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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the SEC Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
MESA INC.
(Name of Registrant as Specified In Its Charter)
MESA INC.
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6()(1), or
14a-6(i)(2) or Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange
Act Rule 14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
1) Title of each class of securities to which transaction applies:
________________________________________________________________________
2) Aggregate number of securities to which transaction applies:
________________________________________________________________________
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined).
________________________________________________________________________
4) Proposed maximum aggregate value of transaction:
________________________________________________________________________
5) Total fee paid:
________________________________________________________________________
[x] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
1) Amount Previously Paid:
$125.00
________________________________________________________________________
2) Form, Schedule or Registration Statement No.:
Schedule 14A
________________________________________________________________________
3) Filing Party:
MESA Inc.
________________________________________________________________________
4) Date Filed:
April 29, 1996
________________________________________________________________________
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MESA INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 25, 1996
IRVING, TEXAS
To the Stockholders of MESA Inc.:
Notice is hereby given that a Special Meeting of the Stockholders of MESA
Inc. will be held at the Fairmont Hotel, 1717 N. Akard Street, Dallas, Texas, at
10:00 a.m. on Tuesday, June 25, 1996, to consider and act upon three proposals
(the "Proposals"), as more fully described in the accompanying Proxy Statement:
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Proposal One: Approval of the issuance and sale of a minimum of approximately 58.8
million shares and a maximum of approximately 117.3 million shares (subject
to appropriate adjustment to reflect the reverse stock split described in
Proposal Three, if approved) of Series B 8% Cumulative Convertible
Preferred Stock, par value $.01 per share, of MESA Inc. ("Mesa") to
DNR-MESA Holdings, L.P., a Texas limited partnership ("DNR"), the sole
general partner of which is Rainwater, Inc., at a price of $2.26 per share
on the terms and subject to the conditions set forth in that certain Stock
Purchase Agreement, dated April 26, 1996, between Mesa and DNR.
Proposal Two: Approval of an amendment of Mesa's Amended and Restated Articles of
Incorporation to (i) increase the number of authorized shares of Common
Stock, par value $.01 per share, of Mesa from 100,000,000 to 600,000,000
(subject to the effect of the reverse stock split described in Proposal
Three, if approved), (ii) increase the number of authorized shares of
Preferred Stock, par value $.01 per share, of Mesa from 10,000,000 to
500,000,000 (subject to the effect of the reverse stock split described in
Proposal Three, if approved) and (iii) permit the taking of action by
written consent of the holders of any series of Preferred Stock if and to
the extent provided in the resolution of the Board of Directors
establishing any such series.
Proposal Three: Approval of an amendment of Mesa's Amended and Restated Articles of
Incorporation to effect (i) a one-for-four reverse stock split of the
outstanding shares of Common Stock, (ii) a reduction of the authorized
shares of Common Stock from 600,000,000 to 150,000,000 and (iii) a
reduction of the authorized shares of Preferred Stock from 500,000,000 to
125,000,000.
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NONE OF THE PROPOSALS WILL BE IMPLEMENTED UNLESS BOTH PROPOSAL ONE AND
PROPOSAL TWO ARE APPROVED. HOWEVER, THE IMPLEMENTATION OF PROPOSALS ONE AND TWO
IS NOT CONDITIONED UPON THE APPROVAL OF PROPOSAL THREE. ACCORDINGLY, A VOTE
AGAINST PROPOSAL ONE OR PROPOSAL TWO WILL GENERALLY HAVE THE SAME EFFECT AS A
VOTE AGAINST ALL OF THE PROPOSALS, BUT A VOTE AGAINST PROPOSAL THREE WILL NOT
AFFECT THE IMPLEMENTATION OF PROPOSALS ONE AND TWO.
Stockholders of record at the close of business on April 29, 1996, will be
entitled to notice of, and to vote at, the Special Meeting or any postponements
or adjournments thereof. Stockholders are cordially invited to attend the
Special Meeting in person. Whether or not you plan to attend in person, please
sign, date, and promptly mail the enclosed proxy card for which a
self-addressed, U.S. postage-paid, return envelope is provided. Stockholders are
urged to read carefully the attached Proxy Statement for additional information
concerning the matters to be considered at the Special Meeting.
By order of the Board of Directors,
/s/ STEPHEN K. GARDNER
STEPHEN K. GARDNER
Vice President and Chief Financial
Officer
May 24, 1996
<PAGE> 3
May 24, 1996
MESA INC.
1400 Williams Square West
5205 North O'Connor Boulevard
Irving, Texas 75039-3746
---------------------
PROXY STATEMENT
---------------------
SPECIAL MEETING OF STOCKHOLDERS
To Be Held June 25, 1996
This Proxy Statement is being furnished to the Stockholders of MESA Inc. in
connection with the solicitation of proxies by the Board of Directors for use at
the Special Meeting of Stockholders to be held at the Fairmont Hotel, 1717 N.
Akard Street, Dallas, Texas, at 10:00 a.m. on June 25, 1996, and at any
postponements or adjournments thereof (the "Special Meeting"). Unless the
context otherwise requires, references herein to "Mesa" are to MESA Inc. and its
subsidiaries and predecessors viewed as a single entity.
At the Special Meeting, including any adjournment thereof, holders of
shares of Mesa's Common Stock, par value $.01 per share ("Common Stock"), will
be asked to consider and vote upon the following three proposals:
(i) the issuance and sale of a minimum of approximately 58.8 million
shares and a maximum of approximately 117.3 million shares (subject to
appropriate adjustment to reflect the reverse stock split described below,
if approved) of Series B 8% Cumulative Convertible Preferred Stock, par
value $.01 per share (the "Series B Preferred Stock"), of Mesa to DNR-MESA
Holdings, L.P., a Texas limited partnership ("DNR"), the sole general
partner of which is Rainwater, Inc., a Texas corporation owned by Richard
E. Rainwater (together, "Rainwater"), at a price of $2.26 per share on the
terms and subject to the conditions set forth in that certain Stock
Purchase Agreement, dated April 26, 1996, between Mesa and DNR (the "Stock
Purchase Agreement");
(ii) an amendment of Mesa's Amended and Restated Articles of
Incorporation to (i) increase the number of authorized shares of Common
Stock of Mesa from 100,000,000 to 600,000,000 (subject to the effect of the
reverse stock split described below, if approved), (ii) increase the number
of authorized shares of Preferred Stock, par value $.01 per share
("Preferred Stock"), of Mesa from 10,000,000 to 500,000,000 (subject to the
effect of the reverse stock split described below, if approved) and (iii)
permit the taking of action by written consent of the holders of any series
of Preferred Stock if and to the extent provided in the resolution of the
Board of Directors establishing any such series (the "Required Charter
Amendments"); and
(iii) an amendment of Mesa's Amended and Restated Articles of
Incorporation to effect (i) a one-for-four reverse stock split (the
"Reverse Stock Split") of the outstanding shares of Common Stock, (ii) a
reduction of the authorized shares of Common Stock from 600,000,000 to
150,000,000 and (iii) a reduction of the authorized shares of Preferred
Stock from 500,000,000 to 125,000,000 (the "Reverse Split Charter
Amendments").
This Proxy Statement and the enclosed form of proxy are first being mailed to
stockholders on or about May 28, 1996.
<PAGE> 4
TABLE OF CONTENTS
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PAGE
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Summary............................................................................... 1
The Special Meeting................................................................... 8
The Recapitalization.................................................................. 10
Terms of the Recapitalization....................................................... 10
Effects of the Recapitalization on Control of Mesa.................................. 11
Sources and Uses of Funds........................................................... 13
Background of the Recapitalization.................................................. 13
Opinion of Independent Financial Advisor............................................ 24
Advantages of the Recapitalization.................................................. 28
Disadvantages of the Recapitalization............................................... 29
Consequences if the DNR Purchase is not Approved.................................... 30
Absence of Appraisal Rights......................................................... 30
Interests of Certain Persons in the Recapitalization................................ 31
Expenses of the Recapitalization.................................................... 31
Board Recommendation................................................................ 31
Letters of Dissenting Directors..................................................... 33
Response of the Majority of the Board to the Letters of Dissenting Directors........ 36
Price Range of Common Stock and Dividend Policy....................................... 38
Unaudited Pro Forma Financial Information............................................. 39
Selected Historical Financial Information............................................. 44
Capital Resources and Liquidity....................................................... 45
The Stock Purchase Agreement.......................................................... 47
Description of Preferred Stock........................................................ 54
The Rights Offering................................................................... 58
Description of New Debt............................................................... 59
Capitalization........................................................................ 62
The Required Charter Amendments....................................................... 63
The Reverse Split Charter Amendments.................................................. 64
Management............................................................................ 67
Executive Compensation................................................................ 71
Certain Relationships and Related Transactions........................................ 76
Security Ownership of Certain Beneficial Owners and Management........................ 77
Shareholder Rights Plan............................................................... 80
Annual Meeting........................................................................ 81
Incorporation of Certain Documents by Reference....................................... 81
Other Matters......................................................................... 82
Annex A -- Opinion of Lehman Brothers Inc. ........................................... A-1
Annex B -- Stock Purchase Agreement................................................... B-1
Annex C -- Statement of Resolution.................................................... C-1
</TABLE>
FORWARD LOOKING STATEMENTS
This Proxy Statement 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 Proxy Statement, including without limitation, the
statements under "Summary," "The Recapitalization," "Unaudited Pro Forma
Financial Information" and "Capital Resources and Liquidity" regarding Mesa's
financial position and liquidity, the amount of and its ability to make debt
service payments and payments of dividends, 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 Proxy
Statement, including without limitation in conjunction with the forward-looking
statements included in this Proxy Statement. 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.
<PAGE> 5
SUMMARY
The following summary is not intended to be complete and is qualified in
its entirety by the more detailed information appearing elsewhere in this Proxy
Statement and the Annexes hereto. Stockholders are urged to read the entire
Proxy Statement.
OVERVIEW
This Proxy Statement relates to a proposal for a series of transactions
that are intended to deleverage and recapitalize Mesa through the issuance of
$265 million in new equity and the repayment and/or refinancing of Mesa's
existing $1.2 billion in debt (the "Recapitalization," as more specifically
defined below). For the past several years, Mesa has operated under significant
financial constraints as a result of the devotion of substantially all of its
operating cash flow to debt service. Mesa's high degree of leverage, combined
with the impact of low and volatile prices for natural gas and liquids, have
resulted in a lack of liquidity and access to capital markets which threaten
Mesa's financial viability.
In an effort to address this situation, Mesa's Board of Directors (the
"Board") embarked on a process to evaluate its strategic alternatives in late
1994, and expanded the process in mid-1995. Through its independent financial
advisor, the Board solicited proposals for a sale of Mesa, a stock-for-stock
merger, joint ventures, asset sales, equity infusions, and refinancing
transactions (the "Proposal Solicitation Process"). A majority of the Board has
determined that the Recapitalization is the most advantageous alternative
available to Mesa and believes that Rainwater will be an important strategic
partner in the future financial success of Mesa. Two of Mesa's eight directors
dissented from the Board's determination. The Recapitalization is also intended
to enhance Mesa's ability to compete within the oil and gas industry by
substantially increasing cash flow available for investment and enhancing its
ability to attract capital. Concurrently with the closing of the
Recapitalization, DNR will obtain the right to elect a majority of the Board.
MESA
Mesa is one of the largest independent oil and gas companies in the United
States and considers itself one of the most efficient operators of domestic
natural gas producing properties and natural gas processing facilities. Mesa has
been publicly held since 1964 and is primarily in the business of exploring for,
developing, producing, processing and selling natural gas and oil in the United
States. As of December 31, 1995, Mesa owned approximately 1.9 trillion cubic
feet of equivalent proved natural gas reserves.
DNR AND RAINWATER, INC.
DNR is a Texas limited partnership formed to invest in Mesa. Rainwater,
Inc. is the sole general partner of DNR and Richard E. Rainwater personally owns
a majority of the limited partnership interests in DNR. Rainwater, Inc. is a
Texas corporation owned by Mr. Rainwater. Mr. Rainwater was the chief investment
advisor to the Bass family of Fort Worth, Texas from 1970 to 1986. During that
time he was principally responsible for numerous major corporate acquisitions
and dispositions. In 1986, he founded what is now ENSCO International, Inc., an
international offshore drilling company. Additionally, in 1987 he co-founded
Columbia Hospital Corporation and in 1989 participated in a management-led
buyout of HCA-Hospital Corporation of America. In 1994, these two companies
merged to create Columbia/HCA Healthcare Corporation, the nation's largest
publicly traded hospital chain. In 1992, Mr. Rainwater was one of the founders
of Mid Ocean Limited, a provider of casualty re-insurance. In 1994, he founded
Crescent Real Estate Equities, Inc., one of the nation's largest real estate
investment trusts, for which he currently serves as chairman of the board.
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SUMMARY OF THE PROPOSED RECAPITALIZATION
The Recapitalization is proposed to be effected as follows:
- Sale to DNR. Mesa will sell approximately 58.8 million shares of Series B
Preferred Stock to DNR at a price of $2.26 per share (an aggregate of
$133 million). This sale will occur at a closing (the "First Closing")
shortly after approval of the necessary elements of the Recapitalization
at the Special Meeting, subject to concurrent completion of the Debt
Refinancing described below.
- Refinancing of Existing Debt. Mesa will repay and/or refinance
substantially all of its outstanding indebtedness (approximately $1.2
billion at December 31, 1995) with funds from the following sources: (i)
a new $500 million revolving credit facility (the "New Credit Facility")
for which Mesa has received a commitment letter from Chemical Bank, The
Chase Manhattan Bank, N.A., and Bankers Trust Company, (ii) the sale of
$500 million of senior subordinated notes (the "New Notes") in an
underwritten public offering, for which Chase Securities Inc., BT
Securities Corporation, Donaldson, Lufkin & Jenrette Securities
Corporation and Merrill Lynch & Co. will serve as lead managers, (iii)
the $133 million in proceeds from the sale of shares to DNR at the First
Closing and (iv) cash on hand. The New Credit Facility, the sale of the
New Notes and the application of the net proceeds therefrom are referred
to herein as the "Debt Refinancing." The Debt Refinancing is subject to
the concurrent completion of DNR's purchase of Series B Preferred Stock
at the First Closing.
- Rights Offering. After the First Closing, Mesa will conduct a rights
offering (the "Rights Offering") whereby it will distribute to the
holders of Common Stock transferable rights (the "Rights") to purchase a
pro rata portion of an aggregate of approximately 58.4 million shares of
Series A 8% Cumulative Convertible Preferred Stock of Mesa, par value
$.01 per share ("Series A Preferred Stock"), for the same purchase price
of $2.26 per share to be paid by DNR (an aggregate of $132 million). 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. The Rights Offering and any sale of
shares to DNR pursuant to the Standby Commitment will close concurrently
(the "Second Closing"). 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 at the First Closing and pursuant to the
Standby Commitment (together, the "DNR Purchase"), the Debt Refinancing and the
Rights Offering. The number and price of shares of Preferred Stock to be issued
in the Recapitalization are subject to appropriate adjustment if the Reverse
Stock Split is implemented.
CONTROL OF MESA
As the sole holder of the Series B Preferred Stock, DNR will have 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 and meet certain minimum
stock ownership requirements. See "Description of Preferred Stock." Upon
completion of the Second Closing, DNR will own between 32% and 65% of the
outstanding Common Stock on a fully diluted basis, depending on the extent to
which the Rights Offering is subscribed.
DNR intends to implement an orderly transition and succession plan for
Mesa's senior management. Such plans are being developed.
TERMS OF THE PREFERRED STOCK
Except for voting rights to elect directors, the rights and privileges of
the Series A Preferred Stock and the Series B Preferred Stock will be
substantially identical. Each share of Series A and Series B Preferred Stock
will be convertible into one share of Common Stock (subject to customary
antidilution adjustments) at any time at the holder's option. Dividends on the
Series A and Series B Preferred Stock will be paid in additional shares of
Preferred Stock until the fourth anniversary of the date of issuance, after
which Mesa will
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have the option to pay dividends in cash if certain financial tests are
satisfied, subject to any limitations in Mesa's debt agreements. Shares of
Series B Preferred Stock that are transferred or sold by DNR to an unaffiliated
third party will automatically convert into shares of Series A Preferred Stock.
The Series A Preferred Stock has been approved for listing on the New York
Stock Exchange, subject to official notice of issuance.
OPINION OF INDEPENDENT FINANCIAL ADVISOR
Mesa has received an opinion from Lehman Brothers Inc. ("Lehman Brothers"),
its independent financial advisor, that, as of the date of such opinion, and
subject to the assumptions, factors and limitations set forth in such opinion,
the consideration to be received by Mesa for the Series A Preferred Stock to be
issued in the Rights Offering and the Series B Preferred Stock to be issued to
DNR is fair from a financial point of view to Mesa and, accordingly, to its
stockholders.
ADVANTAGES OF THE RECAPITALIZATION
The principal advantages of the Recapitalization considered by the Board
include, among other things, that (i) the Recapitalization will improve Mesa's
financial condition by significantly reducing its costs of debt service, (ii)
the Recapitalization will eliminate Mesa's near term liquidity issues and
enhance Mesa's ability to compete in the oil and gas industry by substantially
increasing cash flow available for investment and enhancing its ability to
attract capital, and (iii) Mesa's current stockholders will have the right to
participate in the Recapitalization by purchasing shares of Series A Preferred
Stock through the Rights Offering, or by selling their Rights in the market, in
either case mitigating the dilution of their investment in the Recapitalization.
In addition, Mesa expects to benefit from the ability of DNR's Board
representatives, who have participated in a number of significant transactions
and enjoy an excellent reputation in the financial community, to attract
capital. See "The Recapitalization -- Advantages of the Recapitalization."
DISADVANTAGES OF THE RECAPITALIZATION
The principal disadvantages of the Recapitalization considered by the Board
are (i) the transfer of control to DNR at a discount to market prices, (ii)
dilution of the investment of existing stockholders and (iii) a limitation on
the potential use of certain net operating loss carryforwards for tax purposes.
See "The Recapitalization -- Disadvantages of the Recapitalization."
RECOMMENDATION OF THE BOARD OF DIRECTORS OF MESA
In arriving at a recommendation, the Board considered the advantages and
disadvantages of the Recapitalization, the results of the extensive review of
Mesa's strategic alternatives, the opinion of Lehman Brothers, Mesa's financial
condition, and other factors, all as more fully discussed herein. A majority of
the Board has concluded that the Recapitalization is in the best interests of
Mesa and its stockholders and recommends that the holders of Common Stock vote
to approve the DNR Purchase.
The Required Charter Amendments are necessary in order to implement the DNR
Purchase and the Rights Offering, and the Board believes they are otherwise
advantageous to Mesa. Accordingly, a majority of the Board recommends that such
amendments be approved.
A majority of the Board believes that the Reverse Stock Split will be
advantageous to Mesa and its stockholders as a means of enhancing the liquidity
and marketability of the Common Stock, and accordingly a majority of the Board
recommends that the Reverse Split Charter Amendments be approved.
Two of the eight members of the Board of Directors, Dorn Parkinson and Joel
Reed, dissented in writing from the Board's conclusions and recommendations.
Letters from Mr. Parkinson and Mr. Reed stating their reasons for dissenting are
set forth herein under "The Recapitalization -- Letters of Dissenting
Directors."
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CONDITIONS TO THE RECAPITALIZATION
Consummation of the Recapitalization is conditioned upon (i) the receipt of
all requisite stockholder approvals of the transactions contemplated by the
Recapitalization, (ii) the closing of the Debt Refinancing concurrently with the
initial sale of Series B Preferred Stock to DNR at the First Closing and (iii)
other customary conditions.
RIGHTS OFFERING
The Rights Offering will commence promptly after the First Closing under
the Stock Purchase Agreement, and will expire not less than 16 nor more than 21
days thereafter, subject to extension by Mesa.
Mesa will send written notice to its stockholders at least ten days in
advance of the proposed record date for determining the eligibility of
stockholders to receive Rights.
One Right will entitle the holder thereof to receive, upon payment of the
$2.26 per share 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 same 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.
PRINCIPAL FEDERAL INCOME TAX CONSEQUENCES OF THE RIGHTS OFFERING
It is expected that holders of Common Stock will not be taxed upon the
receipt or exercise of the Rights issued in the Rights Offering. However, it is
expected that upon a sale of the Rights, a stockholder will be taxed on any
capital gain realized through such sale (gain or loss is determined by the
difference in any amount received in the sale of the Rights and the
stockholder's tax basis in the Rights).
REQUIRED CHARTER AMENDMENTS
In connection with the Recapitalization, Mesa proposes to amend its Amended
and Restated Articles of Incorporation (the "Articles of Incorporation") so
that: (i) the number of authorized shares of Common Stock would be increased
from 100 million to 600 million, (ii) the number of authorized shares of
Preferred Stock would be increased from 10 million to 500 million and (iii) the
taking of action by written consent of the holders of any series of preferred
stock would be permitted if and to the extent provided in the resolution of the
Board of Directors establishing any such series. Approval of these Required
Charter Amendments is a necessary condition to implementation of the
Recapitalization.
REVERSE STOCK SPLIT
Mesa proposes certain additional amendments to its Articles of
Incorporation to effect a one-for-four Reverse Stock Split pursuant to which
each holder of Common Stock will receive one share of Common Stock for every
four shares of Common Stock held prior to the Reverse Stock Split. Except for
minor changes resulting from the treatment of fractional shares, the Reverse
Stock Split will not affect any stockholder's percentage ownership interest in
Mesa or of the outstanding Common Stock. Following the Reverse Stock Split, the
total number of shares of Common Stock outstanding would be reduced from
64,050,009 to approximately 16,012,502, the total number of shares of authorized
Common Stock would be reduced to 150 million and the total number of shares of
authorized Preferred Stock would be reduced to 125 million. The numbers of
shares of Series A and Series B Preferred Stock to be issued in the
Recapitalization would be similarly adjusted, and the purchase price for such
shares would be increased from $2.26 to $9.04 per share.
It is impossible to predict the market's reaction to any reverse stock
split or, in this case, to separate such reaction from the market's reaction to
the proposed Recapitalization as a whole. However, Mesa would expect that
immediately after the Reverse Stock Split, each share of Common Stock would be
valued at a price
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approximately four times greater than without the split. The consummation of the
Recapitalization is not conditioned upon the Reverse Stock Split being approved
by the stockholders or effected by Mesa.
Except as otherwise indicated, all share and per share information in this
Proxy Statement is presented without giving effect to the Reverse Stock Split.
SPECIAL MEETING
Date; Location............. The Special Meeting will be held on June 25, 1996
at 10:00 a.m., Dallas time, at the Fairmont Hotel,
1717 N. Akard Street, Dallas, Texas.
Voting..................... Each share of Common Stock entitles the holder
thereof on the record date to one vote on each
matter submitted for a vote of the stockholders at
the Special Meeting. The Board of Directors has set
April 29, 1996 as the record date (the "Record
Date") for determination of stockholders entitled
to receive notice of and vote at the Special
Meeting.
Shares Outstanding......... There were 64,050,009 shares of Common Stock issued
and outstanding as of the Record Date.
Vote Required.............. The affirmative vote of a majority of the shares of
Common Stock represented in person or by proxy and
entitled to vote at the Special Meeting will be
required to approve the DNR Purchase. The
affirmative vote of a majority of the shares of
Common Stock outstanding as of the Record Date will
be required to approve the Required Charter
Amendments and the Reverse Split Charter
Amendments.
MARKET PRICE OF THE COMMON STOCK
The closing sale price of the Common Stock as reported by the New York
Stock Exchange on February 28, 1996 (the last trading day prior to the
announcement of the letter of intent between Mesa and Rainwater) was $3 per
share. The closing sale price on April 2, 1996 (the last trading day prior to
the announcement that Rainwater had favorably concluded its initial review
period under the letter of intent and that commitments and a "highly confident"
letter regarding the Debt Refinancing had been obtained) was $2 7/8 per share.
On April 26, 1996 (the last trading day before the announcement that Mesa and
DNR had entered into the Stock Purchase Agreement) the closing sale price was
$3 7/8 per share. On May 23, 1996 (the last trading day before the date of this
Proxy Statement), the closing sale price was $3 5/8 per share.
INTENTION OF OFFICERS AND DIRECTORS
Each of the officers and directors who owns Common Stock has indicated that
he intends to vote in favor of approval of all Proposals. These officers and
directors own, in the aggregate, 5,435,485 shares of the outstanding Common
Stock (representing 8.5% of the outstanding shares).
Two directors, Dorn Parkinson and Joel Reed, oppose the Proposals but do
not own shares of Common Stock and will therefore be unable to vote on the
Proposals at the Special Meeting.
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SELECTED HISTORICAL FINANCIAL INFORMATION
(in millions, except per share data)
The following table sets forth selected historical financial information of
Mesa as of the dates and for the periods indicated and should be read in
conjunction with "Capital Resources and Liquidity," the consolidated financial
statements of Mesa which are incorporated by reference herein and the "Unaudited
Pro Forma Financial Information."
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THREE MONTHS ENDED
YEARS ENDED DECEMBER 31 MARCH 31
-------------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- ------ --------
(UNAUDITED)
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STATEMENT OF OPERATIONS DATA:
Revenues.......................... $ 249.5 $ 237.1 $ 222.2 $ 228.7 $ 235.0 $ 62.2 $ 80.6
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
Interest income................... 16.5 13.5 10.7 13.5 15.9 3.9 3.2
Interest expense.................. (150.8) (143.4) (142.0) (144.8) (148.6) (36.7) (37.7)
Other income...................... 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
======== ======== ======== ======== ======== ====== ========
BALANCE SHEET DATA (END OF
PERIOD):
Cash and investments.............. $ 260.3 $ 169.1 $ 150.0 $ 162.5 $ 187.4 $ 155.7
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
Total stockholders' equity........ 273.6 184.4 112.1 124.6 67.0 68.1
PRO FORMA DATA:
Operating income................ $ 48.0 $ 25.3
Interest income................. 0.4 0.1
Interest expense................ (84.6) (23.2)
Other income.................... 27.1 10.3
-------- --------
Net income (loss) before
Preferred Stock dividends..... $ (9.1) $ 12.5
======== ========
Net income (loss) available to
common stockholders........... $ (31.0) $ 6.8
======== ========
Net income (loss) per common share:
Primary....................... $ (.48) $ .10
======== ========
Fully diluted................. -- .07
======== ========
Cash and investments............ $ 1.0
Long-term debt, including
current maturities............ 854.5
Stockholders' equity............ 242.2
</TABLE>
6
<PAGE> 11
CAPITALIZATION
The following table sets forth the unaudited historical consolidated
capitalization of Mesa as of March 31, 1996, and as adjusted to give effect to
(i) the Recapitalization and the application of the proceeds thereof (assuming
net proceeds of $1.1 billion and assuming that all Rights are exercised in full)
as described under "Recapitalization -- Use of Proceeds" and (ii) the Required
Charter Amendments, as if the Recapitalization and the Required Charter
Amendments had been consummated or adopted on March 31, 1996.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
--------------------------
HISTORICAL AS ADJUSTED
---------- -----------
(IN MILLIONS, EXCEPT SHARE DATA)
<S> <C> <C>
Cash and investments.................................................. $ 155.7 $ 1.0
========= =========
Current maturities of long term debt.................................. $ 92.5 $ 5.3
--------- ---------
Long term debt:
Existing Credit Facility(a)......................................... 38.6 --
HCLP Secured Notes.................................................. 457.3 --
12 3/4% Secured Discount Notes...................................... 618.4 --
13 1/2% Subordinated Notes.......................................... 7.4 --
New Credit Facility(a).............................................. -- 349.2
New Notes........................................................... -- 500.0
--------- ---------
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)(b)..................... -- .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)(b)..................... -- .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......................................................... .6 .6
Additional paid-in capital(c)....................................... 399.0 647.8
Accumulated deficit(d).............................................. (331.5) (407.4)
--------- ---------
Total stockholders' equity............................................ 68.1 242.2
--------- ---------
Total capitalization.................................................. $ 1,282.3 $ 1,096.7
========= =========
</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) 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.
(c) The increase in additional paid-in capital represents the gross proceeds
from the sale of the Series A and B Preferred Stock of $265 million, less
$1.2 million of stated capital attributable to the Preferred Stock and less
$15 million in expenses related to the equity issuance.
(d) The increase in the amount of the accumulated deficit of $75.9 million
represents the sum (i) a $64 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.
7
<PAGE> 12
THE SPECIAL MEETING
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, including any adjournment thereof, holders of
shares of Mesa's Common Stock will be asked to consider and vote upon the
following three proposals (the "Proposals"):
(i) the issuance and sale of a minimum of approximately 58.8 million
shares and a maximum of approximately 117.3 million (subject to appropriate
adjustment to reflect the Reverse Stock Split, if approved) shares of
Series B Preferred Stock to DNR at a price of $2.26 per share on the terms
and subject to the conditions set forth in the Stock Purchase Agreement
("Proposal One");
(ii) an amendment of Mesa's Articles of Incorporation to (i) increase
the number of authorized shares of Common Stock of Mesa from 100,000,000 to
600,000,000 (subject to the effect of the Reverse Stock Split, if
approved), (ii) increase the number of authorized shares of Preferred Stock
from 10,000,000 to 500,000,000 (subject to the effect of the Reverse Stock
Split, if approved) and (iii) permit the taking of action by written
consent of the holders of any series of Preferred Stock if and to the
extent provided in the resolution of the Board of Directors establishing
any such series ("Proposal Two"); and
(iii) an amendment of Mesa's Articles of Incorporation to effect (i) a
one-for-four reverse stock split of the outstanding shares of Common Stock,
(ii) a reduction of the authorized shares of Common Stock from 600,000,000
to 150,000,000 and (iii) a reduction of the authorized shares of Preferred
Stock from 500,000,000 to 125,000,000 ("Proposal Three").
As more fully described herein, the DNR Purchase and the Required Charter
Amendments are part of the Recapitalization in which Mesa intends to repay
and/or refinance substantially all of its existing debt. Mesa also proposes to
effect the Reverse Stock Split, though the approval of Proposal Three is not a
condition to implementation of the Recapitalization.
A MAJORITY OF THE MESA INC. BOARD OF DIRECTORS HAS APPROVED THE PROPOSALS
AND RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE APPROVAL OF EACH OF THE
PROPOSALS. TWO OF MESA'S EIGHT DIRECTORS DISSENTED FROM THE BOARD'S
DETERMINATION.
RECORD DATE
At the close of business on April 29, 1996, the Record Date for the
determination of stockholders entitled to notice of, and to vote at, the Special
Meeting, there were 64,050,009 shares of Common Stock outstanding. Each share of
Common Stock is entitled to one vote with respect to each of the Proposals to be
acted upon at the Special Meeting.
PROXIES
Each proxy will be voted in accordance with the specifications marked
thereon. If no voting specification is made, shares represented by proxies will
be voted FOR the adoption of each of the Proposals. A stockholder may revoke his
or her proxy by written notice of revocation received by The Corporation Trust
Company, the independent collection agent for the Special Meeting, at
Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801, any
time before it is voted, by executing and delivering a later-dated proxy for the
Special Meeting to the independent collection agent, or by attending the Special
Meeting and voting in person.
Mesa has retained Morrow & Co., Inc., to solicit proxies in the enclosed
form and will pay such firm a fee of approximately $50,000 plus reasonable
expenses for so acting. In addition, certain officers, representatives, and
regular employees of Mesa may also contact stockholders by telephone, telegram,
or personal interview. Mesa will reimburse brokers and other custodians or
nominees for their reasonable expenses incurred in forwarding the solicitation
material to beneficial owners of Common Stock. The entire cost of this
solicitation will be borne by Mesa.
8
<PAGE> 13
CONFIDENTIAL VOTING
Mesa's Bylaws require the Board to designate an independent third party not
affiliated with Mesa or with any other third party soliciting proxies to
collect, count, and hold all proxies and ballots that identify stockholders.
Pursuant to this provision, the Board has designated The Corporation Trust
Company as the independent collection agent for the Special Meeting. The Board
believes that the Bylaw provision requiring independent and confidential
collection and counting of proxies helps assure the integrity of the voting
process and is in the best interests of the stockholders and Mesa.
QUORUM
Under Mesa's Articles of Incorporation and Bylaws, as well as the Texas
Business Corporation Act (the "TBCA"), the holders of a majority of shares of
Common Stock entitled to vote on a matter, represented in person or by proxy,
shall constitute a quorum as to that matter at the Special Meeting. In addition,
if a quorum is present at the Special Meeting, the stockholders represented in
person or by proxy at the Special Meeting may conduct such business as may be
properly brought before the Special Meeting, including consideration of the
Proposals, until it is adjourned; and the subsequent withdrawal from the Special
Meeting of any stockholder or the refusal of any stockholder represented in
person or by proxy to vote shall not affect the presence of a quorum at the
Special Meeting. Any proxy cards that reflect abstentions or "broker non-votes"
(i.e., shares held by a broker or nominee that are represented at the meeting,
but with respect to which such broker or nominee is not empowered to vote on a
particular matter) will be counted as shares that are present and entitled to
vote for purposes of determining the presence of a quorum at the Special
Meeting.
VOTE REQUIRED
Stockholders of Mesa are entitled to cast one vote with respect to each
Proposal to be acted upon at the Special Meeting for each share of Common Stock
held of record by them on the Record Date. The affirmative vote of the holders
of a majority of the shares of Common Stock that are represented in person or by
proxy and entitled to vote at the Special Meeting will be required to approve
the DNR Purchase. The affirmative vote of the holders of a majority of the
shares of Common Stock outstanding as of the Record Date will be required to
approve the Required Charter Amendments and the Reverse Split Charter
Amendments. Abstentions as to a particular proposal will have the same effect as
votes against a proposal. Broker non-votes, however, will be treated as not
having been voted for purposes of determining approval of such proposal and will
not be counted as votes for or against such proposal.
NONE OF THE PROPOSALS WILL BE IMPLEMENTED UNLESS BOTH PROPOSAL ONE AND
PROPOSAL TWO ARE APPROVED. HOWEVER, THE IMPLEMENTATION OF PROPOSALS ONE AND TWO
IS NOT CONDITIONED UPON THE APPROVAL OF PROPOSAL THREE. ACCORDINGLY, A VOTE
AGAINST PROPOSAL ONE OR PROPOSAL TWO WILL GENERALLY HAVE THE SAME EFFECT AS A
VOTE AGAINST ALL OF THE PROPOSALS, BUT A VOTE AGAINST PROPOSAL THREE WILL NOT
AFFECT THE IMPLEMENTATION OF PROPOSALS ONE AND TWO.
Management does not intend to bring any matters before the Special Meeting
other than those set forth in the Notice of Special Meeting of Stockholders and
does not know of any other matters to be brought before the Special Meeting by
others. The Bylaws of Mesa require advance notice to Mesa of proposals by
stockholders for action to be taken at the Special Meeting. If any other matter
should properly come before the Special Meeting, it is the intention of the
persons named in the accompanying proxy to vote proxies in accordance with their
judgment on such matters. The proxy card, when properly executed, will be voted
as specified therein by the stockholder. If no specification is made, the proxy
will be voted for each of the proposals.
9
<PAGE> 14
INTENTION OF OFFICERS AND DIRECTORS
Each of the officers and directors who owns Common Stock has indicated that
he intends to vote in favor of approval of all Proposals. These officers and
directors own, in the aggregate, 5,435,485 shares of the outstanding Common
Stock (representing 8.5% of the outstanding shares).
Two directors, Dorn Parkinson and Joel Reed, oppose the Proposals but do
not own shares of Common Stock and will therefore be unable to vote on the
Proposals at the Special Meeting.
THE RECAPITALIZATION
References to share numbers and per share prices in the following
discussion do not give effect to the Reverse Split Charter Amendments.
TERMS OF THE RECAPITALIZATION
The Recapitalization contemplates that Mesa will issue an aggregate of $265
million of 8% cumulative convertible preferred stock in transactions in which
DNR will acquire at least 50.2% of the preferred shares. To effect the
transaction, Mesa will sell approximately 58.8 million shares of Series B
Preferred Stock to DNR at the First Closing at a price of $2.26 per share (an
aggregate of $133 million). Immediately following the First Closing, Mesa will
commence the Rights Offering whereby it will distribute to holders of Common
Stock, as of a record date following the date of the First Closing, transferable
rights to purchase a pro rata portion of an aggregate of approximately 58.4
million shares of Series A Preferred Stock for the same purchase price of $2.26
per share (an aggregate of $132 million). Each share of existing Common Stock
will entitle the holder to receive approximately .912 Rights. DNR will further
commit to purchase at the Second Closing (which will occur upon conclusion of
the Rights Offering) an additional amount of the Series B Preferred Stock equal
to the unsubscribed portion of the Rights Offering. Each share of Series A
Preferred Stock and each share of Series B Preferred Stock will be convertible
at any time into one share of Common Stock.
Assuming that the Rights Offering is fully subscribed and DNR purchases the
minimum of 58.8 million shares of Series B Preferred Stock, the Series B
Preferred Stock will be convertible initially into approximately 32% of Mesa's
fully diluted outstanding shares of Common Stock. To the extent the Rights
Offering is not fully subscribed, the additional Series B Preferred Stock to be
purchased by DNR pursuant to the Standby Commitment could be convertible into up
to another approximately 32% of the fully diluted Common Stock. Therefore,
depending on the number of Rights exercised by existing stockholders in the
Rights Offering, DNR will own between 32% and 65% of the fully diluted
outstanding shares of Common Stock. Following the mandatory four-year period of
pay-in-kind dividends on the Series A and Series B Preferred Stock, such
percentages would be approximately 36% and 72%, assuming no additional issuances
of stock after the Recapitalization.
DNR, as owner of the Series B Preferred Stock, will have the right to
nominate and elect a majority of the Board as long as DNR meets certain minimum
stock ownership requirements. Except for DNR's right to control the Board as
holder of the Series B Preferred Stock and the right of the holders of Series A
Preferred Stock to elect directors upon certain dividend defaults, the rights
and preferences of the Series A Preferred Stock and the Series B Preferred Stock
will be substantially identical. Furthermore, by their terms, any shares of
Series B Preferred Stock that are transferred or sold by DNR to an unaffiliated
party will be automatically converted into shares of Series A Preferred Stock.
As part of the Recapitalization, Mesa will repay and/or refinance
substantially all of its outstanding indebtedness (approximately $1.2 billion at
December 31, 1995). In this regard, on April 1, 1996, Mesa, with DNR's
assistance, obtained a commitment for a revolving credit facility for an
aggregate of $500 million from Chemical Bank, The Chase Manhattan Bank, N.A.,
and Bankers Trust Company. Mesa has also filed a registration statement with
respect to an underwritten public offering of $500 million of senior
subordinated notes, for which Chase Securities Inc., BT Securities Corporation,
Donaldson, Lufkin & Jenrette Securities Corporation and Merrill Lynch & Co. will
act as lead underwriters. Proceeds from the bank financing and the
10
<PAGE> 15
New Notes, when added to the $265 million equity investment described above and
cash on hand, will provide Mesa with the funds necessary to repay and/or
refinance all of its existing debt obligations. Rainwater's involvement in the
Recapitalization was instrumental to obtaining the commitments for the New
Credit Facility and engaging the prospective lead underwriters for the offering
of the New Notes.
The terms and conditions of the DNR Purchase are set forth in the Stock
Purchase Agreement between
Mesa and DNR dated April 26, 1996. For a more detailed description of the Stock
Purchase Agreement and the Series B Preferred Stock, see "The Stock Purchase
Agreement" and "Description of Preferred Stock," as well as the complete text of
the Stock Purchase Agreement and the Statement of Resolution establishing the
Series A and Series B Preferred Stock set forth as Annex B and Annex C,
respectively, hereto.
EFFECTS OF THE RECAPITALIZATION ON CONTROL OF MESA
As holder of the Series B Preferred Stock, DNR will have the right to elect
four of the seven directors on Mesa's Board so long as it meets the Minimum
Ownership Condition. 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 of the Series B Preferred Stock is exercised by, Richard E.
Rainwater and/or his affiliates. See "Description of Preferred Stock -- Voting
Rights."
The Board is empowered by the TBCA to direct the management of the business
of Mesa and to make numerous major decisions without stockholder approval.
Matters and decisions subject to Board control include, among other things, the
purchase and sale of assets of Mesa (other than a disposition of all or
substantially all of Mesa's assets outside of the ordinary course of business),
the issuance of additional equity or debt securities (subject to limitations
imposed by Mesa's charter and debt agreements), the declaration of dividends in
respect of Mesa's capital stock, the election and removal of officers of Mesa,
capital expenditure decisions, strategic planning, bylaw amendments, officer
compensation matters, and the recommendation for stockholder approval of certain
major corporate transactions (including mergers, certain asset sales, charter
amendments and dissolutions). The four directors elected by DNR, if they vote
together, will have the ability to control the outcome of all votes taken by the
Board, subject to limited exceptions. Under applicable law, such directors, like
all directors, will have fiduciary obligations to all of Mesa's stockholders,
not just to DNR. However, DNR's right to control the Board could have the effect
of delaying, deterring or preventing tender offers or takeover attempts that
some or a majority of Mesa's stockholders might consider to be in their best
interests, including offers or attempts that might result in the payment of a
premium over the market price for the Common Stock and the Series A Preferred
Stock. 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.
In the event that all of the Rights distributed in the Rights Offering are
not exercised, DNR has agreed to buy from Mesa, and Mesa has agreed to sell to
DNR, a number of additional shares of Series B Preferred Stock equal to the
number of shares of Series A Preferred Stock offered in the Rights Offering that
are not purchased pursuant to the exercise of Rights. Accordingly, if a
sufficient number of shares of Series A Preferred Stock are not purchased
pursuant to the exercise of Rights, DNR could also obtain ownership of shares of
Mesa having, in addition to the right to elect a majority of the Board, a
majority of the voting power on matters other than the election of directors.
Even if all of the Rights are exercised, DNR will own approximately 32% of the
voting shares of Mesa and therefore will be in a position to significantly
influence actions that require the approval of Mesa's stockholders. Under the
TBCA and Mesa's Articles of Incorporation and Bylaws, the following matters
generally require the approval of the holders of a majority of the outstanding
shares entitled to vote (subject to any additional rights of the holders of any
class or series of stock to vote on such matters separately as a class): (i) a
merger of Mesa with or into another corporation or
11
<PAGE> 16
other entity; (ii) the acquisition pursuant to a statutory share exchange of all
of the outstanding shares of one or more classes or series of Mesa's capital
stock; (iii) a sale, lease, exchange or disposition of all or substantially all
of Mesa's assets other than in the ordinary course of business; (iv) the
amendment of Mesa's Articles of Incorporation; and (v) a dissolution of Mesa. In
addition, subject to certain exceptions, New York Stock Exchange ("NYSE") rules
require that the following securities issuances by listed companies be approved
by at least a majority of the votes cast (provided that the votes cast represent
over 50% of all securities entitled to vote): (a) the establishment of a stock
option or purchase plan or arrangement pursuant to which stock may be acquired
by officers and directors, except for warrants or rights issued generally to
security holders or broadly-based plans or arrangements including other
employees; (b) the issuance of greater than one percent of the outstanding
common stock or voting power of the company in exchange for the acquisition,
directly or indirectly, of assets, property or securities from a director,
officer or substantial security holder of the company or from any entity in
which such a person has a substantial direct or indirect interest; (c) the
issuance of common stock or securities convertible into or exchangeable for
common stock representing more than 20% of the common stock or voting power
outstanding prior to the issuance, other than in a public offering for cash; and
(d) an issuance of securities that will result in a change of control of the
company.
Holders of Series A Preferred Stock, Series B Preferred Stock and Common
Stock will vote together as a single class on all matters other than (i) the
election of directors, (ii) certain matters that affect one class or series
differently from others, (iii) the creation or issuance of preferred stock
ranking senior to or on a parity with the Series A and Series B Preferred Stock,
(iv) any amendment of Mesa's charter to eliminate cumulative voting in the
election of directors, and (v) any amendment of Mesa's charter or bylaws that
would limit the authority of the Board to amend or repeal any provision of
Mesa's Bylaws. Matters referred to in clauses (iii) and (iv) above would require
the approval of the holders of Series A and Series B Preferred Stock voting
together as a single class. Matters referred to in clause (v) above would
require the approval of the Series B Preferred Stock voting as a separate class.
Under applicable Texas law, Mesa's charter and applicable NYSE rules, matters
submitted to stockholders generally require approval of the holders of a
majority of the outstanding shares (or in certain cases, a plurality or majority
of those voting). Article XII of Mesa's charter provides that certain
fundamental transactions between Mesa and a 20% stockholder (such as DNR)
require approval of the holders of shares having 80% of the total voting power,
unless (i) certain "fair price" provisions are satisfied or (ii) the transaction
is approved by a majority of the "Continuing Directors," which would exclude
directors affiliated with or nominated by the 20% stockholder. Such fundamental
transactions include: (i) any merger, consolidation or share exchange with a 20%
stockholder; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition by Mesa to any 20% stockholder, or by any 20% stockholder to Mesa,
of assets having an aggregate fair market value of $10 million or more; (iii)
any issuance or transfer by Mesa to any such 20% stockholder of securities of
Mesa, subject to certain exceptions; (iv) any dissolution of Mesa voluntarily
caused by or on behalf of any such 20% stockholder; (v) any reclassification of
securities which has the effect of increasing any 20% stockholder's
proportionate share of such securities by more than 1%; (vi) any series or
combination of transactions having the same effect as any of the foregoing; and
(vii) any agreement, contract or other arrangement providing for any of the
foregoing. The affirmative vote of the holders of not less than 80% of the
outstanding voting stock, voting as a single class, is required to amend or
repeal, or adopt any provisions inconsistent with, Article XII of Mesa's
Articles of Incorporation.
12
<PAGE> 17
SOURCES AND USES OF FUNDS
The following table sets forth the proposed sources and uses of the
proceeds of the Recapitalization, assuming the Recapitalization had been
completed as of March 31, 1996.
<TABLE>
<CAPTION>
($ in millions)
<S> <C>
SOURCES
New Credit Facility(1)................................................. $ 349.2
New Notes.............................................................. 500.0
Series A and B Preferred Stock......................................... 265.0
Cash and investments(2)................................................ 219.9
---------
Total........................................................ $ 1,334.1
=========
USES
Repayment of HCLP Secured Notes(2)..................................... $ 492.3
Repayment of Existing Credit Facility(1)............................... 51.1
Redemption of 12 3/4% Secured Discount Notes due June 30, 1998......... 617.4
Repayment of 12 3/4% Unsecured 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(3)............... 64.0
Transaction Expenses(4)................................................ 35.0
Accrued Interest....................................................... 27.0
---------
Total........................................................ $ 1,334.1
=========
</TABLE>
- - ---------------
(1) 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.
(2) Includes approximately $114.7 million in cash and cash investments, $40.0
million in investments, $56.5 million in restricted cash of one of Mesa's
subsidiaries, and $8.7 million of refundable prepaid interest, as shown on
Mesa's consolidated balance sheet as of March 31, 1996. This represents
substantially all of Mesa's cash and cash investments, investments and
restricted cash balances at March 31, 1996.
(3) The amount of the prepayment premium that will be due upon the 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 million on March 31, 1996 and approximately $57 million as of May 23,
1996.
(4) Represents expenses attributable to the Recapitalization, including $15
million attributable to the sale of Series A and Series B Preferred Stock.
BACKGROUND OF THE RECAPITALIZATION
Mesa has historically maintained a high degree of leverage and over the
last five years has completed a number of transactions designed to either repay,
refinance or restructure its debt. Despite these efforts, Mesa's current
financial forecasts indicate, assuming no changes in its capital structure and
that no significant transactions (including the Recapitalization) are completed,
that available cash and cash flow from operating activities may not be
sufficient to meet its debt service obligations at the end of 1996. See "Capital
Resources and Liquidity." The high degree of leverage limits Mesa's financial
flexibility, its ability to reinvest in order to increase reserves and
production, its ability to access capital markets in order to decrease leverage,
and its ability to capitalize on and increase future asset values. Mesa believes
such flexibility and abilities will be improved significantly if the
Recapitalization is completed. The Recapitalization is the result of an
extensive review of strategic alternatives conducted by the Board and its
independent financial advisor, Lehman Brothers, as more fully described below.
13
<PAGE> 18
Original Mesa and the Partnership
In 1964, Boone Pickens founded Mesa Petroleum Co. ("Original Mesa") to
conduct exploration and drilling activities in the United States and Canada.
Mesa Limited Partnership (the "Partnership") was formed in December 1985 as the
successor to Original Mesa. The Partnership reduced capital expenditures and
distributed substantially all of its available cash flow to its owners from 1986
through the first quarter of 1990. From 1986 to 1988, the Partnership made two
major acquisitions which increased its proved reserves substantially, through
the issuance of preference units and debt.
During 1990, the Partnership began considering various alternatives to
reduce debt and to extend the maturities of its debt. In 1991 the Partnership
sold properties and created a subsidiary, Hugoton Capital Limited Partnership
("HCLP"), to own its Hugoton field oil and gas properties and to issue the HCLP
Secured Notes, using the proceeds to repay outstanding bank debt and to increase
cash. Since such property sales, Mesa's two major assets have been its Hugoton
field natural gas properties, with 65% of its proved reserves, and its West
Panhandle field natural gas properties, with 31% of its proved reserves. In
December 1991, the Partnership effected a conversion to corporate form.
Debt Exchange Offer and Equity Offering
During the third quarter of 1993, Mesa completed a debt exchange offer for
substantially all of Mesa's $600 million of previously outstanding subordinated
notes (the "Debt Exchange"). The Debt Exchange resulted in the deferral of cash
interest requirements of approximately $75 million annually from mid-1993
through mid-1995. Under the terms of the Debt Exchange, holders of the
subordinated notes received a package of Secured Discount Notes, Unsecured
Discount Notes and approximately 7.5 million shares of Common Stock.
In the spring of 1994, Mesa sold 16 million shares of Common Stock in a
public offering for net proceeds of $93 million, which were used to retire a
portion of the Unsecured Discount Notes. Following that offering, Mesa amended
its bank credit facility to extend the maturity to 1997.
Reassessment of Financial Strategy
In the summer of 1994, natural gas prices experienced a sharp decline. At
that time, management reassessed and lowered its expectation of
near-to-intermediate term prices. Upon concluding that natural gas prices were
unlikely to rebound strongly enough to provide for a successful refinancing of
Mesa's debt due in 1996 and 1998, management began reviewing options to markedly
reduce leverage and position Mesa for reinvestment and growth in a more moderate
pricing environment.
Management explored the financial strategy of conveying a net profits
interest in its Hugoton properties to a royalty trust and then selling units in
the royalty trust publicly or privately. Mesa provided financial information to
two investment banking firms, both of which concluded that a royalty trust
offering of the nature and size being explored by Mesa was not likely to be
successful. A plan to refinance debt was also discussed. In the fall of 1994,
Mesa continued to study other potential financial alternatives. This process
included an analysis of a volumetric production payment based on Mesa's Hugoton
properties in response to an informal proposal from a large natural gas concern
("Company A"). In mid-November 1994, members of management informed Company A
that the production payment did not offer a comprehensive solution to Mesa's
financial concerns. The results of this analysis were presented to Mesa's Board
on November 29, 1994.
Following the November 29 Board meeting, Mesa was approached by an oil and
gas company ("Company B") regarding a sale of all or a substantial portion of
the Hugoton properties. After a series of due diligence meetings, Company B
indicated a preliminary valuation for the Hugoton properties of $900 million.
Following these meetings, on December 19, 1994, Mesa's Board met to discuss
strategy and the results of the non-binding indication of interest by Company B.
The Board concluded that the Company B indication was not firm enough or at a
high enough value to be considered a preemptive offer and that the Hugoton
properties should be marketed to a broader group of potential buyers. Shortly
thereafter, Mesa announced its intentions to market the Hugoton properties as a
whole.
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Dennis Washington Makes Hart-Scott-Rodino Filing, Nominates Director
Candidates
On December 5, 1994, David H. Batchelder, a former employee of Mesa's
predecessor, met at his request with Mr. Pickens. Mr. Batchelder informed Mr.
Pickens that he was the financial advisor to Dennis R. Washington and that Mr.
Washington had acquired shares of Mesa Common Stock having a value of just under
$15 million and constituting less than 5% of the outstanding shares. Mr.
Batchelder said that Mr. Washington would soon make a filing regarding Mesa
shares under the Hart-Scott-Rodino Antitrust Improvements Act of 1974 (the "HSR
Act"). On December 6, 1994, Mr. Washington made such a filing, notifying Mesa
and federal antitrust authorities that he had a present good faith intention to
acquire more than $15 million of the outstanding Common Stock and, depending on
market conditions, might acquire more of such shares. His notification
designated the 25% threshold, which had the effect of permitting him to acquire
up to 49.9% of the outstanding shares without further notification under the HSR
Act.
By letter dated February 17, 1995, pursuant to a provision of Mesa's
bylaws, Mr. Washington notified Mesa of his wish to nominate three candidates
for election as directors at Mesa's May 1995 annual meeting of stockholders and
of his intent to cumulate votes in the election. Mr. Washington's letter stated
that he beneficially owned at that time 2,854,900 shares of Common Stock, which
constituted approximately 4.5% of the outstanding shares. On April 1, 1995, Mesa
and Mr. Washington entered into an agreement pursuant to which, among other
things, the parties agreed that the slate of nominees to be proposed by the
Board for election at the annual meeting would consist of the eight
then-incumbent directors and two designees of Mr. Washington (Mr. Batchelder and
Dorn Parkinson, the president of a company owned by Mr. Washington).
Hugoton Auction
In January 1995, management initiated an auction process intended to result
in the sale of all of Mesa's Hugoton properties. First, a select group of oil
and gas companies with the potential interest and the financial resources to
complete an all-cash purchase of all of Mesa's interests in the Hugoton field
would be invited to review information supplied by Mesa and submit preliminary
non-binding indications of interest. Next, Mesa would invite the companies that
indicated the highest levels of interest to review detailed information in
Hugoton property data rooms, solicit binding offers from each of them and then
select a winning bidder.
Of the 21 parties to whom Mesa sent preliminary information, 11 parties
timely submitted preliminary indications of interest. Based on the dollar
amounts indicated in the submissions, which ranged from $560 million to $850
million, Mesa invited four parties to begin additional due diligence. Three
candidates ("Company C," "Company D" and "Company E," respectively) conducted
due diligence at various times from March 22 through April 10, 1995.
Because the preliminary price indications were generally lower than those
Mesa had anticipated in light of prices received by sellers of other natural gas
properties in the then recent past, management engaged Lehman Brothers as its
financial advisor on March 20, 1995, to consider non-asset sale financial
alternatives available to Mesa. On April 6, 1995, Lehman Brothers presented
management with its preliminary evaluations of several strategic alternatives,
including: (i) a sale of the Hugoton properties for $800-$900 million; (ii) a
sale of the Hugoton properties for cash combined with loans to Mesa from the
buyer; (iii) a joint venture involving Mesa's equity in HCLP; (iv) a partial
sale of the Hugoton assets; (v) a Mesa equity offering; and (vi) a merger or
sale of Mesa. Lehman Brothers also presented a list of potential participants in
such transactions, an analysis of Mesa's alternatives for realizing value from
its Hugoton assets and an overview of rights offerings to stockholders. Mesa
concluded that continuing the auction for the sale of the Hugoton properties
offered the best prospects for the successful resolution of its financial
issues.
On April 28, 1995, a senior representative of Company C met with members of
Mesa's management and expressed a high level of interest in the Hugoton
properties, stating that Company C might pay as much as $1 billion for the
properties. In subsequent conversations, the Company C representative proposed
to offer a combination of cash and producing properties of Company C.
Representatives of Mesa conducted preliminary due diligence at Company C in
order to evaluate the potential noncash consideration.
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On May 17, 1995, at Mesa's annual stockholders' meeting, Mr. Batchelder and
Mr. Parkinson were elected to Mesa's Board. The status of the Hugoton auction
was reviewed with the Board, including the two new members, at a meeting the
same day.
On May 22, 1995, Mesa received final bids from Company C and Company D.
Company C submitted two alternative bids, both involving cash and properties and
both subject to the subsequent approval of Company C's board of directors. Mesa
estimated that one of the Company C bids had a value of approximately $850
million, and that the other had a somewhat lower value. Company D submitted an
all cash bid of $625 million, which was substantially lower than Company D's
preliminary indication and regarded by Mesa's management as not competitive. On
May 26, 1995, a representative of Company D informed management that it might be
able to raise its bid by $100 million.
Mesa focused on refining the evaluation of the property components of
Company C's bids. On June 7, 1995, an officer of Company C met with members of
Mesa's management and informed them that the board of directors of Company C had
not approved its bids of May 22, 1995. Instead, Company C was prepared to offer
a smaller package of properties and cash that Mesa estimated had a value of $750
million. Faced with this change, Mesa's senior management considered Mesa's
options, particularly the possibility of continuing to negotiate with Company C
or developing a new auction process to sell its Hugoton assets in smaller
parcels. On June 9, 1995, Mesa's Board held a call with Lehman Brothers to
consider Mesa's available options, and concluded that none of the bids received
in the auction were acceptable. All directors participating in the call,
including Mr. Batchelder, agreed with that conclusion. Mr. Parkinson did not
participate in the call. The Board members also concluded that Mesa should
continue to explore asset sale and refinancing alternatives. During the
discussion, Mr. Batchelder recommended, without asking for a vote, that a sale
or merger of Mesa be included among the strategic alternatives to be explored.
Such recommendation was not adopted at that time. On June 12, the next business
day, Mesa announced that no acceptable bids had been received in the Hugoton
field auction, that the auction had terminated, that it would continue to pursue
asset sale and refinancing alternatives and that it had retained Lehman Brothers
as its financial advisor for this purpose.
Hugoton Segment Sales
Following the termination of the auction process in mid-June 1995,
management determined to divide the Hugoton interests into smaller segments for
sale to a broader range of buyers. Management believed that offering smaller
segments could increase the number of bidders that would have the financial
resources to purchase the properties and that, in the aggregate, Mesa could
realize a higher price for its Hugoton interests. This conclusion was supported
by comparison with several smaller publicly announced property sales for
properties similar to Mesa's Hugoton interests but with valuations significantly
higher than those indicated in the auction. Mesa engineering personnel then
divided Mesa's Hugoton interests into eight different segments, including a
segment consisting of the natural gas gathering and processing assets (the "GG&P
Assets").
Dissident Shareholders Announce 13D Group
On June 29, 1995, a Statement of Beneficial Ownership on Schedule 13D was
filed with the Securities and Exchange Commission ("SEC") announcing that Mr.
Washington, Marvin Davis and certain of his affiliates, Mr. Batchelder and Mr.
Parkinson (collectively, the "WDB Group") beneficially owned an aggregate of 6
million shares of Mesa's Common Stock, or approximately 9.4% of the outstanding
shares. The filing stated that Mr. Washington owned 3.5 million of these shares
and that Mr. Davis and certain affiliates owned 2.5 million shares. That same
day, Mr. Washington and Mr. Davis sent a letter to the Board asking the Board to
promptly form a committee consisting of all independent directors, with
independent legal and financial advisors, to explore all alternatives to enhance
value for Mesa's stockholders. Mr. Batchelder and Mr. Parkinson sent a similar
letter to the other directors seeking the appointment of an independent
committee to explore alternatives, including business combinations or a sale of
Mesa.
On July 3, 1995, after a conference call among the directors other than Mr.
Batchelder and Mr. Parkinson, Mesa 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
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Exchange Act, because they had constituted a group owning more than 5% of Mesa's
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. The lawsuit sought injunctive relief,
including prohibitions against voting Mesa shares and calling a special
stockholders' meeting, rescission of the April 1, 1995 agreement between Mesa
and Mr. Washington and an order that Mr. Batchelder and Mr. Parkinson resign
from Mesa's Board.
Hugoton Segment Proposal
In early July 1995, Company B contacted Mesa regarding a bid for all or a
portion of the Hugoton segments, and visited Mesa's data rooms. One week later,
Company B submitted three alternative bids for different working interest
segments. Mesa encouraged Company B to raise its offers for the working interest
segments, but it raised them only slightly. On July 20, Mesa's Board determined
that Company B's bids were inadequate. By letter dated August 14, 1995, Company
B formally withdrew its offer.
July 6 Board Meeting
On July 6, 1995, Mesa's Board met to consider expansion of its review of
strategic alternatives and whether to authorize Lehman Brothers to solicit
formal proposals for the sale of Mesa's assets (either as a whole or in
segments), the sale or merger of Mesa and equity infusions. Lehman Brothers
recommended the Proposal Solicitation Process in which candidates would be
invited to submit bids by November 20, 1995. The objective of the process was to
allow the Board to be able to review proposals for each of the various
transaction types concurrently, although preemptive proposals or offers could be
evaluated prior to that date. The Board determined that all the strategic
alternatives would be explored under the direction of Mesa's entire Board and
with the advice of Lehman Brothers and company counsel, and not by a separate
committee with separate financial and legal advisors. Mr. Batchelder and Mr.
Parkinson voted against this proposal, stating that their opposition was based
on the fact that the proposal did not contemplate a separate committee with
separate advisors.
At the July 6 meeting, the Board also approved a proposal that Mesa adopt a
limited term shareholder rights plan (the "Shareholder Rights Plan"), which was
designed to ensure that if Mesa received any takeover proposals during the
Proposal Solicitation Process, the Board would have sufficient time to respond
and also to prevent certain takeover abuses. The provisions of the Shareholder
Rights Plan would be triggered if a person or group acquired beneficial
ownership of 10% or more of the Common Stock after July 6, 1995, except pursuant
to a "Permitted Offer" -- a tender or exchange offer that meets certain
criteria, as described under "Shareholder Rights Plan" below. If triggered, the
Shareholder Rights Plan would allow all stockholders, other than the person or
group exceeding the ownership threshold, to purchase Common Stock at a 50%
discount. Mr. Batchelder and Mr. Parkinson voted against the adoption of the
Shareholder Rights Plan.
Also on July 6, 1995, following the special meeting of the Board that day,
the WDB Group announced that in light of the Board's rejection of the WDB
Group's independent committee proposal, the WDB Group would seek to call a
special meeting of Mesa's stockholders "for the purpose of electing a majority
of directors committed to exploring all alternatives for maximizing shareholder
value."
The Proposal Solicitation Process
Lehman Brothers developed a list of 141 candidates consisting of domestic
and foreign integrated oil companies, independent exploration and production
companies and financial buyers. On August 2, 1995, Lehman Brothers sent
preliminary notification letters to each of these companies and later called top
executives at each company by telephone to gauge their interest levels in the
Hugoton segments, Mesa's Hugoton properties as a whole, a merger or sale of
Mesa, an equity infusion or a combination of these transactions. Lehman Brothers
contacted Mr. Batchelder to ask whether Mr. Washington and/or Mr. Davis had any
interest in participating in the Proposal Solicitation Process or in submitting
a proposal, to which Mr. Batchelder replied that they were not interested.
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Ultimately, 49 of the 141 companies indicated an interest in participating
in the process, each in one or more categories of potential transaction. Each
company received either a descriptive memorandum about Mesa, a descriptive
memorandum about Mesa's Hugoton properties or both. The property memoranda were
sent out in mid-August to 46 candidates and the corporate memoranda two weeks
later to 36 candidates.
Following the receipt and review of these memoranda, data room visits were
scheduled with those candidates that wished to pursue the process further. From
September 5, 1995, to October 27, 1995, a total of 26 companies visited the data
rooms, including 12 candidates for the corporate data rooms and 14 for the
property data rooms. Lehman Brothers and Mesa also met with 21 companies during
this period to discuss direct equity infusions, asset purchases and a merger or
sale of Mesa. Such companies were generally asked to submit any other type of
proposal they wished Mesa to consider.
Among these meetings was a meeting with representatives of Rainwater held
on October 6, 1995 to discuss a potential equity infusion. Mesa, Lehman Brothers
and Rainwater discussed a number of options, primarily a preferred equity
investment of approximately $100 million in HCLP. Based on these discussions,
Mesa determined not to pursue the investment, as it did not consider it to be
preemptive or to offer a comprehensive solution to Mesa's financial concerns.
Rainwater nonetheless indicated an interest in discussing other options with
Mesa in the future, but did not submit a proposal on November 20 and made no new
proposal until February 1996.
Proxy Filing by WDB Group
On August 8, 1995, the WDB Group filed a preliminary proxy statement with
the SEC with respect to its proposal to call a special meeting of Mesa's
stockholders. The preliminary proxy statement, as subsequently revised, stated
that the purpose of the solicitation would be to obtain sufficient written
requests from stockholders to call a special meeting, at which stockholders
would be asked to vote for, among other things, the removal of all directors
serving on the Board at the date of such meeting and the election of the
nominees of the WDB Group to replace all of the directors so removed. In an
amendment to its Schedule 13D filed with the SEC on August 7, 1995, the WDB
Group stated that it would not immediately seek to call a special meeting, but
would communicate with stockholders with respect to certain matters, and that it
would determine in its sole judgment whether and when to seek to call a special
meeting.
Also on August 8, 1995, the WDB Group filed an answer denying the claims in
Mesa's lawsuit and asserting a counterclaim against Mesa and its directors other
than Mr. Batchelder and Mr. Parkinson. The counterclaim, as amended, alleged,
among other things, that such directors constituted a group owning more than 5%
of Mesa's Common Stock and were required to file a Schedule 13D; that certain of
them had engaged in transactions in Mesa securities that violated federal
securities laws; and that the adoption of the Shareholder Rights Plan was a
violation of fiduciary duty by such directors. The counterclaim sought damages
and injunctive relief, including invalidation of the Shareholder Rights Plan.
Settlement with WDB Group
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 and
Joel L. Reed, his business partner, was elected by the Board to succeed him.
Except as specifically permitted by the WDB Settlement Agreement as
described below, the members of the WDB Group agreed that they will not, prior
to December 31, 1996, solicit or encourage any other person to solicit, or
advise any person with respect to the solicitation of, proxies with respect to
any securities issued by Mesa or any of its subsidiaries, or 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
Mesa's stockholders or the holders of any such securities; or advise or seek to
advise any person with respect to the voting of any Mesa securities; or submit,
or encourage any other person to submit, or advise or assist any person with
respect to the submission of, any nominations or proposals to Mesa or to the
holders of any Mesa securities for consideration by its
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stockholders or the holders of any Mesa 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 Mesa securities. The agreement also provided that,
other than in the context of a proxy solicitation as to which members of the WDB
Group have exercised their contractual rights to solicit proxies, none of the
parties to the agreement will publicly make any negative statements regarding
any other party, Mesa's Board, the process by which Mesa is exploring
alternatives to maximize stockholder value, or any proposed, pending or
consummated business combination, asset sale or equity infusion regarding Mesa.
The WDB Settlement Agreement permits the members of the WDB Group to
conduct a proxy solicitation with respect to Mesa's 1996 annual meeting if, at
the time of the solicitation, Mesa (i) 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 (ii) has consummated a
similar transaction that is not an "Endorsed Transaction" under the criteria set
forth in the WDB Settlement Agreement. Upon consummation, the DNR Purchase
together with the Rights Offering will constitute an Endorsed Major Transaction.
The WDB Settlement Agreement also provided that on or before February 29,
1996, the Board would set and announce a date for Mesa's 1996 annual meeting of
stockholders, which date would be no later than May 31, 1996. The agreement
further provided that the Board could extend each such date (or, after February
29, 1996, could extend the May 31, 1996 date) for up to 60 days if at the time
of extension either (i) Mesa had entered into a definitive agreement, or filed
proxy materials, for an Endorsed Major Transaction or (ii) an acceptable
investment banker had informed the Board in writing that discussions or
negotiations were in process with one or more third parties that appeared
reasonably likely to result in such a definitive agreement prior to the date to
which the annual meeting was to be extended. The WDB Settlement Agreement also
provided that the members of the WDB Group could not take any solicitation
action with respect to such meeting until the Board had publicly announced the
date thereof.
Company A Proposals
Mesa received a proposal from Company A in early August 1995 that entailed
(i) a volumetric production payment based on Mesa's Hugoton properties, (ii) a
sale to Company A of the GG&P Assets and (iii) a preferred stock investment in
HCLP. Management and Lehman Brothers met with representatives of Company A
numerous times over the next several months and continued to negotiate with them
over terms and proposals. Mesa's Board reviewed the proposal in various forms on
August 22 and November 8 and determined that they were not sufficiently
attractive to preempt the Proposal Solicitation Process. Company A ultimately
submitted two proposals on November 20, 1995.
November 20, 1995 Proposals
During the week of November 20, 1995, Mesa received fifteen proposals from
interested parties. All of the proposals were for all or parts of Mesa's Hugoton
properties. No proposals for a merger or sale of the entire company or for an
equity infusion into Mesa were received. Lehman Brothers presented the results
of the process to the Board on November 21 and again on November 30.
Company C submitted a cash and property proposal for all the Hugoton
properties that Mesa believed did not provide an adequate cash component, and
did not provide an acceptable value for the properties. Company A submitted a
financing and asset purchase proposal that Mesa believed had an approximate
value of $725 million. Finally, another company submitted a low bid for the
Hugoton interests that Mesa's Board did not consider. Mesa received five bids
for smaller Hugoton segments, none of which represented a substantial dollar
value. The Board received seven proposals for the GG&P Assets, ranging in value
up to $150 million.
In addition, Mesa received a proposal to acquire its West Panhandle field
processing plant and received an indication from two parties that they were
considering a joint proposal to Mesa. This joint proposal was never submitted.
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In presenting the proposals, Lehman Brothers reviewed with the Board a
number of issues cited by various participants in the process who declined to
submit proposals. The primary issues cited were low commodity price
expectations, the belief that Mesa's properties were fully developed and thus
lacked "upside" potential, the overall size of the transaction and Mesa's high
financial leverage. In addition, Lehman Brothers attributed the disappointing
results in part to the notion that Mesa was viewed as a distressed seller.
Subsequent Negotiations
At the request of the Board, Lehman Brothers contacted three of the
companies that had submitted proposals for the GG&P Assets in order to encourage
them to purchase preferred equity in HCLP and to raise their offers for the GG&P
Assets. All declined to pursue the purchase of a preferred equity interest in
HCLP. Lehman Brothers also contacted Company A and inquired as to its interest
in acquiring a preferred equity interest in HCLP, which Company A also declined.
Finally, Lehman Brothers contacted Company C to encourage it to increase the
cash component of its proposal. Company C revised its proposal but not to a
level considered adequate by the Board.
In addition, two participants in the process which had declined to submit
proposals, Company D and a pipeline company, were contacted as to their interest
in purchasing the GG&P Assets and an HCLP preferred equity interest. Both
declined to pursue these transactions, citing value and rate of return concerns.
Two other companies that had earlier declined to submit proposals contacted
Mesa. One, a financial company, contacted Mesa in January 1996 to discuss a
preferred equity investment in conjunction with a debt restructuring. Mesa held
meetings with senior representatives of such company, but no proposal was
received. Another group proposed a concept that involved a property swap,
issuance of debt and equity securities and a debt restructuring. This group's
concept was considered by the Board to be insufficiently defined and subject to
too many substantial contingencies.
Mesa conducted substantive negotiations with the two bidders for the GG&P
Assets whose proposals were most attractive, including Company E. Beginning on
January 3, 1996, representatives of Mesa met with representatives of those two
companies to negotiate the purchase and sale agreement and related gathering and
processing arrangements to facilitate the sale. By late February, the
negotiations with Company E had resulted in a proposed definitive agreement to
be presented to the Board. However, management had become increasingly concerned
that, among other things, the sale of the GG&P Assets on a stand alone basis
would not relieve Mesa of its near term liquidity issues.
In early February 1996, representatives of Rainwater and Mesa began
discussions and negotiations relating to a purchase of equity securities of
Mesa. On February 16, 1996, Rainwater's first formal proposal was received, and
a revised proposal was received on February 23, 1996.
Representatives of Mesa and Rainwater negotiated the amount of
consideration to be paid by Rainwater following their initial discussions in
early February 1996. Over the course of the following weeks, the parties held
numerous meetings prior to the establishment of the stated price per share.
Initially, an equity infusion of $150 million, to be sold at a discount to
market, was proposed by Rainwater representatives. Mesa responded that such
amount was insufficient to fully resolve its financial concerns and proposed a
$300 million equity infusion. After substantial negotiations, the parties agreed
to the equity infusion on the terms described herein. The purchase price per
share was based upon a formula that established a price per share equal to the
lesser of a discount to the ten day average closing NYSE composite price per
share or $2.50 per share. After further negotiation, the discount was
established at 25%, which, based on the average closing price for the ten days
ending the day before the execution of the letter of intent, set the price at
$2.26.
February 28 Board Meeting
At a meeting on February 28, 1996, Mesa's Board reviewed Mesa's financial
condition, the Rainwater proposal and the GG&P Asset sale proposal from Company
E. With respect to the potential sale of the GG&P Assets to Company E, the Board
considered the following potential benefits: (i) the proceeds from the sale,
when applied to Mesa's existing debt, would resolve Mesa's near term liquidity
issues and avoid a potential debt default until December 1997, and (ii) the
proposed price was considered attractive, based on Lehman
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Brothers' analysis of discounted cash flow values, comparable asset sales and
the other GG&P Asset sale proposals received. The principal disadvantages
considered by the Board were (i) that the sale would not fully resolve all of
Mesa's financial concerns, because it would extend the projected date at which a
liquidity crisis was expected by only 12 to 18 months and would not reduce the
amount of new equity needed to effect a refinancing of Mesa's remaining debt;
(ii) that Mesa's stock price might be impaired if Mesa could not consummate
another transaction to reduce debt in the near term or if industry conditions
did not improve; (iii) the potential negative impact of the sale on the value of
Mesa's remaining Hugoton property interests; and (iv) potential production
constraints due to the loss of control of the GG&P Assets.
In considering the Recapitalization, the Board considered the potential
advantages and disadvantages and other matters described elsewhere herein.
After comparing the potential advantages and disadvantages of one
transaction to the other, the Board chose to pursue the Rainwater proposal
rather than the GG&P Asset sale proposal principally because the former, unlike
the latter, offered a comprehensive solution to Mesa's financial concerns.
Accordingly, the Board authorized the execution of a letter of intent with
Rainwater that contemplated a recapitalization substantially as described
herein, except as to board representation. The letter of intent contemplated
that Rainwater, as holder of the Series B Preferred Stock, would be entitled to
elect two of Mesa's seven directors and that those two, together with Mr.
Pickens, would constitute an Executive Committee of the Board. A majority of the
Executive Committee would be required to approve a substantial number of major
matters, whether or not full Board approval was also required, as well as all
matters which by law do not need approval by the full Board.
The letter of intent contained a binding agreement by Mesa that was
substantially the same (including the exceptions thereto) as the Exclusivity
Covenant described under "The Stock Purchase Agreement -- Covenants Regarding
Exclusivity." The letter of intent also obligated Mesa to pay Rainwater
termination fees generally the same as those described under "The Stock Purchase
Agreement -- Termination Payments" with respect to the Stock Purchase Agreement
in the event of termination of the letter of intent for reasons equivalent to
those stated in such section. Among other things, such provisions gave Rainwater
the right to terminate the letter of intent and to require Mesa to pay it
certain fees in the event Mesa solicited proposals for alternative transactions.
All directors present at the February 28 meeting voted in favor of the
letter of intent, except that Mr. Reed and Mr. Parkinson voted against. The
letter of intent was signed by Mesa on February 28, 1996 and publicly announced
the next morning. The letter of intent provided for a 30 day initial review
period for due diligence by Rainwater and for an exploration of the availability
of financing.
Also at the February 28 meeting, Lehman Brothers delivered to the Board a
letter stating that the discussions or negotiations then in process with
Rainwater appeared reasonably likely to result, prior to July 30, 1996, in a
definitive agreement for an Endorsed Major Transaction for purposes of the WDB
Settlement Agreement. Accordingly, the Board extended to April 29, 1996 the date
by which it was required by the WDB Settlement Agreement to set and announce a
date for the 1996 annual meeting of stockholders.
Financing Commitments
On March 1, 1996, representatives of Rainwater and Mesa began contacting
major commercial and investment banks in order to solicit proposals for
refinancing Mesa's debt. Beginning on March 7, 1996, meetings were held with
three commercial banks, which were asked to submit proposals for a fully
committed senior secured credit facility. "Highly confident" letters for a
subordinated note issuance were also sought. Mesa received a number of proposals
that, on the whole, contained favorable terms that the banks indicated would not
have otherwise been available to Mesa absent the involvement of Rainwater. By
the end of March, the proposal for a new credit facility offered by Chemical
Bank, The Chase Manhattan Bank, N.A., and Bankers Trust Company was considered
by management to be the most desirable from Mesa's standpoint. Its terms
required, among other things, that Rainwater be entitled to elect a majority of
Mesa's directors. A commitment letter was executed by the banks and presented to
Mesa for its consideration and acceptance.
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Mesa also received from Chase Securities Inc. a letter stating that, based on
then current market conditions and subject to certain assumptions, such firm was
highly confident that it could arrange for the sale by Mesa of up to $525
million of subordinated notes through a private sale (through a Rule 144A
offering) or public offering.
On April 1, 1996, the Board met to consider the proposed bank commitment
and an amendment to the letter of intent with Rainwater. Like the proposed bank
commitment, the amendment to the letter of intent contemplated that Rainwater,
as holder of the Series B Preferred Stock, voting as a separate class, would be
entitled to elect a majority of Mesa's directors, in lieu of the governance
structure described in the letter of intent. The Board authorized execution of
the amendment to the letter of intent and acceptance of the commitment letter
from the banks named above for the New Credit Facility. All directors present
(including Mr. Parkinson) voted in favor, except that Mr. Reed abstained
regarding the amendment to the letter of intent.
On April 2, Mesa announced that Rainwater had favorably completed its
initial review period and that Mesa had received the bank commitment letter and
the "highly confident" letter.
During April 1996, Mesa and Rainwater negotiated the Stock Purchase
Agreement and related documents and Rainwater completed its due diligence.
April 23 Board Meeting
At a meeting held on April 23, 1996, the Board reviewed the terms of the
DNR Purchase, including the terms of the proposed Stock Purchase Agreement and
the terms of the Series A and Series B Preferred Stock. At that meeting, Lehman
Brothers presented its analysis of the transaction and its potential effects on
Mesa and the trading values of the Common Stock and Series A Preferred Stock
after the transaction, as well as possible trading values of the Common Stock in
the event the transaction was not pursued. Lehman Brothers also delivered its
opinion, described below, to the Board regarding the fairness of the
transaction. A discussion of Lehman Brothers' analysis is set forth at "Opinion
of Independent Financial Advisor" below. At that time, five of the six directors
present indicated that they favored pursuing the Recapitalization, subject to
further exploration of certain issues, including those being discussed with the
NYSE regarding the application of the NYSE's voting rights policy to the special
voting rights of the Series B Preferred Stock. The Board directed management and
counsel to engage in further discussions with Rainwater regarding these issues
and agreed to convene again on April 25 or 26 as discussions with the NYSE
progressed. All directors other than Fayez Sarofim and Dorn Parkinson attended
the meeting. Of those present, Joel Reed was the sole director opposing the
transaction.
Discussions with WDB Group
At the April 23 meeting, the Board also discussed the provision of the
proposed Stock Purchase Agreement that would entitle DNR to terminate the Stock
Purchase Agreement if the WDB Group were to take certain actions that are
prohibited by the WDB Settlement Agreement or were to initiate prior to the
Special Meeting certain proxy solicitation actions that, in either case, DNR
considered to be materially adverse to DNR or the Recapitalization. See
"-- Settlement with WDB Group" and "The Stock Purchase
Agreement -- Termination." In the meeting, Mr. Reed, who is a member of the WDB
Group, was asked what the intentions of the group were with respect to the
Recapitalization. After some discussion, Mr. Reed said he would check with
others after the Board meeting and would then discuss the matter with a
representative of Mesa. Mr. Reed also advised the Board that the WDB Group would
shortly file a Schedule 13D amendment disclosing that the group had been
disbanded and that Mr. Davis had sold shares.
Following the Board meeting, a Mesa representative proposed to Mr. Reed
that Mesa and the WDB Group consider amending the WDB Settlement Agreement and
otherwise agree that (i) Mesa would combine the Special Meeting and the 1996
annual meeting for the election of directors into a single meeting, (ii) Mr.
Reed and Mr. Parkinson would be nominated by the Board for election as directors
at that meeting, subject to their agreement to resign from the Board if the
First Closing occurred by a date to be agreed upon, (iii) the WDB Group would
not solicit proxies on any matter at that meeting, and (iv) if the
Recapitalization
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were not consummated by a date to be agreed upon, the WDB Group would have the
right to require Mesa to hold a special meeting at which directors would be
elected as at an annual meeting, as opposed to having to obtain the affirmative
vote of the holders of a majority of the outstanding shares to remove and
replace the Board (as usually required at a special meeting).
After a break in the discussions for Mr. Reed to use the telephone, Mr.
Reed said that the elements listed above would be acceptable if the following
elements were added: (A) in connection with the Rights Offering, the WDB Group
would be permitted to acquire additional Rights in the marketplace and to
exercise such Rights, (B) the WDB Group's lawyers would have to be satisfied
that the special meeting referred to in clause (iv) above would be held even if
Mesa were to make a Chapter 11 filing, (C) if, after Mr. Reed and Mr. Parkinson
resigned from the Board at the First Closing, the Second Closing did not occur
by a date to be agreed upon, the Board would reelect them to the Board, (D) the
WDB Group would vote its shares of Common Stock at the Special Meeting
proportionately with the votes cast by other stockholders and (E) Mesa would
reimburse the WDB Group for expenses, to be documented, which Mr. Reed estimated
at $3 million. Later that day, the Mesa representative advised Mr. Reed that,
although the other elements of his counter proposal sounded workable, the
expense reimbursement would not be acceptable to the Board. Mr. Reed replied
that no agreement could be reached without the expense reimbursement provision.
On April 24, 1996, Mr. Reed called the Mesa representative and said that
Mr. Parkinson wanted to participate in the April 25 or 26 Board meeting, that
Mr. Parkinson, as well as Mr. Reed, planned to dissent with respect to the
Recapitalization and that both would provide written dissents for inclusion in
Mesa's proxy materials. Mr. Reed also said that Mr. Batchelder had spoken with
the parties and that they will nominate candidates for election as directors at
the 1996 annual meeting. Mr. Reed also said that they expect the
Recapitalization proposal to fail.
Also on April 24, 1996, the WDB Group filed an amendment to its Schedule
13D stating that, on April 22, 1996, Mr. Davis and his affiliates had notified
Mr. Washington in writing that Mr. Davis and his affiliates were terminating
their participation in the WDB Group. The amendment further disclosed that the
Davis parties had sold an aggregate of 937,500 shares of the 2,500,000 shares of
Common Stock owned by them at the time the Schedule 13D was first filed in June
1995.
April 26 Board Meeting
On April 26, 1996, following discussions with the NYSE, Mesa believed a
resolution of the voting rights issue could be achieved. Accordingly, the Board
convened by conference call to again consider the Recapitalization and the terms
thereof. Earlier in the day, counsel to Mesa had received drafts of letters from
Mr. Reed and Mr. Parkinson in which they stated the reasons for which they would
dissent to the DNR Purchase, copies of which were forwarded to the other
directors. At the meeting, Mr. Reed and Mr. Parkinson each discussed with the
Board their concerns regarding the DNR Purchase (which concerns are set forth in
the text of their letters as reproduced under "Letters of Dissenting Directors"
below). The Board also discussed other issues relating to the Recapitalization,
including the NYSE voting rights policy issue. Thereafter, the Board approved
the Recapitalization, including the DNR Purchase, subject to resolution of the
NYSE matter. Five of the seven directors present (Paul W. Cain, John S.
Herrington, Wales H. Madden, Boone Pickens and Robert L. Stillwell) voted in
favor of the Recapitalization, with Mr. Reed and Mr. Parkinson dissenting. The
remaining director, Fayez Sarofim, did not participate in the meeting, but
indicated his support for the Recapitalization to other directors prior to the
meeting.
Subsequent to the Board meeting, and after further discussions between the
NYSE and each of Mesa and Rainwater, DNR agreed to increase the "minimum
ownership amount," below which the special voting rights of the Series B
Preferred Stock would terminate, to that percentage reflected below under
"Description of Preferred Stock -- Voting Rights." Thereafter, Mesa and DNR
executed the Stock Purchase Agreement on the evening of April 26, 1996. Mesa and
DNR believe that, as modified, the special voting rights of the Series B
Preferred will be acceptable to the NYSE.
At the April 26 Board meeting, the Board also unanimously approved July 30,
1996 as the date for Mesa's 1996 Annual Meeting of Stockholders.
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On the next business day, April 29, 1996, Mesa publicly announced the
signing of the definitive agreement and filed preliminary proxy materials for
the Special Meeting with the SEC.
Registration Statements; HSR Filings
On May 7, 1996, Mesa filed with the SEC a registration statement with
respect to the New Notes (the "Note Registration Statement"). On May 9, 1996,
Mesa filed with the SEC a registration statement with respect to the Series A
Preferred Stock to be issued pursuant to the exercise of Rights (the "Rights
Offering Registration Statement").
On May 9, 1996, DNR and Mesa each filed a Premerger Notification and Report
Form with respect to the DNR Purchase with the Federal Trade Commission and the
Department of Justice pursuant to the HSR Act. Early termination of the waiting
period under the HSR Act was granted on May 17, 1996.
Dennis Washington Announces Intent to Nominate Directors
By letter dated May 9, 1996, pursuant to a provision of Mesa's bylaws, Mr.
Washington notified Mesa that he wishes to nominate seven persons to stand for
election to the Board at Mesa's 1996 annual meeting of stockholders and of his
intent to cumulate votes in the election. On May 10, 1996, the WDB Group filed
an amendment to its Schedule 13D reporting Mr. Washington's notification letter
and stating that (i) Mr. Washington had provided the notice at that time in
order to preserve his ability to nominate directors at the 1996 annual meeting
and (ii) the WDB Group anticipated that it would not solicit proxies with
respect to the 1996 annual meeting prior to the vote of Mesa's stockholders on
the Recapitalization, although they reserve the right to solicit proxies subject
to applicable restrictions in the WDB Settlement Agreement. Under the WDB
Settlement Agreement, Mr. Washington has agreed not to nominate directors at the
1996 annual meeting if, prior to that meeting, Mesa has completed an Endorsed
Major Transaction. See "-- Settlement with WDB Group" above.
OPINION OF INDEPENDENT FINANCIAL ADVISOR
The Board engaged Lehman Brothers on July 6, 1995 to act as its financial
advisor with respect to the solicitation and evaluation of proposals from third
parties for (i) an equity infusion into Mesa, (ii) the purchase of all or a part
of Mesa's Hugoton field assets in segments or as a whole, (iii) the acquisition
of Mesa with or without a sale of all or a part of the Hugoton field assets and
(iv) other alternative transactions, and to render to the Board its opinion as
to the fairness, from a financial point of view, to Mesa or its stockholders of
the terms of any transaction that might ultimately be implemented.
On April 23, 1996, in connection with the consideration of the DNR Purchase
and the Stock Purchase Agreement, Lehman Brothers made a presentation to the
Board with respect to the DNR Purchase and delivered its opinion that, as of the
date of such opinion, and subject to assumptions, factors and limitations set
forth in such opinion as discussed below, the consideration to be received by
Mesa for the Preferred Stock to be issued and sold in the Recapitalization is
fair, from a financial point of view, to Mesa and, accordingly, to the
stockholders of Mesa. Such opinion was reissued on May 24, 1996.
THE FULL TEXT OF THE WRITTEN OPINION OF LEHMAN BROTHERS, WHICH SETS FORTH
THE ASSUMPTIONS MADE, FACTORS CONSIDERED AND LIMITATIONS ON THE REVIEW
UNDERTAKEN BY LEHMAN BROTHERS IN RENDERING ITS OPINION, IS INCLUDED AS ANNEX A
TO THIS PROXY STATEMENT, AND IS INCORPORATED HEREIN BY REFERENCE. THE SUMMARY OF
THE OPINION OF LEHMAN BROTHERS SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
No limitations were imposed by Mesa on the scope of Lehman Brothers'
investigation or the procedures to be followed by Lehman Brothers in rendering
its opinion. Lehman Brothers was not requested to and did not make any
recommendation to the Board as to the form or amount of consideration to be
offered to Mesa for the Preferred Stock to be issued and sold in the
Recapitalization, which was determined through arm's-length negotiations between
Mesa and Rainwater and their respective advisors. Lehman Brothers' opinion is
for the use and benefit of the Board and was rendered to the Board in connection
with its consideration of the DNR Purchase. Lehman Brothers' opinion does not
constitute a recommendation to any of Mesa's
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stockholders as to how such stockholder should vote with respect to the DNR
Purchase or as to whether such stockholder should subscribe for any shares of
Series A Preferred Stock pursuant to the Rights Offering. Lehman Brothers was
not requested to opine as to, and its opinion does not address, Mesa's
underlying business decision to proceed with or effect the DNR Purchase.
In arriving at its opinion, Lehman Brothers reviewed and analyzed: (i) the
Stock Purchase Agreement and the specific terms of the DNR Purchase, including
the terms of the Preferred Stock to be issued and sold in the Recapitalization,
(ii) such publicly available information concerning Mesa which Lehman Brothers
believed to be relevant to its inquiry, including the Annual Reports to
stockholders and Annual Reports on Form 10-K of Mesa for the three years ended
December 31, 1995 and certain interim reports to stockholders and Quarterly
Reports on Form 10-Q of Mesa, (iii) financial and operating information with
respect to the business, operations and prospects of Mesa furnished to Lehman
Brothers by Mesa, including without limitation certain projections prepared by
Mesa, (iv) a trading history of Mesa's Common Stock for the two year period
ended April 19, 1996 and a comparison of that trading history with those of
other companies that Lehman Brothers deemed relevant, (v) a comparison of the
historical financial results and present financial condition of Mesa with those
of other companies that Lehman Brothers deemed relevant, (vi) a comparison of
the financial terms of the DNR Purchase including the specific terms of the
preferred stock with the financial terms of certain other transactions that
Lehman Brothers deemed relevant, and (vii) Mesa's current need for additional
cash to fund its debt obligations and capital, operating and growth
requirements, its current highly leveraged capital structure and the
alternatives available to Mesa to obtain additional financing at this time. In
connection with its opinion, Lehman Brothers also reviewed certain information
provided by Mesa relating to Mesa's oil and natural gas reserves, including
year-end reserve reports prepared by Mesa's petroleum engineers and discussed
the reserve information with the senior management of Mesa and its petroleum
engineers.
In arriving at its opinion, Lehman Brothers assumed and relied upon the
accuracy and completeness of the financial and other information used by it
without assuming any responsibility for independent verification of such
information. Lehman Brothers further relied upon the assurances of management of
Mesa that it was not aware of any facts that would make such information
inaccurate or misleading. With respect to the projections provided to Lehman
Brothers by the management of Mesa, Lehman Brothers assumed that such
projections were reasonably prepared on a basis reflecting the best currently
available estimates and judgments of the management of Mesa as to the future
financial performance of Mesa and that Mesa will perform substantially in
accordance with such projections. In arriving at its opinion, Lehman Brothers
did not conduct a physical inspection of the properties and facilities of Mesa
and did not make or obtain any independent evaluations or appraisals of the
assets or liabilities of Mesa. The opinion of Lehman Brothers states that it was
necessarily based upon market, economic and other conditions as they existed on,
and could be evaluated as of, the date of the opinion.
In arriving at its opinion, at Mesa's request and as mentioned above,
Lehman Brothers also considered (i) all proposals available to Mesa for
alternative transactions, (ii) all substantive discussions Lehman Brothers had,
and all substantive discussions that to its knowledge Mesa has had, with
qualified parties who have made bona fide offers, proposals or expressions of
interest for alternative transactions, and (iii) the impact, if any, of the
terms of the Recapitalization, after giving effect to the consummation thereof,
on future proposals by third parties for, and the consummation of, any merger,
consolidation, tender offer, share exchange, or exchange offer, involving Mesa.
In connection with its presentation to the Board on April 23, 1996 and
advising the Board of its opinion, Lehman Brothers performed certain financial,
comparative and other analyses as described below. The preparation of a fairness
opinion involves various determinations as to the most appropriate and relevant
methods of financial and comparative analysis and the application of those
methods to the particular circumstances, and therefore such an opinion is not
readily susceptible to summary description. Furthermore, in arriving at its
fairness opinion, Lehman Brothers did not attribute any particular weight to any
analysis or factor considered by it, but rather made qualitative judgments as to
the significance and relevance of each analysis and factor. Accordingly, Lehman
Brothers believes that its analyses must be considered as a whole and that
considering any portions of such analyses and of the factors considered, without
considering all
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analyses and factors, could create a misleading or incomplete view of the
process underlying the opinions. In its analyses, Lehman Brothers made numerous
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the control of Mesa. Any
estimates contained in the analyses are not necessarily indicative of actual
values or predictive of future results or values, which may be significantly
more or less favorable than as set forth therein. In addition, analyses relating
to the value of businesses do not purport to be appraisals or to reflect the
prices at which businesses actually may be sold.
As mentioned above, in rendering its opinion Lehman Brothers considered the
other proposals and indications of interest received as a result of the
extensive Proposal Solicitation Process discussed above and the implied value of
Mesa's Common Stock based on such proposals as well as Mesa's current and
projected financial condition.
In preparing the following analyses, Lehman Brothers used certain
projections provided by Mesa consisting primarily of Mesa's 1996 operating plan,
Mesa's projections of debt service under its long term debt agreements, Mesa's
projections of general and administrative expenses and Mesa's methodology for
calculating income taxes and utilizing net operating loss carryforwards. The
1996 operating plan, which was prepared by Mesa's internal engineers in
conjunction with the preparation of its reserve report, set forth projections of
net natural gas, NGL and oil production, lease operating expenses, production
and other taxes and capital expenditures related to Mesa's oil and gas producing
properties.
Lehman Brothers' assumptions also included two alternative oil and gas
price forecasts. Case 1 consisted of Henry Hub gas prices of $2.05 in 1996,
$2.10 in 1997 and West Texas Intermediate ("WTI") oil prices of $19.00 in 1996
and $19.50 in 1997. Henry Hub and WTI prices were thereafter escalated at 4% and
capped at $7.00 and $75.00, respectively. Case 2 consisted of Henry Hub Gas
Prices of $2.20 in 1996, $2.30 in 1997 and WTI oil prices of $20.00 in 1996 and
$21.00 in 1997. Henry Hub and WTI prices were thereafter escalated at 5.5% and
capped at $7.00 and $75.00, respectively.
Analysis of Selected Publicly Traded Comparable Companies. Using publicly
available information, Lehman Brothers reviewed and compared certain financial
information, ratios, and public market multiples of Mesa with similar data of
selected publicly traded oil and natural gas companies considered by Lehman
Brothers to be comparable to those of Mesa, including Anadarko Petroleum
Corporation, Apache Corporation, Barrett Resources Corporation, Burlington
Resources, Inc., Cabot Oil and Gas Corporation, Cross Timbers Oil Company, Devon
Energy Corporation, Enron Oil & Gas Company, HS Resources, Inc., Louis Dreyfus
Natural Gas Corporation, Louisiana Land and Exploration Company, Newfield
Exploration Company, Noble Affiliates, Inc., Nuevo Energy Company, Oryx Energy
Company, Pogo Producing Company, Santa Fe Energy Resources, Inc., Seagull Energy
Corporation, Tom Brown, Inc., United Meridian Corporation and Vastar Resources,
Inc. (the "Comparable Universe"). Lehman Brothers calculated, among other
things, the following multiples for each of the referenced companies based on
public market prices as of April 19, 1996: (i) the market equity value of the
relevant company to actual 1995 discretionary cash flow and to 1996 estimated
discretionary cash flow; (ii) the net market capitalization (i.e. market value
of equity plus total debt and preferred stock less cash) (the "Net Market
Capitalization") divided by thousands of cubic feet of natural gas equivalents
of proved reserves ("Mcfe") (at a ratio of six Mcf per barrel of oil) as of each
respective company's 1995 fiscal year end; (iii) the Net Market Capitalization
divided by, respectively, (a) 1995 earnings before interest, income taxes,
depreciation, amortization, depletion and exploration expenses ("EBITDE") and
(b) 1996 estimated EBITDE; (iv) the Net Market Capitalization divided by the
standard measure of discounted future cash flows ("SEC Value"); and (v) the Net
Market Capitalization divided by pre-tax SEC Value. The results of these
calculations were used to impute a range of values for Mesa's Common Stock by
applying the multiples derived from the calculations to Mesa's current and pro
forma financial data. Based upon this analysis, the range of values for Mesa's
Common Stock was $2.33 to $10.44 per share.
Because of the inherent differences between the capital structure,
financial condition and prospects of Mesa and those of the companies included in
the Comparable Universe, Lehman Brothers believed that it was inappropriate to,
and therefore did not, rely solely on the quantitative results of the analysis,
and accordingly
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also made qualitative judgments concerning differences between the financial and
operating characteristics of Mesa and the companies included in the Comparable
Universe that would affect the public trading values of Mesa and such comparable
companies.
Analysis of Selected Comparable Transactions. Using publicly available
information, Lehman Brothers compared selected financial data for Mesa with
similar data for selected company and property transactions deemed by Lehman
Brothers to be relevant. Using the same methodology as in the analysis of
comparable companies, the multiples derived from this analysis were used to
impute a range of values for Mesa's Common Stock. Based upon this analysis, the
range of values for Mesa's Common Stock was $0.77 to $6.93 per share.
Because the reasons for and the circumstances surrounding each of the
transactions analyzed were specific to each transaction and because of the
inherent differences between the capital structures, financial condition and
prospects of Mesa and those of the selected acquired companies and properties
analyzed, Lehman Brothers believed that it was inappropriate to, and therefore
did not, rely solely on the quantitative results of the analysis, and
accordingly also made qualitative judgments concerning differences between the
characteristics of these transactions and the DNR Purchase that would affect the
acquisition values of Mesa and such acquired companies.
Discounted Cash Flow Analysis. Under this analysis, Lehman Brothers
calculated estimates of after-tax cash flows from the reserve assets of Mesa
based on the reserve reports and certain projections provided by Mesa. The
projected after-tax cash flows were then discounted to present values using
discount rates which were chosen based on several assumptions regarding the cost
of capital of Mesa's business. Two primary scenarios were evaluated in which the
principal economic variables were the escalation rates applied to oil, natural
gas liquid and natural gas prices and operating and capital costs. An after-tax
discount rate of 10% was used to discount the projected, unleveraged after-tax
cash flows. Other key assumptions related to the depletion, depreciation, and
amortization rates for the existing tax basis of Mesa's reserve assets and for
future capital expenditures, and the utilization of Mesa's tax net operating
losses. The present values were then used to determine a range of values for
Mesa's Common Stock. Based upon this analysis, the range of values for Mesa's
Common Stock was a nominal value to $2.77 per share.
Going Concern Analysis. Under this analysis, Lehman Brothers calculated
cash and equity balances based on projected cash flows, production and reserve
additions for Mesa without giving effect to the Recapitalization for the year
1996. Due to projected negative cash balances and events of default in 1996,
Lehman Brothers determined that Mesa's Common Stock market value would
deteriorate as it had prior to the announcement of the DNR Purchase and would be
of nominal value.
Pro Forma Going Concern Analysis. Under this analysis, Lehman Brothers
calculated a range of values for Mesa's Common Stock based on projected cash
flows, production and reserve additions for Mesa which were provided by Mesa's
management taking into account the proposed terms of the Recapitalization for
the three year period 1996 through 1998 using the same two oil, natural gas
liquid and natural gas price scenarios as in the above going concern analysis,
and projected equity reference values per share for Mesa at the end of 1998
using valuation multiples consistent with current public market trading
multiples for comparable independent oil and gas companies. Additional
assumptions included reasonable reductions to G&A expenses and reinvestment of
discretionary cash flows in the Gulf of Mexico at a finding cost of $0.85 per
Mcfe. The projections and information utilized in the pro forma going concern
analysis were provided by Mesa's management. Based on the above analyses, the
projected total equity value range for Mesa at the end of 1998 was estimated to
be $800 million to $1.8 billion resulting in a range of values for Mesa's Common
Stock at the end of 1998 of $2.48 to $7.55 per share and a range of values for
Mesa's Series A Preferred Stock at the end of 1998 of $4.20 to $10.08 per share.
These projected per share value ranges for the Common Stock and Series A
Preferred Stock at the end of 1998 were then discounted to present values using
a 12% discount rate, which Lehman Brothers considered appropriate based on
certain assumptions regarding the cost of capital of Mesa's business. The
resulting present value range for the Common Stock was $1.87 to $5.69 per share
(the "Post-Recapitalization Common Stock Present Value Range") and the resulting
present value range for the Series A Preferred Stock was $3.16 to $7.59 per
share.
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As part of the Recapitalization, the holders of Common Stock will retain
their shares of Common Stock and will receive, with respect to each share of
Common Stock now owned, the right to buy .912 shares of Series A Preferred Stock
for $2.06 (.912 multiplied by the Rights exercise price of $2.26 per share of
Series A Preferred Stock). To calculate the value of the Recapitalization to
each share of Mesa Common Stock prior to the consummation of the
Recapitalization, the Post-Recapitalization Common Stock Present Value Range,
$1.87 to $5.69 per share of Common Stock, must be added to the value of the
right to buy .912 shares of Series A Preferred Stock. If the
Post-Recapitalization Common Stock Present Value is at the low end of the range
($1.87 per share), the value of the right to buy .912 shares of Series A
Preferred Stock is .912 multiplied by the difference between the Series A
Preferred Stock present value of $3.37 per share minus $2.26, i.e., $1.01 per
right to buy .912 shares of Series A Preferred Stock. If the
Post-Recapitalization Common Stock Present Value is at the high end of the range
($5.69 per share), the value of the right to buy .912 shares of Series A
Preferred Stock is .912 multiplied by the difference between the Series A
Preferred Stock present value of $6.92 per share minus $2.26, i.e., $4.23 per
right to buy .912 shares of Series A Preferred Stock.
The sum of the value of the right to buy .912 shares of Series A Preferred
Stock ($1.01 to $4.23) plus the Post-Recapitalization Common Stock Present Value
Range ($1.87 to $5.69) resulted in a range of values for Mesa's Common Stock
prior to the consummation of the Recapitalization of $2.87 to $9.92 per share.
This range of Common Stock values was used to compare the Recapitalization to
the Mesa Common Stock values estimated using the other types of analysis
discussed above.
Lehman Brothers. Lehman Brothers is an internationally recognized
investment banking firm engaged in, among other things, the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, competitive bids, secondary distributions of listed
and unlisted securities, private placements, and valuations for corporate and
other purposes. The Board selected Lehman Brothers because of its expertise,
reputation and familiarity with Mesa and because its investment banking
professionals have substantial experience in transactions comparable to the DNR
Purchase and the other types of transactions for which proposals were solicited.
Lehman Brothers has previously rendered certain financial advisory and
investment banking services to Mesa, for which it has received customary
compensation. Pursuant to the terms of an engagement letter agreement, dated
August 21, 1995, between Lehman Brothers and Mesa, Mesa has paid Lehman Brothers
$400,000 and will pay Lehman Brothers an additional fee of $3.775 million upon
the consummation of the DNR Purchase. In addition, Mesa has agreed to reimburse
Lehman Brothers for its reasonable expenses (including, without limitation,
professional and legal fees and disbursements) incurred in connection with its
engagement, and to indemnify Lehman Brothers and certain related persons against
certain liabilities in connection with its engagement, including certain
liabilities that may arise under the federal securities laws. Lehman Brothers
will act as dealer manager in connection with the Rights Offering for no
additional fee.
In the ordinary course of its business, Lehman Brothers actively trades in
the debt and equity securities of Mesa for its own account and for the accounts
of its customers and, accordingly, may at any time hold a long or short position
in such securities.
ADVANTAGES OF THE RECAPITALIZATION
As described above, Mesa has explored various strategic alternatives for a
comprehensive solution to its financial condition for a number of years, with
the primary goal being to reduce leverage by either creating equity value or
raising additional equity. A majority of the Board believes that the
Recapitalization is the most advantageous of the alternatives available to Mesa
resulting from the extended review process, principally because of the reduction
of the amount and cost of Mesa's debt and the associated benefits of such
reductions, as well as the expected benefits to Mesa of the additional
transactional and financial expertise of DNR's Board representatives, as
evidenced by the assistance such persons have rendered to Mesa in obtaining a
commitment for the New Credit Facility.
Resolution of Liquidity Concerns. The potential for insolvency and the
associated cost to stockholder value has been a primary concern of Mesa. As a
result of improved operating results for the first quarter of 1996, Mesa
currently expects it would have sufficient cash resources to satisfy its
mid-1996 debt service
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obligations, even if the Recapitalization were not consummated. Notwithstanding
such improvements, Mesa's ability to fund 1996 year end interest payments would
be uncertain. Moreover, absent changes in Mesa's capital structure and the
completion of any significant transactions, Mesa would face substantial interest
payments in 1997 and 1998 and $654 million in principal repayment obligations in
1998. The equity infusion and the accompanying debt refinancing will resolve
Mesa's liquidity issues and materially improve Mesa's capital structure. See
"Capital Resources and Liquidity."
Reduction of Debt. Proceeds of the sale of Series A and Series B Preferred
Stock will be used to reduce Mesa's total debt by approximately 20%. Additional
debt will be repaid from the application of cash on hand. As part of the
Recapitalization, Mesa will then be able to refinance the remainder of its debt
through the Debt Refinancing on terms that will be substantially more favorable
to Mesa than currently exist as a result of the lower debt to equity ratios and
higher interest coverage ratios following the DNR Purchase. The Recapitalization
is also expected to extend the timing of principal repayments, currently
expected to be an aggregate of $185 million in 1996 and 1997 and $654 million in
1998, respectively, until as late as 2003 when the New Credit Facility is due,
absent decreases in the borrowing base. The New Credit Facility is expected to
provide for principal reductions driven only by the borrowing base for seven
years, and the New Notes are expected to have a ten year maturity. This
reduction in leverage will result in the availability of substantial cash for
reinvestment over the next several years.
Reduction of Interest Expense. The Recapitalization is expected to
materially lower Mesa's interest expense. For the past seven years, Mesa has
incurred interest expense in excess of $140 million per year. By repaying a
substantial portion of its existing debt and refinancing the remainder using the
New Credit Facility and the New Notes, at a lower average interest rate, Mesa
expects to reduce its annual cash interest expense by approximately $75 million.
See "Capital Resources and Liquidity." This reduction in debt service
requirements will result in the availability of substantial cash flow for
investment over the next several years.
Use of Increased Funds for Investment. The increased funds available for
investment as a result of the Recapitalization are expected to position Mesa to
add shareholder value by funding exploration, development and acquisition
expenditures. Mesa's ability to make these types of expenditures over the past
several years has been severely constrained by the high cost of its debt. The
Recapitalization is expected to increase cash flow available for investment and
improve Mesa's ability to attract capital, which will increase Mesa's ability to
pursue investment opportunities and make capital expenditures. No specific
investment opportunities or additional material capital expenditures have been
identified.
Contribution of DNR Board Representatives. Immediately following the
completion of the DNR Purchase, DNR will elect a majority of the members of
Mesa's Board. Mesa expects to benefit from the ability of the DNR Board
representatives, who have participated in a number of significant transactions
and enjoy an excellent reputation in the financial community, to attract
capital.
Ability to Create Going Concern Value. Mesa believes its equity securities
do not properly reflect the underlying value of its high quality asset base. The
Board believes that, as concerns about liquidity and a shortage of capital for
reinvestment are alleviated, the market value of Mesa's securities will improve.
DISADVANTAGES OF THE RECAPITALIZATION
The principal disadvantages of the Recapitalization considered by the Board
are (i) the transfer of control to DNR at a discount to market prices at the
time the letter of intent for the Rainwater Purchase was announced, (ii)
dilution of the investment of existing stockholders and (iii) limitations on the
potential use of Mesa's net operating losses for tax purposes.
Transfer of Control at a Discount. The DNR Purchase will effectively
transfer control of the Board to from existing stockholders to DNR at a discount
to the price at which the Common Stock was trading immediately prior to the
public announcement of Mesa's letter of intent with Rainwater. (The discount to
market prices is greater at the date hereof than it was prior to the
announcement of the letter of intent, but a majority of the Board believes the
post-announcement increase in the market price of the Common Stock is
attributable in substantial part to the pendency of the Recapitalization.) DNR
will thus control the Board
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<PAGE> 34
even though, in the event all Rights are exercised, it will hold only
approximately 32% of the economic interest in Mesa. On the other hand, the terms
of the Preferred Stock preclude DNR from realizing a control premium relative to
the Series A Preferred Stock in any subsequent sale of Series B Preferred Stock
by DNR or merger or sale of Mesa, because (i) the Series B shares would
automatically become Series A shares upon sale to any person not affiliated with
Rainwater and (ii) the terms of the Preferred Stock will provide that the Series
A and Series B Preferred Stock must receive the same kind and amount of
consideration per share in any merger or similar transaction. For a discussion
of the powers of the Board, see "-- Effects of the Recapitalization on Control
of Mesa" above.
Dilution. The Recapitalization will triple the number of shares of Common
Stock outstanding on a fully diluted basis. The shares being sold to DNR will be
sold at a discount to the prices at which the Common Stock traded before the
Rainwater letter of intent was announced, and DNR's holdings will be further
increased at a discount price to the extent that existing stockholders neither
exercise the Rights distributed to them nor sell such Rights to someone who does
exercise them. While the sale of equity securities at a discount to market is
dilutive, the ability of Mesa's existing stockholders to participate in the
Recapitalization via the purchase of Series A Preferred Stock at the same price
as that being paid by DNR mitigates such dilution. Stockholders who do not wish
to make the additional economic investment required for such purchase may
mitigate the dilution by selling their Rights in the market. Additionally, the
pay-in-kind dividend feature of the Series A and Series B Preferred Stock will
require the issuance of additional shares of Preferred Stock for at least four
years following the initial issuance. On the other hand, the terms of the
Preferred Stock will provide that holders of Series A Preferred Stock will
receive pay-in-kind dividends at the same times and to the same extent that
holders of Series B Preferred Stock receive such dividends, and holders of
Common Stock who purchase Series A Preferred Stock through the exercise of
Rights will thus share pro rata with the holders of Series B Preferred Stock in
such pay-in-kind dividends.
Restriction on Use of NOLs. At December 31, 1995, Mesa had approximately
$470 million of unused net operating loss ("NOL") carryforwards. The issuance of
Series B Preferred Stock to DNR pursuant to the Stock Purchase Agreement will
cause the NOL carryforward limitations of Section 382 of the Internal Revenue
Code of 1986, as amended (the "Code"), to apply to Mesa's NOL carryforwards. As
a result, Mesa's ability to carry forward its existing NOLs to offset future
income and gain (other than unrealized gain inherent in Mesa's assets at the
time of issuance of the Series B Preferred Stock to DNR) will be limited. The
impact of this limitation cannot be predicted with any certainty because the
amount of the limitation will depend on the value of the Common Stock and on
interest rates in effect at the time of issuance of the Series B Preferred Stock
to DNR. However, based on recent Common Stock trading prices of $3 to $4 per
share and on current interest rates, Mesa's ability to utilize its existing NOLs
would be limited to approximately $11 million to $15 million per year ("Annual
NOL Limitation"). As a result of the restriction on the utilization of the NOL,
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 restriction.
CONSEQUENCES IF THE DNR PURCHASE IS NOT APPROVED
If the DNR Purchase is not completed, Mesa will pursue other alternatives
to address its liquidity issues and financial condition, including the
possibility of soliciting other transactions similar to those sought during the
Proposal Solicitation Process, seeking to restructure its balance sheet by
negotiating with its current debt holders or seeking protection from its
creditors under the federal Bankruptcy Code. See "Capital Resources and
Liquidity."
ABSENCE OF APPRAISAL RIGHTS
Under Texas law and Mesa's Amended and Restated Articles of Incorporation,
objecting stockholders will have no appraisal, dissenters' or similar rights
(i.e., the right to seek a judicial determination of the "fair value" of the
Common Stock and to compel Mesa to purchase their shares of Common Stock for
cash in that amount) with respect to the matters presented at the Special
Meeting or otherwise with respect to the Recapitalization, nor will such rights
be voluntarily accorded to stockholders by Mesa. Therefore, if the
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<PAGE> 35
matters submitted for the approval of the stockholders at the Special Meeting
are approved by the requisite number of shares, such approval will bind all
stockholders and objecting stockholders will have no alternative other than
selling their securities in the market.
INTERESTS OF CERTAIN PERSONS IN THE RECAPITALIZATION
Current Officers and Directors. The Stock Purchase Agreement provides that
the current officers and directors of Mesa will continue to have the benefit of
existing indemnification arrangements under applicable law and Mesa's charter
and bylaws for at least six years following the First Closing under the Stock
Purchase Agreement and, subject to certain limitations, that Mesa will maintain
directors' and officers' liability insurance applicable to them for at least
four years following the First Closing. See "The Stock Purchase
Agreement -- Indemnification of Directors and Officers."
Mesa does not have employment agreements with any of its officers or
directors.
DNR Nominees. 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). As such, DNR will have the right to elect a majority of Mesa's directors
and to receive dividends as described below under "Description of Preferred
Stock -- Voting Rights" and "-- Dividends." 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
Mesa made at the time it entered into the February 28 letter of intent. 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.
EXPENSES OF THE RECAPITALIZATION
Mesa expects to incur expenses incident to the Recapitalization of
approximately $35 million, including fees payable to DNR at the First and/or
Second Closings aggregating $9,275,000, fees payable to Lehman Brothers of
$3,775,000, commitment, facility and other fees payable in connection with the
New Credit Facility, underwriting discounts payable with respect to the issuance
of the New Notes, legal expenses and other transaction expenses, including the
expenses of DNR. Of these expenses, $15 million is attributable to the sale of
the Series A and Series B Preferred Stock. In addition, Mesa may incur a make
whole premium in connection with the prepayment of the HCLP Secured Notes. See
"The Recapitalization -- Sources and Uses of Funds" and "Capital Resources and
Liquidity."
BOARD RECOMMENDATION
A majority of the Board believes that the DNR Purchase is fair to and in
the best interests of Mesa and its stockholders. A majority of the Board
recommends that the stockholders approve the DNR Purchase. Two directors
dissented from the Board's conclusions and recommendations, as more fully
described below.
The recommendation of the majority of the Board is based on its belief that
the DNR Purchase will result in the benefits to Mesa described above under
"Advantages of the Recapitalization." The Board also considered the potential
disadvantages discussed above under "Disadvantages of the Recapitalization."
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<PAGE> 36
In reaching the recommendations and conclusions discussed above, the Board
also considered (i) the condition that the DNR Purchase be approved by holders
of the Common Stock, as described under "The Special Meeting;" (ii) Mesa's
liquidity issues and financial condition, as described herein; (iii) the results
of the Hugoton property auction and the Proposal Solicitation Process described
above under "Background of the Recapitalization;" (iv) the limited number of
viable alternatives Mesa would have to address its liquidity issues and
financial condition in the event that the DNR Purchase were not pursued and the
possible consequences thereof to Mesa and the value of its Common Stock; (v) the
opinion of Lehman Brothers regarding the fairness of the DNR Purchase to Mesa,
as described above under "Opinion of Independent Financial Advisor;" (vi) the
voting power to be held by the holders of the Series B Preferred Stock in
relation to their equity investment in Mesa; (vii) the right of the holders of
Common Stock to purchase shares of Series A Preferred Stock pursuant to the
Rights Offering at the same price that DNR would purchase shares of Series B
Preferred Stock in the DNR Purchase, as described under "The Rights Offering;"
(viii) the terms of the Rights Offering, including the transferability of the
Rights and the oversubscription privileges associated with the Rights, as
described below under "The Rights Offering;" (ix) the relative rights of the
Series A Preferred Stock and the Series B Preferred Stock, as described under
"Description of Preferred Stock;" (x) the Exclusivity Covenant and the
Exclusivity Exception in the Stock Purchase Agreement and the provisions of the
agreement regarding termination and termination payments, as described under
"The Stock Purchase Agreement;" (xi) the other provisions of the Stock Purchase
Agreement, as described under "The Stock Purchase Agreement;" (xii) the
anticipated terms of the Debt Refinancing, as described under "Description of
New Debt;" (xiii) the benefit of Rainwater's involvement in arranging the Debt
Refinancing, as described under "Background of the Recapitalization -- Financing
Commitments;" (xiv) Mesa's results of operations for the first quarter of 1996,
as described herein; (xv) the dissenting views expressed by Mr. Reed and Mr.
Parkinson, including their letters set forth below under "Letters of Dissenting
Directors;" (xvi) the expenses of the Recapitalization, as described above under
"Expenses of the Recapitalization;" (xvii) the interests of certain persons in
the Recapitalization, as described above under "Interests of Certain Persons in
the Recapitalization;" (xviii) the business experience and business reputations
of Richard E. Rainwater and the other nominees for election to the Board; and
(xix) the other information about the Recapitalization and about Mesa included
in this Proxy Statement.
All of the factors listed above were considered as a whole by the majority
of the Board in reaching its belief as to the overall fairness of the DNR
Purchase, and it is impracticable to assign relative weights to the factors
considered.
THE MAJORITY OF THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS
VOTE "FOR" THE PROPOSAL TO APPROVE THE DNR PURCHASE.
Five of the seven directors who participated in the Board's April 26
meeting, namely Mr. Cain, Mr. Herrington, Mr. Madden, Mr. Pickens and Mr.
Stillwell, voted in favor of the DNR Purchase and the other elements of the
Recapitalization. Mr. Sarofim did not participate in that meeting, but indicated
his support for the Recapitalization to other directors prior to the meeting.
Two of the eight members of the Board (Joel L. Reed and Dorn Parkinson)
dissented in writing from the Board's conclusions and recommendations. The full
texts of their written dissents are set forth below.
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<PAGE> 37
LETTERS OF DISSENTING DIRECTORS
April 26, 1996
The Board of Directors
c/o Mr. T. Boone Pickens
MESA, Inc.
1400 Williams Square West
5205 N. O'Connor Boulevard
Irving, TX 75039-3746
Gentlemen:
My dissent to the Rainwater group's proposed acquisition of effective
control of MESA (the "Proposed Acquisition") is based on economics. I request
that the entire text of this letter be included in the Company's proxy statement
with respect to the Proposed Transaction.
As a director and a representative of one of the Company's largest
shareholders, I do not believe that the Board is discharging its duties to
MESA's existing shareholders by handing over value which I estimate to
approximate $100 million to induce the Rainwater group to take control of MESA.
I base the preceding statement on my belief that the current market rate
for underwriting approximately $133 million of the proposed Convertible
Preferred Stock and providing other services in effecting the Proposed
Acquisition is substantially less than the "compensation" element that has been
negotiated with the Rainwater group. If one were to add the approximately $50
million that is proposed to be paid to MESA's existing lenders as prepayment
penalties, I believe the total loss in value being suffered by MESA common
shareholders approaches $150 million or $2.34 per common share. The closing
price on April 25, 1996 was only $3.875. The bottom line is that this is much
too high of a price for MESA's existing shareholders to pay for what is
essentially a Preferred Stock Rights Offering. I'm convinced that we as a Board
can do much better for our shareholders.
Looking at the Proposed Acquisition from another economic perspective
confirms the inequity to our existing shareholders. As I have shown on the
accompanying schedule, in order to equate the price of $2.26 that the Rainwater
group proposes to pay for each share of Convertible Preferred Stock, to a share
of existing common stock, one must deduct the present value of future dividends
on the Preferred Stock. This adjustment yields an estimated common stock
"equivalent" price of $1.17 that arguably might be even lower if one values the
liquidation preference that the Preferred enjoys over the common stock. The
Rainwater group is buying control of MESA at an astonishing 70% discount to
current market of $3.875 per share as of April 25, 1996. The discount to market
based on the closing price of MESA's common stock of $3.00 per share on February
28, 1996 (the day preceding announcement of the Proposed Acquisition) was 61%.
My concern surrounding this transaction is compounded by the fact that the
Rainwater group is purchasing less than 35% of the economic interest in the
Company but is given absolute control of the Board through the creation of
different classes of Convertible Preferred Stock with different voting
provisions attached to each. I believe this voting mechanism further
disenfranchises our common shareholders.
The Company's financial advisors have indicated that a properly capitalized
MESA can yield significant value to its shareholders. The critical question is
at what cost to the existing common shareholders? I believe the cost of the
Proposed Acquisition is too high and that the Company can develop an
economically preferable transaction to the Proposed Acquisition. Improved
business fundamentals help support this conclusion. The prognosis for natural
gas prices, as demonstrated by the NYMEX one-year gas "strip" price, has
improved considerably during the few months since MESA received most of its
indications of interest concerning a sale or merger of the Company or sale of
its assets. Better commodity prices for natural gas were the principal reason
for the Company's net earnings reported for the first quarter of 1996.
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<PAGE> 38
Our shareholders deserve better than the Proposed Acquisition and I believe
that this Board through a focused effort can present to our shareholders a
timely transaction with superior economics. Accordingly, please record my
dissent to the Board's majority decision to approve the Proposed Acquisition.
Sincerely,
/s/ Dorn Parkinson
------------------------------
APPENDIX A
Rainwater Group Economics
The economics for the Rainwater group can be summarized as follows:
<TABLE>
<CAPTION>
(IN MILLIONS
EXCEPT PER
SHARE AMOUNTS)
--------------
<S> <C>
Purchase price of Series B Preferred........................................... $133.0
Less: Closing Fee.............................................................. (9.3)
Present value of future cash dividends in years 5 through 10 discounted at
15%....................................................................... (31.1)
------
Adjusted Purchase Price........................................................ $ 92.6
======
Shares to be received upon conversion of Preferred............................. 58.8
Shares to be received in pay-in-kind dividends in years 1 through 4............ 20.7
------
Total shares to be received.................................................... 79.5
======
Adjusted Purchase Price per Share for the Rainwater Group...................... $ 1.17
======
Closing Price per Share on April 25, 1996...................................... $3.875
======
% Discount..................................................................... 70%
======
</TABLE>
April 26, 1996
The Board of Directors
c/o Mr. T. Boone Pickens
MESA, Inc.
1400 Williams Square West
5205 N. O'Connor Boulevard
Irving, TX 75039-3746
Dear Sirs:
This letter shall serve to record my dissent to the Rainwater group's
proposed transaction whereby it would obtain effective control of the Company
via the purchase of a newly issued Convertible Preferred Stock ("Proposed
Transaction"). I request that the entire text of this letter be included in the
Company's proxy statement with respect to the Proposed Transaction.
In my view, the Board is allowing control of MESA to be sold significantly
below its value. I base this view on the equity market trading value of the
Company and comparably sized companies in the oil and gas industry. The
Company's recent stock price suggests that a properly capitalized MESA under the
direction of highly regarded leadership, such as the Rainwater group, will yield
substantial value to its stockholders. I believe that the Board can do more to
ensure that a greater proportion of that value is retained by the existing
shareholders rather than transferring it to the purchaser as contemplated by the
Proposed Transaction.
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<PAGE> 39
I acknowledge the argument that the Company's long and laborious search for
a transaction might lead one to believe that if a better transaction were
available, it would have surfaced by now. My answer to that argument is that I
believe the process broke down in its later stages approximately two months ago.
At that time, I believe the process was driven by the deadline for a "major"
transaction under the Company's agreement with the Washington-Davis Group
("WDG") rather than the interests of shareholders. Consequently, our
shareholders now face excessive economic dilution from the Proposed Transaction.
On February 27, 1996, just two days ahead of the deadline by which the
Company had to produce a "major" transaction or face freeing WDG to nominate an
alternative slate of directors for MESA, management identified and presented the
Proposed Transaction to the full Board for the first time. The very next day the
Board took action on management's recommendation to approve a Letter of Intent
outlining the Proposed Transaction.
As one of the two dissenting votes cast at the February 28, 1996 telephonic
board meeting, I stated my concern that many would view skeptically the
motivation behind, and timing of, the Board's action. As a director I was not
aware, and I do not believe that potentially interested third parties were
aware, that the Company would seriously consider selling control at a below
market price. After further analysis, I believe that the effective discount to
the then market value of $3.00 per share (closing price on the day the Board
approved the Letter of Intent) was in excess of 60%. That is, after taking into
account the present value of the yield on the proposed Convertible Preferred
Stock, the "comparable-to-common" Convertible Preferred share purchase price is
approximately $1.17 versus the then market price of $3.00. Based on yesterday's
market price of $3.875 (closing price on April 25, 1996) the discount to market
is 70%.
At the aforementioned telephonic board meeting I stated, and I continue to
believe, that the Board has not adequately investigated all alternatives to the
substantial economic dilution implicit in the Proposed Transaction. If the Board
had not executed the Letter of Intent, WDG could have nominated an alternative
slate of directors and communicated directly with our stockholders concerning
the direction of MESA. This open discourse would have been healthy for the
transaction process and might even have provided leverage for the Company in its
negotiations concerning the Proposed Transaction. These views were rejected by
the Board's majority approval of the Letter of Intent.
Once the Board decided to sell control of the Company in a dilutive
transaction, all efforts should have been made to maximize value to our existing
shareholders. Prior to accepting the Proposed Transaction, the Board at a
minimum should have:
1.) Directed management and its advisors to affirmatively solicit interest
in similarly structured transactions from previously interested third
parties;
2.) Released all parties from any standstills that might prevent them from
making offers; and
3.) Instructed management and its advisors to thoroughly review and report
to the Board on a business plan that would provide as much time as
possible to explore a preferable economic outcome that might stem from
the first two actions.
Unfortunately, these actions were not taken and the Letter of Intent was
approved just hours ahead of the WDG settlement agreement deadline.
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<PAGE> 40
These facts lead to my conclusion that the process followed by the MESA
Board during the past two months may not have produced the best transaction for
our shareholders. The substantial "in-the-money" value of the Convertible
Preferred Stock Purchase Rights being transferred to the Rainwater group (which
I believe to be in excess of $100 million) strongly suggests that the Company
can find a qualified underwriter or purchaser of a substantially similar
Convertible Preferred Stock Offering on more favorable economic terms for the
MESA common shareholders.
Sincerely,
/s/ Joel L. Reed
------------------------------
RESPONSE OF THE MAJORITY OF THE BOARD TO THE LETTERS OF DISSENTING DIRECTORS
The points raised by Mr. Parkinson and Mr. Reed in their letters have been
addressed elsewhere in this Proxy Statement. However, the majority of the Board
believes a specific rebuttal may be useful to stockholders.
Prior to addressing those points, the majority of the Board notes that the
day before Mr. Reed advised Mesa that he and Mr. Parkinson remained opposed to
the Recapitalization, would definitely vote against it at the April 26 Board
meeting and would provide written dissents for inclusion in this Proxy
Statement, Mesa had rejected Mr. Reed's counter proposal (which he made in
response to a proposal by Mesa) regarding a possible agreement between Mesa and
the WDB Group. In Mr. Reed's counter proposal, he proposed, among other things,
that (i) the WDB Group would agree to vote their shares at the Special Meeting
proportionately with the votes cast by other stockholders and (ii) Mesa would
reimburse the WDB Group for expenses that Mr. Reed estimated at $3 million. See
"The Recapitalization -- Background -- Discussions with WDB Group."
Endorsement of the Recapitalization
In recommending the Recapitalization to Mesa's stockholders, the Board
carefully considered the advantages and disadvantages of the Recapitalization,
the Board's extensive review of strategic alternatives, the Proposal
Solicitation Process, Mesa's financial condition, the opinion of Lehman Brothers
and the other factors discussed elsewhere in this Proxy Statement. The majority
of the Board believes the advantages of the Recapitalization are compelling, but
they have fully acknowledged and considered the disadvantages of the
Recapitalization.
The majority of the Board believes that the disadvantage of transferring
control of Mesa to DNR at a discount to the market prices of the Common Stock is
offset by, among other things, (i) the opportunity Mesa's stockholders will have
to participate in the transaction either by exercising their Rights to purchase
Preferred Stock at the same $2.26 price being paid by DNR or by selling their
Rights in the market and (ii) the value to Mesa of having Rainwater and its
affiliates involved in Mesa's future direction. The majority of the Board
believes the increase in the price of Mesa's Common Stock from $2 7/8 to current
levels since the announcement on April 2 of the financing commitments for the
Recapitalization is attributable in substantial part to the pendency of the
Rainwater transaction. The suggestion expressed by the dissenting directors that
Mesa has transferred $100 million in value to DNR is unfounded. Any increase in
the value of the transaction to Rainwater since the letter of intent was signed
is solely a result of the increase in Mesa's stock price, and does not result
from any detriment suffered by Mesa or its stockholders, who have also enjoyed
the benefits of this increase in value.
The majority of the Board has further acknowledged and considered the
dilutive effect of the Recapitalization. However, the majority of the Board
believes that the combination of the value of the Rights distributed to
stockholders and the prospective value of Mesa's equity after the
Recapitalization (after giving
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<PAGE> 41
effect to the dilution) will provide a return to stockholders that is superior
to that likely to be available under any of the alternatives that were available
to the Company at that time.
Timing of the Decision
Mesa signed the Rainwater letter of intent in February, and the Stock
Purchase Agreement in April, because the Rainwater proposal was and is the most
attractive proposal for Mesa and its stockholders to result from the Proposal
Solicitation Process, and Mesa needed and needs a solution to its financial
concerns. The February 29 date in the WDB Settlement Agreement was not a factor
in the decision of the majority of the Board regarding whether to approve the
letter of intent. Under the WDB Settlement Agreement, the Board would have had
the right to defer the date of the annual meeting at that time -- whether or not
Mesa had signed a letter of intent by that time -- so long as serious
discussions or negotiations were in process for the Rainwater transaction and
Mesa's financial advisor had informed the Board in writing that those
discussions or negotiations were reasonably likely to result in a definitive
agreement prior to July 30, 1996. In fact, any 60 day deferral that was properly
implemented at that time would have remained effective even if the then-pending
Rainwater negotiations had been abandoned thereafter. See "-- Background of the
Recapitalization -- Settlement with WDB Group."
Recent Increases in Gas Prices
Higher gas prices resulting from the unusually cold 1995-96 winter were
indeed a major reason for Mesa's improved results of operations in the first
quarter of 1996. However, no one can predict whether prices will continue to
improve, stabilize or go back down. The Recapitalization permits Mesa's existing
stockholders to retain significant exposure to improving gas prices while
significantly reducing the risk to the equity of a return to lower gas prices.
HCLP Prepayment Premium
As to any prepayment premium payable on the HCLP Secured Notes (which would
be payable under any refinancing proposal), the majority of the Board believes
the advantages of the much lower interest costs and the extension of principal
maturities to be obtained from replacing those notes with the New Credit
Facility as Mesa's senior secured debt will more than offset such premium.
Proposal Solicitation Process
The majority of the Board believes that the Proposal Solicitation Process
has been successful in achieving its goals -- to fully evaluate all strategic
alternatives available to Mesa for addressing its financial condition and to
achieve a comprehensive solution to its financial concerns. Lehman Brothers
contacted 141 parties about their potential interest in a transaction, and
numerous alternatives, including equity infusions, were explored with all of
those who were interested. The letters of dissent do not suggest that any other
proposal that resulted from the process was preferable to the Recapitalization,
and the Board has reviewed extensive analyses of the prospects for Mesa if it
implements no transaction.
The suggestion that "another underwriter" could now be found, and that a
transaction more advantageous to Mesa and its stockholders than the
Recapitalization could be achieved, is speculative, and would require Mesa and
its stockholders to take the risk that Rainwater would terminate the Stock
Purchase Agreement. Mesa has not been approached by any other party about a
potential transaction since the letter of intent was announced in February. If
that were to occur hereafter, the Board would determine whether to exercise the
Exclusivity Exception ("fiduciary out") in the Stock Purchase Agreement and to
pursue the alternative transaction, subject to paying DNR a termination payment.
Any decision to exercise that right and pursue any such alternative would,
however, necessarily take into account not only the attractiveness of the other
alternative, but also the risk of jeopardizing the Rainwater transaction and
possibly ending up with no transaction.
37
<PAGE> 42
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
TRADING PRICES
The Common Stock currently trades on the New York Stock Exchange under the
symbol MXP. The following table reflects the range of high and low selling
prices of the Common Stock by quarter for 1996, 1995 and 1994.
<TABLE>
<CAPTION>
COMMON STOCK
------------
HIGH LOW
---- ---
<S> <C> <C>
1996
First Quarter.......................................................... $4 $2 5/8
Second Quarter (through May 23)........................................ 4 1/2 2 5/8
1995
First Quarter.......................................................... 6 1/8 4 5/8
Second Quarter......................................................... 6 1/8 3 1/2
Third Quarter.......................................................... 5 1/2 3 7/8
Fourth Quarter......................................................... 4 7/8 3
1994
First Quarter.......................................................... 8 1/2 5 5/8
Second Quarter......................................................... 7 5 3/8
Third Quarter.......................................................... 5 7/8 5 1/8
Fourth Quarter......................................................... 5 1/2 3 5/8
</TABLE>
At April 30, 1996, there were 64,050,009 shares of Common Stock
outstanding. At such date, there were approximately 18,500 record holders of
Common Stock and approximately 45,000 beneficial holders of Common Stock.
DIVIDEND POLICY
Mesa has not paid any dividends or distributions with respect to its equity
securities, including the Common Stock, since 1990.
Mesa's Existing Credit Facility prohibits Mesa from making any
distributions or paying any dividends to equity holders, other than those paid
in the form of its equity securities. The indentures governing Mesa's existing
Secured and Unsecured Discount Notes also include certain restrictions on the
payment of dividends on the Common Stock. In addition, the Statement of
Resolution establishing the Series A Preferred Stock and the Series B Preferred
Stock will prohibit the payment of dividends with respect to the Common Stock
for so long as any shares of Series A Preferred Stock or Series B Preferred
Stock remain outstanding. The New Credit Facility and the New Note indentures
will also contain certain restrictions on the payment of cash dividends on the
Common Stock and Preferred Stock. See "Description of New Debt."
Moreover, Mesa currently does not expect to pay dividends on the Common
Stock in the future unless and until there is a material and sustained increase
in natural gas prices and adequate provision has been made for further reduction
of debt in addition to that contemplated by the Recapitalization. Dividends on
the Preferred Stock will be payable only in kind for the first four years after
issuance.
38
<PAGE> 43
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 Mesa for the year ended December 31, 1995
and for the three months ended March 31, 1996 which are incorporated by
reference in this Proxy, 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.
The Recapitalization is more fully described elsewhere in this Proxy
Statement. The Pro Forma Financial Statements should be read in conjunction with
the historical consolidated financial statements of Mesa and the related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" which are included in Mesa's Form 10-K for the year ended
December 31, 1995 and Mesa's Form 10-Q for the three months ended March 31, 1996
and which are incorporated by reference herein. 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.
39
<PAGE> 44
PRO FORMA BALANCE SHEET
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
---------------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- -----------
(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)
40
<PAGE> 45
PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <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 -- 26.8
Depletion, depreciation and amortization..................... 83.4 -- 83.4
-------- ------- -------
Total costs and expenses....................................... 187.0 -- 187.0
-------- ------- -------
Operating income............................................... 48.0 -- 48.0
-------- ------- -------
Other income (expense):
Interest income.............................................. 15.9 (15.5)(h) 0.4
Interest expense............................................. (148.6) 64.0(i) (84.6)
Investment gains............................................. 18.4 -- 18.4
Other........................................................ 8.7 -- 8.7
-------- ------- -------
Total other income (expense)................................... (105.6) 48.5 (57.1)
-------- ------- -------
Net loss before Preferred Stock dividends...................... (57.6) 48.5 (9.1)
-------- ------- -------
Preferred Stock dividends...................................... -- (21.9)(j) (21.9)
-------- ------- -------
Net loss available to the common stockholders.................. $ (57.6) $ 26.6 $ (31.0)
======== ======= =======
Net loss per common share...................................... $ (0.90) $ (0.48)
======== ======= =======
Average shares outstanding:
Common....................................................... 64.1 64.1
Series A Preferred Stock..................................... -- 60.2 60.2
Series B Preferred Stock..................................... -- 60.6 60.6
</TABLE>
(See Notes to Pro Forma Financial Statements)
41
<PAGE> 46
PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1996
--------------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <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 -- 5.6
Depletion, depreciation and amortization..................... 30.2 -- 30.2
-------- ------- -------
Total costs and expenses....................................... 55.3 -- 55.3
-------- ------- -------
Operating income............................................... 25.3 -- 25.3
-------- ------- -------
Other income (expense):
Interest income.............................................. 3.2 (3.1)(h) 0.1
Interest expense............................................. (37.7) 14.5(i) (23.2)
Investment gains............................................. 8.8 -- 8.8
Other........................................................ 1.5 -- 1.5
-------- ------- -------
Total other income (expense)................................... (24.2) 11.4 (12.8)
-------- ------- -------
Net income before Preferred Stock dividends.................... 1.1 11.4 12.5
-------- ------- -------
Preferred Stock dividends...................................... -- (5.7)(j) (5.7)
-------- ------- -------
Net income available to the common stockholders................ $ 1.1 $ 5.7 $ 6.8
======== ======= =======
Primary income per common share................................ $ .02 $ .10
======== ======= =======
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
</TABLE>
(See Notes to Pro Forma Financial Statements)
42
<PAGE> 47
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 New Notes 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 sales proceeds, net of $15 million in related 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) 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.
(i) Reflects the reduction of interest expense as a result of the
Recapitalization. Interest expense adjustments include the following:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 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)...................................... (22.1) (6.9)
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.......................................... $ 64.0 $ 14.5
======= ======
</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.
(j) 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.
43
<PAGE> 48
SELECTED HISTORICAL FINANCIAL INFORMATION
The following table sets forth selected financial information of Mesa as of
the dates and for the periods indicated. The selected historical consolidated
statement of operations data for the years ended December 31, 1993, 1994 and
1995 and the historical consolidated balance sheet data as of December 31, 1994
and 1995 are derived from the audited Consolidated Financial Statements
incorporated by reference herein. The selected historical consolidated statement
of operations data for the years ended December 31, 1991 and 1992 and the
selected historical consolidated balance sheet data as of December 31, 1991,
1992 and 1993 are derived from audited consolidated financial statements of Mesa
that are not incorporated by reference herein. The selected historical
consolidated statement of operations data for the three months ended March 31,
1995 and March 31, 1996 and the selected historical consolidated balance sheet
data as of March 31, 1996 are derived from unaudited consolidated financial
statements of Mesa. This table should be read in conjunction with the
Consolidated Financial Statements and related notes thereto incorporated by
reference herein and "Capital Resources and Liquidity."
<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 13.5
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 30.3
-------- -------- -------- -------- -------- ------ --------
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
Interest income.................................. 16.5 13.5 10.7 13.5 15.9 3.9 3.2
Interest expense................................. (150.8) (143.4) (142.0) (144.8) (148.6) (36.7) (37.7)
Other income..................................... 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
======== ======== ======== ======== ======== ====== ========
BALANCE SHEET DATA (END OF PERIOD):
Cash and investments(a).......................... $ 260.3 $ 169.1 $ 150.0 $ 162.5 $ 187.4 $ 155.7
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) At March 31, 1996, cash and investments includes $115.8 million of cash and
cash investments and $40.0 million of investments.
44
<PAGE> 49
CAPITAL 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 HCLP Secured Notes due in installments through 2012, (2) $51.1
million (plus $11.4 million in letter of credit obligations) outstanding under
the Existing 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
(together, "Discount Notes") are subordinate to the Existing Credit Facility.
Mesa is required to make significant principal and interest payments on its
debt during the remainder of 1996, including $81.6 million of principal and
interest payments related to the Discount Notes and $12.5 million of principal
payments related to the Existing Credit Facility by June 30, 1996. In addition,
Mesa is required to pay $39.4 million in interest on the 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 obligations with respect to the
HCLP Secured Notes, 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 Existing 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 Existing 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 Existing Credit Facility would cause a cross default under
Mesa's Secured and Unsecured Discount Note indentures unless and until the
Existing Credit Facility default were cured or waived or the debt under the
Existing 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-1988. 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 Existing 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 Existing 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 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 at such time of the Recapitalization.
Mesa is required to make principal payments of $38.6 million (plus $11.4
million in letter of credit obligations) under its Existing Credit Facility in
June 1997 (unless earlier accelerated as described above) and $617.4 million
under its Secured Discount Notes in June 1998. Mesa is also required to make
interest payments of approximately $40 million on each June 30 and December 31
through the repayment date of such notes. Even if Mesa has sufficient cash to
meet its obligations due in 1996, it does not expect that it would have
sufficient cash, assuming no changes in capital structure and no significant
transactions are completed, to meet such obligations thereafter.
45
<PAGE> 50
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) 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 foreseeable future 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.
46
<PAGE> 51
THE STOCK PURCHASE AGREEMENT
The following summary of the material provisions of the Stock Purchase
Agreement does not purport to be complete and is subject to, and qualified in
its entirety by reference to, all of the provisions of such agreement, a copy of
which is attached as Annex B to this Proxy Statement.
PURCHASE AND SALE OF SERIES B PREFERRED STOCK
The Stock Purchase Agreement provides for the issuance and sale by Mesa to
DNR of shares of Series B Preferred Stock as follows:
(a) Mesa will issue and sell to DNR 58,849,557 shares of Series B
Preferred Stock at a purchase price of $2.26 per share concurrently with
the closing and funding of the initial borrowings under the New Credit
Facility and the consummation of the issuance of the New Notes at the First
Closing.
(b) Mesa 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, also at a
price of $2.26 per share, concurrently with the completion of the Rights
Offering at the Second Closing.
The number of shares of Series B Preferred Stock to be purchased pursuant
to the Stock Purchase Agreement, and the purchase price per share payable
therefor, are subject to appropriate adjustment to reflect the Reverse Stock
Split if effected by Mesa prior to the First Closing. However, the sale of
Series B Preferred Stock is not conditioned on the Reverse Stock Split being
effected.
REPRESENTATIONS AND WARRANTIES
The Stock Purchase Agreement contains various representations and
warranties on the part of Mesa relating to, among other things, (a) the
corporate organization and good standing of Mesa and its subsidiaries, (b) the
capital structure of Mesa and its subsidiaries, (c) the due authorization,
execution, delivery and performance of the Stock Purchase Agreement and its
enforceability, (d) the absence of conflicts with other agreements, instruments,
laws and regulations, (e) required consents, approvals and filings, (f) the due
authorization and issuance of the Series B Preferred Stock to be purchased
pursuant to the Stock Purchase Agreement and the due authorization and
reservation of the shares of Common Stock issuable upon conversion thereof, (g)
employee benefit plans, (h) the reports and other documents filed by Mesa with
the SEC and the accuracy of the information contained therein, (i) the absence
of undisclosed liabilities, (j) the absence of certain changes or events, (k)
compliance with applicable laws and permits, (l) pending and threatened
litigation, (m) certain matters regarding the WDB Settlement Agreement,
including the satisfaction of all applicable requirements so that the
Recapitalization will be classified as an Endorsed Major Transaction thereunder,
(n) taxes, (o) environmental matters, (p) various matters relating to the oil
and gas operations of Mesa and its subsidiaries and (q) intellectual property.
The Stock Purchase Agreement also includes certain representations and
warranties on behalf of DNR relating to, among other things, (a) the
organization and existence of DNR, (b) the due authorization, execution,
delivery and performance of the Stock Purchase Agreement and its enforceability,
(c) the absence of conflicts with other agreements, instruments, laws and
regulations, (d) required consents, approvals and filings, (e) investment intent
and accreditation, (f) the adequacy of available financial resources and (g) the
accuracy of the information furnished by DNR for use in the prospectuses used in
the Rights Offering and the offering of the New Notes.
COVENANTS REGARDING THE RECAPITALIZATION
The Stock Purchase Agreement contains various covenants regarding the
Recapitalization. The Stock Purchase Agreement requires that Mesa take all
action necessary to call and hold the Special Meeting as promptly as practicable
to consider and vote on the adoption and approval of the issuance and sale of
Series B Preferred Stock pursuant to the Stock Purchase Agreement and other
matters incident to the Recapitalization
47
<PAGE> 52
for which stockholder approval is required. The Stock Purchase Agreement
provides that, subject to its fiduciary duties to Mesa's stockholders under
applicable law, the Board must (i) recommend to the stockholders of Mesa that
they vote in favor of the adoption and approval of the Recapitalization, (ii)
use its reasonable best efforts to solicit from the stockholders proxies in
favor of such adoption and approval and (iii) take all other action reasonably
necessary to secure a favorable vote of the stockholders. Mesa must also use its
reasonable best efforts to obtain a statement from its officers and directors
who own voting stock of Mesa to the effect that such persons intend to vote all
shares of voting stock owned by them in favor of the Recapitalization.
Mesa has also agreed, pursuant to the Stock Purchase Agreement, to use its
reasonable best efforts to promptly negotiate and enter into the New Credit
Facility and the New Note indentures, all on terms as previously contemplated by
the parties and otherwise reasonably satisfactory to DNR. Mesa must use its
reasonable best efforts to satisfy all requirements of these documents. Mesa
must use its reasonable best efforts to have the Note Registration Statement
declared effective as promptly as practicable after the Special Meeting.
Concurrently with the First Closing, Mesa must pay in full (through redemption,
repayment, prepayment or defeasance) the HCLP Secured Notes, the existing
Discount Notes and Mesa's Existing Credit Facility, as well as such other
portion of Mesa's existing indebtedness as Mesa and DNR agree, from cash on hand
and funds received at the First Closing.
In addition, the Stock Purchase Agreement requires Mesa to use its
reasonable best efforts to have the Rights Offering Registration Statement
declared effective as promptly as practicable after the Special Meeting. Mesa
must also use its reasonable best efforts to cause the Series A Preferred Stock
and the shares of Common Stock issuable upon conversion thereof to be approved
for listing on the New York Stock Exchange prior to the Second Closing and to
cause the Rights to be approved for trading thereon prior to commencement of the
Rights Offering.
The Stock Purchase Agreement requires DNR to comply, and to cause its
affiliates to comply, with reasonable requests of the lenders under the New
Credit Facility to provide, at the time of the First Closing, a letter of credit
to secure DNR's obligations to purchase shares pursuant to its Standby
Commitment. Any fees and expenses incurred by DNR in connection with such letter
of credit will not be reimbursed by Mesa.
COVENANTS REGARDING THE CONDUCT OF BUSINESS PRIOR TO THE FIRST CLOSING
Under the Stock Purchase Agreement, Mesa has agreed that, at all times
prior to the earlier of (i) the First Closing or (ii) the termination of the
Stock Purchase Agreement in accordance with its terms, Mesa will conduct its
business in the ordinary and usual course. Except as otherwise contemplated by
the Stock Purchase Agreement, neither Mesa nor any subsidiary may, without the
prior consent of DNR, (a) amend its charter or bylaws or make any material
changes in its capital structure; (b) incur any liability or obligation or pay,
discharge or satisfy any claims, liabilities or obligations except in the
ordinary course of business consistent with past practice, or settle or
compromise any litigation or claims involving liability in excess of $500,000;
(c) incur any indebtedness for borrowed money, except under Mesa's Existing
Credit Facility; (d) make any loans or advances to any person, subject to
certain exceptions; (e) declare or pay any dividend or make any other
distribution with respect to its capital stock, other than certain dividends
paid by subsidiaries; (f) issue, sell or deliver or purchase or otherwise
acquire any of its capital stock or other securities other than pursuant to
stock options issued and outstanding on the date of the Stock Purchase Agreement
or purchase or otherwise acquire any of its capital stock, employee or director
stock options or debt securities; (g) encumber any of its assets or properties,
other than by operation of law or in the ordinary and usual course of business
or to secure its existing indebtedness; (h) other than in the ordinary course of
business, dispose of any assets, or waive, release, grant or transfer any rights
of value; (i) acquire any corporation or other business organization; create or
make any investment in any subsidiary; or make any capital expenditure, other
than one included in the capital expenditure budget for the period from March
31, 1996 through July 31, 1996; (j) enter into, adopt or amend or terminate any
collective bargaining agreement or any employee benefit plan; approve or
implement any employee lay off or other personnel reorganization plan; approve
or implement any employment severance arrangements (other than payments made
under Mesa's severance policy in accordance with past practice); retain or
discharge any officers and executive management personnel;
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authorize or enter into any employment, severance, consulting services or other
agreement with any officers and executive management personnel; or change the
compensation or benefits provided to any director, officer or employee as of
February 1, 1996; (k) enter into any material contract, agreement, lease or
other commitment; or amend or modify in any material respect any of the
agreements governing Mesa's existing indebtedness or any other material
contract, agreement, lease or other commitment; (l) enter into any speculative
or commodity swaps, hedges or other derivatives transactions or purchase any
securities for investment purposes, except in connection with cash management;
(m) authorize, enter into or amend any contract, agreement or other commitment
with a director, officer, employee or other affiliate pursuant to which any such
person will receive compensation, consideration or benefit of any kind from Mesa
or any subsidiary; (n) adopt, approve or implement any annual general and
administrative expense budget for any period after July 31, 1996 or materially
modify any existing general and administrative expense budget; (o) enter into
any contract not cancelable within 30 days providing for the sale of production
from Mesa's oil and gas properties or obligating Mesa to pay for any services
with respect to its oil and gas properties (except as contemplated in the
capital budget for the period from March 31, 1996 through July 31, 1996); or (p)
grant any option or preferential right to purchase or enter into any other
agreements that could adversely affect the marketability of any material asset
of Mesa.
COVENANTS REGARDING EXCLUSIVITY
Under the Stock Purchase Agreement, Mesa and its directors, officers,
affiliates and representatives are prohibited from, directly or indirectly,
soliciting any offer from, initiating or engaging in any discussions or
negotiations with, or providing any information to, any person or group (other
than DNR, its affiliates and representatives and persons effectuating the Rights
Offering and the other Recapitalization transactions) concerning any possible
proposal regarding the sale by Mesa of its equity securities or the issuance by
Mesa of debt and/or equity instruments in connection with refinancing its
existing indebtedness (other than following a default in payment thereof), or a
merger, consolidation, liquidation, business combination, sale of assets of Mesa
or other similar transaction involving Mesa or a substantial portion of its
assets (any of the foregoing being a "Company Transaction"); provided that Mesa
and its directors, officers, affiliates and representatives may:
(i) respond to any party that initiates discussions regarding a
potential Company Transaction, solely to notify such party that it is
engaged in the Recapitalization and will not engage in any further
communications while pursuing the Recapitalization, except as permitted by
the Stock Purchase Agreement;
(ii) respond to any unsolicited tender offer or exchange offer made by
a third party to the extent required by Rule 14e-2(a) promulgated under the
Exchange Act solely to recommend rejection of such offer and make such
disclosures in connection therewith as are required by Rule 14d-9
promulgated under the Exchange Act; and
(iii) respond or take any other action with respect to any unsolicited
tender or exchange offer made by a third party, to the extent required by
Rules 14e-2(a) and 14d-9 promulgated under the Exchange Act, in any manner
other than as described in the immediately preceding clause (ii), or
respond to, engage in discussions or negotiations with, otherwise
communicate with and provide information to a third party that initiates
such communication or requests such information regarding a potential
Company Transaction, but only if and to the extent that the Board has
determined in good faith that its fiduciary duties to Mesa's stockholders
require Mesa to respond to, communicate with or provide information to such
third party regarding a potential Company Transaction.
The covenant described above is referred to herein as the "Exclusivity
Covenant." The exception described in paragraph (iii) above is referred to
herein as the "Exclusivity Exception." Mesa must promptly inform DNR of any
inquiry or proposal by a third party regarding a Company Transaction.
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PAYMENT OF EXPENSES AND ADDITIONAL FEES
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 (other than fees and expenses related to the
letter of credit provided to secure DNR's obligation to purchase shares pursuant
to its Standby Commitment) 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 is satisfied, DNR will be entitled to receive a fee of
$400,000 per year (payable quarterly in arrears, beginning September 30, 1996)
in consideration of DNR's obligations under the Stock Purchase Agreement and to
compensate DNR for the time DNR has agreed its representatives will devote to
Mesa's affairs, including the provision of continuing analysis and assistance to
Mesa during the course of its investment. Such fee is 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. 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.
CONDITIONS TO FIRST CLOSING
The obligation of DNR to consummate the transactions contemplated by the
Stock Purchase Agreement to be consummated at the First Closing is subject to
the satisfaction or waiver of the following conditions: (a) the accuracy in all
material respects of the representations and warranties of Mesa contained in the
Stock Purchase Agreement; (b) the performance in all material respects by Mesa
of all covenants and agreements required to be performed by it prior to the
First Closing; (c) DNR's receipt of an opinion of counsel to Mesa as to certain
matters set forth in the Stock Purchase Agreement; (d) the absence of litigation
or governmental action with respect to the Recapitalization or against Mesa
which would in good faith be expected to have a material adverse effect on Mesa
and its subsidiaries; (e) the expiration or termination of the applicable
waiting period under the HSR Act; (f) the receipt of all requisite stockholder
approval of the Recapitalization; (g) the absence of any material adverse effect
on Mesa and its subsidiaries other than as a result of changes in oil and gas
prices, but specifically including any material reduction (except by production)
in the aggregate total of Mesa's proved oil and gas reserves below those
reflected in the reserve report provided to DNR, which in the good faith
judgment of DNR makes it inadvisable to proceed with the consummation of the
Recapitalization; (h) the satisfaction or waiver of all conditions precedent to
the closing of the Debt Refinancing, including the initial borrowings under the
New Credit Facility and the issuance and sale of the New Notes, such that the
closing of such transactions will take place simultaneously with the First
Closing; (i) substantial completion of the Rights Offering documents and
satisfaction of the other conditions precedent to commencement of the Rights
Offering (other than declaration of effectiveness by the SEC) so that the Rights
Offering may be commenced as promptly as practicable following the First
Closing; (j) the approval for listing on the New York Stock Exchange of the
Series A Preferred Stock and the shares of Common Stock issuable upon conversion
thereof, subject to official notice of issuance, and the approval of the Rights
for trading on the New York Stock Exchange, subject to official notice of
issuance; (k) the resignation of all but three of Mesa's current directors,
effective as of the First Closing, and Board approval of the nomination of the
four directors to be elected by the holders of Series B Preferred Stock (if not
Richard Rainwater, Darla Moore, Kenneth Hersh and Philip Smith); (l) the
effectiveness of certain amendments to Mesa's Articles of Incorporation and
Bylaws; (m) coverage under Mesa's director and officer insurance policies of the
directors
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elected by DNR; (n) the receipt of a certificate or certificates representing
the shares of Series B Preferred Stock purchased at the First Closing; and (o)
the receipt of a certificate of Mesa's chief executive or chief financial
officer as to the satisfaction of the foregoing conditions.
The obligation of Mesa to consummate the transactions contemplated by the
Stock Purchase Agreement to be consummated at the First Closing is subject to
the satisfaction or waiver of the following conditions: (a) the accuracy in all
material respects of the representations and warranties of DNR contained in the
Stock Purchase Agreement; (b) the performance in all material respects by DNR of
all covenants and agreements required to be performed by it prior to the First
Closing; (c) Mesa's receipt of an opinion of counsel to DNR as to certain
matters set forth in the Stock Purchase Agreement; (d) the absence of litigation
or governmental action with respect to the Recapitalization or against Mesa
which would in good faith be expected to have a material adverse effect on Mesa
and its subsidiaries; (e) the expiration or termination of the applicable
waiting period, if any, under the HSR Act; (f) the receipt of all requisite
stockholder approval of the Recapitalization; (g) the approval for listing on
the New York Stock Exchange of the Series A Preferred Stock and the shares of
Common Stock issuable upon conversion thereof, subject to official notice of
issuance, and the approval of the Rights for trading on the New York Stock
Exchange, subject to official notice of issuance; (h) the satisfaction or waiver
of all conditions precedent to the closing of the Debt Refinancing, including
the initial borrowings under the New Credit Facility and the issuance and sale
of the New Notes, such that the closing of such transactions will take place
simultaneously with the First Closing; and (i) the receipt of a certificate of a
duly authorized representative of DNR as to the satisfaction of the foregoing
conditions.
CONDITIONS TO SECOND CLOSING
The obligations of DNR and Mesa to consummate the transactions to be
consummated at the Second Closing are subject to the satisfaction or waiver of
the following conditions: (a) the First Closing shall have occurred and (b)
either (i) the Rights Offering shall have commenced and expired and the number
of unexercised Rights shall have been determined or (ii) a period of no more
than 120 days nor less than 60 days shall have elapsed since the First Closing,
the length of such period to be established in accordance with the requirements
of the documents relating to the Debt Refinancing.
TERMINATION
The Stock Purchase Agreement may be terminated at any time prior to the
First Closing as follows:
(a) by mutual written consent of Mesa and DNR;
(b) by Mesa or DNR after November 30, 1996, if the First Closing has
not occurred by the close of business on such date, unless the failure to
close results from a breach of the Stock Purchase Agreement by the party
seeking termination;
(c) by Mesa if (i) any of the representations and warranties of DNR
contained in the Stock Purchase Agreement are not true and correct in all
material respects when made or at any time prior to the First Closing,
except as contemplated by the Stock Purchase Agreement, or (ii) DNR fails
to fulfill in all material respects any of its obligations under the Stock
Purchase Agreement, and, in each case, such misrepresentation, breach of
warranty or failure to fulfill an obligation (provided it can be cured) has
not been cured within five days of actual knowledge of it by DNR;
(d) by DNR if (i) any of the representations and warranties of Mesa
contained in the Stock Purchase Agreement are not true and correct in all
material respects when made or at any time prior to the First Closing,
except as contemplated by the Stock Purchase Agreement, or (ii) Mesa fails
to fulfill in all material respects any of its obligations under the Stock
Purchase Agreement, and, in each case, such misrepresentation, breach of
warranty or failure to fulfill an obligation (provided it can be cured) has
not been cured within five days of actual knowledge of it by Mesa;
(e) by DNR at any time following (i) a breach by Mesa of the
Exclusivity Covenant or (ii) the invocation by Mesa's Board of the
Exclusivity Exception;
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(f) by DNR at any time (i) following any breach of Mesa's
representations and warranties regarding the WDB Settlement Agreement or
(ii) in the event that any other party to the WDB Settlement Agreement has
(A) initiated, prior to the Special Meeting, a "Solicitation Action" (as
defined in the WDB Settlement Agreement) (other than the giving of notice
to Mesa, pursuant to Mesa's Bylaws, of an intention to nominate directors
at the Annual Meeting) or (B) breached the WDB Settlement Agreement or
taken certain other actions in the nature of those restricted by the WDB
Settlement Agreement, which Solicitation Action, breach or other action
described in clause (A) or (B) is, in DNR's good faith judgment, materially
adverse to DNR or the Recapitalization (it being acknowledged by DNR that
letters to the Board from Joel L. Reed and Dorn Parkinson, in form and
substance similar to the drafts thereof provided to DNR, and any subsequent
inclusion of such letters in the Proxy Statement will not give rise to any
right to terminate the Stock Purchase Agreement as described in this
paragraph (f));
(g) by Mesa, if at any time the Board determines in good faith that
the Exclusivity Exception should be invoked and that Mesa should pursue a
potential Company Transaction not solicited by Mesa and Mesa shall have
made the termination payment to DNR described below;
(h) by Mesa or DNR if the stockholders of Mesa reject at a meeting the
matters contained in the proxy statement with respect to such meeting that
are necessary to approve the Recapitalization;
(i) by Mesa or DNR, upon the occurrence of a certain events of
bankruptcy regarding Mesa; or
(j) by DNR, upon the occurrence of any default by Mesa under its
Existing Credit Facility or the existing Discount Notes if any holder of
such indebtedness, or any trustee or representative thereof, has taken any
steps to accelerate any such indebtedness or commenced the exercise of any
remedies pursuant to the agreements or instruments creating such
indebtedness.
TERMINATION PAYMENTS
Mesa has agreed that, upon termination of the Stock Purchase Agreement by
DNR as described in paragraph (e)(ii) or (f) above, or upon the termination of
the Stock Purchase Agreement by Mesa as described in paragraph (g) above, (i)
Mesa will pay DNR a partial termination fee in the amount of (A) $300,000 in
cash in the case of termination as described in paragraph (e)(ii) or (g), and
(B) $500,000 in the case of termination as described in paragraph (f), in
addition to the fees and expenses for which Mesa is obligated to reimburse DNR,
and (ii) if Mesa subsequently participates in any Company Transaction within a
one-year period following termination of the Stock Purchase Agreement, or in any
Company Transaction with a third party with whom Mesa communicated during the
exclusivity period as a result of invoking the Exclusivity Exception (regardless
of the closing date of such transaction), Mesa will pay DNR a fee in the amount
of $2,700,000 upon the closing of such Company Transaction.
In addition, Mesa has agreed that, upon any termination of the Stock
Purchase Agreement as described in paragraph (e)(i) above, (i) Mesa will pay DNR
$500,000 as partial liquidated damages and (ii) if Mesa subsequently
participates in any Company Transaction within a one-year period following
termination of the Stock Purchase Agreement, or in any Company Transaction with
a third party with whom Mesa communicated during the exclusivity period in
breach of the Exclusivity Covenant (regardless of the closing date of such
transaction), Mesa will pay DNR a fee in the amount of $3,500,000 upon the
closing of such Company Transaction.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to the Stock Purchase Agreement, for a period of six years from
and after the First Closing, Mesa must indemnify, defend and hold harmless each
person who, at any time prior to the First Closing, is or has been an officer,
director or employee of Mesa or any of its subsidiaries, against all losses,
claims, damages, costs, expenses (including reasonable attorneys' fees),
liabilities or judgments or amounts paid in settlement (with the approval of
Mesa) of or in connection with any claim, action, suit, proceeding or
investigation based in whole or in part on acts or omissions, or alleged acts or
omissions, by such person in his capacity as a
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director, officer or employee of Mesa or any of its subsidiaries or as a
prospective director to be elected by the holders of Series B Preferred Stock,
whether pertaining to a matter existing or occurring at or prior to the First
Closing and whether reasserted or claimed prior to, at or after the First
Closing, to the same extent that such person was entitled to be indemnified by
Mesa prior to the First Closing (and, in the case of the directors to be elected
by the holders of Series B Preferred Stock, as if such person had held such
office during the time the covered liability arose). In addition, the Stock
Purchase Agreement requires that Mesa maintain its current directors' and
officers' liability insurance policies with respect to matters occurring prior
to the Second Closing for a period of four years following the First Closing.
INDEMNIFICATION OF DNR AND MESA
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.
INDEPENDENT DETERMINATION
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.
REGISTRATION RIGHTS AGREEMENT
At the First Closing, Mesa and DNR will enter into a Registration Rights
Agreement (the "Registration Rights Agreement") covering (i) the shares of
Series A Preferred Stock issuable in exchange for shares of Series B Preferred
Stock to be sold under the Stock Purchase Agreement (the "Registrable Series A
Preferred Stock"), (ii) the shares of Common Stock issuable upon conversion or
redemption of shares of Registrable Series A Preferred Stock and Series B
Preferred Stock and (iii) any securities issued or issuable in respect of any
such shares by way of any stock split or stock dividend (including dividends
paid in kind in accordance with the terms of the Series B Preferred Stock) or in
connection with any combination of shares, recapitalization, merger,
consolidation, reorganization or otherwise (the "Registrable Securities").
The Registration Rights Agreement provides that the holders of at least a
majority of the Registrable Securities outstanding may at any time (subject to
customary "black-out" periods) require Mesa to effect the registration under the
Securities Act of Registrable Securities by means of a "shelf" registration
statement for an offering to be made on a continuous basis under the Securities
Act, subject to certain limitations.
The Registration Rights Agreement also provides certain "piggyback"
registration rights to the holders of Registrable Securities whenever Mesa
proposes to register an offering of any of its capital stock under the
Securities Act (including on behalf of any stockholder of Mesa other than a
holder of Registrable Securities), subject to certain exceptions, including pro
rata reduction if, in the reasonable opinion of the managing underwriter(s) of
the offering, such a reduction is necessary to prevent an adverse effect on the
marketability or offering price of all the securities proposed to be offered in
the offering.
The Registration Rights Agreement contains customary provisions regarding
the payment of expenses by Mesa and regarding mutual indemnification agreements
between Mesa and the holders of Registrable Securities for certain securities
law violations.
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DESCRIPTION OF PREFERRED STOCK
The following summary of the material terms of the Series A Preferred Stock
and the Series B Preferred Stock does not purport to be complete and is subject
to, and qualified in its entirety by reference to, all of the provisions of
(including the definitions of certain terms defined in) the Statement of
Resolution establishing the Series A and Series B Preferred Stock, a copy of
which is attached as Annex C hereto.
The terms of the Series A Preferred Stock and Series B Preferred Stock are
identical in all respects, except as described below under "Voting Rights" and
"Transferability; Conversion of Series B to Series A Preferred Stock."
VOTING RIGHTS
Subject to certain special voting rights of the holders of Series B
Preferred Stock (described below), holders of Series A and Series B Preferred
Stock will generally have the right to vote (on an as-converted basis) as a
single class with the holders of Common Stock on all other matters coming before
Mesa's stockholders, except matters for which class voting is required under
Mesa's Articles of Incorporation, including the Statement of Resolution, or the
TBCA.
With respect to any matter for which class voting is required by the TBCA,
except as otherwise described herein or required by law, the holders of Series A
and Series B Preferred Stock will vote together as a single class and not as
separate classes or series apart from each other, including any vote to approve
or adopt (i) any plan of merger, consolidation or share exchange for which the
TBCA requires a stockholder vote; (ii) any disposition of assets for which the
TBCA requires a stockholder vote; and (iii) any dissolution of Mesa for which
the TBCA requires a stockholder vote.
The following matters will require the approval of the holders of at least
a majority of the outstanding Series A and Series B Preferred Stock, voting
together as a single class:
(i) the authorization, creation or issuance, or any increase in the
authorized or issued amount, of any class or series of stock ranking senior
to or in parity with the Series A or Series B Preferred Stock or any
security convertible into or exchangeable for any such class or series
(provided that, if the holders of Series A and Series B are affected
differently, each series will vote as a separate class); or
(ii) any amendment of Mesa's Articles of Incorporation to eliminate
cumulative voting.
Without the affirmative vote or consent of the holders of two-thirds of the
shares of Series A Preferred Stock voting as a separate class, Mesa may not
adopt any amendment to the Articles of Incorporation or the bylaws that would
materially affect the terms of the Series A Preferred Stock. Without the
affirmative vote or consent of the holders of at least a majority of the shares
of Series B Preferred Stock voting as a separate class, Mesa may not adopt any
amendment to the Articles of Incorporation or the bylaws that would materially
affect the terms of the Series B Preferred Stock.
For so long as any shares of Series B Preferred Stock remain outstanding,
the affirmative vote or consent of the holders of at least a majority of such
shares will be required in order to permit, affect or validate the amendment,
alteration or repeal of any provisions of the Articles of Incorporation
(including the Statement of Resolution relating to the Series A and Series B
Preferred Stock) or Bylaws of Mesa that would limit the authority of the Board
to amend or repeal any provision of Mesa's Bylaws.
For so long as the Minimum Ownership Condition is satisfied, the holders of
the Series B Preferred Stock will be entitled, voting separately as a class, to
elect a majority of the members of Mesa's Board (excluding any Series A
Directors, as defined below). The directors elected by the holders of Series B
Preferred Stock (the "Series B Directors") may be removed with or without cause,
and may only be removed by a vote or consent of the holders of a majority of the
outstanding shares of Series B Preferred Stock, voting separately as a class.
Vacancies among the Series B Directors will be filled by a majority vote of the
remaining Series B Directors or by the holders of Series B Preferred Stock. Upon
any termination of the right of the holders of Series B Preferred Stock to elect
Series B Directors, (i) the Series B Directors then serving may continue to
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hold office for the remainder of their term, subject to the right of the
majority of the other directors (other than any Series A Directors) to request
their prior resignation, and (ii) upon the expiration of the term of office or
earlier resignation of each Series B Director, the size of the Board will
automatically be reduced accordingly unless a majority of the non-Series B
Directors by resolution determine otherwise and elect additional directors to
fill any resulting vacancies.
The Minimum Ownership Condition will be deemed satisfied at any time if (i)
the Minimum Ownership Amount (as defined below) is owned in the aggregate by one
or more of DNR and the persons that are partners of DNR as of the original issue
date of the Series B Preferred Stock, and any of their respective affiliates so
long as they remain affiliates of DNR or such persons; (ii) at least one half of
the Minimum Ownership Amount is owned and held in the aggregate by one or more
of Richard E. Rainwater and any of his respective affiliates (together, the
"Rainwater Affiliates"); and (iii) the power to vote at least a majority of the
shares of Series B Preferred Stock outstanding is held by Rainwater Affiliates,
which will be deemed satisfied (A) with respect to any shares of Series B
Preferred Stock owned by DNR if a Rainwater Affiliate at such time is the sole
general partner of DNR, (B) with respect to any shares owned by a Rainwater
Affiliate if at such time the right to vote such shares is not shared with any
person who is not a Rainwater Affiliate and (C) with respect to any shares owned
by a person other than a Rainwater Affiliate, if at such time a Rainwater
Affiliate has the sole right to vote such shares pursuant to a voting agreement,
voting trust, irrevocable proxy or other similar agreement with terms reasonably
satisfactory to Mesa. The "Minimum Ownership Amount" means (i) ownership of
shares of Series B Preferred Stock equal to at least 58% of the number of shares
of Series B Preferred Stock issued to DNR at the First Closing or (ii) shares of
Common Stock (including shares issuable upon conversion of shares of Series A
and Series B Preferred Stock) equal to at least 15% of the total number of
shares of Common Stock outstanding together with the total number of shares of
Common Stock issuable upon conversion of outstanding Series A and Series B
Preferred Stock.
If Mesa is in arrears in the payment of dividends (whether payable in cash
or in kind) on the shares of Series A and Series B Preferred Stock for a total
of six quarters, then the size of the Board will automatically be increased by
two additional directors and the holders of Series A Preferred Stock, voting as
a separate class, will have the exclusive right to elect two directors (the
"Series A Directors") immediately and at the next and every subsequent annual
meeting of stockholders called for the election of directors. The right of the
Series A Preferred Stock holders to elect the Series A Directors will terminate
when all dividends accumulated on the Series A Preferred Stock have been paid in
full, subject to revesting at such time as Mesa is again in arrears in the
payment of dividends.
During any period in which the holders of Series A Preferred Stock are
entitled to elect Series A Directors, or the holders of Series B Preferred Stock
are entitled to elect Series B Directors, the holders of Series A and Series B
Preferred Stock will have certain special rights to call a special meeting of
Mesa in lieu of Mesa's annual meeting or for the purpose of electing Series A or
Series B Directors. At a meeting held for the purpose of electing a Series A or
Series B Director, at least one-third of the outstanding shares of Series A
Preferred Stock or Series B Preferred Stock, as applicable, present in person or
by proxy, will be required to constitute a quorum.
During any period in which the holders of Series B Preferred Stock are
entitled to elect Series B Directors, (i) the holders of Series B Preferred
Stock will not be entitled to vote in the election of any directors other than
the Series B Directors, (ii) no Series B Director will have the right to vote in
the election of any person to fill any vacancy on the Board, other than a
vacancy of a Series B Director, and all such rights with respect to non-Series A
and Series B Directors will be exercised for and on behalf of the Board by a
majority of the non-Series A and Series B Directors, and (iii) only the
non-Series A and Series B Directors will have the right to vote in any action by
or on behalf of the Board with respect to nominating persons to serve as
non-Series A and Series B Directors to be elected at any meeting of stockholders
after the 1996 annual meeting of stockholders. The persons to be nominated by or
on behalf of the Board for election as non-Series A and B Directors at the 1996
annual meeting shall be the persons most recently designated as such nominees by
action of the Board prior to the First Closing Date (or, if any of such nominees
shall be unable or unwilling to serve, such other person or persons as shall be
designated by the other such nominee or nominees), unless otherwise agreed after
such date by the unanimous vote of all non-Series A and B Directors
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then in office. Nothing in clause (ii) or (iii) above, or in the immediately
preceding sentence, shall limit or restrict the right of holders of shares of
Common Stock and Series A Preferred Stock to nominate and to elect, subject to
and in accordance with applicable law, the other provisions of the Articles of
Incorporation and the Bylaws, persons to serve as non-Series A and Series B
Directors. The foregoing provision may not be amended without (x) the
affirmative vote of the holders of a majority of the outstanding shares of
Common Stock and (y) the affirmative vote of the holders of a majority of the
outstanding shares of Series A Preferred Stock.
DIVIDENDS
Subject to the satisfaction of certain conditions described below, holders
of Series A and Series B Preferred Stock will be entitled to receive, as and
when declared by Mesa out of funds legally available therefor, cumulative
dividends at the rate of 8.0% per annum of the stated value (the "Stated Value")
of such shares (initial stated value of $2.26 per share), compounded quarterly.
Dividends will be payable quarterly in arrears on the last business day of each
March, June, September and December, beginning September 30, 1996. Prior to the
fourth anniversary of the issuance of the Series B Preferred Stock, dividends on
shares of Series A and Series B Preferred Stock will be payable in additional
shares of Series A and Series B Preferred Stock, respectively, based upon the
Stated Value of such shares. On and after the fourth anniversary of the issue
date, Mesa may elect to pay dividends in cash rather than shares of Series A and
Series B Preferred Stock for any quarter in which any of the following
conditions is satisfied as of the record date for such dividend:
Fixed Charge Coverage Ratio. Mesa's average Fixed Charge Coverage
Ratio (as defined in the Statement of Resolution) at the end of the four
preceding quarters is in excess of 2.5 to 1.
Gas Price Realization. The Average Gas Equivalent Price (as defined in
the Statement of Resolution) realized by Mesa on an Mcf equivalent basis
(using a 6:1 conversion ratio) during the four preceding quarters is in
excess of $2.95.
Stock Price Threshold. The average closing price of the Common Stock
during any 90 consecutive trading days preceding the tenth day prior to the
record date for any dividend payment date after the fourth anniversary of
the issue date is more than three times the conversion price then in
effect.
If the stock price threshold described above is met, Mesa will thereafter have
the option to pay dividends either in kind or in cash on any subsequent dividend
payment date, regardless of any subsequent changes in the price of the Common
Stock. However, the New Note indentures and the New Credit Facility may limit
Mesa's ability to pay cash dividends even if permitted by the terms of the
Series A and Series B Preferred Stock. To the extent dividends are not paid in
cash or in kind on a scheduled dividend payment date, all accrued but unpaid
dividends will be added to the Stated Value of each share of Series A and Series
B Preferred Stock outstanding and shall remain a part thereof until paid, and
dividends will accrue and be paid thereafter on the basis of the Stated Value,
as adjusted.
CONVERSION
Shares of Series A and Series B Preferred Stock will be convertible into
shares of Common Stock at any time at the option of the holder, at an initial
conversion ratio of one share of Common Stock per share of Series A or Series B
Preferred Stock. The conversion ratio and shares issuable upon conversion will
be subject to customary adjustment in the event of certain dividends and
distributions to holders of Common Stock, stock splits, combinations, sales of
Common Stock at less than market value and mergers and similar transactions.
REDEMPTION
Subject to any restrictions imposed by the terms of the New Credit Facility
or New Note indentures, Mesa will be entitled, at its option, to redeem all or
part of the outstanding shares of Series A and Series B Preferred Stock (pro
rata or by lot among the outstanding shares of both series) on any dividend
payment date after the thirtieth day following the tenth anniversary of the
original date of issue of the Series B Preferred
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<PAGE> 61
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 per share of
the shares to be redeemed, plus an amount equal to the dollar amount of all
accrued and 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 in shares of Common Stock, at the option of Mesa, with the
number of shares of Common Stock used to pay the redemption price to be
determined based upon the average trading price during the 20 day period ending
five days before the redemption date. Mesa may not redeem any shares of Series A
Preferred Stock, Series B Preferred Stock or any class or series of stock
ranking in parity therewith unless the full cumulative dividends on all
outstanding shares of Series A Preferred Stock and Series B Preferred Stock
shall have been, or contemporaneously are, declared and paid for all dividend
periods terminating on or prior to the redemption date.
RANKING AND LIQUIDATION
The Series A Preferred Stock and the Series B Preferred Stock will rank on
a parity with each other as to payment of dividends and distributions and upon
liquidation, dissolution or winding-up of Mesa. Each share of Series A Preferred
Stock and Series B Preferred Stock will rank prior to each share of Common Stock
with respect to the distribution of assets upon a liquidation, dissolution or
winding-up of Mesa. In the event of any such liquidation, dissolution or
winding-up, each holder of a share of Series A Preferred Stock or Series B
Preferred Stock will be entitled to receive, before any distribution to the
holders of Common Stock, a liquidation preference equal to the Stated Value of
such shares, plus all accrued and unpaid dividends thereon.
MERGERS AND SIMILAR TRANSACTIONS
In the event that Mesa is a party to any merger, consolidation or share
exchange in which the Series A Preferred Stock or Series B Preferred Stock is
converted or exchanged into any other securities, property, cash or other
consideration, the securities, property, cash or other consideration into which
the Series A and Series B Preferred Stock may be converted or exchanged must be
identical in kind and amount per share, and no shares of Series A or Series B
Preferred Stock may be converted or exchanged into any securities, property,
cash or other consideration unless all shares of Series A and Series B Preferred
Stock may be converted or exchanged into the same kind and amount per share of
securities, property, cash or other consideration.
AUTHORIZATION BY NON-SERIES A AND SERIES B DIRECTORS
A majority of Mesa's directors, other than Series A Directors and Series B
Directors, will be required to make the determinations required or permitted (i)
as to whether to make payment of the redemption price of Series A and Series B
Preferred Stock in cash or in kind, (ii) as to whether to exercise Mesa's option
to redeem outstanding shares of Series A or Series B Preferred Stock and (iii)
as to whether to make payment of any dividends declared by the Board on the
Series A and Series B Preferred Stock in cash or in kind on or after the fourth
anniversary of the issue date (subject to the requirement that Mesa have
sufficient cash legally available to make any cash dividend payment).
CERTAIN COVENANTS OF MESA
The Statement of Resolution contains customary covenants regarding
reservation of shares for issuance upon conversion, compliance with laws
regarding registration of securities, maintaining eligibility of the Common
Stock for trading, payment of certain taxes and other matters.
TRANSFERABILITY; CONVERSION OF SERIES B TO SERIES A PREFERRED STOCK
The Series A Preferred Stock has been approved for listing on the New York
Stock Exchange, subject to official notice of issuance.
Upon any transfer of shares of Series B Preferred Stock, or the beneficial
ownership thereof, to any person other than DNR, its partners and their
respective affiliates, such shares will automatically convert to an equal number
of shares of Series A Preferred Stock. In addition, at such time as the Minimum
Ownership
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Condition is no longer met, all shares of Series B Preferred Stock then
outstanding will automatically convert into an equal number of shares of Series
A Preferred Stock.
TRANSFER AGENT
The transfer agent for the Preferred Stock will be American Stock Transfer
& Trust Company, which is also the transfer agent for the Rights and the Common
Stock.
THE RIGHTS OFFERING
RIGHTS
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 58,407,080 Rights (subject to rounding
upward to avoid fractions) 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
58,407,080 shares of Series A Preferred Stock (subject to rounding to avoid
fractions) will be sold upon exercise of the Rights, assuming all Rights are
exercised in full.
BASIC AND OVERSUBSCRIPTION PRIVILEGES
One Right will entitle the holder thereof to receive, upon payment of the
Subscription Price, one share of Series A Preferred Stock. 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. 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.
COMMENCEMENT; EXPIRATION; NO REVOCATION
The Rights Offering will commence promptly after the First Closing under
the Stock Purchase Agreement, and will expire not less than 16 nor more than 21
days thereafter, subject to extension by Mesa (as it may be extended, the
"Expiration Date"). Rights not exercised prior to the Expiration Date will be
void and will no longer be exercisable by any Rights holder. Once a holder of
Rights has exercised the Basic Subscription Privilege or the Oversubscription
Privilege, such exercise may not be revoked.
NOTICE TO STOCKHOLDERS
In accordance with New York Stock Exchange rules, Mesa will send written
notice to its stockholders at least ten days in advance of the proposed record
date for the Rights Offering stating its intention to commence the Rights
Offering, subject to effectiveness of registration under the Securities Act.
Such notice will also state, to the extent finally determined, the proposed
record date for determination of those entitled to receive Rights, the proposed
expiration date of the Rights Offering and the date on which it is expected that
certificates evidencing the Rights will be mailed.
TRANSFERABILITY
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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DETERMINATION OF SUBSCRIPTION PRICE
The Subscription Price was determined by Mesa and its Board as a result of
negotiations with Rainwater. The Subscription Price is not intended as an
indication of the actual value of Mesa, the Common Stock or the Series A or
Series B Preferred Stock.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
For United States federal income tax purposes, Rights holders generally
will not recognize taxable income in connection with the issuance to them or
exercise by them of Rights. Rights holders may incur gain or loss upon the sale
of the Rights or the shares of Series A Preferred Stock acquired upon exercise
of the Rights.
THIS PROXY STATEMENT IS NOT AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY SHARES OF SERIES A PREFERRED STOCK OR ANY OTHER SECURITIES. OFFERS
AND SALES OF SERIES A PREFERRED STOCK WILL ONLY BE MADE BY MEANS OF A PROSPECTUS
MEETING THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
APPLICABLE STATE SECURITIES LAWS, ON THE TERMS AND SUBJECT TO THE CONDITIONS SET
FORTH IN SUCH PROSPECTUS.
DESCRIPTION OF NEW DEBT
NEW CREDIT FACILITY
Concurrently with the consummation of the First Closing pursuant to the
Stock Purchase Agreement, Mesa will make the initial borrowings under the New
Credit Facility. Mesa has obtained a commitment for the New Credit Facility from
Chemical Bank, The Chase Manhattan Bank, N.A. (together, "Chase") and Bankers
Trust Company ("Bankers Trust") that contains the terms described below. The
commitment is subject to certain conditions, including negotiation, execution
and delivery of definitive documentation. Mesa Operating Co., a wholly owned
subsidiary of Mesa ("MOC"), will be the borrower under the New Credit Facility,
and all borrowings will be unconditionally guaranteed by Mesa and 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 all of Mesa's West Panhandle and Hugoton properties.
The New Credit Facility will be a seven year revolving credit facility for
an aggregate of up to $500 million, a portion of which will be available for the
issuance of letters of credit. Chase and Bankers Trust have advised Mesa that
each will provide 50% of the entire amount of the New Credit Facility, but that
they intend to syndicate the facility to a group of financial institutions to be
identified by them in consultation with Mesa. Mesa expects to borrow
substantially all of the $500 million available under the New Credit Facility
(including letters of credit) concurrently with the closing of the issuance and
sale of the New 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 facility
upon consummation of the Rights Offering, such that approximately $350 million
(excluding letters of credit) will be outstanding under the New Credit Facility
following the Second Closing.
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 New Notes), (ii)
100% of the net proceeds of the incurrence of certain indebtedness by Mesa and
(iii) 100% of the net proceeds of any sale or other disposition by Mesa of any
assets (subject to certain collateral substitution provisions). Borrowings under
the New Credit Facility will be subject to a borrowing base to be determined
annually by the lenders based on certain proved oil and gas reserves and other
assets of Mesa. Initially, the borrowing base will be $500 million. To the
extent that the borrowing base is less than the aggregate principal amount of
all outstanding loans and letters of credit under
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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 or the federal funds rate plus 0.5% per annum) plus
0.5% or (ii) the Eurodollar rate plus 1.5%.
The loan documents governing the New Credit Facility will contain certain
customary covenants and restrictions relating to Mesa's operations.
The closing of the New Credit Facility will be conditioned upon, among
other things, the consummation of the First Closing under the Stock Purchase
Agreement, the issuance and sale of the New Notes, the absence of a material
adverse condition or material adverse change in or affecting Mesa's business,
operations, property, 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.
NEW NOTES
Concurrently with the consummation of the First Closing under the Stock
Purchase Agreement and the initial borrowings under the New Credit Facility, MOC
will issue and sell in a registered underwritten public offering $500 million in
aggregate principal amount of New Notes. It is expected that a majority of the
New Notes will be senior subordinated notes ("Senior Subordinated Notes") and
that the balance will be senior subordinated discount notes ("Discount Notes").
The net proceeds of the sale of the New Notes, along with the proceeds of the
other transactions consummated at the First Closing, will be applied to repay
and/or refinance a substantial portion Mesa's outstanding indebtedness. See "The
Recapitalization -- Sources and Uses of Funds."
The Senior Subordinated Notes and the Discount Notes will be governed by
separate indentures. Interest will accrue on the Senior Subordinated Notes from
the date of original issuance and will be payable semiannually in arrears. The
Discount Notes will be issued at a substantial discount to their aggregate
principal amount. The Discount Notes will accrete in value until 2001. Cash
interest will not accrue on the Discount Notes prior to 2001. Thereafter,
interest will accrue and be payable semiannually in arrears.
Except as described below, the New Notes will not be redeemable at Mesa's
option prior to 2001, after which the New Notes will be subject to redemption at
Mesa's option, in whole or in part, at specified redemption prices, plus accrued
and unpaid interest thereon to the applicable redemption date. Prior to 1999, a
portion of the New Notes will be redeemable at Mesa's option on any one or more
occasions from the net proceeds of certain sales of equity interests in Mesa.
Upon the occurrence of a Change of Control (as defined in the New Note
indentures), each holder of the New Notes will have the right to require Mesa to
repurchase all or a portion of such holder's New Notes, at an offer price in
cash equal to 101% of the aggregate principal amount of such New 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).
The New Notes will be general, unsecured obligations of MOC and will be
subordinated in right of payment to all existing and future senior debt of MOC,
which will include 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 New Notes. The claims of the
holders of the New 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 $350
million, representing borrowings under the New Credit Facility. See
"Capitalization" and "Capital Resources and Liquidity."
The New Notes will be guaranteed by Mesa and each future "material
restricted subsidiary" (as defined in the New Note indentures) of MOC.
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The indentures governing the New Notes will contain certain covenants that,
among other things, will limit the ability of MOC and its restricted
subsidiaries to incur additional indebtedness and issue "disqualified stock,"
pay dividends, make distributions, make investments, make certain other
restricted payments, enter into certain transactions with affiliates, dispose of
certain assets, incur liens securing pari passu or subordinated indebtedness of
MOC and engage in mergers and consolidations.
The consummation of the sale of the New Notes will be conditioned upon,
among other things, the consummation of the First Closing under the Stock
Purchase Agreement and the initial borrowings under the New Credit Facility.
The foregoing represents a summary of the expected material provisions of
the New Credit Facility and the New Notes, and does not purport to be complete.
The terms and conditions of the New Credit Facility and the New Notes will be
set forth in definitive credit and indenture documents to be entered into at or
prior to the First Closing. Although Mesa believes that such definitive
documents will contain substantially similar provisions to those summarized
herein, there can be no assurance that the terms and provisions of such
definitive documents will not vary from the foregoing summary.
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CAPITALIZATION
The following table sets forth the unaudited historical consolidated
capitalization of Mesa as of March 31, 1996, and as adjusted to give effect to
(i) the Recapitalization and the application of the proceeds thereof (assuming
net proceeds of $1.1 billion and assuming that all Rights are exercised in full)
as described under "Recapitalization -- Use of Proceeds" and (ii) the Required
Charter Amendments, as if the Recapitalization and the Required Charter
Amendments had been consummated or adopted on March 31, 1996.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
---------------------------
HISTORICAL AS ADJUSTED
----------- -----------
(IN MILLIONS,
EXCEPT SHARE DATA)
<S> <C> <C>
Cash and investments................................................. $ 155.7 $ 1.0
========= =========
Current maturities of long term debt................................. $ 92.5 $ 5.3
--------- ---------
Long term debt:
Existing Credit Facility(a)........................................ 38.6 --
HCLP Secured Notes................................................. 457.3 --
12 3/4% Secured Discount Notes..................................... 618.4 --
13 1/2% Subordinated Notes......................................... 7.4 --
New Credit Facility(a)............................................. -- 349.2
New Notes.......................................................... -- 500.0
--------- ---------
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)(b).................... -- .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)(b).................... -- .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........................................................ .6 .6
Additional paid-in capital(c)...................................... 399.0 647.8
Accumulated deficit(d)............................................. (331.5) (407.4)
--------- ---------
Total stockholders' equity........................................... 68.1 242.2
--------- ---------
$ 1,282.3 $ 1,096.7
========= =========
</TABLE>
- - ---------------
(a) 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.
(b) 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.
(c) The increase in additional paid-in capital represents the gross proceeds
from the sale of the Series A and B Preferred Stock of $265 million, less
$1.2 million of stated capital attributable to the Preferred Stock and less
$15 million in expenses related to the equity issuance.
(d) The increase in the amount of the accumulated deficit of $75.9 million
represents the sum (i) a $64 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.
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THE REQUIRED CHARTER AMENDMENTS
INCREASE IN AUTHORIZED SHARES
Proposal Two is a proposal to amend Mesa's Articles of Incorporation to
increase the number of authorized shares of Common Stock from 100,000,000 to
600,000,000 and increase the number of authorized shares of Preferred Stock from
10,000,000 to 500,000,000. As of the Record Date, (i) 64,050,009 shares of
Common Stock and options for 2,932,390 shares of Common Stock (of the 4,000,000
shares subject to Mesa's option plan) were outstanding and (ii) no shares of
Preferred Stock were outstanding, though 1,000,000 shares were reserved for
issuance pursuant to the Shareholder Rights Plan. If the DNR Purchase and the
Rights Offering are consummated (without giving effect to the Reverse Split
Charter Amendments), there will be approximately 117,256,637 shares of Preferred
Stock outstanding. In addition, Mesa will need to reserve an aggregate of
approximately 178,000,000 shares of Preferred Stock for shares issuable as
dividends on shares of Series A Preferred Stock and Series B Preferred Stock.
Mesa will also need to reserve 117,256,637 shares of Common Stock issuable upon
conversion of the Series A Preferred Stock and Series B Preferred Stock, and an
additional 178,000,000 shares of Common Stock to cover the conversion of shares
of Series A and Series B Preferred Stock issued as dividends. As a result, Mesa
needs to authorize additional Common Stock and Preferred Stock to issue the
appropriate number of shares in the DNR Purchase and the Rights Offering.
The Board believes that it is in the best interest of Mesa to increase the
authorized number of shares of Common Stock and Preferred Stock to ensure that
sufficient shares are available for the purposes set forth herein and so that
additional authorized shares of such stock will be available for issuance in the
future for such corporate purposes as the Board deems advisable from time to
time, without further action by the stockholders and without the accompanying
delay and expense involved in calling and holding a special meeting of
stockholders unless such action is required by applicable law or other
applicable rules and regulations. Such corporate purposes may include, among
other things, future equity issuances in public or private offerings or the use
by Mesa of its equity securities as currency in any future acquisitions the
Board may decide are in the best interests of the stockholders to pursue.
In the event that the Reverse Stock Split is approved by the stockholders,
a lesser number of shares of Common Stock and Preferred Stock will be required
in order to complete the DNR Purchase and the Rights Offering. Accordingly, the
Reverse Split Charter Amendments, if approved, will effect a reduction in the
authorized shares of Common Stock and Preferred Stock as more fully described
below.
ACTION BY WRITTEN CONSENT
Mesa's Articles of Incorporation currently provide that no action required
or permitted to be taken by stockholders of Mesa may be taken without a meeting
of stockholders. The TBCA provides that the Articles of Incorporation may
provide that any action required or permitted to be taken at any annual or
special meeting of stockholders may be taken without a meeting if a consent or
consents in writing, setting forth the action so taken, is signed by the holder
or holders of shares having not less than the minimum number of votes that would
be necessary to take such action at a meeting at which the holders of all shares
entitled to vote on the action were present and voted.
The Stock Purchase Agreement requires that the holders of Series B
Preferred Stock be entitled to act by written consent in lieu of a meeting with
respect to any action required or permitted to be taken at any annual or special
meeting by the holders of Series B Preferred Stock. Accordingly, Mesa proposes
to amend its Amended and Restated Articles of Incorporation to permit action by
written consent of the holders of any series of preferred stock to the extent
provided in the resolution of the Board authorizing any such series or as
otherwise required by law.
The power to act by written consent will allow the holders of Series B
Preferred Stock to exercise the special voting rights associated with shares of
Series B Preferred Stock, including the right to elect a majority of Mesa's
directors, without the necessity of calling and holding a meeting of Mesa's
stockholders for such purpose. However, except as otherwise required by
applicable law, any action requiring the approval of the
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holders of Common Stock, Series A Preferred Stock and/or any other class of
Mesa's capital stock other than or in addition to the Series B Preferred Stock,
will continue to require the holding of an annual or special meeting of
stockholders.
Board Recommendation
The majority of the Board believes that the Required Charter Amendments are
advantageous to Mesa and its stockholders, providing additional authorized
shares of Common Stock and Preferred Stock that could be used from time to time,
without further action or authorization by the stockholders, and providing the
flexibility to allow action by written consent of holders of Preferred Stock.
THE PROPOSAL WITH RESPECT TO THE REQUIRED CHARTER AMENDMENTS WILL BE VOTED
UPON BY THE STOCKHOLDERS OF MESA SEPARATELY FROM THE OTHER PROPOSALS. HOWEVER,
THE IMPLEMENTATION OF EACH OF THE OTHER PROPOSALS IS CONDITIONED UPON APPROVAL
OF THE REQUIRED CHARTER AMENDMENTS BY THE STOCKHOLDERS OF MESA. ACCORDINGLY, A
VOTE AGAINST THE REQUIRED CHARTER AMENDMENTS WILL GENERALLY HAVE THE SAME EFFECT
AS A VOTE AGAINST ALL OF THE PROPOSALS, INCLUDING THE DNR PURCHASE.
THE MAJORITY OF THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS
VOTE "FOR" APPROVAL OF THE PROPOSAL WITH RESPECT TO THE REQUIRED CHARTER
AMENDMENTS.
Two directors dissented from the Board's conclusions and recommendations.
See "The Recapitalization -- Letters of Dissenting Directors."
THE REVERSE SPLIT CHARTER AMENDMENTS
Proposal Three is a proposal to amend Mesa's Articles of Incorporation to
effect a reverse stock split pursuant to which each four shares of Common Stock
will be exchanged for one share of Common Stock. Except for minor differences
resulting from the aggregation and sale of fractional shares, as described
below, the Reverse Stock Split will not affect any stockholder's percentage
ownership interest in Mesa or of the outstanding Common Stock. Following the
Reverse Stock Split, the total number of shares of Common Stock outstanding
would be reduced from 64,050,009 to approximately 16,012,502.
A holder of Common Stock will be entitled to receive a whole number of
shares plus a fraction of a share if the number of shares of Common Stock held
by him prior to the Reverse Stock Split is not evenly divisible by four.
However, no certificates or scrip representing fractional shares of Common Stock
will be issued. In lieu of any fractional shares, American Stock Transfer &
Trust Company, as transfer agent, on behalf of all persons otherwise entitled to
receive fractional shares (including individual beneficial owners of shares held
by a nominee holder) will, promptly following the effective time of the Reverse
Stock Split, aggregate such fractional shares and sell the resulting whole
shares of Common Stock for the accounts of those persons in open market
transactions on the New York Stock Exchange. Those persons will thereafter be
entitled to receive their allocable portion of the net proceeds of the sale
thereof upon surrender of their Common Stock certificates as described below.
The Reverse Stock Split will not affect the par value of the Common Stock,
which will remain $.01 per share. The difference between the aggregate par value
of the shares of Common Stock outstanding prior to the Reverse Stock Split and
those to be outstanding thereafter will be transferred from Mesa's stated
capital account to Mesa's surplus account.
There were approximately 18,500 holders of record of the Common Stock as of
March 31, 1996. The Reverse Stock Split is not expected to cause a significant
change in the number of record holders of the Common Stock. Mesa has no plans
for the cancellation or purchase of shares of Common Stock from holders of a
nominal number of shares following the Reverse Stock Split, and has no present
intention to take Mesa private through the Reverse Stock Split or otherwise.
As of April 26, 1996, there were outstanding options to purchase an
aggregate of 2,932,390 shares of Common Stock under Mesa's 1991 Stock Option
Plan. All of such outstanding options include provisions for
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<PAGE> 69
adjustment in the number of shares covered thereby and the exercise price
therefor in the event of a reverse stock split. If the Reverse Stock Split is
approved and effected, there would be reserved for issuance upon exercise of all
outstanding options a total of approximately 733,097 shares of Common Stock.
Each of the outstanding options would thereafter evidence the right to purchase
one-fourth of the number of shares of Common Stock previously covered thereby,
and the exercise price per share would be four times the previous exercise
price.
If the Reverse Split Charter Amendments are approved, Mesa will file the
Reverse Split Charter Amendments with the Secretary of State of the State of
Texas. Mesa will notify holders of Common Stock of the effectiveness of the
Reverse Split Charter Amendments and will furnish the holders of record of
shares of Common Stock at the close of business on such effective date with a
letter of transmittal for use in exchanging certificates. The holders of Common
Stock will be required to promptly mail their certificates representing shares
of Common Stock to American Stock Transfer & Trust Company, as transfer agent,
in order that new certificates giving effect to the Reverse Stock Split may be
issued and the proceeds of the sale of any fractional shares may be distributed.
Commencing with the effective date of the Reverse Split Charter Amendments,
previously outstanding certificates representing shares of Common Stock will be
deemed for all purposes to represent one-fourth of the number of shares
previously represented thereby (subject to the treatment of fractional interests
as described above).
Mesa is currently authorized to issue 100,000,000 shares of Common Stock
and 10,000,000 shares of Preferred Stock. Assuming that the Required Charter
Amendments are approved, Mesa's authorized capital stock will be increased to
600,000,000 shares of Common Stock and 500,000,000 shares of Preferred Stock. In
connection with the Reverse Stock Split, it is proposed to amend Mesa's Articles
of Incorporation to reduce Mesa's authorized capital stock to 150,000,000 shares
of Common Stock and 125,000,000 shares of Preferred Stock.
It is impossible to predict the market's reaction to any reverse stock
split or, in this case, to separate that reaction from the market's reaction to
the proposed Recapitalization as a whole. However, Mesa would expect that
immediately after the Reverse Stock Split each share of Common Stock would be
valued at a price approximately four times greater than without the split. For
information regarding recent prices for the Common Stock, see "Price Range of
Common Stock and Dividend Policy."
The majority of the Board believes that the Reverse Split Charter
Amendments are advantageous to Mesa and its stockholders as a means of enhancing
the liquidity and marketability of the Common Stock. The majority of the Board
believes that the current low per share market price of the Common Stock impairs
the acceptability of Mesa's equity securities to the financial community and the
investing public. Although, theoretically, the number of shares outstanding
should not affect an investor's decision to own shares of Common Stock as a
investment, in practice many investors regard lower-priced stocks as unduly
speculative in nature and may therefore avoid investment in such stocks. In
addition, the majority of the Board believes that the current low market prices
for the Common Stock reduce the effective marketability of Mesa's equity
securities because of the reluctance of many leading brokerage firms to
recommend lower-priced stocks to their clients. Furthermore, certain brokerage
house policies and practices tend to discourage individual brokers with those
firms from dealing in lower-priced stocks, and some brokerage houses will not
permit clients to carry lower-priced stocks on a margin basis. Finally, the
structure of trading commissions also tends to have an adverse impact on holders
of lower-priced stocks because the brokerage commission on a sale of
lower-priced stock generally represents a higher percentage of the sales price
than the commission on a relatively higher-priced issue.
Although there can be no assurance that the market price per share of
Common Stock will increase proportionately to the decrease in the number of
outstanding shares following the Reverse Stock Split, the Reverse Stock Split is
intended to result in a price level for the Common Stock that will increase
investor and broker interest.
THE PROPOSAL WITH RESPECT TO THE REVERSE SPLIT CHARTER AMENDMENTS WILL BE
VOTED UPON BY THE STOCKHOLDERS OF MESA SEPARATELY FROM THE OTHER PROPOSALS. THE
IMPLEMENTATION OF THE OTHER PROPOSALS IS NOT CONDITIONED UPON APPROVAL OF THE
REVERSE SPLIT CHARTER AMENDMENTS BY THE STOCKHOLDERS OF MESA. HOWEVER,
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<PAGE> 70
THE IMPLEMENTATION OF THE REVERSE SPLIT CHARTER AMENDMENTS IS CONDITIONED UPON
APPROVAL OF EACH OF THE OTHER PROPOSALS. ACCORDINGLY, A VOTE AGAINST THE
REQUIRED CHARTER AMENDMENTS OR THE DNR PURCHASE WILL GENERALLY HAVE THE SAME
EFFECT AS A VOTE AGAINST THE REVERSE SPLIT CHARTER AMENDMENTS.
THE MAJORITY OF THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS
VOTE "FOR" APPROVAL OF THE PROPOSAL WITH RESPECT TO THE REVERSE SPLIT CHARTER
AMENDMENTS.
Two directors dissented from the Board's conclusions and recommendations.
See "The Recapitalization -- Letters of Dissenting Directors."
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<PAGE> 71
MANAGEMENT
DIRECTORS
The following table sets forth each person currently serving on the Board
of Mesa, (i) his name and age, (ii) the period during which he has served as a
director, and (iii) his principal occupation over the last five years (including
other directorships and business experience).
<TABLE>
<CAPTION>
NAME AND AGE BUSINESS EXPERIENCE OVER PAST FIVE YEARS
- - ----------------------------------- --------------------------------------------------------
<S> <C>
Boone Pickens, age 68.............. January 1992-Present, Chairman of the Board of Directors
and Chief Executive Officer of Mesa; October
1985-December 1991, General Partner of the Partnership
and Chief Executive Officer and Director of Pickens
Operating Co. (the corporate general partner of the
Partnership); 1964-January 1987, Chairman of the Board,
President, and founder of Original Mesa.
Paul W. Cain, age 57............... January 1992-Present, Director, President and Chief
Operating Officer of Mesa; August 1986-December 1991,
President and Chief Operating Officer of Pickens
Operating Co.; Director of Bicoastal Corporation.
John S. Herrington, age 56......... January 1992-Present, Director of Mesa; December
1991-Present, personal investments and real estate
activities; May 1990-November 1991, Chairman of the
Board of Harcourt Brace Jovanovich, Inc. (publishing);
May 1989-May 1990, Director of Harcourt Brace
Jovanovich, Inc.; February 1985-January 1989, Secretary
of the Department of Energy of the United States.
Wales H. Madden, Jr, age 68........ January 1992-Present, Director of Mesa; December 1985-
December 1991, Member of the Advisory Committee of the
Partnership; 1964-January 1987, Director of Original
Mesa; self-employed attorney and businessman for more
than the last five years; Director of Boatmen's First
National Bank of Amarillo.
Dorn Parkinson, age 49............. May 1995-Present, Director of Mesa; April 1986-Present,
President of Washington Corporations (principal
businesses of Washington Corporations and its affiliates
include rail transport, mining, ship berthing,
environmental remediation, interstate trucking, and the
repair and sale of machinery and equipment); January
1995-Present, Chairman of the Board of Washington
Construction Group, Inc. (heavy construction and
contract mining); July 1993-October 1994, President and
Chief Operating Officer of Washington Construction
Group, Inc.; Director of Washington Construction Group,
Inc.
Joel L. Reed, age 45............... September 1995-Present, Director of Mesa; August
1994-Present, partner with Batchelder & Partners, Inc.;
October 1984-July 1994, various capacities including
Chief Financial Officer, President and Chief Executive
Officer of Wagner and Brown, Ltd. and affiliates
(privately owned company consisting of companies engaged
in energy, real estate, manufacturing, agribusiness, and
investment services); Director of Magnetic Delivered
Therapeutics.
Fayez S. Sarofim, age 67........... January 1992-Present, Director of Mesa; Chairman of the
Board and President of Fayez Sarofim & Co. (investment
adviser) for more than the last five years; Director of
Teledyne, Inc., Unitrin, Inc., Argonaut Group, Inc., and
Imperial Holly Corporation.
</TABLE>
67
<PAGE> 72
<TABLE>
<CAPTION>
NAME AND AGE BUSINESS EXPERIENCE OVER PAST FIVE YEARS
- - ----------------------------------- --------------------------------------------------------
<S> <C>
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>
Effective May 31, 1996, Mr. Cain will retire as Mesa's President and Chief
Operating Officer.
Mr. Parkinson and David H. Batchelder were elected to the Board 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 "The
Recapitalization -- Background of the Recapitalization -- Settlement with WDB
Group."
Assuming completion of the Recapitalization, the size of the Board 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 "The Stock Purchase Agreement."
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.
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<PAGE> 73
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 the 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>
COMMITTEES OF THE BOARD
The Board held ten meetings in 1995. Other than Mr. Herrington, all
directors attended at least 75 percent of the meetings of the Board and
committees of the Board on which he served. The Board has the following standing
committees: the Audit Committee, the Compensation Committee and the Stock Option
Committee. It does not have a nominating committee or committee performing
similar functions.
The Audit Committee is composed of Messrs. Herrington, Madden, and
Parkinson. Its primary functions are (i) the recommendation of independent
public accountants; (ii) the review of the independence of the independent
public accountants, audit engagement, and other professional services of the
independent public accountants; and (iii) the provision for the availability to
the independent public accountants of all aspects of the Company's accounting
practices and procedures. The Audit Committee held two meetings in 1995.
The Compensation Committee is composed of Messrs. Sarofim and Reed. The
Compensation Committee held one meeting in 1995. The Stock Option Committee,
which administers the 1991 Stock Option Plan, is also composed of Messrs.
Sarofim and Reed. The Stock Option Committee held one meeting in 1995.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
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 for certain amounts invested in certain funds in Mesa's Retirement Plans
(described below). During the year ended December 31, 1995, Fayez Sarofim & Co.
received fees, paid by the Retirement Plans, of $175,459 for such services and
has been retained to provide such services in 1996.
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<PAGE> 74
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
Mr. Reed was President, Chief Executive Officer and a director of Insilco
Corporation from April 1989 until April 1993. Insilco filed a petition under
Chapter 11 of the federal Bankruptcy Code on January 13, 1991.
DIRECTOR COMPENSATION
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.
EXECUTIVE OFFICERS
The following table sets forth the name, age, and five-year employment
history of each current executive officer of Mesa.
<TABLE>
<CAPTION>
NAME AND AGE BUSINESS EXPERIENCE OVER PAST FIVE YEARS
- - --------------------------------------------- ----------------------------------------------
<S> <C>
Boone Pickens, age 68........................ January 1992-Present, Chairman of the Board of
Directors and Chief Executive Officer of Mesa;
October 1985-December 1991, General Partner of
the Partnership and Chief Executive Officer
and Director of Pickens Operating Co.;
1964-January 1987, Chairman of the Board,
President, and founder of Original Mesa.
Paul W. Cain, age 57......................... January 1992-Present, Director, President and
Chief Operating Officer of Mesa; August 1986-
December 1991, President and Chief Operating
Officer of Pickens Operating Co.; Director of
Bicoastal Corporation.
Dennis E. Fagerstone, age 47................. January 1992-Present, Vice
President -- Exploration and Production of
Mesa; May 1991-December 1991, Vice
President -- Exploration and Production of
Pickens Operating Co.; June 1988-May 1991,
Vice President -- Operations of Pickens
Operating Co.
Stephen K. Gardner, age 36................... June 1994-Present, Vice President and Chief
Financial Officer of Mesa; January 1992-May
1994, Vice President of BTC Partners Inc.
(financial consultant to Mesa); 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.
</TABLE>
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<PAGE> 75
<TABLE>
<CAPTION>
NAME AND AGE BUSINESS EXPERIENCE OVER PAST FIVE YEARS
- - --------------------------------------------- ----------------------------------------------
<S> <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>
Effective May 31, 1996, Mr. Cain will retire as Mesa's President and Chief
Operating Officer and Mr. Pickens will assume Mr. Cain's duties.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to Mesa during the fiscal year ended December 31, 1995 and Forms 5 and
amendments thereto furnished to Mesa with regard to the fiscal year ended
December 31, 1995, Mesa is not aware of any director, officer or beneficial
owner of 10% or more of any class of securities of Mesa that failed to file on a
timely basis, as disclosed on the above Forms, reports required by Section 16(a)
of the Exchange Act during the fiscal year ended December 31, 1995 or prior
fiscal years, except that Mr. Littlefair failed to file a Form 4 with respect to
one transaction that occurred in 1994, but which was subsequently reported on a
Form 4 filed in 1996.
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 Directors 1994 675,000 175,000 -- 200,000 1,094,500(4)
and Chief Executive Officer 1993 675,000 0 -- 275,000 114,750
Paul W. Cain, ...................... 1995 400,020 0 -- 0 22,165(5)
President and Chief Operating 1994 400,020 150,000 -- 150,000 93,503
Officer 1993 400,020 225,000 -- 100,000 106,253
Dennis E. Fagerstone, .............. 1995 199,980 50,000 -- 0 14,663(6)
Vice President -- Exploration and 1994 199,980 100,000 -- 85,000 50,997
Production 1993 199,980 75,000 -- 10,000 46,747
Stephen K. Gardner, ................ 1995 175,020 40,000 -- 0 12,915(7)
Vice President and Chief Financial 1994(8) 92,095 60,000 -- 135,000 25,856
Officer 1993 -- -- -- -- --
Andrew J. Littlefair, .............. 1995 139,980 40,000 -- 0 11,163(9)
Vice President -- Public Affairs 1994 115,980 100,000 -- 85,000 36,717
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.
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<PAGE> 76
(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 Mesa's 1994 commodities and securities
investment activities managed by him.
(5) Includes the following: a $7,500 Retirement Plans contribution; a $2,164
reallocation of forfeitures in the Profit Sharing Plan; a $12,501 payment
in lieu of a Retirement Plans contribution in excess of the contribution
limitation as described in Note 2 above.
(6) Includes the following: a $7,500 Retirement Plans contribution; a $2,164
reallocation of forfeitures in the Profit Sharing Plan; a $4,999 payment in
lieu of a Retirement Plans contribution in excess of the contribution
limitation as described in Note 2 above.
(7) Includes the following: a $7,500 Retirement Plans contribution; a $2,164
reallocation of forfeitures in the Profit Sharing Plan; a $3,251 payment in
lieu of a Retirement Plans contribution in excess of the contribution
limitation as described in Note 2 above.
(8) Mr. Gardner became an officer of Mesa in June 1994.
(9) Includes the following: a $7,500 Retirement Plans contribution; a $2,164
reallocation of forfeitures in the Profit Sharing Plan; a $1,499 payment in
lieu of a Retirement Plans contribution in excess of the contribution
limitation as described in Note 2 above.
EMPLOYEES PREMIUM AND PROFIT SHARING PLANS
Mesa maintains the Retirement Plans for the benefit of its employees. Each
year, Mesa is required to contribute to the Employees Premium Plan 5% of the
total compensation (as defined in the plan) paid to participants and may also
contribute up to 12% of total compensation (as defined) to the Profit Sharing
Plan. In previous years, Mesa had declared contributions of 17% to the
Retirement Plans. In 1995 Mesa declared contributions of 5% to the Retirement
Plans.
Participants become 30% vested in their account balances in the Retirement
Plans after three years of service and 40% vested after four years of service.
Participants become vested an additional 20% for each additional year of service
through year seven. Effective December 31, 1991, in conjunction with the
conversion of the Partnership to Mesa, 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.
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<PAGE> 77
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.
1991 STOCK OPTION PLAN
The 1991 Stock Option Plan (the "Option Plan") was approved by stockholders
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 its discretion, the Stock
Option Committee may provide for the acceleration of any unvested installments
of outstanding options. The Board may amend, alter, or discontinue the Option
Plan, subject in certain cases to stockholder approval.
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<PAGE> 78
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.
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 Mesa are as
follows:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
YEAR ENDED DECEMBER 31, 1995 NUMBER OF SHARES UNDERLYING IN-THE-MONEY
-------------------------------- UNEXERCISED OPTIONS/SARS AT OPTIONS/SARS AT
NUMBER OF DECEMBER 29, 1995 DECEMBER 29, 1995
SHARES ACQUIRED ---------------------------- ----------------------------
NAME ON EXERCISE VALUE 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, Mesa'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 under the Securities Act). Except as described
below under "Employee Retention Provisions," Mesa does not have any employment
contracts or termination or change-in-control arrangements with respect to a
named executive officer of Mesa that would require disclosure pursuant to Item
402(h) of Regulation S-K.
COMMON STOCK PURCHASE PLAN
Mesa 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 Mesa and its participating affiliates are eligible
to participate. Mesa pays the brokerage fees for these open-market transactions.
74
<PAGE> 79
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 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.
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 as of May 16, 1995 (the "Incumbent Board"); or (b) any
acquisition of beneficial ownership of a higher percentage of the Common Stock
outstanding of Mesa 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; (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 of 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.
75
<PAGE> 80
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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.
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, 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). As such, DNR
will have the right to elect a majority of Mesa's directors and to receive
dividends as described above under "Description of Preferred Stock -- Voting
Rights" and "-- Dividends." 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
Mesa made at the time it entered into the February 28 letter of intent. 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 TBCA. 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.
76
<PAGE> 81
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF MANAGEMENT
The following table presents certain information as to the beneficial
ownership of Mesa's Common Stock as of April 30, 1996, by the directors,
director nominees, and officers of Mesa, individually and as a group. The
following table also indicates the number of shares of Common Stock to be
beneficially owned by such persons assuming that such persons (i) sell or
otherwise fail to exercise all of the Rights to be distributed to them in the
Rights Offering or (ii) exercise all of the Rights to be distributed to them, as
well as the percentage of the number of fully diluted shares of Common Stock to
be owned by such persons under such circumstances (assuming that there will be
181,306,646 shares of Common Stock outstanding on a fully diluted basis,
including 117,256,637 shares issuable upon conversion of shares of Series A and
Series B Preferred Stock). Share numbers do not give effect to the Reverse Stock
Split.
<TABLE>
<CAPTION>
SHARES OWNED BEFORE THE SHARES OWNED AFTER THE SALE OF SERIES B
SALE OF SERIES B PREFERRED STOCK AND THE RIGHTS OFFERING(1)
PREFERRED STOCK AND THE -----------------------------------------------------
RIGHTS OFFERING NO RIGHTS EXERCISED ALL RIGHTS EXERCISED
----------------------- ------------------------- ------------------------
NUMBER(2) PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE
--------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
CURRENT DIRECTORS:
Paul W. Cain............. 322,639 * 322,639 * 331,885 *
John S. Herrington....... 10,000 * 10,000 * 19,120 *
Wales H. Madden, Jr...... 22,200 * 22,200 * 42,447 *
Boone Pickens(3)......... 5,061,626 7.8% 5,061,626 2.8% 8,647,269 4.8%
Fayez S. Sarofim......... 1,400,000 2.2% 1,400,000 * 2,676,800 1.5%
Robert L. Stillwell...... 26,500 * 26,500 * 50,668 *
Dorn Parkinson(4)........ -- * -- * -- *
Joel L. Reed............. -- * -- * -- *
PROPOSED 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 April 30, 1996, as follows: 1,130,000 shares for Mr.
Pickens; 312,500 for Mr. Cain; 104,750 for Mr. Fagerstone; 86,750 for Mr.
Gardner; 96,750 for Mr. Littlefair; 62,750 for Mr. Ballew; and 1,793,500 for
all current directors and officers as a group. No Rights will be issued in
respect of outstanding options pursuant to the Rights Offering.
(3) Includes 7,545 shares of Common Stock owned by several trusts for Mr.
Pickens' children of which he is a trustee, and over which shares he has
sole voting and investment power, although he has no economic interest
therein. Excludes 2,798 shares of Common Stock owned by Mrs. Pickens as her
separate property, as to which Mr. Pickens disclaims beneficial ownership
and with respect to which he does not have or share voting or investment
power.
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<PAGE> 82
(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
Scheduled 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
stockholder and President of Rainwater, Inc., the sole general partner of
DNR, and, as such, may be deemed to beneficially own the shares of stock to
be held by DNR. Mr. Rainwater and Ms. Moore are married to each other but
she disclaims beneficial ownership of shares to be owned by Mr. Rainwater.
(6) Excludes 1,125 shares of Common Stock owned by Mrs. Littlefair as her
separate property, as to which Mr. Littlefair disclaims beneficial ownership
and with respect to which he does not have or share voting or investment
power.
CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information as of April 30, 1996,
regarding each person or "group" (as that term is used in Section 13(d)(3) of
the Exchange Act) known by Mesa to own beneficially more than 5% of the Common
Stock. Information is based on the most recent Schedule 13D or 13G filed by such
holder with the SEC, 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). Share numbers do not give effect to the Reverse Stock
Split.
<TABLE>
<CAPTION>
SHARES OWNED BEFORE THE SHARES OWNED AFTER THE SALE OF SERIES B
SALE OF SERIES B PREFERRED STOCK AND THE RIGHTS OFFERING(1)
PREFERRED STOCK AND THE --------------------------------------------------
RIGHTS OFFERING NO RIGHTS EXERCISED ALL RIGHTS EXERCISED
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 SEC 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
78
<PAGE> 83
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.
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 after 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 Proxy Statement, 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 Series A and Series B Preferred Stock.
79
<PAGE> 84
SHAREHOLDER RIGHTS PLAN
On July 6, 1995, Mesa's Board declared a dividend of one right (each, a
"Rights Plan Right") to purchase preferred stock for each share of Mesa's Common
Stock outstanding as of the close of business on July 17, 1995. Each Rights Plan
Right entitles the registered holder thereof to purchase from Mesa a unit
consisting of one-hundredth of a share (a "Fractional Share") of Series A Junior
Participating Preferred Stock, par value $.01 per share (the "Junior Preferred
Stock"), at a purchase price of $15 per Fractional Share, subject to certain
adjustments to prevent dilution (including but not limited to adjustments that
will be made if the Reverse Split Charter Amendments are approved and
implemented). The description and terms of the Rights Plan Rights are set forth
in a Rights Agreement dated as of July 6, 1995, as from time to time
supplemented or amended, between Mesa and American Stock Transfer and Trust
Company, as Rights Agent.
The Rights Plan Rights are attached to all certificates representing
outstanding shares of Common Stock, and no separate certificates for the Rights
Plan Rights have been distributed. The Rights Plan Rights will separate from the
Common Stock and a "Distribution Date" will occur upon the earlier of (i) ten
days following a public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") has acquired, or obtained the right
to acquire, beneficial ownership of 10% or more of the outstanding shares of
Common Stock, or (ii) ten business days following the commencement of a tender
offer or exchange offer that would result in a person's becoming an Acquiring
Person. In certain circumstances, the Distribution Date may be deferred by the
Board. The Shareholder Rights Plan provides certain exceptions for inadvertent
acquisitions and for persons or groups of affiliated or associated persons that,
at the time of the adoption of the Shareholder Rights Plan, beneficially owned
10% or more of the then outstanding shares of Common Stock. Neither DNR nor any
of its Affiliates or Associates (as such terms are defined in the Shareholder
Rights Plan) will be deemed an Acquiring Person as a result of the execution,
delivery and performance of the Stock Purchase Agreement and any documents
ancillary thereto, and the consummation of any of the transactions contemplated
thereby, unless DNR, together with its Affiliates and Associates, becomes the
beneficial owner of additional shares of Common Stock, or another person that
beneficially owns shares of Common Stock of Mesa becomes an Affiliate or
Associate of DNR.
The Rights Plan Rights are not exercisable until the Distribution Date and
will expire at the close of business on December 31, 1996, unless earlier
terminated or exchanged by Mesa as described below. Until the Distribution Date,
the Rights Plan Rights will be evidenced by the Common Stock certificates and
will be transferred with and only with such Common Stock certificates. As soon
as practicable after the Distribution Date, separate certificates evidencing the
Rights Plan Rights will be mailed to holders of record of Common Stock as of the
close of business on the Distribution Date. Until a Rights Plan Right is
exercised, the holder has no rights as a stockholder of Mesa, including, without
limitation, the right to vote or receive dividends.
In the event (a "Flip-In Event") that a person becomes an Acquiring Person
except pursuant to a "Permitted Offer" (as defined below), each holder of a
Rights Plan Right will thereafter have the right to receive, upon exercise of
the Rights Plan Right, a number of shares of Common Stock (or, in certain
circumstances, cash, property or other securities of Mesa) having a current
market price equal to two times the exercise price of the Rights Plan Right.
However, Rights Plan Rights are not exercisable following a Flip-In Event until
such time as the Rights Plan Rights are no longer redeemable by Mesa as
described below. Following a Flip-In Event, all Rights Plan Rights beneficially
owned by the Acquiring Person will be null and void in certain circumstances set
forth in the Shareholder Rights Plan.
A "Permitted Offer" under the Shareholder Rights Plan means a tender offer
or an exchange offer commenced on or after September 30, 1995 by a bidder for
all outstanding shares of Common Stock, whether or not approved by the Board,
(i) that remains open for at least 50 business days; (ii) pursuant to which the
bidder together with its affiliates and associates becomes the beneficial owner
of 51% of the outstanding shares of Common Stock immediately upon completion of
such offer; (iii) if and to the extent the consideration offered is cash, states
that the bidder has obtained written financing commitments from recognized
financing sources, and/or has on hand cash or cash equivalents, for the full
amount of all financing necessary to purchase all the shares and pay all related
fees and expenses; (iv) if all or part of the consideration offered is
80
<PAGE> 85
securities, offers a security that is to be issued by an entity that has a
consolidated net worth at least equal to that of Mesa and its consolidated
subsidiaries as of June 30, 1995; and (v) states that as promptly as practicable
following the completion of such offer, the bidder will propose and seek to
consummate a merger of Mesa with the bidder (or a subsidiary thereof) in which
each share of Common Stock not then owned by the bidder will be converted into
the same form and amount of consideration per share as that paid in such offer.
In the event (a "Flip-Over Event") that, at any time after the time an
Acquiring Person becomes such, (i) Mesa is acquired in a merger or other
business combination transaction (other than a merger following a Permitted
Offer), or (ii) 50% or more of Mesa's assets or earning power is sold or
transferred, each holder of a Rights Plan Right will thereafter have the right
to receive, upon exercise, a number of shares of common stock of the acquiring
company having a current market price equal to two times the exercise price of
the Rights Plan Right.
At any time until ten days following the first public announcement of a
Flip-In Event, Mesa may redeem the Rights Plan Rights in whole, but not in part,
at a price of $.01 per Rights Plan Right, payable, at Mesa's option, in cash,
shares of Common Stock or such other consideration as the Board may determine.
Under certain circumstances set forth in the Shareholder Rights Plan, redemption
requires the approval of a majority of Mesa's continuing directors. At any time
after the occurrence of a Flip-In Event and prior to a person's becoming the
beneficial owner of more than 50% or more of the then outstanding shares of
Common Stock, Mesa (with the concurrence of a majority of the continuing
directors) may exchange the Rights Plan Rights in whole or in part at an
exchange ratio of one share of Common Stock (or other equity securities of
comparable value) per Rights Plan Right, subject to adjustment.
Other than the redemption price, any of the provisions of the Shareholder
Rights Plan may be amended by the Board of Mesa (in certain circumstances, with
the concurrence of the continuing directors) as long as the Rights Plan Rights
are redeemable.
ANNUAL MEETING
The Annual Meeting of Stockholders of MESA Inc. will be held on July 30,
1996. See "The Recapitalization -- Background of the
Recapitalization -- February 28 Board Meeting."
STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be presented at the 1996 annual
meeting were required to be received by Mesa at its principal executive offices
in Irving, Texas, by approximately February 22, 1996.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Incorporated by reference in this Proxy Statement, and subject in each case
to information contained in this Proxy Statement, are the following documents
filed by Mesa with the SEC 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; and (4) Mesa's Current Report on
Form 8-K dated April 29, 1996.
Mesa will provide without charge to each person, including any beneficial
owner, to whom this Proxy Statement is delivered, upon the written or oral
request of such person, a copy of any and all of the documents incorporated by
reference herein (other than exhibits to such documents unless such exhibits are
specifically incorporated by reference in such documents). Such request should
be directed to Investor Relations, MESA Inc., 1400 Williams Square West, 5205
North O'Connor Boulevard, Irving, Texas 75039 (telephone: (214) 444-9001).
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OTHER MATTERS
Representatives of Mesa's independent public accountants for the current
and most recently completed fiscal years are expected to be present at the
Special Meeting, will have the opportunity to make a statement if they desire to
do so and are expected to be available to respond to appropriate questions.
On behalf of the Board of Directors
/s/ BOONE PICKENS
Boone Pickens
Chairman of the Board and Chief
Executive Officer
Irving, Texas
May 24, 1996
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ANNEX A
LEHMAN BROTHERS
May 24, 1996
Board of Directors
MESA Inc.
1400 Williams Square West
5205 North O'Connor Boulevard
Irving, Texas 75039
Members of the Board:
We understand that MESA Inc. ("Mesa" or the "Company") and DNR-MESA
Holdings L.P. ("Rainwater"), a limited partnership of which Rainwater, Inc. is
the sole general partner, have negotiated an agreement pursuant to which (i)
Rainwater will purchase $133 million of Mesa Series B 8% Cumulative Convertible
Preferred Stock, par value $.01 per share (the "Series B Preferred Stock"), for
a purchase price of $2.26 per share in cash; (ii) Mesa will distribute to its
common shareholders transferable rights to acquire $132 million of Mesa Series A
8% Cumulative Convertible Preferred Stock, par value $.01 per share, (the
"Series A Preferred Stock" and together with the Series B Preferred Stock, the
"Preferred Stock") with each right entitling the holder to purchase one share of
Series A Preferred Stock for an exercise price of $2.26 in cash (the "Rights
Offering"); (iii) Rainwater will purchase a number of shares of Series B
Preferred Stock equal to the number of shares not subscribed for in the Rights
Offering for $2.26 per share in cash; and (iv) Mesa will use its reasonable best
efforts to refinance substantially all of its existing indebtedness with net
proceeds from a new senior secured revolving credit facility and the sale of new
debt securities. Collectively, such transactions are hereinafter referred to as
the Proposed Transaction. The terms and conditions of the Proposed Transaction
are set forth in more detail in the proposed Stock Purchase Agreement between
Mesa and Rainwater (the "Agreement").
We have been requested by the Board of Directors of the Company to render
our opinion with respect to the fairness, from a financial point of view, to the
Company of the consideration to be received by the Company for the Preferred
Stock. We have not been requested to opine as to, and our opinion does not in
any manner address, the Company's underlying business decision to proceed with
or effect the Proposed Transaction.
In arriving at our opinion, we reviewed and analyzed:
(1) the Agreement and the specific terms of the Proposed Transaction,
including the terms of the Preferred Stock;
(2) such publicly available information concerning the Company that we
believe to be relevant to our inquiry, including the Annual Reports to
stockholders and Annual Reports on Form 10-K of the Company for the
three years ended December 31, 1995 and certain interim reports to
stockholders and Quarterly Reports on Form 10-Q of the Company;
(3) financial and operating information with respect to the business,
operations and prospects of the Company furnished to us by the Company,
including without limitation certain projections prepared by the
Company;
(4) a trading history of the Company's common stock for the two year period
ended April 19, 1996 and a comparison of that trading history with
those of other companies that we deemed relevant;
(5) a comparison of the historical financial results and present financial
condition of the Company with those of other companies that we deemed
relevant;
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(6) a comparison of the financial terms of the Proposed Transaction
(including the specific terms of the Preferred Stock) with the
financial terms of certain other transactions and securities that we
deemed relevant; and
(7) the Company's immediate need for additional cash to fund its debt
obligations, capital, operating and growth requirements, its currently
highly leveraged capital structure and the alternatives available to
the Company to obtain additional financing at this time.
In connection with our opinion, we also reviewed certain information
provided by the Company relating to its oil and natural gas reserves, including
year-end reserve reports prepared by the Company's petroleum engineers, and
discussed the reserve information with the senior management of the Company and
its petroleum engineers.
In arriving at our opinion, we also have considered the financial terms of
the other proposals and the indications of interest received by Mesa as a result
of the extensive efforts undertaken by the Company and us to solicit indications
of interest and proposals with respect to an equity infusion into the Company,
the purchase of all or a part of Mesa's Hugoton field in segments or as a whole,
or the acquisition of all of the Company with or without a sale of all or a part
of the Hugoton field and other types of transactions.
In addition, we have had discussions with the management of the Company
concerning its business, operations, assets, liabilities, financial condition
and prospects and undertook such other studies, analyses and investigations as
we deemed appropriate.
In arriving at our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information used by us without
assuming any responsibility for independent verification of such information and
have further relied upon the assurances of management of the Company that they
are not aware of any facts that would make such information inaccurate or
misleading. With respect to the projections prepared by the Company, upon advice
of the Company we have assumed that such projections have been reasonably
prepared on a basis reflecting the best currently available estimates and
judgments of the management of the Company as to the future financial
performance of the Company and that the Company will perform substantially in
accordance with such projections. In arriving at our opinion, we have not
conducted a physical inspection of the properties and facilities of the Company
and have not made or obtained any independent evaluations or appraisals of the
assets or liabilities of the Company. Our opinion necessarily is based upon
market, economic and other conditions as they exist on, and can be evaluated as
of, the date of this letter.
In arriving at our opinion, at your request and as mentioned above, we have
considered (i) all proposals available to Mesa for alternative transactions,
(ii) all substantive discussions we have had, and all substantive discussions
that to our knowledge Mesa has had, with qualified persons who have made bona
fide offers, proposals or expressions of interest for alternative transactions,
and (iii) the impact, if any, of the terms of the Proposed Transaction, after
giving effect to the consummation thereof, on future proposals by third parties
for, and the consummation of, any merger, consolidation, tender offer, share
exchange, or exchange offer, involving Mesa.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the consideration to be
received by the Company for the Preferred Stock is fair to the Company and,
accordingly, to the stockholders of Mesa.
We have acted as financial advisor to the Company in connection with the
Proposed Transaction and will receive a fee for our services which is contingent
upon the consummation of the Proposed Transaction. In addition, the Company has
agreed to indemnify us for certain liabilities that may arise out of the
rendering of this opinion. We also have previously rendered certain financial
advisory and investment banking services to the Company in the past and have
received customary compensation for such services. In the ordinary course of our
business, we actively trade in the debt and equity securities of the Company for
our own account and for the accounts of our customers and, accordingly, may at
any time hold a long or short position in such securities.
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This opinion is for the use and benefit of the Board of Directors of the
Company and is rendered to the Board of Directors in connection with its
consideration of the Proposed Transaction. This opinion is not intended to be
and does not constitute a recommendation to any stockholder of the Company as to
how such stockholder should vote with respect to the Proposed Transaction or as
to whether any stockholder of the Company should subscribe for any shares of
Series A Preferred Stock pursuant to the Rights Offering.
Very truly yours,
LEHMAN BROTHERS
By: /s/ H.E. LENTZ
------------------------------
H.E. Lentz
Managing Director
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ANNEX B
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT (this "Agreement"), dated April 26, 1996, between
MESA Inc., a Texas corporation (the "Company" and, together with its
Subsidiaries, the "Companies"), and DNR-MESA Holdings, L.P., a Texas limited
partnership ("Buyer").
WHEREAS, the Company desires to sell to Buyer, and Buyer desires to
purchase from the Company, shares of Series B 8% Cumulative Convertible
Preferred Stock, par value $.01 per share, of the Company (the "Series B
Preferred Stock");
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby, the
Company and Buyer hereby agree as follows:
ARTICLE I
TERMS OF THE TRANSACTION
1.1 Agreement to Sell and to Purchase Series B Preferred Stock. On the
terms and subject to the conditions set forth in this Agreement, the Company
shall sell and deliver to Buyer, and Buyer shall purchase and accept from the
Company at the times indicated below, the number of shares of Series B Preferred
Stock equal to the sum of the following:
(a) At the First Closing, 58,849,557 shares of Series B Preferred Stock;
and
(b) At the Second Closing, a number of shares of Series B Preferred Stock
equal to the number of Unsubscribed Shares, if any, upon completion of the
Rights Offering.
All of the shares of Series B Preferred Stock sold by the Company to Buyer
pursuant to this Section 1.1 are referred to collectively as the "Shares". All
of the Shares of the Series B Preferred Stock shall be issued pursuant to the
Statement of Resolution as set forth as Exhibit A hereto (the "Statement of
Resolution").
1.2 Purchase Price and Payment. The aggregate purchase price for the
Shares at each of the First Closing and the Second Closing shall be equal to
$2.26 per share times the total number of Shares to be purchased at the First
Closing and the Second Closing, respectively, pursuant to Section 1.1 (the
"Purchase Price"). The Purchase Price payable by Buyer for the Shares to be
purchased by it shall be paid at the First Closing and the Second Closing, as
applicable, in immediately available funds by confirmed wire transfer to a bank
account to be designated by the Company (such designation to occur no later than
the third Business Day prior to the First Closing Date and the Second Closing
Date, respectively).
1.3 Intent of the Parties.
(a) The Company and Buyer intend that (i) the purchase and sale of the
Shares at the First Closing pursuant to this Agreement shall be made in
conjunction with the closing and funding of the loans to be provided under the
New Senior Credit Agreement and the closing of the issuance of the New Notes,
with the proceeds thereof to be used to pay in full all of the Companies'
indebtedness under the Existing Credit Agreement, the 12 3/4% Notes, the Hugoton
Notes and such other Existing Indebtedness as is mutually agreed upon by the
Company and Buyer (the "Debt Refinancing"), and (ii) the purchase and sale of
the Shares at the Second Closing pursuant to this Agreement shall be made in
conjunction with the closing of the Rights Offering. Any of the Shares that are
purchased by Buyer at the Second Closing shall be Series B Preferred Stock
rather than Series A Preferred Stock. The purchase and sale of the Shares, the
Debt Refinancing and the Rights Offering are herein collectively referred to as
the "Transaction". The Reverse Stock Split does not constitute part of the
Transaction nor is the Transaction conditioned in any manner whatsoever on the
Reverse Stock Split.
(b) As used herein, the "Rights Offering" shall mean that certain
distribution by the Company to each record holder of Common Stock, as of a
record date after the Special Meeting Date to be set by the Company,
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of the transferable right (the "Rights") to purchase, at $2.26 per share, a
pro-rata portion of approximately $132,000,000 (subject to rounding as set forth
below) of Series A 8% Cumulative Convertible Preferred Stock, par value $.01 per
share, of the Company (the "Series A Preferred Stock"). It is currently
anticipated that in the Rights Offering (i) the Company will distribute .912
transferrable Rights with respect to each share of Common Stock outstanding as
of the record date for the Rights Offering, at no cost to the record holders;
(ii) one Right plus $2.26 in cash will entitle the holder to purchase one share
of Series A Preferred Stock; (iii) the Rights will be evidenced by transferable
subscription certificates (provided that such rounding shall not cause the total
purchase price of the Series A Preferred to exceed $132,500,000); (iv) no
fractional Rights or cash in lieu thereof will be issued or paid, and the number
of Rights distributed to each holder of Common Stock will be rounded up to the
nearest whole number of Rights; (v) brokers, dealers and other nominees holding
shares of Common Stock on the record date for more than one beneficial owner
will be entitled to obtain separate subscription certificates for their
beneficial owners so that they may each receive the benefit of rounding; and
(vi) each Right will also carry the right to subscribe at the $2.26 subscription
price for additional shares of Series A Preferred Stock for which the other
holders of Rights did not subscribe through the exercise of the basic
subscription privileges (the "Excess Shares"), provided that (a) only Rights
holders who exercise their basic subscription privilege in full will be entitled
to exercise the oversubscription privilege and (b) if the Excess Shares are not
sufficient to satisfy all over-subscriptions, the Excess Shares will be
allocated pro rata (subject to the elimination of fractional shares) among those
Rights holders exercising the oversubscription privilege.
(c) The Company shall also submit to its shareholders a proposal for the
adoption and approval of a reverse stock split with respect to all of the
outstanding capital stock of the Company (the "Reverse Stock Split"). The
shareholder vote required for the adoption and approval of the Reverse Stock
Split shall be the vote required by Applicable Law, the Company's Articles of
Incorporation, and the rules of the New York Stock Exchange. The Transaction is
not conditioned in any manner whatsoever on shareholder approval or
implementation of the Reverse Stock Split; provided, however, that in the event
that the Company shall effectuate the Reverse Stock Split, the number of Shares
sold and purchased hereunder and the purchase price thereof, and the number of
shares of Series A Preferred Stock subject to the Rights and the exercise price
thereof, shall be adjusted accordingly.
ARTICLE II
FIRST CLOSING, SECOND CLOSING AND CLOSING DATES
The closing of the purchase and sale of the Shares pursuant to Section
1.1(a) and the closing of the Debt Refinancing contemplated hereby (the "First
Closing"), and the closing of the purchase and sale of the Shares pursuant to
Section 1.1(b) and the Rights Offering contemplated hereby (the "Second
Closing") shall take place (i) at the offices of the Company, 1400 Williams
Square West, 5205 North O'Connor Boulevard, Irving, Texas, at 9:00 a.m., local
time, on the third Business Day following the satisfaction or waiver (subject to
Applicable Law) of each of the conditions to the obligations of the parties set
forth in Articles VI and VII hereof to the First Closing and the Second Closing,
respectively, or (ii) at such other times or places or on such other date or
dates as the parties hereto shall agree. The date on which the First Closing is
required to take place is herein referred to as the "First Closing Date" and the
date on which the Second Closing is required to take place is herein referred to
as the "Second Closing Date". All closing transactions at the First Closing
shall be deemed to have occurred simultaneously, and all closing transactions at
the Second Closing shall be deemed to have occurred simultaneously.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Buyer for itself and on behalf of
the Companies, as of the date hereof, that:
3.1 Corporate Organization. The Company is a corporation duly organized,
validly existing, and in good standing under the laws of the State of Texas and
has all requisite corporate power and authority in all material respects to own,
lease, and operate its properties and to carry on its business as now being
conducted. No actions or proceedings to dissolve the Company are pending or, to
the best knowledge of the Company, threatened.
3.2 Qualification. Each of the Companies is duly qualified or licensed to
do business as a foreign corporation or limited partnership and is in good
standing in each jurisdiction in which the property owned, leased, or operated
by it or the conduct of its business requires such qualification or licensing,
except where the failure to do so would not have a Material Adverse Effect.
3.3 Capitalization of the Company.
(a) The authorized capital stock of the Company (i) as of the date hereof,
consists of 100,000,000 shares of Common Stock, $.01 par value (the "Common
Stock"), and 10,000,000 shares of preferred stock, $.01 par value, and (ii)
immediately before the issuance of the Shares at the First Closing and before
the Reverse Stock Split, shall consist of 600,000,000 shares of the Common Stock
and 500,000,000 shares of preferred stock. As of the date hereof, (i) 64,050,009
shares of Common Stock (with associated preferred stock purchase rights issued
pursuant to the Company's Rights Agreement dated as of July 6, 1995, as amended
(the "Shareholder Rights Plan")) are outstanding and no shares of preferred
stock are outstanding and (ii) 2,932,390 shares of Common Stock are reserved for
issuance upon exercise of outstanding employee stock options and 1,000,000
shares of preferred stock are reserved for issuance in connection with the
Shareholder Rights Plan. All outstanding shares of capital stock of the Company
have been validly issued and are fully paid and nonassessable, and no shares of
capital stock of the Company are subject to, nor have any been issued in
violation of, preemptive or similar rights.
(b) Except as set forth above in subparagraph (a) of this Section 3.3 and
as contemplated by this Agreement, there are outstanding (i) no shares of
capital stock or other voting securities of the Company; (ii) no securities of
the Company convertible into or exchangeable for shares of capital stock or
other voting securities of the Company; (iii) no options or other rights to
acquire from the Company, and no obligation of the Company to issue or sell, any
shares of capital stock or other voting securities of the Company or any
securities of the Company convertible into or exchangeable for such capital
stock or voting securities; and (iv) other than employee compensation plans
based on the Company's earnings and executive officer employment agreements, no
equity equivalents, interests in the ownership or earnings, or other similar
rights of or with respect to the Company. There are no outstanding contractual
obligations of the Company to repurchase, redeem or otherwise acquire any shares
of Common Stock or any other securities of the type described in clauses
(i)-(iv) of the preceding sentence.
3.4 Authority Relative to This Agreement. The Company has full corporate
power and authority to execute, deliver, and perform this Agreement and to
execute, deliver, and where applicable, perform the Ancillary Documents to which
it is a party and to consummate the transactions contemplated hereby and
thereby. The execution, delivery and performance by the Company of this
Agreement and the execution, delivery, and where applicable, performance by it
of the Ancillary Documents to which it is a party, and the consummation by it of
the transactions contemplated hereby and thereby, have been duly authorized by
all necessary corporate action of the Company (other than the approval of the
transactions contemplated in this Agreement by the shareholders of the Company
in accordance with Applicable Law and the Company's Articles of Incorporation
and the rules of the New York Stock Exchange). This Agreement has been duly
executed and delivered by the Company and constitutes, and each Ancillary
Document executed or to be executed by the Company has been, or when executed
will be, duly executed and delivered by the Company and constitutes, or when
executed and delivered will constitute, a valid and legally binding obligation
of the
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Company, enforceable against the Company in accordance with its terms, except
that such enforceability may be limited by (i) applicable bankruptcy,
insolvency, reorganization, moratorium, and similar laws affecting creditors'
rights generally, and (ii) general equitable principles (regardless of whether
such enforceability is considered in a proceeding in equity or at law).
3.5 Noncontravention. Assuming shareholder approval as contemplated by
Section 3.6, the execution, delivery, and performance by the Company of this
Agreement and the execution, delivery, and where applicable, the performance by
it of Ancillary Documents to which it is a party and the consummation by it of
the Transaction do not and will not (i) conflict with or result in a violation
of any provision of the Company's Amended and Restated Articles of Incorporation
or the Company's Amended and Restated Bylaws, or the charter, bylaws,
partnership agreement or other governing instruments of any Subsidiary, (ii)
conflict with or result in a violation of any provision of, or constitute (with
or without the giving of notice or the passage of time or both) a default under,
or give rise (with or without the giving of notice or the passage of time or
both) to any loss of material benefit, or of any right of termination,
cancellation, or acceleration under, any Material Agreement, (iii) except as
contemplated by the terms of the New Senior Credit Facility, result in the
creation or imposition of any Encumbrance upon the properties of the Company or
any Subsidiary, or (iv) assuming compliance with the matters referred to in
Section 3.6, violate any Applicable Law binding upon the Company or any
Subsidiary, except, in the case of clauses (ii), (iii), and (iv) above, for any
such conflicts, violations, defaults, terminations, cancellations,
accelerations, or Encumbrances which would not, individually or in the
aggregate, have a Material Adverse Effect. The execution, delivery, and
performance by the Company of this Agreement and the execution, delivery, and
where applicable, the performance by it of Ancillary Documents to which it is a
party and the consummation by it of the Transaction do not give rise to an event
that causes the rights outstanding pursuant to the Shareholder Rights Plan to be
or to become exercisable.
3.6 Consents and Approvals. No consent, approval, order, or authorization
of, or declaration, filing, or registration with, any Governmental Entity is
required to be obtained or made by the Company or any Subsidiary in connection
with the execution, delivery, or performance by the Company of this Agreement
and the execution, delivery, and where applicable, performance of Ancillary
Documents to which it is a party or the consummation of the Transaction, other
than (i) the filing of any notification report and expiration or termination of
any applicable waiting period that may be required under the HSR Act; (ii) the
filing of the Statement of Resolution with the Secretary of State of the State
of Texas; (iii) compliance with any applicable requirements of the Securities
Act; (iv) compliance with any applicable requirements of the Exchange Act; (v)
compliance with any applicable state securities laws; (vi) such filings as may
be necessary or appropriate in connection with perfection of Encumbrances
securing indebtedness under the New Senior Credit Facility; (vii) such filings
as may be necessary or appropriate in connection with mergers of any of the
Subsidiaries as contemplated pursuant to the Debt Refinancing; and (viii) such
consents, approvals, orders, or authorizations which, if not obtained, and such
declarations, filings, or registrations which, if not made, would not,
individually or in the aggregate, have a Material Adverse Effect. Except as set
forth in Section 3.6 of the Disclosure Schedule attached hereto (the "Disclosure
Schedule"), no consent or approval of any person other than the Company, Buyer
or any Governmental Entity is required to be obtained or made by the Company or
any Subsidiary in connection with the execution, delivery, or performance by the
Company of this Agreement and execution, delivery and, where applicable,
performance of the Ancillary Documents to which it is a party or the
consummation of the Transaction, other than (a) New York Stock Exchange approval
for the listing of the Series A Preferred Stock and the Conversion Shares and
the trading of the Rights, (b) such approvals as are required to be received
from the shareholders of the Company, and (c) such consents, approvals, orders,
or authorizations which, if not obtained, and such declarations, filings, or
registrations which, if not made, would not, individually or in the aggregate,
have a Material Adverse Effect.
3.7 Authorization of Issuance; Reservation of Shares. When issued and
delivered pursuant to this Agreement against payment therefor, the Shares will
have been duly authorized, issued and delivered and will be fully paid and
nonassessable. During the period within which the Series B Preferred Stock may
be converted, the Company will at all times have authorized and reserved for the
purpose of issue upon conversion of the Series B Preferred Stock, a sufficient
number of shares of Common Stock to provide for the conversion of the Series B
Preferred Stock. All shares of Common Stock which are issuable upon conversion
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of the Shares (the "Conversion Shares") will, when issued, be validly issued,
fully paid and nonassessable. The issuance of the Shares is not, and upon
conversion of the Series B Preferred Stock the issuance of the Conversion Shares
will not be, subject to any preemptive or similar rights.
3.8 Subsidiaries. (a) Except as otherwise set forth in Section 3.8 of the
Disclosure Schedule, the Company does not own, directly or indirectly, more than
five percent of the capital stock or other securities of any corporation or
partnership or have any direct or indirect equity or ownership interest of more
than five percent in any other person, other than the Subsidiaries. Section 3.8
of the Disclosure Schedule lists each Subsidiary as of the date hereof and the
jurisdiction of incorporation or formation of each Subsidiary. Each corporate
Subsidiary is a corporation duly organized, validly existing, and in good
standing under the laws of the jurisdiction of its incorporation, and each
partnership Subsidiary is a partnership duly formed and validly existing under
the laws of the jurisdiction of its formation. Each Subsidiary has all requisite
corporate or, in the case of a partnership Subsidiary, partnership power and
corporate or, in the case of a partnership Subsidiary, partnership authority to
own, lease, and operate its properties and to carry on its business as now being
conducted. Except as otherwise indicated on Section 3.8 of the Disclosure
Schedule, no actions or proceedings to dissolve any Subsidiary are pending.
(b) Except as otherwise indicated on Section 3.8 of the Disclosure
Schedule, all the outstanding capital stock or other equity interests of each
Subsidiary is owned directly or indirectly by the Company, free and clear of all
Encumbrances securing indebtedness for money borrowed and restrictions on
voting, sale, transfer or disposition. All outstanding shares of capital stock
of each corporate Subsidiary have been validly issued and are fully paid and
nonassessable. All partnership interests of each partnership Subsidiary have
been validly issued and are fully paid (to the extent required at such time). No
shares of capital stock or other equity interests of any Subsidiary are subject
to, nor have any been issued in violation of, preemptive or similar rights.
(c) Except as set forth above in Section 3.8(b), there are outstanding (i)
no shares of capital stock or other voting securities of the Subsidiaries; (ii)
no securities of the Subsidiaries convertible into or exchangeable for shares of
capital stock or other voting securities of any of the Subsidiaries; (iii) no
options or other rights to acquire from any of the Subsidiaries, and no
obligation of any of the Subsidiaries to issue or sell, any shares of capital
stock or other voting securities of any of the Subsidiaries or any securities of
the Subsidiaries convertible into or exchangeable for such capital stock or
voting securities; and (iv) other than employee compensation plans based on the
Subsidiaries' earnings and executive officer employment agreements, no equity
equivalents, interests in the ownership or earnings, or other similar rights of
or with respect to the Subsidiaries. There are no outstanding contractual
obligations of the Subsidiaries to repurchase, redeem or otherwise acquire any
shares of capital stock or any other securities of the type described in clauses
(i)-(iv) of the preceding sentence.
3.9 Employee Benefit Plans and Other Agreements.
(a) Section 3.9 of the Disclosure Schedule lists each "employee benefit
plan", as defined in Section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), (i) which is subject to any provision of ERISA,
(ii) which is maintained, administered, or contributed to by the Company or any
affiliate of the Company, and (iii) which covers any employee or former employee
of the Company or any affiliate of the Company or under which the Company or any
affiliate of the Company has any liability. The Company has made available to
Buyer accurate and complete copies of such plans (and, if applicable, the
related trust agreements) and all amendments thereto and written interpretations
thereof, together with (i) the most recent annual reports (Form 5500 including,
if applicable, Schedule B thereto) prepared in connection with any such plan and
(ii) the most recent actuarial valuation report prepared in connection with any
such plan. Such plans are referred to in this Section as the "Employee Plans".
For purposes of this Section only, an "affiliate" of any person means any other
person which, together with such person, would be treated as a single employer
under Section 414(b), (c) and (m) of the Internal Revenue Code of 1986, as
amended (the "Code"). The only Employee Plans which individually or collectively
would constitute an "employee pension benefit plan" as defined in Section 3(2)
of ERISA are identified as such in Section 3.9 of the Disclosure Schedule.
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(b) Except as otherwise identified on Section 3.9 of the Disclosure
Schedule, (i) no Employee Plan constitutes a "multiemployer plan", as defined in
Section 3(37) of ERISA (for purposes of this Section, a "Multiemployer Plan"),
(ii) no Employee Plan is maintained in connection with any trust described in
Section 501(c)(9) of the Code, (iii) no Employee Plan is subject to Title IV of
ERISA or to the minimum funding standards of ERISA and the Code, and (iv) during
the past five years, neither the Company nor any of its affiliates have made or
been required to make contributions to any Multiemployer Plan. There are no
accumulated funding deficiencies as defined in Section 412 of the Code (whether
or not waived) with respect to any Employee Plan. Except as has been currently
or previously reflected on the financial statements of the Company, neither the
Company nor any affiliate of the Company has incurred any material liability
under Title IV of ERISA arising in connection with the termination of, or
complete or partial withdrawal from, any plan covered or previously covered by
Title IV of ERISA. There is no lien arising under ERISA against any of the
assets of the Company or any Subsidiary. Neither the Company nor any Subsidiary
or any director or officer of the Company or any Subsidiary is subject to any
liability under Title I of ERISA or liable for any tax pursuant to Section 4975
of the Code that could have a Material Adverse Effect. There are no threatened
or pending claims by or on behalf of the Employee Plans, or by any participant
therein, alleging a breach or breaches of fiduciary duties or violations of
Applicable Laws which could result in liability on the part of the Company, its
officers or directors, or such Employee Plans, under ERISA or any other
Applicable Law, and to the Company's knowledge, there is no basis for any such
claim.
(c) Each Employee Plan which is intended to be qualified under Section
401(a) of the Code is so qualified and has been so qualified since the date of
its adoption, and each trust forming a part thereof is exempt from tax pursuant
to Section 501(a) of the Code. Each Employee Plan has been maintained in all
material respects in compliance with its terms and with the requirements
prescribed by all Applicable Laws, including but not limited to ERISA and the
Code, which are applicable to such Employee Plans.
(d) Except as set forth in Schedule 3.9 to the Disclosure Schedule, there
is no contract, agreement, plan, or arrangement covering any employee or former
employee of the Company or any affiliate of the Company, that, individually or
collectively, could give rise to the payment of any amount that would be an
"excess parachute payment" within the meaning of Section 280G of the Code.
(e) There are no collective bargaining agreements or other labor union
contracts applicable to any employees to or by which the Company or any
Subsidiary is a party or is bound and no such agreement or contract has been
requested by an employee or group of employees of the Company or any Subsidiary.
(f) Except as otherwise set forth in Section 3.9 of the Disclosure Schedule
or in the Company's Form 10-K for its fiscal year ended December 31, 1995, other
than the payment of wages and salaries in accordance with the ordinary and usual
payroll practices of the Company, there are no agreements, arrangements or
understandings (written or oral, formal or informal) to which the Company or any
Subsidiary is a party with any current or former director, officer, employee,
consultant or advisor or any affiliate of any such person by which any such
person shall receive any compensation, consideration or benefit of any kind
(whether cash or property) from any of the Companies. Except as otherwise set
forth in Section 3.9 of the Disclosure Schedule, no severance payment or
incentive payment, or similar obligation will be owed by the Company or any
Subsidiary to any of its respective directors, officers, or employees as a
direct result of the negotiation and/or the consummation of the Transaction or
any of the transactions constituting the Transaction, nor will any such
director, officer, or employee be entitled to severance payments or other
similar benefits as a direct result of the Transaction in the event of the
subsequent termination of his or her employment.
3.10 SEC Filings. The Company has filed with the Securities and Exchange
Commission (the "SEC"), and has made available to Buyer a complete and correct
copy of, all forms, reports, schedules, statements, and other documents
(excluding exhibits and preliminary material) required to be filed by it under
the Securities Act, the Exchange Act, and all other federal securities laws,
during the period from December 31, 1993 to the date of this Agreement. All
forms, reports, schedules, statements, and other documents (including all
amendments thereto) filed by the Company with the SEC, including the Proxy
Statement and the Registration Statements at the time that such documents are
filed in accordance with Section 5.6 and
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Section 5.9 hereof, respectively, are herein collectively referred to as the
"SEC Filings". The SEC Filings, at the time filed, complied as to form in all
material respects with all applicable requirements of federal securities laws.
None of the SEC Filings, including, without limitation, any financial statements
or schedules included therein, at the time filed, contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements contained therein, in light
of the circumstances under which they were made, not misleading except as the
same was corrected or superseded in a subsequent document duly filed with the
SEC. The audited consolidated financial statements and unaudited consolidated
interim financial statements of the Company included in the SEC Filings present
fairly in all material respects, in conformity with generally accepted
accounting principles applied on a consistent basis (except as may be indicated
in the notes thereto and, in the case of the unaudited consolidated interim
financial statements, except to the extent that preparation of such financial
statements in accordance with generally accepted accounting principles is not
required by applicable rules of the SEC), the consolidated financial position of
the Company as of the dates thereof and its consolidated results of operations
and cash flows for the periods then ended (subject to normal year-end audit
adjustments in the case of any unaudited interim financial statements). No
representations are made in this Section by the Company with respect to any
information furnished by and relative to Buyer for inclusion in the Registration
Statements or the Proxy Statement.
3.11 Absence of Undisclosed Liabilities. Except as set forth in Section
3.11 of the Disclosure Schedule or to the extent disclosed in the SEC Filings
filed prior to the date hereof, (a) as of December 31, 1995, neither the Company
nor any Subsidiary had any liabilities or obligations (whether accrued,
absolute, contingent, unliquidated, or otherwise) material to the Company and
the Subsidiaries considered as a whole, and (b) since December 31, 1995, neither
the Company nor any Subsidiary has incurred any such material liabilities or
obligations, other than those incurred in the ordinary course of business
consistent with past practice or pursuant to or as contemplated by this
Agreement.
3.12 Absence of Certain Changes. Since December 31, 1995, (i) there has
not been any Material Adverse Effect, specifically including, without
limitation, any event causing a material reduction (other than by production of
reserves) in the aggregate total of the proved oil and gas reserves of the
Company and its Subsidiaries, below the aggregate reserve totals reflected in
the most recent reserve report prepared by the Company's engineers estimating
the proved reserves attributable to the Company's oil and gas properties as of
December 31, 1995 and as described in the Company's most recent Form 10-K for
the fiscal year ended December 31, 1995 (the "Reserve Report") (provided that it
is understood and agreed for all purposes of this Agreement that the receipt by
the Company of any reserve report prepared by persons other than the Company,
containing estimates of proved reserves less than the estimate thereof set forth
in the Reserve Report, shall not of itself be deemed to constitute such a
material reduction, unless such other reserve report contains a materially lower
estimate of proved reserves due to taking into account (A) a physical event
occurring subsequent to the date of the Reserve Report or (B) additional
interpretative data from that available at the time of the preparation of the
Reserve Report that, in the case of (A) or (B), in the opinion of the Company's
petroleum engineers, exercising their independent professional judgment, would
cause such persons to materially reduce the estimates of proved reserves
contained in the Reserve Report), (ii) neither the Company nor any Subsidiary
has incurred any liability or engaged in any transaction that is material to the
Company and its Subsidiaries taken as a whole, or entered into any Material
Agreement, except in the ordinary course of business consistent with past
practice, as contemplated by this Agreement or as disclosed in Section 3.12 of
the Disclosure Schedule, or (iii) neither the Company nor any Subsidiary is in
default under (and no event has occurred which with the lapse of time or action
by a third party could result in a default under) any Material Agreement, except
for (x) such defaults that have been waived or cured in all respects prior to
the date hereof and (y) defaults as contemplated by the Company's Form 10-K for
the fiscal year ended December 31, 1995, that may occur on and after the date
hereof under the Existing Bank Debt or the 12 3/4% Notes.
3.13 Compliance With Laws and Permits. Except as set forth in Section 3.13
of the Disclosure Schedule or as otherwise specified in Section 3.9 or Section
3.21, since March 31, 1992, (i) the Company and the Subsidiaries have complied
with all Applicable Laws (including without limitation Applicable Laws
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relating to securities, properties, production of hydrocarbons, sales of
hydrocarbons, employment practices, terms and conditions of employment, wages
and hours, safety, occupational safety, product safety, and civil rights) other
than violations which in the reasonable judgment of the Company, individually or
in the aggregate, do not and will not have a Material Adverse Effect; (ii) each
of the Companies has obtained and holds all material permits, licenses,
variances, exemptions, orders, franchises, approvals and authorizations of all
Governmental Entities necessary for the lawful conduct of its business or the
lawful ownership, use and operation of its assets; (iii) neither the Company nor
any Subsidiary has received any written notice, which has not been dismissed or
otherwise disposed of, that the Company or any Subsidiary has not so complied;
and (iv) neither the Company nor any Subsidiary is charged or, to the best
knowledge of the Company, threatened with, or, to the best knowledge of the
Company, under investigation with respect to, any violation of any Applicable
Law relating to any aspect of the business of the Company or any Subsidiary
other than violations which in the reasonable judgment of the Company,
individually or in the aggregate, do not and will not have a Material Adverse
Effect.
3.14 Litigation. The Company has delivered to Buyer an accurate list of
all Proceedings pending or, to the best knowledge of the Company, threatened
against or involving the Company or any Subsidiary (or any of their respective
directors or officers in connection with the business or affairs of the Company
or any Subsidiary) or any properties or rights of the Company or any Subsidiary
as of the date hereof. Any and all probable and estimated liabilities of the
Company and the Subsidiaries under such Proceedings are adequately covered
(except for standard deductible amounts) by the existing insurance maintained by
the Company or reserves established in the financial statements of the Company.
The Company has no knowledge of any facts that are likely to give rise to any
additional Proceedings that would reasonably be expected to have a Material
Adverse Effect. As of the date hereof, there are no Proceedings pending or, to
the best knowledge of the Company, threatened seeking to restrain, prohibit, or
obtain damages or other relief in connection with this Agreement or the
Transactions.
3.15 Settlement Agreement. All applicable requirements of that certain
Agreement of Compromise and Settlement dated September 20, 1995, among the
Company, Boone Pickens and the parties referred to as the WDB Parties therein
(the "Settlement Agreement") have been satisfied so that the issuance of stock
to Buyer and upon the exercise of Rights in the Rights Offering as contemplated
hereby will be classified as an "Endorsed Major Transaction" thereunder. To the
knowledge of the Company, the Settlement Agreement is in full force and effect
as of the date hereof. The Company has not entered into any amendment of the
Settlement Agreement nor waived any of its rights with respect thereto, and the
Company is not in default thereunder. As of the date hereof, to the knowledge of
the Company, no WDB Party has initiated a "Solicitation Action" (as defined in
the Settlement Agreement) or taken any actions in the nature of those which are
restricted by Sections 4, 6(a), 6(c) or 7 of the Settlement Agreement (except
that no representation or warranty is being made with respect to any letters to
the Board of Directors from Joel L. Reed and Dorn Parkinson, in form and
substance similar to the drafts thereof provided to Buyer on the date hereof).
3.16 True and Complete Disclosure. Taken in the aggregate, all factual
information (excluding estimates), including without limitation factual
information contained in the Reserve Report and any other reserve report
prepared by the Company in connection with the oil and gas properties of the
Companies, heretofore or contemporaneously furnished by the Company to Buyer in
writing for purposes of or in connection with this Agreement or the Transaction
has been true and accurate in all material respects on the date as of which such
information is dated and not incomplete by omitting to state any material fact
necessary to make the statements of fact contained therein, in the light of the
circumstances under which they were made, not misleading at such date. All
financial forecasts prepared and furnished by the Company to Buyer were prepared
in good faith on the basis of assumptions believed to be reasonable and data,
information, tests or conditions believed to be valid or accurate or to exist at
the time such forecasts were prepared.
3.17 Books and Records. All books, records and files of the Companies
(including those pertaining to the Companies' oil and gas properties, wells and
other assets, those pertaining to the production, gathering, transportation and
sale of hydrocarbons, and corporate, accounting, financial and employee records)
(a) have been prepared, assembled and maintained in accordance with usual and
customary policies and procedures
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and (b) fairly and accurately reflect in all material respects the ownership,
use, enjoyment and operation by the Companies of their respective assets.
3.18 Governmental Regulation. Neither the Company nor any Subsidiary is an
"investment company," or a company "controlled" by an "investment company,"
within the meaning of the Investment Company Act of 1940, as amended. Neither
the Company nor any Subsidiary is a "holding company," or a "subsidiary company"
of a "holding company," or an "affiliate" of a "holding company" or of a
"subsidiary company" of a "holding company," within the meaning of the Public
Utility Holding Company Act of 1935, as amended. Neither the Company nor any
Subsidiary has a similar status under any similar state laws or regulations of
the type regulating public utilities.
3.19 Investments and Guarantees. Except as set forth in Section 3.19 of
the Disclosure Schedule or in the SEC Filings filed prior to the date hereof,
none of the Companies is a party to (i) any financial arrangement with respect
to or creating any indebtedness to any person (other than indebtedness incurred
in the ordinary course of business); (ii) any Material Agreement relating to the
making of any advance to, or investment in, any person; or (iii) any Material
Agreement providing for a guaranty or other contingent liability with respect to
any indebtedness for money borrowed or similar obligation of any person.
3.20 Taxes. Except as disclosed in Section 3.20 of the Disclosure
Schedule: (i) the Company and each Subsidiary have duly filed all federal,
state, local, and foreign Tax Returns required to be filed by or with respect to
them with the Internal Revenue Service or other applicable taxing authority when
due (as extended pursuant to extensions with respect to such Tax Returns that
have been requested or granted); (ii) the Company and each Subsidiary have paid,
or adequately reserved against in the Company's financial statements, all Taxes
due, or claimed by any taxing authority to be due, from or with respect to them,
except Taxes that are being contested in good faith by appropriate legal
proceedings and for which adequate reserves have been established in such
financial statements; (iii) to the knowledge of the Company, there has been no
issue raised or adjustment proposed (and none is pending) by the Internal
Revenue Service or any other taxing authority in connection with any of the Tax
Returns, except for (a) such adjustments as the Company has settled prior to the
date of this Agreement with the Internal Revenue Service or applicable taxing
authority, or (b) adjustments that are being contested in good faith by
appropriate legal proceedings and for which adequate reserves have been
established in the Company's financial statements (each of which is disclosed in
Section 3.20 of the Disclosure Schedule); (iv) the Company and each Subsidiary
have made all deposits required with respect to Taxes; and (v) no waiver or
extension of any statute of limitations as to any federal Tax matter has been
given by or requested from the Company or any Subsidiary.
3.21 Environmental Matters. Except as set forth in Section 3.21 of the
Disclosure Schedule:
(a) Each of the Companies has conducted its business and operated its
assets, and is conducting its business and operating its assets, in material
compliance with all Applicable Laws pertaining to health, safety, the
environment, Hazardous Material (as such term is defined in CERCLA), or Solid
Wastes (as such term is defined in RCRA) (such Applicable Laws as they now exist
or are hereafter enacted and/or amended are collectively, for purposes of this
Section, called "Environmental Laws"), including without limitation the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended by the Superfund Amendments and Reauthorization Act of 1986 (as
amended, for purposes of this Section, called "CERCLA"), the Resource
Conservation and Recovery Act of 1976, as amended by the Used Oil Recycling Act
of 1980, the Solid Waste Disposal Act Amendments of 1980, and the Hazardous and
Solid Waste Amendments of 1984 (as amended, for purposes of this Section, called
"RCRA");
(b) None of the Companies has been notified by any Governmental Entity that
any of the operations or assets of any of the Companies is the subject of any
investigation or inquiry by any Governmental Entity evaluating whether any
material remedial action is needed to respond to a release of any Hazardous
Material or to the improper storage or disposal (including storage or disposal
at offsite locations) of any Hazardous Material;
(c) None of the Companies and, to the Company's knowledge, no other person
has filed any notice under any federal, state or local law indicating that (i)
any of the Companies is responsible for the improper release
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into the environment, or the improper storage or disposal, of any Hazardous
Material, or (ii) any Hazardous Material is improperly stored or disposed of
upon any property of any of the Companies;
(d) To the Company's knowledge, none of the Companies has any material
contingent liability in connection with (i) the release into the environment at
or on any property now or previously owned or leased by any of the Companies, or
(ii) storage or disposal of any Hazardous Material;
(e) In the last six years, none of the Companies has received any claim,
complaint, notice, inquiry or request for information which remains unresolved
as of the date hereof with respect to any alleged material violation of any
Environmental Law or regarding potential material liability under any
Environmental Law relating to operations or conditions or any facilities or
property owned, leased or operated by any of the Companies;
(f) To the Company's knowledge, no property now or previously owned, leased
or operated by any of the Companies is listed on the National Priorities List
pursuant to CERCLA or on any similar federal or state list as sites requiring
investigation or cleanup;
(g) To the Company's knowledge, none of the Companies is directly
transporting, has directly transported, is directly arranging for the
transportation of, or has directly transported, any Hazardous Material to any
location which is listed on the National Priorities List pursuant to CERCLA or
on any similar federal or state list or which is the subject of federal, state
or local enforcement actions that may lead to material claims against such
company for remedial work, damage to natural resources or personal injury,
including claims under CERCLA;
(h) There are no sites, locations or operations at which any of the
Companies is currently undertaking any remedial or response action relating to
any disposal or release of any Hazardous Material, as required by Environmental
Laws; and
(i) All underground storage tanks and solid waste disposal facilities owned
or operated by the Companies are used and operated in material compliance with
Environmental Laws.
3.22 Insurance. Each of the Companies carry, and will continue to carry,
insurance with reputable insurers (except as to self-insurance) in respect of
such of their respective properties, in such amounts and against such risks as
is customarily maintained by other persons of similar size engaged in similar
businesses (which may include self-insurance in amounts customarily maintained
by companies similarly situated or has been maintained in the past by the
Companies.) None of such insurance was obtained through the use of materially
false or misleading information or the failure to provide the insurer with all
material information requested in order to evaluate the liabilities and risks
insured. The Companies have not received any notice of cancellation or
non-renewal of any insurance policies or binders.
3.23 Oil and Gas Operations. In those instances in which any of the
Companies serves as operator of a well that is currently a producing well or
undergoing drilling operations, it has drilled and completed (if applicable)
such well, and operated and produced such well, in accordance with generally
accepted oil and gas field practices and in compliance in all material respects
with applicable oil and gas leases and all Applicable Laws, except where any
failure or violation could not reasonably be expected to have a Material Adverse
Effect on the Companies. All proceeds from the sale of oil, gas and other
hydrocarbons produced by the Companies are being received by the Companies in a
timely manner and are not being held in suspense for any reason (except for
amounts, individually or in the aggregate, not in excess of $500,000 and held in
suspense in the ordinary course of business).
3.24 Marketing of Production. Except for contracts listed in Section 3.24
of the Disclosure Schedule (with respect to all of which contracts the Company
represents that it or its Subsidiaries are receiving a price for all production
sold thereunder which is computed in accordance with the terms of the relevant
contract), there exist no Material Agreements for the sale of production from
the leasehold and other interests in oil, gas and other mineral properties
owned, or otherwise held in the name of, the Companies (collectively, the "Oil
and Gas Properties") (including without limitation, calls on, or other rights to
purchase, production, whether or not the same are currently being exercised)
other than (i) agreements or arrangements pertaining
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to the sale of production at a price equal to or greater than a price that is
the market price from time to time existing in the areas where the Oil and Gas
Properties subject to such agreement or arrangement are located, and (ii)
agreements or arrangements that are cancelable on 60 days notice or less without
penalty or detriment.
3.25 Prepayments. Neither the Company nor any Subsidiary is obligated, by
virtue of a prepayment arrangement, make-up right under a production sales
contract containing a "take or pay" or similar provision, production payment or
any other arrangement, to deliver hydrocarbons, or proceeds from the sale
thereof, attributable to any of its properties at some future time without then
or thereafter being entitled to receive payment of the contract price therefor,
except where any such arrangement would not have a Material Adverse Effect.
3.26 Gas Imbalances. Except as disclosed in the SEC Filings filed prior to
the date hereof, neither the Company nor any Subsidiary had (i) any obligation
to deliver gas from the Oil and Gas Properties (or cash in lieu thereof) to
other owners of interests in those properties as a result of past production by
the Company, any Subsidiary or any of their predecessors in excess of the share
to which they were entitled nor (ii) any right to receive deliveries of gas from
the Oil and Gas Properties (or cash in lieu thereof) from other owners of
interests in those properties as a result of past production by the Company, any
Subsidiary or any of their predecessors of less than the share to which they
were entitled; in either case where any such gas imbalance would have a Material
Adverse Effect.
3.27 Customers and Suppliers. None of the current customers or suppliers
of the Companies has refused, or communicated in writing that it will or may
refuse, to purchase or supply products or services from or to the Companies or
has communicated in writing that it will or may substantially reduce the amount
of production, goods or services that it is willing to purchase from or supply
to the Companies where any such refusal or reduction would have a Material
Adverse Effect.
3.28 Material Personal Property. All pipelines, wells, gas processing
plants, platforms and other material improvements, fixtures and equipment owned
in whole or in part by the Company or any Subsidiary that are necessary to
conduct normal operations are being maintained in a state adequate to conduct
normal operations, and with respect to such of the foregoing which are operated
by the Company or any Subsidiary, in a manner consistent with the Company's or
the Subsidiaries' past practices.
3.29 Reserve Report. The Company acknowledges and agrees that Buyer has
been provided with a copy of the Reserve Report. The Company's and each
Subsidiary's ownership of the Oil and Gas Properties described in the Reserve
Report entitle the respective owner to receive a percentage of the oil, gas and
other hydrocarbons produced from each well or unit equal to not less than the
percentage set forth in the Reserve Report as the "Net Revenue Interest" for
such well or unit and cause the respective owner to be obligated to bear a
percentage of the cost of operation of such well or unit not greater than the
percentage set forth in the Reserve Report as the "Working Interest" for such
well or unit, and to the extent such percentages of production which the
respective owner is entitled to receive, and shares of expenses which the
respective owner is obligated to bear, may change after the date of such report,
such changes were properly reflected (based on reasonable assumptions) in
preparing such report. The underlying historical information used for
preparation of the Reserve Report was, at the time of delivery, true and correct
in all material respects.
3.30 Nonconsent Operations. Except as set forth in Section 3.30 of the
Disclosure Schedule, there are no operations on the Oil and Gas Properties in
which the Company's or any Subsidiary's commitment would have exceeded
$1,000,000, being conducted as of January 1, 1995, or any time thereafter, in
which the Company or any Subsidiary has elected not to participate.
3.31 Intellectual Property. The Company and its Subsidiaries either own or
have valid licenses or other rights to use all patents, copyrights, trademarks,
software, databases, geological data, geophysical data, engineering data, maps,
interpretations and other technical information used in their businesses as
presently conducted, subject to the limitations contained in the agreements
governing the use of the same, which limitations are customary for companies
engaged in the business of the exploration and production of oil, gas,
condensate and other hydrocarbons, with such exceptions as would not result in a
Material Adverse Effect.
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There are no limitations contained in the agreements of the type described in
the immediately preceding sentence which, upon consummation of the Transaction,
will alter or impair any such rights, breach any such agreement with any third
party vendor, or require payments of additional sums thereunder, except any such
limitations that would not have a Material Adverse Effect. The Company and its
Subsidiaries are in compliance in all material respects with such licenses and
agreements and there are no pending or, to the best knowledge of the Company or
any Subsidiary, threatened Proceedings challenging or questioning the validity
or effectiveness of any license or agreement relating to such property or the
right of the Company or any Subsidiary to use, copy, modify or distribute the
same.
3.32 Prior Securities Offerings. Since January 1, 1993, the Company has
not sold any securities other than securities registered pursuant to the
Securities Act.
3.33 Private Offering of the Securities. Neither the Company nor anyone
acting on its behalf has offered or will offer the Shares or any part thereof or
any similar securities, other than the Series A Preferred Stock issuable
pursuant to the Rights Offering, for issue or sale to, or has solicited or will
solicit any offer to acquire any of the same from, anyone so as to bring the
issuance and sale of the Shares within the provisions of Section 5 of the
Securities Act.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to the Company that:
4.1 Organization. Buyer is a limited partnership that is duly formed and
validly existing as a limited partnership under the laws of the State of Texas.
4.2 Authority Relative to This Agreement. Buyer has full power and
authority to execute, deliver, and perform this Agreement and execute, deliver
and, where applicable, perform the Ancillary Documents to which it is a party
and to consummate the transactions contemplated hereby and thereby. The
execution, delivery, and performance by Buyer of this Agreement and execution,
delivery, and, where applicable, performance of the Ancillary Documents to which
it is a party, and the consummation by it of the transactions contemplated
hereby and thereby, have been duly authorized by all necessary action of Buyer.
This Agreement has been duly executed and delivered by Buyer and constitutes,
and each Ancillary Document executed or to be executed by Buyer has been, or
when executed will be, duly executed and delivered by Buyer and constitutes, or
when executed and delivered will constitute, a valid and legally binding
obligation of Buyer, enforceable against Buyer in accordance with its terms,
except that such enforceability may be limited by (i) applicable bankruptcy,
insolvency, reorganization, moratorium, and similar laws affecting creditors'
rights generally and (ii) general equitable principles (regardless of whether
such enforceability is considered in a proceeding in equity or at law).
4.3 Noncontravention. The execution, delivery, and performance by Buyer of
this Agreement and the execution, delivery and, where applicable, performance of
Ancillary Documents to which it is a party and the consummation by it of the
transactions contemplated hereby and thereby do not and will not (i) conflict
with or result in a violation of any provision of the agreement of limited
partnership of Buyer, (ii) conflict with or result in a violation of any
provision of, or constitute (with or without the giving of notice or the passage
of time or both) a default under, or give rise (with or without the giving of
notice or the passage of time or both) to any right of termination,
cancellation, or acceleration under, any bond, debenture, note, mortgage,
indenture, lease, agreement, or other instrument or obligation to which Buyer is
a party or by which Buyer or any of its properties may be bound, (iii) result in
the creation or imposition of any Encumbrance upon the properties of Buyer, or
(iv) violate any Applicable Law binding upon Buyer, except, in the case of
clauses (ii), (iii), and (iv) above, for any such conflicts, violations,
defaults, terminations, cancellations, accelerations, or Encumbrances which
would not, individually or in the aggregate, have a material adverse effect on
the business, assets, results of operations, or financial condition of Buyer or
on the ability of Buyer to consummate the transactions contemplated hereby.
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4.4 Consents and Approvals. Other than (i) any HSR Act filing and (ii)
filings required by the Exchange Act, no consent, approval, order, or
authorization of, or declaration, filing, or registration with, any Governmental
Entity is required to be obtained or made by Buyer or any of its partners in
connection with the execution, delivery, or performance by Buyer of this
Agreement. No consent or approval of any person other than any Governmental
Entity is required to be obtained or made by Buyer or any of its partners in
connection with the execution, delivery or performance by Buyer of this
Agreement and the execution, delivery and, where applicable, performance of the
Ancillary Documents to which it is a party.
4.5 Purchase for Investment.
(a) Buyer and each of its partners has been furnished with all information
that it has requested for the purpose of evaluating the proposed acquisition of
the Shares pursuant hereto, and Buyer (and each of its partners) has had an
opportunity to ask questions of and receive answers from the Company regarding
the Company and its business, assets, results of operations, financial condition
and prospects and the terms and conditions of the issuance of the Shares.
(b) Buyer is acquiring the Series B Preferred Stock solely by and for its
own account, for investment purposes only and not for the purpose of resale or
distribution; and neither Buyer nor any of its partners has any contract,
undertaking, agreement or arrangement with any person or entity to sell,
transfer or pledge to such person or anyone else any Series B Preferred Stock;
and neither Buyer nor any of its partners has any present plans or intentions to
enter into any such contract, undertaking or arrangement.
(c) Buyer and each of its partners acknowledges and understands that (i) no
registration statement relating to the Series B Preferred Stock (or the
Conversion Shares or the shares of Series A Preferred Stock into which the
Series B Preferred Stock will be convertible) has been or is to be filed with
the SEC under the Securities Act or pursuant to the securities laws of any
state; (ii) the Series B Preferred Stock (and the Conversion Shares or the
shares of Series A Preferred Stock into which the Series B Preferred Stock will
be convertible) cannot be sold or transferred without compliance with the
registration provisions of the Securities Act or compliance with exemptions, if
any, available thereunder; (iii) the certificates representing the Shares will
include a legend thereon that refers to the foregoing; and (iv) the Company has
no obligation or intention to register the Series B Preferred Stock (or the
Conversion Shares or the shares of Series A Preferred Stock into which the
Series B Preferred Stock will be convertible) under any federal or state
securities act or law; except to the extent in each case that the terms of the
Registration Rights Agreement set forth as Exhibit B hereto shall otherwise
provide.
(d) Buyer and each of its partners (i) is an "accredited investor" as
defined in Rule 501 of the rules promulgated pursuant to the Securities Act;
(ii) has such knowledge and experience in financial and business matters in
general that it has the capacity to evaluate the merits and risks of an
investment in the Series B Preferred Stock and to protect its own interest in
connection with an investment in the Series B Preferred Stock; (iii) has such a
financial condition that it has no need for liquidity with respect to its
investment in the Series B Preferred Stock to satisfy any existing or
contemplated undertaking, obligation or indebtedness; and (iv) is able to bear
the economic risk of its investment in the Series B Preferred Stock for an
indefinite period of time.
(e) Buyer and each of its partners has relied upon its own independent
investigations of the business of the Company or upon its own independent
advisers in evaluating its investment in the Series B Preferred Stock, provided
that in conducting such investigations, they and their advisers have relied upon
the information furnished to them by the Company and the representations and
warranties herein contained.
(f) The agreement of limited partnership of Buyer requires that each
Partner make substantially the same representations and warranties as set forth
in this Section 4.5 in order to enable the Company to substantiate that the sale
of the Series B Preferred Stock to Buyer shall be exempt from the registration
provisions of the Securities Act.
(g) The acquisition of the Shares by Buyer at the First Closing and the
Second Closing, as applicable, shall constitute Buyer's confirmation of the
foregoing representations.
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4.6 No Other Shares. Except for such rights as may be conferred on Buyer
by this Agreement and the Ancillary Documents, neither Buyer, any of its
partners nor any Affiliate of Buyer beneficially owns, directly or indirectly,
any shares of capital stock or other securities of the Company or any of its
Subsidiaries.
4.7 Financial Resources. The Partnership has the financial resources
available to it as are necessary to perform its obligations to acquire the
Shares pursuant to the terms of this Agreement.
4.8 Disclosure Documents. None of the written information furnished by
Buyer before or after the date hereof pursuant to Section 5.17 for inclusion in
either of the Registration Statements or the Proxy Statement will, at the time
each such Registration Statement becomes effective or the prospectus included
therein is first mailed to the Company's shareholders, or at the time the Proxy
Statement is filed with the SEC or is first mailed to the Company's
shareholders, contain 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 contained therein, in light of the circumstances under which they
are made, not misleading. The representations and warranties contained in this
Section 4.8 shall not apply to statements or omissions in the information
furnished pursuant to Section 5.17 to the extent such information is based upon
information furnished to Buyer by the Company.
4.9 Brokerage Fees. Buyer has not retained any financial advisor, broker,
agent, or finder or paid or agreed to pay any financial advisor, broker, agent,
or finder on account of the sale by the Company and the purchase by Buyer of the
Shares pursuant to this Agreement.
4.10 True and Complete Disclosure. Taken in the aggregate, all factual
information (excluding estimates) heretofore or contemporaneously furnished by
Buyer to the Company in writing for purposes of or in connection with this
Agreement or the Transaction has been true and accurate in all material respects
on the date as of which such information is dated and not incomplete by omitting
to state any material fact necessary to make the statements of fact contained
therein, in the light of the circumstances under which they were made, not
misleading at such date.
4.11 Governmental Regulation. Buyer is not an "investment company," or a
company "controlled" by an "investment company," within the meaning of the
Investment Company Act of 1940, as amended.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Continuing Operations. From the date of this Agreement to the earlier
of (i) the First Closing Date, or (ii) the termination of this Agreement in
accordance with its terms (the "Interim Period"), the Company and its
Subsidiaries shall conduct their business in the ordinary and usual course, and
neither the Company nor any Subsidiary shall, without the prior consent of Buyer
(which consent may be obtained in writing or by discussions, in person or by
telephone, with an officer of the general partner of Buyer), except as expressly
contemplated hereby:
(a) amend its charter or bylaws; split (including any reverse split),
combine, or reclassify any shares of its capital stock; adopt resolutions
authorizing a liquidation, dissolution, merger, consolidation,
restructuring, recapitalization, or other reorganization of the Company or
any Subsidiary; or make any other material changes in its capital
structure;
(b) except in the ordinary course of business consistent with past
practice, (i) incur any liability or obligation, (ii) become liable or
responsible for the obligations of any other Person (other than wholly-
owned Subsidiaries) or (iii) pay, discharge, or satisfy any claims,
liabilities, or obligations (whether accrued, absolute, contingent,
unliquidated, or otherwise, and whether asserted or unasserted), other than
the payment, discharge, or satisfaction, in the ordinary course of business
consistent with past practice, of liabilities reflected or reserved against
in the financial statements; provided that, in no event shall any of the
Companies enter into any settlement or compromise of any litigation or
claims involving liability in excess of $500,000, without the prior written
approval of Buyer;
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(c) incur any indebtedness for borrowed money, except for borrowings
under the Existing Credit Agreement;
(d) make any loans or advances to any person, other than (i) advances
to employees in the ordinary and usual course of business and (ii)
transactions among or between the Companies with respect to cash management
conducted in the ordinary and usual course of the Companies' business;
(e) declare or pay any dividend or make any other distribution with
respect to its capital stock, other than dividends paid by any Subsidiary
to another of the Companies in the ordinary and usual course of the
Companies' business;
(f) issue, sell, or deliver (whether through the issuance or granting
of options, warrants, commitments, subscriptions, rights to purchase, or
otherwise) any of its capital stock or other securities other than as
contemplated herein or pursuant to stock options issued and outstanding as
of the date hereof or purchase or otherwise acquire any of its capital
stock, employee or director stock options or debt securities;
(g) subject to Encumbrance any of its assets or properties, other than
those Encumbrances arising by operation of law or in the ordinary and usual
course of business and those Encumbrances incurred to secure the Existing
Indebtedness;
(h) other than in the ordinary course of business, sell, lease,
transfer, or otherwise dispose of, directly or indirectly, any assets, or
waive, release, grant, or transfer any rights of value;
(i) acquire (by merger, consolidation, acquisition of stock or assets
or otherwise) any corporation, partnership or other business organization
or division thereof; create or make any investment in any subsidiary; or
make any other investment or expenditure of a capital nature, other than
any capital expenditure already included in the capital expenditure budget
for the Companies for the period from March 31, 1996 through July 31, 1996,
as previously provided to and approved by Buyer; provided that, the amount
and timing of such capital expenditure must not vary in any material
respect from that set forth in the approved budget;
(j) enter into, adopt, or (except as may be required by law) amend or
terminate any collective bargaining agreement or any Benefit Plan; approve
or implement any employee lay off or other personnel reorganization plans;
approve or implement any employment severance arrangements (other than
payments made under the Company's severance policy in accordance with past
practice) or retain or discharge any officers and executive management
personnel; authorize or enter into any employment, severance, consulting
services or other agreement with any officers and executive management
personnel; or except as set forth in Section 5.1 of the Disclosure
Schedule, change the compensation or benefits provided to any director,
officer, or employee as of February 1, 1996;
(k) enter into any contract, agreement, lease or other commitment
which is material to the business, assets, properties, or financial
position of the Companies; or amend, modify, or change in any material
respect any of the agreements pertaining to the Existing Indebtedness or
any other existing contract, agreement, lease or other commitment which is
material to the business, assets, properties, or financial position of the
Companies;
(l) enter into any speculative or commodity swaps, hedges or other
derivatives transactions or purchase any securities for investment
purposes, other than in connection with the Companies' cash management;
(m) authorize, enter into or amend any contract, agreement or other
commitment with any director, officer, employee or other Affiliate (other
than the Companies) pursuant to which any such person shall receive
compensation, consideration or benefit of any kind (whether cash or
property) from any of the Companies;
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(n) adopt, approve or implement any annual general and administrative
expense budget for the Companies for any period after July 31, 1996, or
modify any of the Companies' existing general and administrative expense
budgets in any material respect;
(o) enter into any contract not cancelable within 30 days providing
for the sale of production from the Companies' oil and gas properties or
obligating any of the Companies to pay for any services with respect to the
Company's oil and gas properties except as contemplated by the capital
budget for the Companies for the period from March 31, 1996 through July
31, 1996 described in clause (i) above; or
(p) grant any option or preferential right to purchase or enter into
any other agreements that could adversely affect the marketability of any
material asset of the Companies.
5.2 Press Releases. Except as may be required by Applicable Law or by the
rules of any national securities exchange, neither Buyer nor the Company shall
issue any press release with respect to this Agreement or the Transaction
without the prior consent of the other party (which consent shall not be
unreasonably withheld under the circumstances). Any such press release required
by Applicable Law or by the rules of any national securities exchange shall only
be made after reasonable notice to the other party.
5.3 Stock Exchange Listing. The Company shall use its reasonable best
efforts to cause the Series A Preferred Stock and the Conversion Shares to be
approved for listing on the New York Stock Exchange, subject to official notice
of issuance (and, in the case of the Series A Preferred Stock, satisfactory
distribution), prior to the Second Closing Date and to cause the Rights to be
approved for trading thereon prior to the commencement of the Rights Offering.
5.4 Fees and Expenses.
(a) The Company shall be responsible for the payment of all expenses
incurred by the Company in connection with the proposed Transaction, regardless
of whether the Transaction closes, including, without limitation, all fees and
expenses incurred in connection with the Registration Statements and the Proxy
Statement and the fees and expenses of the Company's legal counsel and all third
party consultants engaged by the Company to assist in the Transaction. Subject
to receipt of appropriate documentation, the Company shall also reimburse Buyer
for all out of pocket expenses reasonably incurred by Buyer in connection with
the proposed Transaction (other than fees and expenses related to the letter of
credit to be provided pursuant to Section 5.7), including, without limitation,
the fees and expenses of Buyer's legal counsel and all third party consultants
engaged by Buyer to assist in the Transaction, subject to the requirement that
any such third party consultants other than accountants, oil and gas or
environmental consultants, shall be subject to the approval of the Company,
which approval will not be unreasonably withheld. Such reimbursements to Buyer
shall be due at the Second Closing, or promptly following any earlier
termination of this Agreement for any reason (including, without limitation, any
termination of this Agreement by election of Buyer). Concurrently with the
execution of that certain letter of intent (and attached term sheet) by and
between the Company and Rainwater, Inc. dated February 28, 1996 (as amended by
letter dated April 1, 1996, the "Letter of Intent"), the Company paid to Buyer
the amount of $500,000 (the "Initial Payment"), which Initial Payment shall be
credited against the fees and expenses otherwise owed to Buyer upon termination
hereof or upon the Second Closing pursuant to this Section 5.4(a). To the extent
that such Initial Payment exceeds the total of all such fees and expenses owed
to Buyer following any termination hereof, such excess will be refunded to the
Company.
(b) The Company shall (i) at the First Closing pay Buyer the amount of
$4,655,000 (provided, however, that if funds are not reasonably available at
such time, then the Company shall pay such fee as promptly as practicable
thereafter, but in no event later than the Second Closing), which amount
constitutes 3.5% of the aggregate amount of Series B Preferred Stock that Buyer
is obligated to purchase at the First Closing pursuant to this Agreement (i.e.,
3.5% times $133,000,000); and (ii) at the Second Closing pay Buyer the amount of
$4,620,000, which amount constitutes 3.5% of the aggregate amount of Series B
Preferred Stock that Buyer could be obligated to purchase at the Second Closing
pursuant to this Agreement (i.e., 3.5% times $132,000,000), less an amount, if
any, by which the actual fees and expenses owed to Buyer by the Company as of
the Second Closing Date pursuant to Section 5.4(a) above are less than the
Initial Payment.
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(c) For so long as the Minimum Ownership Condition (as such term is defined
in the Statement of Resolution) is satisfied, the Company shall pay Buyer
$400,000 annually, due quarterly in arrears beginning September 30, 1996
(adjusted pro-rata for any period which is less than a full quarter), and
reimburse Buyer annually (payable quarterly in arrears) for all fees and
expenses reasonably incurred by Buyer in connection with monitoring the
activities and operations of the Company (including, without limitation, those
incurred in connection with the Debt Refinancing), up to a maximum of $50,000
for any calendar year (adjusted pro-rata for any period which is less than a
full year), unless the Company shall have approved a greater amount. Buyer
agrees that its principals and its Affiliates shall provide continuing analysis
and assistance to the Company during the course of Buyer's investment, and it is
acknowledged by the parties that the annual fee payable to Buyer pursuant to
this Section 5.4(c) is in consideration of Buyer's obligations hereunder and
also compensates Buyer for the time that its representatives (including
executive officers of the general partner of Buyer) shall devote to Company
affairs rather than other aspects of the business of Buyer and its general
partner. Such amounts payable to Buyer pursuant to this Section 5.4(c) are in
lieu of any transaction or success fees that might otherwise typically be
charged for any such services performed in connection with specific transactions
in which the Company may participate in the future.
5.5 Brokers, etc. The Company shall be solely responsible for the payment
of any amounts owed to Lehman Brothers Inc. in connection with the sale and
purchase of the Shares as contemplated herein, and the Company shall be solely
responsible for the payment of any commission or other compensation payable to
any financial advisor, broker, agent, finder, or similar intermediary retained
by or acting on behalf of the Company in connection with the consummation of the
Debt Refinancing and the Rights Offering.
5.6 Special Meeting; Proxy Statement.
(a) The Company shall take all action necessary in accordance with
Applicable Law and the Company's Articles of Incorporation and Bylaws to duly
call, give notice of, convene and hold a special meeting of its shareholders
(the "Special Meeting") as promptly as practicable after the date hereof to
consider and vote upon the adoption and approval of the Transaction (including,
without limitation, amendments to the Articles of Incorporation of the Company),
to the extent such shareholder approval is necessary with respect to the
effectuation of any part of the Transaction. The shareholder vote required for
the adoption and approval of the Transaction shall be the vote required by
Applicable Law, the Company's Articles of Incorporation, and the rules of the
New York Stock Exchange, as represented by the Company in Section 3.4. The Board
of Directors of the Company shall, subject to its fiduciary obligations to the
Company's shareholders under Applicable Law, taking into account the advice of
counsel, (i) recommend to the shareholders of the Company that they vote in
favor of the adoption and approval of all matters necessary to effectuate the
Transaction, (ii) use its reasonable best efforts to solicit from the
shareholders of the Company proxies in favor of such adoption and approval, and
(iii) take all other action reasonably necessary to secure a vote of the
shareholders of the Company in favor of such adoption and approval. The Company
shall also use its reasonable best efforts to obtain a statement from all of its
officers and directors that own voting stock of the Company that such persons
intend to vote all shares of voting stock of the Company owned by such
shareholders in favor of the Transaction at the Special Meeting.
(b) At the Special Meeting, the Board of Directors of the Company shall
submit the Reverse Stock Split for the adoption and approval of the
shareholders, and shall (i) recommend to the shareholders of the Company that
they vote in favor of the adoption and approval of the Reverse Stock Split, (ii)
use its reasonable best efforts to solicit from the shareholders of the Company
proxies in favor of such adoption and approval, and (iii) take all other action
reasonably necessary to secure a vote of the shareholders of the Company in
favor of such adoption and approval. The Company shall also use its reasonable
best efforts to obtain a statement from all of its officers and directors that
own voting stock of the Company that such persons intend to vote all shares of
voting stock of the Company owned by such shareholders in favor of the Reverse
Stock Split at the Special Meeting. The parties hereto recognize that, although
the Reverse Stock Split shall be submitted to a vote of the shareholders of the
Company at the Special Meeting, the Transaction is not conditioned in any manner
whatsoever on shareholder approval of the Reverse Stock Split. In the event that
the shareholders of the Company approve the Reverse Stock Split, the Company
shall take all actions necessary to implement the Reverse Stock Split prior to
the commencement of the Rights Offering.
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(c) As promptly as practicable after the date hereof, the Company shall
prepare, shall file with the SEC under the Exchange Act, shall use all
reasonable best efforts to have cleared by the SEC, and promptly thereafter
shall mail to its shareholders, a proxy statement with respect to the Special
Meeting. The term "Proxy Statement", as used herein, means such proxy statement
and all related proxy materials and all amendments and supplements thereto, if
any. Except to the extent otherwise determined in good faith by the Board of
Directors of the Company in the exercise of its fiduciary duties, taking into
account the advice of counsel, the Proxy Statement shall contain the
recommendation of the Board that shareholders of the Company vote in favor of
the adoption and approval of all matters necessary to effectuate the Transaction
and the Reverse Stock Split. The Company shall notify Buyer promptly of the
receipt of any comments on, or any requests for amendments or supplements to,
the Proxy Statement by the SEC, and the Company shall supply Buyer with copies
of all correspondence between it and its representatives, on the one hand, and
the SEC or members of its staff, on the other, with respect to the Proxy
Statement. The Company, after consultation with Buyer, shall use its reasonable
best efforts to respond promptly to any comments made by the SEC with respect to
the Proxy Statement. The Company and Buyer shall cooperate with each other in
preparing the Proxy Statement, and the Company and Buyer shall each use its
reasonable best efforts to obtain and furnish the information required to be
included in the Proxy Statement. The Company and Buyer each agrees promptly to
correct any information provided by it for use in the Proxy Statement if and to
the extent that such information shall have become false or misleading in any
material respect, and the Company further agrees to take all steps necessary to
cause the Proxy Statement as so corrected to be filed with the SEC and to be
disseminated promptly to holders of shares of the Common Stock, in each case as
and to the extent required by Applicable Law.
5.7 Debt Refinancing. The Company shall use its reasonable best efforts to
promptly negotiate and enter into the New Senior Credit Facility together with
one or more indentures for the New Notes, and such promissory notes, mortgages,
security agreements, underwriting agreements and other definitive agreements and
instruments required in connection with the Debt Refinancing, all of which shall
be in form and substance reasonably satisfactory to Buyer (the "Debt Refinancing
Documents") and to the extent the terms thereof are reflected in the
Registration Statement, the Buyer will acknowledge that such terms as so
reflected are satisfactory, subject to pricing of the New Notes, prior to the
filing of such statement. It is acknowledged and agreed by the parties that for
purposes hereof, the terms of the New Notes shall not be considered to be
satisfactory by Buyer if the per annum rate of interest rate on the New Notes,
on a weighted average basis, and the material terms of the New Notes are
materially less favorable to the Company than the indicative terms set forth in
the Sub-Debt Letter and in the other materials provided to the Company and Buyer
by the underwriters contemplated to manage the offering of the New Notes during
the course of the Company's review and negotiation of commitments for the Debt
Refinancing. The Company shall use its reasonable best efforts to satisfy all
requirements of the Debt Refinancing Documents; provided, however, that nothing
contained in this Agreement shall be deemed to require any person to waive
compliance with such documents. The obligations contained in this Section are
not intended, nor shall they be construed, to benefit or confer any rights upon
any person other than the parties hereto. Concurrently with the First Closing,
the Company shall pay in full, through redemption, prepayment or defeasance, all
outstanding indebtedness under the Hugoton Notes, the 12 3/4% Notes and the
Existing Credit Agreement and such other portion of the Existing Indebtedness as
is mutually agreed by the Company and Buyer, from cash on hand and funds to be
received at the First Closing of the Transaction. In addition, Buyer agrees to
comply with and to cause its Affiliates to comply with any reasonable requests
of the lenders providing the New Senior Credit Facility with respect to
providing a letter of credit, in favor of the Company, to secure Buyer's
obligation to purchase Shares at the Second Closing.
5.8 Rights Offering. The Company shall promptly prepare and submit to
Buyer for review, a form of subscription agreement, subscription certificate and
all other documents and instruments required in connection with the Rights
Offering, all of which shall be in form and substance reasonably satisfactory to
Buyer (the "Rights Offering Documents"). The Rights Offering Documents shall
provide, among other things, that the Rights Offering shall be generally
conducted in the manner described in Section 1.3(b) of this Agreement.
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5.9 Registration Statements. As promptly as practicable after the date
hereof, the Company shall prepare and file with the SEC registration statements
on Form S-3 for the purpose of registering under the Securities Act (i) the
offering, sale, and delivery of the securities issuable in the Rights Offering,
and (ii) if required, the offering, sale and delivery of securities issuable in
connection with the Debt Refinancing, in each case as necessary to effectuate
the Transaction. The term "Registration Statements", as used herein, means such
registration statements and all amendments and supplements thereto, if any. The
Company shall use all reasonable best efforts to have the Registration
Statements declared effective under the Securities Act as promptly as
practicable after the Special Meeting. The Company shall notify Buyer promptly
of the receipt of any comments on, or any requests for amendments or supplements
to, the Registration Statements by the SEC, and the Company shall supply Buyer
with copies of all correspondence between it and its representatives, on the one
hand, and the SEC or members of its staff, on the other, with respect to the
Registration Statements. The Company, after consultation with Buyer, shall use
its reasonable best efforts to respond promptly to any comments made by the SEC
with respect to the Registration Statements. The Company and Buyer each agrees
promptly to correct any information provided by it for use in the Registration
Statement if and to the extent that such information shall have become false or
misleading in any material respect, and the Company further agrees to take all
steps necessary to cause each Registration Statement (or the prospectus
contained therein) as so corrected to be filed with the SEC and to be
disseminated to the extent required by Applicable Law. The Company shall also
take any action (other than qualifying to do business in any jurisdiction in
which it is not now so qualified) reasonably required to be taken under any
applicable state securities laws in connection with the issuance of securities
pursuant to the Registration Statements.
5.10 Exclusivity Agreement.
(a) From the date of the Letter of Intent to the earlier of (i) the First
Closing Date, or (ii) the termination of this Agreement in accordance with its
terms (but not including upon or due to a breach of this Agreement by the
Company) (the "Exclusivity Period"), the Company will not, and will use its
reasonable best efforts to insure that its directors, officers, Affiliates and
representatives (collectively with the Company, the "Company Parties") do not,
directly or indirectly, solicit any offer from, initiate or engage in any
discussions or negotiations with, or provide any information to, any person or
group (other than Buyer and its Affiliates and their representatives and those
persons agreed upon by the Company and Buyer to effectuate the Rights Offering
and the Debt Refinancing as contemplated in this Agreement) concerning any
possible proposal regarding a sale by the Company of its equity securities, or
the issuance by the Company of debt and/or equity instruments in connection with
refinancing its existing indebtedness (other than any issuance in connection
with the restructuring of such indebtedness following a default in payment
thereof), or a merger, consolidation, liquidation, business combination, sale of
assets of the Company or other similar transaction involving the Company or a
substantial portion of the assets of the Company (any of the foregoing is
referred to herein as a "Company Transaction"); provided that, the Company
Parties may:
(i) respond to any party that initiates discussions regarding a
potential Company Transaction, solely to notify such party that it is
engaged in the Transaction and will not engage in any further
communications while pursuing the Transaction, except as permitted hereby;
(ii) respond to any unsolicited tender offer or exchange offer made by
a third party to the extent required by Rule 14e-2(a) promulgated under the
Exchange Act solely to recommend rejection of such offer and make such
disclosures in connection therewith as are required by Rule 14d-9
promulgated under the Exchange Act; and
(iii) respond or take any other action with respect to any unsolicited
tender or exchange offer made by a third party, to the extent required by
Rules 14e-2(a) and 14d-9 promulgated under the Exchange Act, in any manner
other than as permitted by the immediately preceding clause (ii), or
respond to, engage in discussions or negotiations with, otherwise
communicate with and provide information to a third party that initiates
such communication or requests such information regarding a potential
Company Transaction, but only if and to the extent that the Board of
Directors of the Company has determined in good faith, taking into account
the advice of its legal counsel and financial advisors, that its fiduciary
duties to the Company's shareholders require the Company to respond to,
communicate with or
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provide information to such third party regarding a potential Company
Transaction (collectively, the "Exclusivity Exception").
(b) The Company shall promptly advise Buyer orally and in writing of any
inquiry or proposal by a third party regarding any Company Transaction. Any
breach by the Company of its agreement contained in this Section 5.10 is herein
referred to as an "Exclusivity Breach".
5.11 Use of Proceeds. The funds received by the Companies at the First
Closing and the closing of the Debt Refinancing, and the funds received by the
Companies at the Second Closing and the closing of the Rights Offering, shall be
applied at the First Closing and the Second Closing, respectively, to pay in
full all of the Existing Indebtedness of the Companies and to pay costs and
expenses of the Transaction, with the remaining funds to be used for working
capital purposes.
5.12 Notification and Amendment of Schedules. Each party hereto agrees to
give prompt notice to the other party of (i) the occurrence or nonoccurrence of
any event the occurrence or nonoccurrence of which would be likely to cause any
representation or warranty contained herein to be untrue or inaccurate in any
material respect at or prior to the First Closing and/or the Second Closing, as
applicable, and (ii) any material failure to comply with or satisfy any
covenant, condition, or agreement to be complied with or satisfied by it
hereunder. In addition, each party agrees to supplement or amend promptly the
Schedules hereto with respect to any matter hereafter arising or discovered
prior to the First Closing Date which, if existing or known at the date of this
Agreement, would have been required to be set forth or described in the
Schedules. For all purposes of this Agreement, including without limitation for
purposes of determining whether the conditions set forth in Sections 6.1 and 7.1
have been fulfilled, the Schedules hereto shall be deemed to include only that
information contained therein on the date of this Agreement and shall be deemed
to exclude all information contained in any supplement or amendment thereto;
provided, however, that if the First Closing and the Second Closing shall occur,
then all matters disclosed pursuant to any such supplement or amendment at or
prior to the First Closing and the Second Closing shall be waived and no party
shall be entitled to make a claim thereon pursuant to the terms of this
Agreement.
5.13 Access to Information. During the Interim Period, the Company (i)
shall give Buyer and its authorized representatives reasonable access to the
Company's employees, offices and other facilities, and all books and records of
the Company and the Subsidiaries, (ii) shall permit Buyer and its authorized
representatives to make such inspections as they may reasonably require to
verify the accuracy of any representation or warranty contained in Article III,
and (iii) shall cause the Company's officers to furnish Buyer and its authorized
representatives with such financial and operating data and other information
with respect to the Company and the Subsidiaries as Buyer may from time to time
reasonably request; provided, however, that no investigation pursuant to this
Section shall affect any representation or warranty of the Company contained in
this Agreement or in any agreement, instrument, or document delivered pursuant
hereto or in connection herewith; and provided further that the Company shall
have the right to have a representative present at all times.
5.14 HSR Act Notification. To the extent it is determined that the HSR Act
will be applicable to the Transaction, each of the parties hereto shall (i) file
or cause to be filed, as promptly as practicable after the execution and
delivery of this Agreement and in no event later than ten Business Days after
the date of this Agreement, with the Federal Trade Commission and the United
States Department of Justice, all reports and other documents required to be
filed by such party under the HSR Act concerning the transactions contemplated
hereby and (ii) promptly comply with or cause to be complied with any requests
by the Federal Trade Commission or the United States Department of Justice for
additional information concerning the Transaction, in each case so that the
waiting period applicable to this Agreement and the Transaction contemplated
hereby under the HSR Act shall expire as soon as practicable after the execution
and delivery of this Agreement. Each party hereto agrees to request, and to
cooperate with the other party or parties in requesting, early termination of
any applicable waiting period under the HSR Act.
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5.15 Indemnification of Directors and Officers; Insurance.
(a) For the period of six years from and after the First Closing Date, the
Company shall indemnify, defend, and hold harmless each person who is now, or
has been at any time prior to the date hereof, or who becomes on or prior to the
First Closing Date, an officer, director, or employee of the Company or any of
the Subsidiaries (the "Covered Parties") against all losses, claims, damages,
costs, expenses (including reasonable attorneys' fees), liabilities, or
judgments or amounts that are paid in settlement with the approval of the
indemnifying party (which approval shall not be unreasonably withheld) of or in
connection with any claim, action, suit, proceeding, or investigation based in
whole or in part on acts or omissions, or alleged acts or omissions by, such
person in his capacity as a director, officer, or employee of the Company or any
of the Subsidiaries or as a prospective Series B Director (as such term is
defined in the Statement of Resolution), whether pertaining to any matter
existing or occurring at or prior to the First Closing Date and whether
reasserted or claimed prior to, or at or after, the First Closing Date ("Covered
Liabilities") and shall advance expenses and provide the benefit of self
insurance by the Company to the Covered Parties in connection therewith, to the
same extent that such Covered Party was entitled to indemnification, advancement
of expenses and the benefit of such self insurance from the Company pursuant to
Applicable Law, the Articles of Incorporation or Bylaws of the Company or by
contract on or prior to the First Closing Date, provided that any Series B
Director who is a Covered Party shall be entitled to indemnification for Covered
Liabilities to the same extent as if such Series B Director had held office
during the time that the Covered Liabilities arose.
(b) In the event that the Company shall amend its Articles of Incorporation
or Bylaws subsequent to the First Closing in any respect that would limit the
availability of indemnification to persons who are officers, directors, or
employees of the Company or any of the Subsidiaries, no such amendments shall
limit or otherwise have any effect on the contractual right of the Covered
Parties to receive indemnification pursuant to this Section 5.15. In addition,
no such amendment to the Articles of Incorporation or Bylaws of the Company
shall be made that would have an adverse effect on the Covered Parties unless
such amendment affects equally the Covered Parties and all directors, officers
and employees of the Company or any of the Subsidiaries who hold office at the
time such amendment is enacted.
(c) The Company shall, from and after the date of this Agreement and for
four years from the First Closing Date, maintain in effect the current
directors' and officers' liability insurance policies maintained by the Company
(provided that the Company may substitute therefor policies no less favorable in
terms and amounts of coverage so long as substitution does not result in gaps or
lapses in coverage) with respect to matters occurring prior to the Second
Closing Date; provided, however, that in no event shall the Company be required
to expend pursuant to this Section more than an amount per year equal to 150% of
current annual premiums paid by the Company for such insurance and, in the event
the cost of such coverage shall exceed that amount, the Company shall purchase
as much coverage as possible for such amount, and in any event the Company shall
provide the Covered Parties with the same terms and amounts of coverage as the
Company provides to those persons who are directors and officers of the Company
at the time such policies terminate.
(d) The Company shall amend its existing insurance coverage under the
Company's current policies of directors' and officers' liability insurance, or
obtain comparable replacement policies on terms no less favorable in terms of
coverage and amounts than those in effect on the date hereof, so that Buyer's
purchase of the Shares pursuant to this Agreement shall not constitute a "change
of control" of the Company or otherwise cause any of the Covered Parties or any
of persons who become officers, directors or employees of the Company on or
after the First Closing Date to be excluded from the coverage provided by such
insurance policies.
(e) In the event the Company or any of its successors or assigns (i)
consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger or
(ii) transfers all or substantially all of its properties and assets to any
person, then, and in each such case, proper provision shall be made so that the
successors and assigns of the Company shall assume the obligations set forth in
this Section 5.15. The provisions of this Section are intended to be for the
benefit of, and shall be enforceable by, the parties hereto and each person
entitled to indemnification or insurance coverage pursuant to this Section, his
heirs, and his representatives. The rights provided such persons under this
Section shall be
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in addition to, and not in lieu of, any rights to indemnity that such persons
may have under the Articles of Incorporation or Bylaws of the Company or any
other provisions herein or in other agreements.
(f) The defense of any claim, action, suit, proceeding, or investigation
forming the basis for the Covered Liabilities shall be conducted by the Company.
If the Company has failed to conduct such defense, the Covered Parties may
retain counsel satisfactory to them and the Company shall pay all reasonable
fees and expenses of such counsel for the Covered Parties promptly as statements
therefor are received. The party not conducting the defense will use reasonable
efforts to assist in the vigorous defense of any such matter, provided that such
party shall not be liable for any settlement of any claim effected without its
written consent, which consent, however, shall not be unreasonably withheld. Any
Covered Party wishing to claim indemnification under this Section, upon learning
of any such claim, action, suit, proceeding, or investigation, shall notify the
Company (but the failure of a party so to notify the Company shall not relieve
the Company from any liability which it may have under this Section except to
the extent such failure materially prejudices the Company). If the Company is
responsible for the attorneys' fees of the Covered Parties, then the Covered
Parties as a group may retain only one law firm to represent them with respect
to each such matter unless there is, under applicable standards of professional
conduct, a conflict on any significant issue between the positions of any two or
more Covered Parties.
(g) If any provision or provisions of this Section 5.15 shall be held to be
invalid, illegal or unenforceable for any reason whatsoever, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby; and, to the fullest extent possible, the
provisions of this Section 5.15 shall be construed so as to give effect to the
intent manifested by the provisions held invalid, illegal or unenforceable.
5.16 Reasonable Best Efforts. Except as contemplated by Section
5.10(a)(iii) and subject to the fiduciary obligations of the directors of the
Company to the shareholders of the Company under Applicable Law, each party
hereto agrees that it will not voluntarily undertake any course of action
inconsistent with the provisions or intent of this Agreement and will use its
reasonable best efforts to take, or cause to be taken, all action and to do, or
cause to be done, all things reasonably necessary, proper, or advisable under
Applicable Laws to consummate the Transaction.
5.17 Cooperation and Information. Buyer shall cooperate fully with the
Company in connection with the preparation and filing of the Proxy Statement and
the Registration Statements, and Buyer shall obtain and furnish to the Company
in writing the information regarding Buyer, its Affiliates and the prospective
Series B Directors required to be included (based upon the advice of its
counsel) in the Proxy Statement and each Registration Statement.
5.18 Agreement of Limited Partnership of Buyer. Within five days from the
date hereof, Buyer will furnish to the Company a true and correct executed copy
of the agreement of limited partnership of Buyer, substantially in the form
provided to the Company as of the date hereof, executed by the partners of
Buyer, which agreement shall provide that its partners are required to
collectively make capital contributions in amounts sufficient to satisfy the
obligations of Buyer to purchase the Shares at the First Closing and Second
Closing, subject to no conditions other than the satisfaction of the conditions
to closing set forth in Article VII hereof. After delivery of such agreement to
the Company, Buyer and its partners shall not consent to the admission of any
additional or substituted partners at any time prior to the consummation of the
Second Closing. Buyer shall promptly furnish to the Company any amendment of
such agreement of limited partnership. No such amendment to the agreement of
limited partnership shall have the effect of changing the amount or in any
material respect the timing of the capital contributions that the partners of
Buyer are required to make to Buyer, or of amending or adding to the conditions
to the obligations of the partners to make capital contributions; nor shall the
partners of Buyer agree to any waiver thereunder that would have such an effect.
5.19 Equity Maintenance of General Partner of Buyer. During the Interim
Period and the period from the First Closing Date to the Second Closing Date,
Buyer and its general partner will enforce that certain Equity Maintenance
Agreement between the general partner and its sole shareholder, a copy of which
has been provided to Buyer, and will not permit the amendment, waiver or
termination of same, to the extent necessary in order to ensure that the general
partner of Buyer shall have sufficient financial resources to the
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extent necessary to satisfy the obligations of Buyer to purchase the Shares at
the First Closing and the Second Closing, respectively.
ARTICLE VI
CONDITIONS TO OBLIGATIONS OF THE COMPANY
6.1 Conditions to First Closing. The obligations of the Company to
consummate the transactions contemplated by this Agreement to be consummated at
the First Closing shall be subject to the fulfillment on or prior to the First
Closing Date of each of the following conditions:
(a) Representations and Warranties True. All the representations and
warranties of Buyer contained in this Agreement shall be true and correct on and
as of the First Closing Date (except to the extent otherwise contemplated by
this Agreement or the Ancillary Documents); provided, however, that (i) to the
extent that any such representation or warranty is made as of a specified date,
such representation or warranty shall have been true and correct as of such
specified date, and (ii) with respect to each representation and warranty that
is not otherwise qualified by its terms by a materiality standard (such as a
qualification that a future condition have a Material Adverse Effect), this
condition shall be satisfied if such representation or warranty shall be true
and correct in all material respects.
(b) Covenants and Agreements Performed. Buyer shall have performed and
complied in all material respects with all covenants and agreements required by
this Agreement to be performed or complied with by it on or prior to the First
Closing Date.
(c) Opinion of Counsel. The Company shall have received an opinion of legal
counsel to Buyer, dated the First Closing Date, in form reasonably satisfactory
to the Company, covering those matters set forth in Exhibit 6.1(c) attached
hereto, subject to customary assumptions, limitations and exclusions.
(d) HSR Act. To the extent that the HSR Act is applicable to the
Transaction, all waiting periods (and any extensions thereof) applicable to this
Agreement and the Transaction under the HSR Act shall have expired or been
terminated.
(e) Legal Proceedings. On the First Closing Date, other than suits to
enforce this Agreement, there shall not be (i) any effective injunction, writ,
or temporary restraining order or any other order of any nature issued by a
court or Governmental Entity of competent jurisdiction directing that any aspect
of the Transaction not be consummated, (ii) any Proceeding pending or threatened
in writing in which it is or may be sought to prohibit, substantially delay, or
rescind this Agreement, the Debt Refinancing Documents, the Rights Offering
Documents or any aspect of the Transaction or to obtain an award of damages in
connection with the Transaction and which, in the good faith judgment of either
of the parties, is material, or (iii) any Proceedings pending against the
Companies which, in the good faith judgment of either of the parties, would be
expected to have a Material Adverse Effect.
(f) Shareholder Approvals. The holders of the requisite number of shares of
outstanding capital stock of the Company shall have duly and validly approved
all items necessary to effectuate the Transaction to the extent that shareholder
approval is required.
(g) Stock Exchange Listing. The Series A Preferred Stock and the Conversion
Shares shall have been approved for listing on the New York Stock Exchange,
subject to official notice of issuance (and, in the case of the Series A
Preferred Stock, satisfactory distribution). The Rights shall have been approved
for trading on the New York Stock Exchange, subject to official notice of
issuance.
(h) Completion of Debt Refinancing. All conditions precedent to the closing
of the Debt Refinancing, as outlined in the Senior Debt Commitment, including
the execution and delivery of the Debt Refinancing Documents, the funding of the
loans to be provided under the New Senior Credit Facility and the issuance of
the New Notes, shall have been satisfied or duly waived and such closing shall
occur simultaneously with the First Closing.
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(i) Certificate. The Company shall have received a certificate executed by
a duly authorized person on behalf of Buyer dated the First Closing Date,
representing and certifying, in such detail as the Company may reasonably
request, that the conditions set forth in this Section 6.1 have been fulfilled.
6.2 Conditions to Second Closing. The obligations of the Company to
consummate the transactions contemplated by this Agreement to be consummated at
the Second Closing shall be subject to the fulfillment on or prior to the Second
Closing Date of each of the following conditions:
(a) Consummation of First Closing. The First Closing shall have occurred
prior to the Second Closing Date.
(b) Completion of Rights Offering. Either (i) the Rights Offering shall
have commenced and expired and the number of Unsubscribed Shares shall have been
determined, or (ii) a period of not more than 120 days nor less than 60 days
shall have elapsed since the First Closing Date, the length of such period to be
established in accordance with the requirement of the Debt Refinancing
Documents.
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF BUYER
7.1 Conditions to First Closing. The obligations of Buyer to consummate
the transactions contemplated by this Agreement to be consummated at the First
Closing shall be subject to the fulfillment on or prior to the First Closing
Date of each of the following conditions:
(a) Representations and Warranties True. All the representations and
warranties of the Company contained in this Agreement shall be true and correct
on and as of the First Closing Date (except to the extent otherwise contemplated
by this Agreement or the Ancillary Documents); provided, however, that (i) to
the extent that any such representation or warranty is made as of a specified
date, such representation or warranty shall have been true and correct as of
such specified date, and (ii) with respect to each such representation and
warranty that is not otherwise qualified by its terms by a materiality standard
(such as a qualification that a future condition have a Material Adverse
Effect), this condition shall be satisfied if such representation or warranty
shall be true and correct in all material respects.
(b) Covenants and Agreements Performed. The Company shall have performed
and complied with the agreement contained in Section 5.1 at all times during the
Interim Period, and the Company shall have performed and complied in all
material respects with all other covenants and agreements required by this
Agreement to be performed or complied with by it on or prior to the First
Closing Date.
(c) Opinion of Counsel. Buyer shall have received an opinion of legal
counsel to the Company, dated the First Closing Date, in form reasonably
satisfactory to Buyer, covering those matters set forth in Exhibit 7.1(c)
attached hereto, subject to customary assumptions, limitations and exclusions.
(d) Legal Proceedings. On the First Closing Date, other than suits to
enforce this Agreement, there shall not be (i) any effective injunction, writ,
or temporary restraining order or any other order of any nature issued by a
court or Governmental Entity of competent jurisdiction directing that any aspect
of the Transaction not be consummated, (ii) any Proceeding pending or threatened
in writing in which it is or may be sought to prohibit, substantially delay, or
rescind this Agreement, the Debt Refinancing Documents, the Rights Offering
Documents or any aspect of the Transaction or to obtain an award of damages in
connection with the Transaction and which, in the good faith judgment of either
of the parties, is material, or (iii) any Proceedings pending against the
Companies which, in the good faith judgment of either of the parties, would be
expected to have a Material Adverse Effect.
(e) HSR Act. To the extent that the HSR Act is applicable to the
Transaction, all waiting periods (and any extensions thereof) applicable to this
Agreement and the Transaction under the HSR Act shall have expired or been
terminated.
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(f) Shareholder Approvals. The holders of the requisite number of shares of
outstanding capital stock of the Company shall have duly and validly approved
all items necessary to effectuate the Transaction to the extent that shareholder
approval is required.
(g) No Adverse Changes. Since the date of this Agreement, there shall not
have been any Material Adverse Effect, other than as a result of changes in oil
and gas prices, but specifically including, without limitation, any material
reduction (other than by production of reserves) in the aggregate total of the
proved oil and gas reserves of the Company, below the aggregate reserve totals
reflected in the Reserve Report which, in the good faith judgment of Buyer,
makes it inadvisable for Buyer to proceed with the consummation of the
Transaction; provided that it is understood and agreed for all purposes of this
Agreement that the receipt by the Company of any reserve report prepared by
persons other than the Company, containing estimates of proved reserves less
than the estimate thereof set forth in the Reserve Report, shall not of itself
be deemed to constitute such a material reduction, unless such other reserve
report contains a materially lower estimate of proved reserves due to taking
into account (A) a physical event occurring subsequent to the date of the
Reserve Report or (B) additional interpretative data from that available at the
time of the preparation of the Reserve Report that, in the case of (A) or (B),
in the opinion of the Company's petroleum engineers, exercising their
independent professional judgment, would cause such persons to materially reduce
the estimates of proved reserves contained in the Reserve Report.
(h) Completion of Debt Refinancing. All conditions precedent to the closing
of the Debt Refinancing, as outlined in the Senior Debt Commitment, including
the execution and delivery of the Debt Refinancing Documents, the funding of the
loans to be provided under the New Senior Credit Facility and issuance of the
New Notes, shall have been satisfied or duly waived and such closing shall occur
simultaneously with the First Closing.
(i) Commencement of Rights Offering; Stock Exchange Listing. The Rights
Offering Documents shall have been substantially completed (other than for such
amendments to the Rights Offering Documents as are necessary to reflect the
consummation of the transactions contemplated at the First Closing), and all
other conditions precedent to the commencement of the Rights Offering (other
than the declaration by the SEC of effectiveness of the Rights Offering
Registration Statement) shall have been satisfied at the First Closing so that
the Rights Offering may be commenced as promptly as practicable following the
First Closing. The Series A Preferred Stock and the Conversion Shares shall have
been approved for listing on the New York Stock Exchange, subject to official
notice of issuance (and, in the case of the Series A Preferred Stock,
satisfactory distribution). The Rights shall have been approved for trading on
the New York Stock Exchange, subject to official notice of issuance.
(j) Resignations and Elections of Directors. All but three members of the
Company's current Board of Directors shall have submitted written resignations
to become effective at the First Closing Date so that immediately upon Buyer's
purchase of the Shares, Buyer may, by execution and delivery of a written
consent, elect four members of the Board of Directors effective as of the First
Closing Date. In addition, the current Board of Directors shall have duly
approved the nomination of such four persons designated by Buyer but only to the
extent such persons are not Richard Rainwater, Darla Moore, Kenneth Hersh and
Philip Smith.
(k) Amendment of Articles and Bylaws. The Articles of Incorporation and/or
Bylaws of the Company and each of its Subsidiaries will have been amended on or
prior to the First Closing Date in a form acceptable to the Company and Buyer in
order to effectuate the Transaction contemplated herein, including, without
limitation, such amendments to the Bylaws of the Company as will establish the
Board of Directors at seven members. None of the provisions of the Articles of
Incorporation or Bylaws of the Company shall prohibit or restrict the authority
of the Board of Directors, by action of a majority of its members, from amending
the Company's Bylaws, provided that the Bylaws may provide (and may be amended
after the date hereof to provide) that (i) the number of directors shall not be
less than seven (plus any directors elected by the Series A Preferred Stock
pursuant to the rights of the holders of such stock to elect two directors in
the event of certain dividend arrearages), (ii) each committee of the Board of
Directors shall be constituted so as to provide that at least one member of each
committee will be one of the directors as to which the holders of Common Stock
are entitled to vote (and such directors shall be entitled to determine the
identity of their
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representative on such committee), (iii) any two directors shall be entitled to
call a special meeting of the Board of Directors and (iv) none of such
provisions shall be amended by action of the Board of Directors without the
unanimous vote or consent of all directors.
(l) Directors and Officers Insurance. Each of the representatives of Buyer
serving on the Board of Directors of the Company shall receive the same
insurance coverage under the Company's director and officer insurance policies
as the Company's directors receive as of the date hereof (including coverage for
liabilities arising before the date of taking office to the extent arising from
such person's status as a prospective director of the Company), such policies
shall be in full force and effect in accordance with their terms in existence as
of the date of this Agreement, except to the extent such policies are required
to be amended pursuant to Section 5.15(d) hereof, and the Company shall have
provided to Buyer a copy of such policies together with the riders and schedules
thereto which evidence compliance with this condition.
(m) Certificates. Buyer shall have received a certificate or certificates
representing the Shares purchased at the First Closing, in definitive form
representing the Shares, registered in the name of Buyer and duly executed by
the Company.
(n) Officer Certificate. Buyer shall have received a certificate executed
on behalf of the Company by the chief executive officer or the chief financial
officer of the Company, dated the First Closing Date, representing and
certifying, in such detail as Buyer may reasonably request, that the conditions
set forth in this Section 7.1 have been fulfilled.
7.2 Conditions to Second Closing. The obligations of Buyer to consummate
the transactions contemplated by this Agreement to be consummated at the Second
Closing shall be subject to the fulfillment on or prior to the Second Closing
Date of each of the following conditions:
(a) Consummation of First Closing. The First Closing shall have occurred
prior to the Second Closing Date.
(b) Completion of Rights Offering. Either (i) the Rights Offering shall
have commenced and expired and the number of Unsubscribed Shares shall have been
determined, or (ii) a period of not more than 120 days nor less than 60 days
shall have elapsed since the First Closing Date, the length of such period to be
established in accordance with the requirements of the Debt Refinancing
Documents.
ARTICLE VIII
TERMINATION, AMENDMENT, AND WAIVER
8.1 Termination Prior to First Closing. This Agreement may be terminated
and the transactions contemplated hereby abandoned at any time prior to the
First Closing in the following manner:
(a) by mutual written consent of the Company and Buyer; or
(b) by the Company or Buyer after November 30, 1996 if the First Closing
shall not have occurred by the close of business on such date, so long as the
failure to consummate the transactions contemplated to be consummated at the
First Closing on or before such date does not result from a breach of this
Agreement by the party seeking termination of this Agreement; or
(c) by the Company, if (i) any of the representations and warranties of
Buyer contained in this Agreement shall not be true and correct when made or at
any time prior to the First Closing as if made at and as of such time, except
(A) as contemplated hereby or (B) with respect to each representation and
warranty that is not otherwise qualified by its terms by a materiality standard
(such as a qualification that a future condition have a Material Adverse
Effect), such representation and warranty shall not be true and correct in all
material respects, or (ii) Buyer shall have failed to fulfill any of its
obligations in this Agreement in all material respects; and, in the case of each
of clauses (i) and (ii), such misrepresentation, breach of warranty, or failure
(provided it can be cured) has not been cured within five days of actual
knowledge thereof by Buyer; or
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(d) by Buyer, if (i) any of the representations and warranties of the
Company contained in this Agreement shall not be true and correct when made or
at any time prior to the First Closing as if made at and as of such time, except
(A) as contemplated hereby or (B) with respect to each representation and
warranty that is not otherwise qualified by its terms by a materiality standard
(such as a qualification that a future condition have a Material Adverse
Effect), any such representation and warranty shall not be true and correct in
all material respects, (ii) the Company shall have failed to fulfill any of its
obligations under Section 5.1, or (iii) the Company shall have failed to fulfill
any of its obligations in this Agreement (other than those obligations set forth
in Section 5.1) in all material respects; and, in the case of each of clauses
(i), (ii) and (iii), such misrepresentation, breach of warranty, or failure
(provided it can be cured) has not been cured within five days of actual
knowledge thereof by the Company; or
(e) by Buyer at any time following (i) an Exclusivity Breach, or (ii) the
invoking by the Board of Directors of the Company of the Exclusivity Exception;
(f) by Buyer at any time (i) following any breach of the representation and
warranty contained in Section 3.15 (regardless of whether the breach of such
representation and warranty is caused by the Company or a WDB Party), or (ii) in
the event that any WDB Party shall have (A) initiated, prior to the Special
Meeting, a "Solicitation Action" (as defined in the Settlement Agreement) (other
than giving notice to the Company pursuant to the Company's Bylaws of an
intention to nominate directors at the Company's 1996 annual meeting of
stockholders together with any information with respect to such nominees as is
required by the Bylaws), or (B) breached the Settlement Agreement or taken any
actions in the nature of those which are restricted by Sections 4, 6(a), 6(c) or
7 of the Settlement Agreement, which Solicitation Action, breach or other action
described in clause (A) or (B) is in Buyer's good faith judgment materially
adverse to Buyer or the Transaction (it being acknowledged by Buyer that letters
to the Board of Directors from Joel L. Reed and Dorn Parkinson, in form and
substance similar to the drafts thereof provided to Buyer on the date hereof,
and any subsequent inclusion of such letters in the Proxy Statement shall not
give rise to any right to terminate this Agreement pursuant to this subsection
(f)); or
(g) by the Company, if at any time the Board of Directors of the Company
has determined in good faith that the Exclusivity Exception should be invoked
and that the Company should pursue a potential Company Transaction not solicited
by the Company and the Company shall have made the payment to Buyer required by
Section 8.3; or
(h) by the Company or Buyer, if the shareholders of the Company shall have
rejected at a meeting the matters contained in the Proxy Statement that are
necessary in order to adopt and approve the Transaction; or
(i) by Buyer or the Company, upon the occurrence of a Bankruptcy Event;
(j) by Buyer, upon the occurrence of any default by the Company or its
Subsidiaries under the Existing Bank Debt or the 12 3/4% Notes if any holder of
any indebtedness pursuant to the Existing Bank Debt or the 12 3/4% Notes, or any
trustee or representative thereof, shall have taken any steps to accelerate any
such indebtedness or shall have commenced the exercise of any remedies permitted
pursuant to the agreements or other instruments creating such indebtedness.
8.2 Effect of Termination. In the event of the termination of this
Agreement pursuant to Section 8.1 by the Company, on the one hand, or Buyer, on
the other, written notice thereof shall forthwith be given to the other party
specifying the provision hereof pursuant to which such termination is made, and
this Agreement shall become void and have no effect, except that the provisions
contained in this Article VIII, Article IX and in Sections 5.4 and 5.5 shall
survive the termination hereof. Nothing contained in this Section shall relieve
any party from liability for any breach of this Agreement.
8.3 Termination Fee; Break-Up Fee.
(a) The Company agrees that on the date of termination of this Agreement by
Buyer pursuant to Section 8.1(e)(ii) or Section 8.1(f) or on the date of the
termination of this Agreement by the Company pursuant to Section 8.1(g), (i) the
Company will pay to Buyer a partial termination fee in the amount of (A)
$300,000 in cash, in the case of a termination pursuant to Section 8.1(e)(ii) or
Section 8.1(g), or
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(B) $500,000 in cash, in the case of a termination pursuant to Section 8.1(f),
which such fee is in addition to the fees and expenses for which the Company is
obligated to reimburse Buyer pursuant to Section 5.4, and (ii) if the Company
subsequently participates in any Company Transaction within a one year period
following the termination of this Agreement, or in any Company Transaction with
a third party with whom the
Company communicated during the Exclusivity Period as a result of invoking the
Exclusivity Exception (regardless of the date of the closing of such
transaction), the Company will pay a fee to Buyers at the time of the closing of
such transaction in the amount of $2,700,000 cash.
(b) The parties acknowledge that it would be difficult to establish the
amount of actual damages that Buyer would incur as a result of the occurrence of
any Exclusivity Breach. Therefore, in addition to the fees and expenses for
which the Company is obligated to reimburse Buyer pursuant to Section 5.4, the
Company agrees that upon any termination of this Agreement pursuant to Section
8.1(e)(i) as a result of an Exclusivity Breach (i) the Company will on the date
of such termination, pay as partial liquidated damages to Buyer, the amount of
$500,000 in cash, and (ii) if the Company shall subsequently participate in any
Company Transaction within a one year period following the termination of this
Agreement, or in any Company Transaction with a third party with whom the
Company communicated during the Exclusivity Period in breach of Section 5.10
(regardless of the date of the closing of such transaction), the Company will
pay liquidated damages to Buyer at the time of the closing of such transaction
in the amount of $3,500,000 cash.
8.4 Amendment. This Agreement may not be amended except by an instrument
in writing signed by or on behalf of all the parties hereto.
8.5 Waiver. No failure or delay by a party hereto in exercising any right,
power, or privilege hereunder shall operate as a waiver thereof nor shall any
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power, or privilege. The provisions
of this Agreement may not be waived except by an instrument in writing signed by
or on behalf of the party against whom such waiver is sought to be enforced.
ARTICLE IX
SURVIVAL OF REPRESENTATIONS;
INDEMNIFICATION
9.1 Survival. The representations and warranties of the parties hereto
contained in Articles III and IV of this Agreement or in any certificate
delivered pursuant to Section 6.1(i) or 7.1(n) hereof shall survive the First
Closing and the Second Closing, respectively, regardless of any investigation
made by or on behalf of any party, until the second anniversary of the First
Closing Date (the "Survival Date".) No action may be brought with respect to a
breach of any representation after the Survival Date unless, prior to such time,
the party seeking to bring such an action has notified the other parties of such
claim, specifying in reasonable detail the nature of the loss suffered. The
provisions of this Section 9.1 shall have no effect upon any of the covenants of
the parties set forth in Article V or any of the other obligations of the
parties hereto under the Agreement, whether to be performed later, at or after
the First Closing or the Second Closing, as applicable.
9.2 Indemnification by Company.
(a) The Company shall indemnify, defend, and hold harmless Buyer, Richard
E. Rainwater, their respective Affiliates and each of their respective
directors, officers, employees and agents (collectively, the "Indemnified
Parties") from and against any and all Indemnified Liabilities, REGARDLESS OF
WHETHER SUCH INDEMNIFIED LIABILITIES ARE CAUSED BY THE NEGLIGENCE OF AN
INDEMNIFIED PARTY; provided however, that the Company shall not be obligated to
indemnify an Indemnified Party with respect to any Indemnified Liabilities to
the extent it is ultimately determined by a final non-appealable judgment of a
court of competent jurisdiction that such Indemnified Liabilities were caused by
the gross negligence, willful misconduct or material breach of this Agreement of
or by such Indemnified Party.
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(b) At the written request of an Indemnified Party, the Expenses incurred
by an Indemnified Party in connection with any Proceeding, other than as
provided in subparagraph (c), shall be paid by the Company as and when incurred
by the Indemnified Party in advance of the final disposition of such Proceeding
upon receipt by the Company of an undertaking by or on behalf of an Indemnified
Party to repay promptly such amount to the extent that it is ultimately
determined that an Indemnified Party is not entitled to be indemnified by the
Company (a "Repayment Undertaking"). The request for advancement of Expenses by
an Indemnified Party and the Repayment Undertaking need not be secured. Any
advancement of Expenses shall be made no later than 20 days after receipt by the
Company of the Repayment Undertaking from the Indemnified Party, and is required
to be made notwithstanding any allegation by the Company or any other person
that an Indemnified Party is not entitled to Indemnification pursuant to the
exception set forth in subparagraph (a) hereof.
(c) Notwithstanding any other provisions herein, the Company shall not be
obligated hereunder to indemnify or advance Expenses to an Indemnified Party
with respect to any Proceeding, or any claim therein, brought or made (i) by an
Indemnified Party against the Company, other than a Proceeding, or a claim
therein, made by an Indemnified Party in connection with successfully
establishing or enforcing his right of indemnification or to receive advancement
of Expenses, in whole or in part, hereunder, or (ii) by the Company against
Buyer pursuant to Section 9.3 hereof.
(d) No indemnification shall be required to be made by the Company pursuant
to this Article IX with respect to any Indemnified Liabilities exclusively
arising out of or resulting from claims made by Buyer (and not any third party
claims for which an Indemnified Party seeks indemnity) based upon the breach of
the representations and warranties of the Company contained in Article III
hereof or the certificate delivered pursuant to Section 7.1(n) hereof, unless
each such Indemnified Liability equals or exceeds $50,000 and except to the
extent the aggregate amount of all such Indemnified Liabilities incurred by the
Indemnified Parties arising out of or resulting from such breaches (whether
asserted, resulting, imposed, or incurred before, on, or after the First Closing
Date) exceeds $500,000.
(e) (i) Promptly after receipt by an Indemnified Party of notice of the
commencement of any Proceeding against an Indemnified Party with respect to
which an Indemnified Party demands indemnification or advancement of
Expenses hereunder, such Indemnified Party shall promptly notify the
Company in writing of the commencement thereof, provided that the failure
to so notify the Company shall not relieve it from any liability that it
may have to an Indemnified Party, except to the extent that such failure
has materially prejudiced the Company's ability to provide a defense in the
Proceeding. The Company shall have the right to assume the defense of any
such Proceeding, but the Indemnified Parties collectively shall have the
right, at the expense of the Company, to retain not more than one counsel
of their choice to represent the Indemnified Parties in such Proceeding.
The counsel for the Indemnified Parties may participate in, but not
control, the defense of such Proceeding.
(ii) The indemnity provided for herein shall cover the amount of any
settlements entered into by an Indemnified Party in connection with any
claim for which an Indemnified Party may be indemnified hereunder; provided
that, no settlement binding on an Indemnified Party may be made without the
consent of an Indemnified Party and the Company (which consent shall not be
reasonably withheld).
(iii) Any indemnification hereunder shall be made no later than 45
days after receipt by the Company of the written request of the Indemnified
Party.
(f) If an Indemnified Party is entitled under any provision hereof to
indemnification or to receive advancement by the Company for some or a portion
of the Expenses, judgments, fines or amounts paid in settlement actually and
reasonably incurred by the Indemnified Party in the investigation, defense,
appeal, settlement or other disposition of any proceeding but not, however, for
the total amount thereof, the Company shall nevertheless indemnify the
Indemnified Party for the portion thereof to which the Indemnified Party is
entitled.
(g) In the event of the Company's payment to an Indemnified Party
hereunder, the Company shall be subrogated to the extent of such payment to all
the rights of recovery of the Indemnified Party, who shall
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execute all papers required and shall do everything that may be necessary to
secure such rights, including without limitation the execution of such documents
as may be necessary to enable the Company effectively to bring suit to enforce
such rights.
(h) If any provision or provisions of this Section 9.2 shall be held to be
invalid, illegal or unenforceable for any reason whatsoever, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby; and, to the fullest extent possible, the
provisions of this Section 9.2 shall be construed so as to give effect to the
intent manifested by the provisions held invalid, illegal or unenforceable.
(i) The rights of indemnification and to receive advancement of Expenses as
provided herein shall not be deemed exclusive of any other rights to which an
Indemnified Party may be entitled under applicable law.
9.3 Indemnification by Buyer.
(a) Buyer shall indemnify, defend, and hold harmless the Company from and
against any and all claims, actions, causes of action, demands, assessments,
losses, damages, liabilities, judgments, settlements, penalties, costs and
Expenses of any nature whatsoever asserted against, resulting to, imposed upon,
or incurred by the Company, directly or indirectly, by reason of or resulting
from any breach by Buyer of any of its representations, warranties, covenants,
or agreements contained in this Agreement or in any certificate, instrument, or
document delivered pursuant hereto.
(b) No indemnification shall be required to be made by Buyer pursuant to
this Article IX with respect to any Indemnified Liabilities exclusively arising
out of or resulting from claims made by the Company (and not any third party
claims for which the Company seeks indemnity) based upon the breach of the
representations and warranties of Buyer contained in Article IV hereof or the
certificate delivered pursuant to Section 6.1(i) hereof, unless each such
Indemnified Liability equals or exceeds $50,000 and except to the extent the
aggregate amount of all such Indemnified Liabilities incurred by the Company
arising out of or resulting from such breaches (whether asserted, resulting,
imposed, or incurred before, on, or after the First Closing Date) exceeds
$500,000.
(c) Promptly after receipt by the Company of notice of the commencement of
any Proceeding against the Company with respect to which the Company demands
indemnification hereunder, the Company shall promptly notify Buyer in writing of
the commencement thereof, provided that the failure to so notify Buyer shall not
relieve it from any liability that it may have to the Company, except to the
extent that such failure has materially prejudiced Buyer's ability to provide a
defense in the Proceeding. Buyer shall have the right to assume the defense of
any such Proceeding, but the Company shall have the right, at the expense of
Buyer, to retain not more than one counsel of its choice to represent the
Company in such Proceeding. The counsel for the Company may participate in, but
not control, the defense of such Proceeding. The indemnity provided for herein
shall cover the amount of any settlements entered into by the Company in
connection with any claim for which the Company may be indemnified hereunder;
provided that, no settlement binding on the Company may be made without the
consent of the Company and Buyer (which consent shall not be reasonably
withheld). Any indemnification hereunder shall be made no later than 45 days
after receipt by Buyer of the written request of the Company.
(d) If the Company is entitled under any provision of this Section 9.3 to
indemnification by the Buyer for some or a portion of the Expenses, judgments,
fines or amounts paid in settlement actually and reasonably incurred by the
Indemnified Party in the investigation, defense, appeal, settlement or other
disposition of any proceeding but not, however, for the total amount thereof,
the Buyer shall nevertheless indemnify the Company for the portion thereof to
which the Company is entitled.
(e) In the event of Buyer's payment to the Company hereunder, Buyer shall
be subrogated to the extent of such payment to all the rights of recovery of the
Company, who shall execute all papers required and shall do everything that may
be necessary to secure such rights, including without limitation the execution
of such documents as may be necessary to enable Buyer effectively to bring suit
to enforce such rights.
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(f) If any provision or provisions of this Section 9.3 shall be held to be
invalid, illegal or unenforceable for any reason whatsoever, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby; and, to the fullest extent possible, the
provisions of this Section 9.3 shall be construed so as to give effect to the
intent manifested by the provisions held invalid, illegal or unenforceable.
(g) The rights of indemnification as provided herein shall not be deemed
exclusive of any other rights to which the Company may be entitled under
applicable law.
ARTICLE X
MISCELLANEOUS
10.1 Notices. All notices, requests, demands, and other communications
required or permitted to be given or made hereunder by any party hereto shall be
in writing and shall be deemed to have been duly given or made if delivered
personally, or transmitted by first class registered or certified mail, postage
prepaid, return receipt requested, or sent by prepaid overnight delivery
service, or sent by cable, telegram, or telefax, to the parties at the addresses
and telefax numbers set forth opposite their names on the signature page hereof
(or at such other addresses and telefax numbers as shall be specified by the
parties by like notice).
10.2 Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings, both written and oral,
between the parties and their Affiliates with respect to the subject matter
hereof, including, but not limited to, the Letter of Intent; provided that, that
certain Confidentiality Agreement between Rainwater, Inc. and the Company dated
February 21, 1996 shall remain in effect pending the First Closing of the
Transaction and shall terminate at the First Closing.
10.3 Binding Effect; Assignment; No Third Party Benefit. This Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns. Except as otherwise expressly
provided in this Agreement, neither this Agreement nor any of the rights,
interests, or obligations hereunder shall be assigned by any of the parties
hereto without the prior written consent of the other party. Except as provided
in Section 5.15 (which is expressly intended for the benefit of the "Covered
Parties," as defined therein) and Article IX, nothing in this Agreement, express
or implied, is intended to or shall confer upon any person other than the
parties hereto, and their respective heirs, legal representatives, successors,
and permitted assigns, any rights, benefits, or remedies of any nature
whatsoever under or by reason of this Agreement.
10.4 Severability. If any provision of this Agreement is held to be
unenforceable, then this Agreement shall be considered divisible and such
provision shall be deemed inoperative to the extent it is deemed unenforceable,
and in all other respects this Agreement shall remain in full force and effect
to the maximum extent permitted by Applicable Law; provided, however, that (i)
the provisions of Section 5.15(g) and Section 9.2(h) shall apply with respect to
the severability of the provisions pertaining to the right to indemnification
contained in Section 5.15 or Section 9.2, respectively, and (ii) if any
provision of this Agreement other than Section 9.2 is held unenforceable, and
the unenforceability of such provision would substantially impair the rights and
benefits and/or increase the duties and obligations of either party contained in
this Agreement, then this Agreement shall be terminated at the election of any
party whose rights and benefits are impaired or duties and obligations
increased, subject to the provisions of Article VIII hereof.
10.5 Injunctive Relief. The parties hereto acknowledge and agree that
irreparable damage would occur in the event any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of the provisions of this
Agreement, and shall be entitled to enforce specifically the provisions of this
Agreement, in any court of the United States or any state thereof having
jurisdiction, in addition to any other remedy to which the parties may be
entitled under this Agreement or at law or in equity.
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10.6 Independent Determination. From and after the First Closing Date, all
decisions on behalf of the Company as to the payment of indemnification pursuant
hereto and otherwise regarding the Company's rights and obligations pursuant to
this Agreement shall be made by a committee of directors consisting of all
directors other than those elected by the holder(s) of Series B Preferred Stock;
provided, however, that nothing contained in this Section 10.6 shall prevent any
Indemnified Party from receiving indemnification pursuant to some other source
(such as, by way of example, the bylaws of the Company in the event that such
Indemnified Party is a director of the Company and such director seeks
indemnification due to circumstances that do not pertain to an alleged breach of
this Agreement), and the determination as to whether indemnification pursuant to
such other source is available shall be made in accordance with the procedures
applicable thereto.
10.7 Approval of Series B Nominees. The execution and delivery of this
Agreement by the Company shall be deemed to constitute the approval by the Board
of Directors as constituted at the date hereof of Richard Rainwater, Darla
Moore, Kenneth Hersh and Philip Smith as the nominees of Buyer for election as
directors by Buyer as holder of the Series B Preferred Stock on the First
Closing Date.
10.8 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO
THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF.
10.9 Counterparts. This Agreement may be executed by the parties hereto in
any number of counterparts, each of which shall be deemed an original, but all
of which shall constitute one and the same agreement. Each counterpart may
consist of a number of copies hereof each signed by less than all, but together
signed by all, the parties hereto.
ARTICLE XI
DEFINITIONS
11.1 Certain Defined Terms. As used in this Agreement, each of the
following terms has the meaning given it in this Article:
"Affiliate" has the meaning specified in Rule 12b-2 promulgated under
the Exchange Act.
"Ancillary Documents" means each agreement, instrument, and document
(other than this Agreement) executed or to be executed by the Company or
Buyer in connection with the sale and purchase of the Shares as
contemplated by this Agreement.
"Applicable Law" means any statute, law, rule, or regulation or any
judgment, order, writ, injunction, or decree of any Governmental Entity to
which a specified person or property is subject.
"Bankruptcy Event" means the occurrence of any of the following with
respect to the Company or any of the Subsidiaries:
(i) making an assignment for the benefit of creditors;
(ii) filing a voluntary petition in bankruptcy;
(iii) being adjudicated a bankrupt or insolvent, or having entered
against it an order for relief in any bankruptcy or insolvency
proceeding;
(iv) filing a petition or answer seeking for itself any reorganization,
arrangement, composition, readjustment, liquidation, dissolution,
or similar relief under any statute, law, or regulation;
(v) filing an answer or other pleading admitting to or failing to
contest the material allegations of a petition filed against it in
any proceeding of the nature described in clause (iv) above; or
(vi) seeking, consenting to, or acquiescing in the appointment of a
trustee, receiver, or liquidator of it or all or any substantial
part of its properties.
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"Benefit Plan" means any bonus, profit sharing, compensation,
severance, termination, stock option, stock appreciation right, restricted
stock, performance unit, stock equivalent, stock purchase, pension,
retirement, deferred compensation, employment, severance, or other employee
benefit agreement, trust, plan, fund, or other arrangement for the benefit
or welfare of any director, officer, or employee.
"Business Day" shall mean any day other than a Saturday, a Sunday, or
a day on which banking institutions in Dallas, Texas are authorized or
obligated by law or executive order to close.
"Encumbrances" means liens, charges, pledges, options, mortgages,
deeds of trust, security interests, claims, restrictions (whether on
voting, sale, transfer, disposition, or otherwise), easements, and other
encumbrances of every type and description, whether imposed by law,
agreement, understanding, or otherwise.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exercise Period" means that period of time during which holders of
Rights may exercise rights to subscribe for Series A Preferred Stock of the
Company.
"Existing Credit Agreement" means that certain Third Amended and
Restated Credit Agreement dated November 29, 1996 among the Company, MESA
Operating Co., Societe Generale and the banks named therein, as amended
prior to the date hereof.
"Existing Indebtedness" means all existing indebtedness of the
Companies in respect of borrowed money, including the outstanding
indebtedness under the Existing Credit Agreement and the Existing Notes.
"Existing Notes" means the 12 3/4% Notes, the 13 1/2% Notes and the
Hugoton Notes.
"Expenses" shall mean any expenses incurred in connection with a
Proceeding, including, without limitation, all reasonable attorneys' fees,
retainers, court costs, transcript costs, fees of experts, witness fees,
travel expenses, duplicating costs, printing and binding costs, telephone
charges, postage, delivery service fees and all other disbursements or
expenses of the types customarily incurred in connection with prosecuting,
defending, preparing to prosecute or defend, investigating, or being or
preparing to be a witness in a Proceeding.
"Governmental Entity" means any court or tribunal in any jurisdiction
(domestic or foreign) or any public, governmental, or regulatory body,
agency, department, commission, board, bureau, or other authority or
instrumentality (domestic or foreign).
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"Hugoton Notes" means all outstanding notes issued by Hugoton Capital
Limited Partnership and Hugoton Capital Corporation pursuant to the
Indenture dated as of May 30, 1991 as amended, among the issuers and
Bankers Trust Company, as trustee.
"Indemnified Liabilities" mean any and all claims, actions, causes of
action, demands, losses, liabilities, obligations, losses, damages,
penalties and Expenses of any kind or nature whatsoever with respect to or
arising out of this Agreement, the Transaction (including the Debt
Refinancing and the Rights Offering), the actual or proposed execution,
delivery, enforcement and performance of this Agreement or the Ancillary
Documents, and/or otherwise arising directly or indirectly, by reason of or
resulting from any breach by the Company prior to the First Closing of any
of its representations, warranties, covenants, or agreements contained in
this Agreement or in any certificate delivered pursuant hereto, regardless
of whether discovered prior to or after the First Closing.
"Material Adverse Effect" means any change, development, or effect
(individually or in the aggregate) which is, or is reasonably likely to be,
materially adverse (i) to the business, assets, results of operations,
condition (financial or otherwise), or prospects of the Company and the
Subsidiaries considered as a whole, other than as a result of changes in
oil and gas prices, or (ii) to the ability of the
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Company to perform on a timely basis any material obligation of the Company
under this Agreement or any agreement, instrument, or document entered into
or delivered in connection herewith.
"Material Agreement" means (a) any written or oral agreement,
contract, lease, commitment, understanding, instrument or obligation to
which the Company or any Subsidiary is a party or by which the Company or
any Subsidiary or any of their respective properties may be bound involving
total value or consideration or liability in excess of $1,000,000, (b) any
loan or credit agreement, bond, debenture, note, mortgage or indenture by
which the Company or any Subsidiary or any of their respective properties
may be bound, or (c) any agreement set forth as an exhibit to the Company's
Form 10-K for the fiscal year ended December 31, 1995.
"Minimum Ownership Amount" shall have the meaning set forth in the
Statement of Resolution.
"New Notes" means unsecured notes of the Company and/or one or more of
its Subsidiaries, in an aggregate principal amount of at least
$500,000,000, subordinated to the indebtedness under the New Senior Credit
Facility, with terms not inconsistent with those contained in the Sub-Debt
Letter.
"New Senior Credit Facility" means the definitive agreements providing
for the extension of credit to the Companies substantially in accordance
with the terms set forth in the Senior Debt Commitment.
"person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, enterprise,
unincorporated organization, or Governmental Entity.
"Proceeding" means any action, suit or proceeding, whether civil,
criminal, administrative, arbitrative or investigative, any appeal in such
an action, suit or proceeding, and any inquiry or investigation that could
lead to such an action, suit or proceeding.
"reasonable best efforts" means a party's best efforts in accordance
with reasonable commercial practice and without the incurrence of
unreasonable expense.
"Rights" means the rights to subscribe to purchase Series A Preferred
Stock issued by the Company pursuant to the Rights Offering.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Debt Commitment" means that certain Senior Secured Credit
Revolving Credit Facility Commitment Letter, dated March 31, 1996, and
accompanying term sheet and that Senior Secured Revolving Credit Facility
Fee Letter dated March 31, 1996, each provided to the Company by The Chase
Manhattan Bank, N.A., Bankers Trust Company, Chase Securities Inc. and BT
Securities Corporation.
"Sub-Debt Letter" means that certain letter dated March 31, 1996
addressed to the Company from Chase Securities Inc. regarding the sale of
up to $525,000,000 of unsecured subordinated notes of the Company and/or
one or more of its Subsidiaries.
"Subsidiary" means any corporation, general partnership, limited
partnership, joint venture, or similar entity set forth as a "Subsidiary"
in Section 3.8 of the Disclosure Schedule.
"Taxes" means any income taxes or similar assessments or any sales,
excise, occupation, use, ad valorem, property, production, severance,
transportation, employment, payroll, franchise, or other tax imposed by any
United States federal, state, or local (or any foreign or provincial)
taxing authority, including any interest, penalties, or additions
attributable thereto.
"Tax Return" means any return or report, including any related or
supporting information, with respect to Taxes.
"12 3/4% Notes" means those certain 12 3/4% Secured Discount Notes due
June 30, 1998, and the 12 3/4% Discount Notes due June 30, 1996, issued by
the Company, MESA Operating Co., and MESA Capital Corporation, pursuant to
the Indenture dated as of May 1, 1993, as amended, among the issuers and
Harris Trust and Savings Bank, as trustee, and the Indenture dated as of
May 1, 1993, as amended, among the issuers and American Stock Transfer &
Trust Company, as trustee, respectively.
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"13 1/2% Notes" means the 13 1/2% Subordinated Notes due May 1, 1999
issued by the Company, MESA Operating Co., and MESA Capital Corporation
pursuant to the Indenture dated as of May 1, 1989, as amended, among the
issuers and Texas Commerce Bank National Association, as trustee.
"Unsubscribed Shares" shall mean the number of shares of Series A
Preferred Stock for which the holders of rights shall not have subscribed
during the Exercise Period.
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11.2 Certain Additional Defined Terms. In addition to such terms as are
defined in the opening paragraph of and the recitals to this Agreement and in
Section 11.1, the following terms are used in this Agreement as defined in the
Sections set forth opposite such terms:
<TABLE>
<CAPTION>
DEFINED TERM SECTION REFERENCE
- - --------------------------- -----------------
<S> <C>
Agreement....................................................................... Preamble
Buyer........................................................................... Preamble
CERCLA.......................................................................... 3.21(a)
Code............................................................................ 3.9(a)
Common Stock.................................................................... 3.3(a)
Company and Companies........................................................... Preamble
Company Parties................................................................. 5.10(a)
Company Transaction............................................................. 5.10(a)
Conversion Shares............................................................... 3.7
Covered Liabilities............................................................. 5.15(a)
Covered Parties................................................................. 5.15(a)
Debt Refinancing................................................................ 1.3
Debt Refinancing Documents...................................................... 5.7
Disclosure Schedule............................................................. 3.6
ERISA........................................................................... 3.9(a)
Employee Plans.................................................................. 3.9(a)
Environmental Laws.............................................................. 3.21(a)
Excess Shares................................................................... 1.3(b)
Exclusivity Breach.............................................................. 5.10(b)
Exclusivity Exception........................................................... 5.10(a)
Exclusivity Period.............................................................. 5.10(a)
First Closing................................................................... Article II
First Closing Date.............................................................. Article II
Indemnified Parties............................................................. 9.2(a)
Initial Payment................................................................. 5.4(a)
Interim Period.................................................................. 5.1
Letter of Intent................................................................ 5.4(a)
Multiemployer Plan.............................................................. 3.9(b)
Oil and Gas Properties.......................................................... 3.24
Proxy Statement................................................................. 5.6(c)
Purchase Price.................................................................. 1.2
RCRA............................................................................ 3.21(a)
Registration Statements......................................................... 5.9
Repayment Undertaking........................................................... 9.2(b)
Reserve Report.................................................................. 3.12
Reverse Stock Split............................................................. 1.3(c)
Rights.......................................................................... 1.3(b)
Rights Offering................................................................. 1.3(b)
Rights Offering Documents....................................................... 5.8
SEC............................................................................. 3.10
SEC Filings..................................................................... 3.10
Second Closing.................................................................. Article II
Second Closing Date............................................................. Article II
Series B Director...........................................................Statement of Resolution
Series A Preferred Stock........................................................ 1.3(b)
Series B Preferred Stock........................................................ Preamble
Settlement Agreement............................................................ 3.15
Shareholder Rights Plan......................................................... 3.3(a)
</TABLE>
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<PAGE> 126
<TABLE>
<CAPTION>
DEFINED TERM SECTION REFERENCE
- - --------------------------- -----------------
<S> <C>
Shares.......................................................................... 1.1
Special Meeting................................................................. 5.6(a)
Statement of Resolution......................................................... 1.1
Survival Date................................................................... 9.1
Transaction..................................................................... 1.3
WDB Party....................................................................... 3.15
</TABLE>
IN WITNESS WHEREOF, the parties have executed this Agreement, or caused
this Agreement to be executed by their duly authorized representatives, all as
of the day and year first above written.
<TABLE>
<S> <C>
THE COMPANY:
MESA INC.
Address:
1400 Williams Square West
5205 North O'Connor Boulevard
Irving, Texas 75039 By: /s/ STEPHEN K. GARDNER
Fax: (214) 402-7028 ---------------------------------------------
Stephen K. Gardner, Vice President and
Chief Financial Officer
BUYER:
DNR-MESA HOLDINGS, L.P.
By: Rainwater, Inc., General Partner
---------------------------------------------
777 Main Street
Suite 2700
Fort Worth, Texas 76102
Attention: Kenneth A. Hersh By: /s/ KENNETH A. HERSH
Fax: (817) 820-6650 ---------------------------------------------
Kenneth A. Hersh, Vice President
</TABLE>
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ANNEX C
[FORM OF]
STATEMENT OF RESOLUTION ESTABLISHING
SERIES OF SHARES
designated
SERIES A 8% CUMULATIVE CONVERTIBLE PREFERRED STOCK
and
SERIES B 8% CUMULATIVE CONVERTIBLE PREFERRED STOCK
of
MESA INC.
To the Secretary of State
of the State of Texas:
Pursuant to the provisions of Article 2.13D of the Texas Business
Corporation Act (the "TBCA"), and pursuant to Article IV of its Amended and
Restated Articles of Incorporation, the undersigned, MESA Inc., a corporation
organized and existing under the TBCA (the "corporation"), hereby submits the
following statement for the purpose of establishing and designating series of
its Preferred Stock, par value $.01, designated "Series A Cumulative Convertible
Preferred Stock" and "Series B Cumulative Convertible Preferred Stock" and
fixing and determining the relative rights and preferences thereof:
I. The name of the corporation is MESA Inc.
II. The following resolution establishing and designating series of shares
and fixing and determining the relative rights and preferences thereof, was duly
adopted by all necessary action on the part of the corporation, consisting of
due adoption by the Board of Directors of the corporation at a meeting held on
, 1996.
RESOLVED, that pursuant to the authority vested in the Board of
Directors of the corporation ("Board of Directors") in accordance with
provisions of its Amended and Restated Articles of Incorporation (the
"Articles of Incorporation"), two series of Preferred Stock, par value $.01
per share, of the corporation are hereby created, and that the designation
and number of shares thereof and the preferences, limitations and relative
rights thereof are as follows:
SECTION 1. DESIGNATION, NUMBER OF SHARES AND STATED VALUE OF SERIES A
PREFERRED STOCK. There is hereby authorized and established a series of
Preferred Stock that shall be designated as "Series A 8% Cumulative Convertible
Preferred Stock" (hereinafter referred to as "Series A Preferred"), and the
number of shares constituting such series shall be , plus, at any
time, such number of shares of Series B Preferred as have been or are at such
time being converted to shares of Series A Preferred pursuant to Section 16
hereof. Such number of shares may be increased, but not decreased, by resolution
adopted by the majority of the full Board of Directors. The "Stated Value" per
share of the Series A Preferred shall be equal to $[2.26](1).
SECTION 2. DESIGNATION, NUMBER OF SHARES AND STATED VALUE OF SERIES B
PREFERRED STOCK. There is hereby authorized and established a series of
Preferred Stock that shall be designated as "Series B 8% Cumulative Convertible
Preferred Stock" (hereinafter referred to as "Series B Preferred"), and the
number of shares constituting such series shall be . Such number of
shares may be increased, but not decreased, by resolution adopted by the
majority of the full Board of Directors. The "Stated Value" per share of the
Series B Preferred shall be equal to $[2.26](1).
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(1) Subject to appropriate adjustment for any reverse stock split effectuated
before issuance of the Series A and B Preferred Stock.
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SECTION 3. DEFINITIONS. In addition to the definitions set forth elsewhere
herein, the following terms shall have the meanings indicated:
"Affiliate" means (i) with respect to any Person, any other Person that
directly or indirectly controls or manages, is controlled or managed by, or is
under common control or management with such Person, whether through the
ownership of equity interests, by contract or otherwise, and (ii) with respect
to any individual, in addition to any Persons specified in clause (i), the
spouse, any parent or any child of such individual and any trust for the benefit
of such individual, spouse, parent or child.
"Average Gas Equivalent Price" shall mean for any Rolling 4 Quarter Period,
the average price received by the corporation during such period from sales of
oil and gas production, expressed on a natural gas equivalent basis per thousand
cubic feet ("Mcf") using a factor of 6 Mcf of natural gas per 1 barrel of
liquids, to be calculated as follows:
(i) the aggregate revenues of the corporation and its consolidated
subsidiaries during such Rolling 4 Quarter Period from sales of natural
gas, natural gas liquids and oil and condensate produced (other than that
used for fuel and shrinkage) and sold by the corporation and its
consolidated subsidiaries, as reported in the corporation's consolidated
financial statements, divided by,
(ii) the sum of (A) the total volume, on an Mcf basis, of natural gas
produced (other than that used for fuel and shrinkage) and sold by the
corporation and its consolidated subsidiaries during such Rolling 4 Quarter
Period, plus (B) the product of 6 times the total number of barrels of
natural gas liquids, oil and condensate, produced (other than that used for
fuel and shrinkage) and sold by the corporation and its consolidated
subsidiaries during such Rolling 4 Quarter Period, as derived from the
corporation's consolidated financial statements.
"Business Day" shall mean any day other than a Saturday, Sunday or a day on
which banking institutions in Dallas, Texas are authorized or obligated by law
or executive order to close.
"Closing Price" with respect to a particular security on any Trading Day
shall mean the last reported sales price, regular way, for such security on such
Trading Day, or, in case no sale takes place on such day, the average of the
closing bid and ask prices, regular way on such Trading Day, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if not listed or admitted to trading on the New York Stock Exchange, as reported
in the principal consolidated transaction reporting system with respect to
securities listed on the principal national securities exchange on which such
security is listed or admitted to trading or, if such security is not listed or
admitted to trading on any national securities exchange, the last quoted price
or, if not so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by the Nasdaq Stock Market or such other
system then in use, or, if on any such date such security is not quoted by any
such organization, the average of the closing bid and ask prices on such Trading
Day as furnished by a professional market maker making a market in such security
selected by the Board of Directors of the corporation. If on any such date no
market maker is making a market in such security, the fair value of such shares
on such date as determined in good faith by the Board of Directors shall be
used.
"Common Stock" shall mean the common stock, par value $0.01 per share, of
the corporation.
"Consolidated EBITDA" for any period, shall mean the consolidated net
income or loss of the corporation for such period determined in accordance with
GAAP, but excluding gains and losses not arising from operations (including,
without limitation, interest income, gains and losses from investments, gains
and losses from dispositions of oil and gas properties or other assets,
collections and settlements of claims and litigation, adjustments of contingency
reserves and other extraordinary and/or non-recurring gains and losses), plus,
to the extent the following have been deducted in determining such net income or
loss, interest expense, income taxes, depreciation, depletion and amortization
expense and impairment expense.
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"Conversion Price" shall mean the conversion price per share of Common
Stock into which the Series A Preferred and Series B Preferred is convertible,
as such conversion price may be adjusted pursuant to Section 10 hereof. The
initial Conversion Price will be $[2.26](1).
"full Board of Directors" when used in reference to the corporation's Board
of Directors, means the total number of members of the Board of Directors as
fixed by, or in the manner provided in, the Articles of Incorporation and Bylaws
(without regard to any then existing vacancies), including, any members elected
by the holders of the Series B Preferred pursuant hereto.
"Fixed Charge Coverage Ratio" shall mean as of the end of any Rolling 4
Quarter Period, the ratio of (i) the sum of (A) the Consolidated EBITDA for such
Rolling 4 Quarter Period, plus (B) one-third of gross operating rents paid
before sublease income as defined by Standard & Poor's Corporation ("Gross
Rents") , if any, for such period to (ii) the sum for such Rolling 4 Quarter
Period of (A) interest expense, both expensed and capitalized, of the
corporation and its consolidated subsidiaries for such period, plus (B)
one-third of Gross Rents for such period, plus (C) scheduled principal
amortization of indebtedness (including borrowed money and capitalized leases)
of the corporation and its consolidated subsidiaries.
"GAAP" shall mean generally accepted accounting principles in the United
States of America from time to time.
"Initial Partnership Affiliates" shall mean the Partnership, the Persons
that are partners of the Partnership as of the Original Issue Date of the Series
B Preferred and any of their respective Affiliates so long as they remain
Affiliates of the Partnership or such Persons.
"Junior Securities" means the Common Stock or any other series of stock
issued by the corporation ranking junior as to the Series A Preferred and Series
B Preferred in payment of dividends or distributions or upon liquidation,
dissolution, or winding-up of the corporation.
"Market Price" per share of Common Stock as of any date shall mean the
average of the daily Closing Prices for a period of twenty Trading Days ending
on such date.
"Minimum Ownership Amount" shall mean at any time, ownership of (i) at
least [insert number equal to 58% of the shares of Series B Preferred to be
purchased by the Partnership at the first closing] shares of Series B Preferred
or (ii) such number of shares of Common Stock and Underlying Common Stock which
is at least equal to 15 percent of the total number of shares of Common Stock
and Underlying Common Stock outstanding at such time. For purposes of this
definition, ownership of shares of Series B Preferred shall be considered to be
ownership of the corresponding shares of Underlying Common Stock.
"Minimum Ownership Condition" shall be satisfied at any time if (i) the
Minimum Ownership Amount is owned in the aggregate at such time by one or more
of the Initial Partnership Affiliates, (ii) at least one half of the Minimum
Ownership Amount is owned and held in the aggregate at such time by one or more
of the Rainwater Affiliates, and (iii) the power to vote at least a majority of
the shares of Series B Preferred outstanding at such time is held by Rainwater
Affiliates, which shall be satisfied (A) with respect to any shares of Series B
Preferred owned by the Partnership if a Rainwater Affiliate is at such time the
sole general partner of the Partnership, (B) with respect to any shares owned by
a Rainwater Affiliate if at such time the right to vote such shares is not
shared with any Person who is not a Rainwater Affiliate, and (C) with respect to
any shares owned by a Person other than a Rainwater Affiliate, if at such time a
Rainwater Affiliate shall have the sole right to vote such shares pursuant to a
voting agreement, voting trust, irrevocable proxy or other similar agreement
with terms reasonably satisfactory to the corporation; provided that, the
corporation shall have been presented with appropriate certifications or other
documentation demonstrating that the foregoing requirements have been met.
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(1) Subject to appropriate adjustment for any reverse stock split effectuated
before issuance of the Series A and B Preferred Stock.
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"Non-Series A and B Directors" shall mean the members of the Board of
Directors in whose election the holders of Common Stock are entitled to vote
(whether or not holders of shares of any other class or series are also entitled
to vote thereon).
"Original Issue Date" shall mean with respect to the Series A Preferred or
Series B Preferred, as the case may be, the date on which shares of such series
are first issued.
"Parity Security" means any class or series of stock issued by the
corporation ranking on a parity with the Series A Preferred and Series B
Preferred in payment of dividends or distributions or upon liquidation,
dissolution or winding-up of the corporation.
"Partnership" shall mean DNR-Mesa Holdings, L.P., a Texas limited
partnership.
"Partnership Affiliates" shall mean the Partnership, its partners and their
respective Affiliates for so long as they remain Affiliates of the Partnership
or such partners.
"Payable-in-Kind" or "Paid-in-Kind" when used in reference to any dividend
payable on the shares of Series A Preferred or Series B Preferred, means payment
of the dividend by issuance of that number of additional shares of Series A
Preferred or Series B Preferred, as the case may be, that has an aggregate
Stated Value equal to the dollar amount of such dividend then payable, rounded
to the nearest whole share (i.e. if less than .5 rounded down, and if .5 or more
rounded up). Shares of Series A Preferred or Series B Preferred issued as
dividends Payable-in-Kind shall be duly authorized, validly issued and
nonassessable and, upon issuance, shall have rights (including without
limitation, dividend, voting, conversion and redemption rights) identical to the
outstanding shares of Series A Preferred and Series B Preferred in respect of
which they are issued.
"Person" means any individual, corporation, association, partnership, joint
venture, limited liability company, trust, estate, or other entity or
organization.
"Rainwater Affiliates" shall mean, at any time, Richard E. Rainwater and
any of his Affiliates at such time. As of the date hereof, the Rainwater
Affiliates include, without limitation, Natural Gas Partners II, L.P. and
Natural Gas Partners III, L.P.
"Rolling 4 Quarter Period" means the most recently ended period of four
consecutive fiscal quarters of the corporation prior to the date of
determination.
"Senior Securities" means any class or series of stock issued by the
corporation ranking senior to the Series A Preferred and Series B Preferred in
payment of dividends or distributions or upon liquidation, dissolution, or
winding-up of the corporation.
"Trading Day" with respect to any security means (i) if such security is
listed or admitted for trading on any national securities exchange, a day on
which such national securities exchange is open for trading, or (ii) if such
security is not listed or admitted to trading on any national securities
exchange, a Business Day.
"Transfer Agent" means American Stock Transfer & Trust Corporation, or such
other agent or agents of the corporation as may be designated by the Board of
Directors as the transfer agent or conversion agent for the Series A Preferred
and Series B Preferred.
"Underlying Common Stock" means at any time, with respect to any share of
Series A Preferred or Series B Preferred, the aggregate number of shares of
Common Stock into which such share is then convertible at such time pursuant to
Section 10 hereof.
SECTION 4. DIVIDENDS AND DISTRIBUTIONS.
(a) The holders of outstanding shares of Series A Preferred and Series
B Preferred shall be entitled to receive, as and when declared by the
corporation, out of funds of the corporation legally available for the
payment of dividends, preferential quarterly dividends at the times and at
the rates provided for in this Section 4. Dividends on shares of the Series
A Preferred and Series B Preferred shall be cumulative and shall accrue
from and including the date of issuance of such shares to and including the
date on which such shares shall have been converted into Common Stock or
redeemed pursuant to Section 7 hereof.
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Such dividends shall accrue whether or not there shall be (at the time such
dividend becomes payable or at any other time) profits, surplus or other
funds of the corporation legally available for the payment of dividends.
(b) Dividends shall accrue on each outstanding share of Series A
Preferred and Series B Preferred at the rate of eight percent (8%) per
annum of the Stated Value (the "Dividend Rate") of such share. Dividends
shall be payable quarterly, in arrears, as of the last Business Day of each
December, March, June and September, commencing on September 30, 1996
(each, a "Dividend Payment Date").
(c) During the period beginning on the Original Issue Date of the
Series B Preferred and ending on the first Dividend Payment Date on or
following the fourth anniversary thereof (the "Exclusive PIK Period"),
dividends on outstanding shares of Series A Preferred and Series B
Preferred shall be Payable-in-Kind. After the Exclusive PIK Period,
dividends on the shares of Series A Preferred and Series B Preferred shall
be Payable-in-Kind or, at the corporation's option, if the "Stock Price
Threshold" (as defined in subsection (d) below) or the "Coverage Ratio or
Gas Price Threshold" (as defined in subsection (e) below) is satisfied as
of the record date for such dividend, payable in cash.
(d) For purposes hereof, the "Stock Price Threshold" shall be
satisfied as of a record date for a Dividend Payment Date after the
Exclusive PIK Period if the average of the daily Closing Prices for the
Common Stock during a period of ninety (90) consecutive Trading Days
preceding the tenth day prior to such record date, was more than three
times the Conversion Price then in effect. Once the Stock Price Threshold
has been satisfied, it shall be deemed to remain satisfied on each
subsequent quarterly Dividend Payment Date regardless of any subsequent
changes in the price of the Common Stock.
(e) For purposes hereof, the "Coverage Ratio or Gas Price Threshold"
shall be satisfied as of a record date for a Dividend Payment Date if
either (i) the Fixed Charge Coverage Ratio as of the end of the then most
recently ended Rolling 4 Quarter Period is in excess of 2.5; or (ii) the
Average Gas Equivalent Price realized by the corporation during the then
most recently ended Rolling 4 Quarter Period is in excess of $2.95. As a
condition to the payment of cash dividends on any Dividend Payment Date,
the Coverage Ratio or Gas Price Threshold must be satisfied as of the
record date for such quarterly Dividend Payment Date (unless the Stock
Price Threshold has been satisfied, in which case satisfaction of the
Coverage Ratio or Gas Price Threshold shall not be required).
(f) The amount of dividends payable on each Dividend Payment Date
shall be determined by applying the Dividend Rate from but excluding the
immediately preceding Dividend Payment Date (or from but excluding the date
of issuance of shares of Series A Preferred or Series B Preferred, with
respect to the first dividend period) to and including the Dividend Payment
Date.
(g) Notwithstanding the foregoing or anything else herein to the
contrary, however, (i) dividends payable on any Redemption Date (as defined
in Section 7 below), shall be payable in cash or in Common Stock in
accordance with Section 7 hereof, and (ii) dividends payable on any final
distribution date relating to a dissolution, liquidation or winding up of
the corporation, shall be payable in cash only. If the payment date does
not occur on a regular Dividend Payment Date, dividends shall be calculated
on the basis of the actual number of days elapsed from but excluding the
immediately preceding Dividend Payment Date to and including the Redemption
Date or such final distribution date. Dividends payable on the shares of
Series A Preferred and Series B Preferred for any period of less than a
full quarterly dividend period shall be computed on the basis of a 360-day
year comprised of twelve 30-day months.
(h) To the extent dividends are not paid in cash or Paid-in-Kind on a
Dividend Payment Date, all dividends which shall have accrued on each share
of Series A Preferred and Series B Preferred outstanding as of such
Dividend Payment Date shall be added to the Stated Value of such share of
Series A Preferred and Series B Preferred and shall remain a part thereof
until paid, and dividends shall accrue at the Dividend Rate and be paid on
such share of Series A Preferred and Series B Preferred on the basis of the
Stated Value, as so adjusted.
(i) Dividends payable on each Dividend Payment Date shall be paid to
record holders of the shares of Series A Preferred and Series B Preferred
as they appear on the books of the corporation at the close of
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business on the tenth Business Day immediately preceding the respective
Dividend Payment Date or on such other record date as may be fixed by the
Board of Directors of the corporation in advance of a Dividend Payment
Date, provided that no such record date shall be less than ten nor more
than sixty calendar days preceding such Dividend Payment Date.
(j) So long as any shares of Series A Preferred or Series B Preferred
are outstanding;
(i) No dividend or other distribution shall be declared or paid, or
set apart for payment on or in respect of, any Junior Securities (other
than dividends or distributions payable in shares of Junior Securities
or in rights to purchase Junior Securities), nor shall any Junior
Securities be redeemed, purchased or otherwise acquired for any
consideration (or any money be paid to a sinking fund or otherwise set
apart for the purchase or redemption of any such Junior Securities).
(ii) No dividend or other distribution, except as described in the
next succeeding sentence, shall be declared or paid, or set apart for
payment on or in respect of, Series A Preferred or Series B Preferred or
any Parity Securities for any period unless full cumulative dividends on
all outstanding shares of Series A Preferred and Series B Preferred and
any Parity Securities have been or contemporaneously are declared and
paid for all dividend periods terminating on or prior to the date set
for payment of such dividend. When dividends are not paid in full, as
aforesaid, on the shares of Series A Preferred and Series B Preferred
and any Parity Securities, all dividends declared upon such Parity
Securities shall be declared and paid pro rata so that the amounts of
dividends per share declared and paid on the shares of Series A
Preferred and Series B Preferred and such Parity Securities shall in all
cases bear to each other the same ratio that unpaid dividends per share
on the Series A Preferred and Series B Preferred and on such Parity
Securities bear to each other.
(iii) No shares of Series A Preferred or Series B Preferred or any
Parity Securities shall be redeemed, purchased or otherwise acquired for
any consideration (or any money be paid to a sinking fund or otherwise
set apart for the purchase or redemption of any such Parity Security) by
the corporation unless the full cumulative dividends on all outstanding
shares of Series A Preferred and Series B Preferred shall have been or
contemporaneously are declared and paid for all dividend periods
terminating on or prior to the date on which such redemption, purchase
or other payment is to occur.
SECTION 5. CERTAIN COVENANTS AND RESTRICTIONS. So long as any shares of
Series A Preferred or Series B Preferred are outstanding;
(a) The corporation shall at all times reserve and keep available for
issuance upon the conversion of the shares of Series A Preferred and Series
B Preferred as provided in Section 7 and Section 10, respectively, such
number of its authorized but unissued shares of Common Stock as will be
sufficient to permit the conversion of all outstanding shares of Series A
Preferred and Series B Preferred and all other securities and instruments
convertible into shares of Common Stock, and shall take all reasonable
action within its power required to increase the authorized number of
shares of Common Stock necessary to permit the conversion of all
outstanding shares of Series A Preferred and Series B Preferred and all
such other securities and instruments convertible into shares of Common
Stock.
(b) The corporation covenants and agrees that all shares of Common
Stock that may be issued as payment of the Redemption Price or upon
exercise of the conversion rights of shares of Series A Preferred and
Series B Preferred will, upon issuance, be fully-paid and nonassessable.
(c) The corporation will endeavor to make the shares of stock that may
be issued as payment of the Redemption Price or upon exercise of the
conversion rights of shares of Series A Preferred and Series B Preferred
eligible for trading upon any national securities exchange, or any
automated quotation system of a registered securities association, upon or
through which the Common Stock shall then be traded prior to such delivery.
(d) Prior to the delivery of any securities which the corporation
shall be obligated to deliver upon redemption or conversion of the Series A
Preferred or Series B Preferred, the corporation will endeavor to comply
with all federal and state securities laws and regulations thereunder
requiring the registration of
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such securities with, or any approval of or consent to the delivery of such
securities by, any governmental authority.
(e) The corporation shall pay all taxes and other governmental charges
(other than any income or franchise taxes) that may be imposed with respect
to the issue or delivery of shares of Common Stock upon conversion or
redemption of Series A Preferred or Series B Preferred as provided herein.
The corporation shall not be required, however, to pay any tax or other
charge imposed in connection with any transfer involved in the issue of any
certificate for shares of Common Stock in any name other than that of the
registered holder of the shares of the Series A Preferred or Series B
Preferred surrendered in connection with the conversion or redemption
thereof, or involved in the issue of any certificate for shares of Series A
Preferred in exchange for shares of Series B Preferred, and in such case
the corporation shall not be required to issue or deliver any stock
certificate until such tax or other charge has been paid, or it has been
established to the corporation's satisfaction that no tax or other charge
is due.
SECTION 6. LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution, or winding-up of the
corporation (in connection with the bankruptcy or insolvency of the
corporation or otherwise), whether voluntary or involuntary, before any
payment or distribution of the assets of the corporation (whether capital
or surplus) shall be made to or set apart for the holders of shares of any
Junior Securities, the holders of the shares of Series A Preferred and
Series B Preferred shall be entitled to receive an amount per share equal
to the Stated Value per share held by them, plus an amount in cash equal to
the full cumulative dividends accrued and unpaid thereon, to the date of
such payment, whether or not declared. No payment on account of any such
liquidation, dissolution or winding-up of the corporation shall be paid to
the holders of the shares of Series A Preferred or Series B Preferred or
the holders of any Parity Securities unless there shall be paid at the same
time to the holders of the shares of Series A Preferred and Series B
Preferred and the holders of any Parity Securities proportionate amounts
determined ratably in proportion to the full amounts to which the holders
of all outstanding shares of Series A Preferred and Series B Preferred and
the holders of all such outstanding Parity Securities are respectively
entitled with respect to such distribution. For purposes of this Section 6,
neither a consolidation or merger of the corporation with one or more
partnerships, corporations or other entities nor a sale, lease, exchange or
transfer of all or any substantial part of the corporation's assets for
cash, securities or other property shall be deemed to be a liquidation,
dissolution or winding-up of the corporation, whether voluntary or
involuntary.
(b) After payment of the full amount of the liquidation preference to
which the holders of shares of Series A Preferred and Series B Preferred
are entitled, such holders will not be entitled to any further
participation in any distribution of assets of the corporation.
(c) Written notice of any liquidation, dissolution or winding-up of
the corporation, stating the payment date or dates when and the place or
places where the amounts distributable in such circumstances shall be
payable, shall be given by first class mail, postage prepaid, not less than
15 days prior to any payment date stated therein, to the holders of record
of the shares of Series A Preferred and Series B Preferred at their
respective addresses as the same shall appear in the records of the
corporation.
SECTION 7. REDEMPTION. The outstanding shares of Series A Preferred and
Series B Preferred are subject to redemption in accordance with the following
provisions:
(a) Subject to the terms hereof, the corporation may at its option
elect to redeem outstanding shares of Series A Preferred and Series B
Preferred, in whole or in part (pro-rata or by lot among the outstanding
shares of both series), on any Dividend Payment Date after the thirtieth
(30th) day following the tenth (10th) anniversary of the Original Issue
Date of the Series B Preferred Stock.
(b) On June 30, 2008, the corporation shall redeem all of the shares
of Series A Preferred and Series B Preferred outstanding on such date.
(c) The redemption price per share for Series A Preferred and Series B
Preferred redeemed on any optional or mandatory redemption date (the
"Redemption Price") shall be equal to the Stated Value per
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share of the shares to be redeemed plus an amount equal to the aggregate
dollar amount of all accrued and unpaid dividends through the redemption
date that have not been added to the Stated Value of such shares. The
Redemption Price shall be paid in cash from any source of funds legally
available therefor, unless the corporation shall publicly announce at least
30 days prior to the redemption date that it has elected to make payment of
the Redemption Price in Common Stock, in which case the Redemption Price
shall be payable in Common Stock. If the corporation elects to pay the
Redemption Price in shares of Common Stock, the number (or fraction) of
shares to be issued in payment of the Redemption Price shall be calculated
based on the Market Price per share of Common Stock as of the fifth Trading
Day before the redemption date.
(d) Not less than thirty nor more than sixty days prior the redemption
date, a notice specifying the time and place of such redemption shall be
given by first class mail, postage prepaid, to the holders of record of the
shares of Series A Preferred and Series B Preferred to be redeemed at their
respective addresses as the same shall appear on the books of the
corporation (but no failure to mail such notice or any defect therein shall
affect the validity of the proceedings for redemption except as to the
holder to whom the corporation has failed to mail such notice or except as
to the holder whose notice was defective), calling upon each such holder of
record to surrender to the corporation on the redemption date at the place
designated in such notice such holder's certificate or certificates
representing the then outstanding shares of Series A Preferred or Series B
Preferred held by such holder. On or after the Redemption Date, each holder
of shares of Series A Preferred and Series B Preferred called for
redemption shall surrender his certificate or certificates for such shares
to the corporation at the place designated in the redemption notice and
shall thereupon be entitled to receive payment of the Redemption Price in
the manner set forth in Section 7(a) above. If the redemption is delayed
for any reason, dividends shall continue to accrue on the shares of Series
A Preferred and Series B Preferred outstanding, and shall be added to and
become a part of the Redemption Price of such shares, until the Redemption
Price, as so adjusted, for such shares is paid in full.
(e) If a holder of shares of Series A Preferred or Series B Preferred
called for redemption shall have elected, in accordance with the provisions
of Section 10(b), to convert such shares into Common Stock, such shares of
Series A Preferred or Series B Preferred which are to be converted into
Common Stock shall no longer be subject to redemption, and conversion of
same shall occur in accordance with the terms of Section 10.
SECTION 8. SHARES TO BE RETIRED. All shares of Series A Preferred and
Series B Preferred repurchased, redeemed, converted or otherwise acquired by the
corporation shall be retired and cancelled and shall be restored to the status
of authorized but unissued shares of Preferred Stock, without designation as to
series, and may thereafter be reissued.
SECTION 9. VOTING RIGHTS.
(a) Except as otherwise provided in this Section 9 or required by law
or any provision of the Articles of Incorporation of the corporation, the
holders of the shares of Series A Preferred and Series B Preferred shall
vote together with the shares of Common Stock as a single class at any
annual or special meeting of shareholders of the corporation upon the
following basis: each holder of shares of Series A Preferred and Series B
Preferred shall be entitled to such number of votes for the shares of
Series A Preferred and Series B Preferred held by such holder on the record
date fixed for such meeting as shall be equal to the whole number of shares
of Underlying Common Stock for such shares of Series A Preferred and Series
B Preferred immediately after the close of business on the record date
fixed for such meeting.
(b) With respect to any matter for which the affirmative vote of the
holders of separate classes or series of the corporation's capital stock is
required by the TBCA, the holders of Series A Preferred and Series B
Preferred shall, except as provided in this Section 9 or required by law,
vote together as a single class with respect to such matter and the holders
of the shares of Series A Preferred and Series B Preferred shall not be
entitled to vote as a separate class or series apart from each other,
including, without limitation, any vote on a proposal to approve or adopt
(i) any plan of merger, consolidation or
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share exchange for which the TBCA requires a shareholder vote; (ii) any
disposition of assets for which the TBCA requires a shareholder vote; and
(iii) any dissolution of the corporation for which the TBCA requires a
shareholder vote.
(c) For so long as any shares of Series A Preferred or Series B
Preferred remain outstanding, the corporation shall not: (i) without the
affirmative vote or consent of the holders of a majority of the shares of
Series A Preferred and Series B Preferred voting together as a single
class: (x) authorize, create or issue, or increase the authorized or issued
amount of, any class or series of stock of Senior Securities or Parity
Securities, or any security convertible into or exchangeable for Senior
Securities or Parity Securities or reclassify or modify any Junior
Securities so as to become Parity Securities or Senior Securities; provided
that if the Series A Preferred and Series B Preferred are affected
differently by such action, the holders of each series will vote as a
separate class; or (y) amend the Articles of Incorporation to eliminate
cumulative voting; or (ii) without the affirmative vote or consent of the
holders of two-thirds of the shares of Series A Preferred voting as a
separate class, adopt any amendment to the Articles of Incorporation or the
bylaws that would materially affect the terms of the Series A Preferred; or
(iii) without the affirmative vote or consent of the holders of at least a
majority of the shares of Series B Preferred voting as a separate class,
adopt any amendment to the Articles of Incorporation or the bylaws that
would materially affect the terms of the Series B Preferred.
(d) For so long as any shares of Series B Preferred remain
outstanding, the affirmative vote or consent of the holders of at least a
majority of the shares of Series B Preferred outstanding at the time shall
be necessary to permit, affect or validate the amendment, alteration or
repeal by the shareholders of any provisions of the Articles of
Incorporation (including the Statement of Resolution relating to the Series
A Preferred and Series B Preferred) or Bylaws of the corporation that would
limit the authority of the Board of Directors to amend or repeal any
provision of the corporation's Bylaws.
(e) For so long as any shares of Series B Preferred remain outstanding
and the Minimum Ownership Condition is met, the holders of the Series B
Preferred shall have, in addition to the other voting rights required by
law or set forth herein or in the corporation's Articles of Incorporation,
the exclusive right, voting separately as a single class, to elect the
minimum number of directors (such directors are referred to herein as the
"Series B Directors") necessary to constitute a majority of the full Board
of Directors of the corporation (excluding in any such calculation any
Series A Directors). As of the Original Issue Date for the Series B
Preferred, the holders of the Series B Preferred shall have the right to
elect four of the seven members of the corporation's Board of Directors.
The right to elect the Series B Directors pursuant hereto may be exercised
by written consent in accordance with subsection (j) of this Section 9 or
by vote at any annual or special meeting of shareholders held for the
purpose of electing directors. At elections for the Series B Directors,
each holder of Series B Preferred shall be entitled to one vote for each
share held.
(f) The Series B Directors elected as provided herein shall serve
until the next annual meeting or until their respective successors shall be
elected and shall qualify. Any Series B Director may be removed with or
without cause by, and shall not be removed other than by, the vote of the
holders of a majority of the outstanding shares of Series B Preferred,
voting separately as a class, at a meeting called for such purpose or by
written consent in accordance with subsection (j) hereof. If the office of
any Series B Director becomes vacant by reason of death, resignation,
retirement, disqualification or removal from office or otherwise, the
remaining Series B Directors, by majority vote, may elect a successor, or,
alternatively, the holders of a majority of the outstanding shares of
Series B Preferred, voting separately as a class, at a meeting called for
such purpose or by written consent in accordance with subsection (k) hereof
may elect a successor. Any such successor shall hold office for the
unexpired term in respect of which such vacancy occurred. Upon any
termination of the right of the holders of Series B Preferred to vote for
and elect Series B Directors as herein provided (i) the Series B Directors
then serving on the Board of Directors may continue to hold their office
for the remainder of their term, subject to the right of the majority of
the Non-Series A and B Directors to request their prior resignation, in
which case the Series B Directors shall resign upon such request, and (ii)
upon the expiration of the term of office or earlier resignation of each
Series B Director pursuant to this sentence, the number of members
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constituting the corporation's Board of Directors shall automatically be
reduced accordingly unless a majority of the directors other than the
Series B Directors by resolution determine otherwise and elect additional
directors to fill any resulting vacancies.
(g) The following special voting provisions shall be applicable to the
Series A Preferred Stock:
(i) if the corporation shall be in arrears in the payment of
dividends (whether Payable-in-Kind or in cash) on the shares of Series A
Preferred and Series B Preferred for a total of six quarterly Divided
Payment Dates, then the number of members of the Board of Directors
shall automatically be increased by two additional directors and the
holders of the Series A Preferred, voting as a separate class, shall
have the exclusive right to elect two directors ("Series A Directors")
immediately, and at the next and every subsequent annual meeting of
shareholders called for the election of directors, at which the term of
office of the Series A Directors expire;
(ii) the right of the holders of Series A Preferred to elect the
Series A Directors as aforesaid shall continue until such time as
dividends accumulated on the Series A Preferred shall have been paid in
full, whether Payable-in-Kind or in cash, at which time the office of
the Series A Directors shall be eliminated and the special right of the
holders of Series A Preferred so to vote separately as a class for the
election of the Series A Directors shall terminate, subject to revesting
at such time as the corporation shall be in arrears in the payment of
dividends on the outstanding shares of Series A Preferred as set forth
in clause (i) above;
(iii) each Series A Director shall agree, prior to his election to
office, to resign immediately upon any termination of the right of the
holders of Series A Preferred to vote as a separate class for directors
as herein provided, and upon any such termination, each Series A
Director shall forthwith resign and the size of the Board of Directors
shall automatically be reduced accordingly;
(iv) unless otherwise required to resign as aforesaid, the term of
office of each Series A Director shall terminate upon the election of a
successor Series A Director at any meeting of the shareholders held for
the purpose of electing directors; and
(v) in any case in which the holders of Series A Preferred shall be
entitled to vote pursuant to this Section 9(g), each holder of Series A
Preferred shall be entitled to one vote for each share of Series A
Preferred held.
(h) During any period in which the holders of Series A Preferred shall
be entitled to elect directors pursuant to subsection (g) of this Section
9, or the holders of Series B Preferred shall be entitled to elect
directors pursuant to subsection (e) of this Section 9 the following shall
be applicable:
(i) if the annual meeting of shareholders of the corporation is
not, for any reason, held within the time fixed in the Bylaws of the
corporation, or if a vacancy shall exist in the office of a Series A
Director or a Series B Director, a proper officer of the corporation,
upon the written request of the holders of record of at least ten
percent (10%) of the shares of the Series A Preferred or Series B
Preferred then outstanding, as applicable, addressed to the Secretary of
the corporation, shall call a special meeting in lieu of the annual
meeting of shareholders, or in the event of a vacancy, a special meeting
of the holders of Series A Preferred or Series B Preferred, as
applicable, for the purpose of electing Series A Directors or Series B
Directors, as applicable, and any such meeting shall be held at the
earliest practicable date at such time and place as shall be determined
by the corporation;
(ii) if such meeting shall not be called by the proper officer of
the corporation within twenty (20) days after personal service of said
written request upon the Secretary of the corporation, or within (20)
days after mailing the same within the United States by certified mail,
addressed to the Secretary of the corporation at its principal executive
offices, then the holders of record of at least ten percent (10%) of the
outstanding shares of the Series A Preferred or Series B Preferred, as
applicable, may designate in writing one of their number to call such
meeting at the expense of the corporation, and such meeting may be
called by the person so designated upon the notice required for the
annual meetings of shareholders of the corporation and shall be held at
the principal
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executive offices of the corporation. Any holder of Series A Preferred
or Series B Preferred, as applicable, so designated shall have access to
the lists of Series A Preferred or Series B Preferred shareholders to be
called pursuant to the provisions hereof; and
(iii) at any meeting held for the purpose of electing a director at
which the holders of Series A Preferred or Series B Preferred shall have
the right, voting as a separate class, to elect the Series A Director or
Series B Director pursuant to this Section 9, the presence in person or
by proxy of the holders of at least one-third ( 1/3) of the outstanding
Series A Preferred or Series B Preferred, as applicable, shall be
required to constitute a quorum of such Series A Preferred or Series B
Preferred, as applicable.
(i) During any period in which the holders of Series B Preferred shall
be entitled to elect directors pursuant to subsection (e) of this Section
9, (i) the holders of Series B Preferred shall not have the right or
otherwise be entitled to vote in the election of any directors other than
the Series B Directors, (ii) no Series B Director shall have the right to
vote in the election of any person to fill any vacancy created by the
death, resignation, retirement, disqualification or removal from office or
otherwise of any director other than a Series B Director and all such
rights with respect to the Non-Series A and B Directors shall be exercised
for and on behalf of the Board of Directors by a majority of the Non-Series
A and B Directors, and (iii) only the Non-Series A and B Directors shall
have right to vote in any action by or on behalf of the Board of Directors
with respect to nominating persons to serve as Non-Series A and B Directors
to be elected at any meeting of shareholders that is held after the first
meeting of shareholders at which Non-Series A and B Directors are elected
that is held after the Original Issue Date of the Series B Preferred. The
persons to be nominated by or on behalf of the Board of Directors for
election as Non-Series A and B Directors at such first meeting of
shareholders to be held after such Original Issue Date shall be such
persons as shall have most recently been designated as such nominees by
action of the Board of Directors prior to such Original Issue Date (or, if
any of such nominees shall be unable or unwilling to serve, such other
person or persons as shall be designated by the other such nominee or
nominees), unless otherwise agreed after such date by the unanimous vote of
all Non-Series A and B Directors then in office. Nothing in clause (ii) or
(iii) above of this subsection (i), or in the immediately preceding
sentence, shall limit or restrict the right of holders of shares of Common
Stock and Series A Preferred to nominate and to elect, subject to and in
accordance with applicable law, the other provisions of the Articles of
Incorporation and the bylaws, persons to serve as Non-Series A and B
Directors. This subsection (i) and the defined terms used herein may not be
amended without (x) the affirmative vote of the holders of a majority of
the outstanding shares of Common Stock and (y) the affirmative vote of the
holders of a majority of the outstanding shares of Series A Preferred
Stock.
(j) Pursuant to Article 9.10A of the TBCA, any action of the holders
of the Series B Preferred, voting as a separate class, which is required by
the TBCA to be taken at any annual or special meeting of the holders of the
Series B Preferred, or is otherwise permitted to be taken by the holders of
Series B Preferred at any annual or special meeting pursuant to the TBCA,
the Articles of Incorporation (including the Statement of Resolution
relating to the Series A Preferred and Series B Preferred) or the
corporation's bylaws, may be taken without a meeting, without prior notice,
and without a vote, if a consent or consents in writing, setting forth the
action so taken, shall be signed by the holder or holders of shares of
Series B Preferred having not less than the minimum number of votes that
would be necessary to take such action at a meeting at which the holders of
all shares of Series B Preferred were present and voted.
SECTION 10. CONVERSION RIGHTS. Holders of shares of Series A Preferred and
Series B Preferred shall have the right to convert all or a portion of such
shares into shares of Common Stock, as follows:
(a) Subject to and upon compliance with the provisions of this Section
10, each share of Series A Preferred and Series B Preferred shall be
convertible at the option of the holder thereof into fully paid,
nonassessable shares of Common Stock. The number (or fraction) of shares of
Common Stock deliverable upon conversion of one share of Series A Preferred
or Series B Preferred shall be determined by dividing the Stated Value of
such share of Series A Preferred or Series B Preferred by the Conversion
Price then in effect. For purpose of such determination, the Stated Value
of each share of Series A
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Preferred or Series B Preferred shall be increased by the amount of accrued
and unpaid dividends for all quarterly dividend payment periods ending on
or prior to the date such shares are surrendered to the corporation for
conversion and for the partial dividend period beginning on the date
immediately following the most recent Dividend Payment Date through and
including the date on which such shares are surrendered for conversion.
Notwithstanding the foregoing, holders of shares of Series A Preferred and
Series B Preferred surrendered for conversion shall have the right to
require the corporation to make payment in cash of all such accrued and
unpaid dividends, in lieu of such adjustment to the Stated Value to the
extent funds are legally available therefor.
(b) The conversion of any share of Series A Preferred or Series B
Preferred may be effected by the holder thereof by the surrender of the
certificate for such share to the corporation at the principal office of
the Transfer Agent or to such other agent or agents of the corporation as
may be designated by the Board of Directors. If any shares of Series A
Preferred or Series B Preferred are called for redemption pursuant to
Section 7 hereof, such right of conversion shall cease and terminate as to
the shares called for redemption at the close of business on the Business
Day immediately preceding the redemption date, unless the corporation shall
default in the payment of the Redemption Price, in which event such
conversion right shall remain in effect until full payment of the
Redemption Price has been made.
(c) As promptly as practicable after the surrender of shares of Series
A Preferred and Series B Preferred for conversion, the corporation shall
issue and deliver or cause to be issued and delivered to the holder of such
shares certificates representing the number (or fraction) of fully paid and
non-assessable shares of Common Stock into which such shares of Series A
Preferred and Series B Preferred have been converted in accordance with the
provisions of this Section 10. Subject to the following provisions of this
Section 10, such conversion shall be deemed to have been made as of the
close of business on the date on which the shares of Series A Preferred and
Series B Preferred shall have been surrendered for conversion in the manner
herein provided, so that the rights of the holder of the shares of Series A
Preferred and Series B Preferred so surrendered shall cease at such time,
and the person or persons entitled to receive the shares of Common Stock
upon conversion thereof shall be treated for all purposes as having become
the record holder or holders of such shares of Common Stock at such time;
provided, however, that any such surrender on any date when the stock
transfer books of the corporation are closed shall be deemed to have been
made, and shall be effective to terminate the rights of the holder or
holders of the shares of Series A Preferred and Series B Preferred so
surrendered for conversion and to constitute the person or persons entitled
to receive such shares of Common Stock as the record holder or holders
thereof for all purposes, at the opening of business on the next succeeding
day on which such transfer books are open and such conversion shall be at
the Conversion Price in effect at such time.
(d) Before taking any action which would cause an adjustment reducing
the Conversion Price below the then par value of the shares of Common Stock
deliverable upon conversion of the shares of Series A Preferred and Series
B Preferred, the corporation will take any corporate action which may, in
the opinion of its counsel, be necessary in order that the corporation may
validly and legally issue fully paid and non-assessable shares of Common
Stock at such adjusted Conversion Price.
(e) The Conversion Price shall be subject to adjustment from time to
time as follows:
(i) In case at any time the corporation shall (A) subdivide the
outstanding shares of Common Stock into a greater number of shares, or
(B) combine the outstanding shares of Common Stock into a smaller number
of shares, the Conversion Price in effect immediately prior thereto
shall be adjusted proportionately so that the adjusted Conversion Price
shall bear the same relation to the Conversion Price in effect
immediately prior to such event as the total number of shares of Common
Stock outstanding immediately prior to such event shall bear to the
total number of shares of Common Stock outstanding immediately after
such event. Such adjustment shall become effective immediately after the
effective date of a subdivision or combination.
(ii) In case at any time the corporation shall declare, order, pay
or make any dividend or other distribution to holders of the Common
Stock payable in Common Stock, then in each such case, subject to
Section 10(e)(v) hereof, the Conversion Price in effect immediately
prior to the close of
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business on the record date fixed for determination of holders of any
class of securities entitled to receive such dividend or distribution
shall be reduced to a price (calculated to the nearest .001 of cent)
determined by multiplying such Conversion Price by a fraction:
(A) the numerator of which shall be the number of shares of
Common Stock outstanding immediately prior to such dividend or
distribution; and
(B) the denominator of which shall be the number of shares of
Common Stock outstanding immediately after such dividend or
distribution.
Shares of Common Stock owned by or held for the account of the
corporation shall not be deemed outstanding for the purpose of any such
computation. Such adjustment shall be made on the date such dividend is
paid or such distribution is made and shall become effective retroactive
to the record date for the determination of shareholders entitled to
receive such dividend or distribution.
(iii) In case at any time the corporation shall declare, order, pay
or make any dividend or other distribution to all holders of the Common
Stock, other than a dividend payable in shares of Common Stock
(including, without limitation, dividends or distributions payable in
cash, evidences of indebtedness, rights, options or warrants to
subscribe or purchase any Common Stock or other securities, or any other
securities or other property, but excluding any rights to purchase any
stock or other securities if such rights are not separable from the
Common Stock except upon the occurrence of a contingency beyond the
control of the corporation), then, and in each such case, subject to
Section 10(e)(v) hereof, the Conversion Price in effect immediately
prior to the close of business on the record date fixed for the
determination of holders of Common Stock entitled to receive such
dividend or distribution shall be reduced to a price (calculated to the
nearest .001 of a cent) determined by multiplying such Conversion Price
by a fraction:
(A) the numerator of which shall be the Market Price per share
of Common Stock in effect as of such record date or, if the Common
Stock trades on an ex-dividend basis, on the Trading Day immediately
prior to the date of commencement of ex-dividend trading, less the
value of such dividend or distribution (as determined in good faith
by the Board of Directors of the corporation) applicable to one share
of Common Stock, and
(B) the denominator of which shall be such Market Price per
share of Common Stock as of such record date or, if the Capital Stock
trades on an ex-dividend basis, on the Trading Day immediately prior
to the date of commencement of ex-dividend trading.
Such adjustment shall be made on the date such dividend is paid or such
distribution is made and shall become effective retroactive to the
record date for the determination of shareholders entitled to receive
such dividend or distribution.
(iv) In case at any time the corporation issues or sells any shares
of Common Stock or any rights, options or warrants to subscribe for or
purchase shares of Common Stock or shares having the same rights,
privileges and preferences as the Common Stock ("equivalent common
stock") or securities convertible into Common Stock or equivalent common
stock, at a price per share of Common Stock or equivalent common stock
(or having a conversion price per share, if a security is convertible
into shares of Common Stock or equivalent common stock) less than the
Market Price of the Common Stock as of the date of such issue or sale,
then upon such issue or sale the Conversion Price shall be reduced to
such Conversion Price determined by multiplying the Conversion Price in
effect immediately prior to such issue or sale by a fraction, (x) the
numerator of which shall be the sum of the number of shares of Common
Stock outstanding immediately prior to such issue or sale plus the
number of shares of Common Stock which the aggregate offering price of
the total number of shares of Common Stock and/or equivalent common
stock so to be offered (and/or the aggregate initial conversion price of
the convertible securities so to be offered) would purchase at such
Market Price and (y) the denominator of which shall be the sum of the
number of shares of Common Stock outstanding immediately prior to such
issue or sale plus the number of additional shares of Common Stock
and/or equivalent common stock to be offered for subscription
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or purchase (or into which the convertible securities so to be offered
are initially convertible). In case such subscription price may be paid
in a consideration part of or all of which shall be in a form other than
cash, the value of such consideration shall be determined in good faith
by the Board of Directors of the corporation. Shares of Common Stock
owned by or held for the account of the corporation shall not be deemed
outstanding for the purpose of any such computation. Such issue or sale
adjustment shall be made successively upon the issuance or sale of
shares of Common Stock or equivalent common stock or any rights, options
or warrants to subscribe for or purchase Common Stock or equivalent
common stock or securities convertible into common stock or equivalent
common stock. Notwithstanding the foregoing, no adjustment of the
Conversion Price pursuant to this Section 10(e)(iv) shall be made upon
(A) the conversion or redemption of shares of Series A Preferred or
Series B Preferred; (B) the payment of any stock dividend on the Series
A Preferred or Series B Preferred; (C) the issuance of options to
officers, directors and employees of the corporation and its
subsidiaries, to purchase shares of Common Stock, including any such
options as are issued and outstanding as of the Original Issue of the
Series B Preferred; (D) the issuance and sale of Common Stock upon
exercise of any rights, options or warrants referenced in the
immediately preceding clause (C) or in Section 10(e)(iii); or (E) the
issuance and sale of Common Stock in an underwritten public offering at
a price to the public of not less than 95% of the Closing Price of the
Common Stock on the date of the pricing of such offering.
(v) If the amount of any adjustment of the Conversion Price
required pursuant to this Paragraph 10 would be less than 1% of the
Conversion Price in effect at the time such adjustment is otherwise so
required to be made, such amount shall be carried forward and an
adjustment with respect thereto made at the time of and together with
any subsequent adjustment which, together with such amount and any other
amount or amounts so carried forward, shall aggregate at least 1% of
such Conversion Price. All calculations under this Section 10 shall be
made to the nearest .001 of a cent.
(vi) Except as herein otherwise expressly provided, for all
purposes of this Section 10(e) the term "Common Stock" shall mean the
Common Stock and any shares of stock or other class of capital stock of
the corporation which is not preferred as to dividends or assets over
any other class of capital stock of the corporation and which is not
subject to redemption, or which is issued to the holders of shares of
Common Stock upon any reclassification thereof.
(f) In case at any time after the Original Issuance Date, the
corporation shall be a party to any transaction (including without
limitation, a merger, consolidation, statutory share exchange, sale of all
or substantially all of the corporation's assets or recapitalization of the
Common Stock), in each case as a result of which shares of Common Stock (or
any other securities of the corporation then issuable upon conversion of
the Series A Preferred or Series B Preferred) shall be converted to the
right to receive stock, securities or other property (including cash or any
combination thereof) (each of the foregoing transactions being referred to
as a "Fundamental Change Transaction"), then the shares of Series A
Preferred and Series B Preferred remaining outstanding will thereafter no
longer be subject to conversion into Common Stock (or such other
securities) pursuant to this Section 10, but instead each share shall be
convertible into the kind and amount of stock and other securities and
property receivable (including cash) upon the consummation of such
Fundamental Change Transaction by a holder of that number of shares or
fraction thereof of Common Stock (or such other securities) into which one
share of Series A Preferred or Series B Preferred was convertible
immediately prior to such Fundamental Change Transaction assuming such
holder of Common Stock failed to exercise any right of election as to the
kind of consideration to be received in such Fundamental Change
Transaction. The corporation shall not be a party to any Fundamental Change
Transaction after which shares of the Series A Preferred and Series B
Preferred shall remain outstanding unless the terms of such Fundamental
Change Transaction are consistent with the provisions of this Section
10(f), and it shall not consent or agree to the occurrence of any such
Fundamental Change Transaction until the corporation has entered into an
agreement with the successor or purchasing entity, as the case may be, for
the benefit of the holders of the shares of Series A Preferred and Series B
Preferred which will contain provisions enabling the holders of shares of
the
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Series A Preferred and Series B Preferred which remain outstanding after
such Fundamental Change Transaction to convert such shares into the
consideration received by holders of Common Stock (or any other securities
of the corporation then issuable upon conversion of the Series A Preferred
or Series B Preferred) at the Conversion Price immediately after such
Fundamental Change Transaction. In the event that at any time, as a result
of an adjustment made pursuant to this Section 10, the Series A Preferred
and Series B Preferred shall become subject to conversion into any
securities other than shares of Common Stock, thereafter the number of such
other securities so issuable upon conversion of the shares of Series A
Preferred and Series B Preferred shall be subject to adjustment from time
to time in a manner and on terms nearly equivalent as practicable to the
provisions with respect to the shares of Series A Preferred and Series B
Preferred contained in this Section 10. The provisions of this Section
10(f) shall similarly apply to successive Fundamental Change Transactions.
(g) Upon the occurrence of any event requiring an adjustment of the
Conversion Price, then and in any such case the corporation shall promptly
deliver to the holders of shares of Series A Preferred and Series B
Preferred, a notice stating the Conversion Price resulting from such
adjustment, the method of calculation thereof, and setting forth a brief
statement of the facts requiring such adjustment and upon which such
adjustment is based.
(h) In case at any time:
(i) the corporation shall declare or pay to all holders of Common
Stock any dividend (whether payable in Common Stock, cash, securities or
other property);
(ii) there shall be any capital reorganization, or reclassification
of the Common Stock of the corporation or consolidation or merger of the
corporation with, or sale of all or substantially all of its assets to,
another corporation or other entity;
(iii) there shall be a voluntary or involuntary dissolution,
liquidation, or winding-up of the corporation; or
(iv) there shall be any other Fundamental Change Transaction;
then, in any one or more of such cases, the corporation shall give to the
holder of shares of Series A Preferred and Series B Preferred (A) at least
15 days prior to any event referred to in clause (i) above and at least 30
days prior to any event referred to in clause (ii), (iii) or (iv) above,
written notice of the date on which the books of the corporation shall
close or records shall be taken for such dividend or distribution or for
determining rights to vote in respect of any such organization,
reclassification, consolidation, merger, sale, dissolution, liquidation,
winding-up, or Fundamental Change Transaction and (B) in the case of any
such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation, winding-up, or Fundamental Change Transaction
known to the corporation, at least 30 days prior written notice of the
date, or if not then known, a reasonable approximation thereof by the
corporation) when the same shall take place. Such notice in accordance with
the foregoing clause (A) shall also specify, in the case of any such
dividend or distribution, the date on which such holders of Common Stock
shall be entitled thereto, and such notice in accordance with the foregoing
clause (B) shall also specify the date on which such holders of Common
Stock shall be entitled to exchange their Common Stock securities or other
property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation, winding-up, or
Fundamental Change Transaction, as the case may be.
(i) All shares of Common Stock issuable upon the conversion set forth
in this Section 10 shall be validly issued, fully-paid and non-assessable.
SECTION 11. RANKING.
(a) The Series A Preferred and the Series B Preferred shall rank on a
parity with each other as to payment of dividends and distributions and
upon liquidation, dissolution or winding-up of the corporation. In the
event the corporation is a party to any merger, consolidation or share
exchange in which the
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Series A Preferred or Series B Preferred is converted or exchanged into any
other securities, property, cash or other consideration, the securities,
property, cash or other consideration into which the Series A Preferred and
Series B Preferred, respectively, may be converted or exchanged shall be
identical in kind and amount per share as that into which the Series B
Preferred or Series A Preferred, as the case may be, may be converted or
exchanged, and no shares of Series A Preferred or Series B Preferred shall
be converted or exchanged therein into any securities, property, cash or
other consideration unless all shares of Series A Preferred and Series B
Preferred may be converted or exchanged into the same kind and amount per
share of securities, property, cash or other consideration.
(b) Without limiting the definition of Junior Securities, the
following securities and obligations of the corporation shall rank junior
to the Series A Preferred and Series B Preferred with respect to the
payments required or permitted to be made to the holders thereof pursuant
to their respective governing instruments and payments required to be made
to the holders of the Series A Preferred and Series B Preferred pursuant
hereto: the shares of Common Stock and Series A Junior Participating
Preferred Stock, par value $.01 per share.
SECTION 12. RECORD HOLDERS. The corporation and the Transfer Agent may deem
and treat the record holder of any shares of Series A Preferred and Series B
Preferred as the true and lawful owner thereof for all purposes, and neither the
corporation nor Transfer Agent shall be affected by any notice to the contrary.
SECTION 13. NOTICE. Except as may otherwise be provided by law or provided
for herein, all notices referred to herein shall be in writing, and all notices
hereunder shall be deemed to have been given upon receipt, in the case of a
notice of conversion given to the corporation as contemplated in Section 10(b)
hereof, or, in all other cases, upon the earlier of receipt of such notice or
three Business Days after the mailing of such notices sent by Registered Mail
(unless first-class mail shall be specifically permitted for such notice under
the terms hereof) with postage prepaid, addressed: If to the corporation, to its
principal executive offices (Attention: Corporate Secretary) or to any agent of
the corporation designated as permitted hereby; or if to a holder of the Series
A Preferred and Series B Preferred, to such holder at the address of such holder
of the Series A Preferred and Series B Preferred as listed in the stock record
books of the corporation (which shall include the records of the Transfer
Agent), or to such other address as the corporation or holder, as the case may
be, shall have designated by notice similarly given.
SECTION 14. AUTHORIZATION BY NON-SERIES A AND B DIRECTORS. A majority of
the Non-Series A and B Directors shall make (and no Series B Director shall be
entitled to vote on) any determination required or permitted to be made by the
Board of Directors on behalf of the corporation (i) pursuant to Section 7(c)
hereof, as to whether to make payment of the Redemption Price of the Series A
Preferred and Series B Preferred in cash or in kind, (ii) pursuant to Section
7(a) hereof, as to whether to exercise the corporation's option to redeem
outstanding shares of Series A Preferred or Series B Preferred, or (iii)
pursuant to Section 4(c) hereof, as to whether to make payment of any dividends
declared by the Board of Directors on the Series A Preferred and Series B
Preferred in cash or in kind; provided that, the Non-Series A and B Directors
shall not be entitled to make any determination to pay cash dividends unless the
corporation shall have sufficient cash legally available to make such payment in
full.
SECTION 15. SUCCESSORS AND TRANSFEREES. The provisions applicable to shares
of Series A Preferred and Series B Preferred shall bind and inure to the benefit
of and be enforceable by the corporation, the respective successors to the
corporation, and by any record holder of shares of Series A Preferred and Series
B Preferred.
SECTION 16. CONVERSION OF SERIES B TO SERIES A SHARES. Upon any transfer of
shares of Series B Preferred (or any transfer of beneficial ownership of such
shares) to any Person other than to any Partnership Affiliate, such shares shall
be automatically converted to shares of Series A Preferred on a one for one
basis, and as a condition to the registration of the transfer of such shares,
the certificate for the shares of Series B Preferred to be transferred shall be
surrendered to the Transfer Agent in exchange for the issuance of a certificate
for the same number of shares of Series A Preferred registered in the name of
the transferee. In addition, at such time as the Minimum Ownership Condition is
no longer met, all shares of Series B Preferred remaining outstanding shall be
automatically converted to shares of Series A Preferred on a one for one basis
and each holder of
C-16
<PAGE> 143
shares of Series B Preferred shall surrender to the Transfer Agent the
certificates for such shares in exchange for certificates for the same number of
shares of Series A Preferred registered in the name of such holder.
RESOLVED FURTHER, that the appropriate officers of the corporation, be, and
they are hereby, authorized and directed from time to time to execute such
certificates, instruments or other documents and do all such things as may be
necessary or advisable in their discretion in order to carry out the terms
hereof, including the filing with the Secretary of State for the State of Texas
of a copy of the foregoing resolution executed by an officer of the corporation.
Dated: , 1996.
MESA INC.
By:
--------------------------------
Name:
Title:
C-17
<PAGE> 144
[MESA LOGO]
Dear Stockholder:
You are cordially invited to attend the Special Meeting of Stockholders
of MESA Inc. on Tuesday, June 25, 1996. At this meeting, stockholders will be
asked to approve certain matters relating to the proposed transaction with an
affiliate of Rainwater, Inc. announced February 29, 1996.
The meeting will begin at 10 a.m. at The Fairmont Hotel, 1717 N. Akard
St., Dallas, Texas.
After reviewing the enclosed material, please take a moment to sign,
date and mark your vote on the proxy card below and return it in the enclosed
postage-paid envelope. While management is recommending a vote "FOR" each of the
proposals outlined below and would appreciate your support, we urge your careful
review of the enclosed material so that you can make your own determination on
how to vote. We believe all stockholders should have a voice in the Company's
direction, so we ask that you return the proxy card whether or not you plan to
attend the special meeting.
I look forward to seeing you.
/s/ BOONE PICKENS
Boone Pickens
Chairman of the Board and
Chief Executive Officer
FOLD AND TEAR HERE FOLD AND TEAR HERE FOLD AND TEAR HERE
- - --------------------------------------------------------------------------------
PROXY PROXY
MESA INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR THE SPECIAL MEETING OF
STOCKHOLDERS
TO BE HELD JUNE 25, 1996
The undersigned stockholder hereby appoints Stephen K. Gardner and William D.
Ballew, jointly and severally, proxies, with full power of substitution, to
vote, as specified below, all shares of MESA Inc. (the "Company") that the
undersigned is entitled to vote at the Special Meeting of Stockholders of the
Company to be held at The Fairmont Hotel, Dallas, Texas, at 10 a.m. on Tuesday,
June 25th, 1996, or any adjournment or postponement thereof (the "Special
Meeting"), and directs said proxies to vote as instructed on the matters set
forth below AND OTHERWISE AT THEIR DISCRETION. Receipt of a copy of the Notice
of the Special Meeting and the accompanying Proxy Statement is hereby
acknowledged. This proxy revokes all prior proxies given by the undersigned.
Please sign EXACTLY as name(s)
appears hereon, and in signing as
Attorney, Administrator, Guardian,
Trustee or Corporate Officer,
please add your title as such.
Signature
---------------------------
Title
-------------------------------
Date 1996
------------------
<PAGE> 145
- - --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 1, PROPOSAL 2 AND PROPOSAL
3 SET FORTH BELOW.
Proposal 1. Approve the issuance and sale of a minimum of approximately 58.8
million shares and a maximum of approximately 117.3 million shares of Series B
8% Cumulative Convertible Preferred Stock to DNR-MESA Holdings, L.P., on the
terms and subject to the conditions set forth in the Stock Purchase Agreement
dated April 26, 1996, between the Company and DNR-MESA Holdings, L.P.
/ / FOR / / AGAINST / / ABSTAIN
Proposal 2. Approve an amendment to the Company's Amended and Restated Articles
of Incorporation to (i) increase the authorized shares of Common Stock to 600
million, (ii) increase the authorized shares of Preferred Stock to 500 million
and (iii) permit the taking of action by written consent of the holders of any
series of Preferred Stock if and to the extent provided in the resolution of the
Board of Directors establishing any such series.
/ / FOR / / AGAINST / / ABSTAIN
Proposal 3. Approve an amendment of the Company's Amended and Restated Articles
of Incorporation to (i) effect a one-for-four reverse stock split of the
outstanding shares of Common Stock, (ii) reduce the authorized shares of Common
Stock to 150 million and (iii) reduce the authorized shares of Preferred Stock
to 125 million.
/ / FOR / / AGAINST / / ABSTAIN
NONE OF THE PROPOSALS WILL BE IMPLEMENTED UNLESS BOTH PROPOSAL ONE AND PROPOSAL
TWO ARE APPROVED. HOWEVER, THE IMPLEMENTATION OF PROPOSALS ONE AND TWO IS NOT
CONDITIONED UPON THE APPROVAL OF PROPOSAL THREE . THIS PROXY, WHEN PROPERLY
EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN. WHERE NO VOTE IS
SPECIFIED FOR A PROPOSAL, THIS PROXY WILL BE VOTED FOR SUCH PROPOSAL . THE
INDIVIDUALS NAMED HEREIN ARE AUTHORIZED TO VOTE IN THEIR DISCRETION ON ANY OTHER
MATTERS THAT PROPERLY COME BEFORE THE SPECIAL MEETING.
