schedule. Amounts accumulated and vested are distributable only under certain
circumstances, including termination of the Retirement Plans.
LIMITATION ON CONTRIBUTIONS TO BENEFIT PLANS
Total employer contributions to the Retirement Plans for the account of a
participant in any calendar year are limited to the lesser of what is specified
by the Code or by the Retirement Plans. The Code provides that annual additions
to a participant's account may not exceed the lesser of $30,000 or 25% of the
amount of the participant's annual compensation. The Retirement Plans provide
that aggregate annual additions to a participant's account may not exceed 17% of
eligible compensation as defined by the Retirement Plans. The eligible
compensation per the Code was limited to $150,000 in 1995, $150,000 in 1994, and
$228,000 in 1993. Mesa, in its discretion, may determine to make cash payments
of amounts attributable to an employee's participation in the Retirement Plans
to the extent such amounts exceed the Code limitations. As a matter of general
policy for employees of Mesa, Mesa makes annual cash payments directly to
employees to the extent that the annual additions to the account of each such
employee pursuant to the Retirement Plans would exceed the Code limitations.
58
<PAGE> 60
1991 STOCK OPTION PLAN
The 1991 Stock Option Plan (the "Option Plan") was approved by stockholders
of Mesa in 1991 and amended with the approval of stockholders in 1994. Its
purpose is to serve as an incentive to, and aid in the retention of, key
executives and other employees whose training, experience, and ability are
considered important to the operations and success of Mesa. The Option Plan is
administered by the Stock Option Committee composed of non-employee directors of
Mesa who meet the requirements of "disinterested person" in Rule 16b-3 (c)(2)(i)
of the Exchange Act. Pursuant to the Option Plan, the Stock Option Committee is
given the authority to designate plan participants, to determine the terms and
provisions of options granted thereunder, and to supervise the administration of
the plan. A total of 4,000,000 shares of Common Stock are currently subject to
the plan, of which options for 3,062,950 shares have been granted. At December
31, 1995, the following stock options were outstanding:
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS
---------
<S> <C>
Granted............................................................................ 3,062,950
Exercised.......................................................................... (62,720)
Forfeited.......................................................................... (67,840)
---------
Outstanding at December 31, 1995................................................... 2,932,390
=========
</TABLE>
Shares of Common Stock subject to an option are awarded at an exercise price
that is equivalent to at least 100% of the fair market value of the Common Stock
on the date the option is granted. The purchase price of the shares as to which
the option is exercised is payable in full at exercise in cash or in shares of
Common Stock previously held by the optionee for more than six months, valued at
their fair market value on the date of exercise. Subject to Stock Option
Committee approval and to certain legal limitations, an optionee may pay all or
any portion of the purchase price by electing to have Mesa withhold a number of
shares of Common Stock having a fair market value equal to the purchase price.
Options granted under the Option Plan include a limited right of relinquishment
that permits an optionee, in lieu of purchasing the entire number of shares
subject to purchase thereunder and subject to consent of the Stock Option
Committee, to relinquish all or part of the unexercised portion of an option, to
the extent exercisable, for cash and/or shares of Common Stock in an amount
representing the appreciation in market value of the shares subject to such
options over the exercise price thereof. In this discretion, the Stock Option
Committee may provide for the acceleration of any unvested installments of
outstanding options. The Board of Directors may amend, alter, or discontinue the
Option Plan, subject in certain cases to stockholder approval.
The options granted and outstanding at December 31, 1995, have exercise
prices and vesting schedules as set forth in the following table:
<TABLE>
<CAPTION>
EXERCISE VESTING SCHEDULE
NUMBER OF PRICE PER ------------------------------------------------
OPTIONS SHARE 30% 55% 80% 100%
- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
1,126,000........................ $ 6.8125 07/10/92 01/10/93 01/10/94 01/10/95
134,500......................... 11.6875 04/02/93 10/02/93 10/02/94 10/02/95
101,890......................... 5.8125 11/18/93 05/18/94 05/18/95 05/18/96
475,000......................... 7.3750 05/10/94 11/10/94 11/10/95 11/10/96
75,000........................ 6.1875 12/06/94 06/06/95 06/06/96 06/06/97
1,000,000........................ 4.2500 06/01/95 12/01/95 12/01/96 12/01/97
20,000........................ 5.6875 11/12/95 05/12/96 05/12/97 05/12/98
</TABLE>
There were no options granted to the Chief Executive Officer or to the other
four most highly compensated executive officers of Mesa during 1995.
59
<PAGE> 61
Options exercised in 1995, and the number and value of exercisable and
unexercisable options at December 31, 1995, for the Chief Executive Officer and
the other four most highly compensated executive officers of the Parent are as
follows:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
YEAR ENDED NUMBER OF SHARES
DECEMBER 31, 1995 UNDERLYING VALUE OF UNEXERCISED
---------------------- UNEXERCISED IN-THE-MONEY
NUMBER OF OPTIONS/SARS AT OPTIONS/SARS AT
SHARES DECEMBER 29, 1995 DECEMBER 29, 1995
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------ ------------ ---------- ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Boone Pickens.......... -- $ -- 1,130,000 145,000 $ 0 $ 0
Paul W. Cain........... -- -- 312,500 87,500 0 0
Dennis E. Fagerstone... -- -- 104,750 40,250 0 0
Stephen K. Gardner..... -- -- 74,250 60,750 0 0
Andrew J. Littlefair... -- -- 96,750 43,250 0 0
</TABLE>
At December 29, 1995, the final trading day of the year, the Parent's Common
Stock closed at $3.75 per share. The exercise price of the four grants of stock
options reflected in the aggregate in the above tables are $6.8125, $7.375,
$6.1875, and $4.25, respectively, per share. Thus, no outstanding options were
in-the-money at such date.
OTHER
There were no awards made under any long-term incentive plans from January
1, 1995, through December 31, 1995; therefore, no disclosure is required in the
Long-Term Incentive Plan Awards table. From January 1, 1995, through December
31, 1995, no options or stock appreciation rights were repriced (as defined in
Item 402(i) of Regulation S-K of the Securities Act). Except as described below
under "Employee Retention Provisions," the Parent does not have any employment
contracts or termination or change-in-control arrangements with respect to a
named executive officer of the Parent that would require disclosure pursuant to
Item 402(h) of Regulation S-K.
COMMON STOCK PURCHASE PLAN
The Parent has established a Common Stock purchase program whereby
employees, except officers, can buy Common Stock through after-tax payroll
deductions. All other full-time employees of the Company and its participating
affiliates are eligible to participate. The Parent pays the brokerage fees for
these open-market transactions.
EMPLOYEE RETENTION PROVISIONS
On August 22, 1995, the Board adopted the MESA Inc. Change in Control
Retention/Severance Plan, as amended, (the "Retention Plan"). Pursuant to the
Retention Plan, all regular employees of Mesa (other than Mr. Pickens) will be
entitled to receive certain benefits upon the occurrence of certain involuntary
termination events (as described below) following a "Change in Control" (as
defined below) of Mesa. The severance benefits consist of 200% of defined pay
for officers (which includes the highest salary and highest bonus during the
then-current and prior three calendar years before the Retention Plan was
adopted), 150% of defined pay for certain key employees (which includes salary
and bonus amounts) and a formula-based amount for all other employees, plus, in
each case, any other accrued or vested or earned but deferred compensation,
rights, options, or benefits otherwise owed to such employee upon his
termination. In addition, on the same date, the Stock Option Committee
determined that all outstanding but unvested stock options granted to an
employee under Mesa's 1991 Stock Option Plan would immediately vest and become
exercisable upon such a termination event following a Change in Control.
Mesa developed the Retention Plan in consultation with an independent
compensation consultant. That consulting firm advised the Board of Directors
that the Retention Plan is conservatively in line with common practices. The
independent firm noted, among other things, that most such plans it surveyed
provide officers with three times their defined pay, rather than two.
60
<PAGE> 62
For purposes of the Retention Plan, a "Change in Control" means (i) any
acquisition by an individual, entity or group resulting in such person's
obtaining beneficial ownership of 35% or more of the then outstanding Common
Stock or the combined voting power of the then outstanding voting securities of
Mesa entitled to vote in an election of directors, provided certain
acquisitions, including the following, shall not in and of themselves constitute
a Change in Control hereunder: (a) any acquisition of securities of Mesa made
directly from Mesa and approved by a majority of the directors then comprising
the members of the Board of Directors as of May 16, 1995 (the "Incumbent
Board"); or (b) any acquisition of beneficial ownership of a higher percentage
of the Common Stock outstanding or the voting securities of Mesa that results
solely from the acquisition, purchase or redemption of securities of Mesa by
Mesa so long as such action by Mesa was approved by a majority of the directors
then comprising the Incumbent Board; (ii) a change in the membership of the
Incumbent Board, together with members elected subsequent to May 16, 1995, whose
election or nomination for election was approved by a majority of the members of
the Incumbent Board as then constituted (excluding for this purpose any
individual whose initial assumption of office occurred as a result of an actual
or threatened election contest), cease for any reason to constitute a majority
of the Board of Directors; (iii) a reorganization, merger, consolidation or sale
of all or substantially all of the assets of Mesa, subject to certain
exceptions; or (iv) approval by the stockholders of Mesa of the complete
liquidation or dissolution of Mesa.
Following the occurrence of a Change in Control, an eligible employee would
be entitled to receive full severance benefits if, within 24 months of the
occurrence of a Change in Control: (i) the employee was terminated by Mesa
without "Cause" (as defined below); or (ii) the employee's duties,
responsibilities or rate of pay as an employee were materially and adversely
diminished in comparison to the duties, responsibilities and rate of pay enjoyed
by the employee on the effective date of the Retention Plan; or (iii) the
employee was relocated to any location in excess of 35 miles from his location
immediately prior to the Change in Control. All severance benefits with respect
to an eligible employee are payable in a lump sum within ten days after the
termination date of such employee. Under the Retention Plan, "Cause" means the
willful and continued failure of an employee to perform substantially the
employee's duties with Mesa following written demand for performance or the
willful engaging by the employee in illegal conduct or gross misconduct that is
materially and demonstrably injurious to Mesa.
The Recapitalization will not constitute a "Change in Control" for purposes
of the Retention Plan, because the incumbent Board has approved the issuance of
Series B Preferred Stock to DNR and the nomination of the persons DNR intends to
elect as directors.
DIRECTOR COMPENSATION AND CERTAIN RELATIONSHIPS
Each director of Mesa serving throughout 1995 who was not also an employee
of Mesa or its subsidiaries received compensation of $20,000 allocated quarterly
in 1995, except for Messrs. Parkinson, David H. Batchelder and Reed (who
succeeded Mr. Batchelder). Mr. Parkinson received $15,000, Mr. Batchelder
received $10,000, and Mr. Reed received $5,000 for serving as directors for
approximately seven months, four months, and three months, respectively.
Directors who are also employees of Mesa receive no remuneration for their
services as directors.
Mr. Sarofim, a director and member of the Compensation and Stock Option
Committees, is Chairman of the Board, President, and owner of a majority of the
outstanding capital stock of Fayez Sarofim & Co., which acts as an investment
adviser to certain employee benefit plans of Mesa. During the year ended
December 31, 1995, Fayez Sarofim & Co. received fees, paid by the employee
benefit plans, of $175,459 for such services and has been retained to provide
such services in 1996.
Mr. Stillwell, a director, is a partner in the law firm of Baker & Botts,
L.L.P. Mesa retained Baker & Botts, L.L.P., and incurred legal fees for such
services in 1995. Baker & Botts, L.L.P., has been retained to provide legal
services in 1996 and is advising Mesa as to certain legal matters in connection
with the Recapitalization. See "Legal Matters."
Richard E. Rainwater is the sole shareholder and President, Darla D. Moore
is the chief executive officer, and Kenneth A. Hersh is the chief investment
officer, of Rainwater Inc., the sole general partner of DNR, and will be elected
as directors of Mesa by DNR immediately following the sale of Series B Preferred
Stock to DNR at the First Closing. Upon consummation of the Recapitalization,
DNR will be the sole holder of Series B Preferred Stock, representing between
32.5% and 64.7% of Mesa's voting stock (on a fully diluted basis, and prior to
the payment of any dividends in additional shares of Preferred Stock). As such,
DNR will have the right to elect a majority of Mesa's directors and to receive
dividends as described under "Description of the Stock
61
<PAGE> 63
Purchase Agreement and the Rights Offering -- Preferred Stock." Mesa has agreed
to pay DNR (i) a fee of $4,655,000 (constituting 3.5% of the aggregate amount of
Series B Preferred Stock to be purchased at the First Closing) at the First
Closing (or as promptly as practicable thereafter as funds are available
therefor, but no later than the Second Closing) and (ii) a fee of $4,620,000
(constituting 3.5% of the maximum aggregate amount of Series B Preferred Stock
to be purchased pursuant to DNR's Standby Commitment) at the Second Closing,
less the amount by which DNR's reimbursable expenses are less than the initial
$500,000 payment Mesa made at the time it entered into the February 28 letter of
intent with Rainwater, Inc. In addition, the Stock Purchase Agreement provides
that DNR will receive a fee of $400,000 per year in consideration of DNR's
obligations under such agreement and to compensate DNR for the time that DNR has
agreed its representatives will devote to Mesa's affairs, including the
provision of certain investment analysis and assistance to Mesa during the
course of DNR's investment, and DNR will be reimbursed by Mesa for all fees and
expenses (up to a maximum of $50,000 for any calendar year) reasonably incurred
by it in connection with monitoring its investment in Mesa.
INDEMNIFICATION ARRANGEMENTS
Mesa's Bylaws provide for the indemnification of its executive officers and
directors, and the advancement to them of expenses in connection with
proceedings and claims, to the fullest extent permitted by the Texas Business
Corporation Act. Mesa has also entered into indemnification agreements with its
executive officers and directors that contractually provide for indemnification
and expense advancement and include related provisions meant to facilitate the
indemnitees' receipt of such benefits. In addition, Mesa has purchased customary
directors' and officers' liability insurance policies for its directors and
officers (and director nominees). The Bylaws and agreements with directors and
officers also provide for indemnification for amounts (i) in respect of the
deductibles for such insurance policies, (ii) that exceed the liability limits
of such insurance policies, and (iii) that would have been covered by prior
insurance policies of Mesa or its predecessors. Such indemnification may be made
even though directors and officers would not otherwise be entitled to
indemnification under other provisions of the Bylaws or such agreements. The
Stock Purchase Agreement also provides for continuing indemnification following
the Recapitalization for the current directors and officers to the fullest
extent provided by law, as well as continuing coverage under Mesa's directors'
and officers' liability insurance policies.
62
<PAGE> 64
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF MANAGEMENT
The following table presents certain information as to the beneficial
ownership of Mesa's Common Stock as of May 31, 1996, by the directors, director
nominees, and officers of Mesa, individually and as a group. The following table
also indicates the number of shares of Common Stock to be beneficially owned by
such persons assuming that such persons (i) sell or otherwise fail to exercise
all of the Rights to be distributed to them in the Rights Offering or (ii)
exercise all of the Rights to be distributed to them, as well as the percentage
of the number of fully diluted shares of Common Stock to be owned by such
persons under such circumstances (assuming that there will be 181,306,646 shares
of Common Stock outstanding on a fully diluted basis, including 117,256,637
shares issuable upon conversion of shares of Series A and Series B Preferred
Stock).
<TABLE>
<CAPTION>
SHARES OWNED AFTER THE SALE OF SERIES B
SHARES OWNED BEFORE THE PREFERRED STOCK AND THE RIGHTS OFFERING(1)
SALE OF SERIES B -----------------------------------------------------
PREFERRED STOCK AND THE
RIGHTS OFFERING NO RIGHTS EXERCISED ALL RIGHTS EXERCISED
----------------------- ------------------------- ------------------------
NUMBER(2) PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE
--------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
CURRENT DIRECTORS:
Paul W. Cain...................... 322,639 * 322,639 * 331,885 *
John S. Herrington................ 10,000 * 10,000 * 19,120 *
Wales H. Madden, Jr............... 22,200 * 22,200 * 42,447 *
Boone Pickens(3).................. 5,061,626 7.8% 5,061,626 2.8% 8,647,269 4.8%
Fayez S. Sarofim.................. 1,400,000 2.2% 1,400,000 * 2,676,800 1.5%
Robert L. Stillwell............... 26,500 * 26,500 * 50,668 *
Dorn Parkinson(4)................. -- * -- * -- *
Joel L. Reed...................... -- * -- * -- *
FUTURE DIRECTORS:
Richard E. Rainwater(5)........... -- * 117,256,637 64.7% 58,849,557 32.5%
Darla D. Moore.................... -- * -- * -- *
Kenneth A. Hersh.................. -- * -- * -- *
Philip B. Smith................... -- * -- * -- *
OFFICERS:
Dennis E. Fagerstone.............. 104,750 * 104,750 * 104,750 *
Stephen K. Gardner................ 102,979 * 102,979 * 117,780 *
Andrew J. Littlefair(6)........... 113,438 * 113,438 * 128,657 *
William D. Ballew................. 64,853 * 64,853 * 66,771 *
Directors (Current and Future) and
Officers as a group (16
persons)........................ 7,228,985 11.0% 124,485,622 68.7% 71,035,704 39.3%
</TABLE>
- ---------------
* Less than 1.0%
(1) Includes shares of Common Stock issuable upon conversion of Series A and
Series B Preferred Stock.
(2) Includes shares issuable upon the exercise of options that are exercisable
within sixty days of May 31, 1996, as follows: 1,130,000 shares for Mr.
Pickens; 312,500 for Mr. Cain; 104,750 for Mr. Fagerstone; 86,750 for Mr.
Gardner; 96,750 for Mr. Littlefair; 62,750 for Mr. Ballew; and 1,793,500 for
all current directors and officers as a group. No Rights will be issued in
respect of outstanding options pursuant to the Rights Offering.
(3) Includes 7,545 shares of Common Stock owned by several trusts for Mr.
Pickens' children of which he is a trustee, and over which shares he has
sole voting and investment power, although he has no economic interest
therein. Excludes 2,798 shares of Common Stock owned by Mrs. Pickens as her
separate property, as to which Mr. Pickens disclaims beneficial ownership
and with respect to which he does not have or share voting or investment
power.
(4) Excludes 3,800 shares of Common Stock owned by Mr. Parkinson's son as his
separate property, as to which Mr. Parkinson disclaims beneficial ownership
and with respect to which he does not have or share voting or investment
power. Mr. Parkinson is a member of the WDB Group, which has filed a
Schedule 13D which, as amended, states that the WDB Group is the beneficial
owner of 3,500,000 shares of Common Stock. See Note 4 to the table under
"-- Certain Beneficial Owners."
(5) Represents shares of Common Stock issuable upon conversion of shares of
Series B Preferred Stock to be held by DNR. Mr. Rainwater is the sole
shareholder and President of Rainwater, Inc., the sole general partner of
DNR, and, as such, may be deemed to beneficially own the shares of stock to
be held by DNR.
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<PAGE> 65
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.
None of the foregoing persons, nor any of their affiliates, is precluded
from purchasing Notes in the Offering or thereafter.
CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information as of May 31, 1996,
regarding each person or "group" (as that term is used in Section 13(d)(3) of
the Exchange Act) known by Mesa to own beneficially more than 5% of the Common
Stock. Information is based on the most recent Schedule 13D or 13G filed by such
holder with the Commission, or other information provided by the holder to Mesa.
The following table also indicates the number of shares of Common Stock to be
beneficially owned by such persons assuming that such persons (i) sell or
otherwise fail to exercise all of the Rights to be distributed to them in the
Rights Offering or (ii) exercise all of the Rights to be distributed to them, as
well as the percentage of the number of fully diluted shares of Common Stock to
be owned by such persons under such circumstances (assuming that there will be
181,306,646 shares of Common Stock outstanding on a fully diluted basis,
including 117,256,637 shares issuable upon conversion of shares of Series A and
Series B Preferred Stock).
<TABLE>
<CAPTION>
SHARES OWNED AFTER THE SALE OF SERIES B
SHARES OWNED BEFORE PREFERRED STOCK AND THE RIGHTS OFFERING(1)
THE SALE OF SERIES B --------------------------------------------------
PREFERRED STOCK AND THE
RIGHTS OFFERING NO RIGHTS EXERCISED ALL RIGHTS EXERCISED
NAME AND ADDRESS OF ----------------------- ----------------------- -----------------------
BENEFICIAL OWNER NUMBER PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE
- ----------------------------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Boone Pickens................ 5,061,626(2) 7.8% 5,061,626 2.8% 8,647,269 4.8%
1400 Williams Square West
5205 North O'Connor
Boulevard
Irving, Texas 75039-3746
FMR Corp..................... 5,140,400(3) 8.0% 5,140,400 2.8% 9,828,445 5.4%
82 Devonshire Street
Boston, Massachusetts 02109
WDB Group.................... 3,500,000(4) 5.5% 3,500,000 1.9% 6,692,000 3.7%
c/o Dennis R. Washington
Washington Corporations
101 International Way
Missoula, Montana 59807
</TABLE>
- ---------------
(1) Includes shares of Common Stock issuable upon conversion of Series A
Preferred Stock.
(2) See notes (2) and (3) to the table under "Security Ownership of Management."
(3) The Schedule 13G filed with the Commission on February 14, 1996, by FMR
Corp. states that as of December 31, 1995, Fidelity Management & Research
Company ("Fidelity"), a wholly owned subsidiary of FMR Corp. and an
investment adviser registered under Section 203 of the Investment Advisers
Act of 1940, is the beneficial owner of 5,140,400 shares or 8.0% of Common
Stock as a result of acting as investment adviser to various investment
companies registered under Section 8 of the Investment Company Act of 1940.
The ownership of one investment company, Fidelity Capital Appreciation Fund
("Fund"), amounted to 5,140,400 shares or 8.0% of Common Stock outstanding.
Edward C. Johnson, III, chairman of FMR Corp., FMR Corp., through its
control of Fidelity, and the Fund each has sole power to dispose of the
5,140,400 shares owned by the Fund.
(4) A Schedule 13D filed by the WDB Group, as amended as of April 24, 1996,
states that such group at that date beneficially owns 3,500,000 shares of
Common Stock, as to which Dennis R. Washington has sole voting power. The
Schedule 13D filed by the WDB Group prior to that date had included Davis
Acquisition, L.P., Davis Companies, the Marvin Davis and Barbara Davis
Revocable Trust, and Marvin Davis, which collectively owned 2,500,000 shares
of Common Stock. On April 24, 1996, the WDB Group filed an amendment to the
Schedule 13D stating that the Davis entities had terminated their
participation in the WDB Group and had sold shares of Common Stock such
that, as of April 23, 1996, the Davis entities beneficially owned 1,562,500
shares of Common Stock. See "Business -- Legal Proceedings -- Settlement
with WDB Group."
64
<PAGE> 66
BENEFICIAL OWNERSHIP OF DNR
The following table sets forth the percentage of the number of fully diluted
shares of Common Stock to be beneficially owned by DNR upon the Second Closing
assuming certain percentages of the Rights are exercised in the Rights Offering,
and that DNR acquires the required number of shares of Series B Preferred Stock
at the First Closing.
<TABLE>
<CAPTION>
PERCENTAGE OF RIGHTS EXERCISED
------------------------------------
0% 25% 50% 75% 100%
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Percentage Ownership of DNR................................. 64.7% 56.7% 48.6% 40.6% 32.5%
</TABLE>
As used in this Prospectus, the number of "fully diluted" shares of Common
Stock includes shares issuable upon conversion of Series A and Series B
Preferred Stock, but excludes (i) shares issuable pursuant to employee stock
options because no such options have an exercise price below current market
prices of the Common Stock and (ii) unless otherwise indicated, shares issuable
as dividends on the Preferred Stock.
65
<PAGE> 67
DESCRIPTION OF THE NOTES
GENERAL
The Senior Subordinated Notes will be issued pursuant to an Indenture (the
"Senior Subordinated Note Indenture") among the Company, the Parent and Harris
Trust and Savings Bank, as trustee (the "Senior Subordinated Note Trustee"). The
Discount Notes will be issued pursuant to an Indenture (the "Discount Note
Indenture;" together with the Senior Subordinated Note Indenture, the
"Indentures") among the Company, the Parent and Harris Trust and Savings Bank,
as trustee (the "Discount Note Trustee;" together with the Senior Subordinated
Trustee, the "Trustees"). Copies of the Indentures are filed as exhibits to the
Registration Statement of which this Prospectus forms a part and will be made
available to prospective purchasers of the Notes upon request. The Indentures
are subject to and governed by the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"). The terms of the Notes include those stated in the
applicable Indenture and those made part of such Indenture by reference to the
Trust Indenture Act. The Notes are subject to all such terms, and Holders of the
Notes are referred to the applicable Indenture and the Trust Indenture Act for a
statement thereof. The following summary of certain provisions of the Indentures
does not purport to be complete and is qualified in its entirety by reference to
the Indentures, including the definitions therein of certain terms used below.
The definitions of certain terms used in the following summary are set forth
below under "-- Certain Definitions."
The Notes will be general unsecured obligations of the Company and will be
subordinated in right of payment to all existing and future Senior Debt. The
Notes will be guaranteed on a senior subordinated basis by the Parent and all
Material Restricted Subsidiaries of the Company, if any, and certain other
Restricted Subsidiaries. As of the date of the Indentures, the Company has no
Material Restricted Subsidiaries, and no Restricted Subsidiary is a Subsidiary
Guarantor. The obligations of the Parent and any future Subsidiary Guarantors
under the Guarantees will be general unsecured obligations of each of the Parent
and the Subsidiary Guarantors and will be subordinated in right of payment to
all obligations of the Parent and the Subsidiary Guarantors in respect of Senior
Debt. See "-- Guarantees" and "Risk Factors -- Subordination."
As of the date of the Indentures, all of the Company's Subsidiaries will be
Restricted Subsidiaries. Under certain circumstances, however, the Company will
be able to designate current and future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the
restrictive covenants set forth in the Indentures.
For purposes of this section, the term "Company" means Mesa Operating Co.
and the term "Parent" means MESA Inc. Any reference to a "Holder" means a Holder
of the Senior Subordinated Notes or the Discount Notes, as the context may
require.
SUBORDINATION
The payment of principal of, premium, if any, and interest on the Notes and
any other payment obligations of the Company in respect of the Notes (including
any obligation to repurchase the Notes) will be subordinated in right of
payment, as set forth in the Indentures, to the prior payment in full in cash of
all Senior Debt, whether outstanding on the date of the Indentures or thereafter
incurred.
Upon any payment or distribution of property or securities to creditors of
the Company in a liquidation or dissolution of the Company or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to the
Company or its property, or in an assignment for the benefit of creditors or any
marshaling of the Company's assets and liabilities, the holders of Senior Debt
will be entitled to receive payment in full in cash of all Obligations due in
respect of such Senior Debt (including interest after the commencement of any
such proceeding at the rate specified in the applicable Senior Debt, whether or
not a claim for such interest would be allowed in such proceeding) before the
Holders of the Notes will be entitled to receive any payment with respect to the
Notes and, until all Obligations with respect to Senior Debt are paid in full in
cash, any distribution to which the Holders of the Notes would be entitled shall
be made to the holders of Senior Debt (except that Holders of the Notes may
receive payments made from the trust described under "-- Legal Defeasance and
Covenant Defeasance" if the deposit into such trust was permitted to be made
under the terms of the applicable Indenture).
The Company also may not make any payment (whether by redemption, purchase,
retirement, defeasance or otherwise) upon or in respect of the Notes (except
from the trust described under "-- Legal Defeasance and Covenant Defeasance") if
(i) a default in the payment of the principal of, premium, if any, or interest
on
66
<PAGE> 68
Designated Senior Debt occurs or (ii) any other default occurs and is continuing
with respect to Designated Senior Debt that permits, or with the giving of
notice or passage of time or both (unless cured or waived) will permit, holders
of the Designated Senior Debt as to which such default relates to accelerate its
maturity and the Trustees receive a notice of such default (a "Payment Blockage
Notice") from a representative of the holders of any Designated Senior Debt.
Cash payments on the Senior Subordinated Notes (and, if after , 2001,
the Discount Notes) shall be resumed (a) in the case of a payment default, upon
the date on which such default is cured or waived and (b) in case of a
nonpayment default, the earliest of (1) the date on which such nonpayment
default is cured or waived, (2) the date the applicable Payment Blockage Notice
is retracted by written notice to the Trustees from a representative or the
holders of the Designated Senior Debt that have given such Payment Blockage
Notice and (3) 179 days after the date on which the applicable Payment Blockage
Notice is received, unless any of the events described in clause (i) of this
paragraph has then occurred and is continuing or a default of the type described
in clause (x) under the caption "Events of Default" has occurred. No new period
of payment blockage may be commenced unless and until 360 days have elapsed
since the date of commencement of the payment blockage period resulting from the
immediately prior Payment Blockage Notice. No nonpayment default in respect of
Designated Senior Debt that existed or was continuing on the date of delivery of
any Payment Blockage Notice to the Trustees shall be, or be made, the basis for
a subsequent Payment Blockage Notice.
The Indentures will further require that the Company promptly notify holders
of Senior Debt if payment of the Notes is accelerated because of an Event of
Default.
As a result of the subordination provisions described above, in the event of
a liquidation or insolvency of the Company, Holders of the Notes may recover
less ratably than creditors of the Company who are holders of Senior Debt. On a
pro forma basis, after giving effect to the Recapitalization and the application
of the proceeds therefrom, the principal amount of Senior Debt outstanding at
March 31, 1996 would have been approximately $349.2 million, representing the
initial borrowings under the $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 or
other Person other than the Parent, the Company or another Subsidiary Guarantor,
unless (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger assumes all the
obligations of the Parent or such Subsidiary Guarantor, as the case may be,
pursuant to a supplemental indenture in form reasonably satisfactory to the
applicable Trustee in respect of such Indenture, (ii) immediately after giving
effect to such transaction, no Default or Event of Default exists and (iii) such
transaction does not violate any of the covenants described under the heading
"-- Certain Covenants."
The Indentures will provide that in the event of a sale or other disposition
of all or substantially all of the assets of a Subsidiary Guarantor to any
corporation or other Person (including a Subsidiary that is not a Subsidiary
Guarantor) or a sale or other disposition of all of the capital stock of a
Subsidiary Guarantor to any corporation or other Person (including a Subsidiary
that is not a Subsidiary Guarantor), by way of merger, consolidation or
otherwise, in a transaction that does not violate any of the covenants in the
Indentures, then such Subsidiary Guarantor will be released from and relieved of
any obligations under its Guarantees and such acquiring corporation or other
Person if other than the Parent or a Subsidiary Guarantor shall have no
obligation to assume or otherwise become liable under such Guarantees; provided,
if such acquiring corporation or other Person is other than the Company or a
Wholly Owned Restricted Subsidiary, the Net
67
<PAGE> 69
Proceeds of such sale or other disposition are applied in accordance with the
covenant described under the caption "-- Repurchase at the Option of
Holders -- Asset Sales."
Any Subsidiary Guarantor that is designated an Unrestricted Subsidiary in
accordance with the terms of the Indentures shall be released from and relieved
of its obligations under its Guarantees, and any Restricted Subsidiary that
becomes a Material Restricted Subsidiary and any Unrestricted Subsidiary that
ceases to be an Unrestricted Subsidiary and, thereafter, becomes a Material
Restricted Subsidiary will be required to execute Guarantees in accordance with
the terms of the Indentures.
PRINCIPAL, MATURITY AND INTEREST
The Senior Subordinated Notes will be limited in aggregate principal amount
to $325.0 million and will mature on , 2006. Interest on the Senior
Subordinated Notes will accrue at the rate of % per annum and will be
payable semi-annually in arrears on and , commencing on
, 1996, to Holders of the Senior Subordinated Notes of record on the
immediately preceding and . Interest on the Senior
Subordinated Notes will accrue from the most recent date on which interest has
been paid or, if no interest has been paid, from the date of original issuance.
The Discount Notes will be issued at a discount to their aggregate principal
amount to generate gross proceeds to the Company of approximately $175.0 million
and will mature on , 2006. Interest on the Discount Notes will
accrete in value until , 2001 at a rate of % per annum,
compounded semi-annually, to an aggregate principal amount of $ million. Cash
Interest will not accrue on the Discount Notes prior to , 2001.
Thereafter, interest will accrue at the rate of % per annum and will be
payable semi-annually in arrears on and , commencing on
, 2001, to Holders of the Discount Notes of record on the immediately
preceding and . Cash interest on the Discount Notes will
accrue from the most recent date on which interest has been paid or, if no
interest has been paid, from , 2001. All references to the principal
amount of the Discount Notes herein are references to the principal amount at
final maturity.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months. Principal, premium, if any, and interest on the Notes will be
payable at the office or agency of the Company maintained for such purpose
within the City and State of New York or, at the option of the Company, payment
of interest may be made by check mailed to the Holders of the Notes at their
respective addresses set forth in the applicable register of Holders of the
Notes. Until otherwise designated by the Company, the Company's office or agency
in New York for purposes of any Indenture will be the office of the applicable
Trustee maintained for such purpose. The Notes will be fully registered as to
principal and interest in minimum denominations of $1,000 and integral multiples
of $1,000 in excess thereof.
OPTIONAL REDEMPTION
Senior Subordinated Notes. Except as otherwise described below, the Senior
Subordinated Notes will not be redeemable at the Company's option prior to
, 2001. Thereafter, the Senior Subordinated Notes will be subject to
redemption at the option of the Company, in whole or in part, upon not less than
30 nor more than 60 days' notice, at the redemption prices (expressed as
percentages of principal amount) set forth below, plus accrued and unpaid
interest thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning on of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---------------------------------------------------------- ----------
<S> <C>
2001...................................................... %
2002...................................................... %
2003...................................................... %
2004 and thereafter....................................... 100%
</TABLE>
Prior to , 1999, the Company may, at its option, on any one or
more occasions, redeem up to 33 1/3% of the original aggregate principal amount
of the Senior Subordinated Notes at a redemption price equal to % of the
principal amount thereof, plus accrued and unpaid interest, if any, thereon to
the redemption date, with all or a portion of the net proceeds of sales of
Equity Interests (other than Disqualified Stock) in the Company or the Parent;
provided, that at least 66 2/3% of the original aggregate principal amount of
the Senior Subordinated Notes remains outstanding immediately after the
occurrence of such redemption; and provided
68
<PAGE> 70
further, that such redemption shall occur within 60 days after the date of the
closing of the related sale of such Equity Interests.
Discount Notes. Except as described below, the Discount Notes are not
redeemable at the Company's option prior to , 2001. Thereafter, the
Discount Notes will be subject to redemption at the option of the Company, in
whole or in part, upon not less than 30 nor more than 60 days' written notice,
at the redemption prices (expressed as percentages of principal amount) set
forth below, plus accrued and unpaid interest thereon from , 2001 to
the applicable redemption date, if redeemed during the twelve-month period
beginning on of each of the years indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF
PRINCIPAL
YEAR AMOUNT
-------------------------------------------------------- -------------
<S> <C>
2001.................................................... %
2002.................................................... %
2003.................................................... %
2004 and thereafter..................................... 100%
</TABLE>
Prior to , 1999, the Company may, at its option, on any one or
more occasions, redeem up to 33 1/3% of the original aggregate principal amount
of the Discount Notes at a redemption price equal to % of the Accreted Value
thereof with the net proceeds of sales of Equity Interests (other than
Disqualified Stock) in the Company or the Parent; provided, that at least
66 2/3% of the original aggregate principal amount of the Discount Notes remains
outstanding immediately after the occurrence of such redemption; and provided
further, that such redemption shall occur within 60 days after the date of the
closing of the related sale of such Equity Interests.
SELECTION AND NOTICE
In the case of any partial redemption, selection of the Notes for redemption
will be made by the applicable Trustee in compliance with the requirements of
the principal national securities exchange, if any, on which the Notes are
listed, or, if such Notes are not so listed, on a pro rata basis, by lot or by
such other method as such Trustee shall deem fair and appropriate; provided, no
Note of $1,000 or less shall be redeemed in part. Notices of redemption shall be
mailed by first class mail at least 30 but not more than 60 days before the
redemption date to the registered address of each Holder of the Notes to be
redeemed. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the redemption date, interest
ceases to accrue on the Notes or on the aggregate principal amount of the Notes
called for redemption, as the case may be.
MANDATORY REDEMPTION
Except as set forth below under "-- Repurchase at the Option of Holders,"
the Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control (as defined below under
"-- Certain Definitions"), each Holder of the Notes will have the right to
require the Company to repurchase all or any part (equal to $1,000 or an
integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to (i) 101% of the aggregate principal amount of the Senior Subordinated Notes,
plus accrued and unpaid interest, if any, thereon to the date of purchase (the
"Change of Control Senior Subordinated Note Payment"), in the case of the Senior
Subordinated Notes, and (ii) prior to , 2001, 101% of the Accreted
Value of the Discount Notes on the date of purchase and, thereafter, 101% of the
aggregate principal amount of the Discount Notes, plus accrued but unpaid
interest, if any, thereon to the date of purchase (the "Change of Control
Discount Note Payment;" together with the Change of Control Senior Subordinated
Note Payment, the "Change of Control Payment"). The right of the Holders of the
Notes to require the Company to repurchase such Notes upon a Change of Control
may not be waived by the
69
<PAGE> 71
applicable Trustee without the requisite approval of the Holders of the
applicable Notes. See "-- Amendment Supplement or Waiver." Within 30 days
following any Change of Control, the Company will mail a notice to each Holder
describing the transaction or transactions that constitute the Change of Control
and offering to repurchase the Notes pursuant to the procedures required by the
Indentures and described in such notice. The Change of Control Payment shall be
made on a business day not less than 30 days nor more than 60 days after such
notice is mailed (the "Change of Control Payment Date"). The Company, the Parent
and each Subsidiary Guarantor will comply with the requirements of Rule 14e-1
under the Exchange Act and any other securities laws and regulations thereunder
to the extent such laws and regulations are applicable to such party in
connection with the repurchase of the Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (i) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (ii) deposit with (a) the paying agent
for the Senior Subordinated Notes an amount equal to the Change of Control
Senior Subordinated Note Payment in respect of all the Senior Subordinated Notes
or portions thereof so tendered and (b) the paying agent for the Discount Notes
an amount equal to the Change of Control Discount Note Payment in respect of all
Discount Notes or portions thereof so tendered and (iii) deliver or cause to be
delivered to the applicable Trustee the relevant Notes so accepted, together
with an Officers' Certificate stating the aggregate principal amount (or
Accreted Value, as applicable) of such Notes or portions thereof being purchased
by the Company. The applicable paying agent will promptly mail to each Holder of
the Senior Subordinated Notes or the Discount Notes, as the case may be, so
tendered the Change of Control Payment for such Notes, and the applicable
Trustee will promptly authenticate and mail (or cause to be transferred by book
entry) to each such Holder a new Senior Subordinated Note or Discount Note, as
the case may be, equal in principal amount to any unpurchased portion of the
Notes surrendered, if any; provided, each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Company will publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Payment Date.
Except as described above with respect to a Change of Control, the
Indentures do not contain provisions that permit the Holders of the Notes to
require that the Company repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar transaction.
The Company will not be required to make a Change of Control Offer if a
third party makes the Change of Control Offer in the manner, at the times and
otherwise in compliance with the requirements set forth in the Indentures
applicable to a Change of Control Offer made by the Company and purchases all
Notes or portions thereof validly tendered and not withdrawn under such Change
of Control Offer.
The Credit Agreement will prohibit the Company from repurchasing any Notes
pursuant to a Change of Control Offer prior to the repayment in full of the
Senior Debt under the Credit Agreement. Moreover, the occurrence of certain
change of control events identified in the Credit Agreement will constitute a
default under the Credit Agreement. Any future Credit Facilities or other
agreements relating to Senior Debt to which the Company becomes a party may
contain similar restrictions and provisions. If a Change of Control were to
occur, the Company may not have sufficient available funds to pay the Change of
Control Purchase Price for all Notes that might be delivered by Holders of the
Notes seeking to accept the Change of Control Offer after first satisfying its
obligations under the Credit Agreement or other agreements relating to Senior
Debt, if accelerated. The failure of the Company to make or consummate the
Change of Control Offer or pay the Change of Control Purchase Price when due
will give the Trustees and the Holders of the Notes the rights described under
"-- Events of Default."
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Parent and its Subsidiaries taken as a whole and the
Company and its Subsidiaries taken as a whole. Although there is a developing
body of case law interpreting the phrase "substantially all," there is no
precise established definition of the phrase under applicable law. Accordingly,
the ability of a Holder of the Notes to require the Company to repurchase such
Notes as a result of a sale, lease, transfer, conveyance or other disposition of
less than all of the assets of the Parent and its Subsidiaries taken as a whole
and the Company and its Subsidiaries taken as a whole to another Person or group
may be uncertain.
Transactions or events that constitute a Change of Control may include
transactions and events that are approved by the Company's Board of Directors.
Asset Sales
The Indentures will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries (other than MEV) to, engage in an Asset Sale,
unless (i) the Company or the Restricted Subsidiary, as the
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case may be, receives consideration at the time of such Asset Sale at least
equal to the fair market value (as determined in good faith by a resolution of
the Board of Directors of the Company set forth in an Officers' Certificate
delivered to the Trustees, which determination shall be conclusive evidence of
compliance with this provision) of the assets or Equity Interests issued or sold
or otherwise disposed of and (ii) at least 80% of the consideration therefor
received by the Company or such Restricted Subsidiary (after deducting expenses
associated with such Asset Sale) is in the form of cash, Cash Equivalents, oil
and gas properties owned or held by another Person which are to be used in the
Oil and Gas Business of the Company or its Restricted Subsidiaries, or any
combination thereof; provided, that the amount of (a) any liabilities (as shown
on the Company's or such Restricted Subsidiary's most recent balance sheet or,
with respect to plugging and abandonment obligations and other similar
liabilities, in the notes thereto) of the Company or any Restricted Subsidiary
(other than contingent liabilities and liabilities that are by their terms
subordinated to the Notes or any guarantee thereof) that are assumed by the
transferee of any such assets pursuant to a customary novation agreement that
releases the Company or such Restricted Subsidiary from further liability and
(b) any Liquid Securities received by the Company or any such Restricted
Subsidiary from such transferee that are converted by the Company or such
Restricted Subsidiary into cash within 180 days after closing such Asset Sale,
shall be deemed to be cash for purposes of this provision to the extent of the
liabilities assumed or cash received.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may use such Net Proceeds, at its option, for one or more of the
following purposes: (i) to reduce Senior Debt; (ii) to make Permitted Business
Investments; (iii) to acquire controlling interests in other Oil and Gas
Businesses to the extent such Investments are not Permitted Business
Investments; (iv) to make capital expenditures in respect of the Company's or
its Restricted Subsidiaries' Oil and Gas Business; and (v) to purchase assets
that are used or useful in the Oil and Gas Business. Pending the final
application of any such Net Proceeds, the Company may temporarily reduce Senior
Debt that is revolving debt or otherwise invest such Net Proceeds in any manner
that is not prohibited by the Indentures. Any Net Proceeds from Asset Sales that
are not applied or invested as provided in the first sentence of this paragraph
will (after the expiration of the periods specified in this paragraph) be deemed
to constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $10.0 million, the
Company will be required to make an offer to all Holders of the Notes and, to
the extent required by the terms thereof, to all holders of Pari Passu
Indebtedness (an "Asset Sale Offer") to purchase the maximum principal amount of
the Senior Subordinated Notes, the Discount Notes and any such Pari Passu
Indebtedness to which the Asset Sale Offer applies that may be purchased out of
the Excess Proceeds, at an offer price in cash equal to, in the case of the
Senior Subordinated Notes or any such Pari Passu Indebtedness, 100% of the
principal amount thereof, plus accrued and unpaid interest thereon to the date
of purchase, or, in the case of the Discount Notes, prior to , 2001,
100% of the Accreted Value thereof on the date of purchase and, thereafter, 100%
of the principal amount of the Discount Notes, plus after , 2001,
accrued but unpaid interest thereon, if any, to the date of purchase, or, in the
case of any discount Pari Passu Indebtedness, 100% of the accreted value thereof
on the date of purchase, in each case, in accordance with the procedures set
forth in the Indentures or the agreements governing the Pari Passu Indebtedness,
as applicable. To the extent that the aggregate principal amount (or accreted
value, as the case may be) of the Notes and Pari Passu Indebtedness tendered
pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company
may use any remaining Excess Proceeds for general corporate purposes and will no
longer be considered "Excess Proceeds" for purposes of this paragraph. If the
sum of (i) the aggregate Accreted Value (or, if after , 2001, the
principal amount) of the Discount Notes surrendered by Holders thereof, (ii) the
aggregate principal amount of the Senior Subordinated Notes surrendered by
Holders thereof and (iii) the aggregate principal amount or accreted value, as
the case may be, of Pari Passu Indebtedness surrendered by holders thereof,
exceeds the amount of Excess Proceeds, the Trustees shall select the Notes and
Pari Passu Indebtedness to be purchased on a pro rata basis, based on the
aggregate principal amount (or accreted value, as applicable) thereof
surrendered in such Asset Sale Offer.
The Credit Agreement may prohibit the Company from purchasing any Notes from
the Net Proceeds of Asset Sales. Any future credit agreements or other
agreements relating to Senior Debt to which the Company becomes a party may
contain similar restrictions. In the event an Asset Sale Offer occurs at a time
when the Company is prohibited from purchasing the Notes, the Company could seek
the consent of its lenders to the purchase or could attempt to refinance the
Senior Debt that contains such prohibition. If the Company does not obtain such
a consent or repay such Senior Debt, the Company may remain prohibited from
purchasing the Notes. In such case, the Company's failure to purchase tendered
Notes would constitute an Event of Default
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under the Indentures which would, in turn, constitute a default under the Credit
Agreement and possibly a default under other agreements relating to Senior Debt.
In such circumstances, the subordination provisions in the Indentures would
likely restrict payments to the Holders of the Notes.
CERTAIN COVENANTS
Restricted Payments
The Indentures will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or
pay any dividend or make any other payment or distribution on account of the
Company's Equity Interests (including, without limitation, any payment to
holders of the Company's Equity Interests in connection with any merger or
consolidation involving the Company) or to the direct or indirect holders of the
Company's Equity Interests in their capacity as such (other than dividends or
distributions (a) payable in Equity Interests (other than Disqualified Stock) of
the Company, (b) to the extent necessary to permit the Parent to pay overhead,
tax liabilities, legal, accounting or other professional fees and expenses and
any fees and expenses associated with registration statements filed with the
Commission and subsequent ongoing public reporting requirements, in each case to
the extent actually incurred by the Parent in connection with acting as a
holding company for the Subsidiaries, or (c) to the extent necessary to permit
the Parent to perform its obligations to pay fees, expenses and indemnification
under the Stock Purchase Agreement (as described under "Description of the Stock
Purchase Agreement and the Rights Offering -- The Stock Purchase Agreement");
(ii) purchase, redeem, defease or otherwise acquire or retire for value any
Equity Interests of the Company or any direct or indirect parent or other
Affiliate of the Company that is not a Wholly Owned Restricted Subsidiary of the
Company; (iii) make any principal payment on, or purchase, redeem, defease or
otherwise acquire or retire for value any Indebtedness that is subordinated to
the Notes, except any scheduled principal payment or sinking fund payment or at
final maturity; or (iv) make any Restricted Investment (all such payments and
other actions set forth in clauses (i) through (iv) above being collectively
referred to as "Restricted Payments"), unless, at the time of and after giving
effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described below under the caption "-- Incurrence of Indebtedness and
Issuance of Disqualified Stock;" and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made after the date of the Indentures (excluding
Restricted Payments permitted by clauses (ii), (iii), (v) and (vi) of the
next succeeding paragraph), is less than the sum of (l) 50% of the
Consolidated Net Income of the Company for the period (treated as one
accounting period) from the beginning of the first month after the date of
the Indentures to the end of the Company's most recently ended fiscal
quarter for which internal financial statements are available at the time of
such Restricted Payment (or, if such Consolidated Net Income for such period
is a deficit, less 100% of such deficit), plus (2) 100% of the aggregate net
cash proceeds received by the Company since the date of the Indentures (A)
as capital contributions to the Company (other than from a Subsidiary of the
Company or from the Rights Offering or the Standby Commitment) and (B) from
the issue, sale or exercise since the date of the Indentures of Equity
Interests in the Company or the Parent or of debt securities of the Company
or the Parent that have been converted into or exchanged for such Equity
Interests (other than Equity Interests (or convertible debt securities) sold
to a Subsidiary of the Company and other than Disqualified Stock or debt
securities that have been converted into Disqualified Stock), plus (3) to
the extent that any Restricted Investment that was made after the date of
the Indentures is sold for cash or otherwise liquidated or repaid for cash,
the lesser of (A) the net proceeds of such sale, liquidation or repayment
and (B) the initial amount of such Restricted Investment, plus (4) the
amount equal to the net reduction in Investments in Unrestricted
Subsidiaries resulting from (A) payments of dividends or interest or other
transfers of assets to the Company or any Restricted Subsidiary from
Unrestricted Subsidiaries, (B) the redesignation of Unrestricted
Subsidiaries as Restricted Subsidiaries or (C) the receipt of proceeds by
the Company or any Restricted Subsidiary from the sale or other disposition
of any portion of any Investment in an Unrestricted Subsidiary not to exceed
the amount of Investments previously made by the Company or any Restricted
Subsidiary in such
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Unrestricted Subsidiary, which amount was included in the calculation of the
amount of Restricted Payments.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof if at said date of
declaration such payment would have complied with the provisions of the
Indentures and such dividend (a) shall be deemed paid on the date of such date
of declaration for purposes of clauses (a) and (b) in the next preceding
paragraph and (b) shall be included in the determination of Restricted Payments
pursuant to clause (c) of the preceding paragraph only when declared and not
when paid, (ii) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of the Company in exchange for, or out of the proceeds of,
the substantially concurrent sale (other than to a Subsidiary of the Company) of
other Equity Interests of the Company (other than any Disqualified Stock);
provided, that the amount of any such net cash proceeds that are utilized for
any such redemption, repurchase, retirement or other acquisition shall be
excluded from clause (c)(2) of the preceding paragraph, (iii) the defeasance,
redemption or repurchase of Subordinated Indebtedness with the net cash proceeds
from an incurrence of subordinated Permitted Refinancing Debt or the
substantially concurrent sale (other than to a Subsidiary of the Company) of
Equity Interests in the Company or the Parent (other than Disqualified Stock);
provided, that the amount of any such net cash proceeds that are utilized for
any such redemption, repurchase, retirement or other acquisition shall be
excluded from clause (c)(2) of the preceding paragraph, (iv) the repurchase,
redemption or other acquisition or retirement for value of any Equity Interests
in the Company, the Parent or any Subsidiary of the Company (a) held by any of
the Company's (or any of its Subsidiaries') employees pursuant to any management
equity subscription agreement, stock option agreement or any other agreement
with such employee, or (b) in connection with a tender offer to eliminate odd
lots of such Equity Interests; provided, that the aggregate price paid for all
such repurchased, redeemed, acquired or retired Equity Interests shall not
exceed $2.0 million in any fiscal year, plus the aggregate cash proceeds
received by the Company during such fiscal year from any issuance of Equity
Interests by the Company or the Parent to any Permitted Investor or employee of
the Company or any of its Subsidiaries; and provided further, that no Default or
Event of Default shall have occurred and be continuing immediately after such
transaction, (v) repurchases of Equity Interests deemed to occur upon exercise
of stock options if such Equity Interests represent a portion of the exercise
price of such options and (vi) the defeasance, redemption, repurchase or
repayment of the Existing Debt if any of the Existing Debt is subordinated to
the Notes.
The amount of all Restricted Payments (other than cash) shall be the fair
market value (as determined in good faith by a resolution of the Board of
Directors of the Company set forth in an Officers' Certificate delivered to the
Trustees, which determination shall be conclusive evidence of compliance with
this provision) on the date of the Restricted Payment of the asset(s) proposed
to be transferred by the Company or the applicable Restricted Subsidiary, as the
case may be, pursuant to the Restricted Payment. Not later than ten days after
the date of making any Restricted Payment, the Company shall deliver to the
Trustees an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
the covenant "Restricted Payments" were computed.
In computing Consolidated Net Income for purposes of the "Restricted
Payments" covenant, (i) the Company shall use audited financial statements for
the portions of the relevant period for which audited financial statements are
available on the date of determination and unaudited financial statements and
other current financial data based on the books and records of the Company for
the remaining portion of such period and (ii) the Company shall be permitted to
rely in good faith on the financial statements and other financial data derived
from the books and records of the Company that are available on the date of
determination. If the Company makes a Restricted Payment which, at the time of
the making of such Restricted Payment, would in the good faith determination of
the Company be permitted under the requirements of the Indentures, such
Restricted Payment shall be deemed to have been made in compliance with the
Indentures notwithstanding any subsequent adjustments made in good faith to the
Company's financial statements affecting Consolidated Net Income of the Company
for any period.
Designation of Unrestricted Subsidiaries
The Board of Directors of the Company may designate any Restricted
Subsidiary to be an Unrestricted Subsidiary if such designation would not cause
a Default. For purposes of making such determination, all outstanding
Investments by the Company and its Restricted Subsidiaries (except to the extent
repaid in cash) in the Subsidiary so designated will be deemed to be Restricted
Payments at the time of such designation and will reduce the amount available
for Restricted Payments under clause (c) of the first paragraph of the
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covenant "Restricted Payments." All such outstanding Investments will be deemed
to constitute Investments in an amount equal to the fair market value of such
Investments at the time of such designation. Such designation will only be
permitted if such Restricted Payment would be permitted at such time and if such
Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary.
Incurrence of Indebtedness and Issuance of Disqualified Stock
The Indentures will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and that the Company will not, and will
not permit any of its Restricted Subsidiaries to, issue any Disqualified Stock;
provided, however, subject to the limitations set forth below, the Company and
the Subsidiary Guarantors may incur Indebtedness (including Acquired Debt) or
issue shares of Disqualified Stock if:
(i) the Fixed Charge Coverage Ratio for the Company's most recently
ended four full fiscal quarters for which internal financial statements are
available immediately preceding the date on which such additional
Indebtedness is incurred or such Disqualified Stock is issued would have
been at least 2.5 to 1, determined on a pro forma basis as set forth in the
definition of Fixed Charge Coverage Ratio; and
(ii) no Default or Event of Default shall have occurred and be
continuing at the time such additional Indebtedness is incurred or such
Disqualified Stock is issued or would occur as a consequence of the
incurrence of the additional Indebtedness or the issuance of the
Disqualified Stock.
Notwithstanding the foregoing, the Indentures will not prohibit any of the
following (collectively, "Permitted Indebtedness"): (a) the Indebtedness
evidenced by the Notes; (b) the incurrence by the Company of Indebtedness
pursuant to Credit Facilities, so long as the aggregate principal amount of all
Indebtedness outstanding under all Credit Facilities does not, at any one time,
exceed the greater of (1) $500 million and (2) the Borrowing Base; (c) the
guarantee by any Restricted Subsidiary (including any Subsidiary Guarantor) of
any Indebtedness that is permitted by the Indentures to be incurred by the
Company; provided that such Subsidiary, if not a Subsidiary Guarantor, becomes a
Subsidiary Guarantor under the Indenture; (d) all Indebtedness of the Company
and its Restricted Subsidiaries in existence as of the date of the Indentures
after giving effect to the Recapitalization and the application of the proceeds
thereof; (e) intercompany Indebtedness between or among the Company, the Parent
and any of the Company's Restricted Subsidiaries; provided, however, that (1) if
the Company is the obligor on such Indebtedness, such Indebtedness is expressly
subordinate to the payment in full of all Obligations with respect to the Notes
and (2)(A) any subsequent issuance or transfer of Equity Interests that results
in any such Indebtedness being held by a Person other than the Company, the
Parent or a Restricted Subsidiary and (B) any sale or other transfer of any such
Indebtedness to a Person that is not the Company, the Parent or a Restricted
Subsidiary shall be deemed, in each case, to constitute an incurrence of such
Indebtedness by the Company or such Restricted Subsidiary, as the case may be;
(f) Indebtedness of the Company or any Restricted Subsidiary related to any
Permitted Marketing Transaction, including, without limitation, under letters of
credit or guarantees of Indebtedness or other obligations of a party to a
Permitted Marketing Transaction; provided, that in the event that the Company or
any Restricted Subsidiary guarantees such Indebtedness or other obligations of
another party, then either (1) the Person who is obligated to purchase
hydrocarbons from such party has an investment grade credit rating from S&P or
Moody's, or in lieu thereof, a Person guaranteeing the payment of such obligated
Person has an investment grade credit rating from S&P or Moody's or (2) such
Person posts, or has posted for it, a letter of credit in favor of the Company
or such Subsidiary Guarantor with respect to all of such Person's obligations
under such contracts; (g) in addition to Indebtedness under any Credit Facility,
Indebtedness in connection with one or more standby letters of credit,
guarantees, performance bonds or other reimbursement obligations, in each case,
issued in the ordinary course of business and not in connection with the
borrowing of money or the obtaining of advances or credit (other than advances
or credit on open account, includible in current liabilities, for goods and
services in the ordinary course of business and on terms and conditions which
are customary in the Oil and Gas Business, and other than the extension of
credit represented by such letter of credit, guarantee or performance bond
itself), not to exceed in the aggregate at any time outstanding 5.0% of Total
Assets; (h) Indebtedness under Interest Rate Hedging Agreements entered into for
the purpose of limiting interest rate risks; provided, that the obligations
under such agreements are related to payment obligations on Indebtedness
otherwise permitted by the terms of this covenant and that the aggregate
notional principal amount of such agreements does not exceed 105% of the
principal amount of the
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Indebtedness to which such agreements relate; (i) Indebtedness under Oil and Gas
Hedging Contracts; provided, that such contracts were entered into in the
ordinary course of business for the purpose of limiting risks that arise in the
ordinary course of business of the Company and its Subsidiaries; (j) the
incurrence by the Company and Subsidiary Guarantors of Indebtedness not
otherwise permitted to be incurred pursuant to this paragraph; provided, that
the aggregate principal amount (or accreted value, as applicable) of all
Indebtedness incurred pursuant to this clause (j), together with all Permitted
Refinancing Debt incurred pursuant to clause (k) of this paragraph in respect of
Indebtedness previously incurred pursuant to this clause (j), does not exceed
$25.0 million at any time outstanding; (k) Permitted Refinancing Debt incurred
in exchange for, or the net proceeds of which are used to refinance, extend,
renew, replace, defease or refund, Indebtedness that was permitted by the
Indentures to be incurred (including Indebtedness previously incurred pursuant
to this clause (k)); or (l) production imbalances arising in the ordinary course
of business and consistent with past practices.
The Indentures will provide that the Company will not permit any
Unrestricted Subsidiary to incur any Indebtedness other than Non-Recourse Debt;
provided, however, if any such Indebtedness ceases to be Non-Recourse Debt, such
event shall be deemed to constitute an incurrence of Indebtedness by the Company
or a Subsidiary Guarantor of the Company.
No Layering
The Indentures will provide that (i) the Company will not incur, create,
issue, assume, guarantee or otherwise become liable for any Indebtedness that is
subordinate or junior in right of payment to any Senior Debt and senior in any
respect in right of payment to the Notes and (ii) the Parent and the Subsidiary
Guarantors will not directly or indirectly incur, create, issue, assume,
guarantee or otherwise become liable for any Indebtedness that is subordinate or
junior in right of payment to any guarantees issued in respect of Senior Debt
and senior in any respect in right of payment to the Guarantees; provided,
however, that the foregoing limitations will not apply to distinctions between
categories of Indebtedness that exist by reason of any Liens arising or created
in respect of some but not all such Indebtedness.
Liens
The Indentures will provide that the Company will not, and will not permit
any of its Subsidiaries to, create, incur, assume or otherwise cause or suffer
to exist or become effective any Lien (other than Permitted Liens) upon any of
its property or assets, now owned or hereafter acquired, securing any
Indebtedness (other than Senior Debt), unless prior to or contemporaneously
therewith the Notes are directly secured equally and ratably; provided, that (i)
if such secured Indebtedness is Pari Passu Indebtedness, the Lien securing such
Pari Passu Indebtedness shall be subordinate and junior to, or pari passu with,
the Lien securing the Notes and (ii) if such secured Indebtedness is
Subordinated Indebtedness, the Lien securing such Subordinated Indebtedness
shall be subordinate and junior to the Lien securing the Notes at least to the
same extent as such Subordinated Indebtedness is subordinated to the Notes.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Indentures will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to (i)(a) pay dividends
or make any other distributions to the Company or any of its Restricted
Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest
or participation in, or measured by, its profits or (b) pay any Indebtedness
owed by it to the Company or any of its Restricted Subsidiaries, (ii) make loans
or advances to the Company or any of its Restricted Subsidiaries or (iii)
transfer any of its properties or assets to the Company or any of its Restricted
Subsidiaries, except for such encumbrances or restrictions existing under or by
reason of (a) the Credit Agreement as in effect as of the date of the
Indentures, and any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings thereof or any
other Credit Facility; provided, that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements,
refinancings or other Credit Facilities are no more restrictive with respect to
such dividend and other payment restrictions than those contained in the Credit
Agreement as in effect on the date of the Indentures, (b) the Indentures and the
Notes, (c) applicable law, (d) any instrument governing Indebtedness or Capital
Stock of a Person acquired by the Company or any of its Restricted Subsidiaries
as in effect at the time of such acquisition (except, in the case of
Indebtedness, to the extent such Indebtedness was
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incurred in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person and its Subsidiaries or the property
or assets of the Person and its Subsidiaries so acquired; provided, that, in the
case of Indebtedness, such Indebtedness was permitted by the terms of the
Indentures to be incurred, (e) by reason of customary non-assignment provisions
in leases entered into in the ordinary course of business and consistent with
past practices, (f) capital leases and purchase money obligations for property
leased or acquired in the ordinary course of business that impose restrictions
of the nature described in clause (iii) above on the property so leased or
acquired, (g) restrictions in the form of Liens which are not prohibited
pursuant to the "Liens" covenant and which are customary limitations on the
transfer of collateral and customary restrictions contained in stock purchase
agreements or asset sale agreements limiting the transfer of assets pending the
closing of the sale or (h) Permitted Refinancing Debt; provided, that the
restrictions contained in the agreements governing such Permitted Refinancing
Debt are no more restrictive than those contained in the agreements governing
the Indebtedness being refinanced.
Merger, Consolidation, or Sale of Substantially All Assets
The Indentures will provide that the Company may not consolidate or merge
with or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets, in one or more related transactions, to another
Person, and the Company may not permit any of its Restricted Subsidiaries to
enter into any such transaction or series of transactions if such transaction or
series of transactions would, in the aggregate, result in a sale, assignment,
transfer, lease, conveyance, or other disposition of all or substantially all of
the properties or assets of the Company to another Person, unless (i) the
Company is the surviving corporation of any such consolidation or merger or (a)
the Person formed by or surviving any such consolidation or merger (if other
than the Company) or to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made (the "Surviving Entity") is a
corporation organized or existing under the laws of the United States, any state
thereof or the District of Columbia and (b) such Surviving Entity assumes all
the obligations of the Company under the Notes and the Indentures pursuant to a
supplemental indenture for each Indenture in a form reasonably satisfactory to
the applicable Trustee, (ii) immediately before and after giving effect to such
transaction no Default or Event of Default exists, (iii) immediately after
giving effect to such transaction on a pro forma basis (and treating any
Indebtedness not previously an obligation of the Company or any Subsidiary
Guarantor which becomes the obligation of the Company or any Subsidiary
Guarantor as a result of such transaction as having been incurred at the time of
such transaction), the Consolidated Net Worth of the Company or the Surviving
Entity (if the Company is not the continuing obligor under the Indentures) is
equal to or greater than the Consolidated Net Worth of the Company immediately
prior to such transaction and (iv) except in the case of a merger of the Company
with or into a Wholly Owned Restricted Subsidiary of the Company, the Company or
the Surviving Entity (if the Company is not the continuing obligor under the
Indentures) will, at the time of such transaction and after giving pro forma
effect thereto as if such transaction had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the test set forth in the first paragraph of
the covenant described above under the caption "-- Incurrence of Indebtedness
and Issuance of Disqualified Stock."
Transactions with Affiliates
The Indentures will provide that the Company will not, and will not permit
any of its Subsidiaries to, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any of
its Affiliates (each of the foregoing, an "Affiliate Transaction"), unless (i)
such Affiliate Transaction is on terms that are no less favorable to the Company
or such Subsidiary, as the case may be, than would be available in a comparable
transaction in arm's-length dealings with an unrelated third party or, in the
event no comparable transaction with an unaffiliated third party is available,
on terms that are fair from a financial point of view to the Company or such
Subsidiary, as the case may be, (ii) with respect to an Affiliate Transaction or
series of related Affiliate Transactions involving payments in excess of
$1,000,000 in the aggregate, the Company delivers an Officers' Certificate to
the Trustees certifying that such Affiliate Transaction complies with clause (i)
above, (iii) with respect to an Affiliate Transaction or series of related
Affiliate Transactions involving payments in excess of $5,000,000 but less than
$15,000,000 in the aggregate, the Company delivers an Officers' Certificate to
the Trustees certifying that (a) such Affiliate Transaction or series of related
Affiliate Transactions complies with clause (i) above and
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(b) such Affiliate Transaction or series of related Affiliate Transactions has
been approved by a resolution adopted by a majority of the directors of the
Company who are disinterested in such Affiliate Transaction or series of related
Affiliate Transactions (which resolution shall be conclusive evidence of
compliance with this provision) and (iv) with respect to an Affiliate
Transaction or series of related Affiliate Transactions involving payments of
$15,000,000 or more in the aggregate, (A) the Company delivers an Officers'
Certificate to the Trustees certifying that (a) such transaction or series of
related transactions complies with clause (i) above and (b) such Affiliate
Transaction or series of related Affiliate Transactions has been approved by a
resolution adopted by a majority of the members of the Board of Directors of the
Company who are disinterested in such Affiliate Transaction and (B) the Company
shall have received a written opinion of a firm of investment bankers nationally
recognized in the United States that such Affiliate Transaction or series of
related Affiliate Transactions is fair from a financial point of view to the
Company or such Subsidiary (which resolution and fairness opinion shall be
conclusive evidence of compliance with this provision); provided, however, that
the foregoing restrictions shall not apply to (1) the Recapitalization, the
payment of fees, expenses and indemnifications under the Stock Purchase
Agreement (as described under "Description of the Stock Purchase Agreement and
the Rights Offering -- The Stock Purchase Agreement") or any transaction
effected pursuant to the terms of the Series A Preferred Stock or Series B
Preferred Stock of the Parent as in effect on the date of the Indentures, (2)
Permitted Investments and Restricted Payments that are permitted by the
provisions of the Indentures described above under the caption "-- Restricted
Payments," (3) loans or advances to officers, directors and employees of the
Company or any Subsidiary made in the ordinary course of business and consistent
with past practices of the Company and its Subsidiaries not to exceed in the
aggregate at any one time outstanding $2.5 million, (4) the payment of
reasonable and customary regular fees to directors of the Company or any of its
Subsidiaries who are not employees of the Company or any Subsidiary, (5) any
indemnification or similar payment made to any director or officer (A) in
accordance with the corporate charter or bylaws of the Company or any
Subsidiary, (B) under any agreement or (C) under applicable law, (6) obligations
of the Company or any Subsidiary under employee compensation and other benefit
arrangements entered into or provided for in the ordinary course of business 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
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<PAGE> 79
is not permitted to file such reports, documents and information with the
Commission, the Company will provide substantially similar information to the
Trustees, the Holders and prospective Holders (upon request) as if the Company
were subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act. The Company will be deemed to have satisfied such requirements if
the Parent files and provides reports, documents and information of the types
otherwise so required, in each case within the applicable time periods, and the
Company is not required to file such reports, documents and information
separately under the applicable rules and regulations of the Commission (after
giving effect to any exemptive relief) because of the filings by the Parent. The
Company also will comply with the other provisions of Section 314(a) of the
Trust Indenture Act.
EVENTS OF DEFAULT AND REMEDIES
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) the failure by the Company for 60 consecutive days after notice
from the applicable Trustee or the Holders of at least 25% in aggregate
principal amount of the Senior Subordinated Notes or the Discount Notes then
outstanding to comply with any of its other agreements in the applicable
Indenture or such Notes; (vi) except as permitted by the Indentures, any
Guarantee shall be held in any judicial proceeding to be unenforceable or
invalid or shall cease for any reason to be in full force and effect or the
Parent or a Subsidiary Guarantor, or any Person acting on behalf of the Parent
or a Subsidiary Guarantor, shall deny or disaffirm its obligations under its
Guarantee; (vii) the failure by the Parent to issue Preferred Stock for gross
proceeds in the amount of $132 million pursuant to the Rights Offering and
Standby Commitment or either thereof within 90 days following the date of
issuance of the Notes; (viii) a default under any mortgage, indenture or
instrument under which there may be issued or by which there may be secured or
evidenced any Indebtedness for money borrowed by the Company or any Subsidiary
Guarantor, whether such Indebtedness now exists or is created after the date of
the Indentures, which default (a) is caused by a failure to pay such
Indebtedness within any applicable grace period after final maturity (a "Payment
Default") or (b) results in the acceleration of such Indebtedness prior to its
final maturity and, in each case, the principal amount of such Indebtedness,
together with the principal amount of any other such Indebtedness under which
there is then existing a Payment Default or the maturity of which has been so
accelerated, aggregates $10.0 million or more; provided, that if any such
default is cured or waived or any such acceleration rescinded, or such
Indebtedness is repaid, within a period of 10 days from the continuation of such
default beyond the applicable grace period or the occurrence of such
acceleration, as the case may be, such Event of Default under the Indentures and
any consequential acceleration of the Notes shall be automatically rescinded;
(ix) final judgments or orders rendered against the Company or any Restricted
Subsidiary that are unsatisfied and that require the payment in money, either
individually or in an aggregate amount, that is more than $10,000,000 over the
coverage under applicable insurance policies and either (a) commencement by any
creditor of an enforcement proceeding upon such judgment (other than a judgment
that is stayed by reason of pending appeal or otherwise) or (b) the occurrence
of a 60-day period during which a stay of such judgment or order, by reason of
pending appeal or otherwise, was not in effect; and (x) certain events of
bankruptcy or insolvency with respect to the Parent, the Company or any
Subsidiary Guarantor.
If any Event of Default occurs and is continuing, the applicable Trustee or
the Holders of at least 25% in principal amount of the applicable Notes then
outstanding may declare the principal of and accrued but unpaid interest on such
Notes or, in the case of the Discount Notes prior to , 2001, the
Accreted Value of such Discount Notes, to be due and payable immediately. If
payment of the Notes is accelerated because of an Event of Default, the Company
or the applicable Trustee shall notify the holders of the Designated Senior
Indebtedness of the acceleration. The Company may not pay the Notes until five
business days after such holders receive such notice of acceleration and,
thereafter, may pay the Notes only to the extent the subordination provisions of
the Indentures permit such payment. Notwithstanding the foregoing, in the case
of an Event of Default arising from certain events of bankruptcy or insolvency
with respect to the Parent, the
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<PAGE> 80
Company or any Subsidiary Guarantor, all outstanding Notes will become due and
payable without further action or notice. Holders of the Senior Subordinated
Notes or the Discount Notes, as the case may be, may not enforce the applicable
Indenture or such Notes except as provided in the applicable Indenture. Subject
to certain limitations, Holders of a majority in principal amount of the
applicable Notes then outstanding may direct the relevant Trustee in its
exercise of any trust or power. Each Trustee may withhold from Holders of the
applicable Notes notice of any continuing Default or Event of Default (except a
Default or Event of Default relating to the payment of principal or interest) if
it determines that withholding notice is in the interest of such Holders.
After a declaration of acceleration under an Indenture, but before a
judgment or decree for payment of the money due has been obtained by the
applicable Trustee, Holders of a majority in principal amount of the applicable
Notes then outstanding, by written notice to the Company and the applicable
Trustee, may rescind such declaration if (i) the Company, the Parent or any
Subsidiary Guarantor has paid or deposited with the applicable Trustee a sum
sufficient to pay (a) all sums paid or advanced by such Trustee under the
applicable Indenture and the reasonable compensation, expenses, disbursements
and advances of such Trustee, its agents and counsel and (b) all overdue
interest on the applicable Notes, if any, (ii) the rescission would not conflict
with any judgment or decree of a court of competent jurisdiction and (iii) all
Events of Default, other than the nonpayment of principal of, premium, if any,
and interest on the applicable Notes that has become due solely by such
declaration of acceleration, have been cured or waived.
The Holders of a majority in aggregate principal amount of the Senior
Subordinated Notes or the Discount Notes, as the case may be, then outstanding
by notice to the relevant Trustee may on behalf of the Holders of all of such
Notes waive any existing Default or Event of Default and its consequences under
the relevant Indenture except a continuing Default or Event of Default in the
payment of interest or premium on, or the principal of, such Notes.
The Company is required to deliver to each Trustee annually a statement
regarding compliance with the relevant Indenture, and the Company is required,
within five business days after becoming aware of any Default or Event of
Default, to deliver to the Trustees a statement specifying such Default or Event
of Default.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations and the obligations of the 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
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case may be, Holders of the outstanding applicable Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred, (iii) in the case of Covenant Defeasance, the
Company or the Parent shall have delivered to the applicable Trustee an opinion
of counsel reasonably acceptable to such Trustee confirming that Holders of the
outstanding applicable Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not occurred,
(iv) no Default or Event of Default shall have occurred and be continuing on the
date of such deposit (other than a Default or Event of Default resulting from
the borrowing of funds to be applied to such deposit) or, insofar as Events of
Default from bankruptcy or insolvency events are concerned, no such Event of
Default shall have occurred at any time during the period ending on the 91st day
after the date of such deposit, (v) such Legal Defeasance or Covenant Defeasance
will not result in a breach or violation of, or constitute a default under any
material agreement or instrument (other than the relevant Indenture) to which
the Company, the Parent or any of their respective Subsidiaries is a party or by
which the Company, the Parent or any of their respective Subsidiaries is bound
and (vi) the Company and the Parent must deliver to the applicable Trustee an
Officers' Certificate and an opinion of counsel, each stating that all
conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indentures.
The applicable registrar of the Notes and the applicable Trustee may require a
Holder, among other things, to furnish appropriate endorsements and transfer
documents, and the Company may require a Holder to pay any taxes and fees
required by law or permitted by the applicable Indenture. The Company is not
required to transfer or exchange any Note selected for redemption. Also, the
Company is not required to transfer or exchange any Note for a period of 15 days
before a selection of the Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of such Note
for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, each Indenture or
the Senior Subordinated Notes or the Discount Notes, 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
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the consent of the Holders of at least 66 2/3% in aggregate principal amount of
the Senior Subordinated Notes or the Discount Notes, as the case may be, then
outstanding if such amendment would adversely affect the rights of Holders of
such Notes. However, no amendment may be made to the subordination provisions of
the Indentures that adversely affects the rights of any holder of Senior Debt
then outstanding unless the holders of such Senior Debt (or any group or
representative thereof authorized to give a consent) consent to such change.
Notwithstanding the foregoing, without the consent of any Holder of the
Senior Subordinated Notes or the Discount Notes, as the case may be, the Company
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, % of the offering price of the stated
principal amount of such Discount Note, and as of any date after such date of
issuance and prior to , 2001 as of which the Accreted Value is being
calculated (the "Calculation Date"), (a) if the Calculation Date is 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) % 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
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of each and prior to , 2001 shall be an amount in
dollars equal to a percentage of the stated principal amount of such Discount
Note as set forth below:
<TABLE>
<CAPTION>
PMT. DATE PMT. DATE
--------- ---------
<S> <C> <C>
1996................................................... % %
1997................................................... % %
1998................................................... % %
1999................................................... % %
2000................................................... % %
2001................................................... % %
</TABLE>
On and after , 2001, the Accreted Value of each Discount Note shall
be equal to 100% of the stated principal amount thereof.
"Acquired Debt" means, with respect to any specified Person or any
Subsidiary of such specified Person, (i) Indebtedness of any other Person
existing at the time such other Person is merged with or into or became a
Subsidiary of such specified Person, including, without limitation, Indebtedness
incurred in connection with, or in contemplation of, such other Person merging
with or into or becoming a Subsidiary of such specified Person, and (ii)
Indebtedness secured by a Lien encumbering any asset acquired by such specified
Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided, beneficial
ownership of 10% or more of the voting securities of a Person shall be deemed to
be control; further provided, however, that in no event shall any limited
partner of DNR-MESA Holdings, L.P. that is a beneficial owner (within the
meaning of Rule 13d-3 under the Exchange Act) of less than 10% of the aggregate
voting power of the Capital Stock of the Company or the Parent be deemed to be
an Affiliate of the Company or the Parent.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition (but
excluding the creation of a Lien) by the Company or any of its Restricted
Subsidiaries of any assets including, without limitation, by way of a sale and
leaseback; provided, that the sale, lease, conveyance or other disposition of
all or substantially all of the assets of the Company and its Subsidiaries taken
as a whole will be governed by the provisions of the Indentures described above
under the caption "-- Repurchase at the Option of Holders -- Change of Control"
and/or the provisions described above under the caption "-- Certain
Covenants -- Merger, Consolidation, or Sale of Substantially All Assets" and not
by the provisions described above under "-- Repurchase at the Option of
Holders -- Asset Sales", and (ii) the issue or sale by the Company or any of its
Restricted Subsidiaries of Equity Interests in any of the Company's Subsidiaries
(including the sale by the Company or a Restricted Subsidiary of Equity
Interests in an Unrestricted Subsidiary), in the case of either clause (i) or
(ii), whether in a single transaction or a series of related transactions (a)
that have a fair market value in excess of $5.0 million or (b) for net proceeds
in excess of $5.0 million. Notwithstanding the foregoing, the following shall
not be deemed to be Asset Sales: (1) a transfer of assets by the Company to a
Restricted Subsidiary of the Company or by a Restricted Subsidiary of the
Company to the Company or to another Restricted Subsidiary of the Company (in
the case of a transfer to a Subsidiary that is not a Wholly Owned Restricted
Subsidiary, transfers will be excluded from the determination of "Asset Sales"
only to the extent of the Company's or the Restricted Subsidiary's interest in
such Subsidiary after giving effect to such transfer); (2) an issuance of Equity
Interests by a Restricted Subsidiary of the Company to the Company or to another
Restricted Subsidiary of the Company (in the case of an issuance of Equity
Interests to a Subsidiary that is not a Wholly Owned Restricted Subsidiary,
issuances will be excluded from the determination of "Asset Sales" only to the
extent of the Company's or the Restricted Subsidiary's interest in such
Subsidiary after giving effect to such issuance); (3) a Restricted Payment that
is permitted by the covenant described above under the caption "-- Certain
Covenants -- Restricted Payments" or a Permitted Investment; (4) the
abandonment, farm-out, lease or sublease of undeveloped oil and gas properties
in the ordinary course of business; (5) the trade or exchange by the Company or
any Restricted Subsidiary of the Company of any oil and gas property owned or
held by the Company or such Restricted Subsidiary for any oil and gas property
owned or held by another Person, which the Board of Directors of the Company
determine in good faith to be of approximately equivalent value; (6) the
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sale or transfer in the ordinary course of business of hydrocarbons or other
mineral products or other inventory or surplus or obsolete equipment; or (7)
sale of hydrocarbons pursuant to Permitted Marketing Obligations.
"Attributable Debt" in respect of a sale and leaseback transaction means, at
the time of determination, the present value (discounted at the rate of interest
implicit in such transaction, determined in accordance with GAAP) of the
obligation of the lessee for net rental payments during the remaining term of
the lease included in such sale and leaseback transaction (including any period
for which such lease has been extended, to the extent the lease payments during
such extension period are required to be capitalized on a balance sheet in
accordance with GAAP).
"Bankruptcy Code" means Title 11 of the United States Code, as amended.
"Borrowing Base" means, as of any date, the aggregate amount of borrowing
availability as of such date under all Credit Facilities that determine
availability on the basis of a borrowing base or other asset-based calculation;
provided, that in no event shall the Borrowing Base exceed $600 million.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than six
months from the date of acquisition, (iii) certificates of deposit and
eurodollar time deposits with maturities of six months or less from the date of
acquisition, bankers' acceptances with maturities not exceeding six months and
overnight bank deposits, in each case with any lender party to the Credit
Agreement or with any domestic commercial bank having capital and surplus in
excess of $500 million and a Thompson Bank Watch Rating of "B" or better, (iv)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clauses (ii) and (iii) above entered into
with any financial institution meeting the qualifications specified in clause
(iii) above, (v) commercial paper having a rating of at least Pl from Moody's or
a rating of at least Al from S&P and (vi) money market mutual or similar funds
having assets in excess of $100,000,000.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole or the Parent and its Subsidiaries taken as a whole to any "person" (as
such term is used in Section 13(d)(3) of the Exchange Act) other than a
Permitted Investor; (ii) the adoption by the shareholders of the Company or the
Parent of a plan relating to the liquidation or dissolution of the Company or
the Parent; or (iii) after no shares of the Series B Preferred Stock remain
outstanding (a) Continuing Directors cease for any reason to constitute a
majority of the members of the Board of Directors of the Company or the Parent
for a period of two consecutive years or (b) an event or series of events by
which any Person or other entity, other than a Permitted Investor, or any group
of Persons or other entities acting in concert as a partnership or other group,
other than a group of Permitted Investors, shall, as a result of a tender or
exchange offer, open market purchases, privately negotiated purchases, merger,
consolidation or otherwise, have become the beneficial owner (within the meaning
of Rule 13d-3 under the Exchange Act) of 35% or more of the aggregate voting
power of the then outstanding Capital Stock of the Parent having the right to
elect directors under ordinary circumstances.
"Commission" means the Securities and Exchange Commission.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person and its Restricted Subsidiaries for
such period, plus (i) an amount equal to any extraordinary loss plus any net
loss realized in connection with an Asset Sale (together with any related
provision for taxes), to the extent such losses were included in computing such
Consolidated Net Income, plus (ii) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries for such period, to the
extent that such provision for taxes was included in computing such Consolidated
Net Income, plus (iii) consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued
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(including, without limitation, amortization of original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of letters
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Interest Rate Hedging Agreements), to the extent that any such expense was
included in computing such Consolidated Net Income, plus (iv) depreciation,
depletion and amortization expenses (including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash expenses that were
paid in a prior period) for such Person and its Restricted Subsidiaries for such
period to the extent that such depreciation, depletion and amortization expenses
were included in computing such Consolidated Net Income, plus (v) exploration
expenses for such Person and its Restricted Subsidiaries for such period to the
extent such exploration expenses were included in computing such Consolidated
Net Income, plus (vi) other non-cash charges (excluding any such non-cash charge
to the extent that it represents an accrual of or reserve for cash charges in
any future period or amortization of a prepaid cash expense that was paid in a
prior period) of such Person and its Restricted Subsidiaries for such period to
the extent that such other non-cash charges were included in computing such
Consolidated Net Income, in each case, on a consolidated basis and determined in
accordance with GAAP. Notwithstanding the foregoing, the provision for taxes on
the income or profits of, and the depreciation, depletion and amortization,
exploration expenses and other non-cash charges and expenses of, a Restricted
Subsidiary of the referent Person shall be added to Consolidated Net Income to
compute Consolidated Cash Flow only to the extent (and in the same proportion)
that the Net Income of such Restricted Subsidiary was included in calculating
the Consolidated Net Income of such Person and only if a corresponding amount
would be permitted at the date of determination to be dividended to the Company
by such Restricted Subsidiary without prior governmental approval (that has not
been obtained), and without direct or indirect restriction pursuant to the terms
of its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to that Restricted
Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided,
that (i) the Net Income (but not loss) of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions paid in
cash to the referent Person or a Restricted Subsidiary thereof, (ii) the Net
Income of any Restricted Subsidiary shall be excluded to the extent that the
declaration or payment of dividends or similar distributions by that Restricted
Subsidiary of that Net Income is not at the date of determination permitted
without any prior governmental approval (that has not been obtained) or,
directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Restricted Subsidiary or its stockholders, (iii)
the Net Income of any Person acquired in a pooling of interests transaction for
any period prior to the date of such acquisition shall be excluded and (iv) the
cumulative effect of a change in accounting principles shall be excluded.
Notwithstanding the foregoing, for the purpose of the covenant described under
"Certain Covenants -- Limitation on Restricted Payments" only, there shall be
excluded from Consolidated Net Income any dividends or other distributions paid
in cash by Unrestricted Subsidiaries to the referent Person or a Restricted
Subsidiary thereof to the extent such dividend or other distributions increase
the amount of Restricted Payments under such covenant pursuant to clause
(c)(4)(A) thereof.
"Consolidated Net Worth" means the total of the amounts shown on the balance
sheet of the Company and its consolidated Restricted Subsidiaries, determined on
a consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending prior to the taking of any action for the
purpose of which the determination is being made and for which financial
statements are available (but in no event ending more than 135 days prior to the
taking of such action), as (i) the par or stated value of all outstanding
Capital Stock of the Company, plus (ii) paid-in capital or capital surplus
relating to such Capital Stock, plus (iii) any retained earnings or earned
surplus, less (a) any accumulated deficit and (b) any amounts attributable to
Disqualified Stock.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company or the Parent, as the case may be, who (i)
was a member of such Board of Directors immediately after the first date on
which no shares of Series B Preferred Stock were outstanding or (ii) was
nominated for election or elected to such Board of Directors with the approval
of (a) a majority of the Continuing Directors who were members of such Board at
the time of such nomination or election or (b) a majority of those directors who
were previously approved by Continuing Directors.
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"Credit Agreement" means that certain Credit Agreement, dated as of
, 1996, by and among the Company, the Parent, Chase, as
administrative agent and as a lender, Bankers Trust, as syndication agent and as
a lender, Societe General, as documentation agent and as a lender, and certain
banks, financial institutions and other entities, as lenders, providing for up
to $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.
"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 Indebtedness of the Parent and its Subsidiaries in
existence after giving effect to the application of the proceeds of the
Recapitalization on the First Closing Date, in an aggregate principal amount not
to exceed $12.9 million, together with all accrued and unpaid interest thereon
and all premiums payable with respect thereto until such amounts are repaid.
"Fixed Charge Coverage Ratio" means, with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
Company or any of its Restricted Subsidiaries incurs, assumes, guarantees or
redeems or pays any Indebtedness (other than revolving credit borrowings) or
issues or redeems Disqualified Stock subsequent to the commencement of the
period for which the Fixed Charge Coverage Ratio is being calculated but prior
to the date on which the calculation of the Fixed Charge Coverage Ratio is made
(the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be
calculated giving pro forma effect to such incurrence, assumption, guarantee or
redemption or payment of Indebtedness, or such issuance or redemption of
Disqualified Stock, as if the same had occurred at the beginning of the
applicable four-quarter reference period. In addition, for purposes of making
the computation referred to above, (i) acquisitions that have been made by the
Company or any of its Restricted Subsidiaries, including through mergers or
consolidations and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period and on or
prior to the Calculation Date (including, without limitation, any acquisition to
occur on the Calculation Date) shall be deemed to have occurred on the first day
of the four-quarter reference period and Consolidated Cash Flow for such
reference period shall be calculated without giving effect to clause (iii) of
the proviso set forth in the definition of Consolidated Net Income, (ii) the net
proceeds of Indebtedness incurred or Disqualified Stock issued by the Company or
any of its Restricted Subsidiaries pursuant to the first paragraph of the
covenant described under the caption "-- Certain Covenants -- Incurrence of
Indebtedness
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and Issuance of Disqualified Stock" during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date
shall be deemed to have been received by the Company or any such Restricted
Subsidiary on the first day of the four-quarter reference period and applied to
its intended use on such date, (iii) the Consolidated Cash Flow attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded and
(iv) the Fixed Charges attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, but only to the extent that the obligations
giving rise to such Fixed Charges will not be obligations of the referent Person
or any of its Restricted Subsidiaries following the Calculation Date.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether paid or accrued (including,
without limitation, amortization of original issue discount, non-cash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease Obligations,
imputed interest with respect to Attributable Debt, commissions, discounts and
other fees incurred in respect of letter of credit or bankers' acceptance
financings), (ii) the consolidated interest expense of such Person and its
Restricted Subsidiaries that was capitalized during such period, (iii) any
interest expense on Indebtedness of another Person that is guaranteed by such
Person or any of its Restricted Subsidiaries or secured by a Lien on assets of
such Person or any of its Restricted Subsidiaries (whether or not such guarantee
or Lien is called upon) and (iv) all cash dividend payments (and non-cash
dividend payments (unless paid in Equity Interests which are not Disqualified
Stock) in the case of a Person that is a Restricted Subsidiary) on any series of
preferred stock of such Person or any of its Restricted Subsidiaries owned by
Persons other than the Company or a Restricted Subsidiary.
For purposes of the definition of Fixed Charges, (i) interest on a Capital
Lease Obligation shall be deemed to accrue at an interest rate reasonably
determined by the Board of Directors of such Person (as evidenced by a
resolution of the Board of Directors of the Company) to be the rate of interest
implicit in such Capital Lease Obligation in accordance with GAAP, (ii) interest
on Indebtedness that is determined on a fluctuating basis shall be deemed to
have accrued at a fixed rate per annum equal to the rate of interest of such
Indebtedness in effect on the date Fixed Charges are being calculated, subject
to the proviso in clause(iii), (iii) interest on Indebtedness that may
optionally be determined at an interest rate based upon a factor of a prime or
similar rate, a eurocurrency interbank offered rate, or other rate, shall be
deemed to have been based upon the rate actually chosen, or, if none, then based
upon such optional rate chosen as the Company may designate, (provided, that for
the period following the date on which the rate actually chosen ceases to be in
effect, the Company may designate an optional rate other than that actually
chosen, which optional rate shall be deemed to accrue at a fixed per annum equal
to the rate of interest on such optional rate in effect on the date Fixed
Charges are being calculated) and (iv) Fixed Charges shall be increased or
reduced by the net cost (including amortization of discount) or benefit
associated with obligations under Interest Rate Hedging Agreements attributable
to such period.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Indebtedness" means, with respect to any Person, without duplication, (i)
any indebtedness of such Person, whether or not contingent, (a) in respect of
borrowed money, (b) evidenced by bonds, notes, debentures or similar
instruments, (c) evidenced by letters of credit (or reimbursement agreements in
respect thereof) or banker's acceptances, (d) representing Capital Lease
Obligations, (e) representing the balance deferred and unpaid of the purchase
price of any property, except any such balance that constitutes an accrued
expense or trade payable, (f) representing any obligations in respect of
Interest Rate Hedging Agreements or Oil and Gas Hedging Contracts and (g) in
respect of any Production Payment, (ii) all indebtedness of others of the type
referred to in clause (i), (iii), (iv) or (v) secured by a Lien on any asset of
such Person (whether or not such indebtedness is assumed by such Person, except
that the amount of such indebtedness not assumed shall be deemed to be the
lesser of the value of such asset and the amount of such indebtedness so
secured),
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(iii) obligations of such Person in respect of production imbalances, (iv)
Attributable Debt of such Person, (v) Acquired Debt of such Person and (vi) to
the extent not otherwise included in the foregoing, the guarantee by such Person
of any indebtedness of any other Person of the type referred to in the preceding
clause (i), (iii), (iv) or (v).
"Interest Rate Hedging Agreements" means, with respect to any Person, the
obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements and (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in interest rates.
"Investments" means, with respect to any Person, all investments by such
Person (including investments by such Person in Affiliates) in the form of
direct or indirect loans (including guarantees of Indebtedness or other
obligations, but excluding trade credit and other ordinary course advances
customarily made in the Oil and Gas Business), advances or capital contributions
(excluding commission, travel and similar advances to officers and employees
made in the ordinary course of business), purchases or other acquisitions for
consideration of Indebtedness, Equity Interests or other securities, together
with all items that are or would be classified as investments on a balance sheet
prepared in accordance with GAAP; provided, that the following shall not
constitute Investments: (i) an acquisition of assets, Equity Interests or other
securities by the Company for consideration consisting of Equity Interests
(other than Disqualified Stock) in the Company; (ii) Interest Rate Hedging
Agreements entered into in accordance with the limitations set forth in clause
(h) of the second paragraph of the covenant described under the caption
"-- Certain Covenants -- Incurrence of Indebtedness and Issuance of Disqualified
Stock;" (iii) Oil and Gas Hedging Contracts entered into in accordance with the
limitations set forth in clause (i) of the second paragraph of the covenant
described under the caption "-- Certain Covenants -- Incurrence of Indebtedness
and Issuance of Disqualified Stock;" and (iv) Permitted Marketing Transactions.
If the Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted Subsidiary
of the Company (other than MEV) such that, after giving effect to any such sale
or disposition, such Person is no longer a Subsidiary of the Company, the
Company shall be deemed to have made an Investment on the date of any such sale
or disposition equal to the fair market value of the Equity Interests of such
Subsidiary not sold or disposed of.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction).
"Liquid Securities" means securities (i) of an issuer that is not an
Affiliate of the Company and (ii) that are publicly traded on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market; provided,
that securities meeting the requirements of clauses (i) and (ii) above shall be
treated as Liquid Securities from the date of receipt thereof until the earlier
of (a) the date on which such securities are sold or exchanged for cash or Cash
Equivalents and (b) 180 days following the date of the closing of the Asset Sale
in connection with which such Liquid Securities were received. In the event such
securities are not sold or exchanged for cash or Cash Equivalents within such
180-day period, for purposes of determining whether the transaction pursuant to
which the Company or a Restricted Subsidiary received the securities was in
compliance with the covenant described under the caption "-- Repurchase at the
Option of Holders -- Asset Sales," such securities shall be deemed not to have
been Liquid Securities at any time.
"Material Restricted Subsidiary" means any Restricted Subsidiary of the
Company which, as of the relevant date of determination, would be a "significant
subsidiary" as defined in Reg. sec. 230.405 promulgated pursuant to the
Securities Act as in effect on the date of issuance of the Notes, assuming the
Company is the "registrant" referred to in such definition, except that the 10%
amounts referred to in such definition shall be deemed to be 5%.
"MEV" means Mesa Environmental Ventures Co. and its Subsidiaries.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain or loss,
together with any related provision for taxes on such gain or loss, realized in
connection with (a) any Asset Sale (including, without limitation, dispositions
pursuant to sale and leaseback
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transactions) or (b) the disposition of any securities by such Person or any of
its Restricted Subsidiaries or the extinguishment of any Indebtedness of such
Person or any of its Restricted Subsidiaries and (ii) any extraordinary or
nonrecurring gain or loss, together with any related provision for taxes on such
extraordinary or nonrecurring gain or loss.
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of
Liquid Securities or any other non-cash consideration received in any Asset
Sale, but excluding cash amounts placed in escrow, until such amounts are
released to the Company), net of the direct costs relating to such Asset Sale
(including, without limitation, legal, accounting and investment banking fees
and expenses, and sales commissions) and any relocation expenses incurred as a
result thereof, taxes paid or payable as a result thereof (after taking into
account any available tax credits or deductions and any tax sharing
arrangements), amounts paid to minority interest holders, amounts required to be
applied to the repayment of Indebtedness (other than Indebtedness under any
Credit Facility) secured by a Lien on the asset or assets that were the subject
of such Asset Sale and any reserve for adjustment in respect of the sale price
of such asset or assets established in accordance with GAAP and any reserve
established for future liabilities.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides any guarantee or credit
support of any kind (including any undertaking, guarantee, indemnity, agreement
or instrument that would constitute Indebtedness) or (b) is directly or
indirectly liable (as a guarantor or otherwise), (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Restricted Subsidiaries to declare a default under such
other Indebtedness or cause the payment thereof to be accelerated or payable
prior to its stated maturity and (iii) the explicit terms of which provide that
there is no recourse against any of the assets of the Company or its Restricted
Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Oil and Gas Business" means (i) the acquisition, exploration, exploitation,
development, operation and disposition of interests in oil, gas and other
hydrocarbon properties, (ii) the gathering, marketing, treating, processing,
storage, selling and transporting of any production from such interests or
properties, (iii) any business relating to or arising from exploration for or
development, production, treatment, processing, storage, transportation or
marketing of oil, gas and other minerals and products produced in association
therewith and (iv) any activity that is ancillary or necessary or desirable to
facilitate the activities described in clauses (i) through (iii) of this
definition.
"Oil and Gas Hedging Contracts" means any oil and gas purchase or hedging
agreement, and other agreement or arrangement, in each case, that is designed to
provide protection against oil and gas price fluctuations.
"Pari Passu Indebtedness" means Indebtedness that ranks pari passu in right
of payment to the Notes.
"Permitted Business Investments" means investments made in the ordinary
course of, and of a nature that is or shall have become customary in, the Oil
and Gas Business as a means of actively exploiting, exploring for, acquiring,
developing, processing, gathering, marketing or transporting oil and gas through
agreements, transactions, interests or arrangements which permit one to share
risks or costs, comply with regulatory requirements regarding local ownership or
satisfy other objectives customarily achieved through the conduct of Oil and Gas
Business jointly with third parties, including, without limitation, (i)
ownership interests in oil and gas properties, processing facilities, gathering
systems or ancillary real property interests and (ii) Investments in the form of
or pursuant to operating agreements, processing agreements, farm-in agreements,
farm-out agreements, development agreements, area of mutual interest agreements,
unitization agreements, pooling agreements, joint bidding agreements, service
contracts, joint venture agreements, partnership agreements (whether general or
limited), limited liability company agreements, subscription agreements, stock
purchase agreements and other similar agreements with third parties.
"Permitted Indebtedness" has the meaning given in the covenant described
under the caption "-- Certain Covenants -- Incurrence of Indebtedness and
Issuance of Disqualified Stock."
"Permitted Investments" means (i) any Investment in the Company or in a
Restricted Subsidiary of the Company, (ii) any Investment in Cash Equivalents or
securities issued or directly and fully guaranteed or
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insured by the United States government or any agency or instrumentality thereof
having maturities of not more than one year from the date of acquisition, (iii)
any Investment by the Company or any Restricted Subsidiary of the Company in a
Person if, as a result of such Investment and any related transactions that at
the time of such Investment are contractually mandated to occur, (a) such Person
becomes a Restricted Subsidiary of the Company or (b) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys all or
substantially all of its assets to, or is liquidated into, the Company or a
Restricted Subsidiary of the Company, (iv) any Investment made as a result of
the receipt of non-cash consideration from an Asset Sale that was made pursuant
to and in compliance with the covenant described above under the caption
"-- Repurchase at the Option of Holders -- Asset Sales," (v) other Investments
having an aggregate fair market value (measured on the date each such Investment
was made and without giving effect to subsequent changes in value), when taken
together with all other Investments made pursuant to this clause (v) that are at
the time outstanding, not to exceed $37.5 million, (vi) Permitted Business
Investments, (vii) any Investment acquired by the Company in exchange for Equity
Interests in the Company or the Parent (other than Disqualified Stock), (viii)
Investments in Unrestricted Subsidiaries with net cash proceeds contributed to
the common equity capital of the Company or a Restricted Subsidiary since the
date of the Indentures; provided, that the amount of any such net cash proceeds
that are used for any such Investment shall be excluded from clause (c)(2) of
the first paragraph of the covenant described under the caption "-- Certain
Covenants -- Restricted Payments" and (ix) Investments received in connection
with any good faith settlement of a bankruptcy proceeding.
"Permitted Investor" means any Person who is or was (i) a holder of shares
of the Series B Preferred Stock or (ii) an Affiliate of a Person described in
the immediately preceding clause (i).
"Permitted Liens" means (i) Liens securing Senior Debt under the Credit
Agreement, (ii) Liens securing Indebtedness of a Subsidiary and Liens securing
Senior Debt, in each case, that is outstanding on the date of issuance of the
Notes (after giving effect to the Recapitalization and the use of the proceeds
therefrom) and Liens securing Senior Debt that is permitted by the terms of the
Indentures to be incurred, (iii) Liens in favor of the Company or any Restricted
Subsidiary, (iv) Liens on property or assets existing at the time of acquisition
thereof by the Company or any Subsidiary of the Company and Liens on property or
assets of a Subsidiary existing at the time it became a Subsidiary; provided,
that such Liens were in existence prior to the contemplation of the acquisition
and do not extend to any property or assets other than the acquired property or
assets or the property or assets of the acquired Subsidiary, (v) Liens incurred
or deposits made in the ordinary course of business in connection with workers'
compensation, unemployment insurance or other kinds of social security, or to
secure the payment or performance of tenders, statutory or regulatory
obligations, surety or appeal bonds, bids, leases, government contracts and
other contracts (other than for borrowed money), performance and return-of-money
bonds or other obligations of a like nature incurred in the ordinary course of
business (including, without limitation, lessee or operator obligations under
statutes, governmental regulations or instruments related to the ownership,
exploration and production of oil, gas and minerals on state or federal lands or
waters), (vi) Liens existing on the date of the Indentures (after giving effect
to the Recapitalization and the use of proceeds therefrom), (vii) Liens for
taxes, assessments and governmental charges and claims that are not yet
delinquent or that are being contested in good faith by appropriate proceedings
promptly instituted and diligently concluded; provided, that any reserve or
other appropriate provision as shall be required in conformity with GAAP shall
have been made therefor, (viii) statutory liens of landlords, mechanics,
suppliers, vendors, warehousemen, carriers and other like Liens arising in the
ordinary course of business, (ix) pre-judgment Liens and judgment Liens not
giving rise to an Event of Default so long as any appropriate legal proceeding
that may have been duly initiated for the review of such judgment shall not have
been finally terminated or the period within which such proceeding may be
initiated shall not have expired, (x) Liens on, or related to, properties or
assets to secure all or part of the costs incurred in the ordinary course of the
Oil and Gas Business for the exploration, drilling, development, production,
processing, transportation, marketing or storage or operation thereof and to
support trade letters of credit and bankers' acceptances issued or created in
the ordinary course of business, (xi) Liens encumbering pipelines or pipeline
facilities that arise under operation of law, (xii) Liens arising under
operating agreements, joint venture agreements, partnership agreements, oil and
gas leases, farm-out agreements, division orders, contracts for the sale,
transportation or exchange of oil or natural gas, unitization and pooling
declarations and agreements, area of mutual interest agreements and other
agreements that are customary in the Oil and Gas Business, (xiii) Liens reserved
in oil and gas mineral leases for bonus and rental payments and for compliance
with the terms of such leases, (xiv) Liens constituting survey exceptions,
encumbrances, easements, and reservations of, and rights to others for,
rights-of-way, zoning and other restrictions as to the
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use of real properties, and minor defects of title which, in the case of any of
the foregoing, do not secure the payment of borrowed money, and in the aggregate
do not materially adversely affect the value of the assets of the Company and
its Restricted Subsidiaries, taken as a whole, or materially impair the use of
such properties for the purposes for which such properties are held by the
Company or such Subsidiaries, (xv) Liens not otherwise permitted by clauses (i)
through (xiv) that are incurred in the ordinary course of business of the
Company or any Subsidiary of the Company with respect to obligations that do not
exceed $5.0 million at any one time outstanding, (xvi) Liens on assets of
Unrestricted Subsidiaries that secure Non-Recourse Debt of Unrestricted
Subsidiaries, (xvii) any interest or title of a lessor under any Capital Lease
Obligation and (xviii) purchase money Liens; provided, however, that (a) the
related purchase money Indebtedness shall not be secured by any property or
assets of the Company or any Restricted Subsidiary other than the property and
assets so acquired and the proceeds thereof and (b) the Lien securing such
Indebtedness shall be created no later than 10 days after such acquisition.
"Permitted Marketing Transaction" means (i) a transaction in which the
Company or any Subsidiary of the Parent either (a) establishes a position using
New York Mercantile Exchange Crude Oil or Natural Gas Futures contracts to
purchase hydrocarbons for future delivery to it or (b) purchases or commits to
purchase hydrocarbons for future delivery to it, and contemporaneous with such
purchase transaction either (1) establishes one or more positions using New York
Mercantile Exchange Crude Oil or Natural Gas Futures contracts to resell at a
date subsequent to such delivery date or (2) enters into a contract with a
Person to resell at a date subsequent to such delivery date, a similar aggregate
quantity and quality of hydrocarbons as so purchased by the Company or such
Subsidiary, as applicable, at an aggregate price greater than the Indebtedness
incurred for the hydrocarbons so purchased by the Company or such Subsidiary or
(ii) any other purchase by the Company or any Subsidiary of the Parent of
hydrocarbons for which the Company or such Subsidiary has contracts to sell.
"Permitted Refinancing Debt" means any Indebtedness of the Company or any of
its Restricted Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other
Indebtedness (other than Indebtedness incurred under a Credit Facility) of the
Company or any of its Restricted Subsidiaries; provided, that: (i) the principal
amount (or accreted value, if applicable) of such Permitted Refinancing Debt
does not exceed the principal amount (or accreted value, if applicable) of the
Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded,
plus the amount of premiums, prepayment penalties and other amounts required to
be paid to the holders of such Indebtedness in connection therewith and
reasonable fees and expenses incurred in connection therewith; (ii) such
Permitted Refinancing Debt has a final maturity date on or later than the final
maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded
is subordinated in right of payment to the Notes, such Permitted Refinancing
Debt has a final maturity date later than the final maturity date of, and is
subordinated in right of payment to, the Notes at least to the same extent as
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; and (iv) such Indebtedness is incurred either by the Company or by the
Restricted Subsidiary who is the obligor on the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded.
"Production Payments" means Dollar-Denominated Production Payments and
Volumetric Production Payments, collectively.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" means any direct or indirect Subsidiary of the
Company that is not an Unrestricted Subsidiary.
"S&P" means Standard & Poor's Ratings Group and its successors.
"Senior Debt" means (i) Indebtedness of the Company or any Subsidiary of the
Company under or in respect of any Credit Facility, whether for principal,
interest (including interest accruing after the filing of a petition initiating
any proceeding pursuant to any bankruptcy law, whether or not the claim for such
interest is allowed as a claim in such proceeding), reimbursement obligations,
fees, commissions, expenses, indemnities or other amounts, and (ii) any other
Indebtedness permitted under the terms of the 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
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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.
"Subordinated Indebtedness" means any Indebtedness of the Company or any
Restricted Subsidiary (whether outstanding on the date of the issuance of the
Notes or thereafter incurred) which is subordinate or junior in right of payment
to the Notes pursuant to a written agreement.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock, entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Subsidiary Guarantors" means any Restricted Subsidiary of the Company that
executes a Guarantee in accordance with the provisions of the Indentures and any
successor or assign of such Subsidiary that becomes obligated under any
Guarantee pursuant to the Indentures.
"Total Assets" means, with respect to the Company, the total consolidated
assets of the Company and its Restricted Subsidiaries, as shown on the most
recent balance sheet of the Company.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company which at
the time of determination shall be an Unrestricted Subsidiary (as designated by
the Board of Directors of the Company, as provided below) and (ii) any
subsidiary of an Unrestricted Subsidiary. The Board of Directors of the Company
may designate any Subsidiary of the Company (including any newly acquired or
newly formed Subsidiary or a Person becoming a Subsidiary through merger or
consolidation or Investment therein) to be an Unrestricted Subsidiary only if:
(a) such Subsidiary does not own any Capital Stock of, or own or hold any Lien
on any property of, any other Subsidiary of the Company which is not a
Subsidiary of the Subsidiary to be so designated or otherwise an Unrestricted
Subsidiary; (b) all the Indebtedness of such Subsidiary shall at the date of
designation, and will at all times thereafter consist of, Non-Recourse Debt; (c)
the Company certifies that such designation complies with the "Limitation on
Restricted Payments" covenant; (d) such Subsidiary, either alone or in the
aggregate with all other Unrestricted Subsidiaries, does not operate, directly
or indirectly, all or substantially all of the business of the Company and the
Subsidiaries; (e) such Subsidiary does not, directly or indirectly, own any
Indebtedness of or Equity Interest in, and has no Investments in, the Company or
any Restricted Subsidiary; (f) such Subsidiary is a Person with respect to which
neither the Company nor any of its Restricted Subsidiaries has any direct or
indirect obligation (1) to subscribe for additional Equity Interests or (2) to
maintain or preserve such Person's financial condition or to cause such Person
to achieve any specified levels of operating results; and (g) on the date such
Subsidiary is designated an Unrestricted Subsidiary, such Subsidiary is not a
party to any agreement, contract, arrangement or understanding with the Company
or any Restricted Subsidiary with terms substantially less favorable to the
Company than those that might have been obtained from Persons who are not
Affiliates of the Company. Any such designation by the Board of Directors of the
Company shall be evidenced to the Trustees by filing with the Trustees a
resolution of the Board of Directors of the Company giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions. If, at any time, any Unrestricted
Subsidiary would fail to meet the foregoing requirements as an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the Indenture and any Indebtedness of such Subsidiary shall be
deemed to be incurred as of such date. The Board of Directors of the Company may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided,
that immediately after giving effect to such designation, no Default or Event of
Default shall have occurred and be continuing or would occur as a consequence
thereof and the Company could incur at least $1.00 of additional Indebtedness
(excluding Permitted Indebtedness) pursuant to the first paragraph of the
"Incurrence of Indebtedness and Issuance of Disqualified Stock" covenant on a
pro forma basis taking into account such designation.
"Volumetric Production Payments" means production payment obligations
recorded as deferred revenue in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
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"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" means, with respect to any Person, a
Restricted Subsidiary of such Person, all of the outstanding Capital Stock or
other ownership interests of which (other than directors' qualifying shares) are
owned, directly or indirectly, by such Person or by one or more Wholly Owned
Restricted Subsidiaries of such Person.
DESCRIPTION OF THE NEW CREDIT FACILITY
Concurrently with the issuance and sale of the Notes offered hereby, the
Company will make the initial borrowings under the New Credit Facility. Mesa has
obtained a commitment for the New Credit Facility from Chemical Bank and The
Chase Manhattan Bank, N.A. (together, "Chase") and Bankers Trust Company
("Bankers Trust") that contains the terms described below. The Company will be
the borrower under the New Credit Facility, and all borrowings will be
unconditionally guaranteed by the Parent and each of its direct and indirect
subsidiaries that are restricted subsidiaries pursuant to the terms of the New
Credit Facility and will be secured by a first priority security interest in
tangible and intangible assets representing at least 85% of Mesa's total
assessed collateral value, which assets will include at least all of Mesa's West
Panhandle and Hugoton properties and the capital stock of such restricted
subsidiaries.
The New Credit Facility will be a seven year revolving credit facility for
an aggregate of up to $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, and to repay a portion of the New Credit Facility at
the Second Closing upon consummation of the Rights Offering and any sale of
additional shares of Series B Preferred Stock to DNR pursuant to the Standby
Commitment, such that approximately $350 million (excluding letters of credit)
will be outstanding under the New Credit Facility following the Second Closing.
See "Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The New Credit Facility will be subject to mandatory prepayment 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 cash proceeds of any sale or other disposition by Mesa of
any assets (with certain exceptions and 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, which may be
adjusted more frequently upon the occurrence of certain events. 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 and other
covenants and restrictions customarily in credit facilities of this type.
The closing of the New Credit Facility is conditioned upon, among other
things, the consummation of the issuance and sale of the Notes and the initial
sale of Series B Preferred Stock to DNR pursuant to the Stock
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Purchase Agreement, the absence of a material adverse condition or material
adverse change in or affecting Mesa's business, operations, property or
condition (financial or otherwise) or prospects, the satisfaction of certain
financial requirements and the lenders' receipt of and satisfaction with certain
reports regarding Mesa's assets and operations.
DESCRIPTION OF THE STOCK PURCHASE AGREEMENT
AND THE RIGHTS OFFERING
THE STOCK PURCHASE AGREEMENT
The Stock Purchase Agreement provides for the issuance and sale by the
Parent of shares of Series A and Series B Preferred Stock as follows:
(a) The Parent will issue and sell to DNR approximately 58.8 million
shares of Series B Preferred Stock for an aggregate purchase price of $133
million at the First Closing.
(b) Immediately after the First Closing, the Parent will conduct the
Rights Offering whereby it will distribute to the holders of its Common
Stock transferable Rights to purchase a pro rata portion of an aggregate of
approximately 58.4 million shares of Series A Preferred Stock for an
aggregate of approximately $132 million.
(c) The Parent will issue and sell to DNR an additional number of shares
of Series B Preferred Stock equal to the number of shares of Series A
Preferred Stock not purchased pursuant to the exercise of Rights
concurrently with the completion of the Rights Offering at the Second
Closing.
The Stock Purchase Agreement requires DNR to comply, and to cause its
affiliates to comply, with reasonable requests of the lenders under the New
Credit Facility to provide, at the time of the First Closing, a letter of credit
to secure DNR's obligations to purchase shares pursuant to its Standby
Commitment.
The Stock Purchase Agreement requires Mesa to pay all expenses incurred by
Mesa in connection with the Recapitalization and to reimburse DNR for its
reasonable out of pocket expenses incurred in connection with the
Recapitalization (including fees and expenses of counsel and all third party
consultants engaged by DNR to assist in the Recapitalization). An initial
payment in the amount of $500,000 previously paid by Mesa to DNR will be
credited against the fees and expenses otherwise subject to reimbursement under
the Stock Purchase Agreement. In addition, Mesa has agreed to pay DNR (i) a fee
of $4,655,000 (constituting 3.5% of the aggregate amount of Series B Preferred
Stock to be purchased at the First Closing) at the First Closing (or as promptly
as practicable thereafter as funds are available therefor, but no later than the
Second Closing) and (ii) a fee of $4,620,000 (constituting 3.5% of the maximum
aggregate amount of Series B Preferred Stock to be purchased at the Second
Closing) at the Second Closing, less the amount by which DNR's reimbursable
expenses as of the Second Closing are less than the initial $500,000 payment.
The Stock Purchase Agreement also provides that, for so long as the Minimum
Ownership Condition (as defined below) is satisfied, DNR will be entitled to
receive a fee of $400,000 per year (payable quarterly in arrears, beginning
September 30, 1996) in exchange for DNR's continuing analysis and assistance to
Mesa during the course of its investment, and in lieu of any transaction or
success fees to which DNR might otherwise typically be entitled for any such
services performed in connection with specific transactions in which Mesa
participates in the future. Under the Stock Purchase Agreement, Mesa will also
be required to reimburse DNR for all fees and expenses (up to a maximum of
$50,000 for any calendar year) reasonably incurred by it in connection with its
investment in Mesa. The Minimum Ownership Condition will be met so long as (i)
DNR and/or its affiliates continue to own at least 34,132,743 shares of Series B
Preferred Stock (58% of the shares DNR will purchase at the First Closing) or at
least 15% of the total number of shares of Common Stock outstanding (including
shares issuable upon conversion of outstanding Series A and Series B Preferred
Stock) and (ii) at least half of such shares are owned by, and the majority of
the voting power thereof is exercised by, Richard E. Rainwater and his
affiliates.
The Stock Purchase Agreement contains certain mutual indemnification
agreements between DNR and Mesa for claims and liabilities arising out of the
Stock Purchase Agreement, the Recapitalization and breaches of representations,
warranties, covenants and agreements contained in the Stock Purchase Agreement;
provided that claims for indemnity with respect to the breach of representations
and warranties are not required to be paid by either party unless each such
claim payable by such party equals or exceeds $50,000 and then only to the
extent that the aggregate amount of all such claims exceeds $500,000.
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From and after the First Closing, all decisions on behalf of Mesa as to the
payment of indemnification under the Stock Purchase Agreement and otherwise
regarding Mesa's rights and obligations under the Stock Purchase Agreement are
required to be made by a committee of directors consisting of all directors
other than those elected by the holders of Series B Preferred Stock.
DESCRIPTION OF PREFERRED STOCK
Each share of Preferred Stock will be convertible into one share of Common
Stock (subject to adjustment) at the option of the holder at any time prior to
redemption. Subject to any restrictions imposed by the terms of the New Credit
Facility or the Indentures, the Preferred Stock is redeemable in whole or in
part at the option of the Parent on any dividend payment date after the
thirtieth day following the tenth anniversary of the original issue date of the
Series B Preferred Stock. All outstanding shares of Series A and Series B
Preferred Stock will be subject to mandatory redemption on June 30, 2008. The
redemption price upon any optional or mandatory redemption will be equal to the
stated value (the "Stated Value") of the shares being redeemed (initial stated
value of $2.26 per share), plus all accrued but unpaid dividends through the
redemption date that have not been added to the Stated Value of such shares. The
redemption price may be paid either in cash or shares of Common Stock, at the
Parent's option. Dividends on the Preferred Stock will be cumulative from the
date of issuance and will be payable quarterly at the rate of 8% per annum of
the Stated Value per share on the last business day of March, June, September
and December of each year, beginning September 30, 1996. During the first four
years following the issue date, all dividends will be paid in kind with
additional shares of Preferred Stock based on the Stated Value of such shares.
Thereafter, Mesa may elect to pay dividends in cash rather than in kind if
certain financial tests are satisfied. The liquidation preference of the
Preferred Stock is $2.26 per share, plus accrued and unpaid dividends.
The Series A Preferred Stock and the Series B Preferred Stock will vote with
the Common Stock as a single class on all matters brought before the
shareholders, except as otherwise required by law and except for (i) certain
special voting rights of the Series B Preferred Stock that will exist so long as
the Minimum Ownership Condition is satisfied, including the right of the holders
of the Series B Preferred Stock to elect four of the seven members of the Board,
and (ii) the right of the holders of Series A Preferred Stock to elect two
directors in the event of certain dividend arrearages. Following consummation of
the Rights Offering (assuming all Rights are exercised in full), the shares of
Series B Preferred Stock outstanding will constitute 50.1% of the total shares
of Preferred Stock outstanding and 32.5% of the total Common Stock outstanding
(on a fully diluted basis).
THE RIGHTS OFFERING
Each holder of Common Stock will receive .912 transferable Rights for each
share of Common Stock held of record by such holder on a record date to be
established after the Special Meeting. No fractional Rights or cash in lieu
thereof will be distributed by Mesa; instead, the number of Rights distributed
by Mesa to each holder of Common Stock will be rounded up to the nearest whole
number. An aggregate of approximately 58.4 million Rights will be distributed
pursuant to the Rights Offering. One Right plus $2.26 in cash (the "Subscription
Price") will entitle the holder to one share of Series A Preferred Stock. An
aggregate of approximately 58.4 million shares of Series A Preferred Stock will
be sold upon exercise of the Rights, assuming all Rights are exercised in full.
One Right will entitle the holder thereof to receive, upon payment of the
Subscription Price, one share of Series A Preferred Stock (the "Basic
Subscription Privilege"). In addition, each holder of Rights who exercises in
full such holder's Basic Subscription Privilege may also subscribe at the
Subscription Price for additional shares of Series A Preferred Stock available
as a result of unexercised Rights, if any (the "Oversubscription Privilege"). If
an insufficient number of shares of Series A Preferred Stock is available to
satisfy fully all exercises of the Oversubscription Privilege, the available
shares will be prorated among holders who exercise their Oversubscription
Privilege.
The Rights Offering will commence promptly after the First Closing and will
expire not less than 16 nor more than 21 days thereafter, subject to extension
by Mesa.
The Rights will be transferable, and it is expected that they will trade on
the New York Stock Exchange until the close of business on the last New York
Stock Exchange trading day prior to the Expiration Date.
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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. Statements of legal conclusion regarding tax treatments, tax effects
or tax consequences that are set forth in this section reflect the opinion of
Baker & Botts, L.L.P., counsel for Mesa. The conclusions are based on the
provisions of the Code, the Treasury Regulations promulgated thereunder, and
administrative and judicial interpretations thereof, all as in effect as of the
date hereof and all of which are subject to change (possibly on a retroactive
basis). The following discussion does not purport to deal with all aspects of
federal income taxation that may be relevant to a particular investor in light
of such investor's personal investment circumstances. Nor does the discussion
address special rules applicable to certain types of investors subject to
special treatment under the Code (including, without limitation, financial
institutions, broker-dealers, regulated investment companies, life insurance
companies, tax-exempt organizations, foreign corporations and non-resident
aliens). Moreover, the discussion is limited to those who will hold the Notes as
capital assets (generally, property held for investment) within the meaning of
Section 1221 of the Code. No consideration of any aspects of state, local or
foreign taxation is included herein. Mesa has not sought, nor does it intend to
seek, any rulings from the IRS relating to the tax issues addressed herein.
EACH PROSPECTIVE INVESTOR IS URGED TO CONSULT SUCH INVESTOR'S OWN TAX
ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF A PURCHASE OF NOTES IN LIGHT OF
SUCH HOLDER'S OWN PARTICULAR TAX SITUATION, INCLUDING THE APPLICATION AND EFFECT
OF THE CODE, AS WELL AS STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
STATED INTEREST
Stated interest paid or accrued on the Senior Subordinated Notes will be
taxable to a holder as ordinary income in accordance with the holder's method of
accounting for federal income tax purposes. The receipt of stated interest on
the Discount Notes will not be taxable to the holders but, rather, such stated
interest will be included in the original issue discount ("OID") reportable
under the rules described below.
ORIGINAL ISSUE DISCOUNT
The Discount Notes will be issued with OID within the meaning of Section
1273(a) of the Code. The amount of OID on the Discount Notes will equal the
excess of their "redemption price" over their "issue price." The "redemption
price" will equal the sum of the face amount and the aggregate amount of stated
interest payments to be made over the life of the Discount Notes. The "issue
price" of the Discount Notes will be the first price at which a substantial
portion of the Discount Notes are sold in the Offering (excluding sales to bond
houses, brokers or similar persons acting in the capacity of underwriter,
placement agent or wholesaler). All Discount Notes acquired by a particular
holder in the Offering will be treated as a single debt instrument for purposes
of applying the OID rules.
The OID described in the preceding paragraph will accrue on the Discount
Notes on a constant yield basis over their term. Each holder of a Discount Note
generally must include in income for any particular taxable year the daily
portion of OID that accrues on the Discount Note for each day during the taxable
year on which such holder holds the Discount Note and in advance of the receipt
of the cash to which such OID is attributable, regardless of such holder's
method of tax accounting. The daily portion is determined by allocating to each
day of an accrual period (generally, in the case of the Discount Notes, the
initial period beginning on the issue date and ending on , 1996 and
each subsequent six-month period thereafter ending on and
) a pro rata portion of an amount determined by multiplying (i) the
"adjusted issue price" of the Discount Notes at the beginning of the accrual
period by (ii) their yield to maturity (determined on the basis of semiannual
compounding and without reference to actual interest payments and properly
adjusted for the length of the accrual period). The "adjusted issue price" of
the Discount Notes at the beginning of an accrual period will equal their issue
price, increased by the aggregate amount of OID that has accrued on the Discount
Notes in all prior accrual periods, and decreased by all payments (including
stated interest payments) made on the Discount Notes during all prior accrual
periods. The Company is required to provide holders of record other than
corporations and other exempt holders with information returns stating the
amount of OID accrued on the Discount Notes.
95
<PAGE> 97
A Discount Note holder's tax basis in the Discount Notes will be increased
by the OID includable in such holder's taxable income under the foregoing rules
and will be reduced by any payments (including payments of stated interest)
received by such holder with respect to the Discount Notes.
IMPACT OF APPLICABLE HIGH YIELD DISCOUNT OBLIGATION RULES
If the yield-to-maturity on the Discount Notes equals or exceeds the sum of
5% and the "applicable federal rate" (within the meaning of Section 1274(d) of
the Code) in effect for the month in which the Discount Notes are issued
("AFR"), the Discount Notes would be considered "applicable high yield discount
obligations" within the meaning of Section 163(i) of the Code. In such a case,
the Company would not be permitted to take a deduction for U.S. federal income
tax purposes for interest and OID accrued on the Discount Notes until such time
as the Company actually pays such interest and OID in cash or in property other
than stock or debt of Mesa (or persons related to Mesa). Moreover, to the extent
that (i) the yield to maturity of the Discount Notes exceeds (ii) the sum of 6%
and the AFR, such excess (the "Dividend-Equivalent Interest") would not be
deductible at any time by the Company for U.S. federal income tax purposes
(regardless of whether the Company actually pays such Dividend Equivalent
Interest in cash or in other property). For purposes of the dividends-received
deduction, such Dividend-Equivalent Interest would be treated as a dividend to
the extent it is deemed to have been paid out of the Company's current or
accumulated earnings and profits. Accordingly, a holder of a Discount Note that
is a domestic corporation may be entitled to take a dividends-received deduction
with respect to any Dividend-Equivalent Interest received by such corporate
holder on the Discount Note.
MARKET DISCOUNT
The market discount rules may affect resale of the Notes. If a subsequent
purchaser of a Note purchases the Note at a "market discount" and thereafter
recognizes gain upon its disposition, such gain will be taxable as ordinary
interest income (rather than capital gain) to the extent of the "market
discount" that has accrued (and has not otherwise been included in income
pursuant to an election made by such subsequent purchaser) during the period the
subsequent purchaser held such Note. Generally, "market discount" will exist on
the purchase of a Note if the purchase price is less than the adjusted issue
price of the Note and any such market discount will accrue over the remaining
term of the Note on a straight line basis or, at the election of the subsequent
purchaser, on a constant yield to maturity basis.
DISPOSITION
A holder whose Notes are sold or redeemed for cash will recognize gain or
loss to the extent of the difference between the cash received (other than
amounts reflecting accrued and unpaid stated interest on the Senior Subordinated
Notes, which will be taxed as ordinary income), and the holder's adjusted tax
basis in the Notes. Subject to the market discount rules discussed above, such
gain or loss will be capital gain or loss. Any such capital gain or loss will be
long-term capital gain or loss if the Note was held by the holder for more than
one year. Under current law, (i) net capital gains of individuals are, under
certain circumstances, taxed at lower rates than items of ordinary income and
(ii) the deductibility of capital losses is subject to certain limitations.
Proceeds from such a disposition of Notes can also be subject to the backup
withholding rules discussed below unless an exemption applies.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Certain holders of Notes may be subject to backup withholding at the rate of
31% with respect to interest and OID paid on the Notes or with respect to
proceeds received from a disposition of the Notes. Generally, backup withholding
applies only when such holder (i) fails to furnish or certify a correct taxpayer
identification number ("TIN") to the payor in the manner required or otherwise
qualify for an exemption, (ii) is notified by the IRS that it has failed to
report payments of interest and dividends properly or (iii) under certain
circumstances, fails to provide a certified statement, signed under penalties of
perjury, that the TIN furnished is the correct number and that such holder is
not subject to backup withholding. Backup withholding is not an additional tax
but, rather, is a method of tax collection. Holders will be entitled to credit
any amounts withheld under the backup withholding rules against their actual tax
liabilities provided the required information is furnished to the IRS.
For each calendar year, the Company will report to the holders of Notes and
to the IRS the amount of any "reportable payments" made by the Company which are
required to be reported under United States Treasury Regulations and the amount
of tax withheld, if any, with respect to such reportable payments.
96
<PAGE> 98
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement") dated , 1996 among the Company, the
Parent and the Underwriters, the Company and the Parent have agreed to sell to
the Underwriters, and the Underwriters have severally agreed to purchase from
the Company, the following respective amounts of the Notes:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
OF SENIOR PRINCIPAL
SUBORDINATED AMOUNT OF
UNDERWRITER NOTES DISCOUNT NOTES
------------------------------------------------------------- ---------------- ---------------
<S> <C> <C>
Chase Securities Inc......................................... $ $
BT Securities Corporation....................................
Donaldson, Lufkin & Jenrette Securities Corporation..........
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.....................................
-------- --------
Total............................................... $ $
======== ========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the Notes offered
hereby if any of the Notes are purchased. The Company and the Parent have been
advised by the Underwriters that the Underwriters propose to offer the Notes to
the public initially at the respective public offering prices set forth on the
cover page of this Prospectus, and to certain dealers initially at such price
less a discount not in excess of % of the principal amount or initial
accreted value, as the case may be, of the Notes. The Underwriters may allow,
and such dealers may reallow, a concession to certain other dealers not in
excess of % of the principal amount or initial accreted value, as the case
may be, of the Notes. After the initial public offering, the Underwriters may
change the public offering price, the discount and the concession.
The Notes comprise new issues of securities with no established trading
market. The Company and the Parent have been advised by the Underwriters that
the Underwriters intend to make a market in the Notes, as permitted by
applicable laws and regulations. No assurance can be given, however, that the
Underwriters will make a market in the Notes, or as to the liquidity of, or the
trading market for the Notes.
The Company and the Parent have agreed to indemnify the Underwriters against
certain civil liabilities, including liabilities under the Securities Act, and
to contribute to payments which the Underwriters might be required to make in
respect thereof.
Chase Manhattan Bank, N.A. and Chemical Bank, affiliates of Chase Securities
Inc., will be lenders under the New Credit Facility and Chase Manhattan Bank,
N.A. will act as administrative agent thereunder. In addition, Bankers Trust
Company, an affiliate of BT Securities Corporation, is a lender and agent under
the New Credit Facility. See "Description of the New Credit Facility."
LEGAL MATTERS
Certain legal matters in connection with the Notes offered hereby will be
passed upon for Mesa by Baker & Botts, L.L.P. Robert L. Stillwell, a partner of
Baker & Botts, L.L.P., is a director of Mesa and owns 26,500 shares of Common
Stock. Certain legal matters will be passed upon for the Underwriters by Simpson
Thacher & Bartlett (a partnership which includes professional corporations).
EXPERTS
The Consolidated Financial Statements of the Parent included and
incorporated by reference in this Prospectus and elsewhere in the Registration
Statement, to the extent and for the periods indicated in their report, have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
Reference is made to said report which is modified to include a discussion of
substantial doubt as to Mesa's ability to continue as a going concern as
discussed further in Note 2 of Notes to the audited Consolidated Financial
Statements.
97
<PAGE> 99
ADDITIONAL INFORMATION
The Company and the Parent have filed with the Commission Registration
Statements on Form S-3 (the "Registration Statements") under the Securities Act
with respect to the securities offered by this Prospectus. This Prospectus
constitutes a part of the Registration Statements and does not contain all of
the information set forth in the Registration Statements, certain parts of which
are omitted from this Prospectus as permitted by the rules and regulations of
the Commission. Statements made in this Prospectus regarding the contents of any
contract, agreement or other document are not necessarily complete. With respect
to each contract, agreement or other document filed with the Commission as an
exhibit to the Registration Statements, reference is made to the exhibit for
further information regarding the contents thereof, and each such statement is
qualified in its entirety by such reference. For further information regarding
Mesa and the securities offered hereby, reference is made to the Registration
Statements, including the exhibits and schedules thereto.
The Registration Statements, including the exhibits and schedules thereto,
are available for inspection at, and copies of such materials may be obtained at
prescribed rates from, the public reference facilities maintained by the
Commission at its principal offices located at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at its regional offices located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and Seven World Trade Center, 13th Floor, New York, New York 10048.
Mesa is subject to the informational requirements of the Exchange Act and in
accordance with the Exchange Act files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the principal and regional offices of
the Commission set forth above. Such reports, proxy statements and other
information concerning the Parent can also be inspected at the office of the New
York Stock Exchange, 20 Broad Street, New York, New York 10005, the exchange on
which the Common Stock and the 13 1/2% Subordinated Notes are listed.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Incorporated by reference in this Prospectus, and subject in each case to
information contained in this Prospectus, are the following documents filed by
Mesa with the Commission pursuant to the Exchange Act: (1) Mesa's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995; (2) Mesa's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996; (3) Mesa's Current
Report on Form 8-K dated March 1, 1996; (4) Mesa's Current Report on Form 8-K
dated April 29, 1996 and (5) Mesa's Proxy Statement dated May 24, 1996.
Each document filed by Mesa pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act subsequent to the date of this Prospectus and prior to the
termination of the Rights Offering shall be deemed to be incorporated by
reference in this Prospectus and to be a part of this Prospectus from the date
of filing of such document. Any statement contained in a document incorporated
or deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statements as modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
Mesa will provide without charge to each person, including any beneficial
owner, to whom this Prospectus is delivered, upon the written or oral request of
such person, a copy of any and all of the documents incorporated by reference
herein (other than exhibits to such documents unless such exhibits are
specifically incorporated by reference in such documents). Such request should
be directed to Investor Relations, MESA Inc., 1400 Williams Square West, 5205
North O'Connor Boulevard, Irving, Texas 75039 (telephone: (214) 444-9001).
98
<PAGE> 100
GLOSSARY OF SELECTED OIL AND GAS TERMS
The following are abbreviations and definitions of certain terms commonly
used in the oil and gas industry and this Prospectus.
"Bbl" means a barrel of oil and condensate or natural gas liquids.
"Bcf" means billion cubic feet of natural gas.
"Bcfe" means billion cubic feet of natural gas equivalents.
"Btu" or "British Thermal Unit" means the quantity of heat required to raise
the temperature of one pound of water by one degree Fahrenheit.
"Condensate" means a hydrocarbon mixture that becomes liquid and separates
from natural gas when the gas is produced and is similar to crude oil.
"Development well" means a well drilled within the proved area of an oil or
gas reservoir to the depth of a stratigraphic horizon known to be productive.
"Gross," when used with respect to acres or wells, refers to the total acres
or wells in which Mesa has a working interest.
"MBbls" means thousands of barrels of oil.
"Mcf" means thousand cubic feet of natural gas.
"Mcfe" means thousand cubic feet of natural gas equivalents.
"MMBbls" means millions of barrels of oil.
"MMBtu" means one million British Thermal Units.
"MMcf" means million cubic feet of natural gas.
"MMcfe" means million cubic feet of natural gas equivalents.
"Natural gas equivalents" means a volume, expressed in Mcf's of natural gas,
that includes not only natural gas but also oil or natural gas liquids converted
to an equivalent quantity of natural gas on an energy equivalent basis.
Equivalent gas reserves are based on a conversion factor of 6 Mcf of gas per
barrel of liquids.
"Net," when used with respect to acres or wells, refers to gross acres of
wells multiplied, in each case, by the percentage working interest owned by
Mesa.
"Net production" means production that is owned by Mesa less royalties and
production due others.
"Oil" means crude oil or condensate.
"Operator" means the individual or company responsible for the exploration,
development and production of an oil or gas well or lease.
"Present Value of Future Net Revenues" or "Present Value of Proved Reserves"
means the present value of estimated future revenues to be generated from the
production of proved reserves calculated in accordance with Commission
guidelines, net of estimated production and future development costs, using
prices and costs as of the date of estimation without future escalation, except
as otherwise provided by contract, without giving effect to non-property related
expenses such as general and administrative expenses, debt service, future
income tax expense and depreciation, depletion and amortization, and discounted
using an annual discount rate of 10%.
"Proved developed reserves" means reserves that can be expected to be
recovered through existing wells with existing equipment and operating methods.
Additional oil and gas expected to be obtained through the application of fluid
injection or other improved recovery techniques for supplementing the natural
forces and mechanisms of primary recovery will be included as "proved developed
reserves" only after testing by a pilot project or after the operation of an
installed program has confirmed through production response that increased
recovery will be achieved.
"Proved reserves" means the estimated quantities of crude oil, natural gas
and natural gas liquids that geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from
99
<PAGE> 101
known reservoirs under existing economic and operating conditions (i.e., prices
and costs as of the date the estimate is made). Prices include consideration of
changes in existing prices provided only by contractual arrangements, but not on
escalation based upon future conditions.
i. Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation test. The area
of a reservoir considered proved includes (A) that portion delineated by
drilling and defined by gas-oil and/or oil-water contacts, if any; and (B)
the immediately adjoining portions not yet drilled, but which can be
reasonably judged as economically productive on the basis of available
geological and engineering data. In the absence of information on fluid
contacts, the lowest known structural occurrence of hydrocarbons controls
the lower proved limit of the reservoir.
ii. Reserves that can be produced economically through application of
improved recovery techniques (such as fluid injection) are included in the
"proved" classification when successful testing by a pilot project, or the
operation of an installed program in the reservoir, provides support for the
engineering analysis on which the project or program was based.
iii. Estimates of proved reserves do not include the following: (A) oil
that may become available from known reservoirs but is classified separately
as "indicated additional reserve"; (B) crude oil, natural gas and natural
gas liquids, the recovery of which is subject to reasonable doubt because of
uncertainty as to geology, reservoir characteristics or economic factors;
(C) crude oil, natural gas and natural gas liquids that may occur in
undrilled prospects; and (D) crude oil, natural gas and natural gas liquids
that may be recovered from oil shales, coal, gilsonite and other such
sources.
"Proved undeveloped reserves" means reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion. Reserves on undrilled
acreage is limited to those drilling units offsetting productive units that are
reasonably certain of production when drilled. Proved reserves for other
undrilled units can be claimed only where it can be demonstrated with certainty
that there is continuity of production from the existing productive formation.
Under no circumstances are estimates for proved undeveloped reserves
attributable to any acreage for which an application of fluid injection or other
improved recovery technique is contemplated, unless such techniques have been
proved effective by actual tests in the area and in the same reservoir.
"Reserves" means proved reserves.
"Royalty" means an interest in an oil and gas lease that gives the owner of
the interest the right to receive a portion of the production from the leased
acreage (or of the proceeds of the sale thereof), but generally does not require
the owner to pay any portion of the costs of drilling or operating the wells on
the leased acreage. Royalties may be either landowner's royalties, which are
reserved by the owner of the leased acreage at the time the lease is granted, or
overriding royalties, which are usually reserved by the owner of the leasehold
in connection with a transfer to a subsequent owner.
"Tcfe" means trillion cubic feet of natural gas equivalents.
"3-D seismic" means seismic data that are acquired and processed to yield a
three-dimensional picture of the subsurface.
"Working interest" means an interest in an oil and gas lease that gives the
owner of the interest the right to drill for and produce oil and gas on the
leased acreage and requires the owner to pay a share of the costs of drilling
and production operations. The share of production to which a working interest
owner is entitled will always be smaller than the share of costs that the
working interest owner is required to bear, with the balance of the production
accruing to the owners of royalties. For example, the owner of a 100% working
interest in a lease burdened only by a landowner's royalty of 12.5% would be
required to pay 100% of the costs of a well but would be entitled to retain only
87.5% of the production.
100
<PAGE> 102
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MESA Inc. Consolidated Financial Statements for the Three Months Ended March 31, 1996 and 1995
Consolidated Statements of Operations......................................................... F-2
Consolidated Balance Sheets................................................................... F-3
Consolidated Statements of Cash Flows......................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity.................................... F-5
Notes to Consolidated Financial Statements.................................................... F-6
MESA Inc. Consolidated Financial Statements for the Years Ended December 31, 1995,
and 1994
Report of Independent Public Accountants...................................................... F-21
Consolidated Statements of Operations......................................................... F-22
Consolidated Balance Sheets................................................................... F-23
Consolidated Statements of Cash Flows......................................................... F-24
Consolidated Statements of Changes in Stockholders' Equity.................................... F-25
Notes to Consolidated Financial Statements.................................................... F-26
Supplemental Financial Data................................................................... F-48
</TABLE>
F-1
<PAGE> 103
MESA INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1995 1996
-------- --------
<S> <C> <C>
REVENUES:
Natural gas.................................................................. $ 35,856 $ 50,567
Natural gas liquids.......................................................... 18,206 23,136
Oil and condensate........................................................... 5,393 4,363
Other........................................................................ 2,792 2,577
-------- --------
62,247 80,643
-------- --------
COSTS AND EXPENSES:
Lease operating.............................................................. 12,574 13,544
Production and other taxes................................................... 4,745 5,406
Exploration charges.......................................................... 1,304 544
General and administrative................................................... 6,644 5,584
Depreciation, depletion and amortization..................................... 21,006 30,242
-------- --------
46,273 55,320
-------- --------
OPERATING INCOME............................................................... 15,974 25,323
-------- --------
OTHER INCOME (EXPENSE):
Interest income.............................................................. 3,909 3,217
Interest expense............................................................. (36,663) (37,749)
Gains on investments......................................................... 4,553 8,763
Gain from collection of interest from Bicoastal Corporation.................. 4,653 2,548
Other........................................................................ (320) (1,045)
-------- --------
(23,868) (24,266)
-------- --------
NET INCOME (LOSS).............................................................. $ (7,894) $ 1,057
======== ========
NET INCOME (LOSS) PER COMMON SHARE............................................. $ (.12) $ .02
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING..................................... 64,050 64,050
======== ========
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-2
<PAGE> 104
MESA INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
1996
DECEMBER 31, -----------
1995
------------ (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash investments............................................ $ 149,143 $ 115,755
Investments.......................................................... 38,280 39,956
Accounts and notes receivable........................................ 44,734 40,485
Other................................................................ 4,590 6,663
---------- ----------
Total current assets.......................................... 236,747 202,859
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Oil and gas properties, wells and equipment using the successful
efforts method of accounting....................................... 1,900,163 1,907,487
Office and other..................................................... 41,603 41,783
Accumulated depreciation, depletion and amortization................. (859,077) (887,232)
---------- ----------
1,082,689 1,062,038
---------- ----------
OTHER ASSETS:
Restricted cash of subsidiary partnership............................ 57,731 56,541
Gas balancing receivable............................................. 56,020 58,145
Other................................................................ 31,509 29,513
---------- ----------
145,260 144,199
---------- ----------
$1,464,696 $1,409,096
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities on long-term debt................................. $ 101,413 $ 92,502
Accounts payable and accrued liabilities............................. 31,068 30,712
Interest payable..................................................... 60,465 26,887
---------- ----------
Total current liabilities..................................... 192,946 150,101
---------- ----------
LONG-TERM DEBT......................................................... 1,135,330 1,121,768
---------- ----------
DEFERRED REVENUE....................................................... 17,578 17,328
---------- ----------
OTHER LIABILITIES...................................................... 51,838 51,838
---------- ----------
CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, authorized 10,000,000 shares; no
shares issued and outstanding...................................... -- --
Common stock, $.01 par value, authorized 100,000,000 shares;
outstanding 64,050,009 shares...................................... 640 640
Additional paid-in capital........................................... 398,965 398,965
Accumulated deficit.................................................. (332,601) (331,544)
---------- ----------
67,004 68,061
---------- ----------
$1,464,696 $1,409,096
========== ==========
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-3
<PAGE> 105
MESA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1995 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................ $ (7,894) $ 1,057
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation, depletion and amortization................................... 21,006 30,242
Accreted interest on discount notes........................................ 19,585 --
Gains from investments..................................................... (4,553) (8,763)
Changes in operating receivables and payables.............................. (16,875) (35,142)
Changes in investments, net................................................ 16,038 7,087
Other...................................................................... 1,886 3,288
-------- --------
Cash provided by (used in) operating activities....................... 29,193 (2,231)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures......................................................... (7,039) (9,754)
Other........................................................................ (3,230) (228)
-------- --------
Cash used in investing activities..................................... (10,269) (9,982)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt................................................. -- (22,365)
Other........................................................................ 2,150 1,190
-------- --------
Cash provided by (used in) financing activities....................... 2,150 (21,175)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH INVESTMENTS........................... 21,074 (33,388)
CASH AND CASH INVESTMENTS AT BEGINNING OF PERIOD............................... 143,422 149,143
-------- --------
CASH AND CASH INVESTMENTS AT END OF PERIOD..................................... $164,496 $115,755
======== ========
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-4
<PAGE> 106
MESA INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
------ ------ ---------- -----------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995............................. 64,050 $640 $398,965 $(332,601)
Net income........................................... -- -- -- 1,057
------ ---- -------- ---------
BALANCE, March 31, 1996................................ 64,050 $640 $398,965 $(331,544)
====== ==== ======== =========
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-5
<PAGE> 107
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MESA, Inc., a Texas corporation, was formed in 1991 in connection with a
transaction which reorganized the business of Mesa Limited Partnership (the
"Partnership") into corporate form. The Partnership was formed in 1985 to
succeed to the business of Mesa Petroleum Co. ("Original Mesa"). Unless the
context otherwise requires, as used herein the term "Mesa" refers to MESA Inc.
and its subsidiaries taken as a whole and includes its predecessors.
Mesa is primarily in the business of exploring for, developing, producing,
processing and selling natural gas and oil in the United States. Over 65% of
Mesa's annual equivalent production is natural gas and the balance is
principally natural gas liquids. Mesa's primary producing areas are the Hugoton
field of southwest Kansas, the West Panhandle field of Texas and the Gulf of
Mexico offshore Texas and Louisiana. Production from Mesa's properties has
access to a substantial portion of the major metropolitan markets in the United
States, primarily in the midwest and northeast, through numerous pipelines and
other purchasers.
The consolidated financial statements of Mesa for the three month period
ended March 31, 1996 and 1995, are unaudited but reflect, in the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to fairly present the results for such periods. The preparation of the
consolidated financial statements of Mesa in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from the estimates. The
accompanying financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto contained in Mesa's Annual
Report on Form 10-K ("Form 10-K") for the year ended December 31, 1995.
PRINCIPLES OF CONSOLIDATION
Mesa owns and operates its oil and gas properties and other assets through
its direct and indirect subsidiaries. The accompanying consolidated financial
statements reflect the consolidated accounts of Mesa and its subsidiaries after
elimination of intercompany transactions.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, Mesa classifies all cash
investments with original maturities of three months or less as cash and cash
investments.
INVESTMENTS
Mesa invests from time to time in marketable equity and other securities
which are classified as "trading securities" and reported at fair value, with
unrealized gains and losses included in net income (loss) for the current
period. The cost of securities sold is determined on the first-in, first-out
basis.
Mesa enters into various energy futures contracts including New York
Mercantile Exchange ("NYMEX") futures contracts, commodity price swaps and
options which are not intended to be hedges of future natural gas or crude oil
production. Investments in such contracts are adjusted to market prices at the
end of each reporting period and gains and losses are included in gains from
investments in the statements of operations.
OIL AND GAS PROPERTIES
Under the successful efforts method of accounting, all costs of acquiring
unproved oil and gas properties and drilling and equipping exploratory wells are
capitalized pending determination of whether the properties have proved
reserves. If an exploratory well is determined to be nonproductive, the drilling
and equipment costs of the well are expensed at that time. All development
drilling and equipment costs are capitalized. Capitalized costs of proved
properties and estimated future dismantlement and abandonment costs are
F-6
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MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amortized on a property-by-property basis using the unit-of-production method.
Geological and geophysical costs and delay rentals are expensed as incurred.
In the first quarter of 1996 Mesa adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," which establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill. SFAS No. 121 requires a review for impairment whenever
circumstances indicate that the carrying amount of an asset may not be
recoverable. Mesa will estimate future cash flows (undiscounted and without
interest charges) expected to result from use of an asset. Impairment is only
recognized if the carrying amount of an asset is greater than the expected
future cash flows and the amount of impairment is based on the fair value of the
asset. An impairment charge of $6.8 million is included in depreciation,
depletion and amortization expense for the first quarter of 1996 in the
consolidated statements of operations which impairment relates primarily to a
Gulf Coast oil and gas property.
NET INCOME (LOSS) PER COMMON SHARE
The computations of net income (loss) per common share are based on the
weighted average number of common shares outstanding during each period.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Mesa's financial instruments consist of cash, marketable securities,
short-term trade receivables and payables, restricted cash, notes receivable,
and long-term debt. The carrying values of cash, marketable securities,
short-term trade receivables and payables, restricted cash, and notes receivable
approximate fair value. The fair value of long-term debt is estimated based on
the market prices for Mesa's publicly traded debt and on current rates available
for similar debt with similar maturities and security for Mesa's remaining debt
(see Note 4).
GAS REVENUES
Mesa recognizes its ownership interest in natural gas production as revenue.
Actual production quantities sold by Mesa may be different than its ownership
share of production in a given period. If Mesa's sales exceed its ownership
share of production, the differences are recorded as deferred revenue. Gas
balancing receivables are recorded when Mesa's ownership share of production
exceeds sales. Mesa also accrues production expenses related to its ownership
share of production. At March 31, 1996, Mesa had produced and sold a net 23.4
billion cubic feet ("Bcf") of natural gas less than its ownership share of
production and had recorded gas balancing receivables, net of deferred revenues,
of approximately $41.2 million. Substantially all of Mesa's gas balancing
receivables and deferred revenue are classified as long-term.
Mesa periodically enters into NYMEX natural gas futures contracts as a hedge
against natural gas price fluctuations. Gains or losses on such futures
contracts are deferred and recognized as natural gas revenue when the hedged
production occurs. Mesa recognized net gains of $4.9 million in the first
quarter of 1995 related to hedging activities and did not hedge any of its
natural gas production for the first quarter of 1996.
TAXES
Mesa provides for income taxes using the asset and liability method under
which deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. The effect on deferred taxes
of a change in tax laws or tax rates is recognized in income in the period that
includes the enactment date.
OTHER
In October 1995 the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which establishes accounting and
reporting standards for stock-based employee compensation plans. SFAS No. 123
defines a fair value-based method of accounting for stock options or
F-7
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MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
similar equity instruments, but allows companies to continue to measure
compensation cost using the intrinsic value-based method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees."
Mesa will not adopt the fair value-based method of accounting for its option
plans and, accordingly, adoption of this statement will have no impact on Mesa's
results of operations.
(2) RESOURCES AND LIQUIDITY
LONG-TERM DEBT AND CASH FLOWS
Mesa is highly leveraged with over $1.2 billion of long-term debt, including
current maturities. The major components of Mesa's debt are (1) $492.3 million
of secured notes ("HCLP Secured Notes") due in installments through 2012 at
Hugoton Capital Limited Partnership ("HCLP"), an indirect, wholly owned
subsidiary, (2) $51.1 million (plus $11.4 million in letter of credit
obligations) outstanding under a bank credit facility, due in installments
through 1997, with the majority of such debt due on June 23, 1997, (3) $39.7
million of unsecured discount notes due on June 30, 1996, and (4) $617.4 million
of secured discount notes due on June 30, 1998. Both the secured and unsecured
discount notes are subordinate to the bank credit facility. See Note 4 for a
complete description of Mesa's long-term debt.
Mesa is required to make significant principal and interest payments on its
debt during the remainder of 1996. Mesa is required to make $81.6 million of
principal and interest payments related to its discount notes and $12.5 million
of principal payments related to its bank credit facility by June 30, 1996. In
addition, Mesa is required to pay $39.4 million in interest on its secured
discount notes on December 31, 1996. In the aggregate, assuming no acceleration
of amounts due under any of Mesa's long-term debt agreements, Mesa's principal
and interest obligations for the remainder of 1996, excluding HCLP, will total
almost $140 million.
The assets and cash flows of HCLP that are subject to the mortgage securing
HCLP's debt are dedicated to service HCLP's debt and are not available to pay
creditors of Mesa or its subsidiaries other than HCLP.
Mesa's bank credit facility contains a covenant requiring it to maintain
tangible adjusted equity, as defined, of at least $50 million. At March 31,
1996, tangible adjusted equity was approximately $67.8 million. Assuming no
changes in its capital structure and no significant transactions completed, Mesa
expects that it will incur losses from operations for the remainder of 1996 and
that its tangible adjusted equity will fall below $50 million during 1996. If
and when Mesa determines that tangible adjusted equity is below $50 million, an
Event of Default, as defined, would occur under the bank credit facility and the
bank would have the right to accelerate the payment of all outstanding principal
and require cash collateralization of letters of credit. An Event of Default
under the bank credit facility would cause a cross default under Mesa's secured
and unsecured discount note indentures unless and until the bank credit facility
default were cured or waived or the debt under the bank credit facility were
repaid or otherwise discharged. The Events of Default, if they occur and are not
waived, could result in acceleration of approximately $656 million of long-term
debt principal otherwise due in mid-1997 and mid-1998. Pursuant to the
subordination provisions of the discount note indentures, Mesa would be
prohibited from making any payments on such notes for specified periods upon and
during the continuance of any Event of Default under the bank credit facility.
As a result of improved results of operations in the first quarter of 1996,
Mesa now expects that cash generated by its operations, together with available
cash and investment balances, will be sufficient to fund the debt principal and
interest obligations due by June 30, 1996. In addition, if the obligations under
the bank credit facility are accelerated and become due in the second half of
1996 as discussed above, Mesa expects to have sufficient cash to repay those
obligations. However, whether Mesa would have sufficient cash to pay both those
obligations and the interest payments on its secured discount notes due at
December 31, 1996 would depend upon results of operations for the remainder of
1996. Mesa will make decisions regarding payments on its debt as such payments
come due, taking into account the status at such time of the Recapitalization
discussed below.
F-8
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MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPOSED RECAPITALIZATION
On April 26, 1996, Mesa entered into a stock purchase agreement with
DNR-MESA Holdings L.P., a Texas limited partnership ("DNR"), whose sole general
partner is Rainwater Inc., a Texas corporation owned by Richard E. Rainwater.
The agreement contemplates that Mesa will issue $265 million in new equity and
will repay and/or refinance substantially all of its $1.2 billion of existing
debt (the "Recapitalization"). DNR will purchase approximately 58.8 million
shares of a new class of convertible preferred stock entitled Series B 8%
Cumulative Convertible Preferred Stock ("Series B Preferred") in a private
placement and Mesa will offer approximately 58.4 million shares of Series A 8%
Cumulative Convertible Preferred Stock ("Series A Preferred") to Mesa
stockholders in a rights offering (the "Rights Offering"). DNR will provide a
standby commitment to purchase an additional number of shares of Series B
Preferred equal to the number of shares of Series A Preferred not subscribed to
in the Rights Offering. The rights, to be distributed to common stockholders on
a pro rata basis, will allow the stockholders to purchase, in respect of each
share of common stock, .912 shares of Series A Preferred at $2.26 per share, the
same per share price at which DNR will purchase shares of Series B Preferred.
The rights will be transferrable and holders of the rights will be offered
over-subscription privileges for shares not purchased by other rights holders.
Each share of Series A and B Preferred will be convertible into one share of
Mesa common stock at any time prior to mandatory redemption in 2008. An annual
8% pay-in-kind dividend will be paid on the shares during the first four years
following issuance. Thereafter, the 8% dividend may, at the option of Mesa, be
paid in cash or additional shares depending on whether certain financial tests
are met and subject to any limitations in Mesa's debt agreements.
The Series A and B Preferred will represent 64.7% of the fully diluted
common shares at the time of issuance and 71.5% after the mandatory four-year
pay-in-kind period, excluding stock options and assuming no other stock issuance
by Mesa. The Series A and B Preferred will have a liquidation preference per
share equal to $2.26 plus accrued and unpaid dividends. The terms of the Series
A and Series B Preferred are substantially identical except for certain voting
rights and certain provisions relating to transferability. The Series A and B
Preferred will vote with the common stock as a single class on all matters,
except as otherwise required by law and except for certain special voting rights
of the Series B Preferred, including the right of the holders of the Series B
Preferred to nominate and elect a majority of Mesa's Board of Directors for so
long as DNR and its affiliates meet certain minimum stock ownership requirements
and certain rights of the holders of the Series A Preferred to elect two
directors in the event of certain dividend arrearages.
The sale of shares to DNR and certain other matters will be submitted to a
vote of stockholders at a special meeting expected to take place in June 1996.
Mesa expects to issue shares to DNR and to complete the refinancing of its
existing debt promptly after that meeting. The Rights Offering would commence
promptly thereafter. On May 9, 1996, Mesa filed a registration statement with
the Securities and Exchange Commission (the "SEC") for the issuance and sale of
$132 million of Series A Preferred through the Rights Offering.
On May 7, 1996, Mesa and Mesa Operating Co., a direct wholly owned
subsidiary of Mesa ("MOC"), filed a registration statement with the SEC for the
issuance and sale of $500 million of senior subordinated notes ("New Notes")
consisting of $325 million of senior subordinated notes and $175 million of
senior subordinated discount notes, both with ten year maturities. In addition
Mesa has received a commitment from a group of banks for a new $500 million
senior secured revolving credit facility ("New Credit Facility"). Borrowings
under the New Credit Facility and the New Notes, together with existing cash and
investment balances and the $265 million of new equity, will be used to repay
and/or refinance substantially all of Mesa's existing debt. MOC will be the
borrower under the New Credit Facility and the issuer of the New Notes. Mesa
will unconditionally guarantee MOC's obligations under both the New Credit
Facility and the New Notes.
In connection with the Recapitalization, Mesa's other direct wholly owned
subsidiaries, Mesa Holding Co. ("MHC") and Hugoton Management Company ("HMC"),
as well as HCLP, will be merged with and into MOC, with MOC being the surviving
entity. As a result, MOC will be Mesa's only direct subsidiary as well as its
only significant subsidiary. Of the subsidiaries of MOC that will exist
following the Recapitalization, none will have any operations other than Mesa
Environmental Ventures Co. ("MEV") and Mesa Transmission Co. ("Mesa
Transmission"). Neither MEV nor Mesa Transmission will guarantee any of MOC's or
Mesa's debt. Neither MEV's or Mesa Transmission's results of operations are
material to those of Mesa or, following the
F-9
<PAGE> 111
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Recapitalization, to those of MOC. After the Recapitalization, it is expected
that the consolidated financial statements of MOC and its subsidiaries will be
substantially the same as those of Mesa and its subsidiaries. See Note 6 for
disclosure.
The consummation of the Recapitalization is subject to certain conditions
including stockholder approval and completion of the refinancing.
EFFECT OF THE RECAPITALIZATION
The Recapitalization will enhance Mesa's ability to compete in the oil and
gas industry by substantially increasing its cash flow available for investment
and improving its ability to attract capital, which will increase its ability to
pursue investment opportunities. Specifically, Mesa's financial condition will
improve significantly as a result of the Recapitalization due to (i) a
significant reduction in total debt outstanding, (ii) a reduction in annual cash
interest expense of approximately $75 million, (iii) the implementation of a
cost savings program designed to initially reduce annual general and
administrative and other operating overhead expenses by approximately $10
million, and (iv) the extension of maturities on its long-term debt, which will
eliminate Mesa's present liquidity concerns.
The expected reduction of annual cash interest expense is based on the
following assumptions: (i) initial borrowings under the New Credit Facility of
approximately $350 million and (ii) annual interest rates of approximately 7%
under the New Credit Facility, 11% under the senior subordinated notes and
12 1/4% under the senior subordinated discount notes. Actual borrowings and
interest rates under the New Credit Facility will fluctuate over time and will
affect Mesa's actual cash interest expense.
Management believes that cash from operating activities, together with as
much as $150 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 next several years following the
Recapitalization.
The successful completion of the Recapitalization is expected to position
Mesa to operate and continue as a going concern and to pursue its business
strategies. The consolidated financial statements of Mesa do not include any
adjustments reflecting any treatment other than going concern accounting.
If the Recapitalization is not completed, Mesa will pursue other
alternatives to address its liquidity issues and financial condition, including
pursuing other merger and sale transactions, the possibility of seeking to
restructure its balance sheet by negotiating with its current debt holders or
seeking protection from its creditors under the Federal Bankruptcy Code.
F-10
<PAGE> 112
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) INVESTMENTS
The value of investments are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ---------
<S> <C> <C>
NYMEX Futures Contracts:
Margin Cash.................................................... $ 17,498 $33,078
Unrealized gain in trading contracts........................... 7,558 4,963
Commodity Price Swaps:
Margin Cash.................................................... 2,434 548
Unrealized gain (loss) in price swaps.......................... (811) 1,367
Natural Gas Options:
Premiums....................................................... 66 --
Unrealized gain in trading options............................. 978 --
Equity securities:
Cost........................................................... 10,719 --
Unrealized loss................................................ (162) --
------- -------
Total market value...................................... $ 38,280 $39,956
======= =======
</TABLE>
For the three months ended March 31, 1996, Mesa recognized net gains of
approximately $8.8 million from its investments compared with net gains for the
same period in 1995 of $4.6 million. These gains do not include gains or losses
from natural gas futures contracts accounted for a hedge of natural gas
production. Hedge gains or losses are included in natural gas revenue in the
period in which the hedged production occurs (see Note 1).
The net investment gains and losses recognized during a period include both
realized and unrealized gains and losses. Mesa realized net gains from
investments of $10.0 million for the three months ended March 31, 1996, and $5.9
million for the same period in 1995. At March 31, 1996, Mesa had recognized but
not realized approximately $6.3 million of gains associated primarily with
natural gas futures.
In 1995 Mesa invested in certain over-the-counter commodity price swap
agreements for trading purposes. Mesa is required to make payments to (or
receive payments from) a counter party based on the differential between a fixed
and a variable price for specified natural gas volumes. Mesa's agreements were
to expire on the last day of trading for April, May and June 1996 natural gas
futures contracts as determined by the NYMEX. During the three months ended
March 31, 1996, Mesa closed out certain of these positions pertaining to 6.9
million British thermal units ("BTUs") of natural gas at a gain of $1.7 million.
Mesa was the fixed price payor on a notional quantity of 3.2 million BTUs of
natural gas (which remained open from year-end) with a fair value of $7.1
million at March 31, 1996. The remaining agreements were to expire on the last
trading day for June 1996 natural gas futures contracts as determined by the
NYMEX and were closed in mid-April at a gain of approximately $1.7 million. The
average fair value of all commodity price swaps during the three months ended
March 31, 1996 was $15.1 million. In 1995 Mesa also entered into 1,800
over-the-counter natural gas futures call and put options contracts (each
contract represents 10,000 MMBTUs of natural gas). Such contracts were closed
early in the first quarter of 1996 at a gain of $1.1 million. The average fair
value of such option contracts while open was $.8 million. The counter party to
these instruments is a credit-worthy financial institution which is a recognized
market maker. Mesa believes the risk of incurring losses related to the credit
risk of the party is remote.
F-11
<PAGE> 113
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) LONG-TERM DEBT
Long-term debt and current maturities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ----------
<S> <C> <C>
HCLP Secured Notes............................................... $ 504,674 $ 492,309
Credit Agreement................................................. 61,131 51,131
12 3/4% secured discount notes................................... 618,518 618,410
12 3/4% unsecured discount notes................................. 39,725 39,725
13 1/2% subordinated notes....................................... 7,390 7,390
Other............................................................ 5,305 5,305
---------- ----------
1,236,743 1,214,270
Current maturities............................................... (101,413) (92,502)
---------- ----------
Long-term debt................................................... $1,135,330 $1,121,768
========== ==========
</TABLE>
HCLP SECURED NOTES
In 1991 HCLP issued $616 million of HCLP Secured Notes in a private
placement with a group of institutional lenders. The issuance funded a $66
million restricted cash balance within HCLP, which is available to supplement
cash flows from the HCLP properties in the event such cash flows are not
sufficient to fund principal and interest payments on the HCLP Secured Notes
when due. As the HCLP Secured Notes are repaid, the required restricted cash
balance is reduced. HCLP holds substantially all of Mesa's Hugoton field natural
gas properties.
The HCLP Secured Notes were issued in 15 series and have final stated
maturities extending through 2012 but can be retired earlier. The HCLP Secured
Notes outstanding at March 31, 1996, bear interest at fixed rates ranging from
9.05% to 11.30% per annum (weighted average 10.35%). Principal payments, if
required, and interest payments are made semiannually. Provisions in the HCLP
Secured Note agreements require interest rate premiums to be paid to the
noteholders in the event that the HCLP Secured Notes are repaid more rapidly or
slowly than under the initial scheduled amortization. Beginning in August 1994,
HCLP elected to make principal payments on the HCLP Secured Notes based on
actual production, rather than according to the initial scheduled amortization.
As a result, interest rate premiums at a rate of 1.5% per annum will be applied
to those principal amounts not paid according to the initial scheduled
amortization and .35% per annum will be applied to the remaining notes. Such
premiums have increased the effective weighted average interest rate payable on
the remaining HCLP Secured Notes outstanding to 10.84% per annum at March 31,
1996.
The HCLP Secured Note agreements contain various covenants which, among
other things, limit HCLP's ability to sell or acquire oil and gas property
interests, incur additional indebtedness, make unscheduled capital expenditures,
make distributions of property or funds subject to the mortgage, or enter into
certain types of long-term contracts or forward sales of production. The
agreements also require HCLP to maintain separate existence from Mesa and its
other subsidiaries. The assets of HCLP that are subject to the mortgage securing
the HCLP Secured Notes are dedicated to service HCLP's debt and are not
available to pay creditors of Mesa or its subsidiaries other than HCLP. Any cash
not subject to the mortgage is available for distribution to Mesa's subsidiaries
which own HCLP's equity.
The HCLP Secured Note agreements also contain a provision which requires
calculation and payment of premiums on early retirement of the HCLP Secured
Notes. The prepayment premium calculation is based on prevailing interest rates
at the date of redemption. In the aggregate, such premiums would have totaled
$60 million as of March 31, 1996 and approximately $55 million on May 14, 1996.
Mesa is currently negotiating with the holders of the HCLP Secured Notes as to
the amount of prepayment premium, if any, to be paid upon redemption of the HCLP
Secured Notes.
Revenues received from production from HCLP's Hugoton properties are
deposited in a collection account maintained by a collateral agent (the
"Collateral Agent"). The Collateral Agent releases or reserves funds, as
appropriate, for the payment of royalties, taxes, operating costs, capital
expenditures and principal and interest
F-12
<PAGE> 114
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on the HCLP Secured Notes. Only after all required payments have been made may
any remaining funds held by the Collateral Agent be released from the mortgage.
In accordance with the HCLP Secured Note agreements on April 19, 1996, HCLP
obtained its reserve estimates as of December 31, 1995, prepared by an
independent engineering consultant covering its Hugoton field properties. The
reserve quantities in such reserve report are compared to the initial reserve
quantities set forth in the HCLP Secured Note agreements, adjusted for
production. The quantities in such reserve report were less than the adjusted
initial quantities, and a Deficit Reserve Amount ("DRA"), as defined, of .0215
Bcfe was determined to exist. To the extent a DRA exists, the Collateral Agent
may be required to retain additional funds in the collection account subject to
the mortgage for the repayment of the HCLP Secured Notes. However, HCLP
determined in accordance with the HCLP Secured Note agreements, that the DRA was
not so significant as to require additional funds to be retained in the
collection account subject to the mortgage for the repayment of the HCLP Secured
Notes.
The restricted cash balance and cash held by the Collateral Agent for
payment of interest and principal on the HCLP Secured Notes are invested by the
Collateral Agent under the terms of a guaranteed investment contract (the "GIC")
with Morgan Guaranty Trust Co. of New York ("Morgan"). Morgan was paid $13.9
million at the date of issuance of the HCLP Secured Notes to guarantee that
funds invested under the GIC would earn an interest rate equivalent to the
weighted average coupon rate on the outstanding principal balance of the HCLP
Secured Notes (10.35% at March 31, 1996). A portion of this amount may be
refunded if the HCLP Secured Notes are repaid earlier than if HCLP had produced
according to its scheduled production, depending primarily on prevailing
interest rates at that time.
HCLP's cash balances were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ---------
<S> <C> <C>
Subject to the mortgage............................................. $ 40,163 $35,894
Not subject to the mortgage......................................... 7,450 5,249
-------- -------
Cash included in current assets..................................... $ 47,613 $41,143
======== =======
Restricted cash included in noncurrent assets....................... $ 57,731 $56,541
======== =======
Refundable GIC fee included in noncurrent assets.................... $ 9,010 $ 8,667
======== =======
</TABLE>
Mesa Operating Co. ("MOC"), a Mesa subsidiary which owns substantially all
of the limited partnership interest of HCLP, is party to a services agreement
with HCLP. MOC provides services necessary to operate the Hugoton field
properties and market production therefrom, process remittances of production
revenues and perform certain other administrative functions in exchange for a
services fee. The fee totaled approximately $5.3 million for the first three
months of 1996 and $5.1 million for the same period in 1995.
CREDIT AGREEMENT
As of March 31, 1996, Mesa had outstanding borrowings of approximately $51.1
million and letter of credit obligations of $11.4 million under its $82.5
million bank credit facility, as amended (the "Credit Agreement"). The Credit
Agreement requires principal payments of $22.5 million in the first half of 1996
with the remainder due in June 1997 (including cash collateralization of letters
of credit outstanding at that time).
The rate of interest payable on borrowings under the Credit Agreement is the
lesser of the Eurodollar rate plus 2 1/2% or the prime rate plus 1/2%.
Obligations under the Credit Agreement are secured by a first lien on Mesa's
West Panhandle field properties, Mesa's equity interest in MOC and a 76% limited
partner interest in HCLP.
The Credit Agreement requires Mesa to maintain tangible adjusted equity, as
defined, of at least $50 million and available cash, as defined, of $32.5
million. At March 31, 1996, Mesa's tangible adjusted equity, as defined, was
approximately $67.8 million and available cash, as defined, was $113.5 million.
See Note 2 for discussion of the tangible adjusted equity covenant and its
potential effect on Mesa's liquidity.
F-13
<PAGE> 115
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Credit Agreement also restricts, among other things, Mesa's ability to
incur additional indebtedness, create liens, pay dividends, acquire stock or
make investments, loans and advances.
DISCOUNT NOTES
In August 1993, Mesa issued approximately $435.5 million initial accreted
value ($569.2 million face amount), as defined, of 12 3/4% secured discount
notes due June 30, 1998, $136.9 million initial accreted value ($178.8 million
face amount) of 12 3/4% unsecured discount notes due June 30, 1996 (together,
the "Discount Notes") and $29.3 million principal amount of 0% convertible
notes. These notes were exchanged (the "Debt Exchange") for an aggregate $586.3
million of the outstanding 12% subordinated notes due 1996 (all of which have
been repaid) and 13 1/2% subordinated notes due 1999 (plus accrued interest
thereon). The 0% convertible notes were converted into approximately 7.5 million
shares of common stock in 1993. The Discount Notes rank pari passu with each
other, are senior to other subordinated debt and are subordinate to all
permitted first lien debt, as defined, including obligations under the Credit
Agreement.
In 1994, Mesa issued an additional $48.2 million face amount of 12 3/4%
secured discount notes and used the proceeds to settle a lawsuit. Also in 1994,
Mesa redeemed $139.1 million face amount of 12 3/4% unsecured discount notes
with proceeds from a public offering of Mesa common stock and from additional
borrowings under the Credit Agreement.
The Discount Notes did not accrue interest through June 30, 1995; however,
the accreted value, as defined, of both series increased at a rate of 12 3/4%
per year, compounded semiannually, until June 30, 1995. Beginning July 1, 1995,
each series began to accrue interest at an annual rate of 12 3/4%, payable in
cash semiannually in arrears, with the first payment due on December 31, 1995.
The 12 3/4% secured discount notes are secured by second liens on Mesa's
West Panhandle field properties and a 76% limited partner interest in HCLP, both
of which also secure obligations under the Credit Agreement. Mesa's right to
maintain first lien debt, as defined, is limited by the terms of the Discount
Notes to $82.5 million.
See Note 2 for a discussion of certain cross-default provisions in the
Discount Note indentures which could become effective if Mesa defaults under the
terms of the tangible adjusted equity covenant of the Credit Agreement.
The indentures governing the Discount Notes restrict, among other things,
Mesa's ability to incur additional indebtedness, pay dividends, acquire stock or
make investments, loans and advances.
SUBORDINATED NOTES
The 13 1/2% subordinated notes are unsecured and mature in 1999. Interest on
these notes is payable semiannually in cash.
INTEREST AND MATURITIES
The aggregate interest payments, net of amounts capitalized, made during the
three months ended March 31, 1996 and 1995, were $70.8 million and $29.0
million, respectively. The interest payments in the first quarter of 1996
included a $42 million interest payment on January 2, 1996, according to terms
of the Discount Notes, related to Mesa's Discount Notes which was due December
31, 1995. Payment of approximately $19.7 million of interest incurred during the
three months ended March 31, 1995 was deferred under the terms of the Debt
Exchange until the repayment dates of the Discount Notes. Such interest is
included in interest expense in the consolidated statements of operations for
the first quarter of 1995.
F-14
<PAGE> 116
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The scheduled principal repayments on long-term debt for the remainder of
1996 and for the four succeeding years are as follows (in millions):
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000
----- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C>
HCLP Secured Notes.................................... $21.5 $33.3 $ 36.1 $37.1 $36.0
Credit Agreement(a)(b)................................ 12.5 38.6 -- -- --
12 3/4% secured discount notes(c)..................... -- -- 617.4 -- --
12 3/4% unsecured discount notes(c)................... 39.7 -- -- -- --
13 1/2% subordinated notes............................ -- -- -- 7.4 --
Other................................................. 5.3 -- -- -- --
----- ----- ------ ----- -----
Total........................................ $79.0 $71.9 $653.5 $44.5 $36.0
===== ===== ====== ===== =====
</TABLE>
- ---------------
(a) Excludes approximately $11.4 million in letter of credit obligations
currently outstanding and required to be cash collateralized in June 1997.
(b) Maturities may be accelerated if tangible adjusted equity falls below $50
million. (See Note 2).
(c) Maturities may be accelerated if an Event of Default occurs and continues
under the Credit Agreement. (See Note 2).
FAIR VALUE OF LONG-TERM DEBT
The following is a summary of estimated fair value of Mesa's long-term debt
as of the years ended (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 MARCH 31, 1996
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
HCLP Secured Notes............................... $504,674 $568,641 $492,309 $539,078
Credit Agreement................................. 61,131 61,131 51,131 51,131
12 3/4% secured discount notes................... 618,518 541,905 618,410 606,042
12 3/4% unsecured discount notes................. 39,725 35,262 39,725 39,700
13 1/2% subordinated notes....................... 7,390 7,390 7,390 7,390
</TABLE>
The fair value of long-term debt is estimated based on the market prices for
Mesa's publicly traded debt and on current rates available for similar debt with
similar maturities and security for Mesa's remaining debt. Based on the current
financial condition of Mesa, there is no assurance that Mesa could obtain
borrowings under long-term debt agreements with terms similar to those described
above and receive proceeds approximating the estimated fair values. See Note 2
for proposed Recapitalization.
(5) CONTINGENCIES
MASTERSON
In February 1992 the current lessors of an oil and gas lease (the "Gas
Lease") dated April 30, 1955, between R. B. Masterson, et al., as lessor, and
Colorado Interstate Gas Company ("CIG"), as lessee, sued CIG in Federal District
Court in Amarillo, Texas, claiming that CIG had underpaid royalties due under
the Gas Lease. Under the agreements with CIG, Mesa has an entitlement to gas
produced from the Gas Lease. In August 1992 CIG filed a third-party complaint
against Mesa for any such royalty underpayments which may be allocable to Mesa.
Plaintiffs alleged that the underpayment was the result of CIG's use of an
improper gas sales price upon which to calculate royalties and that the proper
price should have been determined pursuant to a "favored-nations" clause in a
July 1, 1967, amendment to the Gas Lease (the "Gas Lease Amendment"). The
plaintiffs also sought a declaration by the court as to the proper price to be
used for calculating future royalties.
The plaintiffs alleged royalty underpayments of approximately $500 million
(including interest at 10%) covering the period from July 1, 1967, to the
present. In March 1995 the court made certain pretrial rulings that eliminated
approximately $400 million of the plaintiffs' claims (which related to periods
prior to October 1,
F-15
<PAGE> 117
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1989), but which also reduced a number of Mesa's defenses. Mesa and CIG filed
stipulations with the court whereby Mesa would have been liable for between 50%
and 60%, depending on the time period covered, of an adverse judgment against
CIG for post-February 1988 underpayments of royalties.
On March 22, 1995, a jury trial began and on May 4, 1995, the jury returned
its verdict. Among its findings, the jury determined that CIG had underpaid
royalties for the period after September 30, 1989, in the amount of
approximately $140,000. Although the plaintiffs argued that the
"favored-nations" clause entitled them to be paid for all of their gas at the
highest price voluntarily paid by CIG to any other lessor, the jury determined
that the plaintiffs were estopped from claiming that the "favored-nations"
clause provides for other than a pricing-scheme to pricing-scheme comparison. In
light of this determination, and the plaintiffs' stipulation that a
pricing-scheme to pricing-scheme comparison would not result in any "trigger
prices" or damages, defendants asked the court for a judgment that plaintiffs
take nothing. The court, on June 7, 1995, entered final judgment that plaintiffs
recover no monetary damages. The plaintiffs have filed a motion for new trial on
which the court has not yet ruled. Mesa cannot predict whether the court will
grant such motion or, if it does not, whether the plaintiffs will appeal the
court's final judgment. However, based on the jury verdict and final judgment,
Mesa does not expect the ultimate resolution of this lawsuit to have a material
adverse effect on its financial position or results of operations.
LEASE TERMINATION
In 1991 Mesa sold certain producing oil and gas properties to Seagull Energy
Company ("Seagull"). In 1994 two lawsuits were filed against Seagull in the
100th District Court in Carson County, Texas, by certain land and royalty owners
claiming that certain of the oil and gas leases owned by Seagull have terminated
due to cessation in production and/or lack of production in paying quantities
occurring at various times from first production through 1994. In the third
quarter of 1995 Seagull filed third-party complaints against Mesa claiming
breach of warranty and false representation in connection with the sale of such
properties to Seagull. Mesa believes it has several defenses to these lawsuits
including a two-year limitation on indemnification set forth in the purchase and
sale agreement.
Seagull filed a similar third-party complaint against Mesa covering a
different lease in the 69th District Court in Moore County, Texas. Mesa believes
it has similar defenses in this case.
The plaintiffs in the cases against Seagull are seeking to terminate the
leases. Seagull, in its complaint against Mesa, is seeking unspecified damages
relating to any leases which are terminated.
Mesa does not expect the resolution of this lawsuit to have a material
adverse effect on its financial position or results of operations.
OTHER
Mesa is also a defendant in other lawsuits and has assumed liabilities
relating to Original Mesa and the Partnership. Mesa does not expect the
resolution of these other matters to have a material adverse effect on its
financial position or results of operations.
(6) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Mesa conducts its operations through various direct and indirect
subsidiaries. On December 31, 1995, Mesa's direct subsidiaries were MOC, Mesa
Holding Co. ("MHC") and Hugoton Management Co. ("HMC"), all of which were wholly
owned by Mesa. MOC owns all of Mesa's interest in the West Panhandle field of
Texas, the Gulf Coast and the Rocky Mountain areas, as well as a 98.6% limited
partnership interest in HCLP. MHC owns cash and securities, a 0.9% limited
partnership interest in HCLP and 100% of Mesa Environmental Ventures Co. ("Mesa
Environmental"), a company established to compete in the natural gas vehicle
market. HMC owns the 0.5% general partner interest in HCLP. HCLP owns
substantially all of Mesa's Hugoton field natural gas properties.
F-16
<PAGE> 118
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In early 1994 Mesa effected a series of merger transactions which resulted
in the conversion of the predecessors of MOC, MHC, and the other subsidiary
partnerships, other than HCLP, to corporate form and eliminated all of the
General Partner's minority interests in the subsidiaries.
Subsidiary Debt
HCLP, together with its wholly owned subsidiary Hugoton Capital Corporation
(a single purpose financing subsidiary of HCLP), are jointly and severally
liable as co-obligors on the HCLP Secured Notes (see Note 4). The assets and
cash flows of HCLP that are subject to the mortgage securing the HCLP Secured
Notes are dedicated to service the HCLP Secured Notes and are not available to
pay creditors of Mesa or its subsidiaries other than HCLP. Hugoton Capital
Corporation, which has insignificant assets and results of operations, is
included within HCLP in the condensed consolidating financial statements. MOC is
the borrower and primary obligor under, and Mesa has unconditionally guaranteed
MOC's obligations under, the Credit Agreement. Mesa, MOC and Mesa Capital Corp.
("Mesa Capital") are jointly and severally liable as co-obligors under the
13 1/2% subordinated notes and the Discount Notes. Mesa Capital is a wholly
owned financing subsidiary of MOC. Mesa Capital, which has insignificant assets
and results of operations, is included with MOC in the condensed consolidating
financial statements.
Other Mesa subsidiaries in the condensed consolidating financial statements
include MHC, HMC, and Mesa Environmental. No such other subsidiary is an obligor
or guarantor under any long term debt.
Intercompany Debt
As of December 31, 1993, MHC had intercompany payables to MOC of
approximately $123 million. On February 28, 1994, MHC assigned an 18% limited
partnership interest in HCLP (out of its total interest of 18.9%) to MOC in
satisfaction of $90 million of intercompany payables. Provisions of the Discount
Note indentures required the repayment of intercompany indebtedness to specified
levels and provided that any HCLP limited partnership interests transferred in
satisfaction of intercompany debt would be valued at $5 million for each one
percent of interest assigned. MHC repaid an additional $33 million of
intercompany debt to MOC in cash during 1994. As a result of these transactions,
MOC now owns a 98.6% limited partnership interest in HCLP, and all of MHC's
intercompany debt to MOC which was outstanding at December 31, 1993, was
eliminated.
Condensed Consolidating Financial Statements
The following are condensed consolidating financial statements of MESA Inc.,
HCLP, MOC, and Mesa's other subsidiaries combined (in millions). These
statements are presented to provide financial information with respect to the
obligors under Mesa's debt for the benefit of the holders of such debt. Separate
financial statements of the obligors under Mesa's debt are not presented because
they are not required and because Mesa believes that they would not be material
to investors. See Note 4 for additional information regarding Mesa's long term
debt.
F-17
<PAGE> 119
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OTHER CONSOL.
MESA MESA AND MESA
DECEMBER 31, 1995 INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- ----------------------------------------------------- ---- ---- ---- ----- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash investments.......................... $-- $ 47 $ 38 $64 $ -- $ 149
Other current assets............................... -- 20 53 15 -- 88
--- ---- ---- --- ----- ------
Total current assets........................ -- 67 91 79 -- 237
--- ---- ---- --- ----- ------
Property, plant and equipment, net................. -- 602 478 3 -- 1,083
Investment in subsidiaries......................... 76 -- 115 10 (201) --
Intercompany receivables........................... -- -- 9 -- (9) --
Other noncurrent assets............................ -- 82 58 5 -- 145
--- ---- ---- --- ----- ------
$76 $751 $751 $97 $(210) $1,465
=== ==== ==== === ===== ======
Liabilities and Equity:
Current liabilities................................ $-- $ 64 $128 $ 1 $ -- $ 193
Long-term debt..................................... -- 471 665 -- -- 1,136
Intercompany payables.............................. 9 -- -- -- (9) --
Other noncurrent liabilities....................... -- -- 66 3 -- 69
Partners'/Stockholders' equity (deficit)........... 67 216 (108) 93 (201) 67
--- ---- ---- --- ----- ------
$76 $751 $751 $97 $(210) $1,465
=== ==== ==== === ===== ======
MARCH 31, 1996
Assets:
Cash and cash investments.......................... $-- $ 41 $ 17 $58 $ -- $ 116
Other current assets............................... -- 19 64 4 -- 87
--- ---- ---- --- ----- ------
Total current assets........................ -- 60 81 62 -- 203
--- ---- ---- --- ----- ------
Property, plant and equipment, net................. -- 594 465 3 -- 1,062
Investment in subsidiaries......................... 77 -- 121 10 (208) --
Intercompany receivables........................... -- -- 9 -- (9) --
Other noncurrent assets............................ -- 80 61 3 -- 144
--- ---- ---- --- ----- ------
$77 $734 $737 $78 $(217) $1,409
=== ==== ==== === ===== ======
Liabilities and Equity:
Current liabilities................................ $-- $ 55 $ 95 $-- $ -- $ 150
Long-term debt..................................... -- 457 665 -- -- 1,122
Intercompany payables.............................. 9 -- -- -- (9) --
Other noncurrent liabilities....................... -- -- 65 4 -- 69
Partners'/Stockholders' equity (deficit)........... 68 222 (88) 74 (208) 68
--- ---- ---- --- ----- ------
$77 $734 $737 $78 $(217) $1,409
=== ==== ==== === ===== ======
</TABLE>
F-18
<PAGE> 120
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED:
<TABLE>
<CAPTION>
OTHER CONSOL.
MESA MESA AND MESA
MARCH 31, 1995 INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- ------------------------------------------------------ ---- ---- ---- ----- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues.............................................. -- 25 37 -- -- 62
--- --- ---- --- --- ----
Costs and Expenses:
Operating, exploration and taxes.................... -- 9 9 -- -- 18
General and administrative.......................... -- -- 6 1 -- 7
Depreciation, depletion and amortization............ -- 9 12 -- -- 21
--- --- ---- --- --- ----
-- 18 27 1 -- 46
--- --- ---- --- --- ----
Operating Income (Loss)............................... -- 7 10 (1) -- 16
--- --- ---- --- --- ----
Interest expense, net of interest income.............. -- (12) (22) 1 -- (33)
Equity in loss of subsidiaries........................ (8) -- (5) -- 13 --
Other................................................. -- -- 4 5 -- 9
--- --- ---- --- --- ----
Net Income (Loss)..................................... $(8) $(5) $(13) $ 5 $13 $ (8)
=== === ==== === === ====
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
MARCH 31, 1996
Revenues.............................................. $-- $37 $ 43 $ 1 $-- $ 81
--- --- ---- --- --- ----
Costs and Expenses:
Operating, exploration and taxes.................... -- 10 9 -- -- 19
General and administrative.......................... -- -- 5 1 -- 6
Depreciation, depletion and amortization............ -- 9 19 2 -- 30
--- --- ---- --- --- ----
-- 19 33 3 -- 55
--- --- ---- --- --- ----
Operating Income (Loss)............................... -- 18 10 (2) -- 26
--- --- ---- --- --- ----
Interest expense, net of interest income.............. -- (12) (23) -- -- (35)
Equity income of subsidiaries......................... 1 -- 6 -- (7) --
Other................................................. -- -- 7 3 -- 10
--- --- ---- --- --- ----
Net Income............................................ $ 1 $ 6 $ -- $ 1 $(7) $ 1
=== === ==== === === ====
</TABLE>
F-19
<PAGE> 121
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED:
<TABLE>
<CAPTION>
OTHER CONSOL.
MESA MESA AND MESA
MARCH 31, 1995 INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- ----------------------------------------------------- ---- ---- ---- ----- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities................. $-- $(3) $ 26 $ 6 $ -- $ 29
---- --- ---- ---- ----- ----
Cash Flows from Investing Activities:
Capital expenditures............................... -- (1) (5) (1) -- (7)
Other.............................................. -- -- -- (3) -- (3)
---- --- ---- ---- ----- ----
-- (1) (5) (4) -- (10)
---- --- ---- ---- ----- ----
Cash Flows from Financing Activities:
Other.............................................. -- 2 -- -- -- 2
---- --- ---- ---- ----- ----
-- 2 -- -- -- 2
---- --- ---- ---- ----- ----
Net Increase (Decrease) in Cash and Cash
Investments........................................ $-- $(2) $ 21 $ 2 $ -- $ 21
==== === ==== ==== ===== ====
MARCH 31, 1996
Cash Flows from Operating Activities................. $-- $ 6 $(22) $ 14 $ -- $ (2)
---- --- ---- ---- ----- ----
Cash Flows from Investing Activities:
Capital expenditures............................... -- (1) (9) -- -- (10)
Contribution to subsidiary......................... -- -- -- -- -- --
---- --- ---- ---- ----- ----
-- (1) (9) -- -- (10)
---- --- ---- ---- ----- ----
Cash Flows from Financing Activities:
Dividend to parent................................. -- -- -- (20) 20 --
Contribution from parent........................... -- -- 20 -- (20) --
Repayments of long-term debt....................... -- (12) (10) -- -- (22)
Other.............................................. -- 1 -- -- -- 1
---- --- ---- ---- ----- ----
-- (11) 10 (20) -- (21)
---- --- ---- ---- ----- ----
Net Increase (Decrease) in cash and cash
investments........................................ $-- $(6) $(21) $ (6) $ -- $(33)
==== === ==== ==== ===== ====
</TABLE>
NOTES TO CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(a) These condensed consolidating financial statements should be read in
conjunction with the consolidated financial statements of Mesa and notes
thereto of which this note is an integral part.
(b) As of March 31, 1996, Mesa owns 100% interest in each of MOC, MHC, and HMC.
These condensed consolidating financial statements present Mesa's investment
in its subsidiaries and MOC's and MHC's investments in HCLP using the equity
method. Under this method, investments are recorded at cost and adjusted for
the parent company's ownership share of the subsidiary's cumulative results
of operations. In addition, investments increase in the amount of
contributions to subsidiaries and decrease in the amount of distributions
from subsidiaries.
(c) The consolidation and elimination entries (i) eliminate the equity method
investment in subsidiaries and equity in income (loss) of subsidiaries, (ii)
eliminate the intercompany payables and receivables, and (iii) eliminate
other transactions between subsidiaries including contributions and
distributions.
F-20
<PAGE> 122
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MESA Inc.:
We have audited the accompanying consolidated balance sheets of MESA Inc. (a
Texas corporation) and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, cash flows and changes in
stockholders' equity for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MESA Inc. and
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed further in Note 2 to the
consolidated financial statements, the Company's current financial forecasts
indicate that cash generated by operating activities, together with available
cash and investment balances, will not be sufficient for the Company to make all
of its required debt principal and interest obligations due in June 1996. Also,
as discussed in Notes 2 and 4 to the consolidated financial statements, certain
covenants related to the Company's bank debt and certain cross-default
provisions of the Discount Notes could result in the acceleration of
approximately $656 million of long-term debt principal (due in mid-1997 and
mid-1998) to the first half of 1996. As a result, there is substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 2 to the consolidated
financial statements. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Houston, Texas
March 6, 1996
F-21
<PAGE> 123
MESA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Natural gas.................................................... $ 141,798 $ 139,580 $ 129,534
Natural gas liquids............................................ 61,427 72,771 75,321
Oil and condensate............................................. 12,428 7,877 19,594
Other.......................................................... 6,551 8,509 10,510
--------- --------- ---------
222,204 228,737 234,959
--------- --------- ---------
Costs and Expenses:
Lease operating................................................ 51,819 52,655 51,815
Production and other taxes..................................... 20,332 21,306 18,403
Exploration charges............................................ 2,705 5,157 6,604
General and administrative..................................... 25,237 28,649 26,749
Depreciation, depletion and amortization....................... 100,099 92,287 83,423
--------- --------- ---------
200,192 200,054 186,994
--------- --------- ---------
Operating Income................................................. 22,012 28,683 47,965
--------- --------- ---------
Other Income (Expense):
Interest income................................................ 10,704 13,457 15,922
Interest expense............................................... (142,002) (144,757) (148,630)
Gains from investments......................................... 3,954 6,698 18,420
Gains from collections from Bicoastal Corporation.............. 18,450 16,577 6,352
Gains on dispositions of oil and gas properties................ 9,600 -- --
Litigation settlement.......................................... (42,750) -- --
Gain from adjustment of contingency reserve.................... 24,000 -- --
Other.......................................................... (6,416) (4,011) 2,403
--------- --------- ---------
(124,460) (112,036) (105,533)
--------- --------- ---------
Net Loss......................................................... $(102,448) $ (83,353) $ (57,568)
========= ========= =========
Net Loss Per Common Share........................................ $ (2.61) $ (1.42) $ (.90)
========= ========= =========
Weighted Average Common Shares Outstanding....................... 39,272 58,860 64,050
========= ========= =========
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-22
<PAGE> 124
MESA INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash investments................................................. $ 143,422 $ 149,143
Investments............................................................... 19,112 38,280
Accounts and notes receivable............................................. 38,938 44,734
Other..................................................................... 3,372 4,590
---------- ----------
Total current assets............................................... 204,844 236,747
---------- ----------
Property, Plant and Equipment:
Oil and gas properties, wells and equipment, using the successful efforts
method of accounting.................................................... 1,867,842 1,900,163
Office and other.......................................................... 43,836 41,603
Accumulated depreciation, depletion and amortization...................... (781,230) (859,077)
---------- ----------
1,130,448 1,082,689
---------- ----------
Other Assets:
Restricted cash of subsidiary partnership................................. 61,299 57,731
Gas balancing receivable.................................................. 54,971 56,020
Other..................................................................... 32,397 31,509
---------- ----------
148,667 145,260
---------- ----------
$1,483,959 $1,464,696
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities on long-term debt...................................... $ 30,537 $ 101,413
Accounts payable and accrued liabilities.................................. 40,468 31,068
Interest payable.......................................................... 18,184 60,465
---------- ----------
Total current liabilities.......................................... 89,189 192,946
---------- ----------
Long-Term Debt.............................................................. 1,192,756 1,135,330
---------- ----------
Deferred Revenue............................................................ 21,900 17,578
---------- ----------
Other Liabilities........................................................... 55,542 51,838
---------- ----------
Contingencies
Stockholders' Equity:
Preferred stock, $.01 par value, authorized 10,000,000 shares; no shares
issued and outstanding.................................................. -- --
Common stock, $.01 par value, authorized 100,000,000 shares; outstanding
64,050,009 and 64,050,009 shares, respectively.......................... 640 640
Additional paid-in capital................................................ 398,965 398,965
Accumulated deficit....................................................... (275,033) (332,601)
---------- ----------
124,572 67,004
---------- ----------
$1,483,959 $1,464,696
========== ==========
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-23
<PAGE> 125
MESA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------
1993 1994 1995
--------- --------- --------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss........................................................ $(102,448) $ (83,353) $(57,568)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation, depletion and amortization...................... 100,099 92,287 83,423
Gains on dispositions of oil and gas properties............... (9,600) -- --
Accreted interest on discount notes........................... 49,160 79,352 38,957
Accrued interest exchanged for discount notes................. 15,395 -- --
Litigation settlement......................................... 42,750 (42,750) --
Gain from adjustment of contingency reserves.................. (24,000) -- --
Decrease (increase) in gas balancing receivables.............. (4,942) (7,840) 1,516
Decrease in deferred natural gas revenue...................... (3,370) (785) (4,219)
Settlement of prior year tax claims........................... (12,931) -- --
Natural gas hedging activities................................ 324 9,715 (9,715)
Sales of investments.......................................... 39,283 18,771 48,555
Purchases of investments...................................... (34,711) (19,866) (49,003)
Gains from investments........................................ (3,954) (6,698) (18,420)
(Increase) decrease in accounts receivable.................... 1,986 5,934 (12,047)
Increase (decrease) in payables and accrued liabilities....... (15,887) (3,142) 45,243
Other......................................................... (4,662) 6,972 2,519
--------- --------- --------
Net cash provided by operating activities................ 32,492 48,597 69,241
--------- --------- --------
Cash Flows From Investing Activities:
Capital expenditures............................................ (29,636) (32,590) (42,297)
Proceeds from dispositions of oil and gas properties............ 26,118 -- --
Collection of notes receivable.................................. 47,501 -- --
Other........................................................... (6,461) (7,660) 860
--------- --------- --------
Net cash provided by (used in) investing activities...... 37,522 (40,250) (41,437)
--------- --------- --------
Cash Flows From Financing Activities:
Issuance of common stock........................................ -- 93,067 --
Repayments of long-term debt.................................... (80,102) (175,107) (25,507)
Long-term borrowings............................................ -- 77,754 --
Debt issuance costs............................................. (9,651) -- --
Other........................................................... 1,251 652 3,424
--------- --------- --------
Net cash used in financing activities.................... (88,502) (3,634) (22,083)
--------- --------- --------
Net Increase (Decrease) in Cash and Cash Investments.............. (18,488) 4,713 5,721
Cash and Cash Investments at Beginning of Year.................... 157,197 138,709 143,422
--------- --------- --------
Cash and Cash Investments at End of Year.......................... $ 138,709 $ 143,422 $149,143
========= ========= ========
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-24
<PAGE> 126
MESA INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
------ ------ ---------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1992................................. 38,571 $386 $273,198 $ (89,232)
Net loss................................................. -- -- -- (102,448)
Common stock issued for 0% convertible notes............. 7,523 75 29,239 --
Common stock issued for the partial conversion of the
General Partner minority interest...................... 417 4 907 --
------ ---- -------- ---------
Balance, December 31, 1993................................. 46,511 465 303,344 (191,680)
Net loss................................................. -- -- -- (83,353)
Common stock issued for the conversion of the remaining
General Partner minority interest...................... 1,251 13 2,716 --
Common stock issued in secondary public offering......... 16,288 162 92,905 --
------ ---- -------- ---------
Balance, December 31, 1994................................. 64,050 640 398,965 (275,033)
Net loss................................................. -- -- -- (57,568)
------ ---- -------- ---------
Balance, December 31, 1995................................. 64,050 $640 $398,965 $(332,601)
====== ==== ======== =========
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-25
<PAGE> 127
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MESA Inc., a Texas corporation, was formed in 1991 in connection with a
transaction (the "Corporate Conversion") which reorganized the business of Mesa
Limited Partnership (the "Partnership"). The Partnership was formed in 1985 to
succeed to the business of Mesa Petroleum Co. ("Original Mesa"). Unless the
context otherwise requires, as used herein the term "Company" refers to MESA
Inc. and its subsidiaries taken as a whole and includes its predecessors.
The Company is primarily in the business of exploring for, developing,
producing, processing and selling natural gas and oil in the United States. Over
60% of the Company's annual equivalent production is natural gas and the balance
is principally natural gas liquids. The Company's primary producing areas are
the Hugoton field of southwest Kansas, the West Panhandle field of Texas and the
Gulf of Mexico offshore Texas and Louisiana. Production from the Company's
properties has access to a substantial portion of the major metropolitan markets
in the United States, primarily in the midwest and northeast, through numerous
pipelines and other purchasers.
The preparation of the consolidated financial statements of the Company in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from the
estimates.
PRINCIPLES OF CONSOLIDATION
The Company owns and operates its oil and gas properties and other assets
through various direct and indirect subsidiaries. Pursuant to the Corporate
Conversion, the Company obtained a 95.86% limited partnership interest and Boone
Pickens (the "General Partner") obtained a 4.14% general partner interest in
three direct subsidiary partnerships. The general partner interest was
convertible into a total of 1,667,560 shares of common stock of the Company. On
December 31, 1993, the General Partner converted approximately one-fourth of his
general partner interests into common stock. In early 1994 the Company effected
a series of merger transactions which resulted in the conversion of each of its
direct subsidiary partnerships to corporate form (see Note 13). Pursuant to
these mergers, the remaining general partner interests in the Company's
subsidiary partnerships held directly or indirectly by the General Partner were
converted into common stock, thereby eliminating the minority interest.
The accompanying consolidated financial statements reflect the consolidated
accounts of the Company and its subsidiaries after elimination of intercompany
transactions.
Certain reclassifications have been made to amounts reported in previous
years to conform to 1995 presentation.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company classifies all
cash investments with original maturities of three months or less as cash and
cash investments.
INVESTMENTS
On January 1, 1994, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," which addresses the accounting and reporting for investments
in equity securities that have readily determinable fair values and for all
investments in debt securities. The Company's portfolio of securities is
classified as "trading securities" under the provisions of SFAS No. 115 and is
reported at fair value, with unrealized gains and losses included in net income
(loss) for the current period. The cost of securities sold is determined on the
first-in, first-out basis. Prior to January 1, 1994, investments in marketable
securities were stated at the lower of cost or market. The adoption of SFAS No.
115 did not have a material effect on the financial position or results of
operations of the Company.
F-26
<PAGE> 128
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company enters into various energy futures contracts including New York
Mercantile Exchange ("NYMEX") futures contracts, commodity price swaps and
options which are not intended to be hedges of future natural gas or crude oil
production. Investments in such contracts are adjusted to market prices at the
end of each reporting period and gains and losses are included in gains from
investments in the statements of operations.
OIL AND GAS PROPERTIES
Under the successful efforts method of accounting, all costs of acquiring
unproved oil and gas properties and drilling and equipping exploratory wells are
capitalized pending determination of whether the properties have proved
reserves. If an exploratory well is determined to be nonproductive, the drilling
and equipment costs of the well are expensed at that time. All development
drilling and equipment costs are capitalized. Capitalized costs of proved
properties and estimated future dismantlement and abandonment costs are
amortized on a property-by-property basis using the unit-of-production method
whereby the ratio of annual production to beginning of period proved oil and gas
reserves is applied to the remaining net book value of such properties. Oil and
gas reserve quantities represent estimates only and there are numerous
uncertainties inherent in the estimation process. Actual future production may
be materially different from amounts estimated and such differences could
materially affect future amortization of proved properties. Geological and
geophysical costs and delay rentals are expensed as incurred.
Unproved properties are periodically assessed for impairment of value and a
loss is recognized at the time of impairment. The aggregate carrying value of
proved properties is periodically compared with the undiscounted future net cash
flows from proved reserves, determined in accordance with Securities and
Exchange Commission (the "Commission") regulations, and a loss is recognized if
permanent impairment of value is determined to exist. A loss is recognized on
proved properties expected to be sold in the event that carrying value exceeds
expected sales proceeds.
In March 1995 the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," which establishes accounting standards for
the impairment of long-lived assets, certain identifiable intangibles and
goodwill. SFAS No. 121 requires a review for impairment whenever circumstances
indicate that the carrying amount of an asset may not be recoverable. In
performing the review for recoverability, the Company would estimate future cash
flows (undiscounted and without interest charges) expected to result from use of
an asset and its eventual disposition. Impairment is recognized only if the
carrying amount of an asset is greater than the expected future cash flows. The
amount of impairment is based on the fair value of the asset. Under SFAS No.
121, each field is individually evaluated for impairment. The Company will adopt
the provisions of SFAS No. 121 in 1996 and has estimated that impairment of
approximately $10 to $12 million will be charged to operations in the first
quarter of 1996. Such impairment relates primarily to a Gulf Coast oil and gas
property.
NET LOSS PER COMMON SHARE
The computations of net loss per common share are based on the weighted
average number of common shares outstanding during each period.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, marketable securities,
commodity price swaps, options, short-term trade receivables and payables,
restricted cash, notes receivable, and long-term debt. The carrying values of
cash, marketable securities, notes receivable, short-term trade receivables and
payables, and restricted cash approximate fair value. The carrying values of the
commodity price swaps and options represent their required cash deposits plus or
minus unrealized gains and losses (see Note 3). The fair value of long-term debt
is estimated based on the market prices for the Company's publicly traded debt
and on current rates available for similar debt with similar maturities and
security for the Company's remaining debt (see Note 4).
F-27
<PAGE> 129
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GAS REVENUES
The Company recognizes its ownership interest in natural gas production as
revenue. Actual production quantities sold by the Company may be different than
its ownership share of production in a given period. If the Company's sales
exceed its ownership share of production, the differences are recorded as
deferred revenue. Gas balancing receivables are recorded when the Company's
ownership share of production exceeds sales. The Company also accrues production
expenses related to its ownership share of production. At December 31, 1995, the
Company had produced and sold a cumulative net 21.9 billion cubic feet ("Bcf")
of natural gas less than its ownership share of production and had recorded gas
balancing receivables, net of deferred revenues, of approximately $38.8 million.
Substantially all of the Company's gas balancing receivables and deferred
revenue are classified as long-term.
The Company periodically enters into NYMEX natural gas futures contracts as
a hedge against natural gas price fluctuations. Gains or losses on such futures
contracts are deferred and recognized as natural gas revenue when the hedged
production occurs. The Company recognized net gains of $12.7 million and
$895,000 in 1995 and 1994, respectively, and a net loss of $324,000 in 1993
related to hedging activities.
TAXES
The Company provides for income taxes using the asset and liability method
under which deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. The effect on deferred taxes
of a change in tax laws or tax rates is recognized in income in the period that
includes the enactment date.
(2) RESOURCES AND LIQUIDITY
LONG-TERM DEBT AND CASH FLOWS
The Company is highly leveraged with over $1.2 billion of long-term debt,
including current maturities. The major components of the Company's debt are (1)
$504.7 million of secured notes due in installments through 2012 at Hugoton
Capital Limited Partnership ("HCLP"), an indirect, wholly owned subsidiary, (2)
$61.1 million (plus $11.4 million in letter of credit obligations) outstanding
under a bank credit facility, due in installments through 1997, with the
majority of such debt due on June 23, 1997, (3) $39.7 million of unsecured
discount notes due on June 30, 1996, and (4) $617.4 million of secured discount
notes due on June 30, 1998. Both the secured and unsecured discount notes are
subordinate to the bank credit facility. See Note 4 for a complete description
of the Company's long-term debt.
The Company is required to make significant principal and interest payments
on its debt during the first six months of 1996. Including the $42 million of
interest paid on its discount notes on January 2, 1996, the Company is required
to make $123.5 million of principal and interest payments related to its
discount notes and $22.5 million of principal payments related to its bank
credit facility by June 30, 1996.
The Company's bank credit facility contains a covenant requiring the Company
to maintain tangible adjusted equity, as defined, of at least $50 million. At
December 31, 1995, tangible adjusted equity was $64.7 million. Assuming no
changes in its capital structure and no significant transactions are completed,
the Company expects to continue to report substantial net losses and expects its
tangible adjusted equity to fall below $50 million in the first half of 1996. If
and when the Company determines that tangible adjusted equity is below $50
million, an Event of Default, as defined, would occur under the bank credit
facility and the bank would have the right to accelerate the payment of all
outstanding principal and require cash collateralization of letters of credit.
An Event of Default under the bank credit facility would cause a cross default
under the Company's secured and unsecured discount note indentures unless and
until the bank credit facility default were cured or waived or the debt under
the bank credit facility were repaid or otherwise discharged. The Events of
Default, if they occur and are not waived, could result in acceleration of
approximately $656 million of long-term debt principal due in mid-1997 and
mid-1998 to the first half of 1996. Pursuant to the subordination provisions of
the
F-28
<PAGE> 130
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
discount note indentures, the Company would be prohibited from making any
payments on such notes for specified periods upon and during the continuance of
any Event of Default under the bank credit facility.
The assets and cash flows of HCLP that are subject to the mortgage securing
HCLP's debt are dedicated to service HCLP's debt and are not available to pay
creditors of the Company or its subsidiaries other than HCLP.
The Company's current financial forecasts indicate, assuming no changes in
its capital structure and no significant transactions are completed, that cash
generated by operating activities, together with available cash and investment
balances will not be sufficient to make all of its required debt principal and
interest obligations due in June 1996. If amounts outstanding under the Credit
Agreement were to be accelerated in the first half of 1996, the Company would
expect to have sufficient cash to meet the Credit Agreement obligations and cure
an Event of Default under the Credit Agreement and avoid, at that time, cross
defaults under the terms of its Discount Note indentures. However, such a
payment would substantially deplete the Company's remaining cash and investments
balances. The Company will make decisions regarding such payments on its debt as
they come due, taking into account the status at that time of the Rainwater
transaction discussed below.
EXPLORATION OF STRATEGIC ALTERNATIVES/PROPOSED TRANSACTION WITH RAINWATER
In an effort to address its liquidity issues and to position the Company for
expansion through exploration and development, in December 1994 the Company
announced its intent to sell all or a portion of its interests in the Hugoton
field. In the first quarter of 1995 the Company began an auction process to sell
such properties. The Company's Board of Directors (the "Board") concluded the
auction process in the second quarter of 1995 after no acceptable bids were
received for the Hugoton properties.
On July 6, 1995, the Board approved and implemented a proposal solicitation
process which expanded its exploration of strategic alternatives to include
consideration of the sale of the Company, a stock-for-stock merger, joint
ventures, asset sales, equity infusions, and refinancing transactions. The
Company engaged an independent financial advisor to assist in these efforts and
to solicit proposals on its behalf. The proposal solicitation process commenced
in August 1995 and the Company received proposals beginning on November 20,
1995.
On February 28, 1996, the Company signed a letter of intent with Rainwater,
Inc. ("Rainwater"), an independent investment company owned by Ft. Worth, Texas,
investor Richard Rainwater, to raise $265 million of equity in connection with a
refinancing of the Company's debt. Pursuant to the terms of the letter of
intent, Rainwater will purchase in a private placement approximately 58.8
million shares of a new class of convertible preferred stock and the Company
will offer approximately 58.4 million shares of convertible preferred stock to
the Company stockholders in a rights offering (the "Rights Offering"). Rainwater
will provide a standby commitment to purchase any shares of preferred stock not
subscribed to in the Rights Offering. Rights will be distributed to common
stockholders on a pro rata basis. The rights will allow the stockholder to
purchase, in respect of each share of common stock, approximately .91 shares of
preferred stock at $2.26 per share, the same per share price at which Rainwater
will purchase preferred shares. The rights will be transferrable and holders of
the rights will be offered over-subscription privileges for shares not purchased
by other rights holders.
Each preferred share will be convertible into one share of the Company
common stock at any time prior to mandatory redemption in 2006. An annual 8%
pay-in-kind dividend will be paid on the preferred shares during the first four
years following issuance. Thereafter, the 8% dividend may, at the option of the
Company, be paid in cash or additional shares depending on whether certain
financial tests are met.
The preferred stock will represent 63.6% of the fully diluted common shares
at the time of issuance and 70.6% after the mandatory four-year pay-in-kind
period, assuming no other stock issuance by the Company. The preferred stock
will have a liquidation price equal to the purchase price. The preferred shares
purchased in the Rights Offering will vote with the common stock as a single
class on all matters, except as otherwise required by law and except for certain
special voting rights for shares held by Rainwater.
F-29
<PAGE> 131
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rainwater will be entitled to elect two members of the Company's Board,
which will have seven directors. The Rainwater designees will constitute two of
the three members of a newly formed executive committee of the Board. The
executive committee will act for the whole Board on matters which by law do not
need Board authorization and will have authority over major capital
transactions, stock issuances, financing arrangements, budgeting, and other
items.
During an interim 30-day period beginning February 28, 1996, the Company,
with assistance from Rainwater, will seek commitments for new bank loans plus
assurance of availability of new subordinated debt to be issued in conjunction
with the transaction. Proceeds from the new debt, when combined with proceeds
from the newly issued equity and the Company's available cash balances, would
refinance or repay all of the Company's existing debt.
The proposed transaction is subject to certain conditions, including
negotiation and execution of definitive agreements, arrangement of the new debt
financing, due diligence by Rainwater and the Company stockholder approval. The
parties anticipate executing definitive agreements in about 30 days. The
transaction will be submitted to a vote of stockholders at a special meeting
expected to take place in June 1996. The Rights Offering would commence promptly
after that meeting. There can be no assurance that this transaction will be
completed, or if completed, what the final terms or timing thereof will be. Nor
can there be any assurance regarding the availability or terms of any
refinancing debt.
The ability of the Company to continue as a going concern is dependent upon
several factors. The successful completion of the Rainwater transaction is
expected to position the Company to operate and continue as a going concern and
to pursue its business strategies. The consolidated financial statements of the
Company do not include any adjustments reflecting any treatment other than going
concern accounting.
If the Rainwater transaction is not completed, the Company will pursue other
alternatives to address its liquidity issues and financial condition, including
other potential transactions arising from the proposal solicitation process, the
possibility of seeking to restructure its balance sheet by negotiating with its
current debt holders or seeking protection from its creditors under the Federal
Bankruptcy Code.
(3) INVESTMENTS
The value of investments are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1994 1995
------- -------
<S> <C> <C>
Equity securities:
Cost................................................................... $ 9,489 $10,719
Unrealized loss........................................................ (1,381) (162)
NYMEX Futures Contracts:
Margin Cash............................................................ 1,337 17,498
Unrealized gain in hedge contracts..................................... 6,823 --
Unrealized gain in trading contracts................................... 2,844 7,558
Commodity Price Swaps:
Margin Cash............................................................ -- 2,434
Unrealized loss in price swaps......................................... -- (811)
Natural Gas Options:
Premiums............................................................... -- 66
Unrealized gain in trading options..................................... -- 978
------- -------
Total market value..................................................... $19,112 $38,280
======= =======
</TABLE>
In 1995 the Company recognized net gains of approximately $18.4 million from
its investments compared with net gains in 1994 of $6.7 million and in 1993 of
$4.0 million. These gains do not include gains or losses from natural gas
futures contracts accounted for as a hedge of natural gas production. Hedge
gains or losses are included in natural gas revenue in the period in which the
hedged production occurs (see Note 1).
F-30
<PAGE> 132
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net investment gains and losses recognized during a period include both
realized and unrealized gains and losses. The Company realized net gains from
investments of $12.3 million in 1995, $4.7 million in 1994, and $2.3 million in
1993. At December 31, 1995, the Company had recognized but not realized
approximately $7.6 million of gains associated primarily with natural gas
futures. Subsequent to year end, the Company closed some of its positions which
were open on December 31, 1995. As of March 6, 1996, the Company had closed
substantially all of the positions open at December 31, 1995, at a realized loss
of $156,000. Positions which were open at December 31, 1995, and remain open had
unrealized gains of $1.7 million at March 6, 1996.
In 1995 the Company invested in certain over-the-counter commodity price
swap agreements for trading purposes. The Company is required to make payments
to (or receive payments from) a counter party based on the differential between
a fixed and a variable price for specified natural gas volumes. The Company's
agreements expire on the last day of trading for April, May and June 1996
natural gas futures contracts as determined by the NYMEX. The Company is the
fixed price payor on a notional quantity of 10.1 million British thermal units
of natural gas with a fair value of $18.3 million at December 31, 1995. The
average fair value of such commodity price swaps during 1995 was $18.4 million.
In 1995 the Company also entered into over-the-counter natural gas futures call
and put options contracts. At December 31, 1995, the open quantity of options
was 1,800 contracts (each contract represents 10,000 MMBtu of natural gas) with
a fair value of $1.0 million. The average fair value of such option contracts
during 1995 was $.4 million. The counter party to these instruments is a
credit-worthy financial institution which is a recognized market-maker. The
Company believes the risk of incurring losses related to credit risk of the
counter party is remote.
(4) LONG-TERM DEBT
Long-term debt and current maturities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
HCLP Secured Notes.................................................. $ 520,180 $ 504,674
Credit Agreement.................................................... 71,131 61,131
12 3/4% secured discount notes...................................... 581,942 618,518
12 3/4% unsecured discount notes.................................... 37,345 39,725
13 1/2% subordinated notes.......................................... 7,390 7,390
Other............................................................... 5,305 5,305
---------- ----------
1,223,293 1,236,743
Current maturities.................................................. (30,537) (101,413)
---------- ----------
Long-term debt...................................................... $1,192,756 $1,135,330
========== ==========
</TABLE>
HCLP Secured Notes
In 1991 HCLP issued $616 million of secured notes (the "HCLP Secured Notes")
in a private placement with a group of institutional lenders. The issuance also
funded a $66 million restricted cash balance within HCLP, which is available to
supplement cash flows from the HCLP properties in the event such cash flows are
not sufficient to fund principal and interest payments on the HCLP Secured Notes
when due. As the HCLP Secured Notes are repaid, the required restricted cash
balance is reduced. HCLP holds substantially all of the Company's Hugoton field
natural gas properties.
The HCLP Secured Notes were issued in 15 series and have final stated
maturities extending through 2012 but can be retired earlier. The HCLP Secured
Notes outstanding at December 31, 1995, bear interest at fixed rates ranging
from 8.80% to 11.30% per annum (weighted average 10.31%). Principal and interest
payments are made semiannually. Provisions in the HCLP Secured Note agreements
require interest rate premiums to be paid to the noteholders in the event that
the HCLP Secured Notes are repaid more rapidly or slowly than under the initial
scheduled amortization. Beginning in August 1994, HCLP elected to make principal
payments on the HCLP Secured Notes based on actual production, rather than
according to the initial scheduled amortization. As a result, interest rate
premiums at a rate of 1.5% per annum will be applied to those principal amounts
not paid according to the initial scheduled amortization and .35% per annum will
be applied to the remaining notes.
F-31
<PAGE> 133
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Such premiums have increased the effective weighted average interest rate
payable on the remaining HCLP Secured Notes outstanding to 10.79% per annum at
December 31, 1995.
The HCLP Secured Note agreements contain various covenants which, among
other things, limit HCLP's ability to sell or acquire oil and gas property
interests, incur additional indebtedness, make unscheduled capital expenditures,
make distributions of property or funds subject to the mortgage, or enter into
certain types of long-term contracts or forward sales of production. The
agreements also require HCLP to maintain separate existence from the Company and
its other subsidiaries. The assets of HCLP that are subject to the mortgage
securing the HCLP Secured Notes are dedicated to service HCLP's debt and are not
available to pay creditors of the Company or its subsidiaries other than HCLP.
Any cash not subject to the mortgage is available for distribution to the
Company's subsidiaries which own HCLP's equity.
The HCLP Secured Note agreements also contain a provision which requires
calculation and payment of premiums on early retirement of the HCLP Secured
Notes. The actual premiums due in the event of a redemption of the HCLP Secured
Notes will depend on prevailing interest rates at the date of redemption and the
amount of debt redeemed. In the aggregate, such premiums would have totaled $79
million as of December 31, 1995.
Revenues received from production from HCLP's Hugoton properties are
deposited in a collection account maintained by a collateral agent (the
"Collateral Agent"). The Collateral Agent releases or reserves funds, as
appropriate, for the payment of royalties, taxes, operating costs, capital
expenditures and principal and interest on the HCLP Secured Notes. Only after
all required payments have been made may any remaining funds held by the
Collateral Agent be released from the mortgage.
By April 29, 1996, HCLP is required to obtain a reserve report as of
December 31, 1995, covering its Hugoton field properties prepared by an
independent engineering consultant. HCLP is required to compare the reserve
quantities in such reserve report to the initial reserve quantities set forth in
the HCLP Secured Note agreements, adjusted for production. If the quantities in
such reserve report are less than the adjusted initial quantities, a Deficit
Reserve Amount ("DRA"), as defined, is determined to exist. To the extent a DRA
exists, the Collateral Agent is required to retain additional funds in the
collection account subject to the mortgage for the repayment of the HCLP Secured
Notes. The Company is not obligated to fund any principal payments at HCLP from
sources other than HCLP's Hugoton field properties. The independent reserve
report has not been completed, but HCLP has received preliminary indications
that the independent engineers' estimates of reserve quantities related to the
Hugoton field properties will reflect a downward revision from previous years.
Although HCLP has not determined whether a DRA will result from such downward
revisions, preliminary estimates indicate that a DRA, if any, will not be
material. See Note 14 (unaudited) for subsequent events affecting the DRA.
The restricted cash balance and cash held by the Collateral Agent for
payment of interest and principal on the HCLP Secured Notes are invested by the
Collateral Agent under the terms of a guaranteed investment contract (the "GIC")
with Morgan Guaranty Trust Co. of New York ("Morgan"). Morgan was paid $13.9
million at the date of issuance of the HCLP Secured Notes to guarantee that
funds invested under the GIC would earn an interest rate equivalent to the
weighted average coupon rate on the outstanding principal balance of the HCLP
Secured Notes (10.31% at December 31, 1995). A portion of this amount may be
refunded if the HCLP Secured Notes are repaid earlier than if HCLP had produced
according to its scheduled production, depending primarily on prevailing
interest rates at that time.
F-32
<PAGE> 134
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
HCLP's cash balances were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1994 1995
------- -------
<S> <C> <C>
Subject to the mortgage.................................................. $48,087 $40,163
Not subject to the mortgage.............................................. 1,551 7,450
------- -------
Cash included in current assets.......................................... $49,638 $47,613
======= =======
Restricted cash included in noncurrent assets............................ $61,299 $57,731
======= =======
Refundable GIC fee included in noncurrent assets......................... $10,295 $ 9,010
======= =======
</TABLE>
Mesa Operating Co. ("MOC"), a Company subsidiary which owns 99% of the
limited partnership interests of HCLP, is party to a services agreement with
HCLP. MOC provides services necessary to operate the Hugoton field properties
and market production therefrom, processes remittances of production revenues
and performs certain other administrative functions in exchange for a services
fee. The fee totaled approximately $13.2 million in 1995, $12.8 million in 1994,
and $11.4 million in 1993.
Credit Agreement
As of December 31, 1995, the Company had outstanding borrowings of
approximately $61.1 million and letter of credit obligations of $11.4 million
under its $82.5 million bank credit facility, as amended (the "Credit
Agreement"). The Credit Agreement requires principal payments of $22.5 million
in the first half of 1996 with the remainder due in June 1997 (including cash
collateralization of letters of credit outstanding at that time).
The rate of interest payable on borrowings under the amended Credit
Agreement is the lesser of the Eurodollar rate plus 2 1/2% or the prime rate
plus 1/2%. Obligations under the Credit Agreement are secured by a first lien
on the Company's West Panhandle field properties, the Company's equity interest
in MOC and a 76% limited partner interest in HCLP.
The amended Credit Agreement requires the Company to maintain tangible
adjusted equity, as defined, of at least $50 million and available cash, as
defined, of at least $32.5 million. At December 31, 1995, the Company's tangible
adjusted equity, as defined, was approximately $64.7 million and available cash,
as defined, was $139.5 million (See Note 2 for discussion of the tangible
adjusted equity covenant and its potential effect on the Company's liquidity).
The Credit Agreement also restricts, among other things, the Company's
ability to incur additional indebtedness, create liens, pay dividends, acquire
stock or make investments, loans and advances.
Discount Notes
In conjunction with a debt exchange transaction consummated on August 26,
1993, (the "Debt Exchange"), the Company issued approximately $435.5 million
initial accreted value, as defined, of 12 3/4% secured discount notes due June
30, 1998 and $136.9 million initial accreted value, as defined, of 12 3/4%
unsecured discount notes due June 30, 1996 (together, the "Discount Notes") in
exchange for $293.7 million aggregate principal amount of 12% subordinated notes
and $292.6 million aggregate principal amount of 13 1/2% subordinated notes
(together with the $28.6 million of accrued interest claims thereon). The
Company also issued $29.3 million principal amount of 0% convertible notes due
June 30, 1998, which were converted into approximately 7.5 million shares of
common stock by the end of 1993. The Discount Notes, which rank pari passu with
each other, are senior in right of payment to the remaining 13 1/2% subordinated
notes due 1999 and subordinate to all permitted first lien debt, as defined,
including obligations under the Credit Agreement.
On March 2, 1994, the Company issued $48.2 million face amount of additional
12 3/4% secured discount notes due June 30, 1998. The proceeds of $42.8 million
were used to pay the settlement amount arising from the 1994 settlement of a
lawsuit with Unocal Corporation ("Unocal"). The additional indebtedness incurred
to settle the Unocal lawsuit was specifically permitted under the terms of the
indentures governing the Discount Notes and under the Credit Agreement (See Note
9 for additional discussion of the Unocal litigation).
F-33
<PAGE> 135
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Discount Notes did not accrue interest through June 30, 1995; however,
the accreted value, as defined, of both series increased at a rate of 12 3/4%
per year, compounded semiannually, until June 30, 1995. Beginning July 1, 1995,
each series began to accrue interest at an annual rate of 12 3/4%, payable in
cash semiannually in arrears, with the first payment due on December 31, 1995.
In the second quarter of 1994 the Company completed a public offering in
which 16.3 million shares of the Company's common stock were sold for net
proceeds of $93 million ($6 per share) (the "Equity Offering"). The Company used
approximately $87 million of the proceeds to redeem or repurchase $87 million
accreted value ($99.1 million face amount at maturity) of 12 3/4% unsecured
discount notes which were due in 1996.
In the fourth quarter of 1994 the Company used proceeds from increased
borrowings under its amended Credit Agreement to redeem $37.6 million accreted
value ($40.0 million face amount at maturity) of 12 3/4% unsecured discount
notes which were due in 1996.
The 12 3/4% secured discount notes are secured by second liens on the
Company's West Panhandle field properties and a 76% limited partner interest in
HCLP, both of which also secure obligations under the Credit Agreement. The
Company's right to maintain first lien debt, as defined, is limited by the terms
of the Discount Notes to $82.5 million.
See Note 2 for a discussion of certain cross-default provisions in the
Discount Note indentures which could become effective if the Company defaults
under the terms of the tangible adjusted equity covenant of the Credit
Agreement.
The indentures governing the Discount Notes restrict, among other things,
the Company's ability to incur additional indebtedness, pay dividends, acquire
stock or make investments, loans and advances.
Subordinated Notes
The 13 1/2% subordinated notes are unsecured and mature in 1999. Interest on
these notes is payable semiannually in cash.
Interest and Maturities
The aggregate interest payments, net of amounts capitalized, made during
1995, 1994, and 1993 were $63.8 million, $62.1 million and $86.5 million,
respectively. In addition, on January 2, 1996, according to terms of the
Discount Notes, the Company made a $42 million interest payment related to its
Discount Notes which was due December 31, 1995. Payment of approximately $39.0
million, $70.6 million and $64.6 million of interest incurred during 1995, 1994
and 1993, respectively, has been deferred under the terms of the Debt Exchange
until the repayment dates of the Discount Notes. Such interest is included in
interest expense in the 1995, 1994 and 1993 consolidated statements of
operations.
The scheduled principal repayments on long-term debt for the next five years
are as follows (in millions):
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000
------ ----- ------ ----- -----
<S> <C> <C> <C> <C> <C>
HCLP Secured Notes(a)............................... $ 33.9 $33.3 $ 36.1 $37.1 $36.0
Credit Agreement(b)(c).............................. 22.5 38.6 -- -- --
12 3/4% secured discount notes(d)................... -- -- 617.4 -- --
12 3/4% unsecured discount notes(d)................. 39.7 -- -- -- --
13 1/2% subordinated notes.......................... -- -- -- 7.4 --
Other............................................... 5.3 -- -- -- --
------ ----- ------ ----- -----
Total...................................... $101.4 $71.9 $653.5 $44.5 $36.0
====== ===== ====== ===== =====
</TABLE>
- ---------------
(a) Principal payment requirements could be greater, in the aggregate, in 1996
through 1998 if a DRA is determined to exist.
(b) Excludes approximately $11.4 million in letter of credit obligations
currently outstanding and required to be cash collateralized in June 1997.
F-34
<PAGE> 136
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Maturities may be accelerated if tangible adjusted equity falls below $50
million (See Note 2).
(d) Maturities may be accelerated if an Event of Default occurs and continues
under the Credit Agreement (See Note 2).
Fair Value of Long-Term Debt
The following is a summary of estimated fair value of the Company's
long-term debt as of the years ended (in thousands):
<TABLE>
<CAPTION>
1994 1995
---------------------- ----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
HCLP Secured Notes............................... $520,180 $ 535,135 $504,674 $ 568,641
Credit Agreement................................. 71,131 71,131 61,131 61,131
12 3/4% secured discount notes................... 581,942 528,688 618,518 541,905
12 3/4% unsecured discount notes................. 37,345 37,591 39,725 35,262
13 1/2% subordinated notes....................... 7,390 7,390 7,390 7,390
</TABLE>
The fair value of long-term debt is estimated based on the market prices for
the Company's publicly traded debt and on current rates available for similar
debt with similar maturities and security for the Company's remaining debt.
Based on the current financial condition of the Company, there is no assurance
that the Company could obtain borrowings under long-term debt agreements with
terms similar to those described above and receive proceeds approximating the
estimated fair values.
(5) INCOME TAXES
The Company provides for income taxes using the asset and liability method
under which deferred tax assets and liabilities are recognized by applying the
enacted statutory tax rates applicable to future years to temporary differences
between the financial statement and tax bases of existing assets and
liabilities. The tax basis of the Company's consolidated net assets is greater
than the financial basis of those net assets; therefore a net deferred tax asset
has been recorded. However, due to the Company's history of net operating losses
and its current financial condition, a valuation allowance has been recorded
which offsets the entire net deferred tax asset. A summary of the Company's net
deferred tax asset is as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1994 1995
----- -----
<S> <C> <C>
Deferred tax asset........................................................... $ 240 $ 261
Deferred tax liability....................................................... -- --
Valuation allowance.......................................................... (240) (261)
----- -----
Net deferred tax asset.............................................. $ -- $ --
===== =====
</TABLE>
The principal components of the Company's net deferred tax asset (utilizing
a 39% combined federal and state income tax rate) and the valuation allowance
are as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1994 1995
----- -----
<S> <C> <C>
Tax basis of oil and gas properties in excess of financial basis............. $ 80 $ 75
Regular tax net operating loss carryforward.................................. 156 184
Other, net................................................................... 4 2
Valuation allowance.......................................................... (240) (261)
----- -----
Net deferred tax asset.............................................. $ -- $ --
===== =====
</TABLE>
F-35
<PAGE> 137
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1995, the Company had a regular tax net operating loss
carryforward of approximately $470 million. Additionally, the Company had an
alternative minimum tax loss carryforward available to offset future alternative
minimum taxable income of approximately $450 million. If not used, these
carryforwards will expire between 2007 and 2010.
The Internal Revenue Service Code of 1986 (the "Code") contains numerous
provisions which restrict or limit the use of corporate tax attributes in
conjunction with corporate acquisitions, dispositions, and reorganizations.
Included among these restrictive provisions is Code Section 382 which, in
general, limits the utilization of net operating loss carryovers subsequent to a
substantial change (generally more than 50%) in corporate stock ownership. The
Section 382 ownership change (as defined for tax purposes) is considered on a
cumulative basis over a specified time period, normally three years. Successful
completion of the Rainwater transaction (see Note 2) is expected to result in a
Section 382 ownership change which will limit the utilization of the Company's
tax carryforwards prior to their expiration.
The Company assumed from the Partnership any tax liabilities or refunds
which may arise as a result of any changes to Original Mesa's taxable income or
loss for open tax years. During 1993, the Internal Revenue Service (the "IRS")
completed two field examinations of the tax returns filed by Original Mesa for
the tax years 1984 through 1987. In December 1993 the Company made a payment to
the IRS of approximately $13 million, which payment includes interest, in full
settlement of all claims for these years. The Company was fully reserved for the
additional tax assessment relating to the tax years 1984 through 1987. As of
January 1, 1995, there are no remaining open tax years for Original Mesa for
federal income tax purposes.
(6) PROPERTY SALES
In April 1993 the Company sold a portion of its Rocky Mountain area
properties for approximately $7.1 million, after adjustments, and recorded a
gain on the sale of approximately $4.1 million. The Company also retained a
reversionary interest in the properties under which the Company will receive a
50% net profits interest in the properties after the purchaser has recovered its
investment and certain other costs and expenses.
In June 1993 the Company sold its interest in the deep portion of the
Hugoton field not owned by HCLP for approximately $19.0 million, after
adjustments, and recorded a gain on the sale of approximately $5.5 million.
(7) STOCKHOLDERS' EQUITY
At December 31, 1995, the Company had outstanding 64.1 million shares of
common stock. In 1993 the Company issued 7.5 million shares of common stock in
conjunction with the Debt Exchange (see Note 4). In late 1993 and 1994 the
Company issued a total of approximately 1.7 million shares of common stock in
exchange for the General Partner's 4.14% interest in the subsidiary partnerships
of the Company (see Note 1). In 1994 the Company completed the Equity Offering
which resulted in the issuance of an additional 16.3 million shares of common
stock. Proceeds from the Equity Offering increased stockholders' equity by
approximately $93 million and were used to reduce long-term debt (see Note 4).
The Company has authorized 10 million shares of preferred stock. No shares
of preferred stock have been issued as of December 31, 1995.
In July 1995, in conjunction with the determination of the Board of
Directors of the Company to include the possible sale or merger of the Company
among its strategic alternatives, the Board approved a proposal that the Company
adopt a limited-term stockholder rights plan (the "Rights Plan"). The provisions
of the Rights Plan would be triggered if a person or group acquired beneficial
ownership of 10% or more of the Company's common stock after July 6, 1995,
except pursuant to a "permitted offer" -- a tender or exchange offer that meets
certain criteria, whether or not approved by the Board. However, if any person
or group beneficially owned more than 10% of the common stock on July 6, 1995,
the Rights Plan would not be triggered unless that person or group were to
obtain beneficial ownership of more than 100,000 additional shares. If
triggered, the Rights Plan would allow all stockholders, other than the person
or group exceeding the beneficial ownership threshold, to purchase common stock
at a 50% discount.
F-36
<PAGE> 138
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) NOTES RECEIVABLE
Prior to 1992 the Company had notes receivable totaling $68 million,
exclusive of interest, from Bicoastal Corporation ("Bicoastal") which was in
bankruptcy. Because of the uncertainty of collection, the Company did not record
interest on these notes. A plan of reorganization for Bicoastal was approved by
the Bankruptcy Court in September 1992. During 1992 and 1993, the Company
collected a total of approximately $74 million from Bicoastal, representing all
of the Company's principal amount of allowed claims in the bankruptcy
reorganization plan, plus an additional amount representing a portion of its
interest claims. As a result, the Company recorded gains of $18.5 million in
1993 relating to collections in excess of the recorded receivable. In 1995 and
1994 the Company recorded gains of $6.4 million and $16.6 million, respectively,
from additional interest claims collected from Bicoastal.
(9) CONTINGENCIES
Masterson
In February 1992 the current lessors of an oil and gas lease (the "Gas
Lease") dated April 30, 1955, between R. B. Masterson, et al., as lessor, and
Colorado Interstate Gas Company ("CIG"), as lessee, sued CIG in Federal District
Court in Amarillo, Texas, claiming that CIG had underpaid royalties due under
the Gas Lease. Under the agreements with CIG, Mesa has an entitlement to gas
produced from the Gas Lease. In August 1992 CIG filed a third-party complaint
against the Company for any such royalty underpayments which may be allocable to
the Company. The plaintiffs alleged that the underpayment was the result of
CIG's use of an improper gas sales price upon which to calculate royalties and
that the proper price should have been determined pursuant to a
"favored-nations" clause in a July 1, 1967, amendment to the Gas Lease (the "Gas
Lease Amendment"). The plaintiffs also sought a declaration by the court as to
the proper price to be used for calculating future royalties.
The plaintiffs alleged royalty underpayments of approximately $500 million
(including interest at 10%) covering the period from July 1, 1967, to the
present. In March 1995 the court made certain pretrial rulings that eliminated
approximately $400 million of the plaintiffs' claims (which related to periods
prior to October 1, 1989), but which also reduced a number of the Company's
defenses. The Company and CIG filed stipulations with the court whereby the
Company would have been liable for between 50% and 60%, depending on the time
period covered, of an adverse judgment against CIG for post-February 1988
underpayments of royalties.
On March 22, 1995, a jury trial began and on May 4, 1995, the jury returned
its verdict. Among its findings, the jury determined that CIG had underpaid
royalties for the period after September 30, 1989, in the amount of
approximately $140,000. Although the plaintiffs argued that the
"favored-nations" clause entitled them to be paid for all of their gas at the
highest price voluntarily paid by CIG to any other lessor, the jury determined
that the plaintiffs were stopped from claiming that the "favored-nations" clause
provides for other than a pricing-scheme to pricing-scheme comparison. In light
of this determination, and the plaintiffs' stipulation that a pricing-scheme to
pricing-scheme comparison would not result in any "trigger prices" or damages,
defendants asked the court for a judgment that plaintiffs take nothing. The
court, on June 7, 1995, entered final judgment that plaintiffs recover no
monetary damages. The Company cannot predict whether the plaintiffs will appeal.
However, based on the jury verdict and final judgment, the Company does not
expect the ultimate resolution of this lawsuit to have a material adverse effect
on its financial position or results of operations.
Lease Termination
In 1991 the Company sold certain producing oil and gas properties to Seagull
Energy Company ("Seagull"). In 1994 two lawsuits were filed against Seagull in
the 100th District Court in Carson County, Texas, by certain land and royalty
owners claiming that certain of the oil and gas leases owned by Seagull have
terminated due to cessation in production and/or lack of production in paying
quantities occurring at various times from first production through 1994. In the
third quarter of 1995 Seagull filed third-party complaints against the Company
claiming breach of warranty and false representation in connection with the sale
of such properties to Seagull. The Company believes it has several defenses to
these lawsuits including a two-year limitation on indemnification set forth in
the purchase and sale agreement.
F-37
<PAGE> 139
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Seagull filed a similar third-party complaint against the Company covering a
different lease in the 69th District Court in Moore County, Texas. The Company
believes it has similar defenses in this case.
The plaintiffs in the cases against Seagull are seeking to terminate the
leases. Seagull, in its complaint against the Company, is seeking unspecified
damages relating to any leases which are terminated.
The Company does not expect the resolution of this lawsuit to have a
material adverse effect on its financial position or results of operations.
Unocal
The Company was subject to a lawsuit relating to a 1985 investment in Unocal
which asserted that certain profits allegedly realized by the Company and other
defendants upon the disposition of Unocal common stock in 1985 were recoverable
by Unocal pursuant to Section 16(b) of the Securities Exchange Act of 1934. On
January 11, 1994, the Company and other defendants entered into a settlement
agreement (the "Settlement Agreement") whereby they agreed to pay Unocal an
aggregate of $47.5 million, of which $42.75 million was to be paid by the
Company and $4.75 million by the other defendants. The Settlement Agreement was
approved by the court on February 28, 1994. The Company funded its share of the
settlement amount with proceeds from issuance of additional long-term debt. (See
Note 4 for discussion of the issuance of the additional long-term debt.) As a
result of the settlement, the Company recognized a $42.8 million loss in the
fourth quarter of 1993.
Other
The Company is also a defendant in other lawsuits and has assumed
liabilities relating to Original Mesa and the Partnership. The Company does not
expect the resolution of these other matters to have a material adverse effect
on its financial position or results of operations.
The Company assumed certain litigation and tax-related obligations from
Original Mesa and the Partnership and also recorded certain contingent
liabilities relating to various matters, including litigation, office space
leases and retirement benefit obligations, in conjunction with the 1986
acquisition of Pioneer Corporation ("Pioneer") and the 1988 acquisition of
Tenneco Inc.'s midcontinent division. During the fourth quarter of 1993, the
Company settled certain claims with the IRS (see Note 5) and resolved or
revalued certain other contingent liabilities to reflect actual or estimated
liabilities. The Company had previously reserved for the IRS claims and certain
other contingencies in excess of the actual or estimated liabilities. As a
result, the Company recorded a net gain of $24 million in the fourth quarter of
1993.
(10) EMPLOYEE BENEFIT PLANS
Retirement Plans
The Company maintains two defined contribution retirement plans for the
benefit of its employees. The Company expensed $.8 million in 1995, $3.3 million
in 1994, and $3.2 million in 1993 in connection with these plans. The Company
determines the contributions to such plans based on a percentage of each
employee's compensation, subject to limitations specified by the Code. The
Company declared contributions of 5% of each employee's compensation in 1995 and
17% of each employee's compensation in 1994 and 1993.
F-38
<PAGE> 140
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Option Plan
In December 1991 the stockholders of the Company approved the 1991 Stock
Option Plan of the Company (the "Option Plan"), which authorized the grant of
options to purchase up to two million shares of common stock to officers and key
employees. In May 1994 the stockholders of the Company approved an amendment to
the Option Plan which increased the number of shares of common stock authorized
from two million to four million. The exercise price for each share of common
stock placed under option cannot be less than 100% of the fair market value of
the common stock on the date the option is granted. Upon exercise, the grantee
may elect to receive either shares of common stock or, at the discretion of the
Option Committee of the Board of Directors, cash or certain combinations of
stock and cash in an amount equal to the excess of the fair market value of the
common stock at the time of exercise over the exercise price. At December 31,
1995, the following stock options were outstanding:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS
-----------------
<S> <C>
Outstanding at December 31, 1994............................................ 2,976,460
Granted................................................................... 20,000
Exercised................................................................. --
Forfeited................................................................. (14,070)
---------
Outstanding at December 31, 1995............................................ 2,932,390
=========
</TABLE>
The outstanding options at December 31, 1995, are detailed as follows:
<TABLE>
<CAPTION>
EXERCISE
NUMBER OF OPTIONS DATE OF GRANT PRICE PER SHARE EXERCISABLE
- ----------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
1,126,000................................... 01/10/92 $ 6.8125 1,126,000
134,500.................................... 10/02/92 11.6875 134,500
101,890.................................... 05/18/93 5.8125 81,512
475,000.................................... 11/10/93 7.3750 380,000
75,000.................................... 06/06/94 6.1875 41,250
1,000,000................................... 12/01/94 4.2500 550,000
20,000.................................... 05/12/95 5.6875 6,000
---------
2,932,390 2,319,262
=========
</TABLE>
Options are exercisable from the date of grant as follows: after six months,
30%; after one year, 55%; after two years, 80%; and after three years, 100%. At
December 31, 1995, options for 1,004,890 shares were available for grant.
In October 1995 the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which establishes accounting and reporting standards for
stock-based employee compensation plans. SFAS No. 123 defines a fair value-based
method of accounting for stock options or similar equity instruments, but allows
companies to continue to measure compensation cost using the intrinsic
value-based method prescribed by Accounting Principles Board Opinion ("APB") No.
25, "Accounting for Stock Issued to Employees." Under the fair value-based
method, compensation cost is measured at the grant date based on the value of
the award and is recognized over the service period (generally, the vesting
period). Under the intrinsic value-based method, compensation cost is the
excess, if any, of the quoted market price of the stock at the date of grant
over the exercise price.
Under the provisions of SFAS No. 123, a company may elect to measure
compensation cost associated with its stock option and similar plans as a
component of compensation expense in its statement of operations. Companies may
also elect to continue to measure compensation cost under the provisions of APB
No. 25. Companies which elect to continue measurement under APB No. 25 are
required to provide pro forma disclosure in the notes to financial statements
reflecting the difference, if any, between compensation cost included in net
income and the cost if the fair value-based method were used including effects
on earnings per share. Since the inception of the Option Plan, the Company has
not recognized any compensation cost related
F-39
<PAGE> 141
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to grants of stock options. The disclosure requirements of this statement are
effective for financial statements for fiscal years beginning after December 15,
1995. At this time, the Company does not expect to adopt the fair value-based
method of accounting for its stock option plans and, accordingly, adoption of
this statement will have no impact on the Company's results of operations.
Postretirement Benefits
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," which requires that
the costs of such benefits be recorded over the periods of employee service to
which they relate. For the Company, this standard primarily applies to
postretirement medical benefits for retired and current employees. The liability
for benefits existing at the date of adoption (the "Transition Obligation") will
be amortized over the remaining life of the retirees or 20 years, whichever is
shorter.
The Company maintains two separate plans for providing postretirement
medical benefits. One plan covers the Company's retirees and current employees
(the "Mesa Plan"). The other plan relates to the retirees of Pioneer which was
acquired by the Company in 1986 (the "Pioneer Plan"). Under the Mesa Plan,
employees who retire from the Company and who have had at least ten years of
service with the Company after attaining age 45 are eligible for postretirement
health care benefits. These benefits may be subject to deductibles, copayment
provisions, retiree contributions and other limitations and the Company has
reserved the right to change the provisions of the plan. The Pioneer Plan is
maintained for Pioneer retirees and dependents only and is subject to
deductibles, copayment provisions and certain maximum payment provisions. The
Company does not have the right to change the Pioneer Plan or to require retiree
contributions. Both plans are self-insured indemnity plans and both coordinate
benefits with Medicare as the primary payer. Neither plan is funded.
The following table reconciles the status of the two plans with the amount
included under other liabilities in the consolidated balance sheet at December
31, 1995, (in thousands):
<TABLE>
<CAPTION>
MESA PLAN PIONEER PLAN TOTAL
--------- ------------ -------
<S> <C> <C> <C>
Accumulated Postretirement Benefit Obligation ("APBO"):
Retirees and dependents................................. $ 1,080 $ 11,289 $12,369
Actives -- fully eligible............................... 353 -- 353
Other actives........................................... 731 -- 731
------- -------- -------
Total APBO....................................... 2,164 11,289 13,453
Unrecognized Transition Obligation........................ (1,420) (2,310) (3,730)
------- -------- -------
Accrued Postretirement Benefit Obligation................. $ 744 $ 8,979(a) $ 9,723
======= ======== =======
</TABLE>
- ---------------
(a) The Company established an accrued liability associated with the Pioneer
Plan in conjunction with its acquisition of Pioneer in 1986.
For measurement purposes, the 1995 annual rate of increase in per capita
cost of covered health care benefits was assumed to be 10% for those
participants under age 65 and 9% for those participants over age 65. The rates
were assumed to decrease gradually to 5.0% by the year 2000 and to remain at
that level thereafter. The health care cost trend rate assumption affects the
amount of the Transition Obligation and periodic cost reported. An increase in
the assumed health care cost trend rates by 1% in each year would increase the
APBO as of December 31, 1995, by approximately $735,000 and the net periodic
postretirement benefit cost for the year ended December 31, 1995, by
approximately $77,000. The net periodic postretirement benefit cost for the year
ended December 31, 1995, was approximately $1.4 million based on the assumptions
used.
The discount rate used in determining the APBO as of December 31, 1995, was
8%.
F-40
<PAGE> 142
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents the Company's cost of postretirement benefits
other than pensions for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Net periodic postretirement benefit cost:
Service cost..................................................... $ 96 $ 110 $ 124
Interest cost.................................................... 988 988 1,005
Amortization of Transition Obligation............................ 276 276 276
------ ------ ------
$1,360 $1,374 $1,405
====== ====== ======
Actual costs of providing benefits:
Mesa Plan........................................................ $ 123 $ 120 $ 4
Pioneer Plan..................................................... 909 666 918
------ ------ ------
$1,032 $ 786 $ 922
====== ====== ======
</TABLE>
(11) MAJOR CUSTOMERS
In 1995 revenues include sales to Mapco Petroleum, Inc. ("Mapco") of $75.0
million (34.4%) and Western Resources, Inc. ("WRI") of $21.9 million (10.0%). In
1994 revenues included sales to Mapco of $70.9 million (31.4%), WRI of $37.4
million (16.6%), and Energas Company of $22.8 million (10.1%). In 1993 revenues
included sales to Mapco of $60.2 million (27.5%), WRI of $51.8 million (23.6%)
and Natural Gas Clearinghouse of $23.1 million (10.5%).
(12) CONCENTRATIONS OF CREDIT RISK
Substantially all of the Company's accounts receivable at December 31, 1995,
result from oil and gas sales and joint interest billings to third party
companies in the oil and gas industry. This concentration of customers and joint
interest owners may impact the Company's overall credit risk, either positively
or negatively, in that these entities may be similarly affected by changes in
economic or other conditions. In determining whether or not to require
collateral from a customer or joint interest owner, the Company analyzes the
entity's net worth, cash flows, earnings, and credit ratings. Receivables are
generally not collateralized. Historical credit losses incurred by the Company
on receivables have not been significant.
(13) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The Company conducts its operations through various direct and indirect
subsidiaries. On December 31, 1995, the Company's direct subsidiaries were MOC,
Mesa Holding Co. ("MHC") and Hugoton Management Co. ("HMC"), all of which were
wholly owned by the Company. MOC owns all of the Company's interest in the West
Panhandle field of Texas, the Gulf Coast and the Rocky Mountain areas, as well
as a 98.6% limited partnership interest in HCLP. MHC owns cash and securities, a
0.9% limited partnership interest in HCLP and 100% of Mesa Environmental
Ventures Co. ("Mesa Environmental"), a company established to compete in the
natural gas vehicle market. HMC owns the 0.5% general partner interest in HCLP.
HCLP owns substantially all of the Company's Hugoton field natural gas
properties.
In early 1994 the Company effected a series of merger transactions which
resulted in the conversion of the predecessors of MOC, MHC, and the other
subsidiary partnerships, other than HCLP, to corporate form and eliminated all
of the General Partner's minority interests in the subsidiaries.
Subsidiary Debt
HCLP, together with its wholly owned subsidiary Hugoton Capital Corporation
(a single purpose financing subsidiary of HCLP), are jointly and severally
liable as co-obligors on the HCLP Secured Notes (see Note 4). The assets and
cash flows of HCLP that are subject to the mortgage securing the HCLP Secured
Notes are dedicated to service the HCLP Secured Notes and are not available to
pay creditors of the Company or its subsidiaries other than HCLP. Hugoton
Capital Corporation, which has insignificant assets and results of operations,
is included within HCLP in the condensed consolidating financial statements. MOC
is the borrower and primary obligor under, and the Company has unconditionally
guaranteed MOC's obligations under, the
F-41
<PAGE> 143
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Credit Agreement. The Company, MOC and Mesa Capital Corp. ("Mesa Capital") are
jointly and severally liable as co-obligors under the 13 1/2% subordinated notes
and the Discount Notes. Mesa Capital is a wholly owned financing subsidiary of
MOC. Mesa Capital, which has insignificant assets and results of operations, is
included with MOC in the condensed consolidating financial statements.
Other Company subsidiaries in the condensed consolidating financial
statements include MHC, HMC, and Mesa Environmental. No such other Company
subsidiary is an obligor or guarantor under any long term debt.
Intercompany Debt
As of December 31, 1993, MHC had intercompany payables to MOC of
approximately $123 million. On February 28, 1994, MHC assigned an 18% limited
partnership interest in HCLP (out of its total interest of 18.9%) to MOC in
satisfaction of $90 million of intercompany payables. Provisions of the Discount
Note indentures required the repayment of intercompany indebtedness to specified
levels and provided that any HCLP limited partnership interests transferred in
satisfaction of intercompany debt would be valued at $5 million for each one
percent of interest assigned. MHC repaid an additional $33 million of
intercompany debt to MOC in cash during 1994. As a result of these transactions,
MOC now owns a 98.6% limited partnership interest in HCLP, and all of MHC's
intercompany debt to MOC which was outstanding at December 31, 1993, was
eliminated.
Condensed Consolidating Financial Statements
The following are condensed consolidating financial statements of MESA Inc.,
HCLP, MOC, and the Company's other subsidiaries combined (in millions). These
statements are presented to provide financial information with respect to the
obligors under the Company's debt for the benefit of the holders of such debt.
Separate financial statements of the obligors under the Company's debt are not
presented because they are not required and because the Company believes that
they would not be material to investors. See Note 4 for additional information
regarding the Company's long term debt.
Condensed Consolidating Balance Sheets
<TABLE>
<CAPTION>
OTHER CONSOL. THE
COMPANY AND COMPANY
DECEMBER 31, 1994 MESA INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- -------------------------------------------- --------- ---- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash investments................. $ -- $50 $ 24 $ 70 $ -- $ 144
Other current assets...................... -- 16 39 6 -- 61
----- ---- ----- ---- ----- ------
Total current assets............... -- 66 63 76 -- 205
----- ---- ----- ---- ----- ------
Property, plant and equipment, net........ -- 626 503 1 -- 1,130
Investment in subsidiaries................ 134 -- 126 10 (270) --
Intercompany receivables.................. -- -- 9 -- (9) --
Other noncurrent assets................... -- 88 58 3 -- 149
----- ---- ----- ---- ----- ------
$ 134 $780 $ 759 $ 90 $(279) $1,484
===== ==== ===== ==== ===== ======
Liabilities and Equity:
Current liabilities....................... $ -- $47 $ 41 $ 1 $ -- $ 89
Long-term debt............................ -- 505 688 -- -- 1,193
Intercompany payables..................... 9 -- -- -- (9) --
Other noncurrent liabilities.............. -- -- 73 4 -- 77
Partners'/Stockholders' equity
(deficit)............................... 125 228 (43) 85 (270) 125
----- ---- ----- ---- ----- ------
$ 134 $780 $ 759 $ 90 $(279) $1,484
===== ==== ===== ==== ===== ======
</TABLE>
F-42
<PAGE> 144
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OTHER CONSOL. THE
COMPANY AND COMPANY
DECEMBER 31, 1995 MESA INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- -------------------------------------------- --------- ---- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash investments................. $ -- $47 $ 38 $ 64 $ -- $ 149
Other current assets...................... -- 20 53 15 -- 88
----- ---- ----- ---- ----- ------
Total current assets............... -- 67 91 79 -- 237
----- ---- ----- ---- ----- ------
Property, plant and equipment, net........ -- 602 478 3 -- 1,083
Investment in subsidiaries................ 76 -- 115 10 (201) --
Intercompany receivables.................. -- -- 9 -- (9) --
Other noncurrent assets................... -- 82 58 5 -- 145
----- ---- ----- ---- ----- ------
$ 76 $751 $ 751 $ 97 $(210) $1,465
===== ==== ===== ==== ===== ======
Liabilities and Equity:
Current liabilities....................... $ -- $64 $ 128 $ 1 $ -- $ 193
Long-term debt............................ -- 471 665 -- -- 1,136
Intercompany payables..................... 9 -- -- -- (9) --
Other noncurrent liabilities.............. -- -- 66 3 -- 69
Partners'/Stockholders' equity
(deficit)............................... 67 216 (108) 93 (201) 67
----- ---- ----- ---- ----- ------
$ 76 $751 $ 751 $ 97 $(210) $1,465
===== ==== ===== ==== ===== ======
</TABLE>
CONDENSED CONSOLIDATING STATEMENTS OF
OPERATIONS YEARS ENDED:
<TABLE>
<CAPTION>
OTHER CONSOL. THE
COMPANY AND COMPANY
DECEMBER 31, 1993 MESA INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- -------------------------------------------- --------- ---- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................................... $ -- $103 $ 120 $ (1) $ -- $ 222
----- ---- ----- ---- ----- ------
Costs and Expenses:
Operating, exploration and taxes.......... -- 27 48 -- -- 75
General and administrative................ -- -- 23 2 -- 25
Depreciation, depletion and
amortization............................ -- 35 65 -- -- 100
----- ---- ----- ---- ----- ------
-- 62 136 2 -- 200
----- ---- ----- ---- ----- ------
Operating Income (Loss)..................... -- 41 (16) (3) -- 22
----- ---- ----- ---- ----- ------
Interest expense, net of interest income.... -- (50) (83) 2 -- (131)
Intercompany interest income (expense)...... -- -- 16 (16) -- --
Gains of dispositions of oil and gas
properties................................ -- -- 10 -- -- 10
Equity in loss of subsidiaries.............. (102) -- (7) (2) 111 --
Other....................................... -- -- (42) 29 10 (3)
----- ---- ----- ---- ----- ------
Net Income (Loss)........................... $(102) $(9) $(122) $ 10 $ 121 $ (102)
===== ==== ===== ==== ===== ======
</TABLE>
F-43
<PAGE> 145
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OTHER CONSOL. THE
COMPANY AND COMPANY
DECEMBER 31, 1994 MESA INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- -------------------------------------------- --------- ---- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................................... $ -- $113 $ 116 $ -- $ -- $ 229
----- ---- ----- ----- ----- ------
Costs and Expenses:
Operating, exploration and taxes.......... -- 30 49 -- -- 79
General and administrative................ -- -- 26 3 -- 29
Depreciation, depletion and
amortization............................ -- 37 55 -- -- 92
----- ---- ----- ----- ----- ------
-- 67 130 3 -- 200
----- ---- ----- ----- ----- ------
Operating Income (Loss)..................... -- 46 (14) (3) -- 29
----- ---- ----- ----- ----- ------
Interest expense, net of interest income.... -- (47) (87) 3 -- (131)
Losses on dispositions of oil and gas
properties................................ -- -- -- (91)(d) 91 --
Equity in loss of subsidiaries.............. (83) -- (1) -- 84 --
Other....................................... -- -- 22 15 (18) 19
----- ---- ----- ----- ----- ------
Net Loss.................................... $ (83) $ (1) $ (80) $ (76) $ 157 $ (83)
===== ==== ===== ===== ===== ======
</TABLE>
<TABLE>
<CAPTION>
OTHER CONSOL. THE
COMPANY AND COMPANY
DECEMBER 31, 1995 MESA INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- -------------------------------------------- --------- ---- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................................... $ -- $ 97 $ 137 $ 1 $ -- $ 235
----- ---- ----- ----- ----- ------
Costs and Expenses:
Operating, exploration and taxes.......... -- 28 49 -- -- 77
General and administrative................ -- -- 24 3 -- 27
Depreciation, depletion and
amortization............................ -- 34 49 -- -- 83
----- ---- ----- ----- ----- ------
-- 62 122 3 -- 187
Operating Income (Loss)..................... -- 35 15 (2) -- 48
----- ---- ----- ----- ----- ------
Interest expense, net of interest income.... -- (47) (91) 5 -- (133)
Equity in loss of subsidiaries.............. (58) -- (11) -- 69 --
Other....................................... -- -- 21 6 -- 27
----- ---- ----- ----- ----- ------
Net Income (Loss)........................... $ (58) $(12) $ (66) $ 9 $ 69 $ (58)
===== ==== ===== ===== ===== ======
</TABLE>
F-44
<PAGE> 146
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEARS ENDED:
<TABLE>
<CAPTION>
OTHER CONSOL. THE
COMPANY AND COMPANY
DECEMBER 31, 1993 MESA INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- -------------------------------------------- --------- ---- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities........ $ -- $ 21 $ 16 $ (4) $ -- $ 33
----- ---- ----- ----- ----- ------
Cash Flows from Investing Activities:
Capital expenditures...................... -- (8) (21) (1) -- (30)
Proceeds from dispositions of oil and gas
properties.............................. -- -- 26 -- -- 26
Other..................................... -- -- 30 46 (35) 41
----- ---- ----- ----- ----- ------
-- (8) 35 45 (35) 37
----- ---- ----- ----- ----- ------
Cash Flows from Financing Activities:
Repayments of long-term debt.............. -- (39) (41) -- -- (80)
Other..................................... -- 2 (10) (35) 35 (8)
----- ---- ----- ----- ----- ------
-- (37) (51) (35) 35 (88)
----- ---- ----- ----- ----- ------
Net Increase (Decrease) in Cash and Cash
Investments............................... $ -- $(24) $ -- $ 6 $ -- $ (18)
===== ==== ===== ==== ===== ======
</TABLE>
<TABLE>
<CAPTION>
OTHER CONSOL. THE
MESA COMPANY AND COMPANY
DECEMBER 31, 1994 INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- ----------------------------------------------- ----- ---- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities........... $ -- $ 41 $ (15) $ 23 $ -- $ 49
----- ---- ----- ----- ----- ------
Cash Flows from Investing Activities:
Capital expenditures......................... -- (7) (26) -- -- (33)
Contributions to subsidiaries................ (93) -- (5) (1) 99 --
Distributions from subsidiaries.............. -- -- 10 -- (10) --
Other........................................ -- -- 28 (2) (33) (7)
----- ---- ----- ----- ----- ------
(93) (7) 7 (3) 56 (40)
----- ---- ----- ----- ----- ------
Cash Flows from Financing Activities:
Issuance of common stock..................... 93 -- -- -- -- 93
Repayments of long-term debt................. -- (21) (154) -- -- (175)
Long-term borrowings......................... -- -- 78 -- -- 78
Contributions from equity holders............ -- 6 93 -- (99) --
Distribution to partners..................... -- (10) -- -- 10 --
Other........................................ -- 1 (1) (33) 33 --
----- ---- ----- ----- ----- ------
93 (24) 16 (33) (56) (4)
----- ---- ----- ----- ----- ------
Net Increase (Decrease) in Cash and Cash
Investments.................................. $ -- $ 10 $ 8 $ (13) $ -- $ 5
===== ==== ===== ===== ===== ======
</TABLE>
F-45
<PAGE> 147
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OTHER CONSOL. THE
MESA COMPANY AND COMPANY
DECEMBER 31, 1995 INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- ----------------------------------------------- ----- ---- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities........... $ -- $ 20 $ 50 $ (1) $ -- $ 69
----- ---- ---- ----- ----- ------
Cash Flows from Investing Activities:
Capital expenditures......................... -- (10) (30) (2) -- (42)
Other........................................ -- -- 4 (3) -- 1
----- ---- ---- ----- ----- ------
-- (10) (26) (5) -- (41)
----- ---- ---- ----- ----- ------
Cash Flows from Financing Activities:
Repayments of long-term debt................. -- (16) (10) -- -- (26)
Other........................................ -- 4 -- -- -- 4
----- ---- ---- ----- ----- ------
-- (12) (10) -- -- (22)
----- ---- ---- ----- ----- ------
Net Increase (Decrease) in Cash and Cash
Investments.................................. $ -- $ (2) $ 14 $ (6) $ -- $ 6
===== ==== ===== ===== ===== ======
</TABLE>
- ---------------
Notes to Condensed Consolidated Financial Statements
(a) These condensed consolidating financial statements should be read in
conjunction with the consolidated financial statements of the Company and
notes thereto of which this note is an integral part.
(b) As of December 31, 1995, the Company owns 100% interest in each of MOC, MHC,
and HMC. These condensed consolidating financial statements present the
Company's investment in its subsidiaries and MOC's and MHC's investments in
HCLP using the equity method. Under this method, investments are recorded at
cost and adjusted for the parent company's ownership share of the
subsidiary's cumulative results of operations. In addition, investments
increase in the amount of contributions to subsidiaries and decrease in the
amount of distributions from subsidiaries.
(c) The consolidation and elimination entries (i) eliminate the equity method
investment in subsidiaries and equity in income (loss) of subsidiaries, (ii)
eliminate the intercompany payables and receivables, (iii) eliminate other
transactions between subsidiaries including contributions and distributions,
and (iv) establish the General Partner's minority interest in the
consolidated results of operations and financial position of the Company.
(d) The condensed consolidating statement of operations of MHC for the year
ended December 31, 1994, reflects a $91 million loss from its disposition of
an 18% equity interest in HCLP. The HCLP equity interest was used to repay a
portion of MHC's intercompany payable to MOC and was valued, in accordance
with the provisions of the Discount Note indentures, at $5 million for each
one percent of interest assigned. A loss was recognized for the difference
between the carrying value of the HCLP interest assigned to MOC and the $90
million value attributed to such interests which reduced the intercompany
payable. The loss recognized by MHC is eliminated in consolidation.
(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.
F-46
<PAGE> 148
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Purchase Agreement
On April 26, 1996, the Company entered into a Stock Purchase Agreement with
DNR-Mesa Holdings, L.P., a Texas limited partnership ("DNR") whose sole general
partner is Rainwater. Upon DNR's purchase of 58.8 million shares of a new class
of convertible preferred stock at the first closing under the Stock Purchase
Agreement, DNR as the holder of such preferred stock will elect a majority of
the directors of the Company's board of directors in accordance with the special
voting rights granted to it as the holder of such preferred stock. Such special
voting rights will continue for so long as DNR meets certain minimum ownership
requirements.
HCLP Secured Notes
Subsequent to the issuance of the consolidated financial statements of the
Company for the year ended December 31, 1995, the Company obtained the reserve
report required to be prepared under the HCLP Secured Note Agreements covering
the Hugoton field properties. The reserve report resulted in a downward revision
and a DRA was determined to exist. However, such DRA will not cause the
Collateral Agent to retain additional funds in the collection account. Therefore
principal repayments in addition to those set forth in the scheduled maturities
table in Note 4 will not be required. See Note 4 for additional discussion of
the DRA.
Proposed Recapitalization
On April 26, 1996, the Company entered into a stock purchase agreement with
DNR-MESA Holdings L.P., a Texas limited partnership ("DNR"), whose sole general
partner is Rainwater Inc., a Texas corporation owned by Richard E. Rainwater.
The agreement contemplates that the Company will issue $265 million in new
equity and will repay and/or refinance substantially all of its $1.2 billion of
existing debt (the "Recapitalization"). DNR will purchase approximately 58.8
million shares of a new class of convertible preferred stock entitled Series B
8% Cumulative Convertible Preferred Stock ("Series B Preferred") in a private
placement and the Company will offer approximately 58.4 million shares of Series
A 8% Cumulative Convertible Preferred Stock ("Series A Preferred") to the
Company's stockholders in a rights offering (the "Rights Offering"). DNR will
provide a standby commitment to purchase an additional number of shares of
Series B Preferred equal to the number of shares of Series A Preferred not
subscribed to in the Rights Offering. The rights, to be distributed to common
stockholders on a pro rata basis, will allow the stockholders to purchase, in
respect of each share of common stock, .912 shares of Series A Preferred at
$2.26 per share, the same per share price at which DNR will purchase shares of
Series B Preferred. The rights will be transferrable and holders of the rights
will be offered over-subscription privileges for shares not purchased by other
rights holders.
Each share of Series A and B Preferred will be convertible into one share of
the Company's common stock at any time prior to mandatory redemption in 2008. An
annual 8% pay-in-kind dividend will be paid on the shares during the first four
years following issuance. Thereafter, the 8% dividend may, at the option of the
Company, be paid in cash or additional shares depending on whether certain
financial tests are met and subject to any limitations in the Company's debt
agreements.
The Series A and B Preferred will represent 64.7% of the fully diluted
common shares at the time of issuance and 71.5% after the mandatory four-year
pay-in-kind period, excluding stock options and assuming no other stock issuance
by the Company. The Series A and B Preferred will have a liquidation preference
per share equal to $2.26 plus accrued and unpaid dividends. The terms of the
Series A and Series B Preferred are substantially identical except for certain
voting rights and certain provisions relating to transferability. The Series A
and B Preferred will vote with the common stock as a single class on all
matters, except as otherwise required by law and except for certain special
voting rights of the Series B Preferred, including the right of the holders of
the Series B Preferred to nominate and elect a majority of the Company's Board
of Directors for so long as DNR and its affiliates meet certain minimum stock
ownership requirements and certain rights of the holders of the Series A
Preferred to elect two directors in the event of certain dividend arrearages.
The sale of shares to DNR and certain other matters will be submitted to a
vote of stockholders at a special meeting expected to take place in June 1996.
The Company expects to issue shares to DNR and to complete the refinancing of
its existing debt promptly after that meeting. The Rights Offering would
commence promptly thereafter. On May 9, 1996, the Company filed a registration
statement with the Securities and Exchange Commission (the "SEC") for the
issuance and sale of $132 million of Series A Preferred through the Rights
Offering.
F-47
<PAGE> 149
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On May 7, 1996, the Company and Mesa Operating Co., a direct wholly owned
subsidiary of the Company ("MOC"), filed a registration statement with the SEC
for the issuance and sale of $500 million of senior subordinated notes ("New
Notes") consisting of $325 million of senior subordinated notes and $175 million
of senior subordinated discount notes, both with ten year maturities. In
addition the Company has received a commitment from a group of banks for a new
$500 million senior secured revolving credit facility ("New Credit Facility").
Borrowings under the New Credit Facility and the New Notes, together with
existing cash and investment balances and the $265 million of new equity, will
be used to repay and/or refinance substantially all of the Company's existing
debt. MOC will be the borrower under the New Credit Facility and the issuer of
the New Notes. The Company will unconditionally guarantee MOC's obligations
under both the New Credit Facility and the New Notes.
In connection with the Recapitalization, the Company's other direct wholly
owned subsidiaries, Mesa Holding Co. ("MHC") and Hugoton Management Company
("HMC"), as well as HCLP, will be merged with and into MOC, with MOC being the
surviving entity. As a result, MOC will be the Company's only direct subsidiary
as well as its only significant subsidiary. Of the subsidiaries of MOC that will
exist following the Recapitalization, none will have any operations other than
Mesa Environmental Ventures Co. ("MEV") and Mesa Transmission Co. ("Mesa
Transmission"). Neither MEV nor Mesa Transmission will guarantee any of MOC's or
the Company's debt. Neither MEV's nor Mesa Transmission's results of operations
are material to those of the Company or, following the Recapitalization, to
those of MOC. After the Recapitalization, it is expected that the consolidated
financial statements of MOC and its subsidiaries will be substantially the same
as those of the Company and its subsidiaries.
The consummation of the Recapitalization is subject to certain conditions
including stockholder approval and completion of the refinancing.
Effect of the Recapitalization
The Recapitalization will enhance the Company's ability to compete in the
oil and gas industry by substantially increasing its cash flow available for
investment and improving its ability to attract capital, which will increase its
ability to pursue investment opportunities. Specifically, the Company's
financial condition will improve significantly as a result of the
Recapitalization due to (i) a significant reduction in total debt outstanding,
(ii) a reduction in annual cash interest expense of approximately $75 million,
(iii) the implementation of a cost savings program designed to initially reduce
annual general and administrative and other operating overhead expenses by
approximately $10 million, and (iv) the extension of maturities on its long-term
debt, which will eliminate the Company's present liquidity concerns.
The expected reduction of annual cash interest expense is based on the
following assumptions: (i) initial borrowings under the New Credit Facility of
approximately $350 million, and (ii) annual interest rates of approximately 7%
under the New Credit Facility, 11% under the senior subordinated notes and
12 1/4% under the senior subordinated discount notes. Actual borrowings and
interest rates under the New Credit Facility will fluctuate over time and will
affect Mesa's actual cash interest expense.
Management believes that cash from operating activities, together with as
much as $150 million of availability under the $500 million New Credit Facility
following the completion of the Recapitalization, will be sufficient for the
Company to meet its debt service obligations and scheduled capital expenditures,
and to fund its working capital needs for the next several years following the
Recapitalization.
The successful completion of the Recapitalization is expected to position
the Company to operate and continue as a going concern and to pursue its
business strategies. The consolidated financial statements of the Company do not
include any adjustments reflecting any treatment other than going concern
accounting.
If the Recapitalization is not completed, the Company will pursue other
alternatives to address its liquidity issues and financial condition, including
pursuing other merger and sale transactions, the possibility of seeking to
restructure its balance sheet by negotiating with its current debt holders or
seeking protection from its creditors under the Federal Bankruptcy Code.
F-48
<PAGE> 150
MESA INC.
SUPPLEMENTAL FINANCIAL DATA
Oil and Gas Reserves and Cost Information (Unaudited)
Net proved oil and gas reserves as of December 31, 1995 and 1994, were
estimated by Company engineers. Net proved oil and gas reserves as of December
31, 1993, associated with the Company's two most significant natural gas
producing fields were estimated by independent petroleum engineering
consultants. These two fields, the Hugoton and West Panhandle fields,
represented over 95% of the Company's net proved equivalent natural gas reserves
as of the date estimated by the independent petroleum engineers. All of the
Company's reserves at December 31, 1995, 1994, and 1993, were in the United
States. In accordance with regulations established by the Commission, the
reserve estimates were based on economic and operating conditions existing at
the end of the respective years.
Future prices for natural gas were based on market prices as of each year
end and contract terms, including fixed and determinable price escalations.
Market prices received as of each year end were used for future sales of oil,
condensate and natural gas liquids. Future operating costs, production and ad
valorem taxes and capital costs were based on current costs as of each year end,
with no escalation.
Approximately 65% of the Company's equivalent proved reserves (based on a
factor of six thousand cubic feet "Mcf" of gas per barrel of liquids) at
December 31, 1995, is natural gas. The natural gas prices in effect at December
31, 1995, (having a weighted average of $1.95 per Mcf) were used in accordance
with Commission regulations but may not be the most appropriate or
representative prices to use for estimating reserves since such prices were
influenced by the seasonal demand for natural gas and contractual arrangements
at that date. The average price received by the Company for sales of natural gas
in 1995 was $1.48 per Mcf. Assuming all other variables used in the calculation
of reserve data are held constant, the Company estimates that each $.10 change
in the price per Mcf for natural gas production would affect the Company's
estimated future net cash flows and present value thereof, both before income
taxes, by $109 million and $44 million, respectively. At December 31, 1995, the
Company's standardized measure of future net cash flows from proved reserves
(the "Standardized Measure") and the pretax Standardized Measure were less than
the net book value of oil and gas properties by approximately $100 million and
$25 million, respectively. The Company believes that the ultimate value to be
received for production from its oil and gas properties will be greater than the
current net book value of its oil and gas properties.
At December 31, 1993, the Company's internal estimates of proved reserves
for the Hugoton and West Panhandle properties were greater than the estimates
prepared by independent petroleum engineers as of such date. In the Hugoton
field, the primary difference reflects increased reserves for properties on
which the Company drilled 382 infill wells since 1987 resulting from the
Company's internal interpretation of pressure and cumulative production data. In
the West Panhandle field, the reserve differences result from the interpretation
of cumulative production data on producing wells and in the estimates of proved
undeveloped reserves.
Oil and gas reserve quantities estimated as of December 31, 1995, reflect a
net increase over 1994, after production, of approximately 171 Bcfe of natural
gas. Equivalent natural gas reserves increased in each of the Company's major
production areas. Increases in Hugoton field reserves reflect alignment of the
assumptions used in preparing the proved reserve estimates with the Company's
practice of recovering ethane at the Satanta Plant. In previous years Hugoton
proved reserve estimates were prepared assuming that the Company would not
recover ethane which resulted in slightly higher natural gas volumes, lower
natural gas liquids volumes and lower total equivalent volumes than if ethane
recovery were assumed. The decision as to whether or not to recover ethane is
based on the relative value of ethane as a liquid versus the energy-equivalent
value of such ethane if left in the residue natural gas. In the future, if
economic conditions warrant, the Company may revise proved reserves to reflect
any changes in such relative values. In the West Panhandle field, reserves were
revised upward to reflect the development drilling results over the past year
and the planned upgrade of the Fain Plant for a higher rate of liquids recovery
per Mcf of gas produced from the field. In the Gulf Coast, reserve additions
resulted from exploratory and development drilling in 1994 and 1995.
There are numerous uncertainties inherent in estimating quantities of proved
reserves and in projecting the future rates of production and timing of
development expenditures. Reserve data represent estimates only and should not
be construed as being exact. Estimates prepared by other engineers might be
materially different from those set forth herein. Moreover, the Standardized
Measure should not be construed as the current market value of the proved oil
and gas reserves or the costs that would be incurred to obtain equivalent
F-49
<PAGE> 151
reserves. A market value determination would include many additional factors
including (i) anticipated future changes in oil and gas prices, and production
and development costs; (ii) an allowance for return on investment; (iii) the
value of additional reserves, not considered proved at present, which may be
recovered as a result of further exploration and development activities; and
(iv) other business risks.
CAPITALIZED COSTS AND COSTS INCURRED (UNAUDITED)
Capitalized costs relating to oil and gas producing activities at December
31, 1995, 1994, and 1993 and the costs incurred during the years then ended are
set forth below (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Capitalized Costs:
Proved properties............................................. $1,845,483 $1,865,004 $1,897,168
Unproved properties........................................... 754 2,838 2,995
Accumulated depreciation, depletion and amortization.......... (670,706) (753,827) (834,304)
---------- ---------- ----------
Net.................................................... $1,175,531 $1,114,015 $1,065,859
========== ========== ==========
Costs Incurred:
Exploration and development:
Proved properties........................................... $ 73 $ 523 $ 269
Unproved properties......................................... 17 2,425 157
Exploration costs........................................... 2,705 5,157 8,167
Development costs........................................... 2,381 14,043 14,572
---------- ---------- ----------
Total exploration and development............................. 5,176 22,148 23,165
---------- ---------- ----------
Plants and facilities:
Processing plants........................................... 17,501 3,248 1,850
Field compression facilities................................ 4,387 3,129 10,561
Other....................................................... 2,257 5,168 3,354
---------- ---------- ----------
Total plants and facilities................................. 24,145 11,545 15,765
---------- ---------- ----------
Total costs incurred.......................................... $ 29,321 $ 33,693 $ 38,930
========== ========== ==========
Depreciation, depletion and amortization........................ $ 96,774 $ 89,413 $ 80,513
========== ========== ==========
</TABLE>
ESTIMATED QUANTITIES OF RESERVES (UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------
NATURAL GAS (MMCF) 1993 1994 1995
- ----------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Proved Reserves:
Beginning of year.............................................. 1,276,049 1,202,444 1,303,187
Extensions and discoveries................................... 5,132 6,211 29,728
Purchases of producing properties............................ 166 822 1,000
Revisions of previous estimates.............................. 7,284 176,049 (38,574)
Sales of producing properties................................ (6,367) -- --
Production................................................... (79,820) (82,339) (77,312)
--------- --------- ---------
End of year.................................................... 1,202,444 1,303,187 1,218,029
========= ========= =========
Proved Developed Reserves:
Beginning of year.............................................. 1,223,672 1,159,453 1,257,883
========= ========= =========
End of year.................................................... 1,159,453 1,257,883 1,160,751
========= ========= =========
</TABLE>
F-50
<PAGE> 152
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
NATURAL GAS (MMCF) 1993 1994 1995
- ----------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
NATURAL GAS LIQUIDS, OIL AND CONDENSATE(MBBLS)
Proved Reserves:
Beginning of year.............................................. 87,392 82,446 89,428
Extensions and discoveries................................... 778 491 3,121
Purchases of producing properties............................ -- 1 5
Revisions of previous estimates.............................. 3,083 13,947 26,630
Sales of producing properties................................ (3,019) -- --
Production................................................... (5,788) (7,457) (7,766)
--------- --------- ---------
End of year.................................................... 82,446 89,428 111,418
========= ========= =========
Proved Developed Reserves:
Beginning of year.............................................. 82,439 79,294 85,656
========= ========= =========
End of year.................................................... 79,294 85,656 105,197
========= ========= =========
</TABLE>
- - Proved natural gas liquids, oil and condensate reserve quantities include oil
and condensate reserves at December 31 of the respective years as follows:
1993, 3,296 MBbls, 1994, 5,031 MBbls; and 1995, 9,521 MBbls.
- - In addition to the proved reserves disclosed above, the Company owned proved
helium and carbon dioxide ("CO2") reserves at December 31 of the respective
years as follows: 1993, 5,198 MMcf of helium and 46,376 MMcf of CO2, 1994,
4,457 MMcf of helium and 46,459 MMcf of CO2; and 1995, 3,670 MMcf of helium
and 46,459 MMcf of CO2.
STANDARDIZED MEASURE OF FUTURE NET CASH FLOWS FROM PROVED RESERVES (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------
1993 1994 1995
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows......................................... $ 3,723,760 $ 3,513,282 $ 3,804,371
Future production and development costs:
Operating costs and production taxes...................... (1,337,224) (1,192,005) (1,257,957)
Development and abandonment costs......................... (80,310) (95,441) (96,594)
Future income taxes....................................... (240,017) (211,076) (296,987)
----------- ----------- -----------
Future net cash flows....................................... 2,066,209 2,014,760 2,152,833
Discount at 10% per annum................................. (1,079,278) (1,080,578) (1,186,644)
----------- ----------- -----------
Standardized Measure........................................ $ 986,931 $ 934,182 $ 966,189
=========== =========== ===========
Future net cash flows before income taxes................... $ 2,306,226 $ 2,225,836 $ 2,449,820
=========== =========== ===========
Standardized Measure before income taxes.................... $ 1,068,740 $ 988,325 $ 1,040,413
=========== =========== ===========
</TABLE>
- - The estimate of future income taxes is based on the future net cash flows from
proved reserves adjusted for the tax basis of the oil and gas properties but
without consideration of general and administrative and interest expenses.
F-51
<PAGE> 153
CHANGES IN STANDARDIZED MEASURE (UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------
1993 1994 1995
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Standardized Measure at beginning of year........................ $1,037,181 $ 986,931 $ 934,182
--------- --------- ---------
Revisions of reserves proved in prior years:
Changes in prices and production costs......................... 6,178 (121,300) 52,724
Changes in quantity estimates.................................. 17,616 151,538 71,673
Changes in estimates of future development and abandonment
costs........................................................ 8,054 (27,343) (18,424)
Net change in income taxes..................................... 48,703 27,666 (20,081)
Accretion of discount.......................................... 116,769 106,874 98,833
Other, primarily timing of production.......................... (108,371) (80,650) (94,511)
--------- --------- ---------
Total revisions.................................................. 88,949 56,785 90,214
Extensions, discoveries and other additions, net of future
production and development costs............................... 4,456 8,075 61,259
Purchases of proved properties................................... 138 463 1,692
Sales of oil and gas produced, net of production costs........... (143,502) (146,267) (154,231)
Sales of producing properties.................................... (26,907) -- --
Previously estimated development and abandonment costs incurred
during the period.............................................. 26,616 28,195 33,073
--------- --------- ---------
Net changes in Standardized Measure.............................. (50,250) (52,749) 32,007
--------- --------- ---------
Standardized Measure at end of year.............................. $ 986,931 $ 934,182 $ 966,189
========= ========= =========
</TABLE>
QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1995:
Revenues....................................... $ 62,247 $ 59,174 $ 48,967 $ 64,571
======== ======== ======== ========
Gross profit(1)................................ $ 44,928 $ 44,066 $ 29,926 $ 45,821
======== ======== ======== ========
Operating income............................... $ 15,974 $ 17,080 $ 219 $ 14,692
======== ======== ======== ========
Net loss....................................... $ (7,894) $(13,953) $(32,473) $ (3,248)(2)
======== ======== ======== ========
Net loss per common share...................... $ (.12) $ (.22) $ (.51) $ (.05)
======== ======== ======== ========
1994:
Revenues....................................... $ 61,084 $ 53,361 $ 45,725 $ 68,567
======== ======== ======== ========
Gross profit(1)................................ $ 42,214 $ 34,462 $ 28,713 $ 49,387
======== ======== ======== ========
Operating income (loss)........................ $ 10,176 $ 4,867 $ (2,065) $ 15,705
======== ======== ======== ========
Net loss....................................... $(17,766) $(25,338) $(25,907) $ (14,342)
======== ======== ======== ========
Net loss per common share...................... $ (.37) $ (.43) $ (.40) $ (.22)
======== ======== ======== ========
</TABLE>
- ---------------
(1) Gross profit consists of total revenues less lease operating expenses and
production and other taxes.
(2) In the fourth quarter of 1995 results of operations included net gains from
investments of $18.4 million. (See Note 3 to the consolidated financial
statements of the Company).
F-52
<PAGE> 154
No dealer, salesman or other person has been authorized to give any information
or to make any representations other than those contained in this Prospectus in
connection with the offer contained herein, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Parent, the Company or the Underwriters. This Prospectus does not
constitute an offer to sell or the solicitation of an offer to buy, any
securities other than the securities to which it relates or any offer to sell,
or the solicitation of an offer to buy, such securities in any circumstances in
which such offer or solicitation is unlawful. Neither the delivery of this
Prospectus nor any sale made hereunder will, under any circumstances, create an
implication that there has been no change in the affairs of the Parent or the
Company since the date hereof or that the information contained herein is
correct as of any time subsequent to its date.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary.......................... 3
Risk Factors................................ 14
Use of Proceeds............................. 20
Capitalization.............................. 21
Unaudited Pro Forma Financial Information... 22
Selected Historical Financial Data.......... 28
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 29
Business.................................... 37
Management.................................. 54
Executive Compensation...................... 57
Security Ownership of Certain Beneficial
Owners and Management..................... 63
Description of the Notes.................... 66
Description of the New Credit Facility...... 92
Description of the Stock Purchase Agreement
and the Rights Offering................... 93
Certain Federal Income Tax Considerations... 95
Underwriting................................ 97
Legal Matters............................... 97
Experts..................................... 97
Additional Information...................... 98
Incorporation of Certain Documents by
Reference................................. 98
Glossary of Selected Oil and Gas Terms...... 99
Index to Consolidated Financial
Statements................................ F-1
</TABLE>
PROSPECTUS
MESA OPERATING CO.
$325,000,000 % SENIOR
SUBORDINATED NOTES DUE 2006
$ % SENIOR
SUBORDINATED DISCOUNT NOTES
DUE 2006
[LOGO]
CHASE SECURITIES INC.
BT SECURITIES CORPORATION
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MERRILL LYNCH & CO.
, 1996
<PAGE> 155
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the estimated expenses of the issuance and distribution of
the securities being registered, all of which will be borne by Mesa.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................................ $68,966
NASD fee........................................................................... 20,500
Printing and engraving expenses.................................................... *
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> 156
director or officer, to repay all amounts so advanced if it is ultimately
determined that such director or officer is not entitled to indemnification.
The Company's Certificate of Incorporation provides that the personal
liability of a director of the Company will be limited to the fullest extent
permitted by the DGCL. Pursuant to Section 102(b)(7) of the DGCL, Article Sixth
of the Company's Certificate of Incorporation eliminates the personal liability
of a director to the Company or its stockholders for monetary damages for breach
of fiduciary duty as a director, except for liabilities arising (i) from any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) from acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL or
(iv) from any transaction from which the director derived an improper personal
benefit.
The above discussion of the Company's Bylaws and Certificate of
Incorporation is not intended to be exhaustive and is respectively qualified in
its entirety by such documents.
MESA Inc.
Article 2.02-1 of the Texas Business Corporation Act provides that a
corporation may indemnify any director or officer who was, is or is threatened
to be made a named defendant or respondent in a proceeding because he is or was
a director or officer, provided that the director or officer (i) conducted
himself in good faith, (ii) reasonably believed (a) in the case of conduct in
his official capacity, that his conduct was in the corporation's best interests,
(b) in all other cases, that his conduct was at least not opposed to the
corporation's best interests and (iii) in the case of any criminal proceeding,
had no reasonable cause to believe his conduct was unlawful. Subject to certain
exceptions, a director or officer may not be indemnified if the person is found
liable to the corporation or if the person is found liable on the basis that he
improperly received a personal benefit. Under Texas law, reasonable expenses
incurred by a director or officer may be paid or reimbursed by the corporation
in advance of a final disposition of the proceeding after the corporation
receives a written affirmation by the director of his good faith belief that he
has met the standard of conduct necessary for indemnification and a written
undertaking by or on behalf of the director to repay the amount if it is
ultimately determined that the director or officer is not entitled to
indemnification by the corporation. Texas law requires a corporation to
indemnify an officer or director against reasonable expenses incurred in
connection with the proceeding in which he is named defendant or respondent
because he is or was a director or officer if he is wholly successful in defense
of the proceeding.
Texas law also permits a corporation to purchase and maintain insurance or
another arrangement on behalf of any person who is or was a director or officer
against any liability asserted against him and incurred by him in such a
capacity or arising out of his status as such a person, whether or not the
corporation would have the power to indemnify him against that liability under
Article 2.02-1.
The Parent's Bylaws provide for the indemnification of its officers and
directors, and the advancement to them of expenses in connection with
proceedings and claims, to the fullest extent permitted by the Texas Business
Corporation Act. The Parent has also entered into indemnification agreements
with its executive officers and directors that contractually provide for
indemnification and expense advancement. Both the Bylaws and the agreements
include related provisions meant to facilitate the indemnitees' receipt of such
benefits. These provisions cover, among other things: (i) specification of the
method of determining entitlement to indemnification and the selection of
independent counsel that will in some cases make such determination, (ii)
specification of certain time periods by which certain payments or
determinations must be made and actions must be taken and (iii) the
establishment of certain presumptions in favor of an indemnitee. The benefits of
certain of these provisions are available to an indemnitee only if there has
been a change in control (as defined). In addition, the Parent carries customary
directors' and officers' liability insurance policies for its directors and
officers. Furthermore, the Bylaws and agreements with directors and officers
provide for indemnification for amounts (i) in respect of the deductibles for
such insurance policies, (ii) that exceed the liability limits of such insurance
policies and (iii) that would have been covered by prior insurance policies of
the Parent or its predecessors. Such indemnification may be made even though
directors and officers would not otherwise be entitled to indemnification under
other provisions of the Bylaws or such agreements.
The above discussion of the Parent's Bylaws and of Article 2.01-1 of the
Texas Business Corporation Act is not intended to be exhaustive and is
respectively qualified in its entirety by such statute and the Bylaws.
II-2
<PAGE> 157
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
<TABLE>
<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.
+8 Tax Opinion of Baker & Botts, L.L.P.
12 Computation of Ratio of Earnings to Fixed Charges
23.1 Consent of Arthur Andersen LLP, independent accountants.
+23.3 Consent of Baker & Botts, L.L.P. (included in Exhibit 5 and Exhibit 8 to this Registration
Statement).
*24 Powers of Attorney of directors and officers of Mesa Operating Co. and MESA Inc. (included
on signature pages to this Registration Statement).
+25 Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of 1939.
</TABLE>
- ---------------
* Previously filed, other than the power of attorney of John S. Herrington,
which is filed herewith.
+ 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> 158
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Dallas, State of Texas, on the 7th day of June, 1996.
MESA OPERATING CO.
By: /s/ BOONE PICKENS*
------------------------------
Boone Pickens,
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------- -------------------------------------- -------------
<C> <S> <C>
/s/ BOONE PICKENS* Director, President, Chief Executive June 7, 1996
- ------------------------------------------------- Officer and Chief Operating Officer
Boone Pickens (Principal Executive Officer)
/s/ STEPHEN K. GARDNER Vice President and Chief Financial June 7, 1996
- ------------------------------------------------- Officer (Principal Financial
Stephen K. Gardner Officer)
/s/ WILLIAM D. BALLEW* Controller (Principal Accounting June 7, 1996
- ------------------------------------------------- Officer)
William D. Ballew
*By: /s/ STEPHEN K. GARDNER
--------------------------------------------
Stephen K. Gardner
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 159
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Dallas, State of Texas, on the 7th day of June, 1996.
MESA Inc.
By: /s/ BOONE PICKENS*
------------------------------
Boone Pickens,
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------- ------------------------------- --------------------
<C> <S> <C>
/s/ BOONE PICKENS* President, Chief Executive June 7, 1996
- ------------------------------------------------- Officer, Chief Operating
Boone Pickens Officer and Chairman of the
Board of Directors (Principal
Executive Officer)
/s/ STEPHEN K. GARDNER Vice President and Chief June 7, 1996
- ------------------------------------------------- Financial Officer (Principal
Stephen K. Gardner Financial Officer)
/s/ WILLIAM D. BALLEW* Controller (Principal June 7, 1996
- ------------------------------------------------- Accounting Officer)
William D. Ballew
/s/ PAUL W. CAIN* Director June 7, 1996
- -------------------------------------------------
Paul W. Cain
/s/ JOHN S. HERRINGTON* Director June 7, 1996
- -------------------------------------------------
John S. Herrington
/s/ WALES H. MADDEN, JR.* Director June 7, 1996
- -------------------------------------------------
Wales H. Madden, Jr.
Director
- -------------------------------------------------
Dorn Parkinson
Director
- -------------------------------------------------
Joel L. Reed
/s/ FAYEZ S. SAROFIM* Director June 7, 1996
- -------------------------------------------------
Fayez S. Sarofim
/s/ ROBERT L. STILLWELL* Director June 7, 1996
- -------------------------------------------------
Robert L. Stillwell
*By: /s/ STEPHEN K. GARDNER
Stephen K. Gardner
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 160
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
+4.1 Form of Senior Subordinated Note Indenture among Mesa Operating Co., MESA Inc. and
, 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.
+8 Tax Opinion of Baker & Botts, L.L.P.
12 Computation of Ratio of Earnings to Fixed Charges
23.1 Consent of Arthur Andersen LLP, independent accountants.
+23.3 Consent of Baker & Botts, L.L.P. (included in Exhibit 5 and Exhibit 8 to this Registration
Statement).
*24 Powers of Attorney of directors and officers of Mesa Operating Co. and MESA Inc.
+25 Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of 1939.
</TABLE>
- ---------------
* Previously filed, other than the power of attorney of John S. Herrington,
which is filed herewith.
+ To be filed by amendment.
<PAGE> 1
EXHIBIT 1.1
MESA OPERATING CO.
$325,000,000 % SENIOR SUBORDINATED NOTES DUE 2006
$ % SENIOR SUBORDINATED DISCOUNT NOTES DUE 2006
UNDERWRITING AGREEMENT
, 1996
CHASE SECURITIES INC.
BT SECURITIES CORP.
DONALDSON LUFKIN AND JENRETTE
SECURITIES CORP.
MERRILL LYNCH, PIERCE FENNER
& SMITH INCORPORATED
As Representatives of the several
Underwriters named in Schedule 1
270 Park Avenue
New York, New York 10017
Dear Sirs:
Mesa Operating Co., a Delaware corporation (the "Company"), proposes to
issue and sell $325,000,000 principal amount of % Senior Subordinated Notes
due 2006 (the "Senior Subordinated Notes") and $ aggregate principal
amount of its % Senior Subordinated Discount Notes due 2006 (the "Discount
Notes", and together with the Senior Subordinated Notes, the "Securities"). The
Senior Subordinated Notes are to be issued pursuant to an Indenture dated as of
, 1996 (the "Senior Subordinated Note Indenture") to be entered into
among the Company, Mesa Inc. (the "Parent"), a Texas corporation which is the
sole owner of the Company and a guarantor of the Securities and Harris Trust and
Savings Bank, as Trustee (the "Trustee"). The Discount Notes are to be issued
pursuant to an Indenture dated as of , 1996 to be entered into among
the Company, the Parent and the Trustee (the "Discount Note Indenture", and
together with the Senior Subordinated Note Indenture, the "Indentures"). The
form of each of the Indentures has been filed as an exhibit to the Registration
Statement (as defined below). The Securities will be guaranteed on a senior
subordinated basis by the Parent. This is to confirm the agreement concerning
the purchase of the Securities and the Guarantees (as defined herein) from the
Company by the several Underwriters named in Schedule 1 hereto (the
"Underwriters").
1. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE PARENT, THE COMPANY,
HCLP AND MHC. The Parent and the Company each represents and warrants to and
agrees with the several Underwriters that:
(a) A registration statement on Form S-3 (No. 333-03281), including a
form of prospectus, relating to the Securities has been prepared by the
Company and, the Parent in conformity with the requirements of the
Securities Act of 1933, as amended (the "Securities Act"), and the rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") and has been filed by the Company and the
Parent with the Commission. The Company and the Parent may have filed one or
more amendments thereto, including the related preliminary prospectus, each
of which has previously been furnished to you. The Company and the Parent
will next file with the Commission either (i) prior to effectiveness of such
registration statement, a further amendment to such registration statement
(including the form of final prospectus) or (ii) after effectiveness of such
registration statement, a final prospectus in accordance with Rules 430A and
424(b)(1) or (4). In the case of clause (ii), the Company and the Parent
have included in such registration statement, as amended at the Effective
Time (as defined below), all information (other than information permitted
to be omitted from the Registration Statement when it becomes effective
pursuant to Rule 430A ("Rule 430A Information")) required by the Act and the
rules thereunder to be included in the final prospectus with respect to the
Securities and the Guarantees and the offering thereof. As filed, such
amendment and form of final prospectus, or such final prospectus, shall
contain all Rule 430A Information, together with all other such required
information, with respect to the Securities and the offering thereof and,
except to the extent the Representatives shall agree
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in writing to a modification, shall be in all substantive respects in the
form furnished to you prior to the execution of this Agreement or, to the
extent not completed at such time, shall contain only such specific
additional information and other changes (beyond that contained in the
latest Preliminary Prospectus) as the Company and the Parent have advised
you, prior to the execution of this Agreement, will be included or made
therein. For purposes of this Agreement, "Effective Time" means the date and
time as of which such registration statement, or the most recent
post-effective amendment thereto, if any, was or is declared effective by
the Commission. "Preliminary Prospectus" means each prospectus included in
such registration statement, or amendments thereof, before it becomes
effective under the Securities Act, any prospectus filed with the Commission
by the Company and the Parent pursuant to Rule 424(a) and the prospectus
included in the Registration Statement at the Effective Time that omits Rule
430A Information, in each case including all material incorporated by
reference therein. Such registration statement (together with the
registration statement on Form S-3 (No. 333-52627) filed by the Parent and
the Company and declared effective on November 2, 1994), as amended at the
Effective Time, including information by reference therein all Rule 430A
Information, if any, and including information incorporated by reference
therein all is hereinafter referred to as the "Registration Statement", and
the form of prospectus relating to the Securities and the Guarantees, as
first filed with the Commission pursuant to and in accordance with Rule
424(b) or, if no such filing is required, as included in the Registration
Statement and including all material incorporated by reference is
hereinafter referred to as the "Prospectus".
(b) At the Effective Time, the Registration Statement did or will, and
when the Prospectus is first filed (if required) in accordance with Rule
424(b) and on the Closing Date, the Prospectus (and any supplements thereto)
will, comply in all material respects with the applicable requirements of
the Act and the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"), and the respective rules thereunder; at the Effective Time,
the Registration Statement did not or will not include any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not misleading;
at the Effective Time and on the Closing Date, each of the Indentures did or
will comply in all material respects with the applicable requirements of the
Trust Indenture Act and the rules thereunder; and, at the Effective Time,
the Prospectus, if the Prospectus is not filed pursuant to Rule 424(b), did
not or will not, and on the date of any filing pursuant to Rule 424(b) and
on the Closing Date, the Prospectus (together with any supplement thereto)
will not, include any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. The
preceding sentence does not apply to (i) that part of the Registration
Statement which shall constitute the Statement of Eligibility and
Qualification (Form T-1) of the Trustee under the Trust Indenture Act or
(ii) information contained in or omitted from the Registration Statement or
the Prospectus (or any supplement thereto) in reliance upon and in
conformity with written information furnished to the Company and/or the
Parent through the Representatives by or on behalf of any Underwriter
specifically for use therein (the "Underwriters' Information"). The parties
acknowledge and agree that the Underwriters' Information consists solely of
the material included under the caption "Underwriting" in the Prospectus.
Each Indenture conforms in all respects to the requirements of the Trust
Indenture Act and the rules and regulations of the Commission thereunder.
The documents incorporated by reference in the Registration Statement and
the Prospectus, at the time such incorporated documents were filed or will
be filed with the Commission, complied or will comply in all material
respects with the requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and did not or, will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Commission has
not issued any order preventing or suspending the use of any Preliminary
Prospectus or Prospectus.
(c) Each of the Parent and the Company and each of their respective
subsidiaries are duly organized and are validly existing as corporations or
limited partnerships in good standing under the laws of their respective
jurisdictions of organization, are duly qualified to do business and are in
good standing as foreign corporations or limited partnerships in each
jurisdiction in which their respective ownership or lease of property or the
conduct of their respective businesses requires such qualification, and have
all power and authority necessary to own or hold their respective properties
and to conduct the businesses in which they are engaged, except where the
failure to so qualify or have such power or authority would not have,
singularly or in the aggregate, a material adverse effect on the condition
(financial or otherwise), results of
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operations, business or prospects of the Parent and its subsidiaries taken
as a whole or the Company and its subsidiaries taken as a whole.
(d) The Parent has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Parent have
been duly and validly authorized and issued, are fully paid and
nonassessable and conform to the description thereof contained in the
Prospectus. All the outstanding shares of capital stock of each subsidiary
of the Parent have been duly authorized and validly issued, are fully paid
and nonassessable and, except to the extent set forth in the Registration
Statement, are owned by the Parent directly or indirectly through one or
more wholly-owned subsidiaries, free and clear (except as otherwise stated
in the Prospectus) of any claim, lien, encumbrance, security interest,
restriction upon voting or transfer or any other claim of any third party.
(e) The execution, delivery and performance of (i) this Agreement, each
of the Indentures and the Securities by the Company, (ii) this Agreement and
each of the Indentures by the Parent, and (iii) the guarantees to be entered
into by the Parent guaranteeing the Securities on a senior subordinated
basis, (the "Guarantees") by the Parent and the consummation of the
transactions contemplated hereby and thereby will not conflict with or
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Parent or any of its
subsidiaries is a party or by which the Parent or any of its subsidiaries is
bound or to which any of the property or assets of the Parent or any of its
subsidiaries is subject, nor will such actions result in any violation of
the provisions of the charter, by-laws, partnership agreement or other
organizational documents of the Parent or any of its subsidiaries or any
statute or any order, rule or regulation of any court or governmental agency
or body having jurisdiction over the Parent or any of its subsidiaries or
any of their properties or assets; and except for the registration of the
Securities and the Guarantees under the Securities Act, the qualification of
each of the Indentures under the Trust Indenture Act and such consents,
approvals, authorizations, registrations or qualifications as may be
required under the Exchange Act and applicable state securities laws in
connection with the purchase and distribution of the Securities and the
Guarantees by the Underwriters, no consent, approval, authorization or order
of, or filing or registration with, any such court or governmental agency or
body is required for the execution, delivery and performance of this
Agreement, the Indentures, the Securities or the Guarantees by the parties
hereto and thereto and the consummation of the transactions contemplated
hereby and thereby.
(f) The financial statements (including the related notes and supporting
schedules) filed as part of the Registration Statement or included in the
Prospectus present fairly the financial condition and results of operations
of the entities purported to be shown thereby, at the dates and for the
periods indicated, and have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis throughout the
periods involved.
(g) The oil and gas reserve estimates of the Parent and its subsidiaries
contained in the Registration Statement and the Prospectus have been
prepared by the internal engineers of the Parent and its subsidiaries in
accordance with Commission guidelines applied on a consistent basis
throughout the periods involved, and none of the Parent or the Company has
any reason to believe that such estimates do not fairly reflect oil and gas
reserves of the Parent and its subsidiaries at the dates indicated.
(h) There are no contracts or other documents which are required to be
described in the Prospectus or filed as exhibits to the Registration
Statement by the Securities Act or by the Rules and Regulations and which
have not been so described or filed.
(i) There are no legal or governmental proceedings pending to which the
Parent, the Company or any of their respective subsidiaries is a party or of
which any property or assets of the Parent, the Company or any of their
respective subsidiaries is the subject which, singularly or in the
aggregate, if determined adversely to the Parent, the Company of any of
their subsidiaries, are reasonably likely to have a material adverse effect
on the condition (financial or otherwise), results of operations, business
or prospects of the Parent and its subsidiaries taken as a whole or the
Company and its subsidiaries taken as a whole; and to the best of the
Parent's or the Company's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others.
(j) Neither the Parent, the Company nor any of their respective
subsidiaries (i) is in violation of its charter, partnership agreement,
by-laws or other organizational documents, (ii) is in default in any
material respect, and no event has occurred which, with notice or lapse of
time or both, would constitute such a
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default, in the due performance or observance of any term, covenant or
condition contained in any material indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which it is a party or by
which it is bound or to which any of its property or assets is subject or
(iii) is in violation in any respect of any law, ordinance, governmental
rule, regulation or court decree to which it or its property or assets may
be subject, except any violation or default that would not have a material
adverse effect on the condition (financial or otherwise), results of
operations, business or prospects of the Parent and its subsidiaries taken
as a whole or the Company and its subsidiaries taken as a whole.
(k) The Parent, the Company and each of their subsidiaries possess all
material licenses, certificates, authorizations and permits issued by, and
have made all declarations and filings with, the appropriate state, federal
or foreign regulatory agencies or bodies which are necessary or desirable
for the ownership of their respective properties or the conduct of their
respective businesses as described in the Prospectus, except where the
failure to possess or make the same would not have, singularly or in the
aggregate, a material adverse effect on the condition (financial or
otherwise), results of operations, business or prospects of the Parent and
its subsidiaries taken as a whole or the Company and its subsidiaries taken
as a whole, and neither the Parent nor the Company has received notification
of any revocation or modification of any such license, authorization or
permit and none has reason to believe that any such license, certificate,
authorization or permit will not be renewed.
(l) Except as disclosed in the Registration Statement and the
Prospectus, neither the Parent nor the Company (i) has any material lending
or other relationship with any bank or lending affiliate of the
Representatives, or (ii) intends to use any of the proceeds from the sale of
the Securities and the Guarantees hereunder to repay any outstanding debt
owed to any affiliate of the Representatives.
(m) The Company has full right, power and authority to execute and
deliver this Agreement, the Indentures and the Securities and to perform its
obligations hereunder and thereunder; and all corporate action required to
be taken for the due and proper authorization, execution and delivery of
this Agreement, the Indentures and the Securities and the consummation of
the transactions contemplated by this Agreement and the Indentures have been
duly and validly taken.
(n) The Parent has full right, power and authority to execute and
deliver this Agreement, the Indentures and the applicable Guarantee and to
perform its obligations hereunder and thereunder; and all corporate action
required to be taken for the due and proper authorization, execution and
delivery of this Agreement, the Indentures and the applicable Guarantee and
the consummation of the transactions contemplated by this Agreement and the
Indentures have been duly and validly taken.
(o) All corporate or partnership action required to be taken for the due
and proper authorization, execution and delivery of the Indentures and the
applicable Guarantees and the consummation of the transactions contemplated
by the Indentures have been duly and validly taken.
(p) The Indentures, when duly executed by the proper officers of the
Parent and the Company and delivered by the Parent and the Company, will
constitute a valid and binding agreement of the Company enforceable against
the Company in accordance with its terms, except as enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium and other
similar laws relating to or affecting creditors' rights generally, by
general equitable principles (regardless of whether such enforceability is
considered in a proceeding in equity or at law); and the Securities, when
duly executed, authenticated, issued and delivered as provided in the
Indentures, will be duly and validly issued and outstanding and will
constitute valid and binding obligations of the Company entitled to the
benefits of the applicable Indenture and enforceable in accordance with
their terms, except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally, by general equitable principles
(regardless of whether such enforceability is considered in a proceeding in
equity or at law); and the Guarantees, when duly executed, authenticated,
issued and delivered as provided in the Indentures, will be duly and validly
issued and outstanding and will constitute valid and binding obligations of
the Parent entitled to the benefits of such Indentures and enforceable in
accordance with their terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally, by general equitable
principles (regardless of whether such enforceability is considered in a
proceeding in equity or at law) and the Indentures, the Securities and the
Guarantees conform to the descriptions thereof contained in the Prospectus.
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(q) There are no persons with registration or other similar rights
either to have any securities registered pursuant to the Registration
Statement or to have any securities otherwise registered by the Company, the
Parent or any of their respective subsidiaries under the Securities Act in
connection with or as a result of the execution, delivery and performance of
this Agreement.
(r) None of the Parent, the Company nor any of their respective
subsidiaries is an "investment company" within the meaning of the Investment
Company Act of 1940, as amended (the "Investment Company Act"), and the
rules and regulations of the Commission thereunder.
(s) The Parent, the Company and each of their subsidiaries own or
possess adequate rights to use all material patents, patent applications,
trademarks, service marks, trade names, trademark registrations, service
mark registrations, copyrights, licenses and know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures) necessary for the conduct of their
business and have no reason to believe that the conduct of their business
will conflict with, and have not received any notice of any claim of
conflict with, any such rights of others.
(t) No "prohibited transaction" (as defined in Section 406 of the
Employee Retirement Income Security Act of 1974, as amended, including the
regulations and published interpretations thereunder ("ERISA"), or Section
4975 of the Internal Revenue Code of 1986, as amended from time to time (the
"Code")) or "accumulated funding deficiency" (as defined in Section 302 of
ERISA) or any of the events set forth in Section 4043(b) of ERISA (other
than events with respect to which the 30-day notice requirement under
Section 4043 of ERISA has been waived) has occurred with respect to any
employee benefit plan which could have a material adverse effect on the
condition (financial or otherwise), results of operations, business or
prospects of the Parent and its subsidiaries taken as a whole or the Company
and its subsidiaries taken as a whole; each employee benefit plan is in
compliance in all material respects with applicable law, including ERISA and
the Code; neither the Parent nor the Company have incurred and do not expect
to incur liability under Title IV of ERISA with respect to the termination
of, or withdrawal from, any "pension plan"; and each "pension plan" (as
defined in ERISA) for which the Parent or the Company would have any
liability that is intended to be qualified under Section 401(a) of the Code
is so qualified in all material respects and nothing has occurred, whether
by action or by failure to act, which could cause the loss of such
qualification.
(u) The Parent, the Company and each of their subsidiaries have good and
marketable title in fee simple to, or have valid rights to lease or
otherwise use, all items of real or personal property which are material to
the business of the Parent, the Company and their subsidiaries taken as a
whole, in each case free and clear of all liens, encumbrances, claims and
defects that may materially interfere with the condition (financial or
otherwise), results of operations, business or prospects of the Parent and
its subsidiaries taken as a whole or the Company and its subsidiaries taken
as a whole.
(v) No labor disturbance by the employees of the Parent, the Company or
any of their subsidiaries exists or, to the best of the Parent's and the
Company's knowledge, is imminent which might be expected to have a material
adverse effect on the condition (financial or otherwise), results of
operations, business or prospects of the Parent and its subsidiaries taken
as a whole or the Company and its subsidiaries taken as a whole.
(w) There has been no storage, generation, transportation, handling,
treatment, disposal, discharge, emission, or other release of any kind of
toxic or other wastes or other hazardous substances by, due to, or caused by
the Parent, the Company or any of their subsidiaries (or, to the best of the
Parent's or the Company's knowledge, any other entity for whose acts or
omissions the Parent, the Company or any of their subsidiaries is or may be
liable) upon any of the property now or previously owned or leased by the
Parent, the Company or any of their subsidiaries, or upon any other
property, in violation of any statute or any ordinance, rule, regulation,
order, judgment, decree or permit or which would, under any statute or any
ordinance, rule (including rule of common law), regulation, order, judgment,
decree or permit, give rise to any liability, except for any violation or
liability which would not have, singularly or in the aggregate with all such
violations and liabilities, a material adverse effect on the condition
(financial or otherwise), results of operations, business or prospects of
the Parent and its subsidiaries taken as a whole or the Company and its
subsidiaries taken as a whole; there has been no disposal, discharge,
emission or other release of any kind onto such property or into the
environment surrounding such property of any toxic or other wastes or other
hazardous substances with respect to which the Parent, the Company or any of
their subsidiaries
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has knowledge, except for any such disposal, discharge, emission, or other
release of any kind which would not have, singularly or in the aggregate
with all such discharges and other releases, a material adverse effect on
the condition (financial or otherwise), results of operations, business or
prospects of the Parent and its subsidiaries taken as a whole or the Company
and its subsidiaries taken as a whole.
(x) No forward looking statement within the meaning to Section 27A of
the Securities Act and Section 21E of the Exchange Act contained in the
Registration Statement has been made or reaffirmed without a reasonable
basis or has been disclosed other than in good faith.
(y) The conditions for use of Form S-3, as set forth in the General
Instructions thereto, have been satisfied.
2. PURCHASE BY THE UNDERWRITERS. On the basis of the representations,
warranties and agreements contained herein, and subject to the terms and
conditions set forth herein, the Company agrees to issue and sell to each of the
Underwriters, severally and not jointly, and each of the Underwriters, severally
and not jointly, agrees to purchase from the Company, the principal amount of
Securities set forth opposite the name of such Underwriter in Schedule 1 hereto
at a purchase price equal to, in the case of the Senior Subordinated Notes %
of the principal amount thereof plus accrued interest, if any, from ,
1996 to the Closing Date (as hereinafter defined) and, in the case of the Senior
Subordinated Discount Notes, % of the principal amount thereof plus
accretion, if any, from , 1996 to the Closing Date.
The Parent and the Company shall not be obligated to deliver any of the
Securities except upon payment for all the Securities and the related Guarantees
to be purchased as provided herein.
3. DELIVERY OF AND PAYMENT FOR THE SECURITIES. Delivery of and payment for
the Securities (and the Guarantees) shall be made at the office of Simpson
Thacher and Bartlett, 425 Lexington Avenue, New York, New York 10017, or at such
other place as shall be agreed upon by Chase Securities Inc. ("CSI") and the
Company, at 10:00 A.M., New York City time, on , 1996, or at such
other date or time, not later than seven full business days thereafter, as shall
be agreed upon by CSI and the Company (such date and time being referred to
herein as the "Closing Date"). On the Closing Date, the Company and the Parent
shall deliver or cause to be delivered to the Representatives for the account of
each Underwriter, certificates for the Securities and Guarantees against payment
to or upon the order of the Company of the purchase price by certified or
official bank check or checks drawn in New York Clearing House funds or similar
next-day funds. Time shall be of the essence, and delivery at the time and place
specified pursuant to this Agreement is a further condition of the obligation of
each Underwriter hereunder. Upon delivery, the Securities shall be in definitive
fully registered form, in such denominations and registered in such names as the
Representatives shall have requested in writing not less than two full business
days prior to the Closing Date. The Company shall make the certificates for the
Securities and Guarantees available for inspection by the Representatives in New
York, New York, not later than one full business day prior to the Closing Date.
4. FURTHER AGREEMENTS OF THE PARENT AND COMPANY. The Parent and the Company
each agrees with each of the several Underwriters:
(a) That, if the Effective Time is prior to the execution and delivery
of this Agreement, to file the Prospectus with the Commission pursuant to
and in accordance with subparagraph (1) (or, if applicable and if consented
to by CSI, subparagraph (4)) of Rule 424(b) within the time period
prescribed by such rule and will provide evidence satisfactory to the
Representatives of such timely filing;
(b) To advise the Representatives promptly of any proposal to amend or
supplement the registration statement as filed or the related prospectus or
the Registration Statement or the Prospectus and not to effect such
amendment or supplementation without the consent of the Representatives; to
advise the Representatives promptly of the receipt of any comments from the
Commission and of the effectiveness of the Registration Statement (in each
case if the Effective Time is subsequent to the execution and delivery of
this Agreement) and of any amendment or supplementation of the Registration
Statement or the Prospectus, or of any request by the Commission therefor,
and of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any
proceedings for that purpose; to advise the Representatives promptly of any
order preventing or suspending the use of any prospectus relating to the
Securities, of the suspension of the qualification of such Securities for
offering or sale in any jurisdiction and of the initiation or threatening of
any proceeding for any such purpose; and to use best efforts to prevent the
issuance of any stop order or of any such order preventing or suspending the
use of any prospectus relating to the Securities or suspending any such
qualification
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and, if any such stop order or order or suspension is issued, to obtain the
lifting thereof at the earliest possible time;
(c) To furnish promptly to each of the Representatives and counsel for
the Underwriters a signed copy of the Registration Statement as originally
filed with the Commission, and each amendment thereto filed with the
Commission, including all consents and exhibits filed therewith; and to
deliver promptly without charge to the Representatives such number of the
following documents as the Representatives may from time to time reasonably
request: (i) conformed copies of the Registration Statement as originally
filed with the Commission and each amendment thereto (in each case excluding
exhibits other than this Agreement, the Indentures, the computation of the
ratio of earnings to fixed charges and the computation of per share
earnings) and (ii) each Preliminary Prospectus, the Prospectus and any
amended or supplemented Prospectus;
(d) If the delivery of a prospectus is required at any time in
connection with the sale of the Securities and the Guarantees and if at such
time any events shall have occurred as a result of which the Prospectus as
then amended or supplemented would include an untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made when such Prospectus is delivered, not misleading, or if for any other
reason it shall be necessary at such time to amend or supplement the
Prospectus in order to comply with the Securities Act, to notify the
Representatives immediately thereof, and to promptly prepare and file with
the Commission an amended Prospectus or a supplement to the Prospectus which
will correct such statement or omission or effect such compliance;
(e) To file promptly with the Commission any amendment to the
Registration Statement or the Prospectus or any supplement to the Prospectus
that may, in the judgment of the Parent, the Company or the Representatives,
be required by the Securities Act or requested by the Commission or
advisable in connection with the distribution of the Securities and the
Guarantees;
(f) As soon as practicable to make generally available to the Parent's
and the Company's security holders and to deliver to the Representatives a
consolidated earning statement of the Parent and its subsidiaries (which
need not be audited) complying with Section 11(a) of the Securities Act and
the Rules and Regulations (including, at the option of the Parent, Rule
158);
(g) For so long as any of the Securities are outstanding, to furnish to
the Representatives copies of all materials furnished by the Parent to its
shareholders and all public reports and all reports and financial statements
furnished by the Parent and the Company to the Commission pursuant to the
Exchange Act or any rule or regulation of the Commission thereunder;
(h) Promptly from time to time to take such action as the
Representatives may reasonably request to qualify the Securities and the
Guarantees for offering and sale under the securities laws of such
jurisdictions as the Representatives may request and to comply with such
laws so as to permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the distribution
of the Securities; provided that in connection therewith neither the Parent
nor the Company shall be required to qualify as a foreign corporation or to
file a general consent to service of process in any jurisdiction;
(i) For a period of 180 days from the date of the Prospectus, to not
offer for sale, sell, contract to sell or otherwise dispose of, directly or
indirectly, or file a registration statement for, or announce any offering
of, any debt securities of the Parent or the Company (other than the
Securities and Guarantees) without the prior written consent of the
Representatives; and
(j) As soon as practicable, to commence the Rights Offering (as defined
herein), to consummate the Rights Offering and to apply the proceeds
therefrom, together with the net proceeds from the sale of additional shares
of Series B 8% Cumulative Preferred Stock to DNR (as defined herein)
pursuant to the Stock Purchase Agreement (as defined herein) and any
drawdown under the Letter of Credit (as defined herein) to the payment of
revolving credit loans under the New Credit Facility (as defined herein) in
an amount at least equal to $ and to the repayment of $
principal amount of [other outstanding indebtedness].
5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The respective obligations of
the several Underwriters hereunder are subject to the accuracy, when made and on
the Closing Date, of the representations and warranties of each of the Parent
and the Company contained herein, to the accuracy of the
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statements of each of the Parent, the Company and their subsidiaries made in any
certificates pursuant to the provisions hereof, to the performance by each of
the Parent and the Company of its obligations hereunder, and to each of the
following additional terms and conditions:
(a) If the Effective Time is not prior to the execution and delivery of
this Agreement, the Registration Statement shall have become effective and
the Indentures shall have been qualified under the Trust Indenture Act, and
the Representatives shall have received notice thereof, not later than (i)
6:00 p.m. New York City time on the date of determination of the public
offering price, if such determination occurred at or prior to 3:00 p.m. New
York City time on such date or (ii) 12:00 noon New York City time on the
business day following the day on which the offering price was determined if
such determination occurred after 3:00 p.m. New York City time on such date.
If the Effective Time is prior to the execution and delivery of this
Agreement, the Prospectus shall have been timely filed with the Commission
in accordance with Section 4(a) of this Agreement. Prior to the Closing
Date, no stop order suspending the effectiveness of the Registration
Statement or any part thereof shall have been issued and no proceeding for
that purpose shall have been initiated or threatened by the Commission; and
any request of the Commission for inclusion of additional information in the
Registration Statement or the Prospectus or otherwise shall have been
complied with to the reasonable satisfaction of the Representatives.
(b) All corporate or partnership proceedings and other legal matters
incident to the authorization, form and validity of this Agreement, the
Securities, the Guarantees, the Indentures, the Registration Statement and
the Prospectus, and all other legal matters relating to this Agreement and
the transactions contemplated hereby shall be reasonably satisfactory in all
material respects to counsel for the Underwriters, and the Parent and the
Company each shall have furnished and shall have caused their subsidiaries
to have furnished to such counsel all documents and information that they
may reasonably request to enable them to pass upon such matters.
(c) Baker & Botts, L.L.P. shall have furnished to the Representatives
their written opinion, as counsel to the Parent and the Company addressed to
the Underwriters and dated the Closing Date, in form and substance
reasonably satisfactory to the Representatives, to the effect that:
(i) The Parent, the Company and each of their respective subsidiaries
have been duly organized and are validly existing as corporations or
limited partnerships in good standing under the laws of their respective
jurisdictions of organization, are duly qualified to do business and are
in good standing as foreign corporations or limited partnerships in each
jurisdiction in which their respective ownership or lease of property or
the conduct of their respective businesses requires such qualification
(other than those jurisdictions in which the failure to so qualify would
not have a material adverse effect on the Parent, the Company, the Parent
and its subsidiaries taken as a whole or the Company and its subsidiaries
taken as a whole), and have all power and authority necessary to own or
hold their respective properties and to conduct the businesses in which
they are engaged;
(ii) The Parent has the authorized capitalization set forth in the
Prospectus, and all of the issued shares of capital stock of the Parent
have been duly and validly authorized and issued, are fully paid and
non-assessable and conform to the description thereof contained in the
Prospectus; and all of the issued shares of capital stock of each
subsidiary of the Parent have been duly and validly authorized and issued
and are fully paid and non-assessable and (except for directors'
qualifying shares) are owned directly or indirectly by the Parent, free
and clear of all liens, encumbrances, equities or claims.
(iii) Each of the Registration Statement and the registration
statement of the Parent (the "Rights Offering Registration Statement") on
Form S-3 (Registration No. 333-03365) filed with the Commission in
connection with the rights offering by the Parent of 58,400,000 Shares of
Series A 8% Cumulative Convertible Preferred Stock, par value $.01 per
share, (the "Rights Offering") was declared effective under the
Securities Act and each of the Indentures was qualified under the Trust
Indenture Act as of the date and time specified in such opinion; the
Prospectus was filed with the Commission pursuant to the subparagraph of
Rule 424(b) of the Rules and Regulations specified in such opinion on the
date specified therein; and no stop order suspending the effectiveness of
the Registration Statement or the Rights Offering Registration Statement
has been issued and, to the best of such counsel's knowledge, no
proceeding for that purpose is pending or threatened by the Commission;
(iv) The Registration Statement and the Rights Offering Registration
Statement and the Prospectus and any further amendments or supplements to
the Registration Statement and the Rights
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<PAGE> 9
Offering Registration Statement or the Prospectus made by the Parent and
the Company prior to the Closing Date (other than the financial
statements and related schedules therein, as to which such counsel
express no opinion) comply as to form in all material respects with the
requirements of the Securities Act and the Rules and Regulations;
(v) None of the Parent, the Company and their subsidiaries is a
"holding company" as defined in Section 2(a)(7) of the Public Utility
Holding Company Act of 1935, as amended;
(vi) The documents incorporated by reference in the Prospectus and
the Registration Statement, as of the dates they were filed with the
Commission or became effective under the Exchange Act, as the case may
be, comply as to form in all material respects with the requirements of
the Exchange Act and the rules and regulations thereunder (other than
financial statements and related schedules therein, as to which such
counsel express no opinion).
(vii) Each Indenture complies as to form in all material respects
with the requirements of the Trust Indenture Act and the rules and
regulations of the Commission thereunder;
(viii) The statements set forth under the captions "Certain Federal
Income Tax Considerations," "Business -- Regulation and Prices" and
"Business -- Legal Proceedings," to the extent they represent statements
or summaries of legal matters, are true and correct; and to the best of
such counsel's knowledge, there are no contracts or other documents which
are required to be described in the Prospectus or filed as exhibits to
the Registration Statement by the Securities Act or by the Rules and
Regulations and which have not been so described or filed;
(ix) (A) The Parent and the Company each has full right, power and
authority to execute and deliver this Agreement and each of the
Indentures and to perform its obligations hereunder and thereunder, (B)
the Company has full right, power and authority to execute and deliver
the Securities and to perform its obligations thereunder and (C) the
Parent has full right, power and authority to execute and deliver the
Guarantees and to perform their respective obligations thereunder; and
all corporate action required to be taken for the due and proper
authorization, execution and delivery of this Agreement, each of the
Indentures, the Securities and the Guarantees and the consummation of the
transactions contemplated by this Agreement, each of the Indentures and
the Guarantees have been duly and validly taken;
(x) This Agreement has been duly authorized, executed and delivered
by the Parent and the Company;
(xi) Each of the Indentures has been duly authorized, executed and
delivered by the Parent and the Company and constitutes a valid and
binding agreement of each of the Parent and the Company enforceable
against the Parent and the Company in accordance with its terms; the
Securities are in the form contemplated by the applicable Indenture and
have been duly authorized and executed by the Company and, upon the due
authentication and delivery thereof by the applicable Trustee pursuant to
the applicable Indenture, will be duly and validly issued and outstanding
and will constitute valid and binding obligations of the Company entitled
to the benefits of the applicable Indenture and enforceable in accordance
with their terms; and the Indentures and the Securities conform to the
descriptions thereof contained in the Prospectus;
(xii) The Guarantees have been duly authorized, executed and
delivered by the Parent and constitute valid and binding agreement of the
parties thereto enforceable against the parties thereto in accordance
with their terms, and the Guarantees conform to the description thereof
contained in the Prospectus;
(xiii) The execution, delivery and performance of (i) this Agreement,
the Indentures and the Securities by the Company, (ii) this Agreement,
the Indentures and the Guarantees by the Parent and (iii) this Agreement
by HCLP and MHC and the consummation of the transactions contemplated
hereby and thereby will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument known to such counsel to which the Parent, the
Company or any of their subsidiaries is a party or by which the Parent,
the Company or any of their subsidiaries is bound or to which any of the
property or assets of the Parent, the Company or any of their
subsidiaries is subject, nor will such actions result in any violation of
the provisions of the charter or by-laws of the Parent, the Company or
any of their subsidiaries or any statute or any order, rule or regulation
known
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<PAGE> 10
to such counsel of any court or governmental agency or body having
jurisdiction over the Parent, the Company or any of their subsidiaries or
any of the Parent's, the Company's or any of their subsidiaries'
properties or assets; and except for the registration of the Securities
and the Guarantees under the Securities Act, the qualification of each of
the Indentures under the Trust Indenture Act and such consents,
approvals, authorizations, registrations or qualifications as may be
required under the Exchange Act and applicable state securities laws in
connection with the purchase and distribution of the Securities and the
Guarantees by the Underwriters, no consent, approval, authorization or
order of, or filing or registration with, any such court or governmental
agency or body is required for the execution, delivery and performance of
this Agreement, the Indentures, the Securities or the Guarantees by the
parties hereto and thereto and the consummation of the transactions
contemplated hereby and thereby;
(xiv) To the best of such counsel's knowledge, there are no
contracts, agreements or understandings between the Parent, the Company
and/or any of their subsidiaries on the one hand and any person on the
other hand granting such person the right to require the Parent, the
Company and/or any of their subsidiaries to include securities owned or
to be owned by such person in the securities registered pursuant to the
Registration Statement;
(xv) To the best of such counsel's knowledge and except as set forth
in the Prospectus, there are no legal or governmental proceedings pending
to which the Parent, the Company or any of their subsidiaries is a party
or of which any property or assets of the Parent, the Company or any of
their subsidiaries is the subject which, if determined adversely to the
Parent, the Company or any of their subsidiaries, are reasonably likely
to have a material adverse effect on the condition (financial or
otherwise), results of operations, business or prospects of the Parent
and its subsidiaries taken as a whole, or the Company; and, to the best
of such counsel's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others;
(xvi) None of the Parent, the Company nor any of their subsidiaries
is an "investment company" within the meaning of the Investment Company
Act and the rules and regulations of the Commission thereunder;
(xvii) each of Hugoton Capital Limited Partnership ("HCLP"), Mesa
Holding Company ("MHC") and Hugoton Management Company ("HMC") have been
merged with and into the Company with the Company being the surviving
corporation, all in accordance with applicable law; and
(xviii) Such counsel has no reason to believe that the Registration
Statement (or any post-effective amendment thereto), at the time of its
effective date, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or that the
Prospectus contains any untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary in order
to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
References to the Prospectus in this paragraph (c) include any supplements
thereto at the Closing Date.
(d) The Representatives shall have received from Simpson Thacher &
Bartlett, counsel for the Underwriters, such opinion or opinions, dated the
Closing Date, with respect to such matters as the Representatives may
reasonably require, and the Parent and the Company shall have furnished to
such counsel such documents as they request for enabling them to pass upon
such matters.
(e) The Parent and the Company shall have furnished to the
Representatives a letter of Arthur Andersen LLP, dated the date of delivery
thereof (which, if the Effective Time is prior to the execution and delivery
of this Agreement, shall be on or prior to the date of this Agreement or, if
the Effective Time is subsequent to the execution and delivery of this
Agreement, shall be prior to the filing of the amendment or post-effective
amendment to the Registration Statement to be filed shortly prior to the
Effective Time), in form and substance satisfactory to the Representatives,
to the effect that:
(i) they are independent public accountants with respect to the
Parent and its subsidiaries within the meaning of the Securities Act and
are in compliance with the applicable requirements relating to the
qualification of accountants under Rule 2-01 of Regulation S-X of the
Commission;
(ii) in their opinion the consolidated financial statements and
financial statement schedules audited by them and included in the
Registration Statement and the Prospectus comply as to form in
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<PAGE> 11
all material respects with the applicable accounting requirements of the
Securities Act and the Rules and Regulations;
(iii) (A) based upon the procedures of the American Institute of
Certified Public Accountants for a review of interim financial
information as described in Statement of Auditing Standards No. 71 ("SAS
No. 71"), inquiries of certain officials of the Parent and the Company
who have responsibility for financial and accounting matters and certain
other limited procedures requested by the Representatives and described
in detail in such letter, nothing has come to their attention that causes
them to believe that:
(I) any material modifications should be made to the unaudited
condensed consolidated financial statements included in the
Registration Statement for them to be in conformity with generally
accepted accounting principles;
(II) the unaudited condensed consolidated financial statements
included in the Registration Statement do not comply as to form in all
material respects with the applicable requirements of the Securities
Act and the related published rules and regulations;
(III) (1) at December 31, 1995, there was any change in the
capital stock, increase in long-term debt, decrease in consolidated
net current assets or stockholders' equity as compared with the
amounts shown in the unaudited condensed consolidated balance sheet at
March 31, 1996 included in the Registration Statement or (2) for the
period from April 1, 1996 to [insert the last date included in the
period covered by the latest available income statement] there were
any decreases, as compared with the corresponding period in the
preceding year in net revenues or income before income taxes or in
total or per share amounts of net income of the Parent and its
subsidiaries, except in all instances for changes, increases or
decreases set forth in such letter, in which case the letter shall be
accompanied by an explanation by the Parent and the Company as to the
significance thereof unless said explanation is not deemed necessary
by the Representatives.
(B) based upon the procedures detailed in such letter with respect
to the period subsequent to the date of the last available balance
sheet, including, without limitation, reading of minutes and inquiries
of certain officials of the Parent and the Company who have
responsibility for financial and accounting matters, nothing has come
to their attention that causes them to believe that there was any such
change, increase or decrease, as the case may be, in the balance sheet
and income statement line items enumerated in clause (e)(iii)(A)(III)
of this Section 5, except in all instances for changes, increases or
decreases set forth in such letter, in which case the letter shall be
accompanied by an explanation of the Parent and the Company as to the
significance thereof unless said explanation is not deemed necessary
by the Representatives.
(iii) In the absence of a review of the interim financial information
as described by SAS No. 71, the letter shall set forth the procedures
that the Representatives have requested the accountants to perform on the
interim financial information. These procedures may include, but need not
be limited to, the procedures described in Statement of Auditing
Standards No. 72, Example O and the accountants shall state the findings
of such procedures.
(iv) they have performed certain procedures with respect to the
information included in the Registration Statement and Prospectus in
response to Regulation S-K, Item 503(d) (the "Regulation S-K
Information") (examples of such procedures identified in greater detail
in Statement of Auditing Standards No. 72, Examples F and G, pp. 45-51)
and the accountants set forth the findings of such procedures; and the
accountants have (a) compared the Regulation S-K Information with the
disclosure requirements of Regulation S-K and (b) made inquiries of
certain officials of the Parent, the Company, HCLP and MHC who have
responsibility for financial and accounting matters as to whether this
information conforms in all material respects with the disclosure
requirements of Regulation S-K, and nothing has come to their attention
as a result of the foregoing procedures that causes them to believe that
this information does not conform in all material respects with the
disclosure requirements of Item 503(d) of Regulation S-K.
(v) they have performed certain other specified procedures as a
result of which they determined that certain information of an
accounting, financial or statistical nature (which is limited to
accounting, financial or statistical information derived from the general
accounting records of the Parent and its
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subsidiaries) set forth in the Registration Statement, the Prospectus,
including the information set forth under the captions "Prospectus
Summary," "Risk Factors," "Use of Proceeds," "Capitalization," "Unaudited
Pro Forma Financial Information," "Selected Historical Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results
of Operations," "Business," "Executive Compensation," "Security Ownership
of Certain Beneficial Owners and Management," "Description of the Notes,"
in the Prospectus, the Parent's annual report on Form 10-K for the fiscal
year ended December 31, 1996, as amended, the Parent's quarterly report
of Form 10-Q for the fiscal quarter ended March 31, 1996 and the Parent's
current reports on Form 8-K filed with the Commission on agrees
with the accounting records of the Parent and its subsidiaries, excluding
any questions of legal interpretation; and
(vi) on the basis of a reading of the unaudited pro forma financial
statements included in the Registration Statement and the Prospectus (the
"pro forma financial statements"); carrying out certain specified
procedures; inquiries of certain officials of the Parent, the Company,
HCLP, MHC and DNR-MESA Holdings, L.P. ("DNR") who have responsibility for
financial and accounting matters; and proving the arithmetic accuracy of
the application of the pro forma adjustments to the historical amounts in
the pro forma financial statements, nothing came to their attention which
caused them to believe that the pro forma financial statements do not
comply in form in all material respects with the applicable accounting
requirements of Rule 11-02 of Regulation S-X or that the pro forma
adjustments have not been properly applied to the historical amounts in
the compilation of such statements.
References to the Prospectus in this paragraph (f) and in paragraph (g)
below include any supplement thereto at the date of the letter.
(f) The Parent and the Company shall have furnished to the
Representatives a letter (the "bring-down letter") of Arthur Andersen
L.L.P., addressed to the Underwriters and dated the Closing Date (i)
confirming, as of the date of the bring-down letter (or, with respect to
matters involving changes or developments since the respective dates as of
which specified financial information is given in the Prospectus, as of a
date not more than five days prior to the date of the bring-down letter),
the conclusions and findings of such firm with respect to the financial
information and other matters covered by its letter delivered to the
Representatives concurrently with the execution of this Agreement and
described in paragraph (f) (the "initial letter") and (ii) if the Effective
Time is prior to the execution and delivery of this Agreement, confirming
they have performed the procedures specified in clause (v) of paragraph (f)
of this Section 5 with respect to certain amounts, percentages and financial
information specified by the Representatives and deemed to be a part of the
Registration Statement pursuant to Rule 430A(b) and have found such amounts,
percentages and financial information to be in agreement with the records
specified in paragraph (f)(v).
(g) The Parent and the Company shall have each furnished a letter dated
the Closing Date confirming certain statements and certain information of an
accounting, financial or statistical nature set forth in the Registration
Statement and the Prospectus not otherwise covered by Arthur Andersen LLP in
paragraphs (f)(v) or (g) of this Section 5.
(h) The Parent and the Company shall have each furnished to the
Representatives a certificate, dated the Closing Date, of its Chairman of
the Board, its President or a Vice President and its chief financial officer
stating that (A) such officers have carefully examined the Registration
Statement and the Prospectus, (B) in their opinion, as of the Effective
Time, the Registration Statement and the Prospectus did not include any
untrue statement of a material fact and did not omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading and since the Effective Time, no event has occurred
which should have been set forth in a supplement or amendment to the
Registration Statement or the Prospectus and (C) to the best of his or her
knowledge after reasonable investigation, as of the Closing Date, the
representations and warranties of each of the Parent and the Company in this
Agreement are true and correct, each of the Parent and the Company has
complied with all agreements and satisfied all conditions on its part to be
performed or satisfied hereunder at or prior to the Closing Date, no stop
order suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been instituted or, to the
best of his or her knowledge, are contemplated by the Commission, and
subsequent to the date of the most recent financial statements in the
Prospectus, there has been no material adverse change in the financial
position or results of operation of the Parent and its subsidiaries taken as
a whole or the Company and its subsidiaries taken as a whole,
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<PAGE> 13
or any change, or any development including a prospective change, in or
affecting the condition (financial or otherwise), results of operations,
business or prospects of the Parent and its subsidiaries taken as a whole or
the Company and its subsidiaries taken as a whole, except as set forth in
the Prospectus.
(i) Subsequent to the execution and delivery of this Agreement or, if
earlier, the dates as of which information is given in the Registration
Statement (exclusive of any amendment thereof) and the Prospectus (exclusive
of any supplement thereto), there shall not have been any change in the
capital stock or long-term debt of the Parent, the Company or any of their
subsidiaries or any change, or any development involving a prospective
change, in or affecting the condition (financial or otherwise), results of
operations, business or prospects of the Parent and its subsidiaries taken
as a whole or the Company and its subsidiaries taken as a whole, the effect
of which, in any such case described above, is, in the judgment of the
Representatives, so material and adverse as to make it impracticable or
inadvisable to proceed with the public offering or the delivery of the
Securities on the terms and in the manner contemplated in the Prospectus
(exclusive of any supplement).
(j) Subsequent to the execution and delivery of this Agreement (i) no
downgrading shall have occurred in the rating accorded any of the Parent's,
the Company's or any of their subsidiaries' debt securities by any
"nationally recognized statistical rating organization", as that term is
defined by the Commission for purposes of Rule 436(g)(2) of the Rules and
Regulations and (ii) no such organization shall have publicly announced that
it has under surveillance or review (other than an announcement with
positive implications of a possible upgrading), its rating of the Parent's,
the Company's or any of their subsidiaries' debt securities.
(k) Subsequent to the execution and delivery of this Agreement there
shall not have occurred any of the following: (i) trading in securities
generally on the New York Stock Exchange, the American Stock Exchange or the
over-the-counter market shall have been suspended or limited, or minimum
prices shall have been established on either of such exchanges or such
market by the Commission, by such exchange or by any other regulatory body
or governmental authority having jurisdiction, or trading in securities of
the Parent, the Company or any of their subsidiaries on any exchange or in
the over-the-counter market shall have been suspended or (ii) a general
moratorium on commercial banking activities shall have been declared by
Federal or New York State authorities or (iii) an outbreak or escalation of
hostilities or a declaration by the United States of a national emergency or
war or such a material adverse change in general economic, political or
financial conditions (or the effect of international conditions on the
financial markets in the United States shall be such) as to make it, in the
judgment of a majority in interest of the several Underwriters,
impracticable or inadvisable to proceed with the public offering or the
delivery of the Securities on the terms and in the manner contemplated in
the Prospectus.
(l) The Parent shall have issued and sold to DNR an aggregate of
58,849,557 shares of Series B 8% Cumulative Preferred Stock pursuant to the
stock purchase agreement dated April 26, 1996 between the Parent and DNR
(the "Stock Purchase Agreement") for an aggregate purchase price of $133
million cash.
(m) The Company shall have entered into a $500 million senior secured
revolving credit facility (the "New Credit Facility") with The Chase
Manhattan Bank, N.A., Chemical Bank and Bankers Trust Company and other
lenders, and the Company shall have initially drawn down at least $
million under such New Credit Facility.
(n) HCLP shall have received consents from at least % of (i) the
registered owners of the HCLP secured notes and (ii) the special owners (as
defined in the HCLP secured note indenture) to the amended HCLP secured note
indenture and mortgage as set forth in the consent solicitation statement of
HCLP dated June , 1996.
(o) HCLP, MHC and HMC shall have been merged with and into the Company
in accordance with applicable law.
(p) The Parent shall have been issued an irrevocable letter of credit
(the "Letter of Credit") from Bank in the amount of $132
million to support DNR's standby commitment pursuant to the terms of the
Stock Purchase Agreement to purchase additional shares of Series B 8%
Cumulative Preferred Stock equal to the number of shares of the Parent's
Series A 8% Cumulative Preferred Stock, if any, not purchased pursuant to
the Rights Offering, which Letter of Credit shall be payable to the Parent
no later than 90 days after the Closing Date.
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(q) The Rights Offering Registration Statement shall have been declared
effective by the Commission and no stop order suspending the effectiveness
of the Rights Offering Registration Statement shall have been issued and no
proceeding for that purpose shall be pending or have been threatened by the
Commission.
(r) The Parent and the Company and/or HCLP shall have paid or discharged
in full (i) the HCLP secured notes, (ii) the existing credit facility with
Societe Generale and the other lenders named therein, (iii) the Company's
12 3/4% Secured Discount Notes due June 30, 1998, and (iv) the Company's
12 3/4% Discount Notes due June 30, 1996 and all liens securing such
indebtedness described in clauses (i) through (iv) shall have been released.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably satisfactory
to counsel for the Underwriters.
6. TERMINATION. This Agreement shall become effective upon the later of when
(i) the Underwriters, the Parent and the Company shall have received
notification of the effectiveness of the Registration Statement or (ii) the
execution of this Agreement. The obligations of the Underwriters hereunder may
be terminated by CSI, in its absolute discretion, by notice given to and
received by the Company prior to delivery of and payment for the Securities if,
prior to that time, any of the events described in Sections 5(i), 5(j) or 5(k)
shall have occurred.
7. DEFAULTING UNDERWRITERS. (a) If, on the Closing Date, any Underwriter or
Underwriters default in the performance of its or their obligations under this
Agreement, the Representatives may make arrangements for the purchase of such
Securities by other persons satisfactory to the Company and the Representatives,
including any of the Underwriters, but if no such arrangements are made by the
Closing Date, then each remaining non-defaulting Underwriter shall be severally
obligated to purchase the Senior Subordinated Notes or Discount Notes, as the
case may be, which the defaulting Underwriter or Underwriters agreed but failed
to purchase on the Closing Date in the respective proportions which the
principal amount of Senior Subordinated Notes or Discount Notes, as the case may
be, set forth opposite the name of each remaining non-defaulting Underwriter in
Schedule 1 hereto bears to the aggregate principal amount of Senior Subordinated
Notes or Discount Notes, as the case may be, set forth opposite the names of all
the remaining non-defaulting Underwriters in Schedule 1 hereto; provided,
however, that the remaining non-defaulting Underwriters shall not be obligated
to purchase any of the Securities on the Closing Date if the aggregate principal
amount of Senior Subordinated Notes or Discount Notes, as the case may be, which
the defaulting Underwriter or Underwriters agreed but failed to purchase on such
date exceeds one-eleventh of the aggregate principal amount of the Senior
Subordinated Notes or Discount Notes, as the case may be, to be purchased on the
Closing Date, and any remaining non-defaulting Underwriter shall not be
obligated to purchase in total more than 110% of the principal amount of the
Senior Subordinated Notes or Discount Notes, as the case may be, which it agreed
to purchase on the Closing Date pursuant to the terms of Section 2. If the
foregoing maximums are exceeded and the remaining Underwriters or other
underwriters satisfactory to the Representatives and the Company do not elect to
purchase the Securities which the defaulting Underwriter or Underwriters agreed
but failed to purchase, this Agreement shall terminate without liability on the
part of any non-defaulting Underwriter, the Parent, the Company, HCLP or MHC,
except that the Parent, the Company, HCLP and MHC will continue to be liable for
the payment of expenses to the extent set forth in Sections 8 and 12 and except
that the provisions of Sections 9 and 10 shall not terminate and shall remain in
effect. As used in this Agreement, the term "Underwriter" includes, for all
purposes of this Agreement unless the context otherwise requires, any party not
listed in Schedule 1 hereto who, pursuant to this Section 7, purchases
Securities which a defaulting Underwriter agreed but failed to purchase.
(b) Nothing contained herein shall relieve a defaulting Underwriter of
any liability it may have for damages caused by its default. If other
underwriters are obligated or agree to purchase the Securities of a
defaulting Underwriter, either the Representatives, the Parent or the
Company may postpone the Closing Date for up to seven full business days in
order to effect any changes that in the opinion of counsel for the Parent
and/or the Company or counsel for the Underwriters may be necessary in the
Registration Statement, the Prospectus or in any other document or
arrangement, and the Parent and the Company agrees to file promptly any
amendment or supplement to the Registration Statement or the Prospectus that
effects any such changes.
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8. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If (a) notice shall have been
given pursuant to Section 6 preventing this Agreement from becoming effective,
(b) the Parent and the Company shall fail to tender the Securities and the
Guarantees for delivery to the Underwriters for any reason permitted under this
Agreement or (c) the Underwriters shall decline to purchase the Securities and
the Guarantees for any reason permitted under this Agreement, the Parent and the
Company shall reimburse the Underwriters for the fees and expenses of their
counsel and for such other out-of-pocket expenses as shall have been reasonably
incurred by them in connection with this Agreement and the proposed purchase of
the Securities and the Guarantees, and upon demand the Parent and the Company
shall pay the full amount thereof to the Representatives. If this Agreement is
terminated pursuant to Section 7 by reason of the default of one or more
Underwriters, the Parent and the Company shall not be obligated to reimburse any
defaulting Underwriter on account of those expenses.
9. INDEMNIFICATION. (a) Each of the Parent and the Company shall indemnify
and hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of the Securities Act (collectively referred to
for the purposes of this Section 9 and Section 10 as the Underwriter) against
any loss, claim, damage or liability, joint or several, or any action in respect
thereof, to which that Underwriter may become subject, under the Securities Act
or otherwise, insofar as such loss, claim, damage, liability or action arises
out of or is based upon (i) any untrue statement or alleged untrue statement of
a material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus or in any amendment or supplement thereto or in any
documents incorporated by reference therein or (ii) the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and shall reimburse
each Underwriter for any legal or other expenses reasonably incurred by that
Underwriter in connection with investigating or preparing to defend or defending
against or appearing as a third party witness in connection with any such loss,
claim, damage, liability or action as such expenses are incurred; provided,
however, that each of the Parent and the Company shall not be liable in any such
case to the extent that any such loss, claim, damage, liability or action arises
out of or is based upon an untrue statement or alleged untrue statement in or
omission or alleged omission from any Preliminary Prospectus, the Registration
Statement or the Prospectus or any documents incorporated by reference therein
or any such amendment or supplement in reliance upon and in conformity with
written information furnished to the Parent and the Company through the
Representatives by or on behalf of any Underwriter specifically for use therein.
(b) Each Underwriter, severally and not jointly, shall indemnify and
hold harmless each of the Parent, the Company and each of their respective
directors, each officer of the Parent or the Company who signed the
Registration Statement and each person, if any, who controls Parent or the
Company within the meaning of the Securities Act (collectively referred to
for the purposes of this Section 9 and Section 10 as the Parent and the
Company), against any loss, claim, damage or liability, joint or several, or
any action in respect thereof, to which the Parent and the Company may
become subject, under the Securities Act or otherwise, insofar as such loss,
claim, damage, liability or action arises out of or is based upon (i) any
untrue statement or alleged untrue statement of a material fact contained in
any Preliminary Prospectus, the Registration Statement or the Prospectus or
in any amendment or supplement thereto or (ii) the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, but in each case
only to the extent that the untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity
with written information furnished to the Parent and the Company through the
Representatives by or on behalf of that Underwriter specifically for use
therein, and shall reimburse the Parent and the Company for any legal or
other expenses reasonably incurred by the Parent and the Company in
connection with investigating or preparing to defend or defending against or
appearing as third party witness in connection with any such loss, claim,
damage, liability or action as such expenses are incurred.
(c) Promptly after receipt by an indemnified party under this Section 9
of notice of any claim or the commencement of any action, the indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 9, notify the indemnifying party in
writing of the claim or the commencement of that action; provided, however,
that the failure to notify the indemnifying party shall not relieve it from
any liability which it may have under this Section 9 except to the extent it
has been materially prejudiced by such failure; and, provided, further, that
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have to an indemnified party otherwise than under
this Section 9. If any such claim or action shall be brought against an
indemnified party, and it shall notify the indemnifying party thereof, the
indemnifying party shall be entitled to participate therein and, to the
extent that it wishes, jointly with any other similarly notified
indemnifying party, to assume the defense thereof with counsel
15
<PAGE> 16
reasonably satisfactory to the indemnified party. After notice from the
indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable
to the indemnified party under this Section 9 for any legal or other
expenses subsequently incurred by the indemnified party in connection with
the defense thereof other than reasonable costs of investigation; provided,
however, that the Representatives shall have the right to employ counsel to
represent jointly the Representatives and those other Underwriters and their
respective controlling persons who may be subject to liability arising out
of any claim in respect of which indemnity may be sought by the Underwriters
against the Parent and the Company under this Section 9 if, in the
reasonable judgment of the Representatives, it is advisable for the
Representatives and those Underwriters and controlling persons to be jointly
represented by separate counsel, and in that event the fees and expenses of
such separate counsel shall be paid by the Parent and the Company. Each
indemnified party, as a condition of the indemnity agreements contained in
Sections 9(a) and 9(b), shall use all reasonable efforts to cooperate with
the indemnifying party in the defense of any such action or claim. No
indemnifying party shall be liable for any settlement of any such action
effected without its written consent (which consent shall not be
unreasonably withheld), but if settled with its written consent or if there
be a final judgment of the plaintiff in any such action, the indemnifying
party agrees to indemnify and hold harmless any indemnified party from and
against any loss or liability by reason of such settlement or judgment.
The obligations of the Parent, the Company and the Underwriters in this
Section 9 and in Section 10 are in addition to any other liability which the
Parent, the Company or the Underwriters, as the case may be, may otherwise have.
10. CONTRIBUTION. If the indemnification provided for in Section 9 is
unavailable or insufficient to hold harmless an indemnified party under Section
9(a) or (b), then each indemnifying party shall, in lieu of indemnifying such
indemnified party, contribute to the amount paid or payable by such indemnified
party as a result of such loss, claim, damage or liability, or action in respect
thereof, (i) in such proportion as shall be appropriate to reflect the relative
benefits received by the Parent and the Company on the one hand and the
Underwriters on the other from the offering of the Securities and the Guarantees
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Parent and the Company on the one hand and the Underwriters on the other
with respect to the statements or omissions which resulted in such loss, claim,
damage or liability, or action in respect thereof, as well as any other relevant
equitable considerations. The relative benefits received by the Parent and the
Company on the one hand and the Underwriters on the other with respect to such
offering shall be deemed to be in the same proportion as the total net proceeds
from the offering of the Securities purchased under this Agreement (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters with respect to the
Securities and the Guarantees purchased under this Agreement, in each case as
set forth in the table on the cover page of the Prospectus. The relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Parent or the
Company on the one hand or the Underwriters on the other, the intent of the
parties and their relative knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission. The Parent and the Company
and the Underwriters agree that it would not be just and equitable if
contributions pursuant to this Section 10 were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to herein. The amount paid or payable by
an indemnified party as a result of the loss, claim, damage or liability, or
action in respect thereof, referred to above in this Section 10 shall be deemed
to include, for purposes of this Section 10, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 10, no Underwriter shall be required to contribute any amount in excess
of the amount by which the total price at which the Securities underwritten by
it and distributed to the public were offered to the public less the amount of
any damages which such Underwriter has otherwise paid or become liable to pay by
reason of any untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute as provided in this Section 10 are
several in proportion to their respective underwriting obligations and not
joint.
16
<PAGE> 17
11. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure to
the benefit of and be binding upon the Underwriters, the Parent, the Company and
their respective successors. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person, firm or corporation, other
than the Underwriters, the Parent, the Company and their respective successors
and the controlling persons and officers and directors referred to in Sections 9
and 10 and their heirs and legal representatives, any legal or equitable right,
remedy or claim under or in respect of this Agreement or any provision contained
herein.
12. EXPENSES. Each of the Parent and the Company agrees with the
Underwriters to pay (a) the costs incident to the authorization, issuance, sale,
preparation and delivery of the Securities and the Guarantees and any taxes
payable in that connection; (b) the costs incident to the preparation, printing
and filing under the Securities Act of the Registration Statement and any
amendments and exhibits thereto; (c) the costs of distributing the Registration
Statement as originally filed and each amendment thereto and any post-effective
amendments thereof (including, in each case, exhibits), any Preliminary
Prospectus, the Prospectus and any amendment or supplement to the Prospectus,
all as provided in this Agreement; (d) the costs of printing, reproducing and
distributing this Agreement and any other underwriting and selling group
documents by mail, telex or other means of communications; (e) the filing fees
incident to securing any required review by the National Association of
Securities Dealers, Inc. of the terms of sale of the Securities; any applicable
listing or other fees; (f) the fees and expenses of qualifying the Securities
and the Guarantees under the securities laws of the several jurisdictions as
provided in Section 4(h) and of preparing, printing and distributing Blue Sky
Memoranda and Legal Investment Surveys (including related fees and expenses of
counsel to the Underwriters); (g) all fees and expenses of the Trustee; and (h)
all other costs and expenses incident to the performance of the obligations of
the Parent and the Company under this Agreement; provided that, except as
otherwise provided in this Section 12 and in Section 8, the Underwriters shall
pay their own costs and expenses, including the costs and expenses of their
counsel, any transfer taxes on the Securities and the Guarantees which they may
sell and the expenses of advertising any offering of the Securities and the
Guarantees made by the Underwriters.
13. SURVIVAL. The respective indemnities, rights of contribution,
representations, warranties and agreements of the Parent, the Company and the
Underwriters contained in this Agreement or made by or on behalf on them,
respectively, pursuant to this Agreement, shall survive the delivery of and
payment for the Securities and shall remain in full force and effect, regardless
of any termination or cancellation of this Agreement or any investigation made
by or on behalf of any of them or any person controlling any of them.
14. NOTICES, ETC. All statements, requests, notices and agreements hereunder
shall be in writing, and:
(a) if to the Underwriters, shall be delivered or sent by mail, telex or
facsimile transmission to Chase Securities Inc., 270 Park Avenue, New York,
New York 10017, Attention: .
(b) if to the Parent or Company shall be delivered or sent by mail,
telex or facsimile transmission to the address of the Parent set forth in
the Registration Statement, Attention: [Stephen K. Gardner];
provided, however, that any notice to an Underwriter pursuant to Section 8(c)
shall be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its acceptance telex to the
Representatives, which address will be supplied to any other party hereto by the
Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Parent and the
Company shall each be entitled to act and rely upon any request, consent, notice
or agreement given or made on behalf of the Underwriters by the Representatives.
15. DEFINITIONS OF CERTAIN TERMS. For purposes of this Agreement, (a)
"business day" means any day on which the New York Stock Exchange, Inc. is open
for trading and (b) "subsidiary" has the meaning set forth in Rule 405 of the
Rules and Regulations.
16. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
17. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same instrument.
18. HEADINGS. The headings herein are inserted for convenience of reference
only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
17
<PAGE> 18
If the foregoing is in accordance with your understanding of the agreement
between the Parent, the Company and the several Underwriters, kindly indicate
your acceptance in the space provided for that purpose below.
Very truly yours,
MESA INC.
By
----------------------------------
Name:
----------------------------
Title:
---------------------------
MESA OPERATING CO.
By
----------------------------------
Name:
----------------------------
Title:
---------------------------
Accepted:
Chase Securities Inc.
BT Securities Corp.
Donaldson, Lufkin & Jenrette
Securities Corporation
Merrill Lynch, Pierce Fenner
& Smith Incorporated
by CHASE SECURITIES INC.
By
----------------------------------
Authorized Signatory
For itself and as representative
of the Underwriters
18
<PAGE> 19
SCHEDULE 1
<TABLE>
<CAPTION>
PRINCIPAL
PRINCIPAL AMOUNT
AMOUNT OF SENIOR
OF SENIOR SUBORDINATED
SUBORDINATED DISCOUNT
UNDERWRITERS NOTES NOTES
- ----------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Chase Securities Inc............................................. $ $
BT Securities Corporation........................................
Donaldson, Lufkin & Jenrette Securities Corporation..............
Merrill Lynch, Pierce Fenner & Smith Incorporated................
---------- ----------
Total............................................................ $ $
========== ==========
</TABLE>
19
<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 and each of the
three-month periods ended March 31, 1995 and 1996 represent the actual results
of Mesa's operations for those periods.
The columns 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>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------------------------------------ ------------------------------------
1995 1995 1996
--------------------------- ------- --------------------------
AS ADJUSTED AS ADJUSTED
FOR THE FOR THE
1991 1992 1993 1994 ACTUAL RECAPITALIZATION ACTUAL RECAPITALIZATION
-------- -------- --------- -------- -------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNINGS:
Net income
(loss)...... $(79,163) $(89,232) $(102,448) $(83,353) $(57,568) $ (6,970) $(7,894) $ 1,057 $ 8,527
Adjustments:
Interest
expense... 150,770 143,392 142,002 144,757 148,630 87,549 36,663 37,749 22,617
-------- -------- -------- --------- -------- -------- ------- ------- -------
Total
earnings.... $ 71,607 $ 54,160 $ 39,554 $ 61,404 $ 91,062 $ 80,579 $28,769 $38,806 $ 31,144
======== ======== ======== ========= ======== ======== ======= ======= =======
Fixed charges
Interest
capitalized... $ -- $ 2,365 $ 2,884 $ 104 $ 908 $ 908 $ -- $ 68 $ 68
Interest
expense... 150,770 143,392 142,002 144,757 148,630 87,549 36,663 37,749 22,617
-------- -------- -------- --------- -------- -------- ------- ------- -------
Total fixed
charges..... $150,770 $145,757 $ 144,886 $144,861 $149,538 $ 88,457 $36,663 $37,817 $ 22,685
======== ======== ======== ========= ======== ======== ======= ======= =======
Ratio of
earnings to
fixed
charges..... NM NM NM NM NM NM NM 1.03 1.37
======== ======== ======== ========= ======== ======== ======= ======= =======
Preferred
dividend
requirements... $ 21,845 $ 5,737
======== =======
Total fixed
charges and
preferred
dividends... $110,302 $ 28,422
======== =======
Ratio of
earnings to
combined
fixed
charges and
preferred
dividends... NM 1.10
======== =======
Amount by
which fixed
charges
exceed
earnings.... $ 79,163 $ 91,597 $ 105,332 $ 83,457 $ 58,476 $ 7,908 $ 7,894 $ -- $ --
======== ======== ======== ========= ======== ======== ======= ======= =======
Amount by
which
combined
fixed
charges and
preferred
dividends
exceed
earnings.... $ 29,723 $ --
======== =======
</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
June 7, 1996
<PAGE> 1
EXHIBIT 24
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>
Chief Executive Officer and
- ------------------------------------------------- Chairman of the Board of
Boone Pickens Directors (Principal
Executive Officer)
President, Chief Operating
- ------------------------------------------------- Officer and Director
Paul W. Cain
Vice President and Chief
- ------------------------------------------------- Financial Officer (Principal
Stephen K. Gardner Financial Officer)
Controller (Principal
- ------------------------------------------------- Accounting Officer)
William D. Ballew
/s/ JOHN S. HERRINGTON Director May 9, 1996
- -------------------------------------------------
John S. Herrington
Director
- -------------------------------------------------
Wales H. Madden, Jr.
Director
- -------------------------------------------------
Dorn Parkinson
Director
- -------------------------------------------------
Joel L. Reed
Director
- -------------------------------------------------
Fayez S. Sarofim
Director
- -------------------------------------------------
Robert L. Stillwell
</TABLE>
