<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 12, 1996
REGISTRATION STATEMENT NO. 333-03365
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------
MESA INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
TEXAS 75-2394500
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
STEPHEN K. GARDNER
1400 WILLIAMS SQUARE WEST 1400 WILLIAMS SQUARE WEST
5205 NORTH O'CONNOR BOULEVARD 5205 NORTH O'CONNOR BOULEVARD
IRVING, TEXAS 75039 IRVING, TEXAS 75039
(214) 444-9001 (214) 444-9001
(Address, including zip code, and telephone (Name, address, including zip code,
number, including area code, of registrant's and telephone number, including
principal executive offices) area code, of agent for service)
</TABLE>
------------------------
Copy to:
STEPHEN A. MASSAD
BAKER & BOTTS, L.L.P.
ONE SHELL PLAZA, 910 LOUISIANA
HOUSTON, TEXAS 77002
(713) 229-1475
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
IF THE ONLY SECURITIES BEING REGISTERED ON THIS FORM ARE BEING OFFERED
PURSUANT TO DIVIDEND OR INTEREST REINVESTMENT PLANS, PLEASE CHECK THE FOLLOWING
BOX. / /
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED ON
A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF
1933, OTHER THAN SECURITIES OFFERED ONLY IN CONNECTION WITH DIVIDEND OR INTEREST
REINVESTMENT PLANS, CHECK THE FOLLOWING BOX. /X/
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING
PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT, PLEASE CHECK THE FOLLOWING BOX
AND LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER
EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING. / /
-------------------
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(C)
UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING. / /
------------------
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434,
PLEASE CHECK THE FOLLOWING BOX. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE 12, 1996
PROSPECTUS
58,407,080 SHARES
LOGO
SERIES A 8% CUMULATIVE CONVERTIBLE PREFERRED STOCK
------------------------
MESA Inc. (the "Company") is distributing to the holders of its Common
Stock, par value $.01 per share ("Common Stock"), transferable rights (the
"Rights") to subscribe for and purchase an aggregate of approximately 58,407,080
shares of the Company's Series A 8% Cumulative Convertible Preferred Stock, par
value $.01 per share ("Series A Preferred Stock"), for a price of $2.26 per
share (the "Subscription Price"). Each holder of Common Stock of record as of
June , 1996, is entitled to receive .912 Rights for each share of Common Stock
held as of such date. One Right and $2.26 in cash entitle the holder to purchase
one share of Series A Preferred Stock. Each Right also carries the right to
subscribe at the Subscription Price for shares of Series A Preferred Stock that
are not otherwise purchased pursuant to the exercise of Rights. No fractional
Rights or cash in lieu thereof will be distributed by the Company, and the
number of Rights distributed to each record holder will be rounded up to the
nearest whole number. The Rights will be evidenced by transferable certificates
(each, a "Subscription Certificate"). The distribution of the Rights and sale of
shares of Series A Preferred Stock are referred to herein as the "Rights
Offering."
On April 26, 1996, the Company entered into a Stock Purchase Agreement (the
"Stock Purchase Agreement") with DNR-MESA Holdings, L.P. ("DNR"), a limited
partnership the sole general partner of which is Rainwater, Inc., a company
owned by Richard E. Rainwater (together, "Rainwater"). Pursuant to the Stock
Purchase Agreement, (i) on July , 1996, DNR purchased 58,849,557 shares of the
Company's Series B 8% Cumulative Convertible Preferred Stock, par value $.01 per
share ("Series B Preferred Stock" and, together with the Series A Preferred
Stock, the "Preferred Stock"), at a price of $2.26 per share (aggregate purchase
price of $133 million), and (ii) DNR has provided a standby commitment (the
"Standby Commitment") to purchase 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. Upon the purchase by DNR of shares of Series B Preferred Stock on July
, 1996, DNR exercised its right to elect a majority of the Board of Directors
of the Company. See "Risk Factors -- Transaction Risks -- Control by DNR" and
"Management."
Each share of Preferred Stock will be convertible into one share of Common
Stock (subject to adjustment) at the option of the holder at any time. The
Preferred Stock will be redeemable in whole or in part at the Company's option
at any time after the 30th day following the tenth anniversary of issuance and
any shares of Preferred Stock that remain outstanding must be redeemed on June
30, 2008. In either case, the applicable redemption price may be paid in cash or
in shares of Common Stock, at the Company's option. Dividends on the Preferred
Stock will be cumulative from the date of issuance and will be payable quarterly
at the rate of 8% per annum per share on the last business day of each March,
June, September and December, beginning September 30, 1996. During the first
four years following the issue date, all dividends will be paid in kind with
additional shares of Preferred Stock based on the stated value of such shares
(initially $2.26 per share). Thereafter, the Company may elect to pay dividends
in cash rather than in kind if certain financial tests are satisfied. The
liquidation preference of the Preferred Stock is $2.26 per share, plus accrued
and unpaid dividends. For a description of the rights and preferences of the
Series A and Series B Preferred Stock, see "Description of Capital
Stock -- Preferred Stock."
The Rights Offering, together with the Standby Commitment, are part of a
Recapitalization (as defined) of the Company pursuant to which the Company will
repay or refinance substantially all of its debt existing prior to the
Recapitalization ($1.2 billion at March 31, 1996). See "Use of Proceeds."
The Rights will expire at 5:00 p.m., New York City time, on July , 1996,
unless extended by the Company (such date and time, the "Expiration Date"), and
thereafter will be void and of no effect. Shareholders who do not exercise or
sell their Rights prior to the Expiration Date will relinquish the value
inherent in the Rights. Accordingly, shareholders are strongly urged to exercise
or sell their Rights prior to the Expiration Date.
The Common Stock is listed on the New York Stock Exchange under the symbol
"MXP." On June , 1996, the last reported sale price of the Common Stock on the
New York Stock Exchange was $ per share. The Series A Preferred Stock has
been approved for listing on the New York Stock Exchange, subject to official
notice of issuance, under the symbol "MXPPrA." It is anticipated that the Rights
will trade on the New York Stock Exchange under the symbol "MXPPrA-RT" until the
close of business on the last trading day preceding the Expiration Date.
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SERIES A
PREFERRED STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<S> <C> <C> <C>
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SUBSCRIPTION UNDERWRITING PROCEEDS TO
PRICE DISCOUNTS COMPANY(2)
AND COMMISSIONS(1)
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Per share of Series A Preferred $2.26 -- $132,000,000
Stock.............................
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</TABLE>
(1) The Company has retained Lehman Brothers Inc. ("Lehman Brothers") to act as
the dealer manager (the "Dealer Manager") in connection with the Rights
Offering. The Company will not pay Lehman Brothers a separate fee for acting
as Dealer Manager, but has agreed to reimburse certain of its expenses. In
addition, the Company has agreed to indemnify the Dealer Manager against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended. See "The Rights Offering -- Dealer Manager."
(2) Before deducting expenses payable by the Company with respect to the Rights
Offering, estimated at approximately $8,000,000.
------------------------
The Dealer Manager for this offering is:
LEHMAN BROTHERS
July , 1996
<PAGE> 3
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THIS OFFERING COVERED BY THIS PROSPECTUS. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY AGENT OR UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, RIGHTS, PREFERRED STOCK OR COMMON STOCK IN ANY JURISDICTION WHERE, OR TO
ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS
SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.................................................................... 3
Risk Factors.......................................................................... 15
Use of Proceeds....................................................................... 22
Capitalization........................................................................ 23
Dilution.............................................................................. 24
Price Range of Common Stock and Dividend Policy....................................... 25
The Rights Offering................................................................... 26
Unaudited Pro Forma Financial Information............................................. 33
Selected Historical Financial Data.................................................... 39
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 40
Business.............................................................................. 49
Management............................................................................ 67
Executive Compensation................................................................ 70
Security Ownership of Certain Beneficial Owners and Management........................ 76
The Stock Purchase Agreement.......................................................... 79
Description of New Debt............................................................... 82
Description of Capital Stock.......................................................... 83
Certain Federal Income Tax Considerations............................................. 91
Legal Matters......................................................................... 93
Experts............................................................................... 93
Additional Information................................................................ 94
Incorporation of Certain Documents by Reference....................................... 94
Glossary of Selected Oil and Gas Terms................................................ 95
Index to Consolidated Financial Statements............................................ F-1
</TABLE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All statements other than statements of historical fact
included in this Prospectus, including without limitation, the statements under
"Prospectus Summary," "Risk Factors -- Financial Risks -- High Leverage,"
"Unaudited Pro Forma Financial Information," "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Capital Resources
and Liquidity," "Certain Federal Income Tax Considerations -- Tax Consequences
to Holders of Rights" and Notes 2 and 4 to the Consolidated Financial Statements
located elsewhere herein 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 Prospectus, including without limitation in conjunction with
the forward-looking statements included in this Prospectus. All subsequent
written and oral forward-looking statements attributable to Mesa or persons
acting on its behalf are expressly qualified in their entirety by the Cautionary
Statements.
CERTAIN ASSUMPTIONS
Statements in this Prospectus assume that the First Closing, as described
on page 3, has occurred. The share numbers and related data contained in this
Registration Statement do not give effect to a proposed 1-for-4 reverse stock
split with respect to the outstanding shares of Common Stock (and the related
effect on the number and price of the shares of Preferred Stock to be issued in
the Recapitalization) that will be submitted for the approval of shareholders at
a special meeting to be held on June 25, 1996.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus or incorporated by reference in this Prospectus.
Unless the context otherwise requires, the term "Mesa" means MESA Inc. and its
subsidiaries taken as a whole and includes the Company's predecessors.
Quantities stated as equivalent natural gas reserves are based on a factor of
six thousand cubic feet of natural gas per barrel of liquids. Certain terms
relating to the oil and gas business and used herein are defined in the
"Glossary of Selected Oil and Gas Terms" included elsewhere in this Prospectus.
THE COMPANY
Mesa is one of the largest independent oil and gas companies in the United
States, with approximately 1.9 Tcfe of proved reserves as of December 31, 1995.
Approximately 95% of Mesa's reserves are concentrated in the Hugoton field in
southwest Kansas and the West Panhandle field in Texas. These fields, which are
part of one contiguous reservoir, are considered to be among the premier natural
gas properties in the United States and are characterized by long lived reserves
and stable production. Despite operating under significant capital constraints
since 1990, Mesa has maintained a large, concentrated and efficiently managed
asset base.
THE RECAPITALIZATION
The Rights Offering is the final step in, and an integral part of, Mesa's
Recapitalization. The Recapitalization consists of a series of transactions that
are intended to deleverage and recapitalize Mesa through the issuance of $265
million in equity and the repayment and/or refinancing of substantially all of
Mesa's $1.2 billion of debt existing prior to the Recapitalization. The
Recapitalization is the result of a lengthy evaluation of Mesa's strategic
alternatives, including the solicitation of proposals for a sale of Mesa, a
stock-for-stock merger, joint ventures, asset sales, equity infusions and
refinancing transactions. At a special meeting of Mesa's shareholders held on
June 25, 1996 (the "Special Meeting"), the shareholders approved certain
proposals that permitted Mesa to proceed with the Recapitalization, including
the sale of Preferred Stock to DNR.
The Recapitalization is being effected in two stages, the first of which
occurred on July , 1996 (the "First Closing"):
First Closing
At the First Closing, the following transactions occurred concurrently:
- Sale of Equity to DNR. Mesa sold an aggregate of $133 million of Series
B Preferred Stock to DNR pursuant to the Stock Purchase Agreement (an
aggregate of 58,849,557 shares at $2.26 per share).
- Execution of New Credit Facility. Mesa entered into and made initial
borrowings under a new seven year, $500 million senior secured revolving
credit facility (the "New Credit Facility") with The Chase Manhattan
Bank, N.A., Chemical Bank and Bankers Trust Company, as co-agents.
- Issuance of Notes. Mesa issued and sold (i) $325 million principal
amount of % Senior Subordinated Notes due 2006 (the "Senior
Subordinated Notes") and (ii) $175 million in initial accreted value of
% Senior Subordinated Discount Notes due 2006 (the "Discount Notes"
and, together with the Senior Subordinated Notes, the "Notes").
- Refinancing of Existing Debt. Mesa applied the proceeds from (i) the
sale of equity to DNR, (ii) borrowings under the New Credit Facility,
(iii) the issuance of the Notes and (iv) cash and investments balances
to repay and/or refinance substantially all of its then existing debt.
The New Credit Facility, the issuance of the Notes and the application
of the net proceeds therefrom are referred to herein as the "Debt
Refinancing."
3
<PAGE> 5
Second Closing
At the completion of the Rights Offering made hereby (the "Second
Closing"), the following will occur concurrently:
- Rights Offering. Mesa will issue and sell up to an aggregate of
approximately $132 million of Series A Preferred Stock to investors who
subscribe to purchase shares of Series A Preferred Stock in the Rights
Offering. The Rights Offering will permit such investors to purchase
shares of Series A Preferred Stock at the same $2.26 per share price
being paid by DNR for shares of Series B Preferred Stock pursuant to the
Stock Purchase Agreement.
- DNR Standby Commitment. Pursuant to the Standby Commitment, DNR 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, at the same $2.26 per share price at which Rights
holders may subscribe to purchase shares of Series A Preferred Stock.
DNR's obligation to purchase additional shares of Series B Preferred
Stock pursuant to the Standby Commitment is secured by a bank letter of
credit in favor of Mesa. A substantial portion of the funds received at
the Second Closing will be used to reduce borrowings under the New
Credit Facility at the First Closing.
As used herein, the term "Recapitalization" refers to the purchase by DNR
of shares of Series B Preferred Stock, the Debt Refinancing and the Rights
Offering.
EFFECTS OF THE RECAPITALIZATION
The Recapitalization will enhance Mesa's ability to compete in the oil and
gas industry by substantially increasing its cash flow available for investment
and improving its ability to attract capital, which will increase Mesa's ability
to pursue investment opportunities. Specifically, Mesa's financial condition
will improve significantly as a result of the Recapitalization due to (i) a
significant reduction in total debt outstanding, (ii) a reduction in annual cash
interest expense of approximately $75 million, (iii) the implementation of a
cost savings program designed to reduce annual general and administrative and
other operating overhead expenses by approximately $10 million and (iv) the
extension of maturities on its long term debt, which will eliminate Mesa's
present liquidity concerns.
CONTROL OF MESA
At the First Closing, DNR obtained the right to nominate and elect a
majority of Mesa's Board of Directors (the "Board"). On that date, all of Mesa's
directors other than Boone Pickens, and resigned in
accordance with the terms of the Stock Purchase Agreement, and DNR elected
Richard E. Rainwater, Darla D. Moore, Kenneth A. Hersh and Philip B. Smith to
the Board. See "Management." This right to elect a majority of the Board will
continue so long as DNR and/or its affiliates own Series B Preferred Stock and
meet certain minimum stock ownership requirements. See "Description of Capital
Stock -- Preferred Stock."
DNR intends to implement an orderly transition and succession plan for
Mesa's senior management. Such plans are being developed.
RESERVES
Approximately 65% of Mesa's total equivalent proved reserves are natural
gas and the balance are principally natural gas liquids ("NGLs") which are
extracted from natural gas. Approximately 95% of Mesa's proved reserves are
developed. The estimated future net cash flows before income taxes from Mesa's
proved reserves, as of December 31, 1995, aggregated approximately $2.4 billion
and had a net present value, discounted at 10%, of approximately $1 billion. See
"Business -- Properties."
Hugoton Field. Mesa's most significant asset is its interest in the Hugoton
field, the largest producing gas field in the United States. Mesa's Hugoton
properties, which represent approximately 13% of the total field, contain 1.2
Tcfe of proved reserves. Mesa holds 230,000 net acres in the Hugoton field,
covering
4
<PAGE> 6
approximately 400 square miles. Mesa's properties are concentrated in the center
of the field and thus benefit from better reservoir characteristics, including
thicker productive zones, higher porosity and higher permeability. Management
believes that, as a result, Mesa's Hugoton properties will have a longer
productive life and higher natural gas recoveries than properties located in
other parts of the Hugoton field.
Mesa has working interests in approximately 1,100 wells in the Hugoton
field, 950 of which it operates, and royalty interests in approximately 300
additional wells. Mesa's Hugoton properties are capable of producing over 230
MMcf of natural gas per day. Over the past several years, Mesa has concentrated
its efforts on fully developing its existing long lived reserve base. In the
Hugoton field, these efforts have included infill drilling, installing
additional compression and gathering facilities and the construction of the
Satanta processing plant. The Satanta plant has the ability to extract a greater
quantity of NGLs per Mcf of natural gas than the plant it replaced, and has the
added ability to reject nitrogen, recover helium and produce liquefied natural
gas ("LNG").
West Panhandle Field. Mesa's other principal asset is its interest in the
West Panhandle field, which is located in the Texas panhandle. Mesa's West
Panhandle properties contain approximately 600 Bcfe of proved reserves. Natural
gas from these properties is produced from approximately 600 wells, all of which
are operated by Mesa, on over 185,000 net acres. Mesa's West Panhandle field
production is processed through Mesa's Fain processing plant, and is governed by
an agreement between Mesa and Colorado Interstate Gas Company ("CIG"). Since
1994, Mesa's entitlement to its share of West Panhandle gas production has been
limited by certain provisions of an agreement with CIG. Beginning in 1997, such
limitations will expire, subject to certain seasonal and daily entitlements of
CIG.
In the West Panhandle field, development activities over the last six years
have included 357 well workovers and redrilling projects, the addition of
compression and the expansion of processing facilities. In addition, Mesa has
identified approximately 120 locations that have additional production potential
from new areas or deeper zones that it plans to redrill over a three year period
that began in early 1996. Mesa is also currently expanding the Fain plant to
increase processing capacity and NGL recoveries. As a result of these activities
and the expiration of the contractual production limitation, Mesa expects to
increase its share of production from the West Panhandle field from 1997 onward.
Gulf of Mexico Properties. Beginning in late 1994, Mesa began to direct a
greater portion of its capital spending towards exploration and development in
the Gulf of Mexico. Since that time, Mesa has successfully completed 17 out of
19 wells. Through December 31, 1995, Mesa's Gulf of Mexico activities have added
51 Bcfe of proved reserves. As a result, Mesa's offshore production increased by
approximately 50% on an Mcfe basis from 1994 to 1995. Offshore production gains
have continued into 1996, with first quarter offshore production having
increased on an Mcfe basis by approximately 23% over fourth quarter 1995 levels.
Because Mesa has existing production facilities offshore, it has been able to
bring new wells on production quickly and at a lower cost than could be achieved
otherwise. Mesa owns interests in 45 blocks in the Gulf of Mexico, covering
approximately 200,000 acres. Application of 3-D seismic technology to Mesa's
substantial Gulf of Mexico acreage represents a significant future opportunity
to increase reserves and cash flow. At the April 1996 federal lease sale in the
Gulf of Mexico, Mesa purchased six blocks covering 28,000 acres for a total of
$500,000.
BUSINESS STRENGTHS
Mesa believes it has certain strengths that provide it with significant
competitive advantages, including the following:
- Long Reserve Life. Mesa's properties have an estimated reserve life,
calculated by dividing total proved reserves by annual production, of
approximately 15 years, which is among the longest reserve lives of any
domestic oil and gas company. As a result of the long lived nature of
its properties, Mesa has lower reinvestment requirements to maintain
reserve quantities, production levels and values than many of its
competitors. The net present value of Mesa's proved reserves has
exhibited considerable stability over the last five years, ranging from
approximately $1.2 billion to approximately $1.0 billion on a pre-tax
basis and from $0.9 billion to $1.0 billion on an after tax basis.
5
<PAGE> 7
- High Percentage of Proved Developed Producing Reserves. Approximately
95% of Mesa's reserves are classified as proved developed producing. The
highly developed nature of these reserves results in relatively low
capital expenditures to maintain production. The combined effect of a
highly developed and long lived reserve base provides Mesa a long term
source of cash flow to invest in future growth opportunities.
- High Degree of Operational Control. Over 90% of Mesa's production and
reserves are attributable to wells operated by Mesa, which provides Mesa
with control over the amount and timing of capital and operating
expenditures. Mesa also owns and operates all of the processing
facilities and a substantial majority of the gathering assets that
service its onshore production. Control over these assets reduces
operating expenses and enhances operational flexibility. These factors
provide Mesa with significant operating advantages, such as the ability
to (i) shift production into the heating season, when prices are
generally higher, (ii) vary the recovery of NGLs to optimize its revenue
mix, (iii) avoid production curtailments due to capacity constraints and
(iv) reduce abandonment pressures for its wells, which should increase
ultimate recoverable reserves.
- Low Cost Operator. Mesa's reserves are primarily recovered from low
pressure, shallow, geographically concentrated gas fields. Consequently,
production costs are low and averaged $0.57 per Mcfe of production in
1995.
- Expertise in Midcontinent and Gulf of Mexico. The Midcontinent, where
the Hugoton and West Panhandle fields are located, and the Gulf of
Mexico are two of the most prolific gas producing regions in the United
States. Mesa's personnel have substantial operational expertise and
experience in the oil and gas industry, particularly with respect to the
technical challenges of these regions. Mesa's operations and exploration
staff has extensive experience with the federal, state and local
agencies with responsibility for these regions. This experience provides
a significant base upon which to expand Mesa's operations as cash flow
and additional capital become available for investment following the
Recapitalization.
BUSINESS STRATEGY
Following the Recapitalization, Mesa intends to position itself as a
leading independent oil and gas exploration and production company by
implementing the following primary strategies:
- Balanced Reserve Growth. Mesa plans to increase reserves and cash flow
by pursuing a balanced strategy of blending property acquisitions with
development drilling and exploration. In pursuit of its strategy, Mesa
intends to target (i) strategic property acquisitions that complement
Mesa's existing asset base, (ii) long term development projects that
provide a stable and low risk portfolio of reinvestment opportunities
and (iii) limited exposure to higher risk exploration activities.
- Exploitation of Existing Assets. Mesa will continue to focus on
exploiting its existing asset base by undertaking projects related to
development drilling, expansion of gathering systems, increased
compression, enhancement of processing facilities and value added
marketing activities.
- Reduction in Costs. Mesa intends to maintain a low cost structure to
maximize free cash flow available for investment. To this end, Mesa has
already implemented the first steps of a program designed to reduce
annual general and administrative and other operating overhead expenses
by approximately $10 million.
- Increased Financial Flexibility. After completion of the
Recapitalization, Mesa's financial flexibility will increase
substantially. Mesa is committed to maintaining financial flexibility to
enable it to access various forms of capital in order to successfully
execute its growth strategy.
6
<PAGE> 8
SOURCES AND USES OF FUNDS
The following table sets forth the proposed sources and uses of the
proceeds of the Recapitalization, after giving effect to the First Closing and
the Second Closing, assuming the Recapitalization had been completed as of March
31, 1996. See "Use of Proceeds" for additional detail.
<TABLE>
<CAPTION>
AMOUNTS
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
SOURCES
New Credit Facility (a)...................................... $ 349.2
Senior Subordinated Notes.................................... 325.0
Discount Notes............................................... 175.0
Preferred Stock.............................................. 265.0
Cash and investments (b)..................................... 219.9
---------
Total sources.............................................. $ 1,334.1
=========
USES
Repayment of HCLP Secured Notes (c).......................... $ 492.3
Repayment of Old Credit Facility (a)......................... 51.1
Redemption of 12 3/4% Secured Discount Notes due 1998........ 617.4
Repayment of 12 3/4% Discount Notes due 1996................. 39.7
Redemption of 13 1/2% Subordinated Notes due 1999............ 7.6
Prepayment premium with respect to HCLP Secured Notes (c).... 64.0
Transaction expenses(d)...................................... 35.0
Accrued interest............................................. 27.0
---------
Total uses................................................. $ 1,334.1
=========
</TABLE>
- ---------------
(a) Reflects initial borrowings under the $500 million New Credit Facility.
Amounts under the New Credit Facility and Mesa's previous credit facility
(the "Old Credit Facility") do not include approximately $11.4 million in
letters of credit outstanding.
(b) Includes approximately $114.8 million in cash and cash investments, $40.0
million in investments, $56.5 million in restricted cash of Hugoton Capital
Limited Partnership, a former subsidiary ("HCLP"), 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 at March 31, 1996.
(c) The amount of the prepayment premium due upon early retirement of the
Secured Notes (the "HCLP Secured Notes") of HCLP is based on prevailing
interest rates as of the date of repayment. Such premium would have totaled
approximately $64.0 million on March 31, 1996 and approximately $54.6
million on June 7, 1996.
(d) Represents expenses attributable to the Recapitalization, including
approximately $8.0 million attributable to the Rights Offering.
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in connection with an investment in the Series A Preferred Stock
offered hereby, including information regarding Mesa's highly leveraged capital
structure and continuing losses, the uncertainty of natural gas and NGL prices
and certain risks associated with the Rights Offering.
---------------------
Mesa maintains its principal executive offices at 1400 Williams Square
West, 5205 North O'Connor Boulevard, Irving, Texas 75039, where its telephone
number is (214) 444-9001.
7
<PAGE> 9
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 June , 1996 (the
"Record Date"). 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 will be distributed pursuant to
the Rights Offering. One Right plus $2.26 in cash
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 will
be sold upon exercise of the Rights, assuming all
Rights are exercised in full. See "The Rights
Offering -- The Rights."
Basic Subscription
Privilege.................. One Right will entitle the holder thereof to
receive, upon payment of the Subscription Price,
one share of Series A Preferred Stock (the "Basic
Subscription Privilege"). See "The Rights
Offering -- Subscription Privileges -- Basic
Subscription Privilege."
Oversubscription
Privilege.................. Each holder of Rights who exercises in full such
holder's Basic Subscription Privilege may also
subscribe at the Subscription Price for additional
shares of Series A Preferred Stock available as a
result of unexercised Rights, if any (the
"Oversubscription Privilege"). If an insufficient
number of shares of Series A Preferred Stock is
available to satisfy fully all exercises of the
Oversubscription Privilege, the available shares
will be prorated among holders who exercise their
Oversubscription Privilege in proportion to the
respective number of Rights exercised by the
beneficial holder pursuant to the Basic
Subscription Privilege. See "The Rights
Offering -- Subscription
Privileges -- Oversubscription Privilege."
Subscription Price......... $2.26 in cash per share of Series A Preferred Stock
Expiration Date............ 5:00 p.m., New York City time, July , 1996
(subject to extension by the Company). Rights not
exercised prior to the Expiration Date will be void
and will no longer be exercisable by any Rights
holder.
Procedure for Exercising
Rights................... The Basic Subscription Privilege and the
Oversubscription Privilege may be exercised by
properly completing and signing the Subscription
Certificate evidencing the Rights (each, a
"Subscription Certificate") and forwarding such
Subscription Certificate (or following the
guaranteed delivery procedures), together with
payment of the Subscription Price for each share of
Series A Preferred Stock subscribed for pursuant to
the Basic Subscription Privilege and the
Oversubscription Privilege, to American Stock
Transfer & Trust Company, as subscription agent
(the "Subscription Agent"), on or prior to the
Expiration Date. If forwarding Subscription
Certificates by mail, it is recommended that
insured, registered mail be used. No interest will
be paid on funds delivered in payment of the
Subscription Price. See "The Rights
Offering -- Exercise of Rights."
NO REVOCATION.............. ONCE A HOLDER OF RIGHTS HAS EXERCISED THE BASIC
SUBSCRIPTION PRIVILEGE OR THE OVERSUBSCRIPTION
PRIVILEGE, SUCH EXERCISE MAY NOT BE REVOKED. SEE
"THE RIGHTS OFFERING -- NO REVOCATION."
8
<PAGE> 10
Transferability of
Rights..................... The Rights are 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. There can be no assurance, however, that a
market for the Rights will develop or, if a market
develops, that the market will remain available
throughout the period during which Rights may be
exercised, or as to the price at which the Rights
will trade. See "The Rights Offering -- Method of
Transferring Rights."
The Dealer Manager will endeavor to sell Rights for
holders who have so requested by delivering
Subscription Certificates with the instruction for
sale properly completed and executed to the
Subscription Agent by 11:00 a.m., New York City
time, on the third New York Stock Exchange trading
day preceding the Expiration Date. Any brokerage
commission, taxes and other direct expenses of sale
will be paid by the holder. There can be no
assurance that the Dealer Manager will be able to
sell any Rights or as to the prices the Dealer
Manager will be able to obtain in such sales. See
"The Rights Offering -- Method of Transferring
Rights."
Standby Commitment......... DNR has agreed to purchase 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. DNR's obligation to
purchase additional shares of Series B Preferred
Stock pursuant to the Standby Commitment is secured
by a bank letter of credit in favor of Mesa. See
"The Stock Purchase Agreement."
Preferred Stock............ 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."
Conversion. Each share of Preferred Stock will be
convertible into one share of Common Stock (subject
to adjustment) at the option of the holder at any
time prior to redemption.
Dividends. Dividends on the Preferred Stock will
be cumulative from the date of issuance and will be
payable quarterly at the rate of 8% per annum of
the stated value per share (initially $2.26) on the
last business day of March, June, September and
December of each year, beginning September 30,
1996. During the first four years following the
issue date, all dividends will be paid in kind with
additional shares of Preferred Stock based on the
stated value of such shares. Thereafter, Mesa may
elect to pay dividends in cash rather than in kind
if certain financial tests are satisfied. 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 the shares of Preferred Stock outstanding, and
dividends will accrue and be paid thereafter on the
basis of such stated value, as adjusted.
Redemption. The Preferred Stock is redeemable in
whole or in part at the option of Mesa on any
dividend payment date after the 30th day following
the tenth anniversary of the original issue date,
and any shares of Preferred Stock that remain
outstanding must be redeemed on June 30, 2008. In
either case, the redemption price will be equal to
the
9
<PAGE> 11
stated value of the shares being redeemed, plus all
accrued but unpaid dividends that have not been
added to such stated value, and will be payable in
cash or shares of Common Stock, at Mesa's option.
Liquidation. The liquidation preference of the
Preferred Stock is $2.26 per share, plus accrued
and unpaid dividends.
Voting Rights. The Series A Preferred Stock and
the Series B Preferred Stock will vote with the
Common Stock as a single class on all matters
brought before the shareholders, except as
otherwise required by law and except for certain
special voting rights of the Series B Preferred
Stock, including the right of the holders of the
Series B Preferred Stock to elect a majority of the
members of the Board, and certain rights of the
holders of Series A Preferred Stock to elect two
directors in the event of certain dividend
arrearages.
Ownership Percentages. Following consummation of
the Rights Offering (assuming all Rights are
exercised in full), (i) the shares of Series A
Preferred Stock will constitute 32.2% of the total
Common Stock outstanding, and (ii) the shares of
Series B Preferred Stock outstanding will
constitute 50.1% of the total shares of Preferred
Stock outstanding and 32.5% of the total Common
Stock outstanding (in each case on a fully diluted
basis, excluding stock options and before giving
effect to the payment of any dividends in kind).
Transferability and Conversion of Series B
Preferred Stock. 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 certain minimum ownership
requirements are 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. For further
information regarding the rights and preferences of
the Series A and Series B Preferred Stock, see
"Description of Capital Stock -- 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 or upon the receipt of
dividends. See "Certain Federal Income Tax
Considerations."
Use of Proceeds............ The net proceeds from the Rights Offering and the
sale of the Series B Preferred Stock pursuant to
the Stock Purchase Agreement will be approximately
$265 million which, together with the initial
borrowings under the New Credit Facility, proceeds
from the issuance and sale of the Notes and
existing cash and investments balances, have been
or will be used by Mesa to repay and/or refinance
substantially all of Mesa's debt existing prior to
the Recapitalization, and to pay fees and expenses
incurred in connection with the Recapitalization.
See "Use of Proceeds."
NYSE Symbols............... The Common Stock is traded on the New York Stock
Exchange under the symbol "MXP." It is anticipated
that the Rights and the Series A
10
<PAGE> 12
Preferred Stock will trade on the New York Stock
Exchange under the symbols "MXPPrA-RT" and
"MXPPrA," respectively.
Dealer Manager and
Soliciting Dealers......... Lehman Brothers has been retained by Mesa to act as
Dealer Manager in connection with the Rights
Offering. Mesa has agreed to pay Lehman Brothers
certain fees in its capacity as Mesa's financial
advisor, including a fee of $3,775,000, which is
contingent upon completion of the Recapitalization.
Mesa has also agreed to reimburse certain expenses
incurred by Lehman Brothers in its capacity as
Mesa's financial advisor and as Dealer Manager.
Lehman Brothers will not receive a separate fee for
acting as Dealer Manager. See "The Rights
Offering -- Dealer Manager."
11
<PAGE> 13
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth summary historical consolidated financial
data with respect to Mesa for the periods ended and as of the dates indicated.
The summary historical consolidated statement of operations data for the years
ended December 31, 1993, 1994 and 1995 and the historical consolidated balance
sheet data as of December 31, 1994 and 1995 are derived from the audited
Consolidated Financial Statements included elsewhere in this Prospectus. The
summary historical consolidated statement of operations data for the years ended
December 31, 1991 and 1992 and the summary historical consolidated balance sheet
data as of December 31, 1991, 1992 and 1993 are derived from audited
Consolidated Financial Statements that are not included in this Prospectus. The
summary historical consolidated statement of operations data for the three
months ended March 31, 1995 and March 31, 1996 and the summary historical
consolidated balance sheet data as of March 31, 1996 are derived from unaudited
consolidated financial statements of Mesa included elsewhere in this Prospectus.
This information should be read in conjunction with the Consolidated Financial
Statements and the notes thereto appearing elsewhere in this Prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." See "Selected Historical Financial Data."
The following table also sets forth certain unaudited summary pro forma
financial data of Mesa for the periods ended and as of the dates indicated. The
unaudited summary pro forma statement of operations data give effect to the
Recapitalization as if the Recapitalization had occurred on January 1, 1995. The
unaudited summary pro forma balance sheet data give effect to the
Recapitalization as if the Recapitalization had occurred on March 31, 1996. See
"Use of Proceeds." The unaudited summary pro forma financial data does not
purport to represent what Mesa's results of operations or financial condition
would actually have been had the Recapitalization been consummated as of such
dates or to project Mesa's results of operations or financial condition for any
future period or as of any future date. The unaudited summary pro forma
financial data should be read in conjunction with the Unaudited Pro Forma
Financial Information and the notes thereto. See "Unaudited Pro Forma Financial
Information" and the separate historical Consolidated Financial Statements and
notes thereto appearing elsewhere in this Prospectus and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
12
<PAGE> 14
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Natural gas................................ $ 169.9 $ 157.6 $ 141.8 $ 139.6 $ 129.6 $ 35.9 $ 50.6
Natural gas liquids........................ 62.0 59.7 61.4 72.7 75.3 18.2 23.1
Oil and condensate......................... 16.1 18.7 12.4 7.9 19.6 5.4 4.4
Other...................................... 1.5 1.1 6.6 8.5 10.5 2.7 2.5
------ ------ ------ ------ ------ ------ ------
Total revenues............................... 249.5 237.1 222.2 228.7 235.0 62.2 80.6
------ ------ ------ ------ ------ ------ ------
Costs and expenses:
Lease operating............................ 46.9 43.9 51.8 52.7 51.8 12.6 13.6
Production and other taxes................. 18.9 18.6 20.4 21.3 18.4 4.7 5.4
Exploration charges........................ 4.7 10.0 2.7 5.2 6.6 1.3 .5
General and administrative................. 27.8 24.5 25.2 28.5 26.8 6.6 5.6
Depreciation, depletion and amortization... 117.1 113.9 100.1 92.3 83.4 21.0 30.2
------ ------ ------ ------ ------ ------ ------
Total costs and expenses..................... 215.4 210.9 200.2 200.0 187.0 46.2 55.3
------ ------ ------ ------ ------ ------ ------
Operating income............................. 34.1 26.2 22.0 28.7 48.0 16.0 25.3
Net interest expense (a)..................... (134.3) (129.9) (131.3) (131.3) (132.7) (32.8) (34.5)
Other income (b)............................. 21.0 14.5 6.9 19.2 27.1 8.9 10.3
------ ------ ------ ------ ------ ------ ------
Net income (loss)............................ $ (79.2) $ (89.2) $ (102.4) $ (83.4) $ (57.6) $ (7.9) $ 1.1
====== ====== ====== ====== ====== ====== ======
Net income (loss) per common share........... $ (2.05) $ (2.31) $ (2.61) $ (1.42) $ (.90) $ (.12) $ .02
====== ====== ====== ====== ====== ====== ======
Pro forma net income (loss) available to
Common Stock............................... $ (28.9) $ 8.6
====== ======
Pro forma net income (loss) per common
share...................................... $ (.45) .13
====== ======
OTHER FINANCIAL DATA:
EBITDA (c)................................... $ 155.9 $ 150.1 $ 124.8 $ 126.2 $ 138.0 $ 38.3 $ 56.0
Cash flows from operating activities......... 35.0 (28.4) 32.5 48.6 69.2 29.2 (2.2)
Cash flows from investing activities......... 399.7 (17.0) 37.5 (40.3) (41.4) (10.3) (10.0)
Cash flows from financing activities......... (310.3) (29.5) (88.5) (3.6) (22.1) 2.2 (21.2)
Net cash interest expense (d)................ 130.9 126.1 78.0 47.8 90.4 12.4 34.0
Capital expenditures......................... 31.9 69.2 29.6 32.6 42.3 7.0 9.8
Ratios:
EBITDA to net interest expense............. 1.2x 1.2x 1.0x 1.0x 1.0x 1.2x 1.6x
EBITDA to net cash interest expense........ 1.2x 1.2x 1.6x 2.6x 1.5x 3.1x 1.7x
Earnings to fixed charges (e).............. NM NM NM NM NM NM 1.0x
Total debt to EBITDA....................... 8.4x 8.6x 10.0x 9.7x 9.0x NM NM
Pro Forma:
EBITDA (c)................................. $ 143.0 57.2
Net interest expense (b)................... 87.1 22.5
Net cash interest expense (d).............. 62.9 16.0
Pro Forma Ratios:
EBITDA to net interest expense............. 1.6x 2.5x
EBITDA to net cash interest expense........ 2.3x 3.6x
Earnings to fixed charges (e).............. NM 1.4x
BALANCE SHEET DATA (END OF PERIOD):
Cash and investments (f)..................... $ 260.3 $ 169.1 $ 150.0 $ 162.5 $ 187.4 $ 155.8
Total assets................................. 1,832.8 1,676.5 1,533.4 1,484.0 1,464.7 1,409.1
Long term debt, including current
maturities................................. 1,310.7 1,286.2 1,241.3 1,223.3 1,236.7 1,214.3
Stockholders' equity......................... 273.6 184.4 112.1 124.6 67.0 68.1
Pro forma:
Cash and investments....................... 1.0
Long term debt, including current
maturities............................... 854.5
Stockholders' equity....................... 242.2
</TABLE>
- ---------------
(a) Net interest expense represents total interest expense less interest income.
(b) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Operations -- Other Income (Expense)" for
additional detail.
(c) EBITDA represents operating income plus exploration charges and
depreciation, depletion and amortization expense. EBITDA is not presented as
an indicator of Mesa's operating performance or as a measure of liquidity.
(d) During the periods presented, certain of Mesa's total interest expense
consisted of non-cash amortization of debt issuance costs and of accretion
of interest on certain discount notes. Such accreted interest was added to
the balance of the discount notes rather than paid in cash. Net cash
interest expense reflects net interest expense less amortization of debt
issuance costs and accretion of interest on discount notes.
(e) For the purpose of determining the ratio of earnings to fixed charges,
earnings are defined as net loss plus fixed charges. Fixed charges consist
of interest expense and capitalized interest. Earnings were inadequate to
cover fixed charges for the three months ended March 31, 1995 by $7.9
million and for each of the years ended December 31, 1991 through December
31, 1995 by $79.2 million, $91.6 million, $105.3 million, $83.5 million and
$58.5 million, respectively. For the year ended December 31, 1995, on a pro
forma basis, earnings were inadequate to cover fixed charges by $7.9 million
and were inadequate to cover fixed charges and preferred dividends by $29.7
million.
(f) At March 31, 1996, cash and investments includes $115.8 million of cash and
cash investments and $40.0 million of investments.
13
<PAGE> 15
SUMMARY RESERVE AND PRODUCTION DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1991 1992 1993 1994 1995
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C> <C>
PROVED RESERVES(A)(B):
Natural gas (Bcf).............................................. 1,368.0 1,276.0 1,202.4 1,303.2 1,218.0
Natural gas liquids (MMBbls)................................... 79.3 80.1 79.2 84.4 101.9
Oil and condensate (MMBbls).................................... 4.0 7.3 3.3 5.0 9.5
Natural gas equivalents (Bcfe)................................. 1,867.3 1,800.4 1,697.1 1,839.8 1,886.5
Percentage proved developed.................................... 98% 95% 96% 96% 95%
PRODUCTION DATA:
Natural gas (Bcf).............................................. 108.5 89.5 79.8 82.3 77.3
Natural gas liquids (MMBbls)................................... 4.7 4.8 5.1 6.9 6.6
Oil and condensate (MMBbls).................................... 0.8 1.0 0.7 0.5 1.2
Natural gas equivalents (Bcfe)................................. 141.5 124.5 114.5 127.1 123.9
PRICES AT DECEMBER 31(B):
Natural gas (per Mcf).......................................... $ 1.83 $ 1.94 $ 2.14 $ 1.66 $ 1.95
Natural gas liquids (per Bbl).................................. 14.57 12.34 10.97 12.98 11.87
FUTURE NET CASH FLOWS(B):
After tax...................................................... $2,204.2 $2,105.5 $2,066.2 $2,014.8 $2,152.8
Discounted at 10%, after tax................................... 995.2 1,037.2 986.9 934.2 966.2
Before tax..................................................... 2,599.0 2,408.0 2,306.2 2,225.8 2,449.8
Discounted at 10%, before tax.................................. 1,181.0 1,167.7 1,068.7 988.3 1,040.4
RESERVE LIFE INDEX (YEARS)(C).................................... 13.2 14.5 14.8 14.5 15.2
RESERVE ADDITIONS (BCFE):
Extensions and discoveries..................................... 10.1 82.6 9.8 9.2 48.5
Acquisitions................................................... 1.5 0.6 0.2 0.8 1.0
Revisions(a)................................................... (119.6) (6.3) 25.8 259.8 121.2
-------- -------- -------- -------- --------
Net additions (reductions)..................................... (108.0) 76.9 35.8 269.8 170.7
======== ======== ======== ======== ========
RESERVE REPLACEMENT(D):
Total.......................................................... (76)% 62% 31% 212% 138%
Total, excluding revisions..................................... 8% 67% 9% 8% 40%
COSTS INCURRED:
Acquisition.................................................... $ 5.4 $ 0.1 $ 0.1 $ 3.0 $ 0.4
Exploration.................................................... 7.9 15.2 2.7 5.2 8.2
Development.................................................... 12.4 6.9 2.4 14.0 14.6
-------- -------- -------- -------- --------
Total acquisition, exploration and development............... 25.7 22.2 5.2 22.2 23.2
Facilities..................................................... 10.3 49.5 24.1 11.5 15.7
-------- -------- -------- -------- --------
Total costs incurred......................................... $ 36.0 $ 71.7 $ 29.3 $ 33.7 $ 38.9
======== ======== ======== ======== ========
FINDING COSTS (PER MCFE)(E):
Total.......................................................... $ NM $ 0.93 $ 0.82 $ 0.12 $ 0.23
Total, excluding revisions and facilities...................... 2.22 0.27 0.52 2.22 0.47
PER MCFE DATA:
Total revenue.................................................. $ 1.76 $ 1.90 $ 1.88 $ 1.73 $ 1.81
Production costs(f)............................................ 0.47 0.50 0.63 0.58 0.57
-------- -------- -------- -------- --------
Gross margin(g)................................................ 1.29 1.40 1.25 1.15 1.24
General and administrative expense............................. 0.20 0.20 0.22 0.23 0.22
-------- -------- -------- -------- --------
Gross profit(h)................................................ $ 1.09 $ 1.20 $ 1.03 $ 0.92 $ 1.02
======== ======== ======== ======== ========
</TABLE>
- ---------------
(a) As of December 31, 1991, 1992 and 1993, the proved oil and gas reserves for
substantially all of Mesa's properties were estimated by independent
petroleum engineering consultants. Estimates of proved reserves as of
December 31, 1994 and 1995 were prepared by Mesa's internal reserve
engineers. See "Business -- Reserves."
(b) Proved reserves and future net cash flows were estimated in accordance with
Securities and Exchange Commission (the "Commission") guidelines. Prices at
December 31 in each of the years 1991 through 1995 were used in the
calculation of proved reserves and future net cash flows and were held
constant through the periods of estimated production, except as otherwise
provided by contract, in accordance with Commission guidelines.
(c) The reserve life index is calculated as proved reserves divided by annual
production, both on a Bcfe basis.
(d) Reserve replacement is calculated as reserve additions (reductions) divided
by annual production, both on a Bcfe basis. See "Business -- Reserves."
(e) Finding costs are calculated as costs incurred divided by reserve additions
(reductions). The average five year finding costs for the period ended
December 31, 1995 were $.47 per Mcfe from all sources and $.60 per Mcfe from
all sources excluding revisions and facilities. See "Business -- Reserves."
(f) Production costs includes lease operating expenses and production and other
taxes.
(g) Gross margin is calculated as total revenue less production costs.
(h) Gross profit is calculated as gross margin less general and administrative
expense.
14
<PAGE> 16
RISK FACTORS
Holders of Rights should consider carefully the following factors relating
to the business of Mesa and the Rights Offering, together with the information
and financial data set forth elsewhere in this Prospectus, prior to making an
investment decision.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical fact included in this Prospectus,
including without limitation, the statements under "Prospectus Summary," "Risk
Factors -- Financial Risks -- High Leverage," "Unaudited Pro Forma Financial
Information," "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Capital Resources and Liquidity," "Certain Federal
Income Tax Considerations -- Tax Consequences to Holders of Rights" and Notes 2
and 4 to the Consolidated Financial Statements located elsewhere herein
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 are disclosed in this Prospectus, including without
limitation in conjunction with the forward-looking statements included in this
Prospectus. All subsequent written and oral forward-looking statements
attributable to Mesa or persons acting on its behalf are expressly qualified in
their entirety by the Cautionary Statements.
FINANCIAL RISKS
High Leverage
Although completion of the Recapitalization will result in a significant
reduction of debt, Mesa will continue to be highly leveraged. After giving
effect to the consummation of the Recapitalization and the application of the
net proceeds therefrom, Mesa would have had total pro forma long term
indebtedness (including current maturities) of approximately $854.5 million and
stockholders' equity of approximately $242.2 million at March 31, 1996. See
"Capitalization" and "Unaudited Pro Forma Financial Information."
Mesa's level of indebtedness following the Recapitalization will have
several important effects on its future operations, including that (i) a
substantial portion of Mesa's cash flow from operations will be dedicated to the
payment of interest on its indebtedness and will not be available for other
purposes, (ii) the covenants contained in the New Credit Facility and in the
indentures governing the Notes require Mesa to meet certain financial tests and
other restrictions, will limit its ability to borrow additional funds, to grant
liens and to dispose of assets and will affect Mesa's flexibility in planning
for and reacting to changes in its business, including possible acquisition
activities, and (iii) Mesa's ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions, general
corporate purposes or other purposes may be impaired.
Mesa's ability to meet its debt service obligations and to reduce its total
indebtedness will be dependent upon Mesa's future performance, which will be
subject to oil and gas prices, Mesa's level of production and general economic
conditions and to financial, business and other factors affecting the operations
of Mesa, many of which are beyond its control. There can be no assurance that
Mesa's future performance will not be adversely affected by such changes in oil
and gas prices and/or production nor by such economic conditions and/or
financial, business and other factors.
History of Losses
Mesa had net losses of $79.2 million, $89.2 million, $102.4 million, $83.4
million and $57.6 million for the years ended December 31, 1991, 1992, 1993,
1994 and 1995, respectively. Although Mesa reported net income of $1.1 million
for the first quarter of 1996, Mesa expects to report a net loss for the year.
Giving effect to the Recapitalization and the application of the proceeds
therefrom to repay and/or refinance substantially all of Mesa's existing
indebtedness as if the Recapitalization and application of the proceeds had
occurred on
15
<PAGE> 17
January 1, 1995, Mesa's pro forma net loss (before preferred stock dividends)
for the year ended December 31, 1995 would have been $7.0 million and pro forma
net income for the three months ended March 31, 1996 would have been $14.3
million. See "Unaudited Pro Forma Financial Information." In the first year
following consummation of the Recapitalization, annual interest expense is
expected to be approximately $90 million, with approximately $65 million payable
in cash, which amounts are expected to vary in subsequent years based on
outstanding borrowings and interest rates under the New Credit Facility and the
accretion of interest on the Discount Notes. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The 8% dividend on
the Preferred Stock will be paid in kind (with additional shares of Preferred
Stock) rather than in cash for the first four years following issuance.
Notwithstanding the improvements in Mesa's capital structure and financial
flexibility expected to result from the Recapitalization, Mesa may continue to
incur net losses and, to the extent that natural gas prices are low, such losses
may be substantial. See "-- Business and Industry Risks -- Volatility of Natural
Gas and NGL Prices."
Accountants' Going Concern Qualification
Mesa believes the successful completion of the Recapitalization will
position it to continue as a going concern and to pursue its business
strategies. Mesa's independent public accountants' report on the consolidated
financial statements of Mesa for the year ended December 31, 1995 was dated
March 6, 1996. This report included a discussion of Mesa's financial condition
and liquidity issues and expressed substantial doubt about Mesa's ability to
continue as a going concern. As the Recapitalization had not been completed as
of the date of their report, the independent public accountants did not consider
the effects of the Recapitalization in their assessment of Mesa's ability to
continue as a going concern.
TRANSACTION RISKS
Control by DNR
Following its purchase of Series B Preferred Stock at the First Closing,
DNR elected a majority of the directors on Mesa's Board in accordance with the
special voting rights granted to it as holder of the Series B Preferred Stock.
Such special voting rights will continue for so long as DNR meets certain
minimum ownership requirements. See "Description of Capital Stock -- Preferred
Stock." DNR's Board representatives will have significant power and authority
over the management and affairs of Mesa and consequently, DNR will have
significant control over Mesa. DNR intends to implement an orderly transition
and succession plan for Mesa's senior management. Such plans are being
developed. There can be no assurance, however, that such plans will not cause
disruption to the business and operations of Mesa, nor can there be any
assurances regarding the effect that DNR's influence on and participation in the
management of Mesa will have on Mesa's financial condition and results of
operations. See "Management."
In addition, in the event that the Rights distributed in the Rights
Offering are not fully exercised, DNR has agreed to buy a number of additional
shares of Series B Preferred Stock equal to the number of shares of Series A
Preferred Stock offered hereby 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 obtain up
to 64.7% of Mesa's voting shares. Even if all of the Rights are exercised, DNR
will own 32.5% of the voting shares (excluding dividends paid in kind) and
therefore will be in a position to influence actions that require the consent of
Mesa's shareholders. Accordingly, DNR will have the ability to control the
actions of the Board and to influence and, in certain cases, determine the
outcome of matters submitted for the approval of the shareholders.
Market Considerations
The Subscription Price was determined by the Board of Directors of the
Company through negotiation with Rainwater and may not reflect the actual value
of the Company, the Common Stock or the Series A Preferred Stock. There is
currently no public market for the Rights or the Series A Preferred Stock. Mesa
has been advised by the Dealer Manager that it presently intends to make a
market in the Rights; however, the
16
<PAGE> 18
Dealer Manager is under no obligation to do so, and any market making activity
may be discontinued at any time. Although the Rights will trade and the Series A
Preferred Stock will be listed for trading on the New York Stock Exchange, there
can be no assurance that an active public market will develop or be sustained
for the Rights or the Series A Preferred Stock, that the market price of the
Common Stock will not decline during the subscription period or that, following
the issuance of the Rights and of the Series A Preferred Stock upon exercise of
Rights, a subscribing Rights holder will be able to sell shares of Series A
Preferred Stock purchased in the Rights Offering at a price equal to or greater
than the Subscription Price. The market price of the Series A Preferred Stock
could be subject to significant fluctuations in response to Mesa's operating
results and other factors, including the size of the public float of the Series
A Preferred Stock (which will depend in part on the percentage of the Rights
that are exercised pursuant to the Rights Offering).
Mesa believes that market prices of the Common Stock prior to the Rights
Offering reflect the combined value of the Common Stock and the Rights. At the
time the Subscription Price for the Rights Offering was determined, such price
represented a 25% discount to the market price for Mesa's Common Stock. The
effect of the discount on the market price for the Rights most likely will be to
increase the trading values for the Rights relative to what those trading values
might be if such discount were not present. The effect of the discount on the
trading value of Mesa's Common Stock is difficult to separate from the effect of
the dilution resulting from the issuance of the Preferred Stock. However, due to
the inherent value of the Rights, the market price for Mesa's Common Stock is
expected to decrease by an amount that approximates the value of the Rights when
the Rights are distributed and begin to trade as a separate security. The
trading values of the Series A Preferred Stock will most likely be based on the
market price of the underlying Common Stock and the value attributed to the
dividend rights and other preferences of the Series A Preferred Stock.
Accordingly, to the extent the market attributes value to the dividend and other
preferential rights, the Series A Preferred Stock is expected to trade at a
premium to the underlying Common Stock.
Irrevocability of Subscriptions
The election to exercise Rights is irrevocable. Until certificates
representing shares of Series A Preferred Stock are delivered, subscribing
Rights holders may not be able to sell such shares. Certificates representing
shares of Series A Preferred Stock purchased in the Rights Offering will be
delivered by mail as soon as practicable following the Expiration Date. No
interest will be paid to Rights holders on funds delivered to the Subscription
Agent pursuant to the exercise of Rights pending delivery of such certificates.
Dividends; Redemption
Before the fourth anniversary of the issue date, all dividends on the
Preferred Stock will be paid in kind with additional shares of Preferred Stock
based on the stated value of such shares. Thereafter, Mesa must satisfy certain
financial tests in order to pay dividends in cash rather than in kind. The New
Credit Facility and the indentures governing the Notes also contain certain
restrictions on the payment of cash dividends on the Common Stock and the
Preferred Stock that could prohibit the payment of cash dividends on the
Preferred Stock for its term. See "Price Range of Common Stock and Dividend
Policy." In addition, although the Preferred Stock is subject to mandatory
redemption on the twelfth anniversary of the date of issuance, the redemption
price may be paid with shares of Common Stock, rather than in cash, at Mesa's
option. Mesa will be prohibited from paying dividends on the Common Stock for so
long as any shares of Series A Preferred Stock or Series B Preferred Stock are
outstanding.
Dilution
The Recapitalization will result in immediate substantial dilution with
respect to shares of Series A Preferred Stock purchased upon the exercise of
Rights. See "Dilution."
Certain Federal Income Tax Considerations
Holders of Common Stock should recognize no income or gain for federal
income tax purposes upon the receipt, exercise or lapse of the Rights.
Nevertheless, the federal income tax treatment of the distribution of
17
<PAGE> 19
Rights to holders of Common Stock and any subsequent exercise or lapse of such
Rights is subject to some uncertainty. In addition, purchasers of Series A
Preferred Stock should consider the federal income tax implications arising from
the payment of dividends on or the redemption or conversion of shares of Series
A Preferred Stock. For example, holders of Series A Preferred Stock who receive
dividends paid in kind may be required to include the fair market value of such
dividends in gross income for federal income taxes purposes notwithstanding that
no cash is received by such holders in respect of such dividends. See "Certain
Federal Income Tax Considerations" for a more detailed discussion of the federal
income tax consequences resulting from the purchase, ownership and disposition
of Rights and shares of Series A Preferred Stock.
BUSINESS AND INDUSTRY RISKS
Volatility of Natural Gas and NGL Prices
Revenues generated from Mesa's operations are highly dependent upon the
sales prices of, and demand for, natural gas and NGLs. Historically, the markets
for natural gas and NGLs have been volatile and are likely to continue to be
volatile in the future. Prices for natural gas and NGLs are subject to wide
fluctuation in response to market uncertainty, changes in supply and demand and
a variety of additional factors, all of which are beyond the control of Mesa.
These factors include domestic and foreign political conditions, the overall
level of supply of and demand for oil, natural gas and natural gas liquids, the
price of imports of oil and natural gas, weather conditions, the price and
availability of alternative fuels and overall economic conditions. Mesa's future
financial condition and results of operations will be dependent, in part, upon
the prices received for Mesa's natural gas production, as well as the costs of
acquiring, finding, developing and producing reserves.
As of December 31, 1995, approximately 65% of Mesa's proved reserves,
calculated on an energy-equivalent basis, were natural gas and substantially all
of its other reserves were NGLs. Substantially all of Mesa's sales of natural
gas and NGLs are made in the spot market, or pursuant to contracts based on spot
market prices, and not pursuant to long term, fixed price contracts. Any
significant decline in prices for natural gas and NGLs could have a material
adverse effect on Mesa's financial condition, results of operations and
quantities of reserves recoverable on an economic basis. Should the industry
experience significant price declines from current levels or other adverse
market conditions, Mesa may not be able to generate sufficient cash flows from
operations to meet its obligations and make planned capital expenditures.
The availability of a ready market for Mesa's natural gas and NGL
production also depends on a number of factors, including the demand for and
supply of natural gas and NGLs and the proximity of reserves to, and the
capacity of, oil and gas gathering systems, pipelines or trucking and terminal
facilities.
Use and Risks of Hedging Transactions and Speculative Investments
In order to manage its exposure to price risks in the marketing of its oil
and natural gas, Mesa has in the past and may in the future enter into oil and
natural gas futures contracts on the New York Mercantile Exchange ("NYMEX"),
fixed price delivery contracts and financial swaps as hedging devices. While
intended to reduce the effects of volatility of the price of oil and natural
gas, such transactions may limit potential gains by Mesa if oil and natural gas
prices were to rise substantially over the price established by the hedge. In
addition, such transactions may expose Mesa to the risk of financial loss in
certain circumstances, including instances in which (i) production is less than
expected, (ii) there is a widening of price differentials between delivery
points for Mesa's production and Henry Hub (in the case of NYMEX futures
contracts) or delivery points required by fixed price delivery contracts to the
extent they differ from those of Mesa's production, (iii) Mesa's customers or
the counterparties to its futures contracts fail to purchase or deliver the
contracted quantities of oil or natural gas or (iv) a sudden, unexpected event
materially impacts oil or natural gas prices. Mesa also invests from time to
time in oil and gas or other futures contracts which are not intended to be
hedges of its oil and gas production. Following the Recapitalization,
speculative investments in energy futures contracts, which in prior periods have
been profitable, are expected to be limited. After May 7, 1996, Mesa had no open
speculative positions in energy futures contracts. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Results of
Operations" and "-- Other" and Note 3 of Notes to the Consolidated Financial
Statements appearing elsewhere in this Prospectus.
18
<PAGE> 20
Reserves and Future Net Cash Flows
Information relating to Mesa's proved oil and gas reserves is based upon
engineering estimates. Reserve engineering is a subjective process of estimating
the recovery from underground accumulations of oil and natural gas that cannot
be measured in an exact manner, and the accuracy of any reserve estimate is a
function of the quality of available data and of engineering and geological
interpretation and judgment. Estimates of economically recoverable oil and gas
reserves and of future net cash flows necessarily depend upon a number of
variable factors and assumptions, such as historical production from the area
compared with production from other producing areas, the assumed effects of
regulations by governmental agencies and assumptions concerning future oil and
gas prices, future operating costs, severance and excise taxes, development
costs and workover and remedial costs, all of which may in fact vary
considerably from actual results. Because all reserve estimates are to some
degree speculative, the quantities of oil and natural gas that are ultimately
recovered, production and operation costs, the amount and timing of future
development expenditures and future oil and natural gas sales prices may all
vary from those assumed in these estimates and such variances may be material.
In addition, different reserve engineers may make different estimates of reserve
quantities and cash flows based upon the same available data. See
"Business -- Reserves."
The present values of estimated future net cash flows referred to in this
Prospectus should not be construed as the current market value of the estimated
proved oil and gas reserves attributable to Mesa's properties. In accordance
with applicable requirements of the Commission, the estimated discounted future
net cash flows from proved reserves are generally based on prices and costs as
of the date of the estimate, whereas actual future prices and costs may be
materially higher or lower. Actual future net cash flows also will be affected
by factors such as the amount and timing of actual production, supply and demand
for oil and gas, curtailments or increases in consumption by gas purchasers and
changes in governmental regulations or taxation. Mesa's producing properties in
the Hugoton field and the West Panhandle field are subject to production
limitations imposed by state regulatory authorities, by contracts or both, and
any future limitation on production would affect the expected decline in
reserves. See "Business -- Production." The timing of actual future net cash
flows from proved reserves, and thus their actual present value, will be
affected by the timing of both the production and the incurrence of expenses in
connection with development and production of oil and gas properties. In
addition, the 10% discount factor, which is required by the Commission to be
used to calculate discounted future net cash flows for reporting purposes, is
not necessarily the most appropriate discount factor based on interest rates in
effect from time to time and risks associated with Mesa's business or the oil
and gas industry in general.
The information set forth in this Prospectus includes revisions of certain
reserve estimates attributable to proved properties included in the preceding
year's estimates. Such revisions reflect additional information from subsequent
activities, production history of the properties involved and any adjustments in
the projected economic life of such properties resulting from changes in product
prices. In addition, the upward revisions at year end 1994 reflect a change by
Mesa to the use of reserve estimates prepared by Mesa's internal reserve
engineers instead of estimates prepared by an independent petroleum engineering
firm. See "Business -- Reserves." Any downward revisions in the future could
adversely affect Mesa's financial condition, borrowing base under the New Credit
Facility, future prospects and market value of its securities.
Replacement of Reserves
Mesa's future performance depends in part upon its ability to acquire, find
and develop additional oil and gas reserves that are economically recoverable.
Without successful acquisition, development or exploration activities, Mesa's
reserves will decline. No assurances can be given that Mesa will be able to
acquire or find and develop additional reserves on an economic basis.
Mesa's business is capital intensive and, to maintain its asset base of
proved oil and gas reserves, a significant amount of cash flow from operations
must be reinvested in property acquisitions, development or exploration
activities. To the extent cash flow from operations is reduced and external
sources of capital become limited or unavailable, Mesa's ability to make the
necessary capital investments to maintain or expand its asset base would be
impaired. Without such investment, Mesa's oil and gas reserves would decline.
19
<PAGE> 21
In recent years, the majority of Mesa's capital expenditures have been
dedicated to developing and upgrading its existing long lived reserve base
through infill drilling of its Hugoton reserves, additions to its compression
and gathering system and pipeline interconnects, and the construction and
expansion of gas processing plants. Relatively modest expenditures have been
made to explore for, develop or acquire new reserve additions. In order to
increase reserves and production, Mesa must continue its development and
exploration drilling program or undertake other replacement activities.
Following completion of the Recapitalization, Mesa's strategy will include
increasing its reserve base through acquisitions of producing properties and
continued exploitation of its existing properties. The successful acquisition of
producing properties requires an assessment of recoverable reserves, future oil
and gas prices and operating costs, potential environmental and other
liabilities and other factors. Such assessments are necessarily inexact and
their accuracy inherently uncertain. There can be no assurance that Mesa's
acquisition activities and exploration and development projects will result in
increases in reserves. Mesa's operations may be curtailed, delayed or canceled
as a result of lack of adequate capital and other factors, such as title
problems, weather, compliance with governmental regulations or price controls,
mechanical difficulties or shortages or delays in the delivery of equipment.
Furthermore, while Mesa's revenues may increase if prevailing gas and oil prices
increase significantly, Mesa's finding costs for additional reserves could also
increase. In addition, the costs of exploration and development may materially
exceed initial estimates. For a discussion of Mesa's reserves, see
"Business -- Properties" and "-- Reserves."
Operating Hazards; Limited Insurance Coverage
Mesa's operations are subject to hazards and risks inherent in drilling for
and production and transportation of natural gas and oil, such as fires, natural
disasters, explosions, encountering formations with abnormal pressures,
blowouts, cratering, pipeline ruptures and spills, any of which can result in
loss of hydrocarbons, environmental pollution, personal injury claims, and other
damage to properties of Mesa and others. These risks could result in substantial
losses to Mesa due to injury and loss of life, severe damage to and destruction
of property and equipment, pollution and other environmental damage and
suspension of operations. Moreover, Mesa's Gulf of Mexico offshore operations
are subject to a variety of operating risks peculiar to the marine environment,
such as hurricanes or other adverse weather conditions, to more extensive
governmental regulation, including regulations that may, in certain
circumstances, impose strict liability for pollution damage, and to interruption
or termination of operations by governmental authorities based on environmental
or other considerations.
As protection against operating hazards, Mesa maintains insurance coverage
against some, but not all, potential losses. Mesa's coverages include, but are
not limited to, operator's extra expense, physical damage on certain assets,
employer's liability, comprehensive general liability, automobile, workers'
compensation and loss of production income insurance and limited coverage for
sudden environmental damages, but Mesa does not believe that insurance coverage
for environmental damages that occur over time is available at a reasonable
cost. Moreover, Mesa does not believe that insurance coverage for the full
potential liability that could be caused by sudden environmental damages is
available at a reasonable cost. Accordingly, Mesa may be subject to liability or
may lose substantial portions of its properties in the event of environmental
damages. The occurrence of an event that is not fully covered by insurance could
have an adverse impact on Mesa's financial condition and results of operations.
Governmental Regulation
General. Mesa's operations are affected from time to time in varying
degrees by political developments and federal and state laws and regulations. In
particular, oil and natural gas production, operations and economics are or have
been affected by price controls, taxes and other laws relating to the oil and
natural gas industry, by changes in such laws and by changes in administrative
regulations. Mesa cannot predict how existing laws and regulations may be
interpreted by enforcement agencies or court rulings, whether additional laws
and regulations will be adopted, or the effect such changes may have on its
business or financial condition. See "Business -- Regulation and Prices."
20
<PAGE> 22
Environmental. Mesa's operations are subject to numerous laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. These laws and regulations
require the acquisition of a permit before drilling commences, restrict the
types, quantities and concentration of various substances that can be released
into the environment in connection with drilling and production activities,
limit or prohibit drilling activities on certain lands lying within wilderness,
wetlands and other protected areas, and impose substantial liabilities for
pollution which might result from Mesa's operations. Moreover, the recent trend
toward stricter standards in environmental legislation and regulation is likely
to continue. For instance, legislation has been proposed in Congress from time
to time that would reclassify certain crude oil and natural gas exploration and
production wastes as "hazardous wastes" which would make the reclassified wastes
subject to much more stringent handling, disposal and clean-up requirements. If
such legislation were to be enacted, it could have a significant impact on the
operating costs of Mesa, as well as the oil and gas industry in general.
Initiatives to further regulate the disposal of crude oil and natural gas wastes
are also pending in certain states, and these various initiatives could have a
similar impact on Mesa. Mesa could incur substantial costs to comply with
environmental laws and regulations. In addition to compliance costs, government
entities and other third parties may assert substantial liabilities against
owners and operators of oil and gas properties for oil spills, discharge of
hazardous materials, remediation and clean-up costs and other environmental
damages, including damages caused by previous property owners. The imposition of
any such liabilities on Mesa could have a material adverse effect on Mesa's
financial condition and results of operations.
The Oil Pollution Act of 1990 imposes a variety of regulations on
"responsible parties" related to the prevention of oil spills. The
implementation of new, or the modification of existing, environmental laws or
regulations, including regulations promulgated pursuant to the Oil Pollution Act
of 1990, could have a material adverse impact on Mesa. See
"Business -- Regulation and Prices -- Environmental Matters."
Competition
Mesa operates in the highly competitive areas of natural gas and oil
production, development and exploration with other companies. Factors affecting
Mesa's ability to compete in the marketplace include the availability of funds
and information relating to a property, the standards established by Mesa for
the minimum projected return on investment, the availability of alternate fuel
sources and the intermediate transportation of gas. Mesa's competitors include
major integrated oil companies and a substantial number of independent energy
companies, many of which may have substantially larger financial resources,
staffs and facilities than Mesa.
21
<PAGE> 23
USE OF PROCEEDS
The total proceeds from the Recapitalization are estimated to be
approximately $1.1 billion (including net proceeds from the Rights Offering
estimated at $124 million, assuming all Rights are exercised). The following
table sets forth the proposed sources and uses of funds of the Recapitalization,
after giving effect to the First Closing and the Second Closing, assuming the
Recapitalization had been consummated as of March 31, 1996. For a description of
the Rights Offering, the New Credit Facility, the Notes, the Stock Purchase
Agreement and the Preferred Stock, see "The Rights Offering," "Description of
New Debt," "The Stock Purchase Agreement" and "Description of Capital
Stock -- Preferred Stock."
<TABLE>
<CAPTION>
AMOUNTS
---------------------
<S> <C>
(DOLLARS IN MILLIONS)
SOURCES
New Credit Facility(a)................................................ $ 349.2
Senior Subordinated Notes............................................. 325.0
Discount Notes........................................................ 175.0
Preferred Stock(b).................................................... 265.0
Cash and investments(c)............................................... 219.9
--------
Total sources...................................................... $ 1,334.1
========
USES
Repayment of HCLP Secured Notes(d).................................... $ 492.3
Repayment of Old Credit Facility (e).................................. 51.1
Redemption of 12 3/4% Secured Discount Notes due June 30, 1998........ 617.4
Repayment of 12 3/4% Discount Notes due June 30, 1996................. 39.7
Redemption of 13 1/2% Subordinated Notes due May 1, 1999.............. 7.6
Prepayment premium with respect to HCLP Secured Notes(f).............. 64.0
Fees and expenses relating to the Rights Offering..................... 8.0
Other fees and expenses relating to the Recapitalization(g)........... 27.0
Accrued interest...................................................... 27.0
--------
Total uses......................................................... $ 1,334.1
========
</TABLE>
- ---------------
(a) Reflects initial borrowings under the $500.0 million New Credit Facility.
Does not include approximately $11.4 million in letters of credit
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) Includes approximately $114.8 million in cash and cash investments, $40.0
million in investments, $56.5 million in restricted cash of HCLP and $8.7
million of refundable prepaid interest as shown on the Consolidated Balance
Sheets as of March 31, 1996. This represents substantially all of Mesa's
cash and cash investments, investments and restricted cash at March 31,
1996.
(d) The HCLP Secured Notes were issued by HCLP in 1991, secured by Mesa's
Hugoton field properties and due in semiannual installments through August
2012. The HCLP Secured Notes outstanding at March 31, 1996 bore interest at
fixed rates ranging from 9.05% to 11.3% per annum (weighted average
10.35%).
(e) Mesa's Old Credit Facility was secured by a first lien on Mesa's West
Panhandle field properties, the Company's equity interest in Mesa Operating
Co. and a 76% limited partnership interest in HCLP and was due in various
installments through June 1997. The Old Credit Facility bore interest at
the lesser of a Eurodollar rate plus 2 1/2% or the prime rate plus 1/2%
(7.92% at March 31, 1996). At March 31, 1996, the Old Credit Facility also
supported letters of credit totaling $11.4 million that are not included in
the table above.
(f) The amount of the prepayment premium due upon early retirement of the HCLP
Secured Notes is based on prevailing interest rates as of the date of
repayment. Such premium would have totaled approximately $64.0 million on
March 31, 1996 and approximately $54.6 million on June 7, 1996.
(g) Includes $9.3 million payable to DNR pursuant to the Stock Purchase
Agreement, with $4.7 million payable at the First Closing and $4.6 million
payable at the Second Closing. See "The Stock Purchase Agreement -- Payment
of Expenses and Additional Fees."
22
<PAGE> 24
CAPITALIZATION
The following table sets forth the unaudited historical consolidated cash
and investments, current maturities of long term debt and capitalization of Mesa
as of March 31, 1996, as adjusted to give effect to (i) the Recapitalization and
the application of the proceeds thereof (assuming proceeds of $1.3 billion and
assuming that all Rights are exercised in full) as described under "Use of
Proceeds," and (ii) the amendments to Mesa's articles of incorporation approved
by Mesa's shareholders at the Special Meeting increasing the authorized capital
stock, as if such Recapitalization had been consummated and such amendments had
been effected on March 31, 1996. This table should be read in conjunction with
the Consolidated Financial Statements and the related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
--------------------------
HISTORICAL AS ADJUSTED
---------- -----------
(DOLLARS IN MILLIONS,
EXCEPT SHARE DATA)
<S> <C> <C>
Cash and investments (a).............................................. $ 155.8 $ 1.0
======== ========
Current maturities of long term debt (b).............................. $ 92.5 $ 5.3
-------- --------
Long term debt:
HCLP Secured Notes.................................................. 457.3 --
Old Credit Facility (c)............................................. 38.6 --
12 3/4% Secured Discount Notes due 1998............................. 618.4 --
Other debt.......................................................... 7.4 --
New Credit Facility (c)............................................. -- 349.2
Senior Subordinated Notes........................................... -- 325.0
Discount Notes...................................................... -- 175.0
-------- --------
Total long term debt (net of current maturities)................. 1,121.7 849.2
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized,
historical; 500,000,000 shares authorized, as adjusted
Series A Preferred Stock, 140,000,000 shares authorized,
58,407,080 shares issued and outstanding, as adjusted
(liquidation preference of $132,000,000) (d).................... -- 0.6
Series B Preferred Stock, 140,000,000 shares authorized,
58,849,557 shares issued and outstanding, as adjusted
(liquidation preference of $133,000,000) (d).................... -- 0.6
Series A Junior Participating Preferred Stock, 1,000,000 shares
authorized, no shares issued and outstanding, historical and as
adjusted........................................................ -- --
Common stock, $.01 par value, 100,000,000 shares authorized,
historical; 600,000,000 shares authorized, as adjusted;
64,050,009 shares issued and outstanding, historical and as
adjusted......................................................... 0.6 0.6
Additional paid-in capital (e)...................................... 399.0 647.8
Accumulated deficit (f)............................................. (331.5) (407.4)
-------- --------
Total stockholders' equity....................................... 68.1 242.2
-------- --------
Total capitalization........................................... $ 1,282.3 $ 1,096.7
======== ========
</TABLE>
- ---------------
(a) Includes approximately $115.8 million in cash and cash investments and $40.0
million in investments.
(b) Consists of $35.0 million relating to the HCLP Secured Notes, $12.5 million
relating to the Old Credit Facility, $39.7 million relating to the 12 3/4%
Discount Notes due 1996 and $5.3 million of other debt.
(c) Reflects initial borrowings under the $500 million New Credit Facility.
Amounts under the New Credit Facility and Mesa's Old Credit Facility do not
include approximately $11.4 million in letters of credit outstanding.
(d) To the extent Rights are not exercised, the number of shares of Series A
Preferred Stock to be issued will decrease and the number of shares of
Series B Preferred Stock to be issued will increase by the same amount.
(e) The increase in additional paid-in capital represents the gross proceeds
from the sale of Preferred Stock of $265.0 million, less $1.2 million of
stated capital attributable to the Preferred Stock and less $15.0 million
in expenses related to the equity issuance.
(f) The increase in the amount of the accumulated deficit of $75.9 million
represents the sum of (i) a $64.0 million prepayment premium on the HCLP
Secured Notes plus (ii) the write-off of approximately $12.6 million of
unamortized debt issuance costs related to debt being repaid and/or
refinanced, less (iii) a $.7 million gain on the extinguishment of existing
long term debt.
23
<PAGE> 25
DILUTION
The net tangible book value of the Common Stock as of March 31, 1996, was
$68 million or $1.06 per share. Net tangible book value per share represents
total tangible assets less total liabilities, divided by the number of shares of
Common Stock outstanding, on a fully diluted basis excluding stock options.
After giving effect to the consummation of the Recapitalization and the
application of the net proceeds therefrom, the net tangible book value of Mesa
as of March 31, 1996, would have been approximately $333 million, or $1.84 per
share (before deducting approximately $15 million of expenses payable by Mesa in
connection with the issuance of Preferred Stock). This represents an immediate
increase in net tangible book value of $.78 per share with respect to shares
outstanding prior to the Rights Offering and an immediate dilution of $.42 per
share with respect to shares purchased upon the exercise of Rights, as
illustrated in the following table:
<TABLE>
<S> <C> <C>
Subscription Price........................................................... $2.26
Net tangible book value per share at March 31, 1996.......................... $1.06
Increase per share attributable to Rights Offering........................... .39
Increase per share attributable to sale of Series B Preferred Stock.......... .39
Pro forma net tangible book value per share after the consummation of the
Recapitalization and application of net proceeds therefrom................. $1.84(1)
=====
Dilution per share purchased upon the exercise of Rights..................... $ .42 1)(2)
=====
</TABLE>
- ---------------
(1) Before deducting approximately $15 million of expenses payable by Mesa in
connection with the issuance of Preferred Stock.
(2) Does not take into account shares acquired or held other than upon the
exercise of Rights.
To the extent a shareholder sells or otherwise does not exercise such
shareholder's Rights, such shareholder's proportionate interest in Mesa's net
assets, earnings and voting power will be decreased. A shareholder selling
Rights may or may not be compensated for such dilution.
24
<PAGE> 26
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 June 11)................................... 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 May 31, 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.
The New Credit Facility prohibits Mesa from making any distributions or
paying any dividends with respect to its equity securities, other than those
paid in the form of equity securities. The indentures governing the Notes also
include certain restrictions on the payment of dividends on the Common Stock and
Preferred Stock. In addition, the Statement of Resolution establishing the
Preferred Stock prohibits the payment of dividends with respect to the Common
Stock for so long as any shares of Preferred Stock remain outstanding. See
"Description of New Debt" and "Description of Capital Stock -- Preferred Stock."
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 are payable only in kind for the first four years from
issuance.
25
<PAGE> 27
THE RIGHTS OFFERING
THE RIGHTS
Mesa is distributing transferrable Rights to the record holders of its
outstanding Common Stock as of the Record Date, at no cost to such record
holders. Mesa will distribute .912 Rights for each share of Common Stock held on
the Record Date. One Right plus $2.26 in cash will entitle the holder to
purchase one share of Series A Preferred Stock. The Rights will be evidenced by
transferable Subscription Certificates.
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. No Subscription Certificate may be
divided in such a way as to permit the holder of such Certificate to receive a
greater number of Rights than the number to which such Subscription Certificate
entitles its holder, except that a depository, bank, trust company or securities
broker or dealer holding shares of Common Stock on the Record Date for more than
one beneficial owner may, upon proper showing to the Subscription Agent,
exchange its Subscription Certificate to obtain a Subscription Certificate for
the number of Rights to which all such beneficial owners in the aggregate would
have been entitled had each been a record holder of Common Stock on the Record
Date. Mesa reserves the right to refuse to issue any such Subscription
Certificate if such issuance would be inconsistent with the principle that each
beneficial owner's holdings will be rounded up to the nearest whole Right.
Because the number of Rights distributed to each record holder will be
rounded up to the nearest whole number, beneficial owners of Common Stock who
are also the record holders of such shares will receive more Rights under
certain circumstances than beneficial owners of Common Stock who are not the
record holders of their shares and who do not obtain (or cause the record holder
of their shares to obtain) a separate Subscription Certificate with respect to
the shares of Common Stock beneficially owned by them, including shares held in
an investment advisory or similar account. To the extent that record holders or
beneficial owners of Common Stock who obtain a separate Subscription Certificate
receive more Rights, they will be able to subscribe for more shares of Series A
Preferred Stock.
SUBSCRIPTION PRIVILEGES
Basic Subscription Privilege. One Right will entitle the holder thereof to
receive, upon payment of the Subscription Price, one share of Series A Preferred
Stock. Certificates representing shares of Series A Preferred Stock purchased
pursuant to the Basic Subscription Privilege will be delivered to subscribers as
soon as practicable after the Expiration Date, irrespective of whether the
Subscription Privilege is exercised immediately prior to the Expiration Date or
earlier.
Oversubscription Privilege. Subject to the allocation described below,
each Right also carries the right to subscribe at the Subscription Price for
additional shares of Series A Preferred Stock not subscribed for through the
exercise of the Basic Subscription Privilege by other Rights holders (the
"Excess Shares"). Only Rights holders who exercise the Basic Subscription
Privilege in full will be entitled to exercise the Oversubscription Privilege.
If the Excess Shares are not sufficient to satisfy all subscriptions
pursuant to the Oversubscription Privilege, the Excess Shares will be allocated
pro rata (subject to the elimination of fractional shares) among those Rights
holders exercising the Oversubscription Privilege, in proportion, not to the
number of shares requested pursuant to the Oversubscription Privilege, but to
the number of shares each beneficial holder subscribed for pursuant to the Basic
Subscription Privilege; provided, however, that if such pro rata allocation
results in any Rights holder being allocated a greater number of Excess Shares
than such holder subscribed for pursuant to the exercise of such holder's
Oversubscription Privilege, then such holder will be allocated only such number
of Excess Shares as such holder subscribed for and the remaining Excess Shares
will be allocated among all other holders exercising the Oversubscription
Privilege. Certificates representing Excess Shares purchased pursuant to the
Oversubscription Privilege will be delivered to subscribers as soon as
practicable after the Expiration Date and after all prorations and adjustments
contemplated by the terms of the Rights Offering have been effected.
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<PAGE> 28
Banks, brokers and other nominee holders of Rights who exercise the Basic
Subscription Privilege and the Oversubscription Privilege on behalf of
beneficial owners of Rights will be required to certify to the Subscription
Agent and Mesa, in connection with the exercise of the Oversubscription
Privilege, as to the aggregate number of Rights that have been exercised and the
number of shares of Series A Preferred Stock that are being subscribed for
pursuant to the Oversubscription Privilege by each beneficial owner of Rights on
whose behalf such nominee holder is acting.
EXPIRATION DATE
The Rights will expire at 5:00 p.m., New York City time, on July , 1996,
unless extended by Mesa. After the Expiration Date, unexercised Rights will be
null and void. Mesa will not be obligated to honor any purported exercise of
Rights received by the Subscription Agent after the Expiration Date, regardless
of when the documents relating to such exercise were sent, except pursuant to
the Guaranteed Delivery Procedures described below.
DETERMINATION OF SUBSCRIPTION PRICE
The Subscription Price was determined by Mesa and its Board of Directors as
a result of negotiations with Rainwater. The Subscription Price should not be
considered an indication of the actual value of Mesa, the Common Stock or the
Series A Preferred Stock. There can be no assurance that the market price of the
Common Stock will not decline during the subscription period or that, following
the issuance of the Rights and of the Series A Preferred Stock upon exercise of
Rights, a subscribing Rights holder will be able to sell shares of Series A
Preferred Stock purchased in the Rights Offering at a price equal to or greater
than the Subscription Price.
Mesa believes that market prices of the Common Stock prior to the Rights
Offering reflect the combined value of the Common Stock and the Rights. At the
time the Subscription Price for the Rights Offering was determined, such price
represented a 25% discount to the market price for Mesa's Common Stock. The
effect of the discount on the market price for the Rights most likely will be to
increase the trading values for the Rights relative to what those trading values
might be if such discount were not present. The effect of the discount on the
trading value of Mesa's Common Stock is difficult to separate from the effect of
the dilution resulting from the issuance of the Preferred Stock. However, due to
the inherent value of the Rights, the market price for Mesa's Common Stock is
expected to decrease by an amount that approximates the value of the Rights when
the Rights are distributed and begin to trade as a separate security. The
trading values of the Series A Preferred Stock will most likely be based on the
market price of the underlying Common Stock and the value attributed to the
dividend rights and other preferences of the Series A Preferred Stock.
Accordingly, to the extent the market attributes value to the dividend and other
preferential rights, the Series A Preferred Stock is expected to trade at a
premium to the underlying Common Stock.
EXERCISE OF RIGHTS
Rights may be exercised by delivery to the Subscription Agent, on or prior
to the Expiration Date, of the properly completed and duly executed Subscription
Certificate evidencing such Rights (together with any required signature
guarantees), accompanied by payment in full of the Subscription Price for each
share of Series A Preferred Stock subscribed for pursuant to the Basic
Subscription Privilege and the Oversubscription Privilege (except as permitted
pursuant to clause (iii) of the next sentence). Such payment in full must be
made by (i) check or bank draft drawn upon a United States bank or postal,
telegraphic or express money order payable to "American Stock Transfer & Trust
Company, as Subscription Agent"; or (ii) wire transfer of funds to the account
maintained by the Subscription Agent for such purpose at ,
Account No. , ABA No. ; or (iii) in such other
manner as Mesa may approve in writing in the case of persons acquiring shares of
Series A Preferred Stock at an aggregate Subscription Price of $1.5 million or
more, provided in each case that the full amount of such Subscription Price is
received by the Subscription Agent in currently available funds within three New
York Stock Exchange trading days following the Expiration Date (the payment
method under (iii) being an "Approved Payment Method"). Payment of the
Subscription Price will be deemed to have been received by the Subscription
Agent only upon
27
<PAGE> 29
(a) clearance of any uncertified check, (b) receipt by the Subscription Agent of
any certified check or bank draft drawn upon a U.S. bank or of any postal,
telegraphic or express money order, (c) receipt of good funds in the
Subscription Agent's account designated above or (d) receipt of funds by the
Subscription Agent through an Approved Payment Method. PLEASE NOTE THAT FUNDS
PAID BY UNCERTIFIED PERSONAL CHECK MAY TAKE AT LEAST FIVE BUSINESS DAYS TO
CLEAR. ACCORDINGLY, HOLDERS WHO WISH TO PAY THE SUBSCRIPTION PRICE BY MEANS OF
UNCERTIFIED PERSONAL CHECK ARE URGED TO MAKE PAYMENT SUFFICIENTLY IN ADVANCE OF
THE EXPIRATION DATE TO ENSURE THAT SUCH PAYMENT IS RECEIVED AND CLEARS BY SUCH
DATE, AND ARE URGED TO CONSIDER PAYMENT BY MEANS OF CERTIFIED OR CASHIER'S
CHECK, MONEY ORDER OR WIRE TRANSFER OF FUNDS.
Subscription Certificates and payment of the Subscription Price should be
delivered to one of the addresses set forth below under "-- Subscription Agent."
If a Rights holder wishes to exercise Rights, but time will not permit such
holder to cause the Subscription Certificate(s) evidencing such Rights to reach
the Subscription Agent on or prior to the Expiration Date, such Rights may
nevertheless be exercised if all of the following conditions (the "Guaranteed
Delivery Procedures") are met:
(i) such holder has caused payment in full of the Subscription Price
for each share of Series A Preferred Stock being subscribed for pursuant to
the Basic Subscription Privilege and the Oversubscription Privilege to be
received (in the manner set forth above) by the Subscription Agent on or
prior to the Expiration Date;
(ii) the Subscription Agent receives, on or prior to the Expiration
Date, a notice of guaranteed delivery (a "Notice of Guaranteed Delivery"),
substantially in the form provided with the Instructions as to Use of
Subscription Certificates (the "Instructions") distributed with the
Subscription Certificates, from a member firm of a registered national
securities exchange or a member of the National Association of Securities
Dealers, Inc., from a commercial bank or trust company having an office or
correspondent in the United States, or from a member in good standing of a
recognized signature guarantee medallion program (each, an "Eligible
Institution"), stating the name of the exercising Rights holder, the number
of Rights represented by the Subscription Certificate(s) held by such
exercising holder, the number of shares of Series A Preferred Stock being
subscribed for pursuant to the Basic Subscription Privilege and the number
of shares, if any, being subscribed for pursuant to the Oversubscription
Privilege, and guaranteeing the delivery to the Subscription Agent of any
Subscription Certificate(s) evidencing such Rights within three New York
Stock Exchange trading days following the date of the Notice of Guaranteed
Delivery; and
(iii) the properly completed and duly executed Subscription
Certificate(s), including any required signature guarantees, evidencing the
Rights being exercised is received by the Subscription Agent within three
New York Stock Exchange trading days following the date of the Notice of
Guaranteed Delivery relating thereto. The Notice of Guaranteed Delivery may
be delivered to the Subscription Agent in the same manner as Subscription
Certificates at the addresses set forth below, or may be transmitted to the
Subscription Agent by facsimile transmission (facsimile no. (718)
234-5001). Additional copies of the form of Notice of Guaranteed Delivery
are available upon request from the Information Agent.
Unless a Subscription Certificate (i) provides that the shares of Series A
Preferred Stock to be issued pursuant to the exercise of Rights represented
thereby are to be delivered to the record holder of such Rights or (ii) is
submitted for the account of an Eligible Institution, signatures on such
Subscription Certificate must be guaranteed by an Eligible Institution.
Funds received in payment of the Subscription Price for Excess Shares
subscribed for pursuant to the Oversubscription Privilege will be held in a
segregated account pending issuance of such Excess Shares. If a Rights holder
exercising the Oversubscription Privilege is allocated less than all of the
Excess Shares that such holder wished to subscribe for pursuant to the
Oversubscription Privilege, the excess funds paid by such holder
28
<PAGE> 30
in respect of the Subscription Price for shares not issued will be returned by
mail without interest or deduction as soon as practicable after the Expiration
Date.
A holder who holds shares of Common Stock for the account of others, such
as a broker, a trustee or a depositary for securities, should notify the
respective beneficial owners of such shares as soon as possible to ascertain
such beneficial owners' intentions and to obtain instructions with respect to
the Rights beneficially owned by them. Beneficial owners of Common Stock or
Rights held through such a holder of record should contact the holder and
request the holder to effect transactions in accordance with the beneficial
owner's instructions.
If either the number of Rights being exercised is not specified on a
Subscription Certificate, or the payment delivered is not sufficient to pay the
full aggregate Subscription Price for all shares of Series A Preferred Stock
stated to be subscribed for, the Rights holder will be deemed to have exercised
the maximum number of Rights that could be exercised for the amount of the
payment delivered by such Rights holder. If the payment delivered by the Rights
holder exceeds the aggregate Subscription Price for the number of Rights
evidenced by the Subscription Certificate(s) delivered by such Rights holder,
the payment will be applied, until depleted, to subscribe for shares of Series A
Preferred Stock in the following order: (i) to subscribe for the number of
shares, if any, of Series A Preferred Stock indicated on the Subscription
Certificate(s) pursuant to the Basic Subscription Privilege; (ii) to subscribe
for shares of Series A Preferred Stock until the Basic Subscription Privilege
has been fully exercised with respect to all of the Rights represented by the
Subscription Certificate; and (iii) to subscribe for additional shares of Series
A Preferred Stock pursuant to the Oversubscription Privilege (subject to any
applicable proration). Any excess payment remaining after the foregoing
allocation will be returned to the Rights holder as soon as practicable by mail,
without interest or deduction.
The Instructions accompanying the Subscription Certificates should be read
carefully and followed in detail. DO NOT SEND SUBSCRIPTION CERTIFICATES TO MESA.
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT WILL BE AT THE ELECTION AND RISK OF
THE RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH CERTIFICATES
AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO ENSURE DELIVERY TO
THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO THE EXPIRATION DATE.
BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO
CLEAR, RIGHTS HOLDERS ARE STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY
MEANS OF CERTIFIED OR CASHIER'S CHECK, MONEY ORDER OR WIRE TRANSFER OF FUNDS.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by Mesa, whose determinations will be
final and binding. Mesa, in its sole discretion, may waive any defect or
irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise of any Right by
reason of any defect or irregularity in such exercise. Subscriptions will not be
deemed to have been received or accepted until all irregularities have been
waived or cured within such time as Mesa determines in its sole discretion.
Neither Mesa nor the Subscription Agent will be under any duty to give
notification of any defect or irregularity in connection with the submission of
Subscription Certificates or incur any liability for failure to give such
notification.
Any questions or requests for assistance concerning the method of
exercising Rights or requests for additional copies of this Prospectus, the
Instructions or the Notice of Guaranteed Delivery should be directed to the
Dealer Manager for the Rights Offering, Lehman Brothers, Inc., or the
Information Agent, Morrow & Co., Inc., at one of their respective addresses set
forth on the back cover page of this Prospectus.
29
<PAGE> 31
NO REVOCATION
AFTER A HOLDER OF RIGHTS HAS EXERCISED THE BASIC SUBSCRIPTION PRIVILEGE OR
THE OVERSUBSCRIPTION PRIVILEGE, SUCH EXERCISE MAY NOT BE REVOKED BY SUCH RIGHTS
HOLDER.
METHOD OF TRANSFERRING RIGHTS
Rights may be purchased or sold through usual investment channels,
including banks and brokers. It is anticipated that the Rights will be listed
for trading on the New York Stock Exchange until the close of business on the
last New York Stock Exchange trading day preceding the Expiration Date.
The Rights evidenced by a single Subscription Certificate may be
transferred in whole by endorsing the Subscription Certificate for transfer in
accordance with the Instructions. A portion of the Rights evidenced by a single
Subscription Certificate (but not fractional Rights) may be transferred by
delivering to the Subscription Agent a Subscription Certificate properly
endorsed for transfer, with instructions to register such portion of the Rights
evidenced thereby in the name of the transferee (and to issue a new Subscription
Certificate to the transferee evidencing such transferred Rights). In such
event, a new Subscription Certificate evidencing the balance of the Rights will
be issued to the Rights holder or, if the holder so instructs, to an additional
transferee.
The Rights evidenced by a Subscription Certificate also may be sold, in
whole or in part, through the Dealer Manager by delivering to the Subscription
Agent such Subscription Certificate properly executed for sale by the Dealer
Manager. If only a portion of the Rights evidenced by a single Subscription
Certificate is to be sold by the Dealer Manager, such Subscription Certificate
must be accompanied by instructions setting forth the action to be taken with
respect to the Rights that are not to be sold. Promptly following any such sale,
the Dealer Manager will send the holder a check for the net proceeds from the
sale of any Rights sold. If the Rights can be sold, sales of such Rights will be
deemed to have been effected at the weighted average price received by the
Dealer Manager for all Rights sold by it on the day such Rights are sold, less
any applicable brokerage commissions, taxes and other direct expenses of sale
(which will be for the account of the selling holder). Orders to sell Rights
must be received by the Subscription Agent prior to 11:00 a.m., New York City
time, on the third New York Stock Exchange trading day preceding the Expiration
Date. If less than all sales orders received by the Subscription Agent can be
filled, sales proceeds will be prorated among the holders based upon the number
of Rights each has instructed the Dealer Manager to sell during such period,
irrespective of when during such period the instructions are received by the
Subscription Agent. The Dealer Manager's obligation to execute orders for the
sale of Rights is subject to its ability to find buyers. Any Rights that cannot
be sold by the Dealer Manager by 5:00 p.m., New York City time, on the third New
York Stock Exchange trading day preceding the Expiration Date, will be returned
promptly by mail to the Rights holder.
Rights holders wishing to transfer all or a portion of their Rights (but
not fractional Rights) should allow a sufficient amount of time prior to the
Expiration Date for (i) the transfer instructions to be received and processed
by the Subscription Agent, (ii) a new Subscription Certificate to be issued and
transmitted to the transferee or transferees with respect to transferred Rights,
and to the transferor with respect to retained Rights, if any, and (iii) the
Rights evidenced by such new Subscription Certificates to be exercised or sold
by the recipients thereof. Neither Mesa nor the Subscription Agent shall have
any liability to a transferee or transferor of Rights if Subscription
Certificates are not received in time for exercise or sale prior to the
Expiration Date.
Except for the fees charged by the Subscription Agent (which will be paid
by Mesa as described herein), all commissions, fees and other expenses
(including brokerage commissions and transfer taxes) incurred in connection with
the purchase, sale or exercise of Rights will be for the account of the
transferor of the Rights, and none of such commissions, fees or expenses will be
paid by Mesa or the Subscription Agent.
30
<PAGE> 32
PROCEDURES FOR BOOK ENTRY TRANSFER FACILITY PARTICIPANTS
Mesa anticipates that the Rights will be eligible for transfer through, and
that the exercise of the Basic Subscription Privilege may be effected through,
the facilities of Depository Trust Company ("DTC"). Rights exercised through DTC
are referred to herein as "DTC Exercised Rights". The holder of a DTC Exercised
Right may exercise the Oversubscription Privilege in respect of such DTC
Exercised Right by properly executing and delivering to the Subscription Agent
on or prior to the Expiration Date, a DTC Participant Oversubscription Exercise
Form, together with payment of the appropriate Subscription Price for the number
of shares of Series A Preferred Stock for which the Oversubscription Privilege
is to be exercised. Copies of the DTC Participant Oversubscription Exercise Form
may be obtained from the Dealer Manager or the Information Agent.
FOREIGN AND CERTAIN OTHER SHAREHOLDERS
Subscription Certificates will not be mailed to Rights holders or to any
subsequent transferees of any Subscription Certificates whose addresses are
outside the United States or who have APO or FPO addresses or whose addresses
are in states in which Mesa has not filed a registration statement pursuant to
the relevant state "blue sky" laws, but will be held by the Subscription Agent
for such holders' accounts. To exercise or sell their Rights, such holders must
notify the Subscription Agent prior to 11:00 a.m., New York City local time, at
least three New York Stock Exchange trading days prior to the Expiration Date,
at which time (if no contrary instructions have been received) the Rights
represented thereby will be sold, subject to the Subscription Agent's ability to
find a purchaser. Any such sales will be at prevailing market prices. See
"-- Method of Transferring Rights." If the Rights can be sold, a check for the
proceeds from the sale of any Rights, less any applicable brokerage commissions,
taxes and other expenses, will be remitted to such holders by mail. The
proceeds, if any, resulting from sales of Rights of holders whose addresses are
not known by the Subscription Agent or to whom delivery cannot be made will be
held by the Subscription Agent in a noninterest bearing account. Any amount
remaining unclaimed on the second anniversary of the Expiration Date will be
turned over by the Subscription Agent to Mesa and, after such date, any person
claiming such proceeds will, as an unsecured general creditor of Mesa, be
entitled to look only to Mesa for payment thereof. The ability of such holders
to exercise or sell Rights will expire on the Expiration Date.
SUBSCRIPTION AGENT
Mesa has appointed American Stock Transfer & Trust Company as Subscription
Agent for the Rights Offering. The Subscription Agent's address, which is the
address to which the Subscription Certificates and payment of the Subscription
Price should be delivered, as well as the address to which Notice of Guaranteed
Delivery must be delivered, is:
40 Wall Street, 46th Floor
New York, New York 10005
Attn: Corporate Stock Transfer Department
The Subscription Agent's telephone number is (718) 921-8200 and its
facsimile number is (718) 234-5001.
Mesa will pay the fees and expenses of the Subscription Agent, and has also
agreed to indemnify the Subscription Agent from any liability which it may incur
in connection with the Rights Offering.
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<PAGE> 33
INFORMATION AGENT
Mesa has appointed Morrow & Co., Inc. as Information Agent for the Rights
Offering. Any questions or requests for additional copies of this Prospectus,
the Instructions or the Notice of Guaranteed Delivery may be directed to the
Information Agent at the following address and telephone number:
Morrow & Co., Inc.
909 Third Avenue
New York, New York 10022
Telephone: (800) 566-9061
Mesa will pay the fees and expenses of the Information Agent and has also
agreed to indemnify the Information Agent from certain liabilities that it may
incur in connection with the Rights Offering.
DEALER MANAGER
The Series A Preferred Stock offered pursuant to the Rights Offering is
being offered by Mesa directly to the holders of Common Stock. Mesa has
appointed Lehman Brothers as Dealer Manager for the Rights Offering. The Dealer
Manager will communicate with brokers, dealers, commercial banks and trust
companies with respect to the Rights Offering and respond to requests for
information and material in connection with the Rights Offering. Mesa will not
pay Lehman Brothers a separate fee for acting as Dealer Manager, but has agreed
to reimburse certain of the Dealer Manager's expenses. The Dealer Manager is not
required to purchase Rights or shares of Series A Preferred Stock in connection
with the Rights Offering.
Lehman Brothers has also provided certain financial advisory services to
Mesa in connection with its proposal solicitation process and review of
strategic alternatives, as well as with respect to the Rights Offering and the
other transactions contemplated by the Recapitalization. Mesa has agreed to pay
Lehman Brothers certain fees in its capacity as Mesa's financial advisor,
including a fee of $3,775,000, which is contingent upon completion of the
Recapitalization. Mesa has also agreed to reimburse certain expenses incurred by
Lehman Brothers in its capacity as Mesa's financial advisor. In addition, Lehman
Brothers has performed in the past, and may perform in the future, other
financial advisory and investment banking services for Mesa, for which it has
received, and may in the future receive, compensation.
The Dealer Manager may be deemed to be an underwriter under the Securities
Act and, therefore, the fee to be paid to the Dealer Manager may be deemed to be
underwriting fees and commissions. Mesa has agreed to indemnify the Dealer
Manager against certain liabilities, including civil liabilities under the
Securities Act, or contribute to payments which the Dealer Manager may be
required to make in respect thereof.
Mesa has not employed any brokers, dealers or underwriters in connection
with the solicitation of exercises of Rights in the Rights Offering, and, except
as described above, no other commissions, fees or discounts will be paid in
connection with the Rights Offering. Certain employees of Mesa may solicit
responses from stockholders and Rights holders, but such employees will not
receive any commissions or compensation for such services other than their
normal employment compensation.
32
<PAGE> 34
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 included elsewhere in this Prospectus,
adjusted to give effect to the Recapitalization. The Pro Forma Statements of
Operations gives effect to the Recapitalization as if the Recapitalization had
occurred on January 1, 1995 and the Pro Forma Balance Sheet gives effect to the
Recapitalization as if the Recapitalization had occurred on March 31, 1996. In
addition, the Pro Forma Financial Statements give effect to certain reductions
in general and administrative expenses. See Note (h) below.
The Recapitalization is more fully described elsewhere in this Prospectus.
The Pro Forma Financial Statements should be read in conjunction with the
historical Consolidated Financial Statements and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus. The Pro Forma Financial
Statements do not purport to represent what Mesa's results of operations or
financial condition would actually have been had the Recapitalization been
consummated and the reduction in general and administrative expenses been
achieved on the above indicated dates, or to project Mesa's results of
operations or financial condition for any future period or as of any future
date.
33
<PAGE> 35
PRO FORMA BALANCE SHEET
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
----------------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash investments........................... $ 115.8 $ (114.8)(a) $ 1.0
Investments......................................... 40.0 (40.0)(a) --
Accounts receivable and other....................... 47.1 -- 47.1
-------- --------- --------
Total current assets............................. 202.9 (154.8) 48.1
-------- --------- --------
Property, plant and equipment, net.................... 1,062.0 -- 1,062.0
-------- --------- --------
Other assets:
Restricted cash of subsidiary partnership........... 56.5 (56.5)(b) --
Refundable prepaid interest......................... 8.7 (8.7)(c) --
Debt issuance costs................................. 12.6 7.4(d) 20.0
Gas balancing receivable............................ 58.1 -- 58.1
Other............................................... 8.3 -- 8.3
-------- --------- --------
Total other assets............................... 144.2 (57.8) 86.4
-------- --------- --------
Total assets................................... $1,409.1 $ (212.6) $ 1,196.5
======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities on long term debt................ $ 92.5 $ (87.2)(e) $ 5.3
Accounts payable and accrued liabilities............ 30.7 -- 30.7
Interest payable.................................... 26.9 (26.9)(e) --
-------- --------- --------
Total current liabilities........................ 150.1 (114.1) 36.0
-------- --------- --------
Long term debt........................................ 1,121.8 (272.6)(e) 849.2
-------- --------- --------
Deferred revenue and other liabilities................ 69.1 -- 69.1
-------- --------- --------
Stockholders' equity:
Series A Preferred Stock............................ -- 0.6(f) 0.6
Series B Preferred Stock............................ -- 0.6(f) 0.6
Common Stock........................................ 0.6 -- 0.6
Additional paid-in capital.......................... 399.0 248.8(f) 647.8
Accumulated deficit................................. (331.5) (75.9)(g) (407.4)
-------- --------- --------
Total stockholders' equity....................... 68.1 174.1 242.2
-------- --------- --------
Total liabilities and stockholders' equity..... $1,409.1 $ (212.6) $ 1,196.5
======== ========= ========
</TABLE>
(See Notes to Pro Forma Financial Statements)
34
<PAGE> 36
PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------------------
RECAPITALIZATION G&A
HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ---------------- ----------- ---------
<S> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PER SHARE DATA)
Revenues:
Natural gas................................ $ 129.6 $ -- $ -- $ 129.6
Natural gas liquids........................ 75.3 -- -- 75.3
Oil and condensate......................... 19.6 -- -- 19.6
Other...................................... 10.5 -- -- 10.5
------- ------ ----- ------
Total revenues............................... 235.0 -- -- 235.0
------- ------ ----- ------
Costs and expenses:
Lease operating............................ 51.8 -- -- 51.8
Production and other taxes................. 18.4 -- -- 18.4
Exploration charges........................ 6.6 -- -- 6.6
General and administrative................. 26.8 -- (5.0)(h) 21.8
Depletion, depreciation and amortization... 83.4 -- -- 83.4
------- ------ ----- ------
Total costs and expenses..................... 187.0 -- (5.0) 182.0
------- ------ ----- ------
Operating income............................. 48.0 -- 5.0 53.0
------- ------ ----- ------
Other income (expense):
Interest income............................ 15.9 (15.5)(i) -- 0.4
Interest expense........................... (148.6) 61.1(j) -- (87.5)
Investment gains........................... 18.4 -- -- 18.4
Other...................................... 8.7 -- -- 8.7
------- ------ ----- ------
Total other income (expense)................. (105.6) 45.6 -- (60.0)
------- ------ ----- ------
Net loss before Preferred Stock dividends.... (57.6) 45.6 5.0 (7.0)
------- ------ ----- ------
Preferred Stock dividends.................... -- (21.9)(k) -- (21.9)
------- ------ ----- ------
Net loss available to Common Stock........... $ (57.6) $ 23.7 $ 5.0 $ (28.9)
======= ====== ===== ======
Net loss per common share.................... $ (.90) $ (.45)
======= ======
Average shares outstanding:
Common..................................... 64.1 -- -- 64.1
Series A Preferred Stock................... -- 60.2 -- 60.2
Series B Preferred Stock................... -- 60.6 -- 60.6
======= ====== ===== ======
</TABLE>
(See Notes to Pro Forma Financial Statements)
35
<PAGE> 37
PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1996
-------------------------------------------------------------
RECAPITALIZATION G&A
HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ---------------- ----------- ---------
<S> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PER SHARE DATA)
Revenues:
Natural gas...................................... $ 50.6 $ -- $ -- $ 50.6
Natural gas liquids.............................. 23.1 -- -- 23.1
Oil and condensate............................... 4.4 -- -- 4.4
Other............................................ 2.5 -- -- 2.5
------ ------ ------ ------
Total revenues..................................... 80.6 -- -- 80.6
------ ------ ------ ------
Costs and expenses:
Lease operating.................................. 13.6 -- -- 13.6
Production and other taxes....................... 5.4 -- -- 5.4
Exploration charges.............................. 0.5 -- -- 0.5
General and administrative....................... 5.6 -- (1.2)(h) 4.4
Depletion, depreciation and amortization......... 30.2 -- -- 30.2
------ ------ ------ ------
Total costs and expenses........................... 55.3 -- (1.2) 54.1
------ ------ ------ ------
Operating income................................... 25.3 -- 1.2 26.5
------ ------ ------ ------
Other income (expense):
Interest income.................................. 3.2 (3.1)(i) -- 0.1
Interest expense................................. (37.7) 15.1(j) -- (22.6)
Investment gains................................. 8.8 -- -- 8.8
Other............................................ 1.5 -- -- 1.5
------ ------ ------ ------
Total other income (expense)....................... (24.2) 12.0 -- (12.2)
------ ------ ------ ------
Net income before Preferred Stock dividends........ 1.1 12.0 1.2 14.3
------ ------ ------ ------
Preferred Stock dividends.......................... -- (5.7)(k) -- (5.7)
------ ------ ------ ------
Net income available to Common
Stock............................................ $ 1.1 $ 6.3 $ 1.2 $ 8.6
====== ====== ====== ======
Primary income per common share.................... $ .02 $ .13
====== ======
Fully diluted income per common share.............. $ .07
======
Average shares outstanding:
Common........................................... 64.1 64.1
Series A Preferred Stock......................... -- 63.2 63.2
Series B Preferred Stock......................... -- 63.7 63.7
====== ====== ======
</TABLE>
(See Notes to Pro Forma Financial Statements)
36
<PAGE> 38
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(a) The pro forma adjustments assume that substantially all cash and investment
balances are utilized as a source of funds in the Recapitalization.
(b) Represents the balance as of March 31, 1996 of a restricted cash balance
within HCLP that is available to supplement cash flows from HCLP's
properties in the event such cash flows are not sufficient to fund required
interest and principal payments on the HCLP Secured Notes. Such restricted
cash will be available to repay the HCLP Secured Notes in connection with
the Recapitalization.
(c) Represents the amount to be refunded under a guaranteed investment contract
entered into upon issuance of the HCLP Secured Notes.
(d) The debt issuance cost adjustment of $7.4 million consists of approximately
$20.0 million related to the Notes and the New Credit Facility (primarily
fees to underwriters, banks, investment advisors and DNR), net of a charge
of approximately $12.6 million representing unamortized debt issuance costs
associated with the debt to be repaid and/or refinanced.
(e) Reflects the repayment and/or refinancing of substantially all of Mesa's
existing debt, including accrued interest, as a result of the
Recapitalization. See "Use of Proceeds" and "Capitalization."
(f) The Series A and Series B Preferred Stock are reflected at par value with
the remaining proceeds, net of issuance costs, reflected in additional
paid-in capital.
(g) Reflects a nonrecurring charge of $64.0 million related to a prepayment
premium 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 repaid and/or refinanced, net of an approximately $0.7 million gain
associated with the extinguishment of the existing long term debt.
(h) In conjunction with the Recapitalization and the concurrent change of
control of the Board of Directors, Mesa has committed to reducing its staff
and eliminating certain departments and activities. This adjustment
reflects the elimination of 74 positions from the total of 385 at December
31, 1995, and a significant downsizing of the natural gas vehicle equipment
business.
Following is a summary of the general and administrative expense pro forma
adjustment:
<TABLE>
<CAPTION>
AMOUNT OF ADJUSTMENT
-----------------------------------------
YEAR ENDED THREE MONTHS ENDED
G&A PRO FORMA ADJUSTMENT DECEMBER 31, 1995 MARCH 31, 1996
-------------------------------------------------------- ------------------ ------------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Personnel reductions.................................... $3.6 $1.0
Natural gas vehicles.................................... 1.4 0.2
---- ----
Total................................................. $5.0 $1.2
==== ====
</TABLE>
In addition to the general and administrative adjustment shown above,
management believes that it will be able to reduce general and
administrative and operating overhead expenses in excess of those amounts
reflected in the pro forma adjustment (up to $5.0 million of additional
annual reductions) subsequent to the Recapitalization. This additional
amount is not reflected as an adjustment in the Pro Forma Statement of
Operations.
(i) Substantially all interest income associated with cash investments,
investments and restricted cash is eliminated on a pro forma basis to
reflect the use of substantially all such balances to effect the
Recapitalization.
37
<PAGE> 39
(j) 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).................................................. (25.0) (6.3)
Interest expense on the Senior Subordinated Notes (assumed 11.0%
annual rate).................................................. (36.8) (9.2)
Interest expense on the Discount Notes (assumed 12 1/4% annual
rate)......................................................... (22.6) (6.2)
------ -----
Total adjustment.............................................. $ 61.1 $ 15.1
====== =====
</TABLE>
Interest expense on existing debt does not include approximately $3.1
million for the year ended December 31, 1995 and $0.9 million for the three
months ended March 31, 1996, representing the interest portion of the
administrative fee charged by CIG in connection with Mesa's West Panhandle
field operations. The effects of fluctuations of 0.125% and 0.250% in
interest rates in respect of the New Credit Facility on pro forma interest
expense would have been $0.4 million and $0.8 million, respectively, for
the year ended December 31, 1995 and $0.1 million and $0.2 million,
respectively, for the three months ended March 31, 1996.
(k) Reflects the pro forma adjustment for an 8% dividend on the Preferred Stock
payable quarterly in additional shares of Preferred Stock for at least the
first four years after issuance.
38
<PAGE> 40
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected financial information of Mesa as of
the dates and for the periods indicated. The selected historical consolidated
statement of operations data for the three months ended March 31, 1995 and 1996
and for the years ended December 31, 1993, 1994 and 1995 and the historical
consolidated balance sheet data as of March 31, 1996 and as of December 31, 1994
and 1995 are derived from the Consolidated Financial Statements included
elsewhere in this Prospectus. The selected historical consolidated statement of
operations data for the years ended December 31, 1991 and 1992 and the selected
historical consolidated balance sheet data as of December 31, 1991, 1992 and
1993 are derived from consolidated financial statements of Mesa that are not
included in this Prospectus. This table should be read in conjunction with the
Consolidated Financial Statements and related notes thereto included elsewhere
in this Prospectus and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- ------ --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Natural gas.................................... $ 169.9 $ 157.6 $ 141.8 $ 139.6 $ 129.6 $ 35.9 $ 50.6
Natural gas liquids............................ 62.0 59.7 61.4 72.7 75.3 18.2 23.1
Oil and condensate............................. 16.1 18.7 12.4 7.9 19.6 5.4 4.4
Other.......................................... 1.5 1.1 6.6 8.5 10.5 2.7 2.5
------ ------ ------ ------ ------ ------ ------
Total revenues................................... 249.5 237.1 222.2 228.7 235.0 62.2 80.6
------ ------ ------ ------ ------ ------ ------
Costs and expenses:
Lease operating................................ 46.9 43.9 51.8 52.7 51.8 12.6 13.6
Production and other taxes..................... 18.9 18.6 20.4 21.3 18.4 4.7 5.4
Exploration charges............................ 4.7 10.0 2.7 5.2 6.6 1.3 .5
General and administrative..................... 27.8 24.5 25.2 28.5 26.8 6.6 5.6
Depreciation, depletion and amortization....... 117.1 113.9 100.1 92.3 83.4 21.0 30.2
------ ------ ------ ------ ------ ------ ------
Total costs and expenses......................... 215.4 210.9 200.2 200.0 187.0 46.2 55.3
------ ------ ------ ------ ------ ------ ------
Operating income................................. 34.1 26.2 22.0 28.7 48.0 16.0 25.3
Net interest expense (a)......................... (134.3) (129.9) (131.3) (131.3) (132.7) (32.8) (34.5)
Other income (b)................................. 21.0 14.5 6.9 19.2 27.1 8.9 10.3
------ ------ ------ ------ ------ ------ ------
Net income (loss)................................ $ (79.2) $ (89.2) $ (102.4) $ (83.4) $ (57.6) $ (7.9) $ 1.1
====== ====== ====== ====== ====== ====== ======
Net income (loss) per common share............... $ (2.05) $ (2.31) $ (2.61) $ (1.42) $ (.90) $ (.12) $ .02
====== ====== ====== ====== ====== ====== ======
Pro forma net income (loss) available to Common
Stock.......................................... $ (20.9) $ 8.6
======
Pro forma net income (loss) per common share..... $ (.45) $ .13
======
OTHER FINANCIAL DATA:
EBITDA (c)....................................... $ 155.9 $ 150.1 $ 124.8 $ 126.2 $ 138.0 38.3 56.0
Cash flows from operating activities............. 35.0 (28.4) 32.5 48.6 69.2 29.2 (2.2)
Cash flows from investing activities............. 399.7 (17.0) 37.5 (40.3) (41.4) (10.3) (10.0)
Cash flows from financing activities............. (310.3) (29.5) (88.5) (3.6) (22.1) 2.2 (21.2)
Net cash interest expense (d).................... 130.9 126.1 78.0 47.8 90.4 12.4 34.0
Capital expenditures............................. 31.9 69.2 29.6 32.6 42.3 7.0 9.8
Ratios:
EBITDA to net interest expense................. 1.2x 1.2x 1.0x 1.0x 1.0x 1.2x 1.6x
EBITDA to net cash interest expense............ 1.2x 1.2x 1.6x 2.6x 1.5x 3.1x 1.7x
Earnings to fixed charges(e)................... NM NM NM NM NM NM 1.0x
Total debt to EBITDA........................... 8.4x 8.6x 10.0x 9.7x 9.0x NM NM
BALANCE SHEET DATA (END OF PERIOD):
Cash and investments (f)......................... $ 260.3 $ 169.1 $ 150.0 $ 162.5 $ 187.4 $ 155.8
Total assets..................................... 1,832.8 1,676.5 1,533.4 1,484.0 1,464.7 1,409.1
Long term debt, including current maturities..... 1,310.7 1,286.2 1,241.3 1,223.3 1,236.7 1,214.3
Stockholders' equity............................. 273.6 184.4 112.1 124.6 67.0 68.1
</TABLE>
- ---------------
(a) Net interest expense represents total interest expense less interest income.
(b) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Operations -- Other Income (Expense)" for
additional detail.
(c) EBITDA represents operating income plus exploration charges and
depreciation, depletion and amortization expense. EBITDA is not presented as
an indicator of Mesa's operating performance or as a measure of liquidity.
(d) During the periods presented, certain of Mesa's total interest expense
consisted of non-cash amortization of debt issuance costs and of accretion
of interest on certain discount notes. Such accreted interest was added to
the balance of the discount notes rather than paid in cash. Net cash
interest expense reflects net interest expense less amortization of debt
issuance costs and accretion of interest on discount notes.
(e) For the purpose of determining the ratio of earnings to fixed charges,
earnings are defined as net loss plus fixed charges. Fixed charges consist
of interest expense and capitalized interest. Earnings were inadequate to
cover fixed charges for the three months ended March 31, 1995 by $7.9
million, and for each of the years ended December 31, 1991 through December
31, 1995 by $79.2 million, $91.6 million, $105.3 million, $83.5 million and
$58.5 million, respectively.
(f) At March 31, 1996, cash and investments includes $115.8 million of cash and
cash investments and $40.0 million of investments.
39
<PAGE> 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the Consolidated
Financial Statements and the related notes thereto included elsewhere in this
Prospectus.
CAPITAL RESOURCES AND LIQUIDITY
The Recapitalization will enhance Mesa's ability to compete in the oil and
gas industry by substantially increasing its cash flow available for investment
and improving its ability to attract capital, which will increase Mesa's ability
to pursue investment opportunities. Specifically, Mesa's financial condition
will improve significantly as a result of the Recapitalization due to (i) a
significant reduction in total debt outstanding, (ii) a reduction in annual cash
interest expense of approximately $75 million, (iii) the implementation of a
cost savings program designed to reduce annual general and administrative and
other operating overhead expenses by approximately $10 million, and (iv) the
extension of maturities on its long term debt, which will eliminate Mesa's
present liquidity concerns.
The expected reduction of annual cash interest expense is based on the
following assumptions: (i) 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 Senior Subordinated Notes and 12 1/4% under
the Discount Notes. Actual borrowings and interest rates under the New Credit
Facility will fluctuate over time and will affect Mesa's actual cash interest
expense.
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 at the Second Closing, will be
sufficient for Mesa to meet its debt service obligations and scheduled capital
expenditures, and to fund its working capital needs for the next several years
following the Recapitalization. Notwithstanding the Recapitalization, Mesa
continues to be highly leveraged.
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 do not include any adjustments
reflecting any treatment other than going concern accounting.
NET OPERATING LOSS CARRYFORWARDS OF MESA
At December 31, 1995, Mesa had approximately $470 million of unused net
operating loss ("NOL") carryforwards. The issuance of Series B Preferred Stock
to DNR pursuant to the Stock Purchase Agreement has caused 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. Mesa's ability to utilize its
existing NOLs has been limited to approximately $ million per year ("Annual NOL
Limitation"). As a result of the restriction on the utilization of the NOLs, a
portion of the NOLs may expire before Mesa is able to utilize them. Any unused
Annual NOL Limitation as well as any tax operating losses which might be
generated after the issuance of the Series B Preferred Stock will carry forward
for use in future years without regard to the limitation in amount described
above.
40
<PAGE> 42
RESULTS OF OPERATIONS
First Quarter 1995 Compared to First Quarter 1996
Mesa reported net income of $1.1 million in the first quarter of 1996
compared with a net loss of $7.9 million in the first quarter of 1995.
The following table presents a summary of the results of operations of Mesa
for the three months ended March 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Revenues...................................................................... $ 62.2 $ 80.6
Operating and administrative costs............................................ (25.2) (25.1)
Depreciation, depletion and amortization...................................... (21.0) (30.2)
------- -------
- -
Operating income.............................................................. 16.0 25.3
Interest expense, net of interest income...................................... (32.8) (34.5)
Other......................................................................... 8.9 10.3
------- -------
- -
Net income (loss)............................................................. $ (7.9) $ 1.1
======== ========
</TABLE>
Revenues
The table below presents, for the three months ended March 31, 1995 and
1996, the revenues, production and average prices received from sales of natural
gas, natural gas liquids and oil and condensate.
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Revenues (in millions):
Natural gas.............................................................. $ 35.9 $ 50.6
Natural gas liquids...................................................... 18.2 23.1
Oil and condensate....................................................... 5.4 4.4
------- -------
Total............................................................. $ 59.5 $ 78.1
======= =======
Natural Gas Production (MMcf):
Hugoton.................................................................. 12,699 12,855
West Panhandle........................................................... 4,927 5,471
Gulf of Mexico........................................................... 2,245 3,697
Other.................................................................... 4 88
------- -------
Total............................................................. 19,875 22,111
======= =======
Natural Gas Liquids Production (MBbls):
Hugoton.................................................................. 930 869
West Panhandle........................................................... 696 840
Gulf of Mexico........................................................... 13 12
Other.................................................................... 1 2
------- -------
Total............................................................. 1,640 1,723
======= =======
Oil and Condensate Production (MBbls):
Hugoton.................................................................. -- --
West Panhandle........................................................... 16 34
Gulf of Mexico........................................................... 292 198
Other.................................................................... 14 12
------- -------
Total............................................................. 322 244
======= =======
Weighted average sales price:
Natural gas (per Mcf).................................................... $ 1.71* $ 2.26
Natural gas liquids (per Bbl)............................................ $ 11.18 $ 13.82
Oil and condensate (per Bbl)............................................. $ 16.51 $ 17.61
</TABLE>
- ---------------
* Includes the effects of hedging activities. See below.
Mesa's natural gas production increased in the first quarter of 1996
compared with the same period of 1995 due to a weather-related increase in
demand in the West Panhandle field and increased production in the Gulf of
Mexico as a result of successful drilling in 1995. Natural gas liquids
production increased slightly in the first quarter of 1996 compared to the first
quarter of 1995 in proportion to higher natural gas production in
41
<PAGE> 43
the West Panhandle field. In the first quarter of 1996 oil and condensate
production decreased compared to the same period of 1995 due to natural decline
in the Gulf of Mexico oil properties.
Natural gas prices in first quarter of 1996 were substantially higher than
in the first quarter of 1995 due to a colder 1995/1996 winter. Natural gas
liquids and oil and condensate prices were also higher due to the colder
weather.
Approximately 85 percent of Mesa's 1996 natural gas production was sold at
market prices. The remaining 15 percent was sold under a fixed-price contract.
When circumstances warrant, Mesa hedges its production. Amortization of deferred
gains and losses from hedging activities are included in natural gas revenues
when the hedged production occurs. In the first quarter of 1995, Mesa recognized
as natural gas revenues $4.9 million of hedge gains. Mesa did not hedge any of
its first quarter 1996 production. The following table shows the effect of
hedging activities on Mesa's natural gas prices:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
---------------
1995 1996
----- -----
<S> <C> <C>
Natural gas prices (per Mcf):
Actual price received for production......................................... $1.47 $2.26
Effect of hedging activities................................................. .24 --
----- -----
Average price................................................................ $1.71 $2.26
===== =====
</TABLE>
Costs and Expenses
Mesa's aggregate costs and expenses increased by approximately 20% in the
first quarter of 1996 compared to the same period in 1995 due primarily to
increased depreciation, depletion and amortization expenses ("DD&A") resulting
from a non-recurring impairment. Lease operating expenses increased marginally
due to increased production. Production and other taxes increased 14% due to
increased production and higher natural gas prices. Exploration charges
decreased due to lower seismic costs. General and administrative expenses were
lower primarily due to a reduction in employee benefit expenses and lower
outside consultant costs. DD&A, which is calculated quarterly on a
unit-of-production basis, was higher by 44% primarily due to impairment of
long-lived assets of approximately $6.8 million in accordance with the adoption
of a new accounting requirement (SFAS No. 121) and higher production in the
first quarter of 1996.
Other Income (Expense)
Interest income and interest expense in the first quarter of 1996 were not
materially different from such income and expense during the same period in 1995
as average cash balances and aggregate debt outstanding were not materially
different.
Results of operations for the three months ended March 31, 1995 and 1996
include certain items which are either non-recurring or are not directly
associated with Mesa's oil and gas producing operations. The following table
sets forth the amounts of such items for the periods indicated (in millions):
<TABLE>
<CAPTION>
1995 1996
---- -----
<S> <C> <C>
Gains from investments.......................................................... $4.6 $ 8.8
Gains from collections from Bicoastal Corporation............................... 4.6 2.5
Other........................................................................... (.3) (1.0)
---- ------
---
Total Other Income..................................................... $8.9 $10.3
======= ======
</TABLE>
The gains from investments relate to Mesa's investments in marketable
securities and energy futures contracts, which include NYMEX futures contracts,
commodity price swaps and options that are not accounted for as hedges of future
production. Mesa's investments in marketable securities and futures contracts
are valued at market prices at each reporting date with gains and losses
included in the statement of operations for such reporting period whether or not
such gains or losses have been realized.
42
<PAGE> 44
The gains from collection of interest from Bicoastal Corporation relate to
a note receivable from such company, which was in bankruptcy. Mesa's claims in
the bankruptcy exceeded its recorded receivable. As of March 31, 1996, Mesa had
collected the full amount of its allowed claim plus a portion of the interest
due on such claims. Mesa does not expect any future amounts received from such
company to be significant.
Years Ended December 31, 1993, 1994 and 1995
The following table presents a summary of the results of operations of Mesa
for the years indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1993 1994 1995
------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Revenues.......................................... $ 222.2 $ 228.7 $ 235.0
Operating and administrative costs................ (100.1) (107.7) (103.6)
Depreciation, depletion and amortization.......... (100.1) (92.3) (83.4)
----- ----- -----
Operating income.................................. 22.0 28.7 48.0
----- ----- -----
Interest expense, net of interest income.......... (131.3) (131.3) (132.7)
Other............................................. 6.9 19.2 27.1
----- ----- -----
Net loss.......................................... $(102.4) $ (83.4) $ (57.6)
===== ===== =====
</TABLE>
Revenues, Production and Average Price Data
The table below presents, for the years indicated, the revenues, production
and average prices received from sales of natural gas, natural gas liquids and
oil and condensate.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Revenues (in millions):
Natural gas..................................... $ 141.8 $ 139.6 $ 129.6
Natural gas liquids............................. 61.4 72.7 75.3
Oil and condensate.............................. 12.4 7.9 19.6
------- ------- -------
Total................................... $ 215.6 $ 220.2 $ 224.5
======= ======= =======
Natural Gas Production (MMcf):
Hugoton......................................... 47,476 51,986 48,871
West Panhandle.................................. 23,786 22,983 20,357
Gulf of Mexico.................................. 8,517 7,359 8,073
Other........................................... 41 11 11
------- ------- -------
Total................................... 79,820 82,339 77,312
======= ======= =======
Natural Gas Liquids Production (MBbls):
Hugoton......................................... 1,481 3,430 3,524
West Panhandle.................................. 3,480 3,423 2,994
Gulf of Mexico.................................. 81 53 48
Other........................................... 8 5 5
------- ------- -------
Total................................... 5,050 6,911 6,571
======= ======= =======
Oil and Condensate Production (MBbls):
Hugoton......................................... 104 -- --
West Panhandle.................................. 153 164 118
Gulf of Mexico.................................. 352 337 1,025
Other........................................... 129 45 52
------- ------- -------
Total................................... 738 546 1,195
======= ======= =======
</TABLE>
43
<PAGE> 45
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Weighted average sales prices:
Natural gas (per Mcf)
Hugoton......................................... $ 1.78 $ 1.57 $ 1.32
West Panhandle.................................. 1.72 1.80 1.83
Gulf of Mexico.................................. 2.08 1.81 1.59
Other........................................... .85 1.29 .54
------- ------- -------
Average(a).............................. $ 1.79 $ 1.67 $ 1.65
======= ======= =======
Natural gas liquids (per Bbl)
Hugoton......................................... $ 12.35 $ 10.03 $ 10.76
West Panhandle.................................. 12.04 11.06 12.33
Gulf of Mexico.................................. 12.61 11.52 11.37
Other........................................... 10.51 8.58 8.77
------- ------- -------
Average................................. $ 12.14 $ 10.55 $ 11.48
======= ======= =======
Oil and condensate (per Bbl)
Hugoton......................................... $ 18.21 $ -- $ --
West Panhandle.................................. 15.04 13.38 14.13
Gulf of Mexico.................................. 16.69 15.18 16.57
Other........................................... 17.08 14.43 16.48
------- ------- -------
Average................................. $ 16.63 $ 14.58 $ 16.32
======= ======= =======
</TABLE>
- ---------------
(a) Includes the effects of hedging activities. See "-- Natural Gas Prices."
The increase in total revenues from sales of natural gas, NGLs, and oil and
condensate from 1994 to 1995 is primarily attributable to increased oil and
condensate production in 1995, increased liquids prices in 1995 and
approximately $12.7 million of natural gas hedge gains recognized in 1995. These
factors offset the decrease in natural gas and natural gas liquids production
and the lower market prices for natural gas production in 1995. The increase in
revenues from 1993 to 1994 was primarily due to increased natural gas and
natural gas liquids production in 1994, partially offset by the decrease in
prices from 1993 to 1994.
Natural gas revenues decreased from 1993 to 1994 and from 1994 to 1995. In
1995 production was lower in both the Hugoton and West Panhandle fields due to
timing and duration of equipment maintenance and weather-related reduction in
demand, respectively. Total natural gas production increased from 1993 to 1994
primarily due to higher allowables in the Hugoton field partially offset by
slightly lower West Panhandle and Gulf of Mexico production. Average natural gas
prices were slightly lower in 1995 than in 1994. Prices received for market
price-based production were $.22 per Mcf (14%) lower in 1995, at $1.33 per Mcf.
Mesa's hedge gains increased the reported prices for such production by $.20 per
Mcf to $1.53 Mcf. The lower market prices were the result of the continuing
surplus of natural gas supply. Average natural gas prices reported were 7% lower
in 1994 than in 1993 due to generally lower market prices. See "-- Natural Gas
Prices."
NGL revenues increased in 1995 compared to 1994. Hugoton field NGL
production was slightly higher despite lower natural gas production reflecting
improved yields from Mesa's Satanta plant. West Panhandle field NGL production
decreased in 1995 in proportion to the lower natural gas production. The lower
production was offset by higher average prices in 1995 due to improved market
conditions for NGLs. NGL production increased from 1993 to 1994 as a result of
increases in Hugoton field liquids production. In the third quarter of 1993 the
Satanta plant in the Hugoton field was completed. The plant, which is capable of
processing up to 250 MMcf of natural gas per day, replaced Mesa's older Ulysses
natural gas processing plant which could process up to 160 MMcf per day. The
Satanta plant has the ability to extract a greater quantity of NGLs per Mcf of
natural gas, reject nitrogen, recover helium and produce LNG.
44
<PAGE> 46
Oil and condensate revenues increased approximately 150% from 1994 to 1995.
Gulf of Mexico production was up over 200% due to successful drilling in late
1994. Average oil and condensate prices were also higher in 1995 by $1.74 per
Bbl. Prior to the resumption of drilling in the Gulf of Mexico in 1994, Mesa's
oil and condensate production had been on a decline.
West Panhandle production is governed by the terms of a contract with CIG.
See "-- Production Allocation Agreement."
Mesa's production from the Hugoton field is affected by the allowables set
for the entire field and by the portion of allowables allocated to Mesa's wells.
See "Business -- Production -- Hugoton Field."
Natural Gas Prices
Substantially all of Mesa's natural gas production is sold under short term
or long term sales contracts. Approximately 80% of Mesa's annual natural gas
sales, whether or not such sales are governed by a contract, are at market
prices. The following table shows Mesa's natural gas production sold under fixed
price contracts and production sold at market prices:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Natural Gas Production (MMcf):
Sold under fixed price contracts......................... 19,467 13,935 15,212
Sold at market prices.................................... 60,353 68,404 62,100
------ ------ ------
Total production......................................... 79,820 82,339 77,312
====== ====== ======
Percent sold at market prices............................ 76% 83% 80%
</TABLE>
In addition to its fixed price contracts, Mesa will, when circumstances
warrant, hedge the price received for its market-sensitive production through
natural gas futures contracts. The following table shows the effects of Mesa's
fixed price contracts and hedging activities on its natural gas prices:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1993 1994 1995
----- ----- -----
<S> <C> <C> <C>
Average Natural Gas Prices (per Mcf):
Fixed price contracts..................................... $1.94 $2.16 $2.12
===== ===== =====
Market prices received.................................... $1.75 $1.55 $1.33
Hedge gains (losses)...................................... (.01) .01 .20
----- ----- -----
Total market prices.................................... $1.74 $1.56 $1.53
===== ===== =====
Total average prices........................................ $1.79 $1.67 $1.65
===== ===== =====
</TABLE>
Gains and losses from hedging activities are included in natural gas
revenues when the applicable hedged natural gas is produced. Mesa recognized
gains from hedging activities of $12.7 million in 1995 and $895,000 in 1994, and
losses of $324,000 in 1993.
Costs and Expenses
Mesa's aggregate costs and expenses declined by approximately 7% from 1994
to 1995. Lease operating expenses declined marginally due to decreased
production. Production and other taxes decreased 14% from 1994 to 1995 due to
decreased production in the Hugoton and West Panhandle fields and lower tax
rates for Hugoton field production in 1995. See "Business -- Production Costs."
Exploration charges in 1995 were greater than in 1994, reflecting increased
exploration activities in the Gulf of Mexico, and consist primarily of
exploratory dry-hole expense. General and administrative ("G&A") expenses were
lower in 1995 than in 1994 primarily due to lower legal expenses and a reduction
in employee benefit expenses. DD&A expense was lower in 1995 than in 1994
primarily due to lower equivalent production in 1995, oil and gas reserve
increases in the Hugoton and West Panhandle fields in the fourth quarters of
1994 and 1995, and additional reserve discoveries
45
<PAGE> 47
in the Gulf of Mexico in 1994 and 1995. (See "Supplemental Financial Data" in
the notes to the Consolidated Financial Statements located elsewhere in this
Prospectus for a discussion of oil and gas reserves.)
Mesa's aggregate costs and expenses declined marginally from 1993 to 1994.
Lease operating expenses increased by 2% as a result of higher operating costs
associated with Mesa's Satanta plant and higher Hugoton field production. See
"Business -- Production Costs." Exploration charges in 1994 were greater than in
1993, reflecting Mesa's increased exploration activities in the Gulf of Mexico,
and resulted primarily from the purchase of 3-D seismic data. G&A expenses were
higher in 1994 than in 1993 primarily due to litigation expenses associated with
Mesa's defense of a royalty lawsuit in the West Panhandle field. See
"Business -- Legal Proceedings." DD&A expense was lower in 1994 compared to
1993. DD&A expense reflects the 1994 reserve increases in the Hugoton and West
Panhandle fields and reserve discoveries in the Gulf of Mexico. (See
"Supplemental Financial Data" in the notes to the Consolidated Financial
Statements located elsewhere in this Prospectus.)
Other Income (Expense)
Interest expense in 1995 was not materially different from 1994 and 1993 as
average aggregate debt outstanding did not materially change.
Interest income increased from $10.7 million in 1993 to $13.5 million in
1994 and $15.9 million in 1995 as a result of higher average cash balances and
higher average interest rates earned on these cash balances in 1994 and 1995.
Results of operations for the years 1993, 1994, and 1995 include certain
items which are either non-recurring or are not directly associated with Mesa's
oil and gas producing operations. The following table sets forth the amounts of
such items:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Gains from investments.................................. $ 4.0 $ 6.7 $18.4
Gains from collections from Bicoastal Corporation....... 18.5 16.6 6.4
Gains on dispositions of oil and gas properties......... 9.6 -- --
Litigation settlement................................... (42.8) -- --
Gain from adjustment of contingency reserve............. 24.0 -- --
Expense of debt exchange transaction.................... (9.7) -- --
Other................................................... 3.3 (4.1) 2.3
---- --- ---
Total other income.................................... $ 6.9 $19.2 $27.1
==== === ===
</TABLE>
The gains from investments relate to Mesa's investments in marketable
securities and energy futures contracts, which include NYMEX futures contracts,
commodity price swaps and options that are not accounted for as hedges of future
production. Mesa's investments in marketable securities and futures contracts
are valued at market prices at each reporting date with gains and losses
included in the statement of operations for such reporting period whether or not
such gains or losses have been realized. At December 31, 1995, Mesa had
recognized but not realized approximately $7.6 million of gains primarily
associated with open positions in natural gas futures contracts. After May 7,
1996, Mesa had no open speculative positions in energy futures contracts.
The gains from collection of interest from Bicoastal Corporation relate to
a note receivable from such company, which was in bankruptcy. Mesa's claims in
the bankruptcy exceeded its recorded receivable. As of year-end 1995, Mesa had
collected the full amount of its allowed claim plus a portion of the interest
due on such claims. The gains on dispositions of oil and gas properties relate
primarily to 1993 sales of oil producing properties in the deep Hugoton and
Rocky Mountain areas for approximately $26 million.
46
<PAGE> 48
The litigation settlement charge relates to Mesa's 1994 settlement of a
lawsuit with Unocal Corporation ("Unocal"). The litigation related to a 1985
investment in Unocal by Mesa's predecessor, Mesa Petroleum Co. ("Original
Mesa"), and certain other defendants. The plaintiffs had sought to recover
alleged "short-swing profits" plus interest totaling over $150 million pursuant
to Section 16(b) of the Exchange Act. In early 1994 Mesa and the other
defendants reached a settlement with the plaintiffs and agreed to pay $47.5
million to Unocal, of which Mesa's share was $42.8 million. Mesa issued
additional secured discount notes with a face amount of $48.2 million to fund
its share of the settlement.
In the fourth quarter of 1993, Mesa completed a settlement with the
Internal Revenue Service (the "IRS") resolving all tax issues relating to the
1984 through 1987 tax returns of Original Mesa. Mesa had previously established
contingency reserves for the IRS claims and certain other contingent liabilities
in excess of the actual and estimated liabilities. As a result of the settlement
with the IRS and the resolution and revaluation of certain other contingent
liabilities, Mesa recorded a net gain of $24 million in the fourth quarter of
1993.
The debt exchange expense relates to costs associated with Mesa's $600
million debt exchange transaction completed in 1993.
Production Allocation Agreement
Effective January 1, 1991, Mesa entered into the Production Allocation
Agreement (as amended, the "PAA") with CIG, which allocates 77% of reserves and
production from the West Panhandle field to Mesa and 23% to CIG. During 1993,
1994 and 1995, Mesa produced and sold 74%, 69%, and 71%, respectively, of total
production from the field; the balance of field production was sold by CIG. Mesa
records its 77% ownership interest in natural gas production as revenue. The
difference between the net value of production sold by Mesa and the net value of
its 77% entitlement is accrued as a gas balancing receivable. The revenues and
costs associated with such accrued production are included in results of
operations.
The following table presents the incremental effect on production and
results of operations from entitlement production recorded in excess of actual
sales as a result of the PAA:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------- JANUARY 1, 1991
1993 1994 1995 TO DATE
----- ----- ----- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Revenues accrued.......................... $ 5.1 $ 8.7 $ 4.3 $ 58.7
Costs and expenses accrued................ (1.1) (3.1) (1.6) (16.1)
----- ----- ----- -------
Recorded to receivable.................... 4.0 5.6 2.7 42.6
----- ----- ----- -------
Depreciation, depletion and
amortization............................ (1.2) (3.7) (1.7) (25.2)
----- ----- ----- -------
Total........................... $ 2.8 $ 1.9 $ 1.0 $ 17.4
===== ===== ===== ============
Production accrued:
Natural gas (MMcf)...................... 740 2,386 1,155 15,887
Natural gas liquids (MBbls)............. 106 355 171 2,275
</TABLE>
At December 31, 1995, the long term gas balancing receivable from CIG, net
of accrued costs, relating to the PAA was $42.6 million, which is included in
"Other assets" in Mesa's consolidated balance sheet. The provisions of the PAA
allow for periodic and ultimate cash balancing to occur. The PAA also provides
that CIG may not take in excess of its 23% share of ultimate production.
OTHER
See "Business -- Legal Proceedings" and Note 9 to the Consolidated
Financial Statements included elsewhere in this Prospectus for information
regarding the status of certain pending litigation.
Mesa recognizes its ownership interest in natural gas production as
revenue. Actual production quantities sold may be different from Mesa's
ownership share of production in a given period. Mesa records these
47
<PAGE> 49
differences as gas balancing receivables or as deferred revenue. Net gas
balancing underproduction represented approximately 5.4% of total equivalent
production for the three months ended March 31, 1996 compared to 2.6% for the
same period of 1995, and represented approximately 2% of total equivalent
production for the year ended December 31, 1995, compared with 5% during the
same period in 1994 and 3% in 1993. The gas balancing receivable or deferred
revenue component of natural gas and natural gas liquids revenues in future
periods is dependent on future rates of production, field allowables and the
amount of production taken by Mesa or by its joint interest partners.
Mesa invests from time to time in marketable equity and other securities,
as well as in energy-related commodity futures contracts, which include NYMEX
futures contracts, price swaps and options. Mesa also enters into natural gas
futures contracts as a hedge against natural gas price fluctuations.
Management does not anticipate that inflation will have a significant
effect on Mesa's operations.
48
<PAGE> 50
BUSINESS
GENERAL
Mesa is one of the largest independent oil and gas companies in the United
States, with approximately 1.9 Tcfe of proved reserves as of December 31, 1995.
Approximately 95% of Mesa's reserves are concentrated in the Hugoton field in
southwest Kansas and the West Panhandle field in Texas. These fields, which are
part of one contiguous reservoir, are considered to be among the premier natural
gas properties in the United States and are characterized by long lived reserves
and stable production. Despite operating under significant capital constraints
since 1990, Mesa has maintained a large, concentrated and efficiently managed
asset base.
Approximately 65% of Mesa's total equivalent proved reserves are natural
gas and the balance are principally NGLs. Approximately 95% of Mesa's proved
reserves are developed. The estimated future net cash flows before income taxes
from Mesa's proved reserves, as of December 31, 1995, aggregated approximately
$2.4 billion and had a net present value, discounted at 10%, of approximately $1
billion.
BUSINESS STRENGTHS
Mesa believes it has certain strengths that provide it with significant
competitive advantages, including the following:
- Long Reserve Life. Mesa's properties have an estimated reserve life,
calculated by dividing total proved reserves by annual production, of
approximately 15 years, which is among the longest reserve lives of any
domestic oil and gas company. As a result of the long lived nature of
its properties, Mesa has lower reinvestment requirements to maintain
reserve quantities, production levels and values than many of its
competitors. The net present value of Mesa's proved reserves has
exhibited considerable stability over the last five years, ranging from
approximately $1.2 billion to approximately $1.0 billion on a pre-tax
basis and from $0.9 billion to $1.0 billion on an after tax basis.
- High Percentage of Proved Developed Producing Reserves. Approximately
95% of Mesa's reserves are classified as proved developed producing. The
highly developed nature of these reserves results in relatively low
capital expenditures to maintain production. The combined effect of a
highly developed and long lived reserve base provides Mesa a long term
source of cash flow to invest in future growth opportunities.
- High Degree of Operational Control. Over 90% of Mesa's production and
reserves are attributable to wells operated by Mesa, which provides Mesa
with control over the amount and timing of capital and operating
expenditures. Mesa also owns and operates all of the processing
facilities and a substantial majority of the gathering assets that
service its onshore production. Control over these assets reduces
operating expenses and enhances operational flexibility. These factors
provide Mesa with significant operating advantages, such as the ability
to (i) shift production into the heating season, when prices are
generally higher, (ii) vary the recovery of NGLs to optimize its revenue
mix, (iii) avoid production curtailments due to capacity constraints and
(iv) reduce abandonment pressures for its wells, which should increase
ultimate recoverable reserves.
- Low Cost Operator. Mesa's reserves are primarily recovered from low
pressure, shallow, geographically concentrated gas fields. Consequently,
production costs are low and averaged $0.57 per Mcfe of production in
1995.
- Expertise in Midcontinent and Gulf of Mexico. The Midcontinent, where
the Hugoton and West Panhandle fields are located, and the Gulf of
Mexico are two of the most prolific gas producing regions in the United
States. Mesa's personnel have substantial operational expertise and
experience in the oil and gas industry, particularly with respect to the
technical challenges of these regions. Mesa's operations and exploration
staff has extensive experience with the federal, state and local
agencies with responsibility for these regions. This experience provides
a significant base upon which
49
<PAGE> 51
to expand Mesa's operations as cash flow and additional capital become
available for investment following the Recapitalization.
BUSINESS STRATEGY
Following the Recapitalization, Mesa intends to position itself as a
leading independent oil and gas exploration and production company by
implementing the following primary strategies:
- Balanced Reserve Growth. Mesa plans to increase reserves and cash flow
by pursuing a balanced strategy of blending property acquisitions with
development drilling and exploration. In pursuit of its strategy, Mesa
intends to target (i) strategic property acquisitions that complement
Mesa's existing asset base, (ii) long term development projects that
provide a stable and low risk portfolio of reinvestment opportunities
and (iii) limited exposure to higher risk exploration activities.
- Exploitation of Existing Assets. Mesa will continue to focus on
exploiting its existing asset base by undertaking projects related to
development drilling, expansion of gathering systems, increased
compression, enhancement of processing facilities and value added
marketing activities.
- Reduction in Costs. Mesa intends to maintain a low cost structure to
maximize free cash flow available for investment. To this end, Mesa has
already implemented the first steps of a program designed to reduce
annual general and administrative and other operating overhead expenses
by approximately $10 million.
- Increased Financial Flexibility. After completion of the
Recapitalization, Mesa's financial flexibility will increase
substantially. Mesa is committed to maintaining financial flexibility to
enable it to access various forms of capital in order to successfully
execute its growth strategy.
PROPERTIES
Approximately 95% of Mesa's proved reserves are concentrated in the Hugoton
field of southwest Kansas and the West Panhandle field of Texas. The two fields
are each part of a reservoir that extends from southwest Kansas, through the
Oklahoma panhandle and into the Texas panhandle. These fields, which produce gas
from depths of 3,500 feet or less, are characterized by stable, long lived, low
cost production. Mesa's other properties are primarily in the Gulf of Mexico and
the Rocky Mountains.
The following table summarizes the estimated proved reserves and estimated
future cash flows associated with Mesa's oil and gas properties as of December
31, 1995, as estimated in accordance with Commission guidelines, by major areas
of operation:
<TABLE>
<CAPTION>
GULF
WEST OF
HUGOTON PANHANDLE MEXICO OTHER TOTAL
---------- --------- ------ ------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Proved reserves:
Natural gas (MMcf)................... 863,939 283,218 38,317 32,555 1,218,029
Natural gas liquids (MBbls).......... 56,720 45,041 122 14 101,897
Oil (MBbls).......................... -- 6,817 2,303 401 9,521
Natural gas equivalents (MMcfe)...... 1,204,259 594,366 52,867 35,045 1,886,537
% Developed.......................... 100% 90% 77% 41% 95%
% Natural Gas........................ 72% 48% 72% 93% 65%
% of Total........................... 64% 32% 3% 1% 100%
Future net cash flows.................. $1,481 $603 $43 $26 $2,153
Present value of future net cash flows,
discounted at 10%.................... $614 $307 $42 $3 $966
Future net cash flows, before income
taxes................................ $1,693 $683 $42 $32 $2,450
Present value of future net cash flows,
before income taxes, discounted at
10%.................................. $ 658 $332 $41 $ 9 $1,040
</TABLE>
50
<PAGE> 52
In recent years Mesa has concentrated its efforts on fully developing its
existing long lived reserve base and expanding its opportunities to sell its
production into as many markets with as few restrictions, such as those imposed
by long term contracts, as possible. In the Hugoton field, these efforts have
included infill drilling (i.e., drilling an additional well on each 640-acre
spacing unit), installing additional compression and gathering facilities, and
the construction of the Satanta natural gas processing plant, which has the
ability to extract a greater quantity of NGLs per Mcf of natural gas, reject
nitrogen, recover helium and produce LNG. Two significant gas sales contracts
related to Hugoton production expired in May 1995, giving Mesa over 200 MMcf per
day of uncommitted deliverability available for sale after that date. Mesa now
has the flexibility to sell its Hugoton production under short term contracts or
on a swing or peak basis. In the West Panhandle field, development activities
have included well workovers and deepenings/redrills, adding compression
facilities, and the expansion and upgrading of natural gas processing facilities
to process greater quantities of natural gas and recover helium. In addition,
Mesa restructured its contractual arrangements in the West Panhandle field to
more clearly define its right to production and to create the ability to sell
gas outside of a restricted market area to a greater number of potential
customers. Since 1994 Mesa has directed approximately 60% of its capital
spending towards exploration and development in the Gulf of Mexico.
Mesa has maintained a large geological and geophysical database covering
the Midcontinent and other areas where it has historically operated. Following
the Recapitalization, Mesa intends to exploit its database and consider
selective acquisitions of producing properties with development and exploration
potential in the Texas Panhandle, the Hugoton field, and other areas of the
Midcontinent and Gulf of Mexico regions.
Hugoton Field
The Hugoton field in southwest Kansas is the largest producing gas field in
the continental United States. Mesa's Hugoton properties represent approximately
13% of the proved reserves in the field and are located on over 230,000 net
acres, covering approximately 400 square miles. Mesa's properties are
concentrated in the center of the field and thus benefit from better reservoir
characteristics, including thicker productive zones, higher porosity and higher
permeability. Management believes that, as a result, Mesa's Hugoton properties
will have a longer productive life and higher natural gas recoveries than
properties located in other parts of the Hugoton field. Mesa has working
interests in approximately 1,100 wells in the Hugoton field, 950 of which it
operates, and royalty interests in approximately 300 additional wells. Mesa owns
substantially all of the gathering and processing facilities which service its
production from the Hugoton field and which allow Mesa to control the
production, gathering, processing and sale of its gas to various major
intrastate and interstate pipelines through its direct interconnects.
Mesa's Hugoton properties are capable of producing more than 230 MMcf of
wet gas per day (i.e., gas production at the wellhead before processing and
before reduction for royalties). Substantially all of Mesa's Hugoton production
is processed through its Satanta plant. After processing, on a peak production
day, Mesa has available to market over 150 MMcf of residue (processed) gas and
13 MBbls of NGLs. Production in the Hugoton field is subject to allowables set
by state regulators. Mesa estimates that, for the last year, it and other major
producers in the Hugoton field have produced at full capacity in the Hugoton
field and expects such practice to continue. See "-- Production -- Hugoton
Field."
Mesa's Hugoton properties accounted for approximately 64% of its equivalent
proved reserves and 64% of the present value of estimated future net cash flows
determined as of December 31, 1995, in accordance with Commission guidelines.
The Hugoton properties accounted for approximately 48%, 53%, and 47% of Mesa's
oil and gas revenues for the years ended December 31, 1993, 1994, and 1995,
respectively. The percentage of revenues from the Hugoton field has been less
than the percentage of equivalent proved reserves due primarily to the longer
life of the Hugoton properties compared to Mesa's other properties. See
"-- Production -- Hugoton Field."
West Panhandle Field
The West Panhandle properties are located in the central panhandle region
of Texas. Natural gas from these properties is produced from approximately 600
wells, all of which Mesa operates, on over 185,000 net
51
<PAGE> 53
acres. All of Mesa's West Panhandle production is processed through Mesa's Fain
natural gas processing plant.
Mesa's West Panhandle reserves are owned and produced pursuant to contracts
with CIG, originally executed in 1928 by predecessors of both companies. The
PAA, an amendment to these contracts, allocates 77% of the production from the
West Panhandle field properties to Mesa and 23% to CIG, effective as of January
1, 1991. Under the associated agreements, Mesa operates the wells and production
equipment and CIG owns and operates the gathering system by which Mesa's
production is transported to the Fain plant. CIG also performs certain
administrative functions. Each party reimburses the other for certain costs and
expenses incurred for the joint account.
As of December 31, 1995, Mesa's West Panhandle properties represented
approximately 32% of Mesa's equivalent proved reserves, and approximately 32% of
the present value of estimated future net cash flows, determined in accordance
with Commission guidelines. Production from the West Panhandle properties
accounted for approximately 40%, 36%, and 33% of Mesa's oil and gas revenues for
the years ended December 31, 1993, 1994, and 1995, respectively. Although the
West Panhandle properties are long lived, the percentage of Mesa's revenues
represented by West Panhandle production has been greater than the percentage of
equivalent proved reserves represented by such properties. This is a result of
higher gas prices received under a sales contract for approximately 29% of
Mesa's West Panhandle residue gas production, as well as the higher yield of
NGLs extracted from West Panhandle natural gas as compared to Hugoton natural
gas.
The Fain plant is capable of processing up to 120 MMcf of natural gas per
day. West Panhandle field natural gas contains a high quantity of NGLs. As a
result, processing this gas yields relatively greater liquids volumes than
recoveries typically realized in other natural gas fields. For example, on a
peak day, Mesa can extract approximately 12 MBbls of NGLs at its Fain plant from
an inlet gas volume of 120 MMcf.
In the last six years Mesa has deepened, redrilled, or reworked 357 wells
in the West Panhandle field, adding reserves, and increasing deliverability.
Mesa has also identified approximately 120 locations that have additional
production potential from new areas or deeper zones that it plans to redrill
over a three year period beginning in early 1996. These drilling locations
target reserves in deeper portions of the reservoirs not currently reached by
existing wells. Mesa has commenced the drilling program to develop these
reserves in anticipation of its contractual right to increase its share of West
Panhandle production in 1997 and thereafter. See "-- Production -- West
Panhandle Production."
Gulf of Mexico
Mesa's Gulf of Mexico properties are located offshore Texas and Louisiana.
Mesa has operated in the Gulf of Mexico since 1970 and has produced
approximately 425 Bcfe (net to Mesa's interest). Mesa currently owns interests
in 45 blocks in the Gulf of Mexico. As of December 31, 1995, these properties
had an estimated 53 Bcfe of remaining proved reserves. In addition, Mesa has
over 100,000 miles of two-dimensional ("2-D") seismic data and approximately 400
square miles of 3-D seismic data in the Gulf of Mexico. Mesa has an office in
Lafayette, Louisiana, to oversee production from its Gulf of Mexico properties.
Mesa's working interests in seven of its 45 blocks are subject to a net profits
interest owned by the Mesa Offshore Trust.
Over the last five years, Mesa has evaluated a number of its offshore
producing properties utilizing well information, 2-D seismic and production
data, combined with 3-D seismic surveys to identify further development and
exploration potential. Mesa currently has 11 3-D seismic surveys under analysis.
New well locations were identified on five producing leases in 1995 and one
exploratory block was acquired based upon interpretation of 3-D seismic data.
Since late 1994, Mesa has successfully completed 17 out of 19 wells drilled in
the Gulf of Mexico based on 3-D seismic surveys. In the aggregate, Mesa incurred
net capital costs of $36 million during this period and, through December 31,
1995, has added approximately 51 Bcfe of proved oil and gas reserves. Mesa
intends to continue its evaluation and identification of additional prospects
for drilling in 1996, depending on the success of its program and other factors.
Because it has existing infrastructure and production facilities on these
properties, Mesa expects that it will be able to bring its successful wells
on-line more quickly and at lower development costs than have been typical for
offshore production.
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<PAGE> 54
In April 1996, Mesa purchased six blocks covering 28,000 acres in the most
recent federal lease sale in the Gulf of Mexico. Mesa paid $500,000 for its
share of the six blocks, five of which are located in an area where Mesa has
producing interests.
Other
Mesa's other producing properties are located in the Rocky Mountain area of
the United States, which accounted for less than 1% of Mesa's total production
in 1995.
Mesa's non-oil and gas tangible properties include buildings, leasehold
improvements, and office equipment, primarily in Amarillo, Dallas, and Fort
Worth, Texas, and certain other assets. Non-oil and gas tangible properties
represent less than 2% of the net book value of Mesa's properties.
RESERVES
The following table summarizes Mesa proved reserves, as estimated in
accordance with the Commission guidelines, associated with Mesa's oil and gas
properties as of December 31, 1991, 1992, 1993, 1994 and 1995 by total reserves
and reserve components.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------------
1991 1992 1993 1994 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Natural gas (MMcf)............ 1,367,968 1,276,049 1,202,444 1,303,187 1,218,029
Natural gas liquids (MBbls)... 79,269 80,124 79,150 84,397 101,897
Oil and condensate (MBbls).... 3,956 7,268 3,296 5,031 9,521
Natural gas equivalents
(MMcfe)..................... 1,867,318 1,800,401 1,697,120 1,839,755 1,886,537
</TABLE>
The proved reserve estimates set forth above for 1994 and 1995 were
prepared by Mesa's internal reserve engineers. Oil and gas reserve quantities
estimated as of December 31, 1995, reflect a net increase over 1994, after
production, of approximately 171 Bcfe of natural gas. Equivalent natural gas
reserves increased in each of Mesa's major production areas. Increases in
Hugoton field reserves reflect alignment of the assumptions used in preparing
the proved reserve estimates with Mesa's practice of recovering ethane at the
Satanta plant. In previous years Hugoton proved reserve estimates were prepared
assuming that Mesa would not recover ethane which resulted in slightly higher
natural gas volumes, lower NGL volumes and lower total equivalent volumes than
if ethane recovery were assumed. The decision as to whether or not to recover
ethane is based on the relative value of ethane as a liquid versus the
energy-equivalent value of such ethane if left in the residue natural gas
stream. In the future, if economic conditions warrant, Mesa may revise proved
reserves to reflect any changes in such relative values. In the West Panhandle
field, reserves were revised upward to reflect the development drilling results
over the past year and the planned upgrade of the Fain plant for a higher rate
of liquids recovery per Mcf of gas produced from the field. In the Gulf of
Mexico, reserve additions resulted from exploratory and development drilling in
1994 and 1995.
Prior to 1994 Mesa's proved reserve estimates were prepared by DeGolyer &
MacNaughton, an independent petroleum engineering firm ("D&M"). In accordance
with a long term debt agreement, D&M prepared proved reserve estimates as of
December 31, 1995, covering Mesa's Hugoton properties in the manner and to the
extent required by the debt agreement. Their report will not be used for
purposes other than those prescribed in the debt agreement. As in prior years,
the Hugoton field reserve estimates prepared by D&M are less than those of
Mesa's engineers due to the independent engineers' different interpretation of
well-test pressure and cumulative production data related to Mesa's Hugoton
field properties. Subsequent to the change in field rules in 1994 allowing
higher production rates, Mesa's wells have been producing at or near capacity
and shut-in periods prior to testing have been brief. As a result, well-test
pressures have been generally lower than those measured prior to the field rule
changes. Mesa believes the historical pressures are more accurate and therefore
the pressure data used in its internal reserve estimates reflect only pressure
data recorded prior to the higher production rates. D&M reserve estimates are
based on well-test pressures that include the more recent data. D&M's December
31, 1995 reserve estimates for the Hugoton field reflect a downward revision
from prior estimates by D&M and, as a result, such estimates were approximately
25% less
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<PAGE> 55
than Mesa's estimates of Hugoton field reserves as of December 31, 1995. See
Note 4 to the Consolidated Financial Statements located elsewhere in this
Prospectus for additional discussion of D&M's reserve report.
In connection with the due diligence conducted by DNR prior to entering
into the Stock Purchase Agreement, and in order to understand the differences
between D&M's report referred to above and Mesa's internal reserve estimates,
DNR requested another independent engineering firm, Williamson Petroleum
Consultants, Inc. ("Williamson"), to make an independent evaluation of the
projected gross proved gas reserves attributable to the Hugoton and West
Panhandle properties in which Mesa had an interest as of December 31, 1995. The
evaluation was based on limited data and abbreviated procedures, and did not
constitute a complete engineering estimate of such reserves. The projected gross
proved gas reserves contained in the evaluation were then used by Mesa's
internal reserve engineers in order to derive estimates of net reserves,
including NGLs, and associated economic projections using abbreviated computer
models at the summary level that could be compared to Mesa's estimates set forth
in the table above. Williamson subsequently reviewed the results of the
procedures performed by Mesa's internal reserve engineers, and concluded that
such procedures and associated estimates were reasonable and consistent and
incorporated techniques used and accepted in the oil and gas industry.
The net reserves (on an MMcfe basis) derived from the data concerning gross
gas reserves provided in Williamson's evaluation were approximately 89% of the
net reserves (on an MMcfe basis) contained in Mesa's internal estimates of the
reserves attributable to Mesa's Hugoton and West Panhandle properties as of
December 31, 1995. The present value of the estimated future net cash flows
discounted at 10%, before income taxes, of such net reserves, as so derived, was
approximately 97% of the present value of the estimated future net cash flows
contained in Mesa's internal estimates of the reserves attributable to Mesa's
Hugoton and West Panhandle properties as of December 31, 1995. The difference in
net reserves is primarily due to differing opinions concerning the reserves that
could be recovered from such properties in the later years of the life of such
reserves.
Information relating to Mesa's proved oil and gas reserves is based upon
engineering estimates. Estimates of economically recoverable oil and gas
reserves and of future net revenues depend upon a number of factors and
assumptions, such as historical production performance, the assumed effects of
regulations by governmental agencies and assumptions concerning future oil and
gas prices, future operating costs, severance and excise taxes, development
costs and workover costs, all of which may in fact vary considerably from actual
future conditions. The accuracy of any reserve estimate is a function of the
quality of the available data, of engineering and geological interpretation and
of subjective judgment. For these reasons, estimates of the economically
recoverable quantities of oil and gas reserves attributable to any particular
group of properties, classifications of such reserves based on risk of recovery
and estimates of the future net revenues expected therefrom prepared by
different engineers or by the same engineers at different times may vary
materially. Actual production, revenues, and expenditures with respect to Mesa's
reserves will likely vary from estimates, and such variances may be material.
See "Risk Factors -- Business and Industry Risks -- Reserves and Future Net Cash
Flows."
Each year, Mesa files reserve estimates as of the end of the preceding
fiscal year with the Energy Information Administration of the Department of
Energy (the "EIA"). Mesa's reserve estimates as of December 31, 1995, filed with
the EIA did not vary from those estimates contained herein by more than 5% as
described above.
The estimated quantities of proved oil and gas reserves, the standardized
measure of future net cash flows from proved oil and gas reserves (the
"Standardized Measure") and the changes in the Standardized Measure for each of
the three years in the period ended December 31, 1995, are included under
"Supplemental Financial Data" in the notes to the Consolidated Financial
Statements of the Company located elsewhere in this Prospectus.
PRODUCTION
Mesa's Hugoton and West Panhandle fields are both mature reservoirs that
are substantially developed and have long life production profiles. Natural gas
production is subject to numerous state and federal laws
54
<PAGE> 56
and Federal Energy Regulatory Commission (the "FERC") regulations. See
"-- Regulation and Prices." Certain other factors affecting production in Mesa's
various fields are discussed in greater detail below.
Hugoton Field
The Kansas Corporation Commission (the "KCC") is the state regulatory
agency that regulates oil and gas production in Kansas. One of the KCC's most
important responsibilities is the determination of market demand (allowables)
for the Hugoton field and the allocation of allowables among the more than 9,000
wells in the field.
Twice each year, the KCC sets the fieldwide allowable production at a level
estimated to be necessary to meet the Hugoton market demand for the summer and
winter production periods. The fieldwide allowable is then allocated among
individual wells determined by a series of calculations that are principally
based on each well's pressure, deliverability and acreage. The allowables
assigned to individual wells are affected by the relative production, testing,
and drilling practices of all producers in the field, as well as the relative
pressure and deliverability performance of each well.
Generally, fieldwide allowables are influenced by overall gas market supply
and demand in the United States as well as specific nominations for gas from the
parties who produce or purchase gas from the field. Since 1987, fieldwide
allowables have increased in each year except 1991. The total field allowable in
1995 was 619 Bcf of wellhead gas.
In 1994 the KCC issued an order establishing new field rules which modified
the formulas used to allocate allowables among wells in the Chase formation
portion of the Hugoton field. The standard pressure used in each well's
calculated deliverability was reduced by 35%, greatly benefitting Mesa's high
deliverability wells. Also, the new rules assign a 30% greater allowable to 640
acre units with infill wells than to similar units without infill wells.
Substantially all of Mesa's Hugoton infill wells have been drilled. Mesa's share
of the allowables from the field increased from approximately 10% in late 1993
to approximately 14% after the new field rules were implemented in 1994. Mesa's
share of the field allowable averaged 14.3% in 1995. Mesa estimates that it and
the other major producers in the Hugoton field produced at or near full capacity
in 1995 and Mesa expects such practice to continue.
Mesa's net Hugoton field production decreased to approximately 70 Bcfe in
1995 compared with 73 Bcfe in 1994 as a result of changes in timing and duration
of equipment maintenance in 1995. Mesa expects its Hugoton field production will
decline slightly from 1995 levels each year through 1998. Beginning in 1999,
Mesa expects annual production declines will reach the historical levels of 8%
to 10% as a result of normal depletion.
Excluding reserve acquisitions, Mesa has invested over $138 million in
capital expenditures in its Hugoton properties since 1986 to drill 382 infill
wells, to construct the Satanta plant and related facilities, and to upgrade
gathering and compression facilities, production equipment and pipeline
interconnects in order to increase production capacity and marketing
flexibility. Mesa expects future capital expenditures for the maintenance of
production to be substantially lower.
West Panhandle Field
Mesa's production of wet gas from the West Panhandle field is governed by
the PAA and other contracts with CIG. Mesa was entitled to take wet gas
production up to a maximum of 32 Bcf in 1995. Mesa actually took 29 Bcf
primarily due to a weather-related decrease in demand in 1995. Mesa will again
be entitled to take wet gas production up to a maximum of 32 Bcf during 1996.
After deductions for processing and royalties, Mesa expects that 32 Bcf of wet
gas production will result in annual net production volumes of approximately 21
Bcf of residue gas and 3 MMBbls of NGLs. Beginning in 1997 Mesa will have the
right to take and market as much gas as it can produce, subject to specific CIG
seasonal and daily entitlements as provided for under the contracts. Assuming
continuation of existing economic and operating conditions, Mesa expects its
existing West Panhandle properties will be able to produce an average of 35 Bcf
of wet gas per year for sale in the years 1997 through 2000.
55
<PAGE> 57
The PAA contains provisions which allocate 77% of ultimate production after
January 1, 1991 to Mesa and 23% to CIG. As a result, Mesa records 77% of total
annual West Panhandle production as sales, regardless of whether Mesa's actual
deliveries are greater or less than the 77% share. The difference between Mesa's
77% entitlement and the amount of production actually sold by Mesa to its
customers is recorded monthly as production revenue with corresponding accruals
for operating costs, production taxes, depreciation, depletion and amortization,
and gas balancing receivables. At December 31, 1995, Mesa had cumulative
production which was less than its 77% entitlement since January 1, 1991, and a
long-term gas balancing receivable of $42.6 million was recorded in Mesa's
balance sheet in other assets. In future years, as Mesa sells to customers more
than its 77% entitlement share of field production, this receivable will be
realized.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations -- Production Allocation
Agreement."
NATURAL GAS PROCESSING
Mesa processes its natural gas production for the extraction of NGLs and
helium to enhance the market value of the gas stream. In recent years Mesa has
made substantial capital investments to enhance its natural gas processing and
helium extraction capabilities in the Hugoton and West Panhandle fields. Mesa
owns and operates its processing facilities, which allows Mesa to (i) capture
the processing margin for itself, as third-party processing agreements generally
available in the industry result in retention of a significant portion of the
processing margin by the contract processor, (ii) control the quality of the
residue gas stream, permitting it to deliver gas directly to pipelines for sales
to local distribution companies, marketing companies and end users, and (iii)
realize value from premium products such as crude helium. Mesa believes that the
ability to control its production stream from the wellhead through its
processing facilities to disposition at central delivery points enhances its
marketing opportunities and competitive position in the industry.
Through its natural gas processing plants, Mesa extracts raw NGLs and crude
helium from the wet natural gas stream. The NGLs are then transported and
fractionated into their constituent hydrocarbons such as ethane, propane, normal
butane, isobutane, and natural gasolines. The NGLs and crude helium are then
sold pursuant to contracts providing for market-based prices.
Satanta Natural Gas Processing Plant
The Satanta plant has the capacity to process 250 MMcf of natural gas per
day, and enables Mesa to extract NGLs from substantially all of the gas produced
from its Hugoton field properties as well as third party producers' gas (to date
third-party gas production has been minimal). The Satanta plant also has the
ability to extract helium from the gas stream. In 1995 the Satanta plant
averaged 191 MMcf per day of inlet gas and produced a daily average of 10.9
MBbls of NGLs, 671 Mcf of crude helium and 144 MMcf of residue natural gas.
Fain Natural Gas Processing Plant
Wet gas produced from the West Panhandle field contains a high quantity of
NGLs, yielding relatively greater NGL volumes than realized from most other
natural gas fields. The Fain plant has inlet capacity of 120 MMcf per day. In
1995 the Fain plant averaged 81 MMcf per day of inlet gas and produced a daily
average of 8.1 MBbls of NGLs and condensate, 53 Mcf of crude helium and 61 MMcf
of residue natural gas.
Mesa plans to expand the Fain plant to process additional natural gas
production which Mesa expects to take beginning in 1997 and to process certain
third-party natural gas. Mesa also plans to upgrade the Fain plant to recover
additional liquids from the natural gas stream due to richer gas in the field.
SALES AND MARKETING
Following the processing of wet gas, Mesa sells the dry (or residue)
natural gas, helium, condensate and NGLs pursuant to various short term and long
term sales contracts. Substantially all of Mesa's gas and NGL sales are made at
market prices, with the exception of certain West Panhandle field volumes. Due
to a number
56
<PAGE> 58
of market forces, including the seasonal demand for natural gas, both sales
volumes from Mesa's properties and sales prices received vary on a seasonal
basis. Sales volumes and price realizations for natural gas are generally higher
during the first and fourth quarters of each calendar year.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations -- Revenues" for a table showing
production and prices by area for the past three years.
Hugoton Gas Sales Contracts
A substantial portion of Mesa's Hugoton field production was subject to two
gas purchase contracts with Western Resources, Inc. ("WRI") and Missouri Gas
Energy ("MGE") which expired in May 1995. The expiration of these contracts
gives Mesa over 200 MMcf per day of uncommitted natural gas production available
to sell on an uninterruptible basis under various short term, long term and peak
day contracts to a substantial number of purchasers in the Midwest. Under the
contracts, WRI and MGE had the right to purchase 19.9 Bcf during the first five
months of 1995 at market prices. In 1995 WRI and MGE together purchased 20.7 Bcf
of gas from Mesa at an average price of $1.44 per Mcf under these contracts.
Since June 1, 1995, gas previously subject to the WRI and MGE contracts has been
sold to multiple purchasers including WRI and MGE under short term contracts at
market prices.
Mesa's efforts to maximize its annual production and to direct natural gas
sales to the most favorable markets available are consistent with regulatory and
contractual requirements. Mesa sells its Hugoton field production to marketers,
pipelines, local distribution companies and end-users, generally at market
prices.
West Panhandle Gas Sales Contracts
Most of Mesa's West Panhandle field residue natural gas is sold pursuant to
gas purchase contracts with two major customers in the Texas Panhandle area.
Approximately 9 Bcf per year of residue natural gas is sold to a gas
utility that serves residential and commercial customers in Amarillo, Texas,
under the terms of a long term agreement dated January 2, 1993, which supersedes
the original contract that had been in effect since 1949. The agreement contains
a pricing formula for the five year period from 1993 through 1997 whereby 70% of
the volumes sold to the gas utility are sold at fixed prices and the other 30%
of volumes sold are priced at a regional market index based on spot prices plus
$.10 per Mcf. The fixed portion of the price formula was $2.85 per Mcf in 1994,
$2.99 per Mcf in 1995 and escalates to $3.21 per Mcf in 1996 and $3.45 per Mcf
in 1997. Prices for 1998 and beyond will be determined by renegotiation. Mesa
provides the gas utility the right to take as much gas as Mesa can produce and
deliver on a given day, including a right to the residue gas volumes required to
meet the seasonal needs of its residential and commercial customers. The average
price received by Mesa for natural gas sales to the gas utility in 1995 was
$2.55 per Mcf.
Through 1995, Mesa's principal industrial customer for West Panhandle field
gas was an intrastate pipeline company which serves various markets, including
an electric power generation facility near Amarillo. In 1990 Mesa entered into a
five year contract with the pipeline company to supply gas to the power
generation facility. The contract provided for a minimum annual volume of 8.4
Bcf in 1995 at a fixed price per MMBtu of $1.70 in 1995. Mesa periodically made
sales to the pipeline company in excess of the minimum volumes specified in the
contract at market prices. In 1995 Mesa sold approximately 9.3 Bcf of residue
natural gas to the pipeline for an average price of $1.63 per Mcf. This contract
expired on December 31, 1995.
Effective January 1, 1996, Mesa entered into a four year contract with a
marketing company, an affiliate of the intrastate pipeline company, which serves
the local electric power generation facility and various other markets within
and outside Amarillo, Texas. The contract provides for the sale of Mesa's West
Panhandle field gas which is in excess of the volumes sold to the gas utility
and other existing industrial customers. The price for gas sold under this
contract is a regional market index determined monthly based on spot prices plus
$0.02 per MMBtu.
Other industrial customers purchase natural gas from Mesa under short to
intermediate term contracts. These sales totaled approximately 3.5 Bcf in 1995.
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<PAGE> 59
Prior to 1993, Mesa's right to sell natural gas produced from the West
Panhandle field was based, in part, upon contractual requirements to serve
customers in Amarillo, Texas, and its environs. An amendment to the PAA in 1993
removed this restriction, and Mesa now has the right to market its production
elsewhere. Mesa believes that the right to market production outside the
Amarillo area will ensure that Mesa receives competitive terms for its West
Panhandle field production. Through 1999, Mesa's West Panhandle field production
is under contract to customers as described above.
NGL, Helium and LNG Sales
NGL production from both the Satanta and Fain plants are sold by component
pursuant to a seven year contractual arrangement with Mapco Oil and Gas Company,
a major transporter and marketer of NGLs, at the greater of Midcontinent or Gulf
Coast prices at the time of sale. Crude helium is sold to an industrial gas
company under a fifteen year agreement that provides for annual price
adjustments based on market prices.
Mesa has formed an LNG production and marketing joint venture, Mesa-Pacific
LNG Joint Venture, L.L.C. ("Mesa Pacific"), with Pacific Enterprises, the parent
company of Southern California Gas Company, in an effort to profit from the
increasing use of LNG as a transportation fuel. Mesa Pacific purchases LNG from
Mesa and then markets the product to fleet operators. Mesa produces LNG at its
Satanta plant and is reviewing plans to add LNG production capabilities at the
Fain plant.
Major Customers
In 1995 revenues include sales to Mapco Petroleum, Inc. ("Mapco") of $75.0
million (34.4%) and WRI of $21.9 million (10.0%). In 1994 revenues included
sales to Mapco of $70.9 million (31.4%), WRI of $37.4 million (16.6%), and
Energas Company of $22.8 million (10.1%). In 1993 revenues included sales to
Mapco of $60.2 million (27.5%), WRI of $51.8 million (23.6%) and Natural Gas
Clearinghouse of $23.1 million (10.5%). Because of the availability of the spot
market for natural gas and NGL sales and Mesa's ability to deliver its
production to numerous geographic markets, Mesa believes that the loss of any
one or more of its major customers would not have a material adverse effect on
Mesa's financial condition or results of operations.
PRODUCTION COSTS
The table below presents Mesa's total production costs (lease operating
expenses and production and other taxes) by area of operation for each of the
last three years:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1993 1994 1995
------------------ ----------------- -----------------
TOTAL PER MCFE TOTAL PER MCFE TOTAL PER MCFE
------ -------- ----- -------- ----- --------
(DOLLARS IN MILLIONS, EXCEPT PER MCFE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Lease operating expense:
Hugoton................................ $ 10.0 $ .18 $12.6 $ .17 $12.7 $ .18
West Panhandle......................... 29.9 .66 28.4 .64 28.4 .73
Gulf Coast............................. 11.0 .99 11.1 1.15 9.8 .68
Other.................................. .9 1.03 .6 2.00 .9 2.57
----- ----- -----
51.8 .45 52.7 .41 51.8 .42
----- ----- -----
Production and other taxes:
Hugoton................................ 15.4 .27 17.5 .24 15.0 .21
West Panhandle......................... 4.6 .10 3.1 .07 3.2 .08
Gulf Coast............................. .1 .01 .1 .01 .1 .00
Other.................................. .3 .30 .6 2.04 .1 .42
----- ----- -----
20.4 .18 21.3 .17 18.4 .15
----- ----- -----
Total production costs................... $ 72.2 $ .63 $74.0 $ .58 $70.2 $ .57
===== ===== =====
</TABLE>
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<PAGE> 60
Mesa's lease operating expenses consist of lease maintenance, gathering and
processing costs and have a significant fixed-cost component. As a result, the
production cost per Mcfe in the table above is affected by changes in the volume
of oil and gas produced. Production tax rates in Kansas, where Mesa's Hugoton
field properties are located, are assessed on wellhead value. These rates were
reduced from 7% in 1993 to 6% in 1994 and 5% in 1995. In 1993 West Panhandle
field taxes included a one-time adjustment related to prior years' production.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations."
DRILLING ACTIVITIES
The following table shows the results of Mesa's drilling activities for the
last five years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1991 1992 1993 1994 1995
------------- ------------- ------------- ------------- -------------
GROSS NET GROSS NET GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exploratory wells:
Productive.............. 6 4.7 5 4.1 -- -- -- -- 1 .3
Dry..................... 1 .2 1 .4 1 1.0 -- -- 4 4.0
Development wells:
Productive.............. 26 10.9 22 16.5 43 29.1 31 24.5 20 14.0
Dry..................... -- -- -- -- -- -- 1 .8 -- --
-- -- -- -- --
---- ---- ---- ---- ----
Total..................... 33 15.8 28 21.0 44 30.1 32 25.3 25 18.3
== ==== == ==== == ==== == ==== == ====
</TABLE>
At December 31, 1995, Mesa was participating in the drilling of one gross
(.25 net) well. Of the four exploratory wells drilled in 1995 that were dry, two
were in the Gulf of Mexico and two were in the Rocky Mountain region.
PRODUCING ACREAGE AND WELLS, UNDEVELOPED ACREAGE
Mesa's ownership of oil and gas acreage held by production, producing wells
and undeveloped oil and gas acreage as of December 31, 1995, is set forth in the
following table:
<TABLE>
<CAPTION>
UNDEVELOPED
PRODUCING ACREAGE PRODUCING WELLS ACREAGE
------------------- ----------------- -----------------
GROSS NET GROSS NET GROSS NET
------- ------- ----- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Onshore U.S.:
Kansas........................... 258,818 231,278 1,387 988.9 5,280 5,280
Texas............................ 241,354 185,654 601 452.4 480 156
Wyoming.......................... 11,477 4,365 2 -- 14,926 9,391
North Dakota..................... 4,661 3,532 20 3.8 3,932 2,572
Other............................ 2,597 2,139 13 1.3 22,012 11,573
------- ------- ----- ------- ------ ------
Total onshore............ 518,907 426,968 2,023 1,446.4 46,630 28,972
------- ------- ----- ------- ------ ------
Offshore U.S.:
Louisiana........................ 87,024 45,710 189 39.7 20,210 19,898
Texas............................ 73,808 18,848 59 10.1 17,280 17,280
------- ------- ----- ------- ------ ------
Total offshore........... 160,832 64,558 248 49.8 37,490 37,178
------- ------- ----- ------- ------ ------
Total acreage...................... 679,739 491,526 2,271 1,496.2 84,120 66,150
======= ======= ===== ======= ====== ======
</TABLE>
Mesa has interests in 2,092 gross (1,473.5 net) producing gas wells and 179
gross (22.7 net) producing oil wells in the United States. Mesa also owns
approximately 84,632 net acres of producing minerals and 42,964 net acres of
nonproducing minerals in the United States.
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COMPETITION
The oil and gas business is highly competitive in the search for,
acquisition of, and sale of oil and gas. Mesa's competitors in these endeavors
include the major oil and gas companies, independent oil and gas concerns and
individual producers and operators, as well as major pipeline companies, many of
which have financial resources greatly in excess of Mesa's. Mesa believes that
its competitive position is affected by, among other things, price, contract
terms, and quality of service.
Mesa is one of the largest owners of natural gas reserves in the United
States. Production from Mesa's properties has access to a substantial portion of
the major metropolitan markets in the United States through numerous pipelines
and other purchasers. Mesa is not dependent upon any single purchaser or small
group of purchasers.
Mesa believes that its competitive position is enhanced by its substantial
long lived reserve holdings and related deliverability, its flexibility to sell
such reserves in a diverse number of markets and its ability to produce its
reserves at a low cost.
REGULATION AND PRICES
Mesa's operations are affected from time to time in varying degrees by
political developments and federal, state, and local laws and regulations. In
particular, oil and gas production operations and economics are, or in the past
have been, affected by price controls, taxes, conservation, safety,
environmental, and other laws relating to the petroleum industry, by changes in
such laws and by constantly changing administrative regulations.
Price Regulations
In the recent past, maximum selling prices for certain categories of oil,
gas, condensate and NGLs were subject to federal regulation. In 1981 all federal
price controls over sales of crude oil, condensate and NGLs were lifted.
Effective January 1, 1993, the Natural Gas Wellhead Decontrol Act (the
"Decontrol Act") deregulated natural gas prices for all "first sales" of natural
gas, which includes all sales by Mesa of its own production. As a result, all
sales of Mesa's domestically produced oil, gas, condensate and NGLs may be sold
at market prices, unless otherwise committed by contract.
Natural Gas Regulation
Historically, interstate pipeline companies generally acted as wholesale
merchants by purchasing natural gas from producers and reselling the gas to
local distribution companies and large end users. Commencing in late 1985, the
FERC issued a series of orders that have had a major impact on interstate
natural gas pipeline operations, services, and rates, and thus have
significantly altered the marketing and price of natural gas. The FERC's key
rule making action, Order No. 636 ("Order 636"), issued in April 1992, required
each interstate pipeline to, among other things, "unbundle" its traditional
bundled sales services and create and make available on an open and
nondiscriminatory basis numerous constituent services (such as gathering
services, storage services, firm and interruptible transportation services, and
standby sales and gas balancing services), and to adopt a new rate making
methodology to determine appropriate rates for those services. To the extent the
pipeline company or its sales affiliate makes gas sales as a merchant in the
future, it does so pursuant to private contracts in direct competition with all
other sellers, such as Mesa; however, pipeline companies and their affiliates
were not required to remain "merchants" of gas, and most of the interstate
pipeline companies have become "transporters only." In subsequent orders, the
FERC largely affirmed the major features of Order 636 and denied a stay of the
implementation of the new rules pending judicial review. By the end of 1994, the
FERC had concluded the Order 636 restructuring proceedings, and, in general,
accepted rate filings implementing Order 636 on every major interstate pipeline.
However, even through the implementation of Order 636 on individual interstate
pipelines is essentially complete, many of the individual pipeline restructuring
proceedings, as well as Order 636 itself and the regulations promulgated
thereunder, are subject to pending appellate review and could possibly be
changed as a result of future court orders. Mesa cannot predict whether the
FERC's orders will be affirmed on appeal or what the effects will be on its
business.
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In recent years the FERC also has pursued a number of other important
policy initiatives which could significantly affect the marketing of natural
gas. Some of the more notable of these regulatory initiatives include (i) a
series of orders in individual pipeline proceedings articulating a policy of
generally approving the voluntary divestiture of interstate pipeline owned
gathering facilities by interstate pipelines to their affiliates (the so-called
"spin down" of previously regulated gathering facilities to the pipeline's
nonregulated affiliate), (ii) the completion of a rule making involving the
regulation of pipelines with marketing affiliates under Order No. 497, (iii) the
FERC's ongoing efforts to promulgate standards for pipeline electronic bulletin
boards and electronic data exchange, (iv) a generic inquiry into the pricing of
interstate pipeline capacity, (v) efforts to refine the FERC's regulations
controlling operation of the secondary market for released pipeline capacity,
and (vi) a policy statement regarding market based rates and other
non-cost-based rates for interstate pipeline transmission and storage capacity.
Several of these initiatives are intended to enhance competition in natural gas
markets, although some, such as "spin downs," may have the adverse effect of
increasing the cost of doing business on some in the industry as a result of the
monopolization of those facilities by their new, unregulated owners. The FERC
has attempted to address some of these concerns in its orders authorizing such
"spin downs," but it remains to be seen what effect these activities will have
on access to markets and the cost to do business. As to all of these recent FERC
initiatives, the ongoing, or in some instances, preliminary evolving nature of
these regulatory initiatives makes it impossible at this time to predict their
ultimate impact on Mesa's business.
Mesa owns, directly or indirectly, certain natural gas facilities that it
believes meet the traditional tests the FERC has used to establish a company's
status as a gatherer not subject to FERC jurisdiction under the Natural Gas Act
of 1938 (the "NGA"). Moreover, recent orders of the FERC have been more liberal
in their reliance upon or use of the traditional tests, such that in many
instances, what was once classified as "transmission" may now be classified as
"gathering." Mesa transports its own gas through these facilities. Mesa also
transports certain of its gas through gathering facilities owned by others,
including interstate pipelines. With respect to item (i) in the preceding
paragraph, on May 27, 1994, the FERC issued orders in the context of the "spin
off" or "spin down" of interstate pipeline owned gathering facilities. A "spin
off" is a FERC approved sale of such facilities to a non-affiliate. A "spin
down" is the transfer by the interstate pipeline of its gathering facilities to
an affiliate. A number of spin offs and spin downs have been approved by the
FERC and implemented. The FERC held that it retains jurisdiction over gathering
provided by interstate pipelines, but that it generally does not have
jurisdiction over pipeline gathering affiliates, except in the event of
affiliate abuse (such as actions by the affiliate undermining open and
nondiscriminatory access to the interstate pipeline). These orders require
nondiscriminatory access for all sources of supply, prohibit the tying of
pipeline transportation service to any service provided by the pipeline's
gathering affiliate, and require the new gathering company to submit a "default"
contract if a satisfactory contract cannot be mutually agreed upon by the
interstate pipeline and its existing customers. Several petitions for rehearing
of the FERC's May 27, 1994, orders were filed. On November 30, 1994, the FERC
issued a series of rehearing orders largely affirming the May 27, 1994, orders.
The FERC clarified that "default" contracts are intended to serve only as a
transition mechanism to prevent arbitrary termination of gathering service to
existing customers. Also, the FERC now requires interstate pipelines to not only
seek authority under Section 7(b) of the NGA to abandon certificated facilities,
but also to seek authority under Section 4 of the NGA to terminate service from
both certificated and uncertificated facilities. On December 31, 1994, an appeal
was filed with the U.S. Court of Appeals for the D.C. Circuit to overturn three
of the FERC's November 30, 1994, orders. Mesa cannot predict what the ultimate
effect of the FERC's orders pertaining to gathering will have on its production
and marketing, or whether the Appellate Court will affirm the FERC's orders on
these matters.
State and Other Regulation
All of the jurisdictions in which Mesa owns producing oil and gas
properties have statutory provisions regulating the exploration for and
production of crude oil and natural gas. Such regulation includes requiring
permits for the drilling of wells, maintaining bonding requirements in order to
drill or operate wells, and relating to the location of wells, the method of
drilling and casing wells, the surface use and restoration of properties upon
which wells are drilled and the plugging and abandoning of wells. Mesa's
operations are also subject to various conservation laws and regulations. These
include the regulation of the size of drilling and
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spacing units or proration units and the density of wells which may be drilled
and the unitization or pooling of oil and gas properties. In this regard, some
states allow the forced pooling or integration of tracts to facilitate
exploration while other states rely on voluntary pooling of lands and leases. In
addition, state conservation laws establish maximum rates of production from oil
and natural gas wells, generally prohibit the venting or flaring of natural gas
and impose certain requirements regarding the ratability of production. Some
states, such as Texas, Oklahoma, and Kansas, have, in recent years, reviewed and
substantially revised methods previously used to make monthly determinations of
allowable rates of production from fields and individual wells. See
"-- Production" for a discussion of recent changes to Mesa's allowables in the
Hugoton field. The effect of these regulations is to limit the amounts of oil
and natural gas Mesa can produce from its wells, and to limit the number of
wells or the location at which Mesa can drill.
State regulation of gathering facilities generally includes various safety,
environmental, and in some circumstances, nondiscriminatory take requirements,
but does not generally entail rate regulation. Natural gas gathering has
received greater regulatory scrutiny at both the state and federal levels in the
wake of the interstate pipeline restructuring under Order 636. For example,
Oklahoma recently enacted a prohibition against discriminatory gathering rates,
and certain Texas and Kansas regulatory officials have expressed interest in
evaluating similar rules in their respective states.
Federal Royalty Matters
By a letter dated May 3, 1993, directed to thousands of producers holding
interests in federal leases, the United States Department of the Interior (the
"DOI") announced its interpretation of existing federal leases to require the
payment of royalties on past natural gas contract settlements which were entered
into in the 1980s and 1990s to resolve, among other things, take-or-pay and
minimum take claims by producers against pipelines and other buyers. The DOI's
letter set forth various theories of liability, all founded on the DOI's
interpretation of the term "gross proceeds" as used in federal leases and
pertinent federal regulations. In an effort to ascertain the amount of such
potential royalties, the DOI sent a letter to producers on June 18, 1993,
requiring producers to provide all data on all natural gas contract settlements,
regardless of whether gas produced from federal leases was involved in the
settlement. Mesa received a copy of this information demand letter. In response
to the DOI's action, in July 1993 various industry associations and others filed
suit in the United States District Court for the Northern District of West
Virginia seeking an injunction to prevent the collection of royalties on natural
gas contract settlement amounts under the DOI's theories. The lawsuit, styled
"Independent Petroleum Association v. Babbitt," was transferred to the United
States District Court in Washington, D.C. On June 14, 1995, the Court issued a
ruling in this case holding that royalties are payable to the United States on
gas contract settlement proceeds in accordance with the Minerals Management
Service's May 3, 1993, letter to producers. This ruling was appealed and is now
pending in the D.C. Circuit Court of Appeals. The DOI's claim in a bankruptcy
proceeding against a producer based upon an interstate pipeline's earlier
buy-out of the producer's gas sale contract was rejected by the federal
Bankruptcy Court in Lexington, Kentucky, in a proceeding styled "Century
Offshore Management Corp." While the facts of the Court's decision do not
involve all of the DOI's theories, the Court found on those at issue that DOI's
theories were without legal merit, and the Court's reasoning suggests that the
DOI's other claims are similarly deficient. This decision was upheld in the
District Court and is now on appeal in the Sixth Circuit Court of Appeals.
Because both the "Independent Petroleum Association v. Babbitt" and "Century
Offshore Management Corp." decisions have been appealed, and because of the
complex nature of the calculations necessary to determine potential additional
royalty liability under the DOI's theories, it is impossible to predict what, if
any, additional or different royalty obligation the DOI may assert or ultimately
be entitled to recover with respect to any of Mesa's prior natural gas contract
settlements.
Environmental Matters
Mesa's operations are subject to numerous federal, state, and local laws
and regulations controlling the discharge of materials into the environment or
otherwise relating to the protection of the environment, including the
Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), also known as the "Federal Superfund Law." Such laws and
regulations, among other things, impose absolute
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liability upon the lessee under a lease for the cost of clean up of pollution
resulting from a lessee's operations, subject the lessee to liability for
pollution damages, may require suspension or cessation of operations in affected
areas, and impose restrictions on the injection of liquids into subsurface
aquifers that may contaminate groundwater. Mesa maintains insurance against
costs of clean up operations, but it is not fully insured against all such
risks. A serious incident of pollution may, as it has in the past, also result
in the DOI requiring lessees under federal leases to suspend or cease operation
in the affected area. In addition, the recent trend toward stricter standards in
environmental legislation and regulation may continue. For instance, legislation
has been proposed in Congress from time to time that would reclassify certain
oil and gas production wastes as "hazardous wastes" which would make the
reclassified exploration and production wastes subject to much more stringent
handling, disposal, and clean up requirements. If such legislation were to be
enacted, it could have a significant impact on Mesa's operating costs, as well
as the oil and gas industry in general. State initiatives to further regulate
the disposal of oil and gas wastes are also pending in certain states, and these
various initiatives could have a similar impact on Mesa.
The Oil Pollution Act of 1990 ("OPA") and regulations thereunder impose a
variety of regulations on "responsible parties" (which include owners and
operators of offshore facilities) related to the prevention of oil spills and
liability for damages resulting from such spills in United States waters. In
addition, OPA imposes ongoing requirements on responsible parties, including
proof of financial responsibility to cover at least some costs in a potential
spill. On August 25, 1993, the Minerals Management Service (the "MMS") published
an advance notice of its intention to adopt a rule under OPA that would require
owners and operators of offshore oil and gas facilities to establish $150
million in financial responsibility. Under the proposed rule, financial
responsibility could be established through insurance, guaranty, indemnity,
surety bond, letter of credit, qualification as a self insurer, or a combination
thereof. There is substantial uncertainty as to whether insurance companies or
underwriters will be willing to provide coverage under OPA because the statute
provides for direct lawsuits against insurers who provide financial
responsibility coverage, and most insurers have strongly protested this
requirement. The financial tests or other criteria that will be used to judge
self-insurance are also uncertain. As a result of the strong opposition to the
$150 million financial responsibility requirement in its present form, the DOI
has decided not to implement the OPA until some time in 1996. While there has
been discussion in the United States Congress about amending the financial
responsibility requirements of the OPA, such action has not been undertaken to
date. Mesa cannot predict the final form of the financial responsibility rule
that will be adopted by the MMS, but such rule has the potential to result in
the imposition of substantial additional annual costs on Mesa or otherwise have
material adverse effects on Mesa's operations in the Gulf of Mexico.
Under current federal regulations concerning offshore operations, the MMS
is authorized to require lessees to post supplemental bonds to cover their
potential leasehold abandonment costs. By letter dated November 9, 1995, Mesa
was advised by the MMS that it does not qualify for a waiver from supplemental
bond requirements and that Mesa may be required to post supplemental bonds
covering its potential obligations with respect to offshore operations. On
December 8, 1995, the MMS published a Notice of Proposed Rule-making in which
the MMS proposed to further clarify and update its Outer Continental Shelf
operational bond requirements. Comments with respect to this proposed rule
making were initially due March 7, 1996, subsequently extended to May 6, 1996.
Mesa submitted a "Guarantee of Abandonment of Liability Responsibility" to the
MMS on April 26, 1996 in response to discussions of this matter with the MMS and
in lieu of posting any supplemental bonds. Mesa cannot predict the final form of
the financial responsibility rule that will be adopted by the MMS or whether the
MMS will require it to post supplemental bonds, but such rule or requirement has
the potential to result in substantial additional annual costs to Mesa or
otherwise have material adverse effects on Mesa's operation in the Gulf of
Mexico.
In 1993 a number of companies in New Mexico, including Mesa, were named in
a preliminary information request from the Environmental Protection Agency (the
"EPA") as persons who may be potentially responsible for costs incurred in
connection with the Lee Acres Landfill site. Although Mesa did not directly
dispose of any materials at the site, it may have contracted to transport
materials from its operations with certain trucking companies also named in the
information request. To the extent any materials produced by Mesa may have been
transported to the site, Mesa believes that such materials were rainwater
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and/or water produced from natural gas wells, which Mesa believes are exempt or
excluded from the definitions of "hazardous waste" or "hazardous substance"
under applicable federal environmental laws, although the EPA may assert a
contrary position. Since submitting its response to the information request in
April 1994, Mesa has not received any additional inquiries or information from
the EPA concerning the site, including whether Mesa is, in fact, asserted to be
a responsible party for the site or what potential liability, if any, Mesa may
face in connection with this matter.
Mesa is not involved in any other administrative or judicial proceedings
arising under federal, state, or local environmental protection laws and
regulations which would have a material adverse effect on Mesa's financial
position or results of operations.
LEGAL PROCEEDINGS
Masterson Lawsuit
In February 1992, the current lessors of an oil and gas lease (the "Gas
Lease") dated April 30, 1955, between R. B. Masterson, et al., as lessor, and
CIG, as lessee, sued CIG in federal District Court in Amarillo, Texas, claiming
that CIG had underpaid royalties due under the Gas Lease. Under the agreements
with CIG, Mesa has an entitlement to gas produced from the Gas Lease. In August
1992, CIG filed a third-party complaint against Mesa for any such royalty
underpayments which may be allocable to Mesa. The plaintiffs alleged that the
underpayment was the result of CIG's use of an improper gas sales price upon
which to calculate royalties and that the proper price should have been
determined pursuant to a "favored-nations" clause in a July 1, 1967, amendment
to the Gas Lease. The plaintiffs also sought a declaration by the court as to
the proper price to be used for calculating future royalties.
The plaintiffs alleged royalty underpayments of approximately $500 million
(including interest at 10%) covering the period from July 1, 1967, to the
present. In March 1995, the court made certain pretrial rulings that eliminated
approximately $400 million of the plaintiffs' claims (which related to periods
prior to October 1, 1989), but which also reduced a number of Mesa's defenses.
Mesa and CIG filed stipulations with the court whereby Mesa would have been
liable for between 50% and 60%, depending on the time period covered, of an
adverse judgment against CIG for post-February 1988 underpayments of royalties.
On March 22, 1995, a jury trial began and on May 4, 1995, the jury returned its
verdict. Among its findings, the jury determined that CIG had underpaid
royalties for the period after September 30, 1989, in the amount of
approximately $140,000. Although the plaintiffs argued that the
"favored-nations" clause entitled them to be paid for all of their gas at the
highest price voluntarily paid by CIG to any other lessor, the jury determined
that the plaintiffs were estopped from claiming that the "favored-nations"
clause provides for other than a pricing-scheme to pricing-scheme comparison. In
light of this determination, and the plaintiffs' stipulation that a
pricing-scheme to pricing-scheme comparison would not result in any "trigger
prices" or damages, defendants asked the court for a judgment that plaintiffs
take nothing. The court, on June 7, 1995, entered final judgment that plaintiffs
recover no monetary damages. The plaintiffs have filed a motion for new trial,
on which the court has not yet ruled. Mesa cannot predict whether the court will
grant such motion or, if it does not, whether the plaintiffs will appeal the
court's final judgment.
Preference Unitholders
Mesa was a defendant in certain purported class-action lawsuits related to
the December 31, 1991, conversion of Mesa Limited Partnership (the
"Partnership") into the Company filed in the U.S. District Court for the
Northern District of Texas, Dallas Division, in the fall of 1991. The lawsuits
were brought under Section 14(a) of the Exchange Act and Rule 14a-9 thereunder,
as well as state law, and alleged, inter alia, that (i) the general partner of
the Partnership breached fiduciary duties to the holders of the Partnership's
preference units in structuring the conversion of the Partnership to corporate
form and allocating Common Stock among the holders of common and preference
units and (ii) the related proxy statement contained material misstatements and
omissions. This lawsuit sought payment of preferential distribution amounts on
the preference units plus unspecified damages, attorneys' fees and other relief.
On January 17, 1992, plaintiffs moved for leave to amend their compliant to
allege that it was also brought under Sections 11, 12(2) and 15 of
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the Securities Act and Rule 10b-5 under the Exchange Act and to allege that the
Partnership failed to obtain an allegedly required vote of 90% of unitholders
or, in lieu thereof, the required opinion of independent counsel. On June 5,
1992, a class was certified. On August 12, 1994, the Court granted defendants'
Motion for Summary Judgment and entered a judgment in favor of all defendants.
The plaintiffs appealed, and on June 19, 1995, the Fifth Circuit affirmed the
decision of the District Court. No application for rehearing or petition for
writ of certiorari was filed. Accordingly, the judgment in favor of Mesa is
final and nonappealable.
Lease Termination
In 1991 Mesa sold certain producing oil and gas properties to Seagull
Energy Company ("Seagull"). In 1994, two lawsuits were filed against Seagull in
the 100th District Court in Carson County, Texas, by certain land and royalty
owners claiming that certain of the oil and gas leases owned by Seagull have
terminated due to cessation in production and/or lack of production in paying
quantities occurring at various times from first production through 1994. In the
third quarter of 1995, Seagull filed third-party complaints against Mesa
claiming breach of warranty and false representation in connection with the sale
of such properties to Seagull. Seagull filed a similar third-party complaint
June 29, 1995, against Mesa covering a different lease in the 69th District
Court in Moore County, Texas. The plaintiffs in the cases against Seagull are
seeking to terminate the leases. Seagull, in its complaint against Mesa, is
seeking unspecified damages relating to any leases which are terminated. Mesa
believes it has several defenses to these lawsuits, including a two year
limitation on indemnification set forth in the purchase and sale agreement
pursuant to which Mesa sold the properties.
Settlement with WDB Group
On June 29, 1995, a Statement of Beneficial Ownership on Schedule 13D was
filed with the Commission announcing that Dennis Washington, Marvin Davis and
certain of his affiliates, David Batchelder and Dorn Parkinson (collectively,
the "WDB Group") beneficially owned an aggregate of 6 million shares of Common
Stock, or approximately 9.4% of the outstanding shares. Mr. Batchelder and Mr.
Parkinson had been elected to Mesa's Board in May 1995 pursuant to an agreement
between Mesa and Mr. Washington.
On July 3, 1995, 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 Exchange Act,
because they had constituted a group owning more than 5% of the Common Stock
since at least late 1994 but had not filed a Schedule 13D until June 29, 1995
and because the Schedule 13D failed to disclose the existence and identity of
other members of the group.
At a July 6, 1995 special meeting of the Board, the Board determined that
all strategic alternatives to enhance value for Mesa's stockholders would be
explored under the direction of Mesa's entire Board and not by an independent
committee, as proposed by the WDB Group. Thereafter, the WDB Group filed a
preliminary proxy statement and an amendment thereto whereby the WDB Group
expressed their intention to, at some point, obtain the support of Mesa's
stockholders to vote for the removal and replacement of the Board with the WDB
Group's nominees.
Simultaneously with the filing of the proxy statement, the WDB Group filed
an answer which denied the claims in Mesa's lawsuit and asserted a counterclaim
against Mesa and certain of its directors, alleging, among other things, that
certain directors had engaged in transactions in Mesa's securities that violated
federal securities laws, and that the adoption of Mesa's Shareholder Rights Plan
was a violation of fiduciary duty by such directors.
On September 20, 1995, Mesa and Mr. Pickens entered into an Agreement of
Compromise and Settlement (the "WDB Settlement Agreement") with the WDB Group
and certain related parties in settlement of the litigation between Mesa and the
WDB Group. Pursuant to the Agreement, Mr. Batchelder resigned from the Board.
Joel L. Reed, a business partner of Mr. Batchelder, was elected as a director.
Under the terms of the WDB Settlement Agreement, prior to December 31,
1996, the members of the WDB Group are prohibited from soliciting or
encouraging, advising or participating in the solicitation of proxies with
respect to any securities issued by Mesa or any of its subsidiaries, and, prior
to December 31, 1996 shall not participate or engage in any solicitation of
proxies (A) with respect to any matter submitted or to be submitted to the vote
of the holders of any such securities at any annual or special meeting or (B)
for the
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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 of Mesa's securities; or submit, or encourage any other person to
submit, or advise or assist any person with respect to the submission of, any
nominations or proposals to Mesa or to the holders of any of Mesa's securities
for consideration by its stockholders or the holders of any of Mesa's securities
at any annual or special meeting of such holders; or otherwise take any action
to request a special meeting of the holders of any of Mesa's securities. The WDB
Group may conduct a proxy solicitation with respect to Mesa's 1996 annual
meeting if, at the time of the solicitation, Mesa has not effected a business
combination, sale of assets or equity or similar transaction that meets certain
criteria as to size and as to which an acceptable investment banker renders a
favorable opinion as to the fairness of the transaction, all as set forth in the
WDB Settlement Agreement (an "Endorsed Major Transaction") or has consummated a
similar transaction that is not an "Endorsed Transaction" under the criteria set
forth in the WDB Settlement Agreement. Upon consummation, the sale of Series B
Preferred Stock to DNR, together with the sale of Series A Preferred Stock
pursuant to the Rights Offering, will constitute an Endorsed Major Transaction.
Pursuant to the WDB Settlement Agreement, Mesa's 1996 annual meeting of
stockholders will be held on July 30, 1996.
Shareholder Litigation
On July 3, 1995, Robert Strougo filed a class action and derivative action
in the District Court of Dallas County, Texas, 160th Judicial District, against
Boone Pickens, Paul W. Cain, John L. Cox, John S. Herrington, Wales H. Madden,
Jr., Fayez S. Sarofim, Robert L. Stillwell and J. R. Walsh, Jr. (the "Director
Defendants"), each of whom is a present or former director of Mesa. The class
action is purportedly brought on behalf of a class of Mesa shareholders and
alleges, inter alia, that the Board infringed upon the suffrage rights of the
class and impaired the ability of the class to receive tender offers by adoption
of a shareholder rights plan. The lawsuit is also brought derivatively on behalf
of Mesa and alleges, inter alia, that the Board breached fiduciary duties to
Mesa by adopting the shareholder rights plan and by failing to consider the sale
of Mesa. The lawsuit seeks unspecified damages, attorneys' fees, and injunctive
and other relief. Two other lawsuits filed by Herman Krangel, Lilian Krangel,
Jacquelyn A. Cady and William A. Montagne, Jr., in the District Court of Dallas
County have been consolidated into this lawsuit. The Court is presently
considering a motion to dismiss the plaintiffs' consolidated petition.
On July 18, 1995, Deborah M. Eigen and Adele Brody filed a purported
derivative lawsuit in the U.S. District Court for the Northern District of
Texas, Dallas Division, against the Director Defendants in their capacities as
members of the Board. This lawsuit is brought under state law and alleges, inter
alia, that the Board breached fiduciary duties to Mesa by adopting the
shareholder rights plan and by failing to consider the sale of Mesa. The lawsuit
is brought derivatively on behalf of Mesa and seeks unspecified damages,
attorneys' fees, and other relief. On January 22, 1996, the Court denied the
Director Defendants' motion to dismiss for failure to state a claim.
Contingencies
See Note 9 to the Consolidated Financial Statements included elsewhere
herein for discussion of the above legal proceedings and the estimated effect,
if any, on Mesa's results of operations and financial position.
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MANAGEMENT
DIRECTORS
Mr. Rainwater, Ms. Moore, Mr. Hersh and Mr. Smith were elected by DNR on
the date of the First Closing to fill the four seats on the Board to which the
holders of the Series B Preferred Stock are entitled. See "Description of
Capital Stock -- Preferred Stock."
The following table sets forth each person serving on Mesa's Board of
Directors following the First Closing, (i) his or her name and age, (ii) the
period during which he or she has served as a director, and (iii) his or her
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>
SERIES B PREFERRED STOCK DIRECTORS
Richard E. Rainwater, age 51....... July , 1996 - Present, Director of Mesa; 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............. July , 1996 - Present, Director of Mesa; 1994 -
Present, private investment activities and chief
executive officer and Director of Rainwater, Inc.;
1989-1994, Managing Director of Chemical Bank,
Restructuring and Reorganization Unit and Retail
Industries Group; Director of Magellan Health Services,
Inc.; Trustee of George Washington University.
Kenneth A. Hersh, age 33........... July , 1996 - Present, Director of Mesa; 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............ July , 1996 - Present, Director of Mesa; 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.
CONTINUING DIRECTORS
Boone Pickens, age 68.............. January 1992 - Present, Chairman of the Board of
Directors and Chief Executive Officer of Mesa; June 1,
1996 - Present, President and Chief Operating Officer of
Mesa; October 1985 - December 1991, General Partner of
the Partnership and Chief Executive Officer and Director
of Pickens Operating Co. (the corporate general partner
of the Partnership); 1964 - January 1987, Chairman of
the Board, President, and founder of Original Mesa.
</TABLE>
67
<PAGE> 69
<TABLE>
<CAPTION>
NAME AND AGE BUSINESS EXPERIENCE OVER PAST FIVE YEARS
- ----------------------------------- --------------------------------------------------------
<S> <C>
[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.]
[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.]
[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>
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.
Mr. Rainwater and Ms. Moore are married to each other.
Mr. Parkinson and David H. Batchelder were elected to Mesa's Board of
Directors pursuant to an agreement dated April 1, 1995, between Mesa and Dennis
R. Washington, the beneficial owner of approximately 4.5% of the outstanding
Common Stock. Mr. Batchelder subsequently resigned from the Board and was
succeeded by Mr. Reed pursuant to the terms of the WDB Settlement Agreement
described above under "Business -- Legal Proceedings -- Settlement with WDB
Group."
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<PAGE> 70
EXECUTIVE OFFICERS
The following table sets forth the name, age, and five year employment
history of each of Mesa's current executive officers:
<TABLE>
<CAPTION>
NAME AND AGE BUSINESS EXPERIENCE OVER PAST FIVE YEARS
- ----------------------------------- --------------------------------------------------------
<S> <C>
Boone Pickens, age 68.............. January 1992 - Present, Chairman of the Board of
Directors and Chief Executive Officer of Mesa; June 1,
1996 - Present, President and Chief Operating Officer of
Mesa; October 1985 - December 1991, General Partner of
the Partnership and Chief Executive Officer and Director
of Pickens Operating Co.; 1964 - January 1987, Chairman
of the Board, President, and founder of Original Mesa.
Dennis E. Fagerstone, age 47....... January 1992 - Present, Vice President-Exploration and
Production of Mesa; May 1991 - December 1991, Vice
President - Exploration and Production of Pickens
Operating Co.; June 1988 - May 1991, Vice
President-Operations of Pickens Operating Co.
Stephen K. Gardner, age 36......... June 1994 - Present, Vice President and Chief Financial
Officer of Mesa; January 1992 - May 1994, Vice President
of BTC Partners Inc. (financial consultant to the
Company); May 1988 - December 1991, Financial Analyst of
BTC Partners, Inc.; June 1987 - April 1988, Financial
Analyst of the Partnership; Director of Bicoastal
Corporation.
Andrew J. Littlefair, age 35....... January 1992 - Present, Vice President-Public Affairs of
Mesa; August 1987 - December 1991, Assistant to the
General Partner of the Partnership; January 1984 -
August 1987, Staff Assistant to the President of the
United States, Washington, D.C.
William D. Ballew, age 38.......... January 1992 - Present, Controller of Mesa; May 1991 -
December 1991, Controller of the Partnership; January
1991 - May 1991, Manager - Accounting of Pickens
Operating Co.; December 1988 - December 1990, Assistant
to the Controller of Pickens Operating Co.; July 1986 -
December 1988, Audit Manager for Price Waterhouse,
Dallas, Texas.
</TABLE>
Mr. Ballew will terminate his employment with Mesa effective June 30, 1996.
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<PAGE> 71
EXECUTIVE COMPENSATION
The table set forth below contains certain information regarding
compensation earned by, awarded to, or paid to the Chief Executive Officer and
the other four most highly compensated executive officers of Mesa for services
rendered to Mesa during the years 1993, 1994 and 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS-NUMBER
-------------------------------------- OF SHARES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS/SARS COMPENSATION(2)
- -------------------------------------- ---- -------- -------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Boone Pickens,........................ 1995 $675,000 $ 0 $ -- 0 $ 35,914(3)
Chairman of the Board of 1994 675,000 175,000 -- 200,000 1,094,500(4)
Directors and Chief 1993 675,000 0 -- 275,000 114,750
Executive Officer
Paul W. Cain,......................... 1995 400,020 0 -- 0 22,165(5)
President and Chief 1994 400,020 150,000 -- 150,000 93,503
Operating Officer(6) 1993 400,020 225,000 -- 100,000 106,253
Dennis E. Fagerstone,................. 1995 199,980 50,000 -- 0 14,663(7)
Vice President -- Exploration 1994 199,980 100,000 -- 85,000 50,997
and Production 1993 199,980 75,000 -- 10,000 46,747
Stephen K. Gardner,................... 1995 175,020 40,000 -- 0 12,915(8)
Vice President and Chief 1994(9) 92,095 60,000 -- 135,000 25,856
Financial Officer 1993 -- -- -- -- --
Andrew J. Littlefair,................. 1995 139,980 40,000 -- 0 11,163(10)
Vice President -- Public 1994 115,980 100,000 -- 85,000 36,717
Affairs 1993 115,980 75,000 -- 25,000 32,467
</TABLE>
- ---------------
(1) Apart from the compensation set forth in the summary compensation table and
under the plans and pursuant to the transactions described below, other
compensation paid for services during the years ended December 31, 1995,
1994, and 1993, respectively, to each individual named in the summary
compensation table aggregated less than 10% of the total salary and bonus
reported for such individual in the summary compensation table, or $50,000,
if lower.
(2) Except as reflected in other notes, "All Other Compensation" consists of
the following items. First, Mesa maintains an Employees Premium Plan and a
Profit Sharing Plan, both of which are retirement plans (the "Retirement
Plans"), for all employees (see separate discussion below). Mesa declared
contributions to the Retirement Plans of 5% of each employee's compensation
in 1995 and 17% of each employee's compensation in 1994 and 1993. However,
total employer contributions to the Retirement Plans for the account of a
participant in any calendar year are limited as specified by the Code and
the Retirement Plans. See "Limitation on Contributions to Benefit Plans"
below. The maximum annual amount of employer contributions to a
participant's accounts in the Retirement Plans totaled $7,500 in 1995,
$25,500 in 1994, and $30,000 in 1993. Second, to the extent that 5% of an
employee's total compensation exceeded $7,500 in 1995, that 17% of an
employee's total compensation exceeded $25,500 in 1994 (in both cases, all
employees with total compensation in excess of $150,000), and that 17% of
an employee's total compensation exceeded $30,000 in 1993 (all employees
with total compensation in excess of $176,470), Mesa, as a matter of
policy, paid the excess amount in cash to such employee. Third, in 1995
there was a reallocation to participant accounts of forfeitures in the
Profit Sharing Plan from unvested balances in the accounts of employees who
terminated during 1994.
(3) Includes the following: a $7,500 Retirement Plans contribution; a $2,164
reallocation of forfeitures in the Profit Sharing Plan; a $26,250 payment
in lieu of a Retirement Plans contribution in excess of the contribution
limitation as described in Note 2 above.
(4) Includes the following: a $25,500 Retirement Plans contribution; a $119,000
payment in lieu of a Retirement Plans contribution in excess of the
contribution limitation as described in Note 2 above; a $950,000 bonus
payment that has been deferred until Mr. Pickens' retirement and that was
subject to
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<PAGE> 72
his continued employment (except in certain events) through December 31,
1995, with respect to the Parent's 1994 commodities and securities
investment activities managed by him.
(5) Mr. Cain retired from Mesa effective May 31, 1996. Amounts include the
following: a $7,500 Retirement Plans contribution; a $2,164 reallocation of
forfeitures in the Profit Sharing Plan; a $12,501 payment in lieu of a
Retirement Plans contribution in excess of the contribution limitation as
described in Note 2 above.
(6) Mr. Cain retired as Mesa's President and Chief Operating Officer effective
May 31, 1996.
(7) Includes the following: a $7,500 Retirement Plans contribution; a $2,164
reallocation of forfeitures in the Profit Sharing Plan; a $4,999 payment in
lieu of a Retirement Plans contribution in excess of the contribution
limitation as described in Note 2 above.
(8) Includes the following: a $7,500 Retirement Plans contribution; a $2,164
reallocation of forfeitures in the Profit Sharing Plan; a $3,251 payment in
lieu of a Retirement Plans contribution in excess of the contribution
limitation as described in Note 2 above.
(9) Mr. Gardner became an officer of Mesa in June 1994.
(10) Includes the following: a $7,500 Retirement Plans contribution; a $2,164
reallocation of forfeitures in the Profit Sharing Plan; a $1,499 payment in
lieu of a Retirement Plans contribution in excess of the contribution
limitation as described in Note 2 above.
EMPLOYEES PREMIUM AND PROFIT SHARING PLANS
Mesa maintains the Retirement Plans for the benefit of its employees. Each
year, Mesa is required to contribute to the Employees Premium Plan 5% of the
total compensation (as defined in the plan) paid to participants and may also
contribute up to 12% of total compensation (as defined) to the Profit Sharing
Plan. In previous years, Mesa had declared contributions of 17% to the
Retirement Plans. In 1995 Mesa declared contributions of 5% to the Retirement
Plans.
Participants become 30% vested in their account balances in the Retirement
Plans after three years of service and 40% vested after four years of service.
Participants become vested an additional 20% for each additional year of service
through year seven. Effective December 31, 1991, in conjunction with the
conversion of the Partnership to corporate form, all participants were fully
vested in their account balances in the Retirement Plans as of that date as a
result of certain property dispositions consummated in 1990 and 1991.
Participants remain fully vested in their 1991 balances, but contributions in
1992 and later years under the Retirement Plans are subject to the vesting
schedule described above.
Prior years of service with Mesa's predecessors are counted in the vesting
schedule. Amounts accumulated and vested are distributable only under certain
circumstances, including termination of the Retirement Plans.
LIMITATION ON CONTRIBUTIONS TO BENEFIT PLANS
Total employer contributions to the Retirement Plans for the account of a
participant in any calendar year are limited to the lesser of what is specified
by the Code or by the Retirement Plans. The Code provides that annual additions
to a participant's account may not exceed the lesser of $30,000 or 25% of the
amount of the participant's annual compensation. The Retirement Plans provide
that aggregate annual additions to a participant's account may not exceed 17% of
eligible compensation as defined by the Retirement Plans. The eligible
compensation per the Code was limited to $150,000 in 1995, $150,000 in 1994, and
$228,000 in 1993. Mesa, in its discretion, may determine to make cash payments
of amounts attributable to an employee's participation in the Retirement Plans
to the extent such amounts exceed the Code limitations. As a matter of general
policy for employees of Mesa, Mesa makes annual cash payments directly to
employees to the extent that the annual additions to the account of each such
employee pursuant to the Retirement Plans would exceed the Code limitations.
71
<PAGE> 73
1991 STOCK OPTION PLAN
The 1991 Stock Option Plan (the "Option Plan") was approved by stockholders
of Mesa in 1991 and amended with the approval of stockholders in 1994. Its
purpose is to serve as an incentive to, and aid in the retention of, key
executives and other employees whose training, experience, and ability are
considered important to the operations and success of Mesa. The Option Plan is
administered by the Stock Option Committee composed of non-employee directors of
Mesa who meet the requirements of "disinterested person" in Rule 16b-3(c)(2)(i)
of the Exchange Act. Pursuant to the Option Plan, the Stock Option Committee is
given the authority to designate plan participants, to determine the terms and
provisions of options granted thereunder, and to supervise the administration of
the plan. A total of 4,000,000 shares of Common Stock are currently subject to
the plan, of which options for 3,062,950 shares have been granted. At December
31, 1995, the following stock options were outstanding:
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS
---------
<S> <C>
Granted.................................................. 3,062,950
Exercised................................................ (62,720)
Forfeited................................................ (67,840)
---------
Outstanding at December 31, 1995......................... 2,932,390
========
</TABLE>
Shares of Common Stock subject to an option are awarded at an exercise
price that is equivalent to at least 100% of the fair market value of the Common
Stock on the date the option is granted. The purchase price of the shares as to
which the option is exercised is payable in full at exercise in cash or in
shares of Common Stock previously held by the optionee for more than six months,
valued at their fair market value on the date of exercise. Subject to Stock
Option Committee approval and to certain legal limitations, an optionee may pay
all or any portion of the purchase price by electing to have Mesa withhold a
number of shares of Common Stock having a fair market value equal to the
purchase price. Options granted under the Option Plan include a limited right of
relinquishment that permits an optionee, in lieu of purchasing the entire number
of shares subject to purchase thereunder and subject to consent of the Stock
Option Committee, to relinquish all or part of the unexercised portion of an
option, to the extent exercisable, for cash and/or shares of Common Stock in an
amount representing the appreciation in market value of the shares subject to
such options over the exercise price thereof. In this discretion, the Stock
Option Committee may provide for the acceleration of any unvested installments
of outstanding options. The Board of Directors may amend, alter, or discontinue
the Option Plan, subject in certain cases to stockholder approval.
The options granted and outstanding at December 31, 1995, have exercise
prices and vesting schedules as set forth in the following table:
<TABLE>
<CAPTION>
EXERCISE VESTING SCHEDULE
NUMBER OF PRICE PER ------------------------------------------------
OPTIONS SHARE 30% 55% 80% 100%
- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
1,126,000................... $ 6.8125 07/10/92 01/10/93 01/10/94 01/10/95
134,500................... 11.6875 04/02/93 10/02/93 10/02/94 10/02/95
101,890................... 5.8125 11/18/93 05/18/94 05/18/95 05/18/96
475,000................... 7.3750 05/10/94 11/10/94 11/10/95 11/10/96
75,000................... 6.1875 12/06/94 06/06/95 06/06/96 06/06/97
1,000,000................... 4.2500 06/01/95 12/01/95 12/01/96 12/01/97
20,000................... 5.6875 11/12/95 05/12/96 05/12/97 05/12/98
</TABLE>
There were no options granted to the Chief Executive Officer or to the
other four most highly compensated executive officers of Mesa during 1995.
72
<PAGE> 74
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>
YEAR ENDED NUMBER OF SHARES
DECEMBER 31, 1995 UNDERLYING VALUE OF UNEXERCISED
---------------------- UNEXERCISED IN-THE-MONEY
NUMBER OF OPTIONS/SARS AT OPTIONS/SARS AT
SHARES DECEMBER 29, 1995 DECEMBER 29, 1995
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------------------------------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Boone Pickens................. -- $ -- 1,130,000 145,000 $ 0 $ 0
Paul W. Cain.................. -- -- 312,500 87,500 0 0
Dennis E. Fagerstone.......... -- -- 104,750 40,250 0 0
Stephen K. Gardner............ -- -- 74,250 60,750 0 0
Andrew J. Littlefair.......... -- -- 96,750 43,250 0 0
</TABLE>
At December 29, 1995, the final trading day of the year, the Common Stock
closed at $3.75 per share. The exercise price of the four grants of stock
options reflected in the aggregate in the above tables are $6.8125, $7.375,
$6.1875, and $4.25, respectively, per share. Thus, no outstanding options were
in-the-money at such date.
OTHER
There were no awards made under any long term incentive plans from January
1, 1995, through December 31, 1995; therefore, no disclosure is required in the
Long-Term Incentive Plan Awards table. From January 1, 1995, through December
31, 1995, no options or stock appreciation rights were repriced (as defined in
Item 402(i) of Regulation S-K of the Securities Act). Except as described below
under "Employee Retention Provisions," 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.
EMPLOYEE RETENTION PROVISIONS
On August 22, 1995, the Board adopted the MESA Inc. Change in Control
Retention/Severance Plan, as amended, (the "Retention Plan"). Pursuant to the
Retention Plan, all regular employees of Mesa (other than Mr. Pickens) will be
entitled to receive certain benefits upon the occurrence of certain involuntary
termination events (as described below) following a "Change in Control" (as
defined below) of Mesa. The severance benefits consist of 200% of defined pay
for officers (which includes the highest salary and highest bonus during the
then-current and prior three calendar years before the Retention Plan was
adopted), 150% of defined pay for certain key employees (which includes salary
and bonus amounts) and a formula-based amount for all other employees, plus, in
each case, any other accrued or vested or earned but deferred compensation,
rights, options, or benefits otherwise owed to such employee upon his
termination. In addition, on the same date, the Stock Option Committee
determined that all outstanding but unvested stock options granted to an
employee under Mesa's 1991 Stock Option Plan would immediately vest and become
exercisable upon such a termination event following a Change in Control.
Mesa developed the Retention Plan in consultation with an independent
compensation consultant. That consulting firm advised the Board of Directors
that the Retention Plan is conservatively in line with common
73
<PAGE> 75
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 of Directors as of May 16, 1995 (the "Incumbent
Board"); or (b) any acquisition of beneficial ownership of a higher percentage
of the Common Stock outstanding or the voting securities of Mesa that results
solely from the acquisition, purchase or redemption of securities of Mesa by
Mesa so long as such action by Mesa was approved by a majority of the directors
then comprising the Incumbent Board; (ii) a change in the membership of the
Incumbent Board, together with members elected subsequent to May 16, 1995, whose
election or nomination for election was approved by a majority of the members of
the Incumbent Board as then constituted (excluding for this purpose any
individual whose initial assumption of office occurred as a result of an actual
or threatened election contest), cease for any reason to constitute a majority
of the Board of Directors; (iii) a reorganization, merger, consolidation or sale
of all or substantially all of the assets of Mesa, subject to certain
exceptions; or (iv) approval by the stockholders of Mesa of the complete
liquidation or dissolution of Mesa.
Following the occurrence of a Change in Control, an eligible employee would
be entitled to receive full severance benefits if, within 24 months of the
occurrence of a Change in Control: (i) the employee was terminated by Mesa
without "Cause" (as defined below); or (ii) the employee's duties,
responsibilities or rate of pay as an employee were materially and adversely
diminished in comparison to the duties, responsibilities and rate of pay enjoyed
by the employee on the effective date of the Retention Plan; or (iii) the
employee was relocated to any location in excess of 35 miles from his location
immediately prior to the Change in Control. All severance benefits with respect
to an eligible employee are payable in a lump sum within ten days after the
termination date of such employee. Under the Retention Plan, "Cause" means the
willful and continued failure of an employee to perform substantially the
employee's duties with Mesa following written demand for performance or the
willful engaging by the employee in illegal conduct or gross misconduct that is
materially and demonstrably injurious to Mesa.
The Recapitalization will not constitute a "Change in Control" for purposes
of the Retention Plan, because prior to the First Closing the incumbent Board
approved the issuance of Series B Preferred Stock to DNR and the nomination of
the persons DNR has elected as directors.
DIRECTOR COMPENSATION AND CERTAIN RELATIONSHIPS
Each director of Mesa serving throughout 1995 who was not also an employee
of Mesa or its subsidiaries received compensation of $20,000 allocated quarterly
in 1995, except for Messrs. Parkinson, David H. Batchelder and Reed (who
succeeded Mr. Batchelder). Mr. Parkinson received $15,000, Mr. Batchelder
received $10,000, and Mr. Reed received $5,000 for serving as directors for
approximately seven months, four months, and three months, respectively.
Directors who are also employees of Mesa receive no remuneration for their
services as directors.
Mr. Sarofim, a director and member of the Compensation and Stock Option
Committees, is Chairman of the Board, President, and owner of a majority of the
outstanding capital stock of Fayez Sarofim & Co., which acts as an investment
adviser to certain employee benefit plans of Mesa. During the year ended
December 31, 1995, Fayez Sarofim & Co. received fees, paid by the employee
benefit plans, of $175,459 for such services and has been retained to provide
such services in 1996.
Mr. Stillwell, a director, is a partner in the law firm of Baker & Botts,
L.L.P. Mesa retained Baker & Botts, L.L.P., and incurred legal fees for such
services in 1995. Baker & Botts, L.L.P., has been retained to provide legal
services in 1996 and is advising Mesa as to certain legal matters in connection
with the Recapitalization. See "Legal Matters."
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<PAGE> 76
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 have been
elected as directors of Mesa by DNR. DNR is currently the sole holder of Series
B Preferred Stock, representing 32.5% of Mesa's voting stock (on a fully diluted
basis, and prior to the payment of any dividends in additional shares of
Preferred Stock). In addition, DNR may acquire up to an additional 32.2% of
Mesa's voting stock by purchasing additional shares of Series B Preferred Stock
pursuant to the Standby Commitment, depending on the number of Rights that are
exercised in the Rights Offering. DNR has the right to elect a majority of
Mesa's directors and to receive dividends as described under "Description of
Capital Stock -- Preferred Stock." Mesa has agreed to pay DNR (i) a fee of
$4,655,000 (constituting 3.5% of the aggregate amount of Series B Preferred
Stock to be purchased at the First Closing) at the First Closing (or as promptly
as practicable thereafter as funds are available therefor, but no later than the
Second Closing) and (ii) a fee of $4,620,000 (constituting 3.5% of the maximum
aggregate amount of Series B Preferred Stock to be purchased pursuant to DNR's
Standby Commitment) at the Second Closing, less the amount by which DNR's
reimbursable expenses are less than the initial $500,000 payment Mesa made at
the time it entered into the February 28, 1996 letter of intent with Rainwater,
Inc. In addition, the Stock Purchase Agreement provides that DNR will receive a
fee of $400,000 per year in consideration of DNR's obligations under such
agreement and to compensate DNR for the time that DNR has agreed its
representatives will devote to Mesa's affairs, including the provision of
certain investment analysis and assistance to Mesa during the course of DNR's
investment, and DNR will be reimbursed by Mesa for all fees and expenses (up to
a maximum of $50,000 for any calendar year) reasonably incurred by it in
connection with monitoring its investment in Mesa.
INDEMNIFICATION ARRANGEMENTS
Mesa's Bylaws provide for the indemnification of its executive officers and
directors, and the advancement to them of expenses in connection with
proceedings and claims, to the fullest extent permitted by the Texas Business
Corporation Act. Mesa has also entered into indemnification agreements with its
executive officers and directors that contractually provide for indemnification
and expense advancement and include related provisions meant to facilitate the
indemnitees' receipt of such benefits. In addition, Mesa has purchased customary
directors' and officers' liability insurance policies for its directors and
officers (and director nominees). The Bylaws and agreements with directors and
officers also provide for indemnification for amounts (i) in respect of the
deductibles for such insurance policies, (ii) that exceed the liability limits
of such insurance policies, and (iii) that would have been covered by prior
insurance policies of Mesa or its predecessors. Such indemnification may be made
even though directors and officers would not otherwise be entitled to
indemnification under other provisions of the Bylaws or such agreements. The
Stock Purchase Agreement also provides for continuing indemnification following
the Recapitalization for the current directors and officers to the fullest
extent provided by law, as well as continuing coverage under Mesa's directors'
and officers' liability insurance policies.
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<PAGE> 77
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF MANAGEMENT
The following table presents certain information as to the beneficial
ownership of Mesa's Common Stock as of May 31, 1996, by the directors and
officers of Mesa following the First Closing, individually and as a group. The
following table also indicates the number of shares of Common Stock to be
beneficially owned by such persons assuming that such persons (i) sell or
otherwise fail to exercise all of the Rights to be distributed to them in the
Rights Offering or (ii) exercise all of the Rights to be distributed to them, as
well as the percentage of the number of fully diluted shares of Common Stock to
be owned by such persons under such circumstances (assuming that there will be
181,306,646 shares of Common Stock outstanding on a fully diluted basis,
including 117,256,637 shares issuable upon conversion of shares of Series A and
Series B Preferred Stock).
<TABLE>
<CAPTION>
SHARES OWNED BEFORE THE SHARES OWNED AFTER THE SALE OF SERIES B
SALE OF SERIES B PREFERRED STOCK AND THE RIGHTS OFFERING(1)
PREFERRED STOCK AND THE -------------------------------------------------------
RIGHTS OFFERING NO RIGHTS EXERCISED ALL RIGHTS EXERCISED
------------------------ -------------------------- -------------------------
NUMBER(2) PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE
---------- ---------- ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
CONTINUING DIRECTORS:
[John S. Herrington].................... 10,000 * 10,000 * 19,120 *
Boone Pickens(3)........................ 5,061,626 7.8% 5,061,626 2.8% 8,647,269 4.8%
[Robert L. Stillwell]................... 26,500 * 26,500 * 50,668 *
[Dorn Parkinson(4)]..................... -- * -- * -- *
[Joel L. Reed].......................... -- * -- * -- *
SERIES B PREFERRED STOCK 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 *
Directors and Officers as a group (
persons).............................. [5,741,932] [8.7%] [122,998,569] [67.8%] [68,249,686] [37.6%]
</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; and 1,730,750 for all current directors
and officers as a group. No Rights will be issued in respect of outstanding
options pursuant to the Rights Offering.
(3) Includes 7,545 shares of Common Stock owned by several trusts for Mr.
Pickens' children of which he is a trustee, and over which shares he has
sole voting and investment power, although he has no economic interest
therein. Excludes 2,798 shares of Common Stock owned by Mrs. Pickens as her
separate property, as to which Mr. Pickens disclaims beneficial ownership
and with respect to which he does not have or share voting or investment
power.
(4) Excludes 3,800 shares of Common Stock owned by Mr. Parkinson's son as his
separate property, as to which Mr. Parkinson disclaims beneficial ownership
and with respect to which he does not have or share voting or investment
power. Mr. Parkinson is a member of the WDB Group, which has filed a
Schedule 13D which, as amended, states that the WDB Group is the beneficial
owner of 3,500,000 shares of Common Stock. See Note 4 to the table under
"-- Certain Beneficial Owners."
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<PAGE> 78
(5) Represents shares of Common Stock issuable upon conversion of shares of
Series B Preferred Stock held by DNR. Mr. Rainwater is the sole shareholder
and President of Rainwater, Inc., the sole general partner of DNR, and, as
such, may be deemed to beneficially own the shares of stock to be held by
DNR. Mr. Rainwater and Ms. Moore are married to each other but she disclaims
beneficial ownership of shares 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 May 31, 1996,
regarding each person or "group" (as that term is used in Section 13(d)(3) of
the Exchange Act) known by Mesa to own beneficially more than 5% of the Common
Stock. Information is based on the most recent Schedule 13D or 13G filed by such
holder with the Commission, or other information provided by the holder to Mesa.
The following table also indicates the number of shares of Common Stock to be
beneficially owned by such persons assuming that such persons (i) sell or
otherwise fail to exercise all of the Rights to be distributed to them in the
Rights Offering or (ii) exercise all of the Rights to be distributed to them, as
well as the percentage of the number of fully diluted shares of Common Stock to
be owned by such persons under such circumstances (assuming that there will be
181,306,646 shares of Common Stock outstanding on a fully diluted basis,
including 117,256,637 shares issuable upon conversion of shares of Series A and
Series B Preferred Stock).
<TABLE>
<CAPTION>
SHARES OWNED BEFORE SHARES OWNED AFTER THE SALE OF SERIES B
THE SALE OF SERIES B PREFERRED STOCK AND THE RIGHTS OFFERING(1)
PREFERRED STOCK AND THE --------------------------------------------------
RIGHTS OFFERING NO RIGHTS EXERCISED ALL RIGHTS EXERCISED
NAME AND ADDRESS OF ----------------------- ----------------------- -----------------------
BENEFICIAL OWNER NUMBER PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE
- ------------------------------------ --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Boone Pickens....................... 5,061,626(2) 7.8% 5,061,626 2.8% 8,647,269 4.8%
1400 Williams Square West
5205 North O'Connor Boulevard
Irving, Texas 75039-3746
FMR Corp............................ 5,140,400(3) 8.0% 5,140,400 2.8% 9,828,445 5.4%
82 Devonshire Street
Boston, Massachusetts 02109
WDB Group........................... 3,500,000(4) 5.5% 3,500,000 1.9% 6,692,000 3.7%
c/o Dennis R. Washington
Washington Corporations
101 International Way
Missoula, Montana 59807
</TABLE>
- ---------------
(1) Includes shares of Common Stock issuable upon conversion of Series A
Preferred Stock.
(2) See notes (2) and (3) to the table under "Security Ownership of Management."
(3) The Schedule 13G filed with the Commission on February 14, 1996, by FMR
Corp. states that as of December 31, 1995, Fidelity Management & Research
Company ("Fidelity"), a wholly owned subsidiary of FMR Corp. and an
investment adviser registered under Section 203 of the Investment Advisers
Act of 1940, is the beneficial owner of 5,140,400 shares or 8.0% of Common
Stock as a result of acting as investment adviser to various investment
companies registered under Section 8 of the Investment Company Act of 1940.
The ownership of one investment company, Fidelity Capital Appreciation Fund
("Fund"), amounted to 5,140,400 shares or 8.0% of Common Stock outstanding.
Edward C. Johnson, III, chairman of FMR Corp., FMR Corp., through its
control of Fidelity, and the Fund each has sole power to dispose of the
5,140,400 shares owned by the Fund.
(4) A Schedule 13D filed by the WDB Group, as amended as of April 24, 1996,
states that such group at that date beneficially owns 3,500,000 shares of
Common Stock, as to which Dennis R. Washington has sole voting power. The
Schedule 13D filed by the WDB Group prior to that date had included Davis
Acquisition, L.P., Davis Companies, the Marvin Davis and Barbara Davis
Revocable Trust, and Marvin Davis, which collectively owned 2,500,000
shares of Common Stock. On April 24, 1996, the WDB Group
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<PAGE> 79
filed an amendment to the Schedule 13D stating that the Davis entities had
terminated their participation in the WDB Group and had sold shares of
Common Stock such that, as of April 23, 1996, the Davis entities
beneficially owned 1,562,500 shares of Common Stock. See "Business -- Legal
Proceedings -- Settlement with WDB Group."
BENEFICIAL OWNERSHIP OF DNR
The following table sets forth the percentage of the number of fully
diluted shares of Common Stock to be beneficially owned by DNR upon the Second
Closing assuming certain percentages of the Rights are exercised in the Rights
Offering.
<TABLE>
<CAPTION>
PERCENTAGE OF RIGHTS EXERCISED
-------------------------------------------------
0% 25% 50% 75% 100%
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Percentage Ownership of DNR.......... 64.7% 56.7% 48.6% 40.6% 32.5%
</TABLE>
As used in this Prospectus, the number of "fully diluted" shares of Common
Stock includes shares issuable upon conversion of Series A and Series B
Preferred Stock, but excludes (i) shares issuable pursuant to employee stock
options because no such options have an exercise price below current market
prices of the Common Stock and (ii) unless otherwise indicated, shares issuable
as dividends on the Preferred Stock.
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<PAGE> 80
THE STOCK PURCHASE AGREEMENT
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) At the First Closing, Mesa issued and sold to DNR 58,849,557
shares of Series B Preferred Stock at a purchase price of $2.26 per share.
(b) At the Second Closing, 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.
The aggregate purchase price for the shares of Series B Preferred Stock
purchased pursuant to the Stock Purchase Agreement was paid, at the First
Closing, and will be paid, at the Second Closing, by wire transfer of
immediately available funds.
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 New Credit Facility and the indentures
governing the Notes.
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 the 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 (i) paid DNR a fee of $4,655,000 (constituting 3.5% of the
aggregate amount of Series B Preferred Stock purchased at the First Closing) at
the First Closing and (ii) has agreed to pay DNR a fee of $4,620,000
(constituting 3.5% of the maximum aggregate amount of Series B Preferred Stock
that may be purchased at the Second Closing) at the Second Closing, less the
amount by which DNR's reimbursable expenses as of the Second Closing are less
than the initial $500,000 payment.
The Stock Purchase Agreement also provides that, for so long as the Minimum
Ownership Condition (as defined below) is satisfied, DNR will be entitled to
receive a fee of $400,000 per year (payable quarterly in arrears, beginning
September 30, 1996) in exchange for DNR's continuing analysis and assistance to
Mesa during the course of its investment, and in lieu of any transaction or
success fees to which DNR might otherwise typically be entitled for any such
services performed in connection with specific transactions in which Mesa
participates in the future. Mesa will also be required to reimburse DNR for all
fees and expenses (up to a maximum of $50,000 for any calendar year), including
legal fees, reasonably incurred by it in connection with monitoring its
investment in Mesa.
The Minimum Ownership Condition will be deemed satisfied at any time if (i)
the Minimum Ownership Amount 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
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<PAGE> 81
"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) shares of Series
A and 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.
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 director, officer or employee of
Mesa or any of its subsidiaries or as a director 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 entered 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 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
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<PAGE> 82
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.
The foregoing summary of the material provisions of the Stock Purchase
Agreement and the Registration Rights 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 agreements, copies of which have been filed as exhibits to
the Registration Statement of which this Prospectus is a part.
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<PAGE> 83
DESCRIPTION OF NEW DEBT
NEW CREDIT FACILITY
Mesa has entered into a Credit Agreement, dated , 1996, with
respect to the New Credit Facility with Chemical Bank and The Chase Manhattan
Bank, N.A. (together, "Chase") and Bankers Trust Company ("Bankers Trust") and
certain banks, financial institutions and other entities, as lenders. Mesa
Operating Co., the Company's only significant subsidiary ("MOC") is the borrower
under the New Credit Facility. All borrowings thereunder are unconditionally
guaranteed by the Company 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 is a seven year revolving credit facility for an
aggregate of up to $500 million, a portion of which is available for the
issuance of letters of credit. Mesa borrowed approximately $ million of the
$500 million available under the New Credit Facility (including letters of
credit) at the First Closing, a portion of which will be repaid at the Second
Closing upon consummation of the Rights Offering and any sale of additional
shares of Series B Preferred Stock to DNR pursuant to the Standby Commitment.
See "Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The New Credit Facility is subject to mandatory prepayment and reduction of
the total commitment by the amount of (i) 75% of the net proceeds of any sale or
issuance of equity by Mesa after the consummation of the First Closing (except
from the net proceeds of the Rights Offering or the Standby Commitment and
except, under certain circumstances, from the net proceeds of other equity
issuances which are used to repay a portion of the Notes), (ii) 100% of the net
proceeds of the incurrence of certain indebtedness by Mesa and (iii) 100% of the
net proceeds of any sale or other disposition by Mesa of any assets (subject to
certain collateral substitution provisions). Borrowings under the New Credit
Facility are subject to a borrowing base to be determined annually by the
lenders based on certain proved oil and gas reserves and other assets of Mesa.
Initially, the borrowing base will be $500 million. To the extent that the
borrowing base is less than the aggregate principal amount of all outstanding
loans and letters of credit under the New Credit Facility, 50% of each
deficiency must be cured within 90 days and the balance must be cured within 180
days.
At Mesa's option, borrowings under the New Credit Facility bear interest at
either (i) the "Adjusted Base Rate" (i.e., the highest of Chase's prime
commercial lending rate, the secondary market rate for certificates of deposit
plus 1% per annum and the federal funds rate plus 0.5% per annum) plus 0.5% or
(ii) the Eurodollar rate plus 1.5%.
The loan documents governing the New Credit Facility contain certain
customary covenants and restrictions relating to Mesa's operations.
THE NOTES
At the First Closing, MOC issued and sold in a registered public offering
$325 million in aggregate principal amount of Senior Subordinated Notes and $175
million initial accreted value of Discount Notes. The net proceeds of the sale
of the Notes, along with the proceeds of the other transactions consummated at
the First Closing, have been applied to repay and/or refinance a substantial
portion Mesa's outstanding indebtedness. See "Use of Proceeds."
The Senior Subordinated Notes and the Discount Notes are governed by
separate indentures. Interest accrues on the Senior Subordinated Notes from the
date of original issuance at an annual rate of % and is payable
semiannually in arrears. The Discount Notes were issued at a substantial
discount to their aggregate principal amount. The Discount Notes will accrete in
value until , 2001 at a rate of % per annum, compounded
semiannually, to an aggregate principal amount of $ million. Cash interest
will not accrue on the Discount Notes prior to , 2001. Thereafter,
interest will accrue at the rate of % per annum and will be payable
semiannually in arrears. The effective yield of the Discount Notes is % per
annum (computed on a semiannual bond equivalent basis).
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<PAGE> 84
Except as described below, the Notes are not redeemable at Mesa's option
prior to , 2001. After , 2001, the Notes will be subject
to redemption at Mesa's option, in whole or in part, at the redemption prices
set forth herein, plus accrued and unpaid interest thereon to the applicable
redemption date. Prior to , 1999, a portion of the 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 Note
indentures), Mesa will be required to offer to repurchase all or a portion of
each holder's Notes, at an offer price in cash equal to 101% of the aggregate
principal amount of such Notes, plus accrued and unpaid interest, if any,
thereon to the date of repurchase (or 101% of the accreted value at such date,
as applicable), and to repurchase all Notes tendered pursuant to such offer.
Mesa will not be required to make such an offer upon the occurrence of a Change
of Control if a third party makes an offer, which meets the requirements
otherwise applicable to Mesa, to purchase all of the Notes and such third party
purchases all Notes tendered pursuant to such offer. The New Credit Facility
will prohibit Mesa from repurchasing any Notes pursuant to a Change of Control
offer prior to the repayment in full of the senior debt under the New Credit
Facility. If a Change of Control were to occur, Mesa may not have sufficient
available funds to purchase all Notes tendered pursuant to the Change of Control
offer after first satisfying its obligations under the New Credit Facility or
other senior debt that may then be outstanding, if accelerated. If a default
occurs, the applicable trustee or holders of at least 25% in principal amount of
the Notes then outstanding may declare the principal of and the accrued and
unpaid interest or the accreted value of the Notes, as applicable, to be due and
payable immediately. However, such repayment would be subject to certain
subordination provisions in the Note indentures.
The Notes are general, unsecured obligations of MOC, are subordinated in
right of payment to all existing and future senior debt of MOC, which includes
borrowings under the New Credit Facility and any other permitted indebtedness
which does not expressly provide that it is on a parity with or subordinated in
right of payment to the Notes. The claims of the holders of the Notes will be
subordinated to senior debt, which, as of December 31, 1995, on a pro forma
basis after giving effect to the Recapitalization and the application of the
proceeds thereof, would have been approximately $307.9 million, representing the
initial borrowings under the New Credit Facility. See "Capitalization."
The Notes are guaranteed by the Company and will be guaranteed by each
future "material restricted subsidiary" (as defined in the Note indentures) of
MOC.
The indentures governing the Notes contain certain covenants that, among
other things, 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 foregoing summary of the material provisions of the New Credit Facility
and the Notes does not purport to be complete and is subject to, and qualified
in its entirety by reference to, all of the provisions of such documents, copies
of which were filed as exhibits to the Registration Statement with respect to
the Notes.
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
As of June , 1996, the authorized capital stock of the Company consists
of 600 million shares of Common Stock, par value $.01 per share, and 500 million
shares of Preferred Stock, par value $.01 per share of which 140 million shares
have been designated as Series A Preferred Stock, 140 million shares have been
designated as Series B Preferred Stock and 1,000,000 shares have been designated
as Series A Junior Participating Preferred Stock. As of June , 1996,
64,050,009 shares of Common Stock were issued and outstanding and 58,849,557
shares of Series B Preferred Stock were issued and outstanding.
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<PAGE> 85
COMMON STOCK
Holders of Common Stock have no preemptive rights to purchase or subscribe
for securities of the Company, and the Common Stock is not convertible into any
other securities or subject to redemption by the Company.
Subject to the rights of the holders of any class of capital stock of the
Company having any preference or priority over the Common Stock, the holders of
the Common Stock are entitled to dividends in such amounts as may be declared by
the Board of Directors of the Company from time to time out of funds legally
available for such payments and, in the event of liquidation, to share ratably
in any assets of the Company remaining after payment in full of all creditors
and provision for any liquidation preferences on any outstanding Preferred Stock
ranking prior to the Common Stock.
American Stock Transfer & Trust Company serves as registrar and transfer
agent for the Common Stock.
PREFERRED STOCK
The Board of Directors, without further action by the shareholders, is
authorized to issue up to 500 million shares of preferred stock in one or more
series and to fix and determine as to any series all the relative rights and
preferences of shares in such series, including, without limitation,
preferences, limitations or relative rights with respect to redemption rights,
conversion rights, if any, voting rights, if any, dividend rights and
preferences on liquidation.
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 Texas Business Corporation Act (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.
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 the company's Bylaws or that would adversely
affect any rights, preferences, privileges or voting power of the Series B
Preferred Stock differently from the rights, preferences, privileges or voting
power of the Series A Preferred Stock (to the extent such rights, preferences,
privileges or voting power of such two series are the same prior to such
amendment).
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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 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.
If the Company 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 shareholders called for the election of directors.
The right of the Series A Preferred 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 the Company 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
the Company in lieu of the Company'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. Nothing in clause (ii) or (iii) above 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 Preferred Stock will be entitled to receive, as and when
declared by the Company 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), 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 Preferred Stock, dividends will be payable in
additional shares of Preferred Stock, based upon their Stated Value. On and
after the fourth anniversary of the issue date, the
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Company may elect to pay dividends in cash rather than shares of 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. The Company's average Fixed Charge
Coverage Ratio at the end of the four preceding quarters is in excess of
2.5. "Fixed Charge Coverage Ratio" means the ratio of (i) the sum of (A)
Consolidated EBITDA plus (B) one-third of gross operating rents paid
before sublease income (as defined by Standard & Poors Corporation), if
any ("Gross Rents") to (ii) the sum of (A) interest expense, both
expensed and capitalized, of the Company and its consolidated
subsidiaries, plus (B) one-third of Gross Rents plus (C) scheduled
principal amortization of indebtedness (including borrowed money and
capitalized leases) of the Company and its consolidated subsidiaries.
"Consolidated EBITDA" means the consolidated net income or loss of the
Company for the period, excluding gains and losses not arising from
operations (including interest income, gains and losses from
investments, gains and losses from dispositions of oil and gas
properties, collections and settlements of claims and litigation,
adjustments of contingency reserves and other extraordinary gains and
losses), plus, to the extent the following have been deducted in
determining such income or loss, interest expense, income taxes,
depreciation, depletion and amortization expense and impairment expense.
Gas Price Realization. The Average Gas Equivalent Price realized
by the Company on an Mcf equivalent basis (using a 6:1 conversion ratio)
during the four preceding quarters as reported in the Company's
financial statements is in excess of $2.95. "Average Gas Equivalent
Price" means the average price received by the Company from sales of oil
and gas production, to be calculated as follows:
(i) the aggregate revenues of the Company and its consolidated
subsidiaries during such 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 Company and its consolidated
subsidiaries, as reported in the Company'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 Company and its consolidated subsidiaries during such 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 Company and its consolidated subsidiaries
during such period, as derived from the Company's consolidated financial
statements.
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, the Company 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 indentures governing the Notes and the
New Credit Facility may limit the Company's ability to pay cash dividends even
if permitted by the terms of the Preferred Stock. See "Risk
Factors -- Transaction Risks -- Dividends; Redemption" and "Description of New
Debt." 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 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 are
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
Preferred Stock. The conversion ratio is subject to customary anti-dilution
adjustment in the event the Company (a) subdivides the outstanding shares of
Common Stock into a greater number of shares; (b) combines the outstanding
shares of Common Stock into a smaller number of shares; (c) declares, orders,
pays or makes any dividend or other distribution to holders of Common Stock
payable in Common Stock;
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(d) declares, orders, pays or makes any dividend or other distribution to all
holders of Common Stock, other than a dividend payable in shares of Common Stock
(including dividends or distributions payable in cash, evidences of
indebtedness, rights, options or warrants to subscribe for or purchase shares of
Common Stock or other securities, or any other securities or other property, but
excluding any rights to purchase stock or other securities if such rights are
not separable from the Common Stock except upon occurrence of a contingency
beyond the control of the Company); or (e) issues or sells any shares of Common
Stock or any rights, options, warrants to subscribe for or purchase shares of
Common Stock or shares having the same rights, privileges and preferences as the
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, in the case of a security convertible into
shares of Common Stock or equivalent common stock) less than the market price of
the Common Stock on the date of such issue or sale, other than (i) the
conversion or redemption of shares of Series A or Series B Preferred Stock, (ii)
the payment of any stock dividend on the Series A or Series B Preferred Stock,
(iii) the issuance of options to officers, directors and employees of the
Company 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 Stock, (iv) the issuance and sale of Common Stock upon
exercise of any rights, options or warrants described in the foregoing clause
(iii) or in clause (d) above or (v) the issuance and sale of Common Stock in an
underwritten public offering at a price of not less than 95% of the closing
price of the Common Stock on the date of pricing such offering.
If, at any time after the original issue date, the Company is a party to
any transaction (including a merger, consolidation, statutory share exchange,
sale of all or substantially all of the Company's assets or recapitalization of
the Common Stock), as a result of which shares of Common Stock (or any other
securities of the Company then issuable upon conversion of the Series A or
Series B Preferred Stock) will be converted into the right to receive stock,
securities or other property (including cash) or any combination thereof (a
"Fundamental Change Transaction"), then the shares of Series A and Series B
Preferred Stock remaining outstanding will thereafter no longer be convertible
into Common Stock (or such other securities), but instead each share will be
convertible into the kind and amount of stock and other securities and property
receivable upon the consummation of such Fundamental Change Transaction by a
holder of that number of shares of Common Stock (or such other securities) into
which one share of Series A or Series B Preferred Stock was convertible
immediately prior to such Fundamental Change Transaction (assuming such holder
of Common Stock or other securities failed to exercise any right of election as
to the kind of consideration to be received in such Fundamental Change
Transaction). The Company is prohibited from being a party to any Fundamental
Change Transaction after which shares of Series A and Series B Preferred Stock
will remain outstanding unless the terms of such Fundamental Change Transaction
are consistent with the foregoing, and it may not consent or agree to the
occurrence of any such Fundamental Change Transaction until it has entered into
an agreement with the successor or purchasing entity, as the case may be, for
the benefit of the holders of the Series A and Series B Preferred Stock
containing provisions enabling such holders to convert such shares into the
consideration received by holders of Common Stock (or other securities of the
Company then issuable upon conversion of Series A or Series B Preferred Stock),
at the conversion ratio then in effect, after such Fundamental Change
Transaction. In the event that, as a result of an adjustment pursuant to a
Fundamental Change Transaction, the Series A and Series B Preferred Stock become
convertible into any securities other than shares of Common Stock, the number of
such other securities issuable upon conversion will be subject to adjustment to
prevent dilution and adjustment in the event of a successive Fundamental Change
Transaction in a manner and on terms as nearly equivalent as practicable to
those described herein.
Redemption. Subject to any restrictions imposed by the terms of the New
Credit Facility or the indentures governing the Notes, the Company may, at its
option, 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 Stock. All
outstanding shares of Series A and Series B Preferred Stock are 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,
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at the option of the Company as announced 30 days prior to the redemption date,
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.
Liquidation. 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 the
Company. The Series A Preferred Stock and Series B Preferred Stock will be pari
passu as to liquidation rights. 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 holder of Common Stock, a liquidation preference equal to the Stated Value
of such shares, plus all accrued and unpaid dividends thereon.
Ranking. 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 the Company. In
the event that the Company 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. The Common Stock and the
Series A Junior Participating Preferred Stock will rank junior to the Series A
and Series B Preferred Stock with respect to the payments required or permitted
to made to the holders of such securities pursuant to their respective governing
instruments.
Authorization by Non-Series A and Series B Directors. A majority of the
Company's directors, other than Series A Directors and Series B Directors, is
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 the Company'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 the Company have
sufficient cash legally available to make any cash dividend payment).
Certain Covenants of the Company. For so long as any shares of Series A or
Series B Preferred Stock are outstanding, the Company must at all times reserve
and keep available for issuance upon the conversion of such shares 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 and Series B
Preferred Stock and all other securities and instruments convertible into shares
of Common Stock. The Company must endeavor to make the shares of stock that may
be issued upon redemption or conversion of Series A or Series B Preferred Stock
eligible for trading on any national securities exchange or automated quotation
system upon or through which the Common Stock is then traded. Prior to the
delivery of any securities upon redemption or conversion of Series A or Series B
Preferred Stock, the Company must endeavor to comply with all federal and state
securities laws and regulations requiring the registration of such securities
with, or the approval of or consent to the delivery of such securities by, any
governmental authority. The Company must pay all taxes and other governmental
charges (other than 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 shares of Series A or Series B Preferred Stock, but will not be required to
pay any transfer taxes incurred as a result of the issuance of shares of Common
Stock in a name other than that of the registered holder of the converted or
redeemed shares of Preferred Stock.
Transferability; Conversation of Series B to Series A Preferred Stock. The
Series A Preferred Stock offered hereby, and the shares of Common Stock issuable
upon conversion thereof, have been registered under the Securities Act and the
Exchange Act. Accordingly, shares of Series A Preferred Stock and shares of
Common Stock issuable upon conversion thereof will generally be freely
transferrable by the holders thereof.
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The Series A Preferred Stock is expected to be listed for trading on the New
York Stock Exchange under the symbol "MXPPrA."
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 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.
The Company has entered into a Registration Rights Agreement with DNR. See
"The Stock Purchase Agreement -- Registration Rights Agreement."
CONFIDENTIAL VOTE
The Company's Bylaws provide for an independent third party to collect and
tabulate shareholders' proxies so as to keep the votes of shareholders
confidential from the Company and other persons soliciting proxies, except to
the extent otherwise required by law or to resolve any dispute with respect
thereto.
SPECIAL MEETINGS
Special meetings of the shareholders of the Company may be called by the
chief executive officer, the Board of Directors or by shareholders holding not
less than 20% of the outstanding voting stock of the Company. Except as
otherwise provided in the resolutions of the Board of Directors establishing any
class or series of preferred stock, shareholders may not act by written consent
without a meeting.
VOTING
Holders of Common Stock and Series B Preferred Stock are, and holders of
Series A Preferred Stock will be, entitled to cast one vote per share on matters
submitted to a vote of shareholders, other than election or removal of
directors, which is subject to cumulative voting. In cumulative voting for
directors, each shareholder is entitled to a number of votes equal to the number
of shares held multiplied by the number of directors to be elected; the
shareholder may cast all such votes for a single director or may cast them for
any or all of the nominees in any manner the shareholder chooses. Each director
will be elected annually. Any director may be removed, with or without cause, at
any meeting of shareholders called expressly for that purpose, by a vote of the
holders of a majority of the outstanding shares entitled to vote in the election
of such director, except that, if less than the entire board is to be removed,
no director may be removed if the votes cast against his removal would be
sufficient to elect him if then cumulatively voted at an election of the entire
board.
Subject to the rights of the holders of the Series A Preferred Stock and
the Series B Preferred Stock and any additional voting rights that may be
granted to holders of future classes or series of stock and to the additional
voting requirements described in the next paragraph, the Company's Articles of
Incorporation require the affirmative vote of holders of a majority of the
outstanding shares entitled to vote thereon to approve any amendment to the
Articles of Incorporation, dissolution of the Company, sale of all or
substantially all the assets of the Company, share exchange or merger for which
a vote is required by the Texas Business Corporation Act.
The Articles of Incorporation of the Company contain an "equal price"
provision that applies to certain business combination transactions involving
any person or group that beneficially owns 20% or more of the aggregate voting
power of all of the outstanding stock of the Company (a "Related Person"). The
provision requires the affirmative vote of holders of at least 80% of the voting
stock of the Company to approve any merger, consolidation, sale or lease of all
or substantially all of the assets of the Company or certain other transactions
involving the Related Person. This voting requirement is not applicable to
certain transactions, including (i) any transaction in which the consideration
to be received by the holders of each class of stock is the same in form and
amount as that paid in a tender offer in which the Related Person acquired at
least 50% of the outstanding shares of each such class and which was consummated
not more than one year earlier,
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(ii) any other transaction that meets certain other specified pricing criteria
or (iii) any other transaction approved by the Company's continuing directors
(as defined in the Articles of Incorporation). This provision could have the
effect of delaying or preventing a change of control of the Company in a
transaction or series of transactions that did not satisfy the "equal price"
criteria.
Approval of any other matter not described above that is submitted to the
shareholders requires the affirmative vote of the holders of a majority of the
shares entitled to vote represented at the meeting. The holders of a majority of
the shares entitled to vote shall constitute a quorum at meetings of
shareholders.
The Company's Bylaws provide that shareholders who wish to nominate
directors or to bring business before a shareholders' meeting must notify the
Company and provide certain pertinent information at least 80 days before the
meeting date (or within ten days after public announcement pursuant to the
Bylaws of the meeting date, if the meeting date has not been publicly announced
at least 90 days in advance).
LIMITATION OF DIRECTOR LIABILITY
The Articles of Incorporation of the Company contain a provision that
limits the liability of the Company's directors as permitted by the Texas
Business Corporation Act. The provision eliminates the personal liability of
directors to the Company, and its shareholders may be unable to recover monetary
damages against directors for negligent or grossly negligent acts or omissions
in violation of their duty of care. The provision does not change the liability
of a director for breach of his duty of loyalty to the Company or to
shareholders, acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, an act or omission for which the
liability of a director is expressly provided for by an applicable statute, or
in respect of any transaction from which a director received an improper
personal benefit. Pursuant to the Articles of Incorporation, the liability of
directors will be further limited or eliminated without action by shareholders
if Texas law is amended to further limit or eliminate the personal liability of
directors.
RIGHTS PLAN
On July 6, 1995, the Company's Board of Directors declared a dividend of
one right (each, a "Rights Plan Right") to purchase preferred stock for each
share of the Company'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 the Company 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. The
description and terms of the Rights Plan Rights are set forth in a Shareholder
Rights Agreement dated as of July 6, 1995, as from time to time supplemented or
amended (the "Shareholder Rights Plan"), between the Company 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 of Directors. 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.
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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 the Company 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
shareholder of the Company, 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 an
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 the Company) 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 the
Company 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. "Permitted Offer" means
a tender or exchange offer commenced on or after September 30, 1995 for all
outstanding shares of Common Stock that meets certain criteria set forth in the
Shareholder Rights Plan, including that the bidder together with its affiliates
and associates must beneficially own at least 51% of the outstanding Common
Stock upon completion of such offer.
In the event (a "Flip-Over Event") that, at any time after the time an
Acquiring Person becomes such, (i) the Company is acquired in a merger or other
business combination transaction (other than a merger following a Permitted
Offer), or (ii) 50% or more of the Company'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, the Company may redeem the Rights Plan Rights in whole, but not
in part, at a price of $.01 per Rights Plan Right, payable, at the Company's
option, in cash, shares of Common Stock or such other consideration as the Board
of Directors may determine. Under certain circumstances set forth in the
Shareholder Rights Plan, redemption requires the approval of a majority of the
Company'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, the Company (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 Directors of the Company (in certain
circumstances, with the concurrence of the continuing directors) as long as the
Rights Plan Rights are redeemable.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a general discussion of certain anticipated federal income
tax consequences of the Rights Offering. This discussion is based on the
provisions of the Code, the Treasury Regulations promulgated thereunder, and
administrative and judicial interpretations thereof, all as in effect as of the
date hereof and all of which are subject to change (possibly on a retroactive
basis). This discussion does not purport to deal with all aspects of federal
income taxation that may be relevant to a particular holder of Rights in light
of such holder's personal investment circumstances nor does this discussion
address special tax implications which may be applicable to certain types of
holders of Rights subject to special treatment under the Code (including,
without limitation, financial institutions, broker-dealers, regulated investment
companies, life insurance
91
<PAGE> 93
companies, tax-exempt organizations, foreign corporations and non-resident
aliens). Moreover, the discussion is limited to those who will hold the Rights
and any Series A Preferred Stock acquired upon the exercise of Rights, as
capital assets (generally, property held for investment) within the meaning of
Section 1221 of the Code. No consideration of any aspects of state, local or
foreign taxation is included herein. Mesa has not sought, nor does it intend to
seek, any rulings from the IRS relating to the tax issues addressed herein, and
such issues may be subject to substantial uncertainty resulting from the lack of
definitive judicial or administrative authority and interpretations applicable
thereto.
EACH EXISTING HOLDER OF COMMON STOCK AND EACH PROSPECTIVE PURCHASER OF
RIGHTS IS URGED TO CONSULT SUCH PERSON'S OWN TAX ADVISOR AS TO THE SPECIFIC TAX
CONSEQUENCES OF THE RIGHTS OFFERING WITH RESPECT TO SUCH PERSON'S OWN PARTICULAR
TAX SITUATION, INCLUDING THE APPLICATION AND EFFECT OF THE CODE, AS WELL AS
STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
TAX CONSEQUENCES TO HOLDERS OF RIGHTS
Issuance of Rights to Existing Stockholders. Existing law is not clear as
to whether the distribution of Rights to holders of Common Stock ("Existing
Stockholders") would be characterized as a distribution under Section 305(a) of
the Code ("Section 305(a) Distribution") or, alternatively, as a distribution
under Sections 301 and 305(b) of the Code ("Section 301 Distribution"). Mesa
intends to take the position that the Rights distribution is properly
characterized as a Section 305(a) Distribution. Assuming that the Rights
distribution is properly characterized as a Section 305(a) Distribution, the
distribution would be nontaxable without regard to Mesa's earnings and profits.
If the Rights distribution were treated as a Section 301 Distribution, and
provided that Mesa does not have positive net earnings during fiscal 1996, the
value of the Rights distributed would be treated as a nontaxable reduction in
the Existing Stockholder's basis in his Common Stock, and the balance (if any)
in excess of such adjusted basis would be taxed as capital gain. In this regard,
based on current projections, Mesa believes that it is highly unlikely that it
will have positive net earnings during fiscal 1996.
Basis of Rights. If, as expected, the Rights distribution is properly
characterized as a Section 305(a) Distribution, then, except as provided in the
following sentence, the tax basis of Rights received by an Existing Stockholder
in the Rights distribution would be zero. If, however, (i) the Rights
distribution constitutes a Section 305(a) Distribution and (ii) either the
Rights have a value (on the date of distribution of the Rights) equal to or
greater than 15% of the value of the shares of Common Stock with respect to
which the Rights are distributed or the Existing Stockholder elects to apply the
rule described in this sentence, then upon exercise or transfer (but not upon
lapse) of the Rights, the Existing Stockholder would reallocate his tax basis in
his Common Stock between the Rights and the Common Stock based on the relative
fair market values of each. If the Rights distribution were treated as a Section
301 Distribution, an Existing Stockholder would have a tax basis in the Rights
equal to (and, assuming that Mesa does not have positive net earnings during
fiscal 1996, the Existing Stockholder's basis in his Common Stock would be
reduced by) an amount equal to the fair market value of the Rights on the date
of the Rights distribution. Persons who acquire Rights by purchase will have a
tax basis in the Rights equal to the purchase price paid therefor.
Holding Period of Rights. If, as expected, the Rights distribution is
treated as a Section 305(a) Distribution, an Existing Stockholder will have a
holding period in the Rights that includes the holding period of the shares of
Common Stock to which the Rights distribution relates. If the Rights
distribution were treated as a Section 301 Distribution, the Existing
Stockholder would have a holding period in the Rights that begins on the day
following the date of distribution of the Rights. A holder who acquires Rights
by purchase will have a holding period in the Rights that begins on the date of
purchase.
Exercise or Sale of Rights. A holder of Rights will not be taxed upon
exercise of the Rights. The holder's tax basis in the shares of Series A
Preferred Stock received upon exercise will equal (i) his basis in the Rights,
plus (ii) the exercise price paid for the Series A Preferred Stock. The holder's
holding period in the Series A Preferred Stock will begin on the day following
the date of exercise of the Rights. Upon a sale of
92
<PAGE> 94
the Rights, a holder of Rights will realize capital gain or loss equal to the
difference between the amount received (if any) for the Rights and his tax basis
in the Rights (determined as described in "-- Basis of Rights," above).
Lapse of Rights. A holder of Rights who allows Rights to lapse would have
a capital loss equal to his basis (determined as described in "-- Basis of
Rights," above), if any, in the Rights that lapsed. If the Rights distribution
is treated as a Section 305(a) Distribution, an Existing Stockholder who allows
a Right to lapse will have no basis in the Right and, thus, would realize no
capital loss.
Dividends on Preferred Stock. The amount of cash and the fair market value
of any Series A Preferred Stock received by a holder as a dividend on shares of
Series A Preferred Stock will be treated as ordinary dividend income (which, in
the case of holders that are qualifying corporations, would be eligible for the
70% dividends received deduction), but only to the extent of Mesa's current year
or accumulated earnings and profits that are allocable to such Series A
Preferred Stock. Any remaining amount of dividend will reduce the holder's tax
basis in its shares of Series A Preferred Stock until such basis is reduced to
zero, and any excess will be treated as capital gain income. To the extent that
the face amount of any Series A Preferred Stock that is distributed as a
dividend exceeds the value of such stock on the date of its distribution, such
excess will likely be treated as a Section 301 Distribution (which is taxed as
ordinary dividend income to the extent of Mesa's current or accumulated
earnings) that accrues on a constant yield to maturity basis over the remainder
of the 12-year period during which the Series A Preferred Stock will remain
outstanding.
Sale or Cash Redemption of Preferred Stock. Upon a sale or cash redemption
of shares of Series A Preferred Stock, a holder who acquired Rights by purchase
and, if (as expected) Mesa has no net earnings during fiscal 1996, an Existing
Stockholder, will generally recognize capital gain or loss in an amount equal to
the difference between the amount received in the sale or redemption and the
holder's tax basis (determined as described in "-- Exercise or Sale of Rights,"
above) in the shares redeemed.
Receipt of Common Stock Upon Redemption or Conversion of Series A Preferred
Stock. Except as provided in the following sentence, the conversion of shares
of Series A Preferred Stock into Common Stock, or the receipt of Common Stock in
redemption of shares of Series A Preferred Stock, will be nontaxable to the
holders of Rights. Notwithstanding the preceding sentence, a holder of Rights
will be treated as receiving a Section 301 Distribution (that is taxed in the
manner described in "-- Dividends on Preferred Stock," above) in an amount equal
to the accrued and unpaid dividends on the Series A Preferred Stock surrendered
or, if less, in an amount equal to the excess of the fair market value of the
Common Stock received over the issue price of the Series A Preferred Stock
surrendered. Each holder's basis and holding period in the Common Stock received
(other than Common Stock received in satisfaction of accrued and unpaid
dividends on the Series A Preferred Stock) will be the same as his basis and
holding period in the shares of Series A Preferred Stock surrendered therefor. A
holder's basis in any Common Stock received in satisfaction of accrued and
unpaid dividends on the Series A Preferred Stock will equal the fair market
value of such Common Stock, and the holder's holding period in such Common Stock
will begin on the date of its receipt by the holder.
LEGAL MATTERS
Certain legal matters in connection with the securities offered hereby will
be passed upon for the Company by Baker & Botts, L.L.P. Robert L. Stillwell, a
partner of Baker & Botts, L.L.P., is a director of the Company and owns 26,500
shares of Common Stock. Certain legal matters will be passed upon for the Dealer
Manager by Simpson Thacher & Bartlett (a partnership which includes professional
corporations), New York, New York.
EXPERTS
The Consolidated Financial Statements included and incorporated by
reference in this Prospectus and elsewhere in the Registration Statement, to the
extent and for the periods indicated in their report, have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
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<PAGE> 95
Reference is made to said report which is modified to include a discussion of
substantial doubt as to Mesa's ability to continue as a going concern as
discussed further in Note 2 of Notes to the audited Consolidated Financial
Statements.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-3 (the "Registration Statement") under the Securities Act with respect to the
securities offered by this Prospectus. This Prospectus constitutes a part of the
Registration Statement and does not contain all of the information set forth in
the Registration Statement, certain parts of which are omitted from this
Prospectus as permitted by the rules and regulations of the Commission.
Statements made in this Prospectus regarding the contents of any contract,
agreement or other document are not necessarily complete. With respect to each
contract, agreement or other document filed with the Commission as an exhibit to
the Registration Statement, reference is made to the exhibit for further
information regarding the contents thereof, and each such statement is qualified
in its entirety by such reference. For further information regarding Mesa and
the securities offered hereby, reference is made to the Registration Statement,
including the exhibits and schedules thereto.
The Registration Statement, including the exhibits and schedules thereto,
is available for inspection at, and copies of such materials may be obtained at
prescribed rates from, the public reference facilities maintained by the
Commission at its principal offices located at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at its regional offices located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and Seven World Trade Center, 13th Floor, New York, New York 10048.
Mesa is subject to the informational requirements of the Exchange Act and
in accordance with the Exchange Act files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the principal and regional offices of
the Commission set forth above. Such reports, proxy statements and other
information concerning the Parent can also be inspected at the office of the New
York Stock Exchange, 20 Broad Street, New York, New York 10005, the exchange on
which the Common Stock is listed.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Incorporated by reference in this Prospectus, and subject in each case to
information contained in this Prospectus, are the following documents filed by
Mesa with the Commission pursuant to the Exchange Act: (1) Mesa's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995; (2) Mesa's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996; (3) Mesa's Current
Report on Form 8-K dated March 1, 1996; (4) Mesa's Current Report on Form 8-K
dated April 29, 1996; and (5) Mesa's Proxy Statement dated May 24, 1996.
Each document filed by Mesa pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act subsequent to the date of this Prospectus and prior to the
termination of the Rights Offering shall be deemed to be incorporated by
reference in this Prospectus and to be a part of this Prospectus from the date
of filing of such document. Any statement contained in a document incorporated
or deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statements as modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
Mesa will provide without charge to each person, including any beneficial
owner, to whom this Prospectus is delivered, upon the written or oral request of
such person, a copy of any and all of the documents incorporated by reference
herein (other than exhibits to such documents unless such exhibits are
specifically incorporated by reference in such documents). Such request should
be directed to Investor Relations, MESA Inc., 1400 Williams Square West, 5205
North O'Connor Boulevard, Irving, Texas 75039 (telephone: (214) 444-9001).
94
<PAGE> 96
GLOSSARY OF SELECTED OIL AND GAS TERMS
The following are abbreviations and definitions of certain terms commonly
used in the oil and gas industry and this Prospectus.
"Bbl" means a barrel of oil and condensate or natural gas liquids.
"Bcf" means billion cubic feet of natural gas.
"Bcfe" means billion cubic feet of natural gas equivalents.
"Btu" or "British Thermal Unit" means the quantity of heat required to
raise the temperature of one pound of water by one degree Fahrenheit.
"Condensate" means a hydrocarbon mixture that becomes liquid and separates
from natural gas when the gas is produced and is similar to crude oil.
"Development well" means a well drilled within the proved area of an oil or
gas reservoir to the depth of a stratigraphic horizon known to be productive.
"Gross," when used with respect to acres or wells, refers to the total
acres or wells in which Mesa has a working interest.
"MBbls" means thousands of barrels of oil.
"Mcf" means thousand cubic feet of natural gas.
"Mcfe" means thousand cubic feet of natural gas equivalents.
"MMBbls" means millions of barrels of oil.
"MMBtu" means one million British Thermal Units.
"MMcf" means million cubic feet of natural gas.
"MMcfe" means million cubic feet of natural gas equivalents.
"Natural gas equivalents" means a volume, expressed in Mcf's of natural
gas, that includes not only natural gas but also oil or natural gas liquids
converted to an equivalent quantity of natural gas on an energy equivalent
basis. Equivalent gas reserves are based on a conversion factor of 6 Mcf of gas
per barrel of liquids.
"Net," when used with respect to acres or wells, refers to gross acres of
wells multiplied, in each case, by the percentage working interest owned by
Mesa.
"Net production" means production that is owned by Mesa less royalties and
production due others.
"Oil" means crude oil or condensate.
"Operator" means the individual or company responsible for the exploration,
development and production of an oil or gas well or lease.
"Present Value of Future Net Revenues" or "Present Value of Proved
Reserves" means the present value of estimated future revenues to be generated
from the production of proved reserves calculated in accordance with Commission
guidelines, net of estimated production and future development costs, using
prices and costs as of the date of estimation without future escalation, except
as otherwise provided by contract, without giving effect to non-property related
expenses such as general and administrative expenses, debt service, future
income tax expense and depreciation, depletion and amortization, and discounted
using an annual discount rate of 10%.
"Proved developed reserves" means reserves that can be expected to be
recovered through existing wells with existing equipment and operating methods.
Additional oil and gas expected to be obtained through the application of fluid
injection or other improved recovery techniques for supplementing the natural
forces and mechanisms of primary recovery will be included as "proved developed
reserves" only after testing by a pilot
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<PAGE> 97
project or after the operation of an installed program has confirmed through
production response that increased recovery will be achieved.
"Proved reserves" means the estimated quantities of crude oil, natural gas
and natural gas liquids that geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions (i.e., prices and costs as of
the date the estimate is made). Prices include consideration of changes in
existing prices provided only by contractual arrangements, but not on escalation
based upon future conditions.
i. Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation test. The
area of a reservoir considered proved includes (A) that portion delineated
by drilling and defined by gas-oil and/or oil-water contacts, if any; and
(B) the immediately adjoining portions not yet drilled, but which can be
reasonably judged as economically productive on the basis of available
geological and engineering data. In the absence of information on fluid
contacts, the lowest known structural occurrence of hydrocarbons controls
the lower proved limit of the reservoir.
ii. Reserves that can be produced economically through application of
improved recovery techniques (such as fluid injection) are included in the
"proved" classification when successful testing by a pilot project, or the
operation of an installed program in the reservoir, provides support for
the engineering analysis on which the project or program was based.
iii. Estimates of proved reserves do not include the following: (A)
oil that may become available from known reservoirs but is classified
separately as "indicated additional reserve"; (B) crude oil, natural gas
and natural gas liquids, the recovery of which is subject to reasonable
doubt because of uncertainty as to geology, reservoir characteristics or
economic factors; (C) crude oil, natural gas and natural gas liquids that
may occur in undrilled prospects; and (D) crude oil, natural gas and
natural gas liquids that may be recovered from oil shales, coal, gilsonite
and other such sources.
"Proved undeveloped reserves" means reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion. Reserves on undrilled
acreage is limited to those drilling units offsetting productive units that are
reasonably certain of production when drilled. Proved reserves for other
undrilled units can be claimed only where it can be demonstrated with certainty
that there is continuity of production from the existing productive formation.
Under no circumstances are estimates for proved undeveloped reserves
attributable to any acreage for which an application of fluid injection or other
improved recovery technique is contemplated, unless such techniques have been
proved effective by actual tests in the area and in the same reservoir.
"Reserves" means proved reserves.
"Royalty" means an interest in an oil and gas lease that gives the owner of
the interest the right to receive a portion of the production from the leased
acreage (or of the proceeds of the sale thereof), but generally does not require
the owner to pay any portion of the costs of drilling or operating the wells on
the leased acreage. Royalties may be either landowner's royalties, which are
reserved by the owner of the leased acreage at the time the lease is granted, or
overriding royalties, which are usually reserved by the owner of the leasehold
in connection with a transfer to a subsequent owner.
"Tcfe" means trillion cubic feet of natural gas equivalents.
"3-D seismic" means seismic data that are acquired and processed to yield a
three-dimensional picture of the subsurface.
"Working interest" means an interest in an oil and gas lease that gives the
owner of the interest the right to drill for and produce oil and gas on the
leased acreage and requires the owner to pay a share of the costs of drilling
and production operations. The share of production to which a working interest
owner is entitled will always be smaller than the share of costs that the
working interest owner is required to bear, with the balance of the production
accruing to the owners of royalties. For example, the owner of a 100% working
interest in a lease burdened only by a landowner's royalty of 12.5% would be
required to pay 100% of the costs of a well but would be entitled to retain only
87.5% of the production.
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<PAGE> 98
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MESA Inc. Consolidated Financial Statements for the Three Months Ended March 31, 1996
and 1995
Consolidated Statements of Operations............................................... F-2
Consolidated Balance Sheets......................................................... F-3
Consolidated Statements of Cash Flows............................................... F-4
Consolidated Statements of Changes in Stockholders' Equity.......................... F-5
Notes to Consolidated Financial Statements.......................................... F-6
MESA Inc. Consolidated Financial Statements for the Years Ended December 31, 1995
and 1994
Report of Independent Public Accountants............................................ F-22
Consolidated Statements of Operations............................................... F-23
Consolidated Balance Sheets......................................................... F-24
Consolidated Statements of Cash Flows............................................... F-25
Consolidated Statements of Changes in Stockholders' Equity.......................... F-26
Notes to Consolidated Financial Statements.......................................... F-27
Supplemental Financial Data......................................................... F-53
</TABLE>
F-1
<PAGE> 99
MESA INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1995 1996
-------- --------
<S> <C> <C>
REVENUES:
Natural gas.................................................................... $ 35,856 $ 50,567
Natural gas liquids............................................................ 18,206 23,136
Oil and condensate............................................................. 5,393 4,363
Other.......................................................................... 2,792 2,577
-------- --------
62,247 80,643
-------- --------
COSTS AND EXPENSES:
Lease operating................................................................ 12,574 13,544
Production and other taxes..................................................... 4,745 5,406
Exploration charges............................................................ 1,304 544
General and administrative..................................................... 6,644 5,584
Depreciation, depletion and amortization....................................... 21,006 30,242
-------- --------
46,273 55,320
-------- --------
OPERATING INCOME................................................................. 15,974 25,323
-------- --------
OTHER INCOME (EXPENSE):
Interest income................................................................ 3,909 3,217
Interest expense............................................................... (36,663) (37,749)
Gains on investments........................................................... 4,553 8,763
Gain from collection of interest from Bicoastal Corporation.................... 4,653 2,548
Other.......................................................................... (320) (1,045)
-------- --------
(23,868) (24,266)
-------- --------
NET INCOME (LOSS)................................................................ $ (7,894) $ 1,057
======== ========
NET INCOME (LOSS) PER COMMON SHARE............................................... $ (.12) $ .02
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING....................................... 64,050 64,050
======== ========
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-2
<PAGE> 100
MESA INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
1996
DECEMBER 31, -----------
1995
------------ (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash investments.............................................. $ 149,143 $ 115,755
Investments............................................................ 38,280 39,956
Accounts and notes receivable.......................................... 44,734 40,485
Other.................................................................. 4,590 6,663
---------- ----------
Total current assets............................................ 236,747 202,859
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Oil and gas properties, wells and equipment using the successful
efforts method of accounting......................................... 1,900,163 1,907,487
Office and other....................................................... 41,603 41,783
Accumulated depreciation, depletion and amortization................... (859,077) (887,232)
---------- ----------
1,082,689 1,062,038
---------- ----------
OTHER ASSETS:
Restricted cash of subsidiary partnership.............................. 57,731 56,541
Gas balancing receivable............................................... 56,020 58,145
Other.................................................................. 31,509 29,513
---------- ----------
145,260 144,199
---------- ----------
$1,464,696 $1,409,096
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities on long-term debt................................... $ 101,413 $ 92,502
Accounts payable and accrued liabilities............................... 31,068 30,712
Interest payable....................................................... 60,465 26,887
---------- ----------
Total current liabilities....................................... 192,946 150,101
---------- ----------
LONG-TERM DEBT........................................................... 1,135,330 1,121,768
---------- ----------
DEFERRED REVENUE......................................................... 17,578 17,328
---------- ----------
OTHER LIABILITIES........................................................ 51,838 51,838
---------- ----------
CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, authorized 10,000,000 shares; no
shares issued and outstanding........................................ -- --
Common stock, $.01 par value, authorized 100,000,000 shares;
outstanding 64,050,009 shares........................................ 640 640
Additional paid-in capital............................................. 398,965 398,965
Accumulated deficit.................................................... (332,601) (331,544)
---------- ----------
67,004 68,061
---------- ----------
$1,464,696 $1,409,096
========== ==========
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-3
<PAGE> 101
MESA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1995 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................................................. $ (7,894) $ 1,057
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation, depletion and amortization..................................... 21,006 30,242
Accreted interest on discount notes.......................................... 19,585 --
Gains from investments....................................................... (4,553) (8,763)
Changes in operating receivables and payables................................ (16,875) (35,142)
Changes in investments, net.................................................. 16,038 7,087
Other........................................................................ 1,886 3,288
-------- --------
Cash provided by (used in) operating activities......................... 29,193 (2,231)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................................... (7,039) (9,754)
Other.......................................................................... (3,230) (228)
-------- --------
Cash used in investing activities....................................... (10,269) (9,982)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt................................................... -- (22,365)
Other.......................................................................... 2,150 1,190
-------- --------
Cash provided by (used in) financing activities......................... 2,150 (21,175)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH INVESTMENTS............................. 21,074 (33,388)
CASH AND CASH INVESTMENTS AT BEGINNING OF PERIOD................................. 143,422 149,143
-------- --------
CASH AND CASH INVESTMENTS AT END OF PERIOD....................................... $164,496 $115,755
======== ========
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-4
<PAGE> 102
MESA INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
------ ------ ---------- -----------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995................................ 64,050 $640 $398,965 $(332,601)
Net income.............................................. -- -- -- 1,057
------ ---- -------- ---------
BALANCE, March 31, 1996................................... 64,050 $640 $398,965 $(331,544)
====== ==== ======== =========
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-5
<PAGE> 103
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MESA Inc., a Texas corporation, was formed in 1991 in connection with a
transaction which reorganized the business of Mesa Limited Partnership (the
"Partnership") into corporate form. The Partnership was formed in 1985 to
succeed to the business of Mesa Petroleum Co. ("Original Mesa"). Unless the
context otherwise requires, as used herein the term "Mesa" refers to MESA Inc.
and its subsidiaries taken as a whole and includes its predecessors.
Mesa is primarily in the business of exploring for, developing, producing,
processing and selling natural gas and oil in the United States. Over 65% of
Mesa's annual equivalent production is natural gas and the balance is
principally natural gas liquids. Mesa's primary producing areas are the Hugoton
field of southwest Kansas, the West Panhandle field of Texas and the Gulf of
Mexico offshore Texas and Louisiana. Production from Mesa's properties has
access to a substantial portion of the major metropolitan markets in the United
States, primarily in the midwest and northeast, through numerous pipelines and
other purchasers.
The consolidated financial statements of Mesa for the three month period
ended March 31, 1996 and 1995, are unaudited but reflect, in the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to fairly present the results for such periods. The preparation of the
consolidated financial statements of Mesa in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from the estimates. The
accompanying financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto contained in Mesa's Annual
Report on Form 10-K ("Form 10-K") for the year ended December 31, 1995.
PRINCIPLES OF CONSOLIDATION
Mesa owns and operates its oil and gas properties and other assets through
its direct and indirect subsidiaries. The accompanying consolidated financial
statements reflect the consolidated accounts of Mesa and its subsidiaries after
elimination of intercompany transactions.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, Mesa classifies all cash
investments with original maturities of three months or less as cash and cash
investments.
INVESTMENTS
Mesa invests from time to time in marketable equity and other securities
which are classified as "trading securities" and reported at fair value, with
unrealized gains and losses included in net income (loss) for the current
period. The cost of securities sold is determined on the first-in, first-out
basis.
Mesa enters into various energy futures contracts including New York
Mercantile Exchange ("NYMEX") futures contracts, commodity price swaps and
options which are not intended to be hedges of future natural gas or crude oil
production. Investments in such contracts are adjusted to market prices at the
end of each reporting period and gains and losses are included in gains from
investments in the statements of operations.
F-6
<PAGE> 104
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OIL AND GAS PROPERTIES
Under the successful efforts method of accounting, all costs of acquiring
unproved oil and gas properties and drilling and equipping exploratory wells are
capitalized pending determination of whether the properties have proved
reserves. If an exploratory well is determined to be nonproductive, the drilling
and equipment costs of the well are expensed at that time. All development
drilling and equipment costs are capitalized. Capitalized costs of proved
properties and estimated future dismantlement and abandonment costs are
amortized on a property-by-property basis using the unit-of-production method.
Geological and geophysical costs and delay rentals are expensed as incurred.
In the first quarter of 1996 Mesa adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," which establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill. SFAS No. 121 requires a review for impairment whenever
circumstances indicate that the carrying amount of an asset may not be
recoverable. Mesa will estimate future cash flows (undiscounted and without
interest charges) expected to result from use of an asset. Impairment is only
recognized if the carrying amount of an asset is greater than the expected
future cash flows and the amount of impairment is based on the fair value of the
asset. An impairment charge of $6.8 million is included in depreciation,
depletion and amortization expense for the first quarter of 1996 in the
consolidated statements of operations which impairment relates primarily to a
Gulf Coast oil and gas property.
NET INCOME (LOSS) PER COMMON SHARE
The computations of net income (loss) per common share are based on the
weighted average number of common shares outstanding during each period.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Mesa's financial instruments consist of cash, marketable securities,
short-term trade receivables and payables, restricted cash, notes receivable,
and long-term debt. The carrying values of cash, marketable securities,
short-term trade receivables and payables, restricted cash, and notes receivable
approximate fair value. The fair value of long-term debt is estimated based on
the market prices for Mesa's publicly traded debt and on current rates available
for similar debt with similar maturities and security for Mesa's remaining debt
(see Note 4).
GAS REVENUES
Mesa recognizes its ownership interest in natural gas production as
revenue. Actual production quantities sold by Mesa may be different than its
ownership share of production in a given period. If Mesa's sales exceed its
ownership share of production, the differences are recorded as deferred revenue.
Gas balancing receivables are recorded when Mesa's ownership share of production
exceeds sales. Mesa also accrues production expenses related to its ownership
share of production. At March 31, 1996, Mesa had produced and sold a net 23.4
billion cubic feet ("Bcf") of natural gas less than its ownership share of
production and had recorded gas balancing receivables, net of deferred revenues,
of approximately $41.2 million. Substantially all of Mesa's gas balancing
receivables and deferred revenue are classified as long-term.
Mesa periodically enters into NYMEX natural gas futures contracts as a
hedge against natural gas price fluctuations. Gains or losses on such futures
contracts are deferred and recognized as natural gas revenue when the hedged
production occurs. Mesa recognized net gains of $4.9 million in the first
quarter of 1995 related to hedging activities and did not hedge any of its
natural gas production for the first quarter of 1996.
F-7
<PAGE> 105
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TAXES
Mesa provides for income taxes using the asset and liability method under
which deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. The effect on deferred taxes
of a change in tax laws or tax rates is recognized in income in the period that
includes the enactment date.
OTHER
In October 1995 the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which establishes accounting and
reporting standards for stock-based employee compensation plans. SFAS No. 123
defines a fair value-based method of accounting for stock options or similar
equity instruments, but allows companies to continue to measure compensation
cost using the intrinsic value-based method prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Mesa will not adopt the fair value-based method of accounting for its
option plans and, accordingly, adoption of this statement will have no impact on
Mesa's results of operations.
(2) RESOURCES AND LIQUIDITY
LONG-TERM DEBT AND CASH FLOWS
Mesa is highly leveraged with over $1.2 billion of long-term debt,
including current maturities. The major components of Mesa's debt are (1) $492.3
million of secured notes ("HCLP Secured Notes") due in installments through 2012
at Hugoton Capital Limited Partnership ("HCLP"), an indirect, wholly owned
subsidiary, (2) $51.1 million (plus $11.4 million in letter of credit
obligations) outstanding under a bank credit facility, due in installments
through 1997, with the majority of such debt due on June 23, 1997, (3) $39.7
million of unsecured discount notes due on June 30, 1996, and (4) $617.4 million
of secured discount notes due on June 30, 1998. Both the secured and unsecured
discount notes are subordinate to the bank credit facility. See Note 4 for a
complete description of Mesa's long-term debt.
Mesa is required to make significant principal and interest payments on its
debt during the remainder of 1996. Mesa is required to make $81.6 million of
principal and interest payments related to its discount notes and $12.5 million
of principal payments related to its bank credit facility by June 30, 1996. In
addition, Mesa is required to pay $39.4 million in interest on its secured
discount notes on December 31, 1996. In the aggregate, assuming no acceleration
of amounts due under any of Mesa's long-term debt agreements, Mesa's principal
and interest obligations for the remainder of 1996, excluding HCLP, will total
almost $140 million.
The assets and cash flows of HCLP that are subject to the mortgage securing
HCLP's debt are dedicated to service HCLP's debt and are not available to pay
creditors of Mesa or its subsidiaries other than HCLP.
Mesa's bank credit facility contains a covenant requiring it to maintain
tangible adjusted equity, as defined, of at least $50 million. At March 31,
1996, tangible adjusted equity was approximately $67.8 million. Assuming no
changes in its capital structure and no significant transactions completed, Mesa
expects that it will incur losses from operations for the remainder of 1996 and
that its tangible adjusted equity will fall below $50 million during 1996. If
and when Mesa determines that tangible adjusted equity is below $50 million, an
Event of Default, as defined, would occur under the bank credit facility and the
bank would have the right to accelerate the payment of all outstanding principal
and require cash collateralization of letters of credit. An Event of Default
under the bank credit facility would cause a cross default under Mesa's secured
and unsecured discount note indentures unless and until the bank credit facility
default were cured or waived or the debt under the bank credit facility were
repaid or otherwise discharged. The Events of Default, if they
F-8
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MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
occur and are not waived, could result in acceleration of approximately $656
million of long-term debt principal otherwise due in mid-1997 and mid-1998.
Pursuant to the subordination provisions of the discount note indentures, Mesa
would be prohibited from making any payments on such notes for specified periods
upon and during the continuance of any Event of Default under the bank credit
facility.
As a result of improved results of operations in the first quarter of 1996,
Mesa now expects that cash generated by its operations, together with available
cash and investment balances, will be sufficient to fund the debt principal and
interest obligations due by June 30, 1996. In addition, if the obligations under
the bank credit facility are accelerated and become due in the second half of
1996 as discussed above, Mesa expects to have sufficient cash to repay those
obligations. However, whether Mesa would have sufficient cash to pay both those
obligations and the interest payments on its secured discount notes due at
December 31, 1996 would depend upon results of operations for the remainder of
1996. Mesa will make decisions regarding payments on its debt as such payments
come due, taking into account the status at such time of the Recapitalization
discussed below.
PROPOSED RECAPITALIZATION
On April 26, 1996, Mesa entered into a stock purchase agreement with
DNR-MESA Holdings L.P., a Texas limited partnership ("DNR"), whose sole general
partner is Rainwater Inc., a Texas corporation owned by Richard E. Rainwater.
The agreement contemplates that Mesa will issue $265 million in new equity and
will repay and/or refinance substantially all of its $1.2 billion of existing
debt (the "Recapitalization"). DNR will purchase approximately 58.8 million
shares of a new class of convertible preferred stock entitled Series B 8%
Cumulative Convertible Preferred Stock ("Series B Preferred") in a private
placement and Mesa will offer approximately 58.4 million shares of Series A 8%
Cumulative Convertible Preferred Stock ("Series A Preferred") to Mesa
stockholders in a rights offering (the "Rights Offering"). DNR will provide a
standby commitment to purchase an additional number of shares of Series B
Preferred equal to the number of shares of Series A Preferred not subscribed to
in the Rights Offering. The rights, to be distributed to common stockholders on
a pro rata basis, will allow the stockholders to purchase, in respect of each
share of common stock, .912 shares of Series A Preferred at $2.26 per share, the
same per share price at which DNR will purchase shares of Series B Preferred.
The rights will be transferrable and holders of the rights will be offered
over-subscription privileges for shares not purchased by other rights holders.
Each share of Series A and B Preferred will be convertible into one share
of Mesa common stock at any time prior to mandatory redemption in 2008. An
annual 8% pay-in-kind dividend will be paid on the shares during the first four
years following issuance. Thereafter, the 8% dividend may, at the option of
Mesa, be paid in cash or additional shares depending on whether certain
financial tests are met and subject to any limitations in Mesa's debt
agreements.
The Series A and B Preferred will represent 64.7% of the fully diluted
common shares at the time of issuance and 71.5% after the mandatory four-year
pay-in-kind period, excluding stock options and assuming no other stock issuance
by Mesa. The Series A and B Preferred will have a liquidation preference per
share equal to $2.26 plus accrued and unpaid dividends. The terms of the Series
A and Series B Preferred are substantially identical except for certain voting
rights and certain provisions relating to transferability. The Series A and B
Preferred will vote with the common stock as a single class on all matters,
except as otherwise required by law and except for certain special voting rights
of the Series B Preferred, including the right of the holders of the Series B
Preferred to nominate and elect a majority of Mesa's Board of Directors for so
long as DNR and its affiliates meet certain minimum stock ownership requirements
and certain rights of the holders of the Series A Preferred to elect two
directors in the event of certain dividend arrearages.
The sale of shares to DNR and certain other matters will be submitted to a
vote of stockholders at a special meeting expected to take place in June 1996.
Mesa expects to issue shares to DNR and to complete the refinancing of its
existing debt promptly after that meeting. The Rights Offering would commence
F-9
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MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
promptly thereafter. On May 9, 1996, Mesa filed a registration statement with
the Securities and Exchange Commission (the "SEC") for the issuance and sale of
$132 million of Series A Preferred through the Rights Offering.
On May 7, 1996, Mesa and Mesa Operating Co., a direct wholly owned
subsidiary of Mesa ("MOC"), filed a registration statement with the SEC for the
issuance and sale of $500 million of senior subordinated notes ("New Notes")
consisting of $325 million of senior subordinated notes and $175 million of
senior subordinated discount notes, both with ten year maturities. In addition
Mesa has received a commitment from a group of banks for a new $500 million
senior secured revolving credit facility ("New Credit Facility"). Borrowings
under the New Credit Facility and the New Notes, together with existing cash and
investment balances and the $265 million of new equity, will be used to repay
and/or refinance substantially all of Mesa's existing debt. MOC will be the
borrower under the New Credit Facility and the issuer of the New Notes. Mesa
will unconditionally guarantee MOC's obligations under both the New Credit
Facility and the New Notes.
In connection with the Recapitalization, Mesa's other direct wholly owned
subsidiaries, Mesa Holding Co. ("MHC") and Hugoton Management Company ("HMC"),
as well as HCLP, will be merged with and into MOC, with MOC being the surviving
entity. As a result, MOC will be Mesa's only direct subsidiary as well as its
only significant subsidiary. Of the subsidiaries of MOC that will exist
following the Recapitalization, none will have any operations other than Mesa
Environmental Ventures Co. ("MEV") and Mesa Transmission Co. ("Mesa
Transmission"). Neither MEV nor Mesa Transmission will guarantee any of MOC's or
Mesa's debt. Neither MEV's or Mesa Transmission's results of operations are
material to those of Mesa or, following the Recapitalization, to those of MOC.
After the Recapitalization, it is expected that the consolidated financial
statements of MOC and its subsidiaries will be substantially the same as those
of Mesa and its subsidiaries. See Note 6 for disclosure.
The consummation of the Recapitalization is subject to certain conditions
including stockholder approval and completion of the refinancing.
EFFECT OF THE RECAPITALIZATION
The Recapitalization will enhance Mesa's ability to compete in the oil and
gas industry by substantially increasing its cash flow available for investment
and improving its ability to attract capital, which will increase its ability to
pursue investment opportunities. Specifically, Mesa's financial condition will
improve significantly as a result of the Recapitalization due to (i) a
significant reduction in total debt outstanding, (ii) a reduction in annual cash
interest expense of approximately $75 million, (iii) the implementation of a
cost savings program designed to initially reduce annual general and
administrative and other operating overhead expenses by approximately $10
million, and (iv) the extension of maturities on its long-term debt, which will
eliminate Mesa's present liquidity concerns.
The expected reduction of annual cash interest expense is based on the
following assumptions: (i) initial borrowings under the New Credit Facility of
approximately $350 million and (ii) annual interest rates of approximately 7%
under the New Credit Facility, 11% under the senior subordinated notes and
12 1/4% under the senior subordinated discount notes. Actual borrowings and
interest rates under the New Credit Facility will fluctuate over time and will
affect Mesa's actual cash interest expense.
Management believes that cash from operating activities, together with as
much as $150 million of availability under the $500 million New Credit Facility
following the completion of the Recapitalization, will be sufficient for Mesa to
meet its debt service obligations and scheduled capital expenditures, and to
fund its working capital needs for the next several years following the
Recapitalization.
F-10
<PAGE> 108
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(3) INVESTMENTS
The value of investments are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ---------
<S> <C> <C>
NYMEX Futures Contracts:
Margin Cash...................................................... $ 17,498 $33,078
Unrealized gain in trading contracts............................. 7,558 4,963
Commodity Price Swaps:
Margin Cash...................................................... 2,434 548
Unrealized gain (loss) in price swaps............................ (811) 1,367
Natural Gas Options:
Premiums......................................................... 66 --
Unrealized gain in trading options............................... 978 --
Equity securities:
Cost............................................................. 10,719 --
Unrealized loss.................................................. (162) --
------- -------
Total market value........................................ $ 38,280 $39,956
======= =======
</TABLE>
For the three months ended March 31, 1996, Mesa recognized net gains of
approximately $8.8 million from its investments compared with net gains for the
same period in 1995 of $4.6 million. These gains do not include gains or losses
from natural gas futures contracts accounted for a hedge of natural gas
production. Hedge gains or losses are included in natural gas revenue in the
period in which the hedged production occurs (see Note 1).
The net investment gains and losses recognized during a period include both
realized and unrealized gains and losses. Mesa realized net gains from
investments of $10.0 million for the three months ended March 31, 1996, and $5.9
million for the same period in 1995. At March 31, 1996, Mesa had recognized but
not realized approximately $6.3 million of gains associated primarily with
natural gas futures.
In 1995 Mesa invested in certain over-the-counter commodity price swap
agreements for trading purposes. Mesa is required to make payments to (or
receive payments from) a counter party based on the differential between a fixed
and a variable price for specified natural gas volumes. Mesa's agreements were
to expire on the last day of trading for April, May and June 1996 natural gas
futures contracts as determined by the NYMEX. During the three months ended
March 31, 1996, Mesa closed out certain of these positions pertaining to 6.9
million British thermal units ("BTUs") of natural gas at a gain of $1.7 million.
Mesa was the fixed price payor on a notional quantity of 3.2 million BTUs of
natural gas (which remained open from year-end) with a fair value of $7.1
million at March 31, 1996. The remaining agreements were to expire on the last
trading day for June 1996 natural gas futures contracts as determined by the
NYMEX and were closed in mid-April at a gain of approximately $1.7 million. The
average fair value of all commodity price swaps during the three months ended
March 31, 1996 was $15.1 million. In 1995 Mesa also entered into 1,800 over-the-
counter natural gas futures call and put options contracts (each contract
represents 10,000 MMBTUs of natural gas). Such contracts were closed early in
the first quarter of 1996 at a gain of $1.1 million. The average
F-11
<PAGE> 109
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fair value of such option contracts while open was $.8 million. The counter
party to these instruments is a credit-worthy financial institution which is a
recognized market maker. Mesa believes the risk of incurring losses related to
the credit risk of the party is remote.
(4) LONG-TERM DEBT
Long-term debt and current maturities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ----------
<S> <C> <C>
HCLP Secured Notes................................................. $ 504,674 $ 492,309
Credit Agreement................................................... 61,131 51,131
12 3/4% secured discount notes..................................... 618,518 618,410
12 3/4% unsecured discount notes................................... 39,725 39,725
13 1/2% subordinated notes......................................... 7,390 7,390
Other.............................................................. 5,305 5,305
---------- ----------
1,236,743 1,214,270
Current maturities................................................. (101,413) (92,502)
---------- ----------
Long-term debt..................................................... $1,135,330 $1,121,768
========== ==========
</TABLE>
HCLP SECURED NOTES
In 1991 HCLP issued $616 million of HCLP Secured Notes in a private
placement with a group of institutional lenders. The issuance funded a $66
million restricted cash balance within HCLP, which is available to supplement
cash flows from the HCLP properties in the event such cash flows are not
sufficient to fund principal and interest payments on the HCLP Secured Notes
when due. As the HCLP Secured Notes are repaid, the required restricted cash
balance is reduced. HCLP holds substantially all of Mesa's Hugoton field natural
gas properties.
The HCLP Secured Notes were issued in 15 series and have final stated
maturities extending through 2012 but can be retired earlier. The HCLP Secured
Notes outstanding at March 31, 1996, bear interest at fixed rates ranging from
9.05% to 11.30% per annum (weighted average 10.35%). Principal payments, if
required, and interest payments are made semiannually. Provisions in the HCLP
Secured Note agreements require interest rate premiums to be paid to the
noteholders in the event that the HCLP Secured Notes are repaid more rapidly or
slowly than under the initial scheduled amortization. Beginning in August 1994,
HCLP elected to make principal payments on the HCLP Secured Notes based on
actual production, rather than according to the initial scheduled amortization.
As a result, interest rate premiums at a rate of 1.5% per annum will be applied
to those principal amounts not paid according to the initial scheduled
amortization and .35% per annum will be applied to the remaining notes. Such
premiums have increased the effective weighted average interest rate payable on
the remaining HCLP Secured Notes outstanding to 10.84% per annum at March 31,
1996.
The HCLP Secured Note agreements contain various covenants which, among
other things, limit HCLP's ability to sell or acquire oil and gas property
interests, incur additional indebtedness, make unscheduled capital expenditures,
make distributions of property or funds subject to the mortgage, or enter into
certain types of long-term contracts or forward sales of production. The
agreements also require HCLP to maintain separate existence from Mesa and its
other subsidiaries. The assets of HCLP that are subject to the mortgage securing
the HCLP Secured Notes are dedicated to service HCLP's debt and are not
available to pay creditors of Mesa or its subsidiaries other than HCLP. Any cash
not subject to the mortgage is available for distribution to Mesa's subsidiaries
which own HCLP's equity.
F-12
<PAGE> 110
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The HCLP Secured Note agreements also contain a provision which requires
calculation and payment of premiums on early retirement of the HCLP Secured
Notes. The prepayment premium calculation is based on prevailing interest rates
at the date of redemption. In the aggregate, such premiums would have totaled
$60 million as of March 31, 1996 and approximately $55 million on May 14, 1996.
Mesa is currently negotiating with the holders of the HCLP Secured Notes as to
the amount of prepayment premium, if any, to be paid upon redemption of the HCLP
Secured Notes.
Revenues received from production from HCLP's Hugoton properties are
deposited in a collection account maintained by a collateral agent (the
"Collateral Agent"). The Collateral Agent releases or reserves funds, as
appropriate, for the payment of royalties, taxes, operating costs, capital
expenditures and principal and interest on the HCLP Secured Notes. Only after
all required payments have been made may any remaining funds held by the
Collateral Agent be released from the mortgage.
In accordance with the HCLP Secured Note agreements on April 19, 1996, HCLP
obtained its reserve estimates as of December 31, 1995, prepared by an
independent engineering consultant covering its Hugoton field properties. The
reserve quantities in such reserve report are compared to the initial reserve
quantities set forth in the HCLP Secured Note agreements, adjusted for
production. The quantities in such reserve report were less than the adjusted
initial quantities, and a Deficit Reserve Amount ("DRA"), as defined, of .0215
Bcfe was determined to exist. To the extent a DRA exists, the Collateral Agent
may be required to retain additional funds in the collection account subject to
the mortgage for the repayment of the HCLP Secured Notes. However, HCLP
determined in accordance with the HCLP Secured Note agreements, that the DRA was
not so significant as to require additional funds to be retained in the
collection account subject to the mortgage for the repayment of the HCLP Secured
Notes.
The restricted cash balance and cash held by the Collateral Agent for
payment of interest and principal on the HCLP Secured Notes are invested by the
Collateral Agent under the terms of a guaranteed investment contract (the "GIC")
with Morgan Guaranty Trust Co. of New York ("Morgan"). Morgan was paid $13.9
million at the date of issuance of the HCLP Secured Notes to guarantee that
funds invested under the GIC would earn an interest rate equivalent to the
weighted average coupon rate on the outstanding principal balance of the HCLP
Secured Notes (10.35% at March 31, 1996). A portion of this amount may be
refunded if the HCLP Secured Notes are repaid earlier than if HCLP had produced
according to its scheduled production, depending primarily on prevailing
interest rates at that time.
HCLP's cash balances were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ---------
<S> <C> <C>
Subject to the mortgage............................................... $ 40,163 $35,894
Not subject to the mortgage........................................... 7,450 5,249
------- -------
Cash included in current assets....................................... $ 47,613 $41,143
======= =======
Restricted cash included in noncurrent assets......................... $ 57,731 $56,541
======= =======
Refundable GIC fee included in noncurrent assets...................... $ 9,010 $ 8,667
======= =======
</TABLE>
Mesa Operating Co. ("MOC"), a Mesa subsidiary which owns substantially all
of the limited partnership interest of HCLP, is party to a services agreement
with HCLP. MOC provides services necessary to operate the Hugoton field
properties and market production therefrom, process remittances of production
revenues and perform certain other administrative functions in exchange for a
services fee. The fee totaled approximately $5.3 million for the first three
months of 1996 and $5.1 million for the same period in 1995.
F-13
<PAGE> 111
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CREDIT AGREEMENT
As of March 31, 1996, Mesa had outstanding borrowings of approximately
$51.1 million and letter of credit obligations of $11.4 million under its $82.5
million bank credit facility, as amended (the "Credit Agreement"). The Credit
Agreement requires principal payments of $22.5 million in the first half of 1996
with the remainder due in June 1997 (including cash collateralization of letters
of credit outstanding at that time).
The rate of interest payable on borrowings under the Credit Agreement is
the lesser of the Eurodollar rate plus 2 1/2% or the prime rate plus 1/2%.
Obligations under the Credit Agreement are secured by a first lien on Mesa's
West Panhandle field properties, Mesa's equity interest in MOC and a 76% limited
partner interest in HCLP.
The Credit Agreement requires Mesa to maintain tangible adjusted equity, as
defined, of at least $50 million and available cash, as defined, of $32.5
million. At March 31, 1996, Mesa's tangible adjusted equity, as defined, was
approximately $67.8 million and available cash, as defined, was $113.5 million.
See Note 2 for discussion of the tangible adjusted equity covenant and its
potential effect on Mesa's liquidity.
The Credit Agreement also restricts, among other things, Mesa's ability to
incur additional indebtedness, create liens, pay dividends, acquire stock or
make investments, loans and advances.
DISCOUNT NOTES
In August 1993, Mesa issued approximately $435.5 million initial accreted
value ($569.2 million face amount), as defined, of 12 3/4% secured discount
notes due June 30, 1998, $136.9 million initial accreted value ($178.8 million
face amount) of 12 3/4% unsecured discount notes due June 30, 1996 (together,
the "Discount Notes") and $29.3 million principal amount of 0% convertible
notes. These notes were exchanged (the "Debt Exchange") for an aggregate $586.3
million of the outstanding 12% subordinated notes due 1996 (all of which have
been repaid) and 13 1/2% subordinated notes due 1999 (plus accrued interest
thereon). The 0% convertible notes were converted into approximately 7.5 million
shares of common stock in 1993. The Discount Notes rank pari passu with each
other, are senior to other subordinated debt and are subordinate to all
permitted first lien debt, as defined, including obligations under the Credit
Agreement.
In 1994, Mesa issued an additional $48.2 million face amount of 12 3/4%
secured discount notes and used the proceeds to settle a lawsuit. Also in 1994,
Mesa redeemed $139.1 million face amount of 12 3/4% unsecured discount notes
with proceeds from a public offering of Mesa common stock and from additional
borrowings under the Credit Agreement.
The Discount Notes did not accrue interest through June 30, 1995; however,
the accreted value, as defined, of both series increased at a rate of 12 3/4%
per year, compounded semiannually, until June 30, 1995. Beginning July 1, 1995,
each series began to accrue interest at an annual rate of 12 3/4%, payable in
cash semiannually in arrears, with the first payment due on December 31, 1995.
The 12 3/4% secured discount notes are secured by second liens on Mesa's
West Panhandle field properties and a 76% limited partner interest in HCLP, both
of which also secure obligations under the Credit Agreement. Mesa's right to
maintain first lien debt, as defined, is limited by the terms of the Discount
Notes to $82.5 million.
See Note 2 for a discussion of certain cross-default provisions in the
Discount Note indentures which could become effective if Mesa defaults under the
terms of the tangible adjusted equity covenant of the Credit Agreement.
The indentures governing the Discount Notes restrict, among other things,
Mesa's ability to incur additional indebtedness, pay dividends, acquire stock or
make investments, loans and advances.
F-14
<PAGE> 112
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUBORDINATED NOTES
The 13 1/2% subordinated notes are unsecured and mature in 1999. Interest
on these notes is payable semiannually in cash.
INTEREST AND MATURITIES
The aggregate interest payments, net of amounts capitalized, made during
the three months ended March 31, 1996 and 1995, were $70.8 million and $29.0
million, respectively. The interest payments in the first quarter of 1996
included a $42 million interest payment on January 2, 1996, according to terms
of the Discount Notes, related to Mesa's Discount Notes which was due December
31, 1995. Payment of approximately $19.7 million of interest incurred during the
three months ended March 31, 1995 was deferred under the terms of the Debt
Exchange until the repayment dates of the Discount Notes. Such interest is
included in interest expense in the consolidated statements of operations for
the first quarter of 1995.
The scheduled principal repayments on long-term debt for the remainder of
1996 and for the four succeeding years are as follows (in millions):
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000
----- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C>
HCLP Secured Notes...................................... $21.5 $33.3 $ 36.1 $37.1 $36.0
Credit Agreement(a)(b).................................. 12.5 38.6 -- -- --
12 3/4% secured discount notes(c)....................... -- -- 617.4 -- --
12 3/4% unsecured discount notes(c)..................... 39.7 -- -- -- --
13 1/2% subordinated notes.............................. -- -- -- 7.4 --
Other................................................... 5.3 -- -- -- --
----- ----- ------ ----- -----
Total.......................................... $79.0 $71.9 $653.5 $44.5 $36.0
===== ===== ====== ===== =====
</TABLE>
- ---------------
(a) Excludes approximately $11.4 million in letter of credit obligations
currently outstanding and required to be cash collateralized in June 1997.
(b) Maturities may be accelerated if tangible adjusted equity falls below $50
million. (See Note 2).
(c) Maturities may be accelerated if an Event of Default occurs and continues
under the Credit Agreement. (See Note 2).
FAIR VALUE OF LONG-TERM DEBT
The following is a summary of estimated fair value of Mesa's long-term debt
as of the years ended (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 MARCH 31, 1996
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
HCLP Secured Notes................................... $504,674 $568,641 $492,309 $539,078
Credit Agreement..................................... 61,131 61,131 51,131 51,131
12 3/4% secured discount notes....................... 618,518 541,905 618,410 606,042
12 3/4% unsecured discount notes..................... 39,725 35,262 39,725 39,700
13 1/2% subordinated notes........................... 7,390 7,390 7,390 7,390
</TABLE>
The fair value of long-term debt is estimated based on the market prices
for Mesa's publicly traded debt and on current rates available for similar debt
with similar maturities and security for Mesa's remaining debt. Based on the
current financial condition of Mesa, there is no assurance that Mesa could
obtain borrowings under long-term debt agreements with terms similar to those
described above and receive proceeds approximating the estimated fair values.
See Note 2 for proposed Recapitalization.
F-15
<PAGE> 113
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) CONTINGENCIES
MASTERSON
In February 1992 the current lessors of an oil and gas lease (the "Gas
Lease") dated April 30, 1955, between R. B. Masterson, et al., as lessor, and
Colorado Interstate Gas Company ("CIG"), as lessee, sued CIG in Federal District
Court in Amarillo, Texas, claiming that CIG had underpaid royalties due under
the Gas Lease. Under the agreements with CIG, Mesa has an entitlement to gas
produced from the Gas Lease. In August 1992 CIG filed a third-party complaint
against Mesa for any such royalty underpayments which may be allocable to Mesa.
Plaintiffs alleged that the underpayment was the result of CIG's use of an
improper gas sales price upon which to calculate royalties and that the proper
price should have been determined pursuant to a "favored-nations" clause in a
July 1, 1967, amendment to the Gas Lease (the "Gas Lease Amendment"). The
plaintiffs also sought a declaration by the court as to the proper price to be
used for calculating future royalties.
The plaintiffs alleged royalty underpayments of approximately $500 million
(including interest at 10%) covering the period from July 1, 1967, to the
present. In March 1995 the court made certain pretrial rulings that eliminated
approximately $400 million of the plaintiffs' claims (which related to periods
prior to October 1, 1989), but which also reduced a number of Mesa's defenses.
Mesa and CIG filed stipulations with the court whereby Mesa would have been
liable for between 50% and 60%, depending on the time period covered, of an
adverse judgment against CIG for post-February 1988 underpayments of royalties.
On March 22, 1995, a jury trial began and on May 4, 1995, the jury returned
its verdict. Among its findings, the jury determined that CIG had underpaid
royalties for the period after September 30, 1989, in the amount of
approximately $140,000. Although the plaintiffs argued that the
"favored-nations" clause entitled them to be paid for all of their gas at the
highest price voluntarily paid by CIG to any other lessor, the jury determined
that the plaintiffs were estopped from claiming that the "favored-nations"
clause provides for other than a pricing-scheme to pricing-scheme comparison. In
light of this determination, and the plaintiffs' stipulation that a
pricing-scheme to pricing-scheme comparison would not result in any "trigger
prices" or damages, defendants asked the court for a judgment that plaintiffs
take nothing. The court, on June 7, 1995, entered final judgment that plaintiffs
recover no monetary damages. The plaintiffs have filed a motion for new trial on
which the court has not yet ruled. Mesa cannot predict whether the court will
grant such motion or, if it does not, whether the plaintiffs will appeal the
court's final judgment. However, based on the jury verdict and final judgment,
Mesa does not expect the ultimate resolution of this lawsuit to have a material
adverse effect on its financial position or results of operations.
LEASE TERMINATION
In 1991 Mesa sold certain producing oil and gas properties to Seagull
Energy Company ("Seagull"). In 1994 two lawsuits were filed against Seagull in
the 100th District Court in Carson County, Texas, by certain land and royalty
owners claiming that certain of the oil and gas leases owned by Seagull have
terminated due to cessation in production and/or lack of production in paying
quantities occurring at various times from first production through 1994. In the
third quarter of 1995 Seagull filed third-party complaints against Mesa claiming
breach of warranty and false representation in connection with the sale of such
properties to Seagull. Mesa believes it has several defenses to these lawsuits
including a two-year limitation on indemnification set forth in the purchase and
sale agreement.
Seagull filed a similar third-party complaint against Mesa covering a
different lease in the 69th District Court in Moore County, Texas. Mesa believes
it has similar defenses in this case.
The plaintiffs in the cases against Seagull are seeking to terminate the
leases. Seagull, in its complaint against Mesa, is seeking unspecified damages
relating to any leases which are terminated.
F-16
<PAGE> 114
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Mesa does not expect the resolution of this lawsuit to have a material
adverse effect on its financial position or results of operations.
OTHER
Mesa is also a defendant in other lawsuits and has assumed liabilities
relating to Original Mesa and the Partnership. Mesa does not expect the
resolution of these other matters to have a material adverse effect on its
financial position or results of operations.
(6) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Mesa conducts its operations through various direct and indirect
subsidiaries. On December 31, 1995, Mesa's direct subsidiaries were MOC, Mesa
Holding Co. ("MHC") and Hugoton Management Co. ("HMC"), all of which were wholly
owned by Mesa. MOC owns all of Mesa's interest in the West Panhandle field of
Texas, the Gulf Coast and the Rocky Mountain areas, as well as a 98.6% limited
partnership interest in HCLP. MHC owns cash and securities, a 0.9% limited
partnership interest in HCLP and 100% of Mesa Environmental Ventures Co. ("Mesa
Environmental"), a company established to compete in the natural gas vehicle
market. HMC owns the 0.5% general partner interest in HCLP. HCLP owns
substantially all of Mesa's Hugoton field natural gas properties.
In early 1994 Mesa effected a series of merger transactions which resulted
in the conversion of the predecessors of MOC, MHC, and the other subsidiary
partnerships, other than HCLP, to corporate form and eliminated all of the
General Partner's minority interests in the subsidiaries.
Subsidiary Debt
HCLP, together with its wholly owned subsidiary Hugoton Capital Corporation
(a single purpose financing subsidiary of HCLP), are jointly and severally
liable as co-obligors on the HCLP Secured Notes (see Note 4). The assets and
cash flows of HCLP that are subject to the mortgage securing the HCLP Secured
Notes are dedicated to service the HCLP Secured Notes and are not available to
pay creditors of Mesa or its subsidiaries other than HCLP. Hugoton Capital
Corporation, which has insignificant assets and results of operations, is
included within HCLP in the condensed consolidating financial statements. MOC is
the borrower and primary obligor under, and Mesa has unconditionally guaranteed
MOC's obligations under, the Credit Agreement. Mesa, MOC and Mesa Capital Corp.
("Mesa Capital") are jointly and severally liable as co-obligors under the
13 1/2% subordinated notes and the Discount Notes. Mesa Capital is a wholly
owned financing subsidiary of MOC. Mesa Capital, which has insignificant assets
and results of operations, is included with MOC in the condensed consolidating
financial statements.
Other Mesa subsidiaries in the condensed consolidating financial statements
include MHC, HMC, and Mesa Environmental. No such other subsidiary is an obligor
or guarantor under any long term debt.
Intercompany Debt
As of December 31, 1993, MHC had intercompany payables to MOC of
approximately $123 million. On February 28, 1994, MHC assigned an 18% limited
partnership interest in HCLP (out of its total interest of 18.9%) to MOC in
satisfaction of $90 million of intercompany payables. Provisions of the Discount
Note indentures required the repayment of intercompany indebtedness to specified
levels and provided that any HCLP limited partnership interests transferred in
satisfaction of intercompany debt would be valued at $5 million for each one
percent of interest assigned. MHC repaid an additional $33 million of
intercompany debt to MOC in cash during 1994. As a result of these transactions,
MOC now owns a 98.6% limited partnership interest in HCLP, and all of MHC's
intercompany debt to MOC which was outstanding at December 31, 1993, was
eliminated.
F-17
<PAGE> 115
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Condensed Consolidating Financial Statements
The following are condensed consolidating financial statements of MESA
Inc., HCLP, MOC, and Mesa's other subsidiaries combined (in millions). These
statements are presented to provide financial information with respect to the
obligors under Mesa's debt for the benefit of the holders of such debt. Separate
financial statements of the obligors under Mesa's debt are not presented because
they are not required and because Mesa believes that they would not be material
to investors. See Note 4 for additional information regarding Mesa's long term
debt.
F-18
<PAGE> 116
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OTHER CONSOL.
MESA MESA AND MESA
DECEMBER 31, 1995 INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- ------------------------------------------------------- ---- ---- ---- ----- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash investments............................ $-- $47 $38 $64 $ -- $ 149
Other current assets................................. -- 20 53 15 -- 88
--- ---- ---- --- ----- ------
Total current assets.......................... -- 67 91 79 -- 237
--- ---- ---- --- ----- ------
Property, plant and equipment, net................... -- 602 478 3 -- 1,083
Investment in subsidiaries........................... 76 -- 115 10 (201) --
Intercompany receivables............................. -- -- 9 -- (9) --
Other noncurrent assets.............................. -- 82 58 5 -- 145
--- ---- ---- --- ----- ------
$76 $751 $751 $97 $(210) $1,465
=== ==== ==== === ===== ======
Liabilities and Equity:
Current liabilities.................................. $-- $64 $128 $ 1 $ -- $ 193
Long-term debt....................................... -- 471 665 -- -- 1,136
Intercompany payables................................ 9 -- -- -- (9) --
Other noncurrent liabilities......................... -- -- 66 3 -- 69
Partners'/Stockholders' equity (deficit)............. 67 216 (108) 93 (201) 67
--- ---- ---- --- ----- ------
$76 $751 $751 $97 $(210) $1,465
=== ==== ==== === ===== ======
MARCH 31, 1996
Assets:
Cash and cash investments............................ $-- $41 $17 $58 $ -- $ 116
Other current assets................................. -- 19 64 4 -- 87
--- ---- ---- --- ----- ------
Total current assets.......................... -- 60 81 62 -- 203
--- ---- ---- --- ----- ------
Property, plant and equipment, net................... -- 594 465 3 -- 1,062
Investment in subsidiaries........................... 77 -- 121 10 (208) --
Intercompany receivables............................. -- -- 9 -- (9) --
Other noncurrent assets.............................. -- 80 61 3 -- 144
--- ---- ---- --- ----- ------
$77 $734 $737 $78 $(217) $1,409
=== ==== ==== === ===== ======
Liabilities and Equity:
Current liabilities.................................. $-- $55 $95 $-- $ -- $ 150
Long-term debt....................................... -- 457 665 -- -- 1,122
Intercompany payables................................ 9 -- -- -- (9) --
Other noncurrent liabilities......................... -- -- 65 4 -- 69
Partners'/Stockholders' equity (deficit)............. 68 222 (88) 74 (208) 68
--- ---- ---- --- ----- ------
$77 $734 $737 $78 $(217) $1,409
=== ==== ==== === ===== ======
</TABLE>
F-19
<PAGE> 117
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED:
<TABLE>
<CAPTION>
OTHER CONSOL.
MESA MESA AND MESA
MARCH 31, 1995 INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- -------------------------------------------------------- ---- ---- ---- ----- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................................ -- 25 37 -- -- 62
--- --- ---- --- --- ----
Costs and Expenses:
Operating, exploration and taxes...................... -- 9 9 -- -- 18
General and administrative............................ -- --- 6 1 -- 7
Depreciation, depletion and amortization.............. -- 9 12 -- -- 21
--- --- ---- --- --- ----
-- 18 27 1 -- 46
--- --- ---- --- --- ----
Operating Income (Loss)................................. -- 7 10 (1) -- 16
--- --- ---- --- --- ----
Interest expense, net of interest income................ -- (12) (22) 1 -- (33)
Equity in loss of subsidiaries.......................... (8) -- (5) -- 13 --
Other................................................... -- -- 4 5 -- 9
--- --- ---- --- --- ----
Net Income (Loss)....................................... $(8) $(5) $(13) $ 5 $13 $ (8)
=== === ==== === === ====
MARCH 31, 1996
Revenues................................................ $-- $37 $43 $ 1 $-- $ 81
--- --- ---- --- --- ----
Costs and Expenses:
Operating, exploration and taxes...................... -- 10 9 -- -- 19
General and administrative............................ -- --- 5 1 -- 6
Depreciation, depletion and amortization.............. -- 9 19 2 -- 30
--- --- ---- --- --- ----
-- 19 33 3 -- 55
--- --- ---- --- --- ----
Operating Income (Loss)................................. -- 18 10 (2) -- 26
--- --- ---- --- --- ----
Interest expense, net of interest income................ -- (12) (23) -- -- (35)
Equity income of subsidiaries........................... 1 -- 6 -- (7) --
Other................................................... -- -- 7 3 -- 10
--- --- ---- --- --- ----
Net Income.............................................. $ 1 $ 6 $-- $ 1 $(7) $ 1
=== === ==== === === ====
</TABLE>
F-20
<PAGE> 118
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED:
<TABLE>
<CAPTION>
OTHER CONSOL.
MESA MESA AND MESA
MARCH 31, 1995 INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- ------------------------------------------------------- ---- ---- ---- ----- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities................... $-- $(3) $ 26 $ 6 $ -- $ 29
---- ---- ----- ---- ---- ----
Cash Flows from Investing Activities:
Capital expenditures................................. -- (1) (5) (1) -- (7)
Other................................................ -- -- -- (3) -- (3)
---- ---- ----- ---- ---- ----
-- (1) (5) (4) -- (10)
---- ---- ----- ---- ---- ----
Cash Flows from Financing Activities:
Other................................................ -- 2 -- -- -- 2
---- ---- ----- ---- ---- ----
-- 2 -- -- -- 2
---- ---- ----- ---- ---- ----
Net Increase (Decrease) in Cash and Cash
Investments.......................................... $-- $(2) $ 21 $ 2 $ -- $ 21
==== ==== ===== ==== ==== ====
MARCH 31, 1996
Cash Flows from Operating Activities................... $-- $ 6 $(22) $ 14 $ -- $ (2)
---- ---- ----- ---- ---- ----
Cash Flows from Investing Activities:
Capital expenditures................................. -- (1) (9) -- -- (10)
Contribution to subsidiary........................... -- -- -- -- -- --
---- ---- ----- ---- ---- ----
-- (1) (9) -- -- (10)
---- ---- ----- ---- ---- ----
Cash Flows from Financing Activities:
Dividend to parent................................... -- -- -- (20) 20 --
Contribution from parent............................. -- -- 20 -- (20) --
Repayments of long-term debt......................... -- (12) (10) -- -- (22)
Other................................................ -- 1 -- -- -- 1
---- ---- ----- ---- ---- ----
-- (11) 10 (20) -- (21)
---- ---- ----- ---- ---- ----
Net Increase (Decrease) in cash and cash
investments.......................................... $-- $(6) $(21) $ (6) $ -- $(33)
==== ==== ===== ==== ==== ====
</TABLE>
NOTES TO CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(a) These condensed consolidating financial statements should be read in
conjunction with the consolidated financial statements of Mesa and notes
thereto of which this note is an integral part.
(b) As of March 31, 1996, Mesa owns 100% interest in each of MOC, MHC, and HMC.
These condensed consolidating financial statements present Mesa's investment
in its subsidiaries and MOC's and MHC's investments in HCLP using the equity
method. Under this method, investments are recorded at cost and adjusted for
the parent company's ownership share of the subsidiary's cumulative results
of operations. In addition, investments increase in the amount of
contributions to subsidiaries and decrease in the amount of distributions
from subsidiaries.
(c) The consolidation and elimination entries (i) eliminate the equity method
investment in subsidiaries and equity in income (loss) of subsidiaries, (ii)
eliminate the intercompany payables and receivables, and (iii) eliminate
other transactions between subsidiaries including contributions and
distributions.
F-21
<PAGE> 119
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MESA Inc.:
We have audited the accompanying consolidated balance sheets of MESA Inc. (a
Texas corporation) and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, cash flows and changes in
stockholders' equity for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MESA Inc. and
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed further in Note 2 to the
consolidated financial statements, the Company's current financial forecasts
indicate that cash generated by operating activities, together with available
cash and investment balances, will not be sufficient for the Company to make all
of its required debt principal and interest obligations due in June 1996. Also,
as discussed in Notes 2 and 4 to the consolidated financial statements, certain
covenants related to the Company's bank debt and certain cross-default
provisions of the Discount Notes could result in the acceleration of
approximately $656 million of long-term debt principal (due in mid-1997 and
mid-1998) to the first half of 1996. As a result, there is substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 2 to the consolidated
financial statements. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Houston, Texas
March 6, 1996
F-22
<PAGE> 120
MESA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Natural gas............................................. $ 141,798 $ 139,580 $ 129,534
Natural gas liquids..................................... 61,427 72,771 75,321
Oil and condensate...................................... 12,428 7,877 19,594
Other................................................... 6,551 8,509 10,510
--------- --------- ---------
222,204 228,737 234,959
--------- --------- ---------
Costs and Expenses:
Lease operating......................................... 51,819 52,655 51,815
Production and other taxes.............................. 20,332 21,306 18,403
Exploration charges..................................... 2,705 5,157 6,604
General and administrative.............................. 25,237 28,649 26,749
Depreciation, depletion and amortization................ 100,099 92,287 83,423
--------- --------- ---------
200,192 200,054 186,994
--------- --------- ---------
Operating Income.......................................... 22,012 28,683 47,965
--------- --------- ---------
Other Income (Expense):
Interest income......................................... 10,704 13,457 15,922
Interest expense........................................ (142,002) (144,757) (148,630)
Gains from investments.................................. 3,954 6,698 18,420
Gains from collections from Bicoastal Corporation....... 18,450 16,577 6,352
Gains on dispositions of oil and gas properties......... 9,600 -- --
Litigation settlement................................... (42,750) -- --
Gain from adjustment of contingency reserve............. 24,000 -- --
Other................................................... (6,416) (4,011) 2,403
--------- --------- ---------
(124,460) (112,036) (105,533)
--------- --------- ---------
Net Loss.................................................. $(102,448) $ (83,353) $ (57,568)
========= ========= =========
Net Loss Per Common Share................................. $ (2.61) $ (1.42) $ (.90)
========= ========= =========
Weighted Average Common Shares Outstanding................ 39,272 58,860 64,050
========= ========= =========
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-23
<PAGE> 121
MESA INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash investments......................................... $ 143,422 $ 149,143
Investments....................................................... 19,112 38,280
Accounts and notes receivable..................................... 38,938 44,734
Other............................................................. 3,372 4,590
---------- ----------
Total current assets...................................... 204,844 236,747
---------- ----------
Property, Plant and Equipment:
Oil and gas properties, wells and equipment, using the successful
efforts method of accounting................................... 1,867,842 1,900,163
Office and other.................................................. 43,836 41,603
Accumulated depreciation, depletion and amortization.............. (781,230) (859,077)
---------- ----------
1,130,448 1,082,689
---------- ----------
Other Assets:
Restricted cash of subsidiary partnership......................... 61,299 57,731
Gas balancing receivable.......................................... 54,971 56,020
Other............................................................. 32,397 31,509
---------- ----------
148,667 145,260
---------- ----------
$1,483,959 $1,464,696
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities on long-term debt.............................. $ 30,537 $ 101,413
Accounts payable and accrued liabilities.......................... 40,468 31,068
Interest payable.................................................. 18,184 60,465
---------- ----------
Total current liabilities................................. 89,189 192,946
---------- ----------
Long-Term Debt...................................................... 1,192,756 1,135,330
---------- ----------
Deferred Revenue.................................................... 21,900 17,578
---------- ----------
Other Liabilities................................................... 55,542 51,838
---------- ----------
Contingencies
Stockholders' Equity:
Preferred stock, $.01 par value, authorized 10,000,000 shares; no
shares issued and outstanding.................................. -- --
Common stock, $.01 par value, authorized 100,000,000 shares;
outstanding 64,050,009 and 64,050,009 shares, respectively..... 640 640
Additional paid-in capital........................................ 398,965 398,965
Accumulated deficit............................................... (275,033) (332,601)
---------- ----------
124,572 67,004
---------- ----------
$1,483,959 $1,464,696
========== ==========
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-24
<PAGE> 122
MESA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------
1993 1994 1995
--------- --------- --------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss................................................. $(102,448) $ (83,353) $(57,568)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation, depletion and amortization.............. 100,099 92,287 83,423
Gains on dispositions of oil and gas properties....... (9,600) -- --
Accreted interest on discount notes................... 49,160 79,352 38,957
Accrued interest exchanged for discount notes......... 15,395 -- --
Litigation settlement................................. 42,750 (42,750) --
Gain from adjustment of contingency reserves.......... (24,000) -- --
Decrease (increase) in gas balancing receivables...... (4,942) (7,840) 1,516
Decrease in deferred natural gas revenue.............. (3,370) (785) (4,219)
Settlement of prior year tax claims................... (12,931) -- --
Natural gas hedging activities........................ 324 9,715 (9,715)
Sales of investments.................................. 39,283 18,771 48,555
Purchases of investments.............................. (34,711) (19,866) (49,003)
Gains from investments................................ (3,954) (6,698) (18,420)
(Increase) decrease in accounts receivable............ 1,986 5,934 (12,047)
Increase (decrease) in payables and accrued
liabilities......................................... (15,887) (3,142) 45,243
Other................................................. (4,662) 6,972 2,519
--------- --------- --------
Net cash provided by operating activities........ 32,492 48,597 69,241
--------- --------- --------
Cash Flows From Investing Activities:
Capital expenditures..................................... (29,636) (32,590) (42,297)
Proceeds from dispositions of oil and gas properties..... 26,118 -- --
Collection of notes receivable........................... 47,501 -- --
Other.................................................... (6,461) (7,660) 860
--------- --------- --------
Net cash provided by (used in) investing
activities..................................... 37,522 (40,250) (41,437)
--------- --------- --------
Cash Flows From Financing Activities:
Issuance of common stock................................. -- 93,067 --
Repayments of long-term debt............................. (80,102) (175,107) (25,507)
Long-term borrowings..................................... -- 77,754 --
Debt issuance costs...................................... (9,651) -- --
Other.................................................... 1,251 652 3,424
--------- --------- --------
Net cash used in financing activities............ (88,502) (3,634) (22,083)
--------- --------- --------
Net Increase (Decrease) in Cash and Cash Investments....... (18,488) 4,713 5,721
Cash and Cash Investments at Beginning of Year............. 157,197 138,709 143,422
--------- --------- --------
Cash and Cash Investments at End of Year................... $ 138,709 $ 143,422 $149,143
========= ========= ========
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-25
<PAGE> 123
MESA INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
------ ------ ---------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1992........................... 38,571 $386 $ 273,198 $ (89,232)
Net loss........................................... -- -- -- (102,448)
Common stock issued for 0% convertible notes....... 7,523 75 29,239 --
Common stock issued for the partial conversion of
the General Partner minority interest........... 417 4 907 --
------ ---- -------- ---------
Balance, December 31, 1993........................... 46,511 465 303,344 (191,680)
Net loss........................................... -- -- -- (83,353)
Common stock issued for the conversion of the
remaining General Partner minority interest..... 1,251 13 2,716 --
Common stock issued in secondary public offering... 16,288 162 92,905 --
------ ---- -------- ---------
Balance, December 31, 1994........................... 64,050 640 398,965 (275,033)
Net loss........................................... -- -- -- (57,568)
------ ---- -------- ---------
Balance, December 31, 1995........................... 64,050 $640 $ 398,965 $(332,601)
====== ==== ======== =========
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-26
<PAGE> 124
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MESA Inc., a Texas corporation, was formed in 1991 in connection with a
transaction (the "Corporate Conversion") which reorganized the business of Mesa
Limited Partnership (the "Partnership"). The Partnership was formed in 1985 to
succeed to the business of Mesa Petroleum Co. ("Original Mesa"). Unless the
context otherwise requires, as used herein the term "Company" refers to MESA
Inc. and its subsidiaries taken as a whole and includes its predecessors.
The Company is primarily in the business of exploring for, developing,
producing, processing and selling natural gas and oil in the United States. Over
60% of the Company's annual equivalent production is natural gas and the balance
is principally natural gas liquids. The Company's primary producing areas are
the Hugoton field of southwest Kansas, the West Panhandle field of Texas and the
Gulf of Mexico offshore Texas and Louisiana. Production from the Company's
properties has access to a substantial portion of the major metropolitan markets
in the United States, primarily in the midwest and northeast, through numerous
pipelines and other purchasers.
The preparation of the consolidated financial statements of the Company in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from the
estimates.
PRINCIPLES OF CONSOLIDATION
The Company owns and operates its oil and gas properties and other assets
through various direct and indirect subsidiaries. Pursuant to the Corporate
Conversion, the Company obtained a 95.86% limited partnership interest and Boone
Pickens (the "General Partner") obtained a 4.14% general partner interest in
three direct subsidiary partnerships. The general partner interest was
convertible into a total of 1,667,560 shares of common stock of the Company. On
December 31, 1993, the General Partner converted approximately one-fourth of his
general partner interests into common stock. In early 1994 the Company effected
a series of merger transactions which resulted in the conversion of each of its
direct subsidiary partnerships to corporate form (see Note 13). Pursuant to
these mergers, the remaining general partner interests in the Company's
subsidiary partnerships held directly or indirectly by the General Partner were
converted into common stock, thereby eliminating the minority interest.
The accompanying consolidated financial statements reflect the consolidated
accounts of the Company and its subsidiaries after elimination of intercompany
transactions.
Certain reclassifications have been made to amounts reported in previous
years to conform to 1995 presentation.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company classifies all
cash investments with original maturities of three months or less as cash and
cash investments.
INVESTMENTS
On January 1, 1994, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," which addresses the accounting and reporting for investments
in equity securities that have readily determinable fair values and for all
investments in debt securities. The Company's portfolio of securities is
classified as "trading securities" under the provisions of SFAS No. 115 and is
reported at fair value, with unrealized gains and losses included
F-27
<PAGE> 125
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in net income (loss) for the current period. The cost of securities sold is
determined on the first-in, first-out basis. Prior to January 1, 1994,
investments in marketable securities were stated at the lower of cost or market.
The adoption of SFAS No. 115 did not have a material effect on the financial
position or results of operations of the Company.
The Company enters into various energy futures contracts including New York
Mercantile Exchange ("NYMEX") futures contracts, commodity price swaps and
options which are not intended to be hedges of future natural gas or crude oil
production. Investments in such contracts are adjusted to market prices at the
end of each reporting period and gains and losses are included in gains from
investments in the statements of operations.
OIL AND GAS PROPERTIES
Under the successful efforts method of accounting, all costs of acquiring
unproved oil and gas properties and drilling and equipping exploratory wells are
capitalized pending determination of whether the properties have proved
reserves. If an exploratory well is determined to be nonproductive, the drilling
and equipment costs of the well are expensed at that time. All development
drilling and equipment costs are capitalized. Capitalized costs of proved
properties and estimated future dismantlement and abandonment costs are
amortized on a property-by-property basis using the unit-of-production method
whereby the ratio of annual production to beginning of period proved oil and gas
reserves is applied to the remaining net book value of such properties. Oil and
gas reserve quantities represent estimates only and there are numerous
uncertainties inherent in the estimation process. Actual future production may
be materially different from amounts estimated and such differences could
materially affect future amortization of proved properties. Geological and
geophysical costs and delay rentals are expensed as incurred.
Unproved properties are periodically assessed for impairment of value and a
loss is recognized at the time of impairment. The aggregate carrying value of
proved properties is periodically compared with the undiscounted future net cash
flows from proved reserves, determined in accordance with Securities and
Exchange Commission (the "Commission") regulations, and a loss is recognized if
permanent impairment of value is determined to exist. A loss is recognized on
proved properties expected to be sold in the event that carrying value exceeds
expected sales proceeds.
In March 1995 the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," which establishes accounting standards for
the impairment of long-lived assets, certain identifiable intangibles and
goodwill. SFAS No. 121 requires a review for impairment whenever circumstances
indicate that the carrying amount of an asset may not be recoverable. In
performing the review for recoverability, the Company would estimate future cash
flows (undiscounted and without interest charges) expected to result from use of
an asset and its eventual disposition. Impairment is recognized only if the
carrying amount of an asset is greater than the expected future cash flows. The
amount of impairment is based on the fair value of the asset. Under SFAS No.
121, each field is individually evaluated for impairment. The Company will adopt
the provisions of SFAS No. 121 in 1996 and has estimated that impairment of
approximately $10 to $12 million will be charged to operations in the first
quarter of 1996. Such impairment relates primarily to a Gulf Coast oil and gas
property.
NET LOSS PER COMMON SHARE
The computations of net loss per common share are based on the weighted
average number of common shares outstanding during each period.
F-28
<PAGE> 126
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, marketable securities,
commodity price swaps, options, short-term trade receivables and payables,
restricted cash, notes receivable, and long-term debt. The carrying values of
cash, marketable securities, notes receivable, short-term trade receivables and
payables, and restricted cash approximate fair value. The carrying values of the
commodity price swaps and options represent their required cash deposits plus or
minus unrealized gains and losses (see Note 3). The fair value of long-term debt
is estimated based on the market prices for the Company's publicly traded debt
and on current rates available for similar debt with similar maturities and
security for the Company's remaining debt (see Note 4).
GAS REVENUES
The Company recognizes its ownership interest in natural gas production as
revenue. Actual production quantities sold by the Company may be different than
its ownership share of production in a given period. If the Company's sales
exceed its ownership share of production, the differences are recorded as
deferred revenue. Gas balancing receivables are recorded when the Company's
ownership share of production exceeds sales. The Company also accrues production
expenses related to its ownership share of production. At December 31, 1995, the
Company had produced and sold a cumulative net 21.9 billion cubic feet ("Bcf")
of natural gas less than its ownership share of production and had recorded gas
balancing receivables, net of deferred revenues, of approximately $38.8 million.
Substantially all of the Company's gas balancing receivables and deferred
revenue are classified as long-term.
The Company periodically enters into NYMEX natural gas futures contracts as
a hedge against natural gas price fluctuations. Gains or losses on such futures
contracts are deferred and recognized as natural gas revenue when the hedged
production occurs. The Company recognized net gains of $12.7 million and
$895,000 in 1995 and 1994, respectively, and a net loss of $324,000 in 1993
related to hedging activities.
TAXES
The Company provides for income taxes using the asset and liability method
under which deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. The effect on deferred taxes
of a change in tax laws or tax rates is recognized in income in the period that
includes the enactment date.
(2) RESOURCES AND LIQUIDITY
LONG-TERM DEBT AND CASH FLOWS
The Company is highly leveraged with over $1.2 billion of long-term debt,
including current maturities. The major components of the Company's debt are (1)
$504.7 million of secured notes due in installments through 2012 at Hugoton
Capital Limited Partnership ("HCLP"), an indirect, wholly owned subsidiary, (2)
$61.1 million (plus $11.4 million in letter of credit obligations) outstanding
under a bank credit facility, due in installments through 1997, with the
majority of such debt due on June 23, 1997, (3) $39.7 million of unsecured
discount notes due on June 30, 1996, and (4) $617.4 million of secured discount
notes due on June 30, 1998. Both the secured and unsecured discount notes are
subordinate to the bank credit facility. See Note 4 for a complete description
of the Company's long-term debt.
The Company is required to make significant principal and interest payments
on its debt during the first six months of 1996. Including the $42 million of
interest paid on its discount notes on January 2, 1996, the
F-29
<PAGE> 127
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company is required to make $123.5 million of principal and interest payments
related to its discount notes and $22.5 million of principal payments related to
its bank credit facility by June 30, 1996.
The Company's bank credit facility contains a covenant requiring the
Company to maintain tangible adjusted equity, as defined, of at least $50
million. At December 31, 1995, tangible adjusted equity was $64.7 million.
Assuming no changes in its capital structure and no significant transactions are
completed, the Company expects to continue to report substantial net losses and
expects its tangible adjusted equity to fall below $50 million in the first half
of 1996. If and when the Company determines that tangible adjusted equity is
below $50 million, an Event of Default, as defined, would occur under the bank
credit facility and the bank would have the right to accelerate the payment of
all outstanding principal and require cash collateralization of letters of
credit. An Event of Default under the bank credit facility would cause a cross
default under the Company's secured and unsecured discount note indentures
unless and until the bank credit facility default were cured or waived or the
debt under the bank credit facility were repaid or otherwise discharged. The
Events of Default, if they occur and are not waived, could result in
acceleration of approximately $656 million of long-term debt principal due in
mid-1997 and mid-1998 to the first half of 1996. Pursuant to the subordination
provisions of the discount note indentures, the Company would be prohibited from
making any payments on such notes for specified periods upon and during the
continuance of any Event of Default under the bank credit facility.
The assets and cash flows of HCLP that are subject to the mortgage securing
HCLP's debt are dedicated to service HCLP's debt and are not available to pay
creditors of the Company or its subsidiaries other than HCLP.
The Company's current financial forecasts indicate, assuming no changes in
its capital structure and no significant transactions are completed, that cash
generated by operating activities, together with available cash and investment
balances will not be sufficient to make all of its required debt principal and
interest obligations due in June 1996. If amounts outstanding under the Credit
Agreement were to be accelerated in the first half of 1996, the Company would
expect to have sufficient cash to meet the Credit Agreement obligations and cure
an Event of Default under the Credit Agreement and avoid, at that time, cross
defaults under the terms of its Discount Note indentures. However, such a
payment would substantially deplete the Company's remaining cash and investments
balances. The Company will make decisions regarding such payments on its debt as
they come due, taking into account the status at that time of the Rainwater
transaction discussed below.
EXPLORATION OF STRATEGIC ALTERNATIVES/PROPOSED TRANSACTION WITH RAINWATER
In an effort to address its liquidity issues and to position the Company
for expansion through exploration and development, in December 1994 the Company
announced its intent to sell all or a portion of its interests in the Hugoton
field. In the first quarter of 1995 the Company began an auction process to sell
such properties. The Company's Board of Directors (the "Board") concluded the
auction process in the second quarter of 1995 after no acceptable bids were
received for the Hugoton properties.
On July 6, 1995, the Board approved and implemented a proposal solicitation
process which expanded its exploration of strategic alternatives to include
consideration of the sale of the Company, a stock-for-stock merger, joint
ventures, asset sales, equity infusions, and refinancing transactions. The
Company engaged an independent financial advisor to assist in these efforts and
to solicit proposals on its behalf. The proposal solicitation process commenced
in August 1995 and the Company received proposals beginning on November 20,
1995.
On February 28, 1996, the Company signed a letter of intent with Rainwater,
Inc. ("Rainwater"), an independent investment company owned by Ft. Worth, Texas,
investor Richard Rainwater, to raise $265 million of equity in connection with a
refinancing of the Company's debt. Pursuant to the terms of the letter of
intent, Rainwater will purchase in a private placement approximately 58.8
million shares of a new
F-30
<PAGE> 128
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
class of convertible preferred stock and the Company will offer approximately
58.4 million shares of convertible preferred stock to the Company stockholders
in a rights offering (the "Rights Offering"). Rainwater will provide a standby
commitment to purchase any shares of preferred stock not subscribed to in the
Rights Offering. Rights will be distributed to common stockholders on a pro rata
basis. The rights will allow the stockholder to purchase, in respect of each
share of common stock, approximately .91 shares of preferred stock at $2.26 per
share, the same per share price at which Rainwater will purchase preferred
shares. The rights will be transferrable and holders of the rights will be
offered over-subscription privileges for shares not purchased by other rights
holders.
Each preferred share will be convertible into one share of the Company
common stock at any time prior to mandatory redemption in 2006. An annual 8%
pay-in-kind dividend will be paid on the preferred shares during the first four
years following issuance. Thereafter, the 8% dividend may, at the option of the
Company, be paid in cash or additional shares depending on whether certain
financial tests are met.
The preferred stock will represent 63.6% of the fully diluted common shares
at the time of issuance and 70.6% after the mandatory four-year pay-in-kind
period, assuming no other stock issuance by the Company. The preferred stock
will have a liquidation price equal to the purchase price. The preferred shares
purchased in the Rights Offering will vote with the common stock as a single
class on all matters, except as otherwise required by law and except for certain
special voting rights for shares held by Rainwater.
Rainwater will be entitled to elect two members of the Company's Board,
which will have seven directors. The Rainwater designees will constitute two of
the three members of a newly formed executive committee of the Board. The
executive committee will act for the whole Board on matters which by law do not
need Board authorization and will have authority over major capital
transactions, stock issuances, financing arrangements, budgeting, and other
items.
During an interim 30-day period beginning February 28, 1996, the Company,
with assistance from Rainwater, will seek commitments for new bank loans plus
assurance of availability of new subordinated debt to be issued in conjunction
with the transaction. Proceeds from the new debt, when combined with proceeds
from the newly issued equity and the Company's available cash balances, would
refinance or repay all of the Company's existing debt.
The proposed transaction is subject to certain conditions, including
negotiation and execution of definitive agreements, arrangement of the new debt
financing, due diligence by Rainwater and the Company stockholder approval. The
parties anticipate executing definitive agreements in about 30 days. The
transaction will be submitted to a vote of stockholders at a special meeting
expected to take place in June 1996. The Rights Offering would commence promptly
after that meeting. There can be no assurance that this transaction will be
completed, or if completed, what the final terms or timing thereof will be. Nor
can there be any assurance regarding the availability or terms of any
refinancing debt.
The ability of the Company to continue as a going concern is dependent upon
several factors. The successful completion of the Rainwater transaction is
expected to position the Company to operate and continue as a going concern and
to pursue its business strategies. The consolidated financial statements of the
Company do not include any adjustments reflecting any treatment other than going
concern accounting.
If the Rainwater transaction is not completed, the Company will pursue
other alternatives to address its liquidity issues and financial condition,
including other potential transactions arising from the proposal solicitation
process, the possibility of seeking to restructure its balance sheet by
negotiating with its current debt holders or seeking protection from its
creditors under the Federal Bankruptcy Code.
F-31
<PAGE> 129
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) INVESTMENTS
The value of investments are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1994 1995
------- -------
<S> <C> <C>
Equity securities:
Cost........................................................... $ 9,489 $10,719
Unrealized loss................................................ (1,381) (162)
NYMEX Futures Contracts:
Margin Cash.................................................... 1,337 17,498
Unrealized gain in hedge contracts............................. 6,823 --
Unrealized gain in trading contracts........................... 2,844 7,558
Commodity Price Swaps:
Margin Cash.................................................... -- 2,434
Unrealized loss in price swaps................................. -- (811)
Natural Gas Options:
Premiums....................................................... -- 66
Unrealized gain in trading options............................. -- 978
------- -------
Total market value............................................. $19,112 $38,280
======= =======
</TABLE>
In 1995 the Company recognized net gains of approximately $18.4 million
from its investments compared with net gains in 1994 of $6.7 million and in 1993
of $4.0 million. These gains do not include gains or losses from natural gas
futures contracts accounted for as a hedge of natural gas production. Hedge
gains or losses are included in natural gas revenue in the period in which the
hedged production occurs (see Note 1).
The net investment gains and losses recognized during a period include both
realized and unrealized gains and losses. The Company realized net gains from
investments of $12.3 million in 1995, $4.7 million in 1994, and $2.3 million in
1993. At December 31, 1995, the Company had recognized but not realized
approximately $7.6 million of gains associated primarily with natural gas
futures. Subsequent to year end, the Company closed some of its positions which
were open on December 31, 1995. As of March 6, 1996, the Company had closed
substantially all of the positions open at December 31, 1995, at a realized loss
of $156,000. Positions which were open at December 31, 1995, and remain open had
unrealized gains of $1.7 million at March 6, 1996.
In 1995 the Company invested in certain over-the-counter commodity price
swap agreements for trading purposes. The Company is required to make payments
to (or receive payments from) a counter party based on the differential between
a fixed and a variable price for specified natural gas volumes. The Company's
agreements expire on the last day of trading for April, May and June 1996
natural gas futures contracts as determined by the NYMEX. The Company is the
fixed price payor on a notional quantity of 10.1 million British thermal units
of natural gas with a fair value of $18.3 million at December 31, 1995. The
average fair value of such commodity price swaps during 1995 was $18.4 million.
In 1995 the Company also entered into over-the-counter natural gas futures call
and put options contracts. At December 31, 1995, the open quantity of options
was 1,800 contracts (each contract represents 10,000 MMBtu of natural gas) with
a fair value of $1.0 million. The average fair value of such option contracts
during 1995 was $.4 million. The counter party to these instruments is a
credit-worthy financial institution which is a recognized market-maker. The
Company believes the risk of incurring losses related to credit risk of the
counter party is remote.
F-32
<PAGE> 130
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) LONG-TERM DEBT
Long-term debt and current maturities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
HCLP Secured Notes.......................................... $ 520,180 $ 504,674
Credit Agreement............................................ 71,131 61,131
12 3/4% secured discount notes.............................. 581,942 618,518
12 3/4% unsecured discount notes............................ 37,345 39,725
13 1/2% subordinated notes.................................. 7,390 7,390
Other....................................................... 5,305 5,305
---------- ----------
1,223,293 1,236,743
Current maturities.......................................... (30,537) (101,413)
---------- ----------
Long-term debt.............................................. $1,192,756 $1,135,330
========== ==========
</TABLE>
HCLP Secured Notes
In 1991 HCLP issued $616 million of secured notes (the "HCLP Secured
Notes") in a private placement with a group of institutional lenders. The
issuance also funded a $66 million restricted cash balance within HCLP, which is
available to supplement cash flows from the HCLP properties in the event such
cash flows are not sufficient to fund principal and interest payments on the
HCLP Secured Notes when due. As the HCLP Secured Notes are repaid, the required
restricted cash balance is reduced. HCLP holds substantially all of the
Company's Hugoton field natural gas properties.
The HCLP Secured Notes were issued in 15 series and have final stated
maturities extending through 2012 but can be retired earlier. The HCLP Secured
Notes outstanding at December 31, 1995, bear interest at fixed rates ranging
from 8.80% to 11.30% per annum (weighted average 10.31%). Principal and interest
payments are made semiannually. Provisions in the HCLP Secured Note agreements
require interest rate premiums to be paid to the noteholders in the event that
the HCLP Secured Notes are repaid more rapidly or slowly than under the initial
scheduled amortization. Beginning in August 1994, HCLP elected to make principal
payments on the HCLP Secured Notes based on actual production, rather than
according to the initial scheduled amortization. As a result, interest rate
premiums at a rate of 1.5% per annum will be applied to those principal amounts
not paid according to the initial scheduled amortization and .35% per annum will
be applied to the remaining notes. Such premiums have increased the effective
weighted average interest rate payable on the remaining HCLP Secured Notes
outstanding to 10.79% per annum at December 31, 1995.
The HCLP Secured Note agreements contain various covenants which, among
other things, limit HCLP's ability to sell or acquire oil and gas property
interests, incur additional indebtedness, make unscheduled capital expenditures,
make distributions of property or funds subject to the mortgage, or enter into
certain types of long-term contracts or forward sales of production. The
agreements also require HCLP to maintain separate existence from the Company and
its other subsidiaries. The assets of HCLP that are subject to the mortgage
securing the HCLP Secured Notes are dedicated to service HCLP's debt and are not
available to pay creditors of the Company or its subsidiaries other than HCLP.
Any cash not subject to the mortgage is available for distribution to the
Company's subsidiaries which own HCLP's equity.
The HCLP Secured Note agreements also contain a provision which requires
calculation and payment of premiums on early retirement of the HCLP Secured
Notes. The actual premiums due in the event of a redemption of the HCLP Secured
Notes will depend on prevailing interest rates at the date of redemption and the
amount of debt redeemed. In the aggregate, such premiums would have totaled $79
million as of December 31, 1995.
F-33
<PAGE> 131
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues received from production from HCLP's Hugoton properties are
deposited in a collection account maintained by a collateral agent (the
"Collateral Agent"). The Collateral Agent releases or reserves funds, as
appropriate, for the payment of royalties, taxes, operating costs, capital
expenditures and principal and interest on the HCLP Secured Notes. Only after
all required payments have been made may any remaining funds held by the
Collateral Agent be released from the mortgage.
By April 29, 1996, HCLP is required to obtain a reserve report as of
December 31, 1995, covering its Hugoton field properties prepared by an
independent engineering consultant. HCLP is required to compare the reserve
quantities in such reserve report to the initial reserve quantities set forth in
the HCLP Secured Note agreements, adjusted for production. If the quantities in
such reserve report are less than the adjusted initial quantities, a Deficit
Reserve Amount ("DRA"), as defined, is determined to exist. To the extent a DRA
exists, the Collateral Agent is required to retain additional funds in the
collection account subject to the mortgage for the repayment of the HCLP Secured
Notes. The Company is not obligated to fund any principal payments at HCLP from
sources other than HCLP's Hugoton field properties. The independent reserve
report has not been completed, but HCLP has received preliminary indications
that the independent engineers' estimates of reserve quantities related to the
Hugoton field properties will reflect a downward revision from previous years.
Although HCLP has not determined whether a DRA will result from such downward
revisions, preliminary estimates indicate that a DRA, if any, will not be
material. See Note 14 (unaudited) for subsequent events affecting the DRA.
The restricted cash balance and cash held by the Collateral Agent for
payment of interest and principal on the HCLP Secured Notes are invested by the
Collateral Agent under the terms of a guaranteed investment contract (the "GIC")
with Morgan Guaranty Trust Co. of New York ("Morgan"). Morgan was paid $13.9
million at the date of issuance of the HCLP Secured Notes to guarantee that
funds invested under the GIC would earn an interest rate equivalent to the
weighted average coupon rate on the outstanding principal balance of the HCLP
Secured Notes (10.31% at December 31, 1995). A portion of this amount may be
refunded if the HCLP Secured Notes are repaid earlier than if HCLP had produced
according to its scheduled production, depending primarily on prevailing
interest rates at that time.
HCLP's cash balances were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1994 1995
------- -------
<S> <C> <C>
Subject to the mortgage.......................................... $48,087 $40,163
Not subject to the mortgage...................................... 1,551 7,450
------- -------
Cash included in current assets.................................. $49,638 $47,613
======= =======
Restricted cash included in noncurrent assets.................... $61,299 $57,731
======= =======
Refundable GIC fee included in noncurrent assets................. $10,295 $ 9,010
======= =======
</TABLE>
Mesa Operating Co. ("MOC"), a Company subsidiary which owns 99% of the
limited partnership interests of HCLP, is party to a services agreement with
HCLP. MOC provides services necessary to operate the Hugoton field properties
and market production therefrom, processes remittances of production revenues
and performs certain other administrative functions in exchange for a services
fee. The fee totaled approximately $13.2 million in 1995, $12.8 million in 1994,
and $11.4 million in 1993.
Credit Agreement
As of December 31, 1995, the Company had outstanding borrowings of
approximately $61.1 million and letter of credit obligations of $11.4 million
under its $82.5 million bank credit facility, as amended (the "Credit
Agreement"). The Credit Agreement requires principal payments of $22.5 million
in the first half of
F-34
<PAGE> 132
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996 with the remainder due in June 1997 (including cash collateralization of
letters of credit outstanding at that time).
The rate of interest payable on borrowings under the amended Credit
Agreement is the lesser of the Eurodollar rate plus 2 1/2% or the prime rate
plus 1/2%. Obligations under the Credit Agreement are secured by a first lien
on the Company's West Panhandle field properties, the Company's equity interest
in MOC and a 76% limited partner interest in HCLP.
The amended Credit Agreement requires the Company to maintain tangible
adjusted equity, as defined, of at least $50 million and available cash, as
defined, of at least $32.5 million. At December 31, 1995, the Company's tangible
adjusted equity, as defined, was approximately $64.7 million and available cash,
as defined, was $139.5 million (See Note 2 for discussion of the tangible
adjusted equity covenant and its potential effect on the Company's liquidity).
The Credit Agreement also restricts, among other things, the Company's
ability to incur additional indebtedness, create liens, pay dividends, acquire
stock or make investments, loans and advances.
Discount Notes
In conjunction with a debt exchange transaction consummated on August 26,
1993, (the "Debt Exchange"), the Company issued approximately $435.5 million
initial accreted value, as defined, of 12 3/4% secured discount notes due June
30, 1998 and $136.9 million initial accreted value, as defined, of 12 3/4%
unsecured discount notes due June 30, 1996 (together, the "Discount Notes") in
exchange for $293.7 million aggregate principal amount of 12% subordinated notes
and $292.6 million aggregate principal amount of 13 1/2% subordinated notes
(together with the $28.6 million of accrued interest claims thereon). The
Company also issued $29.3 million principal amount of 0% convertible notes due
June 30, 1998, which were converted into approximately 7.5 million shares of
common stock by the end of 1993. The Discount Notes, which rank pari passu with
each other, are senior in right of payment to the remaining 13 1/2% subordinated
notes due 1999 and subordinate to all permitted first lien debt, as defined,
including obligations under the Credit Agreement.
On March 2, 1994, the Company issued $48.2 million face amount of
additional 12 3/4% secured discount notes due June 30, 1998. The proceeds of
$42.8 million were used to pay the settlement amount arising from the 1994
settlement of a lawsuit with Unocal Corporation ("Unocal"). The additional
indebtedness incurred to settle the Unocal lawsuit was specifically permitted
under the terms of the indentures governing the Discount Notes and under the
Credit Agreement (See Note 9 for additional discussion of the Unocal
litigation).
The Discount Notes did not accrue interest through June 30, 1995; however,
the accreted value, as defined, of both series increased at a rate of 12 3/4%
per year, compounded semiannually, until June 30, 1995. Beginning July 1, 1995,
each series began to accrue interest at an annual rate of 12 3/4%, payable in
cash semiannually in arrears, with the first payment due on December 31, 1995.
In the second quarter of 1994 the Company completed a public offering in
which 16.3 million shares of the Company's common stock were sold for net
proceeds of $93 million ($6 per share) (the "Equity Offering"). The Company used
approximately $87 million of the proceeds to redeem or repurchase $87 million
accreted value ($99.1 million face amount at maturity) of 12 3/4% unsecured
discount notes which were due in 1996.
In the fourth quarter of 1994 the Company used proceeds from increased
borrowings under its amended Credit Agreement to redeem $37.6 million accreted
value ($40.0 million face amount at maturity) of 12 3/4% unsecured discount
notes which were due in 1996.
The 12 3/4% secured discount notes are secured by second liens on the
Company's West Panhandle field properties and a 76% limited partner interest in
HCLP, both of which also secure obligations under the Credit
F-35
<PAGE> 133
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Agreement. The Company's right to maintain first lien debt, as defined, is
limited by the terms of the Discount Notes to $82.5 million.
See Note 2 for a discussion of certain cross-default provisions in the
Discount Note indentures which could become effective if the Company defaults
under the terms of the tangible adjusted equity covenant of the Credit
Agreement.
The indentures governing the Discount Notes restrict, among other things,
the Company's ability to incur additional indebtedness, pay dividends, acquire
stock or make investments, loans and advances.
Subordinated Notes
The 13 1/2% subordinated notes are unsecured and mature in 1999. Interest
on these notes is payable semiannually in cash.
Interest and Maturities
The aggregate interest payments, net of amounts capitalized, made during
1995, 1994, and 1993 were $63.8 million, $62.1 million and $86.5 million,
respectively. In addition, on January 2, 1996, according to terms of the
Discount Notes, the Company made a $42 million interest payment related to its
Discount Notes which was due December 31, 1995. Payment of approximately $39.0
million, $70.6 million and $64.6 million of interest incurred during 1995, 1994
and 1993, respectively, has been deferred under the terms of the Debt Exchange
until the repayment dates of the Discount Notes. Such interest is included in
interest expense in the 1995, 1994 and 1993 consolidated statements of
operations.
The scheduled principal repayments on long-term debt for the next five
years are as follows (in millions):
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000
------ ----- ------ ----- -----
<S> <C> <C> <C> <C> <C>
HCLP Secured Notes(a)........................ $ 33.9 $33.3 $ 36.1 $37.1 $36.0
Credit Agreement(b)(c)....................... 22.5 38.6 -- -- --
12 3/4% secured discount notes(d)............ -- -- 617.4 -- --
12 3/4% unsecured discount notes(d).......... 39.7 -- -- -- --
13 1/2% subordinated notes................... -- -- -- 7.4 --
Other........................................ 5.3 -- -- -- --
------ ----- ------ ----- -----
Total.............................. $101.4 $71.9 $653.5 $44.5 $36.0
====== ===== ====== ===== =====
</TABLE>
- ---------------
(a) Principal payment requirements could be greater, in the aggregate, in 1996
through 1998 if a DRA is determined to exist.
(b) Excludes approximately $11.4 million in letter of credit obligations
currently outstanding and required to be cash collateralized in June 1997.
(c) Maturities may be accelerated if tangible adjusted equity falls below $50
million (See Note 2).
(d) Maturities may be accelerated if an Event of Default occurs and continues
under the Credit Agreement (See Note 2).
F-36
<PAGE> 134
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Long-Term Debt
The following is a summary of estimated fair value of the Company's
long-term debt as of the years ended (in thousands):
<TABLE>
<CAPTION>
1994 1995
---------------------- ----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
HCLP Secured Notes......................... $520,180 $ 535,135 $504,674 $ 568,641
Credit Agreement........................... 71,131 71,131 61,131 61,131
12 3/4% secured discount notes............. 581,942 528,688 618,518 541,905
12 3/4% unsecured discount notes........... 37,345 37,591 39,725 35,262
13 1/2% subordinated notes................. 7,390 7,390 7,390 7,390
</TABLE>
The fair value of long-term debt is estimated based on the market prices
for the Company's publicly traded debt and on current rates available for
similar debt with similar maturities and security for the Company's remaining
debt. Based on the current financial condition of the Company, there is no
assurance that the Company could obtain borrowings under long-term debt
agreements with terms similar to those described above and receive proceeds
approximating the estimated fair values.
(5) INCOME TAXES
The Company provides for income taxes using the asset and liability method
under which deferred tax assets and liabilities are recognized by applying the
enacted statutory tax rates applicable to future years to temporary differences
between the financial statement and tax bases of existing assets and
liabilities. The tax basis of the Company's consolidated net assets is greater
than the financial basis of those net assets; therefore a net deferred tax asset
has been recorded. However, due to the Company's history of net operating losses
and its current financial condition, a valuation allowance has been recorded
which offsets the entire net deferred tax asset. A summary of the Company's net
deferred tax asset is as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1994 1995
----- -----
<S> <C> <C>
Deferred tax asset.................................................. $ 240 $ 261
Deferred tax liability.............................................. -- --
Valuation allowance................................................. (240) (261)
----- -----
Net deferred tax asset.................................... $ -- $ --
===== =====
</TABLE>
The principal components of the Company's net deferred tax asset (utilizing
a 39% combined federal and state income tax rate) and the valuation allowance
are as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1994 1995
----- -----
<S> <C> <C>
Tax basis of oil and gas properties in excess of financial basis.... $ 80 $ 75
Regular tax net operating loss carryforward......................... 156 184
Other, net.......................................................... 4 2
Valuation allowance................................................. (240) (261)
----- -----
Net deferred tax asset.................................... $ -- $ --
===== =====
</TABLE>
At December 31, 1995, the Company had a regular tax net operating loss
carryforward of approximately $470 million. Additionally, the Company had an
alternative minimum tax loss carryforward available to offset
F-37
<PAGE> 135
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
future alternative minimum taxable income of approximately $450 million. If not
used, these carryforwards will expire between 2007 and 2010.
The Internal Revenue Service Code of 1986 (the "Code") contains numerous
provisions which restrict or limit the use of corporate tax attributes in
conjunction with corporate acquisitions, dispositions, and reorganizations.
Included among these restrictive provisions is Code Section 382 which, in
general, limits the utilization of net operating loss carryovers subsequent to a
substantial change (generally more than 50%) in corporate stock ownership. The
Section 382 ownership change (as defined for tax purposes) is considered on a
cumulative basis over a specified time period, normally three years. Successful
completion of the Rainwater transaction (see Note 2) is expected to result in a
Section 382 ownership change which will limit the utilization of the Company's
tax carryforwards prior to their expiration.
The Company assumed from the Partnership any tax liabilities or refunds
which may arise as a result of any changes to Original Mesa's taxable income or
loss for open tax years. During 1993, the Internal Revenue Service (the "IRS")
completed two field examinations of the tax returns filed by Original Mesa for
the tax years 1984 through 1987. In December 1993 the Company made a payment to
the IRS of approximately $13 million, which payment includes interest, in full
settlement of all claims for these years. The Company was fully reserved for the
additional tax assessment relating to the tax years 1984 through 1987. As of
January 1, 1995, there are no remaining open tax years for Original Mesa for
federal income tax purposes.
(6) PROPERTY SALES
In April 1993 the Company sold a portion of its Rocky Mountain area
properties for approximately $7.1 million, after adjustments, and recorded a
gain on the sale of approximately $4.1 million. The Company also retained a
reversionary interest in the properties under which the Company will receive a
50% net profits interest in the properties after the purchaser has recovered its
investment and certain other costs and expenses.
In June 1993 the Company sold its interest in the deep portion of the
Hugoton field not owned by HCLP for approximately $19.0 million, after
adjustments, and recorded a gain on the sale of approximately $5.5 million.
(7) STOCKHOLDERS' EQUITY
At December 31, 1995, the Company had outstanding 64.1 million shares of
common stock. In 1993 the Company issued 7.5 million shares of common stock in
conjunction with the Debt Exchange (see Note 4). In late 1993 and 1994 the
Company issued a total of approximately 1.7 million shares of common stock in
exchange for the General Partner's 4.14% interest in the subsidiary partnerships
of the Company (see Note 1). In 1994 the Company completed the Equity Offering
which resulted in the issuance of an additional 16.3 million shares of common
stock. Proceeds from the Equity Offering increased stockholders' equity by
approximately $93 million and were used to reduce long-term debt (see Note 4).
The Company has authorized 10 million shares of preferred stock. No shares
of preferred stock have been issued as of December 31, 1995.
In July 1995, in conjunction with the determination of the Board of
Directors of the Company to include the possible sale or merger of the Company
among its strategic alternatives, the Board approved a proposal that the Company
adopt a limited-term stockholder rights plan (the "Rights Plan"). The provisions
of the Rights Plan would be triggered if a person or group acquired beneficial
ownership of 10% or more of the Company's common stock after July 6, 1995,
except pursuant to a "permitted offer" -- a tender or exchange offer that meets
certain criteria, whether or not approved by the Board. However, if any person
or group beneficially owned more than 10% of the common stock on July 6, 1995,
the Rights Plan would not be triggered unless that person or group were to
obtain beneficial ownership of more than 100,000 additional
F-38
<PAGE> 136
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares. If triggered, the Rights Plan would allow all stockholders, other than
the person or group exceeding the beneficial ownership threshold, to purchase
common stock at a 50% discount.
(8) NOTES RECEIVABLE
Prior to 1992 the Company had notes receivable totaling $68 million,
exclusive of interest, from Bicoastal Corporation ("Bicoastal") which was in
bankruptcy. Because of the uncertainty of collection, the Company did not record
interest on these notes. A plan of reorganization for Bicoastal was approved by
the Bankruptcy Court in September 1992. During 1992 and 1993, the Company
collected a total of approximately $74 million from Bicoastal, representing all
of the Company's principal amount of allowed claims in the bankruptcy
reorganization plan, plus an additional amount representing a portion of its
interest claims. As a result, the Company recorded gains of $18.5 million in
1993 relating to collections in excess of the recorded receivable. In 1995 and
1994 the Company recorded gains of $6.4 million and $16.6 million, respectively,
from additional interest claims collected from Bicoastal.
(9) CONTINGENCIES
Masterson
In February 1992 the current lessors of an oil and gas lease (the "Gas
Lease") dated April 30, 1955, between R. B. Masterson, et al., as lessor, and
Colorado Interstate Gas Company ("CIG"), as lessee, sued CIG in Federal District
Court in Amarillo, Texas, claiming that CIG had underpaid royalties due under
the Gas Lease. Under the agreements with CIG, the Company has an entitlement to
gas produced from the Gas Lease. In August 1992 CIG filed a third-party
complaint against the Company for any such royalty underpayments which may be
allocable to the Company. The plaintiffs alleged that the underpayment was the
result of CIG's use of an improper gas sales price upon which to calculate
royalties and that the proper price should have been determined pursuant to a
"favored-nations" clause in a July 1, 1967, amendment to the Gas Lease (the "Gas
Lease Amendment"). The plaintiffs also sought a declaration by the court as to
the proper price to be used for calculating future royalties.
The plaintiffs alleged royalty underpayments of approximately $500 million
(including interest at 10%) covering the period from July 1, 1967, to the
present. In March 1995 the court made certain pretrial rulings that eliminated
approximately $400 million of the plaintiffs' claims (which related to periods
prior to October 1, 1989), but which also reduced a number of the Company's
defenses. The Company and CIG filed stipulations with the court whereby the
Company would have been liable for between 50% and 60%, depending on the time
period covered, of an adverse judgment against CIG for post-February 1988
underpayments of royalties.
On March 22, 1995, a jury trial began and on May 4, 1995, the jury returned
its verdict. Among its findings, the jury determined that CIG had underpaid
royalties for the period after September 30, 1989, in the amount of
approximately $140,000. Although the plaintiffs argued that the
"favored-nations" clause entitled them to be paid for all of their gas at the
highest price voluntarily paid by CIG to any other lessor, the jury determined
that the plaintiffs were stopped from claiming that the "favored-nations" clause
provides for other than a pricing-scheme to pricing-scheme comparison. In light
of this determination, and the plaintiffs' stipulation that a pricing-scheme to
pricing-scheme comparison would not result in any "trigger prices" or damages,
defendants asked the court for a judgment that plaintiffs take nothing. The
court, on June 7, 1995, entered final judgment that plaintiffs recover no
monetary damages. The Company cannot predict whether the plaintiffs will appeal.
However, based on the jury verdict and final judgment, the Company does not
expect the ultimate resolution of this lawsuit to have a material adverse effect
on its financial position or results of operations.
F-39
<PAGE> 137
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Lease Termination
In 1991 the Company sold certain producing oil and gas properties to
Seagull Energy Company ("Seagull"). In 1994 two lawsuits were filed against
Seagull in the 100th District Court in Carson County, Texas, by certain land and
royalty owners claiming that certain of the oil and gas leases owned by Seagull
have terminated due to cessation in production and/or lack of production in
paying quantities occurring at various times from first production through 1994.
In the third quarter of 1995 Seagull filed third-party complaints against the
Company claiming breach of warranty and false representation in connection with
the sale of such properties to Seagull. The Company believes it has several
defenses to these lawsuits including a two-year limitation on indemnification
set forth in the purchase and sale agreement.
Seagull filed a similar third-party complaint against the Company covering
a different lease in the 69th District Court in Moore County, Texas. The Company
believes it has similar defenses in this case.
The plaintiffs in the cases against Seagull are seeking to terminate the
leases. Seagull, in its complaint against the Company, is seeking unspecified
damages relating to any leases which are terminated.
The Company does not expect the resolution of this lawsuit to have a
material adverse effect on its financial position or results of operations.
Unocal
The Company was subject to a lawsuit relating to a 1985 investment in
Unocal which asserted that certain profits allegedly realized by the Company and
other defendants upon the disposition of Unocal common stock in 1985 were
recoverable by Unocal pursuant to Section 16(b) of the Securities Exchange Act
of 1934. On January 11, 1994, the Company and other defendants entered into a
settlement agreement (the "Settlement Agreement") whereby they agreed to pay
Unocal an aggregate of $47.5 million, of which $42.75 million was to be paid by
the Company and $4.75 million by the other defendants. The Settlement Agreement
was approved by the court on February 28, 1994. The Company funded its share of
the settlement amount with proceeds from issuance of additional long-term debt.
(See Note 4 for discussion of the issuance of the additional long-term debt.) As
a result of the settlement, the Company recognized a $42.8 million loss in the
fourth quarter of 1993.
Other
The Company is also a defendant in other lawsuits and has assumed
liabilities relating to Original Mesa and the Partnership. The Company does not
expect the resolution of these other matters to have a material adverse effect
on its financial position or results of operations.
The Company assumed certain litigation and tax-related obligations from
Original Mesa and the Partnership and also recorded certain contingent
liabilities relating to various matters, including litigation, office space
leases and retirement benefit obligations, in conjunction with the 1986
acquisition of Pioneer Corporation ("Pioneer") and the 1988 acquisition of
Tenneco Inc.'s midcontinent division. During the fourth quarter of 1993, the
Company settled certain claims with the IRS (see Note 5) and resolved or
revalued certain other contingent liabilities to reflect actual or estimated
liabilities. The Company had previously reserved for the IRS claims and certain
other contingencies in excess of the actual or estimated liabilities. As a
result, the Company recorded a net gain of $24 million in the fourth quarter of
1993.
(10) EMPLOYEE BENEFIT PLANS
Retirement Plans
The Company maintains two defined contribution retirement plans for the
benefit of its employees. The Company expensed $.8 million in 1995, $3.3 million
in 1994, and $3.2 million in 1993 in connection with these
F-40
<PAGE> 138
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
plans. The Company determines the contributions to such plans based on a
percentage of each employee's compensation, subject to limitations specified by
the Code. The Company declared contributions of 5% of each employee's
compensation in 1995 and 17% of each employee's compensation in 1994 and 1993.
Option Plan
In December 1991 the stockholders of the Company approved the 1991 Stock
Option Plan of the Company (the "Option Plan"), which authorized the grant of
options to purchase up to two million shares of common stock to officers and key
employees. In May 1994 the stockholders of the Company approved an amendment to
the Option Plan which increased the number of shares of common stock authorized
from two million to four million. The exercise price for each share of common
stock placed under option cannot be less than 100% of the fair market value of
the common stock on the date the option is granted. Upon exercise, the grantee
may elect to receive either shares of common stock or, at the discretion of the
Option Committee of the Board of Directors, cash or certain combinations of
stock and cash in an amount equal to the excess of the fair market value of the
common stock at the time of exercise over the exercise price. At December 31,
1995, the following stock options were outstanding:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS
-----------------
<S> <C>
Outstanding at December 31, 1994.................................... 2,926,460
Granted........................................................... 20,000
Exercised......................................................... --
Forfeited......................................................... (14,070)
---------
Outstanding at December 31, 1995.................................... 2,932,390
=========
</TABLE>
The outstanding options at December 31, 1995, are detailed as follows:
<TABLE>
<CAPTION>
EXERCISE
NUMBER OF OPTIONS DATE OF GRANT PRICE PER SHARE EXERCISABLE
- ----------------- ------------- --------------- -----------
<S> <C> <C> <C>
1,126,000.................................. 01/10/92 $ 6.8125 1,126,000
134,500.................................. 10/02/92 11.6875 134,500
101,890.................................. 05/18/93 5.8125 81,512
475,000.................................. 11/10/93 7.3750 380,000
75,000.................................. 06/06/94 6.1875 41,250
1,000,000.................................. 12/01/94 4.2500 550,000
20,000.................................. 05/12/95 5.6875 6,000
---------
2,932,390 2,319,262
=========
</TABLE>
Options are exercisable from the date of grant as follows: after six
months, 30%; after one year, 55%; after two years, 80%; and after three years,
100%. At December 31, 1995, options for 1,004,890 shares were available for
grant.
In October 1995 the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which establishes accounting and reporting standards for
stock-based employee compensation plans. SFAS No. 123 defines a fair value-based
method of accounting for stock options or similar equity instruments, but allows
companies to continue to measure compensation cost using the intrinsic
value-based method prescribed by Accounting Principles Board Opinion ("APB") No.
25, "Accounting for Stock Issued to Employees." Under the fair value-based
method, compensation cost is measured at the grant date based on the value of
the award and is recognized over the service period (generally, the vesting
period). Under the intrinsic value-based method, compensation cost is the
excess, if any, of the quoted market price of the stock at the date of grant
over the exercise price.
F-41
<PAGE> 139
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the provisions of SFAS No. 123, a company may elect to measure
compensation cost associated with its stock option and similar plans as a
component of compensation expense in its statement of operations. Companies may
also elect to continue to measure compensation cost under the provisions of APB
No. 25. Companies which elect to continue measurement under APB No. 25 are
required to provide pro forma disclosure in the notes to financial statements
reflecting the difference, if any, between compensation cost included in net
income and the cost if the fair value-based method were used including effects
on earnings per share. Since the inception of the Option Plan, the Company has
not recognized any compensation cost related to grants of stock options. The
disclosure requirements of this statement are effective for financial statements
for fiscal years beginning after December 15, 1995. At this time, the Company
does not expect to adopt the fair value-based method of accounting for its stock
option plans and, accordingly, adoption of this statement will have no impact on
the Company's results of operations.
Postretirement Benefits
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," which requires that
the costs of such benefits be recorded over the periods of employee service to
which they relate. For the Company, this standard primarily applies to
postretirement medical benefits for retired and current employees. The liability
for benefits existing at the date of adoption (the "Transition Obligation") will
be amortized over the remaining life of the retirees or 20 years, whichever is
shorter.
The Company maintains two separate plans for providing postretirement
medical benefits. One plan covers the Company's retirees and current employees
(the "Mesa Plan"). The other plan relates to the retirees of Pioneer which was
acquired by the Company in 1986 (the "Pioneer Plan"). Under the Mesa Plan,
employees who retire from the Company and who have had at least ten years of
service with the Company after attaining age 45 are eligible for postretirement
health care benefits. These benefits may be subject to deductibles, copayment
provisions, retiree contributions and other limitations and the Company has
reserved the right to change the provisions of the plan. The Pioneer Plan is
maintained for Pioneer retirees and dependents only and is subject to
deductibles, copayment provisions and certain maximum payment provisions. The
Company does not have the right to change the Pioneer Plan or to require retiree
contributions. Both plans are self-insured indemnity plans and both coordinate
benefits with Medicare as the primary payer. Neither plan is funded.
The following table reconciles the status of the two plans with the amount
included under other liabilities in the consolidated balance sheet at December
31, 1995, (in thousands):
<TABLE>
<CAPTION>
MESA PLAN PIONEER PLAN TOTAL
--------- ------------ -------
<S> <C> <C> <C>
Accumulated Postretirement Benefit Obligation
("APBO"):
Retirees and dependents........................... $ 1,080 $ 11,289 $12,369
Actives -- fully eligible......................... 353 -- 353
Other actives..................................... 731 -- 731
------- ------- -------
Total APBO................................ 2,164 11,289 13,453
Unrecognized Transition Obligation.................. (1,420) (2,310) (3,730)
------- ------- -------
Accrued Postretirement Benefit Obligation........... $ 744 $ 8,979(a) $ 9,723
======= ======= =======
</TABLE>
- ---------------
(a) The Company established an accrued liability associated with the Pioneer
Plan in conjunction with its acquisition of Pioneer in 1986.
For measurement purposes, the 1995 annual rate of increase in per capita
cost of covered health care benefits was assumed to be 10% for those
participants under age 65 and 9% for those participants over age 65.
F-42
<PAGE> 140
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The rates were assumed to decrease gradually to 5.0% by the year 2000 and to
remain at that level thereafter. The health care cost trend rate assumption
affects the amount of the Transition Obligation and periodic cost reported. An
increase in the assumed health care cost trend rates by 1% in each year would
increase the APBO as of December 31, 1995, by approximately $735,000 and the net
periodic postretirement benefit cost for the year ended December 31, 1995, by
approximately $77,000. The net periodic postretirement benefit cost for the year
ended December 31, 1995, was approximately $1.4 million based on the assumptions
used.
The discount rate used in determining the APBO as of December 31, 1995, was
8%.
The following table presents the Company's cost of postretirement benefits
other than pensions for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Net periodic postretirement benefit cost:
Service cost............................................. $ 96 $ 110 $ 124
Interest cost............................................ 988 988 1,005
Amortization of Transition Obligation.................... 276 276 276
------ ------ ------
$1,360 $1,374 $1,405
====== ====== ======
Actual costs of providing benefits:
Mesa Plan................................................ $ 123 $ 120 $ 4
Pioneer Plan............................................. 909 666 918
------ ------ ------
$1,032 $ 786 $ 922
====== ====== ======
</TABLE>
(11) MAJOR CUSTOMERS
In 1995 revenues include sales to Mapco Petroleum, Inc. ("Mapco") of $75.0
million (34.4%) and Western Resources, Inc. ("WRI") of $21.9 million (10.0%). In
1994 revenues included sales to Mapco of $70.9 million (31.4%), WRI of $37.4
million (16.6%), and Energas Company of $22.8 million (10.1%). In 1993 revenues
included sales to Mapco of $60.2 million (27.5%), WRI of $51.8 million (23.6%)
and Natural Gas Clearinghouse of $23.1 million (10.5%).
(12) CONCENTRATIONS OF CREDIT RISK
Substantially all of the Company's accounts receivable at December 31,
1995, result from oil and gas sales and joint interest billings to third party
companies in the oil and gas industry. This concentration of customers and joint
interest owners may impact the Company's overall credit risk, either positively
or negatively, in that these entities may be similarly affected by changes in
economic or other conditions. In determining whether or not to require
collateral from a customer or joint interest owner, the Company analyzes the
entity's net worth, cash flows, earnings, and credit ratings. Receivables are
generally not collateralized. Historical credit losses incurred by the Company
on receivables have not been significant.
(13) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The Company conducts its operations through various direct and indirect
subsidiaries. On December 31, 1995, the Company's direct subsidiaries were MOC,
Mesa Holding Co. ("MHC") and Hugoton Management Co. ("HMC"), all of which were
wholly owned by the Company. MOC owns all of the Company's interest in the West
Panhandle field of Texas, the Gulf Coast and the Rocky Mountain areas, as well
as a 98.6% limited partnership interest in HCLP. MHC owns cash and securities, a
0.9% limited partnership interest in HCLP and 100% of Mesa Environmental
Ventures Co. ("Mesa Environmental"), a company established to compete in the
natural gas vehicle market. HMC owns the 0.5% general partner interest in HCLP.
HCLP owns substantially all of the Company's Hugoton field natural gas
properties.
F-43
<PAGE> 141
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In early 1994 the Company effected a series of merger transactions which
resulted in the conversion of the predecessors of MOC, MHC, and the other
subsidiary partnerships, other than HCLP, to corporate form and eliminated all
of the General Partner's minority interests in the subsidiaries.
Subsidiary Debt
HCLP, together with its wholly owned subsidiary Hugoton Capital Corporation
(a single purpose financing subsidiary of HCLP), are jointly and severally
liable as co-obligors on the HCLP Secured Notes (see Note 4). The assets and
cash flows of HCLP that are subject to the mortgage securing the HCLP Secured
Notes are dedicated to service the HCLP Secured Notes and are not available to
pay creditors of the Company or its subsidiaries other than HCLP. Hugoton
Capital Corporation, which has insignificant assets and results of operations,
is included within HCLP in the condensed consolidating financial statements. MOC
is the borrower and primary obligor under, and the Company has unconditionally
guaranteed MOC's obligations under, the Credit Agreement. The Company, MOC and
Mesa Capital Corp. ("Mesa Capital") are jointly and severally liable as
co-obligors under the 13 1/2% subordinated notes and the Discount Notes. Mesa
Capital is a wholly owned financing subsidiary of MOC. Mesa Capital, which has
insignificant assets and results of operations, is included with MOC in the
condensed consolidating financial statements.
Other Company subsidiaries in the condensed consolidating financial
statements include MHC, HMC, and Mesa Environmental. No such other Company
subsidiary is an obligor or guarantor under any long term debt.
Intercompany Debt
As of December 31, 1993, MHC had intercompany payables to MOC of
approximately $123 million. On February 28, 1994, MHC assigned an 18% limited
partnership interest in HCLP (out of its total interest of 18.9%) to MOC in
satisfaction of $90 million of intercompany payables. Provisions of the Discount
Note indentures required the repayment of intercompany indebtedness to specified
levels and provided that any HCLP limited partnership interests transferred in
satisfaction of intercompany debt would be valued at $5 million for each one
percent of interest assigned. MHC repaid an additional $33 million of
intercompany debt to MOC in cash during 1994. As a result of these transactions,
MOC now owns a 98.6% limited partnership interest in HCLP, and all of MHC's
intercompany debt to MOC which was outstanding at December 31, 1993, was
eliminated.
F-44
<PAGE> 142
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Condensed Consolidating Financial Statements
The following are condensed consolidating financial statements of MESA
Inc., HCLP, MOC, and the Company's other subsidiaries combined (in millions).
These statements are presented to provide financial information with respect to
the obligors under the Company's debt for the benefit of the holders of such
debt. Separate financial statements of the obligors under the Company's debt are
not presented because they are not required and because the Company believes
that they would not be material to investors. See Note 4 for additional
information regarding the Company's long term debt.
CONDENSED CONSOLIDATING BALANCE SHEETS
<TABLE>
<CAPTION>
OTHER CONSOL. THE
COMPANY AND COMPANY
DECEMBER 31, 1994 MESA INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- --------------------------------------- --------- ---- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash investments............ $ -- $ 50 $ 24 $ 70 $ -- $ 144
Other current assets................. -- 16 39 6 -- 61
---- ----- ---- ----- ------ ------
Total current assets......... -- 66 63 76 -- 205
---- ----- ---- ----- ------ ------
Property, plant and equipment, net... -- 626 503 1 -- 1,130
Investment in subsidiaries........... 134 -- 126 10 (270) --
Intercompany receivables............. -- -- 9 -- (9) --
Other noncurrent assets.............. -- 88 58 3 -- 149
---- ----- ---- ----- ------ ------
$ 134 $780 $ 759 $ 90 $(279) $1,484
==== ===== ==== ===== ====== ======
Liabilities and Equity:
Current liabilities.................. $ -- $ 47 $ 41 $ 1 $ -- $ 89
Long-term debt....................... -- 505 688 -- -- 1,193
Intercompany payables................ 9 -- -- -- (9) --
Other noncurrent liabilities......... -- -- 73 4 -- 77
Partners'/Stockholders' equity
(deficit)......................... 125 228 (43) 85 (270) 125
---- ----- ---- ----- ------ ------
$ 134 $780 $ 759 $ 90 $(279) $1,484
==== ===== ==== ===== ====== ======
</TABLE>
F-45
<PAGE> 143
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OTHER CONSOL. THE
COMPANY AND COMPANY
DECEMBER 31, 1995 MESA INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- --------------------------------------- --------- ---- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash investments............ $ -- $ 47 $ 38 $ 64 $ -- $ 149
Other current assets................. -- 20 53 15 -- 88
----- ----- ---- ----- ------ ------
Total current assets......... -- 67 91 79 -- 237
----- ----- ---- ----- ------ ------
Property, plant and equipment, net... -- 602 478 3 -- 1,083
Investment in subsidiaries........... 76 -- 115 10 (201) --
Intercompany receivables............. -- -- 9 -- (9) --
Other noncurrent assets.............. -- 82 58 5 -- 145
----- ----- ---- ----- ------ ------
$ 76 $751 $ 751 $ 97 $(210) $1,465
===== ===== ==== ===== ====== ======
Liabilities and Equity:
Current liabilities.................. $ -- $ 64 $ 128 $ 1 $ -- $ 193
Long-term debt....................... -- 471 665 -- -- 1,136
Intercompany payables................ 9 -- -- -- (9) --
Other noncurrent liabilities......... -- -- 66 3 -- 69
Partners'/Stockholders' equity
(deficit)......................... 67 216 (108) 93 (201) 67
----- ----- ---- ----- ------ ------
$ 76 $751 $ 751 $ 97 $(210) $1,465
===== ===== ==== ===== ====== ======
</TABLE>
CONDENSED CONSOLIDATING STATEMENTS OF
OPERATIONS YEARS ENDED:
<TABLE>
<CAPTION>
OTHER CONSOL. THE
COMPANY AND COMPANY
DECEMBER 31, 1993 MESA INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- --------------------------------------- --------- ---- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................... $ -- $103 $ 120 $ (1) $ -- $ 222
----- ----- ---- ----- ------ ------
Costs and Expenses:
Operating, exploration and taxes..... -- 27 48 -- -- 75
General and administrative........... -- -- 23 2 -- 25
Depreciation, depletion and
amortization...................... -- 35 65 -- -- 100
----- ----- ---- ----- ------ ------
-- 62 136 2 -- 200
----- ----- ---- ----- ------ ------
Operating Income (Loss)................ -- 41 (16) (3) -- 22
----- ----- ---- ----- ------ ------
Interest expense, net of interest
income............................... -- (50) (83) 2 -- (131)
Intercompany interest income
(expense)............................ -- -- 16 (16) -- --
Gains of dispositions of oil and gas
properties........................... -- -- 10 -- -- 10
Equity in loss of subsidiaries......... (102) -- (7) (2) 111 --
Other.................................. -- -- (42) 29 10 (3)
----- ----- ---- ----- ------ ------
Net Income (Loss)...................... $(102) $ (9) $(122) $ 10 $ 121 $ (102)
===== ===== ==== ===== ====== ======
</TABLE>
F-46
<PAGE> 144
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OTHER CONSOL. THE
COMPANY AND COMPANY
DECEMBER 31, 1994 MESA INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- --------------------------------------- --------- ---- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................... $ -- $113 $ 116 $ -- $ -- $ 229
---- ----- ---- ----- ------ ------
Costs and Expenses:
Operating, exploration and taxes..... -- 30 49 -- -- 79
General and administrative........... -- -- 26 3 -- 29
Depreciation, depletion and
amortization...................... -- 37 55 -- -- 92
---- ----- ---- ----- ------ ------
-- 67 130 3 -- 200
---- ----- ---- ----- ------ ------
Operating Income (Loss)................ -- 46 (14) (3) -- 29
---- ----- ---- ----- ------ ------
Interest expense, net of interest
income............................... -- (47) (87) 3 -- (131)
Losses on dispositions of oil and gas
properties........................... -- -- -- (91)(d) 91 --
Equity in loss of subsidiaries......... (83) -- (1) -- 84 --
Other.................................. -- -- 22 15 (18) 19
---- ----- ---- ----- ------ ------
Net Loss............................... $ (83) $ (1) $ (80) $ (76) $ 157 $ (83)
==== ===== ==== ===== ====== ======
</TABLE>
<TABLE>
<CAPTION>
OTHER CONSOL. THE
COMPANY AND COMPANY
DECEMBER 31, 1995 MESA INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- --------------------------------------- --------- ---- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................... $ -- $ 97 $ 137 $ 1 $ -- $ 235
---- ----- ---- ----- ------ ------
Costs and Expenses:
Operating, exploration and taxes..... -- 28 49 -- -- 77
General and administrative........... -- -- 24 3 -- 27
Depreciation, depletion and
amortization...................... -- 34 49 -- -- 83
---- ----- ---- ----- ------ ------
-- 62 122 3 -- 187
Operating Income (Loss)................ -- 35 15 (2) -- 48
---- ----- ---- ----- ------ ------
Interest expense, net of interest
income............................... -- (47) (91) 5 -- (133)
Equity in loss of subsidiaries......... (58) -- (11) -- 69 --
Other.................................. -- -- 21 6 -- 27
---- ----- ---- ----- ------ ------
Net Income (Loss)...................... $ (58) $(12) $ (66) $ 9 $ 69 $ (58)
==== ===== ==== ===== ====== ======
</TABLE>
F-47
<PAGE> 145
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEARS ENDED:
<TABLE>
<CAPTION>
OTHER CONSOL. THE
COMPANY AND COMPANY
DECEMBER 31, 1993 MESA INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- --------------------------------------- --------- ---- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities... $ -- $ 21 $ 16 $ (4) $ -- $ 33
---- ----- ---- ----- ------ ------
Cash Flows from Investing Activities:
Capital expenditures................. -- (8) (21) (1) -- (30)
Proceeds from dispositions of oil and
gas properties.................... -- -- 26 -- -- 26
Other................................ -- -- 30 46 (35) 41
---- ----- ---- ----- ------ ------
-- (8) 35 45 (35) 37
---- ----- ---- ----- ------ ------
Cash Flows from Financing Activities:
Repayments of long-term debt......... -- (39) (41) -- -- (80)
Other................................ -- 2 (10) (35) 35 (8)
---- ----- ---- ----- ------ ------
-- (37) (51) (35) 35 (88)
---- ----- ---- ----- ------ ------
Net Increase (Decrease) in Cash and
Cash Investments..................... $ -- $(24) $ -- $ 6 $ -- $ (18)
==== ===== ==== ===== ====== ======
</TABLE>
<TABLE>
<CAPTION>
OTHER CONSOL. THE
COMPANY AND COMPANY
DECEMBER 31, 1994 MESA INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- --------------------------------------- --------- ---- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities... $ -- $ 41 $ (15) $ 23 $ -- $ 49
---- ----- ---- ----- ------ ------
Cash Flows from Investing Activities:
Capital expenditures................. -- (7) (26) -- -- (33)
Contributions to subsidiaries........ (93) -- (5) (1) 99 --
Distributions from subsidiaries...... -- -- 10 -- (10) --
Other................................ -- -- 28 (2) (33) (7)
---- ----- ---- ----- ------ ------
(93) (7) 7 (3) 56 (40)
---- ----- ---- ----- ------ ------
Cash Flows from Financing Activities:
Issuance of common stock............. 93 -- -- -- -- 93
Repayments of long-term debt......... -- (21) (154) -- -- (175)
Long-term borrowings................. -- -- 78 -- -- 78
Contributions from equity holders.... -- 6 93 -- (99) --
Distribution to partners............. -- (10) -- -- 10 --
Other................................ -- 1 (1) (33) 33 --
---- ----- ---- ----- ------ ------
93 (24) 16 (33) (56) (4)
---- ----- ---- ----- ------ ------
Net Increase (Decrease) in Cash and
Cash Investments..................... $ -- $ 10 $ 8 $ (13) $ -- $ 5
==== ===== ==== ===== ====== ======
</TABLE>
F-48
<PAGE> 146
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OTHER CONSOL. THE
COMPANY AND COMPANY
DECEMBER 31, 1995 MESA INC. HCLP MOC SUBS. ELIMIN. CONSOL'D
- --------------------------------------- --------- ---- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities... $ -- $ 20 $ 50 $ (1) $ -- $ 69
---- ----- ---- ----- ------ ------
Cash Flows from Investing Activities:
Capital expenditures................. -- (10) (30) (2) -- (42)
Other................................ -- -- 4 (3) -- 1
---- ----- ---- ----- ------ ------
-- (10) (26) (5) -- (41)
---- ----- ---- ----- ------ ------
Cash Flows from Financing Activities:
Repayments of long-term debt......... -- (16) (10) -- -- (26)
Other................................ -- 4 -- -- -- 4
---- ----- ---- ----- ------ ------
-- (12) (10) -- -- (22)
---- ----- ---- ----- ------ ------
Net Increase (Decrease) in Cash and
Cash Investments..................... $ -- $ (2) $ 14 $ (6) $ -- $ 6
==== ===== ==== ===== ====== ======
</TABLE>
- ---------------
Notes to Condensed Consolidated Financial Statements
(a) These condensed consolidating financial statements should be read in
conjunction with the consolidated financial statements of the Company and
notes thereto of which this note is an integral part.
(b) As of December 31, 1995, the Company owns 100% interest in each of MOC, MHC,
and HMC. These condensed consolidating financial statements present the
Company's investment in its subsidiaries and MOC's and MHC's investments in
HCLP using the equity method. Under this method, investments are recorded at
cost and adjusted for the parent company's ownership share of the
subsidiary's cumulative results of operations. In addition, investments
increase in the amount of contributions to subsidiaries and decrease in the
amount of distributions from subsidiaries.
(c) The consolidation and elimination entries (i) eliminate the equity method
investment in subsidiaries and equity in income (loss) of subsidiaries, (ii)
eliminate the intercompany payables and receivables, (iii) eliminate other
transactions between subsidiaries including contributions and distributions,
and (iv) establish the General Partner's minority interest in the
consolidated results of operations and financial position of the Company.
(d) The condensed consolidating statement of operations of MHC for the year
ended December 31, 1994, reflects a $91 million loss from its disposition of
an 18% equity interest in HCLP. The HCLP equity interest was used to repay a
portion of MHC's intercompany payable to MOC and was valued, in accordance
with the provisions of the Discount Note indentures, at $5 million for each
one percent of interest assigned. A loss was recognized for the difference
between the carrying value of the HCLP interest assigned to MOC and the $90
million value attributed to such interests which reduced the intercompany
payable. The loss recognized by MHC is eliminated in consolidation.
(14) SUBSEQUENT EVENTS (SUBSEQUENT TO THE DATE OF AUDITOR'S EXAMINATION AND
UNAUDITED)
Resources and Liquidity
Subsequent to the issuance of the consolidated financial statements of the
Company for the year ended December 31, 1995, the Company revised its current
financial forecasts to reflect actual first quarter 1996 results and
expectations of increased prices to be received for oil and gas production in
1996. As a result, the Company expects to have sufficient available cash and
investment balances to make its principal and interest payments due in June
1996. However, assuming no changes in its capital structure and no significant
transactions are completed, the current financial forecasts indicate that cash
generated by operating activities, together with available cash and securities
balances will not be sufficient to make all of the required debt principal and
interest payments due in the second half of 1996. Such required payments may
include
F-49
<PAGE> 147
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accelerated principal payments under the Credit Agreement and Discount Notes.
See Note 2 for a discussion of a potential Event of Default.
Stock Purchase Agreement
On April 26, 1996, the Company entered into a Stock Purchase Agreement with
DNR-Mesa Holdings, L.P., a Texas limited partnership ("DNR") whose sole general
partner is Rainwater. Upon DNR's purchase of 58.8 million shares of a new class
of convertible preferred stock at the first closing under the Stock Purchase
Agreement, DNR as the holder of such preferred stock will elect a majority of
the directors of the Company's board of directors in accordance with the special
voting rights granted to it as the holder of such preferred stock. Such special
voting rights will continue for so long as DNR meets certain minimum ownership
requirements.
HCLP Secured Notes
Subsequent to the issuance of the consolidated financial statements of the
Company for the year ended December 31, 1995, the Company obtained the reserve
report required to be prepared under the HCLP Secured Note Agreements covering
the Hugoton field properties. The reserve report resulted in a downward revision
and a DRA was determined to exist. However, such DRA will not cause the
Collateral Agent to retain additional funds in the collection account. Therefore
principal repayments in addition to those set forth in the scheduled maturities
table in Note 4 will not be required. See Note 4 for additional discussion of
the DRA.
Proposed Recapitalization
On April 26, 1996, the Company entered into a stock purchase agreement with
DNR-MESA Holdings L.P., a Texas limited partnership ("DNR"), whose sole general
partner is Rainwater Inc., a Texas corporation owned by Richard E. Rainwater.
The agreement contemplates that the Company will issue $265 million in new
equity and will repay and/or refinance substantially all of its $1.2 billion of
existing debt (the "Recapitalization"). DNR will purchase approximately 58.8
million shares of a new class of convertible preferred stock entitled Series B
8% Cumulative Convertible Preferred Stock ("Series B Preferred") in a private
placement and the Company will offer approximately 58.4 million shares of Series
A 8% Cumulative Convertible Preferred Stock ("Series A Preferred") to the
Company's stockholders in a rights offering (the "Rights Offering"). DNR will
provide a standby commitment to purchase an additional number of shares of
Series B Preferred equal to the number of shares of Series A Preferred not
subscribed to in the Rights Offering. The rights, to be distributed to common
stockholders on a pro rata basis, will allow the stockholders to purchase, in
respect of each share of common stock, .912 shares of Series A Preferred at
$2.26 per share, the same per share price at which DNR will purchase shares of
Series B Preferred. The rights will be transferrable and holders of the rights
will be offered over-subscription privileges for shares not purchased by other
rights holders.
Each share of Series A and B Preferred will be convertible into one share
of the Company's common stock at any time prior to mandatory redemption in 2008.
An annual 8% pay-in-kind dividend will be paid on the shares during the first
four years following issuance. Thereafter, the 8% dividend may, at the option of
the Company, be paid in cash or additional shares depending on whether certain
financial tests are met and subject to any limitations in the Company's debt
agreements.
The Series A and B Preferred will represent 64.7% of the fully diluted
common shares at the time of issuance and 71.5% after the mandatory four-year
pay-in-kind period, excluding stock options and assuming no other stock issuance
by the Company. The Series A and B Preferred will have a liquidation preference
per share equal to $2.26 plus accrued and unpaid dividends. The terms of the
Series A and Series B Preferred are substantially identical except for certain
voting rights and certain provisions relating to transferability. The Series A
and B Preferred will vote with the common stock as a single class on all
matters, except as otherwise
F-50
<PAGE> 148
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
required by law and except for certain special voting rights of the Series B
Preferred, including the right of the holders of the Series B Preferred to
nominate and elect a majority of the Company's Board of Directors for so long as
DNR and its affiliates meet certain minimum stock ownership requirements and
certain rights of the holders of the Series A Preferred to elect two directors
in the event of certain dividend arrearages.
The sale of shares to DNR and certain other matters will be submitted to a
vote of stockholders at a special meeting expected to take place in June 1996.
The Company expects to issue shares to DNR and to complete the refinancing of
its existing debt promptly after that meeting. The Rights Offering would
commence promptly thereafter. On May 9, 1996, the Company filed a registration
statement with the Securities and Exchange Commission (the "SEC") for the
issuance and sale of $132 million of Series A Preferred through the Rights
Offering.
On May 7, 1996, the Company and Mesa Operating Co., a direct wholly owned
subsidiary of the Company ("MOC"), filed a registration statement with the SEC
for the issuance and sale of $500 million of senior subordinated notes ("New
Notes") consisting of $325 million of senior subordinated notes and $175 million
of senior subordinated discount notes, both with ten year maturities. In
addition the Company has received a commitment from a group of banks for a new
$500 million senior secured revolving credit facility ("New Credit Facility").
Borrowings under the New Credit Facility and the New Notes, together with
existing cash and investment balances and the $265 million of new equity, will
be used to repay and/or refinance substantially all of the Company's existing
debt. MOC will be the borrower under the New Credit Facility and the issuer of
the New Notes. The Company will unconditionally guarantee MOC's obligations
under both the New Credit Facility and the New Notes.
In connection with the Recapitalization, the Company's other direct wholly
owned subsidiaries, Mesa Holding Co. ("MHC") and Hugoton Management Company
("HMC"), as well as HCLP, will be merged with and into MOC, with MOC being the
surviving entity. As a result, MOC will be the Company's only direct subsidiary
as well as its only significant subsidiary. Of the subsidiaries of MOC that will
exist following the Recapitalization, none will have any operations other than
Mesa Environmental Ventures Co. ("MEV") and Mesa Transmission Co. ("Mesa
Transmission"). Neither MEV nor Mesa Transmission will guarantee any of MOC's or
the Company's debt. Neither MEV's nor Mesa Transmission's results of operations
are material to those of the Company or, following the Recapitalization, to
those of MOC. After the Recapitalization, it is expected that the consolidated
financial statements of MOC and its subsidiaries will be substantially the same
as those of the Company and its subsidiaries.
The consummation of the Recapitalization is subject to certain conditions
including stockholder approval and completion of the refinancing.
Effect of the Recapitalization
The Recapitalization will enhance the Company's ability to compete in the
oil and gas industry by substantially increasing its cash flow available for
investment and improving its ability to attract capital, which will increase its
ability to pursue investment opportunities. Specifically, the Company's
financial condition will improve significantly as a result of the
Recapitalization due to (i) a significant reduction in total debt outstanding,
(ii) a reduction in annual cash interest expense of approximately $75 million,
(iii) the implementation of a cost savings program designed to initially reduce
annual general and administrative and other operating overhead expenses by
approximately $10 million, and (iv) the extension of maturities on its long-term
debt, which will eliminate the Company's present liquidity concerns.
The expected reduction of annual cash interest expense is based on the
following assumptions: (i) initial borrowings under the New Credit Facility of
approximately $350 million, and (ii) annual interest rates of approximately 7%
under the New Credit Facility, 11% under the senior subordinated notes and
12 1/4% under
F-51
<PAGE> 149
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the senior subordinated discount notes. Actual borrowings and interest rates
under the New Credit Facility will fluctuate over time and will affect Mesa's
actual cash interest expense.
Management believes that cash from operating activities, together with as
much as $150 million of availability under the $500 million New Credit Facility
following the completion of the Recapitalization, will be sufficient for the
Company to meet its debt service obligations and scheduled capital expenditures,
and to fund its working capital needs for the next several years following the
Recapitalization.
The successful completion of the Recapitalization is expected to position
the Company to operate and continue as a going concern and to pursue its
business strategies. The consolidated financial statements of the Company do not
include any adjustments reflecting any treatment other than going concern
accounting.
If the Recapitalization is not completed, the Company will pursue other
alternatives to address its liquidity issues and financial condition, including
pursuing other merger and sale transactions, the possibility of seeking to
restructure its balance sheet by negotiating with its current debt holders or
seeking protection from its creditors under the Federal Bankruptcy Code.
F-52
<PAGE> 150
MESA INC.
SUPPLEMENTAL FINANCIAL DATA
Oil and Gas Reserves and Cost Information (Unaudited)
Net proved oil and gas reserves as of December 31, 1995 and 1994, were
estimated by Company engineers. Net proved oil and gas reserves as of December
31, 1993, associated with the Company's two most significant natural gas
producing fields were estimated by independent petroleum engineering
consultants. These two fields, the Hugoton and West Panhandle fields,
represented over 95% of the Company's net proved equivalent natural gas reserves
as of the date estimated by the independent petroleum engineers. All of the
Company's reserves at December 31, 1995, 1994, and 1993, were in the United
States. In accordance with regulations established by the Commission, the
reserve estimates were based on economic and operating conditions existing at
the end of the respective years.
Future prices for natural gas were based on market prices as of each year
end and contract terms, including fixed and determinable price escalations.
Market prices received as of each year end were used for future sales of oil,
condensate and natural gas liquids. Future operating costs, production and ad
valorem taxes and capital costs were based on current costs as of each year end,
with no escalation.
Approximately 65% of the Company's equivalent proved reserves (based on a
factor of six thousand cubic feet ["Mcf"] of gas per barrel of liquids) at
December 31, 1995, is natural gas. The natural gas prices in effect at December
31, 1995, (having a weighted average of $1.95 per Mcf) were used in accordance
with Commission regulations but may not be the most appropriate or
representative prices to use for estimating reserves since such prices were
influenced by the seasonal demand for natural gas and contractual arrangements
at that date. The average price received by the Company for sales of natural gas
in 1995 was $1.48 per Mcf. Assuming all other variables used in the calculation
of reserve data are held constant, the Company estimates that each $.10 change
in the price per Mcf for natural gas production would affect the Company's
estimated future net cash flows and present value thereof, both before income
taxes, by $109 million and $44 million, respectively. At December 31, 1995, the
Company's standardized measure of future net cash flows from proved reserves
(the "Standardized Measure") and the pretax Standardized Measure were less than
the net book value of oil and gas properties by approximately $100 million and
$25 million, respectively. The Company believes that the ultimate value to be
received for production from its oil and gas properties will be greater than the
current net book value of its oil and gas properties.
At December 31, 1993, the Company's internal estimates of proved reserves
for the Hugoton and West Panhandle properties were greater than the estimates
prepared by independent petroleum engineers as of such date. In the Hugoton
field, the primary difference reflects increased reserves for properties on
which the Company drilled 382 infill wells since 1987 resulting from the
Company's internal interpretation of pressure and cumulative production data. In
the West Panhandle field, the reserve differences result from the interpretation
of cumulative production data on producing wells and in the estimates of proved
undeveloped reserves.
Oil and gas reserve quantities estimated as of December 31, 1995, reflect a
net increase over 1994, after production, of approximately 171 Bcfe of natural
gas. Equivalent natural gas reserves increased in each of the Company's major
production areas. Increases in Hugoton field reserves reflect alignment of the
assumptions used in preparing the proved reserve estimates with the Company's
practice of recovering ethane at the Satanta Plant. In previous years Hugoton
proved reserve estimates were prepared assuming that the Company would not
recover ethane which resulted in slightly higher natural gas volumes, lower
natural gas liquids volumes and lower total equivalent volumes than if ethane
recovery were assumed. The decision as to whether or not to recover ethane is
based on the relative value of ethane as a liquid versus the energy-equivalent
value of such ethane if left in the residue natural gas. In the future, if
economic conditions warrant, the Company may revise proved reserves to reflect
any changes in such relative values. In the West Panhandle field, reserves were
revised upward to reflect the development drilling results over the past year
and the planned upgrade of the Fain Plant for a higher rate of liquids recovery
per Mcf of gas produced from the field. In the Gulf Coast, reserve additions
resulted from exploratory and development drilling in 1994 and 1995.
F-53
<PAGE> 151
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting the future rates of production and timing of
development expenditures. Reserve data represent estimates only and should not
be construed as being exact. Estimates prepared by other engineers might be
materially different from those set forth herein. Moreover, the Standardized
Measure should not be construed as the current market value of the proved oil
and gas reserves or the costs that would be incurred to obtain equivalent
reserves. A market value determination would include many additional factors
including (i) anticipated future changes in oil and gas prices, and production
and development costs; (ii) an allowance for return on investment; (iii) the
value of additional reserves, not considered proved at present, which may be
recovered as a result of further exploration and development activities; and
(iv) other business risks.
CAPITALIZED COSTS AND COSTS INCURRED (UNAUDITED)
Capitalized costs relating to oil and gas producing activities at December
31, 1995, 1994, and 1993 and the costs incurred during the years then ended are
set forth below (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Capitalized Costs:
Proved properties...................................... $1,845,483 $1,865,004 $1,897,168
Unproved properties.................................... 754 2,838 2,995
Accumulated depreciation, depletion and amortization... (670,706) (753,827) (834,304)
---------- ---------- ----------
Net............................................ $1,175,531 $1,114,015 $1,065,859
========== ========== ==========
Costs Incurred:
Exploration and development:
Proved properties................................... $ 73 $ 523 $ 269
Unproved properties................................. 17 2,425 157
Exploration costs................................... 2,705 5,157 8,167
Development costs................................... 2,381 14,043 14,572
---------- ---------- ----------
Total exploration and development...................... 5,176 22,148 23,165
---------- ---------- ----------
Plants and facilities:
Processing plants................................... 17,501 3,248 1,850
Field compression facilities........................ 4,387 3,129 10,561
Other............................................... 2,257 5,168 3,354
---------- ---------- ----------
Total plants and facilities......................... 24,145 11,545 15,765
---------- ---------- ----------
Total costs incurred................................... $ 29,321 $ 33,693 $ 38,930
========== ========== ==========
Depreciation, depletion and amortization................. $ 96,774 $ 89,413 $ 80,513
========== ========== ==========
</TABLE>
F-54
<PAGE> 152
ESTIMATED QUANTITIES OF RESERVES (UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------
NATURAL GAS (MMCF) 1993 1994 1995
- ---------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Proved Reserves:
Beginning of year....................................... 1,276,049 1,202,444 1,303,187
Extensions and discoveries........................... 5,132 6,211 29,728
Purchases of producing properties.................... 166 822 1,000
Revisions of previous estimates...................... 7,284 176,049 (38,574)
Sales of producing properties........................ (6,367) -- --
Production........................................... (79,820) (82,339) (77,312)
--------- --------- ---------
End of year............................................. 1,202,444 1,303,187 1,218,029
========= ========= =========
Proved Developed Reserves:
Beginning of year....................................... 1,223,672 1,159,453 1,257,883
========= ========= =========
End of year............................................. 1,159,453 1,257,883 1,160,751
========= ========= =========
NATURAL GAS LIQUIDS, OIL AND CONDENSATE(MBBLS)
Proved Reserves:
Beginning of year....................................... 87,392 82,446 89,428
Extensions and discoveries........................... 778 491 3,121
Purchases of producing properties.................... -- 1 5
Revisions of previous estimates...................... 3,083 13,947 26,630
Sales of producing properties........................ (3,019) -- --
Production........................................... (5,788) (7,457) (7,766)
--------- --------- ---------
End of year............................................. 82,446 89,428 111,418
========= ========= =========
Proved Developed Reserves:
Beginning of year....................................... 82,439 79,294 85,656
========= ========= =========
End of year............................................. 79,294 85,656 105,197
========= ========= =========
</TABLE>
- - Proved natural gas liquids, oil and condensate reserve quantities include oil
and condensate reserves at December 31 of the respective years as follows:
1993, 3,296 MBbls, 1994, 5,031 MBbls; and 1995, 9,521 MBbls.
- - In addition to the proved reserves disclosed above, the Company owned proved
helium and carbon dioxide ("CO2") reserves at December 31 of the respective
years as follows: 1993, 5,198 MMcf of helium and 46,376 MMcf of CO2, 1994,
4,457 MMcf of helium and 46,459 MMcf of CO2; and 1995, 3,670 MMcf of helium
and 46,459 MMcf of CO2.
F-55
<PAGE> 153
STANDARDIZED MEASURE OF FUTURE NET CASH FLOWS FROM PROVED RESERVES (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------
1993 1994 1995
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows................................... $ 3,723,760 $ 3,513,282 $ 3,804,371
Future production and development costs:
Operating costs and production taxes................ (1,337,224) (1,192,005) (1,257,957)
Development and abandonment costs................... (80,310) (95,441) (96,594)
Future income taxes................................. (240,017) (211,076) (296,987)
----------- ----------- -----------
Future net cash flows................................. 2,066,209 2,014,760 2,152,833
Discount at 10% per annum........................... (1,079,278) (1,080,578) (1,186,644)
----------- ----------- -----------
Standardized Measure.................................. $ 986,931 $ 934,182 $ 966,189
=========== =========== ===========
Future net cash flows before income taxes............. $ 2,306,226 $ 2,225,836 $ 2,449,820
=========== =========== ===========
Standardized Measure before income taxes.............. $ 1,068,740 $ 988,325 $ 1,040,413
=========== =========== ===========
</TABLE>
- - The estimate of future income taxes is based on the future net cash flows from
proved reserves adjusted for the tax basis of the oil and gas properties but
without consideration of general and administrative and interest expenses.
CHANGES IN STANDARDIZED MEASURE (UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------
1993 1994 1995
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Standardized Measure at beginning of year................. $1,037,181 $ 986,931 $ 934,182
--------- --------- ---------
Revisions of reserves proved in prior years:
Changes in prices and production costs.................. 6,178 (121,300) 52,724
Changes in quantity estimates........................... 17,616 151,538 71,673
Changes in estimates of future development and
abandonment costs.................................... 8,054 (27,343) (18,424)
Net change in income taxes.............................. 48,703 27,666 (20,081)
Accretion of discount................................... 116,769 106,874 98,833
Other, primarily timing of production................... (108,371) (80,650) (94,511)
--------- --------- ---------
Total revisions........................................... 88,949 56,785 90,214
Extensions, discoveries and other additions, net of future
production and development costs........................ 4,456 8,075 61,259
Purchases of proved properties............................ 138 463 1,692
Sales of oil and gas produced, net of production costs.... (143,502) (146,267) (154,231)
Sales of producing properties............................. (26,907) -- --
Previously estimated development and abandonment costs
incurred during the period.............................. 26,616 28,195 33,073
--------- --------- ---------
Net changes in Standardized Measure....................... (50,250) (52,749) 32,007
--------- --------- ---------
Standardized Measure at end of year....................... $ 986,931 $ 934,182 $ 966,189
========= ========= =========
</TABLE>
F-56
<PAGE> 154
LOGO
SUBSCRIPTION AGENT:
AMERICAN STOCK TRANSFER & TRUST COMPANY
American Stock Transfer & Trust Co.
40 Wall Street, 46th Floor
New York, New York 10005
Attn: Corporate Stock Transfer Department
<TABLE>
<S> <C>
DEALER MANAGER: INFORMATION AGENT:
LEHMAN BROTHERS, INC. MORROW & CO., INC.
American Express Tower 909 Third Avenue
World Financial Center New York, New York 10022
New York, New York 10285 (800) 566-9061 (toll free)
</TABLE>
<PAGE> 155
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the estimated expenses of the issuance and distribution
of the securities being registered, all of which will be borne by the Company.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee........................ $45,590
Printing and engraving expenses............................................ *
Accounting fees and expenses............................................... *
Blue Sky fees and expenses................................................. *
Listing fees............................................................... *
Legal fees and expenses.................................................... *
Dealer-Manager fees and expenses........................................... *
Subscription Agent fees and expenses....................................... *
Information Agent fees and expenses........................................ *
Mailing expenses........................................................... *
Miscellaneous.............................................................. *
-------
Total............................................................ *
=======
</TABLE>
- ---------------
* To be provided by amendment
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 2.02-1 of the Texas Business Corporation Act provides that a
corporation may indemnify any director or officer who was, is or is threatened
to be made a named defendant or respondent in a proceeding because he is or was
a director or officer, provided that the director or officer (i) conducted
himself in good faith, (ii) reasonably believed (a) in the case of conduct in
his official capacity, that his conduct was in the corporation's best interests,
(b) in all other cases, that his conduct was at least not opposed to the
corporation's best interests and (iii) in the case of any criminal proceeding,
had no reasonable cause to believe his conduct was unlawful. Subject to certain
exceptions, a director or officer may not be indemnified if the person is found
liable to the corporation or if the person is found liable on the basis that he
improperly received a personal benefit. Under Texas law, reasonable expenses
incurred by a director or officer may be paid or reimbursed by the corporation
in advance of a final disposition of the proceeding after the corporation
receives a written affirmation by the director of his good faith belief that he
has met the standard of conduct necessary for indemnification and a written
undertaking by or on behalf of the director to repay the amount if it is
ultimately determined that the director or officer is not entitled to
indemnification by the corporation. Texas law requires a corporation to
indemnify an officer or director against reasonable expenses incurred in
connection with the proceeding in which he is named defendant or respondent
because he is or was a director or officer if he is wholly successful in defense
of the proceeding.
Texas law also permits a corporation to purchase and maintain insurance or
another arrangement on behalf of any person who is or was a director or officer
against any liability asserted against him and incurred by him in such a
capacity or arising out of his status as such a person, whether or not the
corporation would have the power to indemnify him against that liability under
Article 2.02-1.
The Company's Bylaws provide for the indemnification of its officers and
directors, and the advancement to them of expenses in connection with
proceedings and claims, to the fullest extent permitted by the Texas Business
Corporation Act. The Company has also entered into indemnification agreements
with its executive officers and directors that contractually provide for
indemnification and expense advancement. Both the Bylaws and the agreements
include related provisions meant to facilitate the indemnitees' receipt of such
benefits. These provisions cover, among other things: (i) specification of the
method of determining entitlement to indemnification and the selection of
independent counsel that will in some cases make such
II-1
<PAGE> 156
determination, (ii) specification of certain time periods by which certain
payments or determinations must be made and actions must be taken and (iii) the
establishment of certain presumptions in favor of an indemnitee. The benefits of
certain of these provisions are available to an indemnitee only if there has
been a change in control (as defined). In addition, the Company carries
customary directors' and officers' liability insurance policies for its
directors and officers. Furthermore, the Bylaws and agreements with directors
and officers provide for indemnification for amounts (i) in respect of the
deductibles for such insurance policies, (ii) that exceed the liability limits
of such insurance policies and (iii) that would have been covered by prior
insurance policies of the Company or its predecessors. Such indemnification may
be made even though directors and officers would not otherwise be entitled to
indemnification under other provisions of the Bylaws or such agreements.
The above discussion of the Company's Bylaws and of Article 2.01-1 of the
Texas Business Corporation Act is not intended to be exhaustive and is
respectively qualified in its entirety by such statute and the Bylaws.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
<TABLE>
<C> <S> <C>
+ 1 -- Form of Dealer Manager Agreement.
* 4.1 -- Form of Statement of Resolution establishing Series A Preferred Stock and Series B
Preferred Stock (Exhibit 4 to MESA Inc.'s Current Report on Form 8-K dated April
29, 1996).
+ 4.2 -- Form of Series A Preferred Stock Certificate.
+ 4.3 -- Form of Series B Preferred Stock Certificate.
* 4.4 -- Form of Certificate of Common Stock (Exhibit 4(a) to MESA Inc.'s Registration
Statement on Form S-4, Registration No. 33-42104).
+ 4.5 -- Form of Agreement between the Company and American Stock Transfer & Trust Company,
Subscription Agent.
4.6 -- Form of Letter to Stockholders.
4.7 -- Form of Subscription Certificate.
4.8 -- Form of Instructions as to Use of Subscription Certificates.
4.9 -- Form of Letter to Brokers.
4.10 -- Form of Letter to Clients.
4.11 -- Form of Letter to Foreign Stockholders.
4.12 -- Form of Notice of Guaranteed Delivery.
4.13 -- Form of Guidelines to Form W-9.
4.14 -- Form of DTC Participant Oversubscription Exercise Form.
4.15 -- Form of Nominee Holder Certification.
+ 5 -- Opinion of Baker & Botts, L.L.P.
*10 -- Stock Purchase Agreement (Exhibit 10 to MESA Inc.'s Current Report on Form 8-K
dated April 29, 1996).
12 -- Computation of Ratio of Earnings to Fixed Charges.
23.1 -- Consent of Arthur Andersen & Co., independent accountants.
+23.3 -- Consent of Baker & Botts, L.L.P. (included in Exhibit 5 to this Registration
Statement).
*24 -- Powers of Attorney of directors and officers of MESA Inc. (included on signature
pages to this Registration Statement).
</TABLE>
- ---------------
+ To be filed by amendment.
* Previously filed, other than the power of attorney of John S. Herrington,
which is filed herewith.
II-2
<PAGE> 157
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective Registration Statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement;
provided, however, that paragraphs (i) and (ii) will not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
section 13 or section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in this Registration Statement.
For the purpose of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
It will remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
For purposes of determining any liability under the Securities Act of 1933,
each filing of the registrant's annual report pursuant to section 13(a) or
section 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to section
15(d) of the Securities Exchange Act of 1934) that is incorporated by reference
in the Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as a part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of the Registration
Statement as of the time it was declared
II-3
<PAGE> 158
effective. For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE> 159
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Dallas, State of Texas, on the 12th day of June, 1996.
MESA Inc.
By: /s/ BOONE PICKENS*
------------------------------------
Boone Pickens,
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ----------------------------------- --------------
<C> <S> <C>
/s/ BOONE PICKENS* President, Chief Executive Officer, June 12, 1996
- ------------------------------------------ Chief Operating Officer and
Boone Pickens Chairman of the Board of
Directors (Principal Executive
Officer)
/s/ STEPHEN K. GARDNER Vice President and Chief Financial June 12, 1996
- ------------------------------------------ Officer (Principal Financial
Stephen K. Gardner Officer)
/s/ WILLIAM D. BALLEW* Controller (Principal Accounting June 12, 1996
- ------------------------------------------ Officer)
William D. Ballew
/s/ JOHN S. HERRINGTON* Director June 12, 1996
- ------------------------------------------
John S. Herrington
/s/ WALES H. MADDEN, JR.* Director June 12, 1996
- ------------------------------------------
Wales H. Madden, Jr.
Director
- ------------------------------------------
Dorn Parkinson
Director
- ------------------------------------------
Joel L. Reed
/s/ FAYEZ S. SAROFIM* Director June 12, 1996
- ------------------------------------------
Fayez S. Sarofim
/s/ ROBERT L. STILLWELL* Director June 12, 1996
- ------------------------------------------
Robert L. Stillwell
*By: /s/ STEPHEN K. GARDNER
- ------------------------------------------
Stephen K. Gardner
Attorney-in-fact
</TABLE>
II-5
<PAGE> 160
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------ ----------------------------------------------------------------------- ------------
<C> <S> <C> <C>
+ 1 -- Form of Dealer Manager Agreement.
* 4.1 -- Form of Statement of Resolution establishing Series A Preferred Stock
and Series B Preferred Stock (Exhibit 4 to MESA Inc.'s Current Report
on Form 8-K dated April 29, 1996).
+ 4.2 -- Form of Series A Preferred Stock Certificate.
+ 4.3 -- Form of Series B Preferred Stock Certificate.
* 4.4 -- Form of Certificate of Common Stock (Exhibit 4(a) to MESA Inc.'s
Registration Statement on Form S-4, Registration No. 33-42104).
+ 4.5 -- Form of Agreement between the Company and American Stock Transfer &
Trust Company, Subscription Agent.
4.6 -- Form of Letter to Stockholders.
4.7 -- Form of Subscription Certificate.
4.8 -- Form of Instructions as to Use of Subscription Certificates.
4.9 -- Form of Letter to Brokers.
4.10 -- Form of Letter to Clients.
4.11 -- Form of Letter to Foreign Stockholders.
4.12 -- Form of Notice of Guaranteed Delivery.
4.13 -- Form of Guidelines to Form W-9.
4.14 -- Form of DTC Participant Oversubscription Exercise Form.
4.15 -- Form of Nominee Holder Certification.
+ 5 -- Opinion of Baker & Botts, L.L.P.
*10 -- Stock Purchase Agreement (Exhibit 10 to MESA Inc.'s Current Report on
Form 8-K dated April 29, 1996).
12 -- Computation of Ratio of Earnings to Fixed Charges.
23.1 -- Consent of Arthur Andersen & Co., independent accountants.
+23.3 -- Consent of Baker & Botts, L.L.P. (included in Exhibit 5 to this
Registration Statement).
*24 -- Powers of Attorney of directors and officers of MESA Inc. (included on
signature pages to this Registration Statement).
</TABLE>
- ---------------
+ To be filed by amendment.
* Previously filed, other than the power of attorney of John S. Herrington,
which is filed herewith.
<PAGE> 1
[MESA LOGO]
1400 Williams Square West
5205 North O'Connor Blvd.
Irving, Texas 75039-3746
, 1996
Dear Stockholder:
You will find enclosed the Prospectus and other materials relating to the
rights offering by MESA Inc. ("Mesa").
We request you to carefully review the Prospectus which describes how you
may participate in the rights offering. As indicated in the Prospectus, there is
a limited period of time, up to and including the Expiration Date, during which
you will be able to either purchase additional shares or sell your transferable
rights.
SUMMARY OF THE TERMS OF THE OFFERING
- You will receive .912 transferable right for each share of Mesa Common
Stock you owned on the Record Date ( , 1996)
- You may purchase one share of Series A 8% Cumulative Convertible
Preferred Stock for each right you receive at the Subscription Price of
$2.26 per share.
- Stockholders on the Record Date who have fully exercised the rights
issued to them may subscribe for additional shares through the
Oversubscription Privilege. If such oversubscriptions exceed the number of
shares available, shares will be allocated to those stockholders who
oversubscribe, based upon the number of shares such holders subscribed for
pursuant to the basic subscription privilege, as more fully described in
the Prospectus.
- The rights offering expires on [ , 1996].
If your shares are held in your name, a Subscription Certificate is
enclosed. If your shares are held in the name of your bank or broker, you must
contact your bank or broker if you wish to participate in this offering.
The rights will trade on the New York Stock Exchange. Please decide if you
would like to (a) subscribe for additional shares, or (b) sell your rights.
Those stockholders who do not take any action will experience a dilution in the
value of their shares of Mesa Common Stock and a reduction in their
proportionate interest in Mesa.
On behalf of the Board of Directors, we thank you for your support and
confidence and look forward to continuing to serve you.
Sincerely,
LOGO
Chairman of the Board
If you have any questions concerning the rights offering, please feel free
to contact the Information Agent for the rights offering, Morrow & Co. Inc., at
(800) 566-9061.
<PAGE> 1
CONTROL NUMBER [0000] MESA INC. SUBSCRIPTION CERTIFICATE FOR
SUBSCRIPTION CERTIFICATE FOR SHARES OF SERIES A 8% CUMULATIVE CONVERTIBLE
PREFERRED STOCK
VOID IF NOT EXERCISED AT OR BEFORE 5:00 P.M.
(NEW YORK CITY TIME) ________ , 1996, THE EXPIRATION DATE
<TABLE>
<S> <C>
EXPIRATION DATE [ __________ , 1996] THIS SUBSCRIPTION CERTIFICATE IS TRANSFERABLE
AND MAY BE DIVIDED AT THE OFFICE
OF THE SUBSCRIPTION AGENT
<CAPTION>
EXPIRATION DATE [ __________ , 1996] [ ]
SUBSCRIPTION PRICE U.S.$2.26 PER SHARE OF
<CAPTION>
</TABLE>
THIS SUBSCRIPTION CERTIFICATE MAY BE USED TO
SUBSCRIBE FOR SHARES OR MAY BE ASSIGNED OR SOLD,
FULL INSTRUCTIONS APPEAR ON THE BACK OF THIS
SUBSCRIPTION CERTIFICATE.
REGISTERED OWNER [OWNER] CUSIP [000000 00 0]
[0000000000] [**NUMBER OF RIGHTS**]
The registered owner of this Subscription Certificate, named above, or assignee,
is entitled to the number of Rights to subscribe for shares of Series A 8%
Cumulative Convertible Preferred Stock, par value $.01 per share (the "Series A
Preferred Stock"), of MESA Inc. ("Mesa") shown above, in the ratio of one share
of Series A Preferred Stock for each Right, pursuant to the Basic Subscription
Right and upon the terms and conditions and at the price for each Share of
Series A Preferred Stock specified in the Company's Prospectus dated
[ __________ , 1996].
If you subscribe for fewer than all the shares represented by his Subscription
Certificate, the Subscription Agent will issue a new Subscription Certificate
representing the balance of the unsubscribed Rights, provided that the
Subscription Agent has received your Subscription Certificate and payment prior
to 5:00 p.m., New York City time, on [ __________ , 1996]. No new Subscription
Certificate will be issued after such date.
IMPORTANT: Complete appropriate form on reverse
DATE: [ __________ , 1996]
<TABLE>
<C> <C> <S> <C>
[G. Michael Prescott] MESA INC. LOGO
LOGO ---------------------------------------- LOGO
Secretary ----------------------------------------
Chairman of the Board
Chief Executive Officer
</TABLE>
[seal]
<PAGE> 2
PLEASE FILL IN ALL APPLICABLE INFORMATION
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
TO: American Stock Transfer & Trust Company Expiration Date: --------- ,
Subscription Agent 1996
40 Wall Street, 46th Floor
New York, New York 10005
A. Basic Subscription Privilege ------------ x $2.26 = $ -------
(No. of Shares) (Subscription
Price)
B. Oversubscription Privilege ------------ x $2.26 = $ -------(1)
(No. of Shares) (Subscription
Price)
C. Amount of Check Enclosed (or = $ -------
amount in notice of
guaranteed
delivery) payable to MESA
Inc.
D. Sell any remaining Rights / /
E. Sell all of my Rights / /
(1) The Oversubscription Privilege can be exercised only by a holder of Common Stock as of the Record Date, as
described in the Prospectus, and only if the Rights issued to him are exercised to the fullest extent possible.
F. Name of Soliciting Dealer / / Lehman Brothers Inc.
/ / Other: ---------------------------
</TABLE>
- --------------------------------------------------------------------------------
SECTION 1. TO SUBSCRIBE: I hereby irrevocably subscribe for the number of
shares of Series A Preferred Stock for the price indicated as the total of A and
B hereon upon the terms and conditions specified in the Prospectus related
hereto, receipt of which is acknowledged. I hereby agree that if I fail to pay
for the Shares of Series A Preferred Stock for which I have subscribed, the
Company may exercise any of the remedies set forth in the Prospectus.
TO SELL: If I have checked either the box on line D or on line E, I
authorize the sale of Rights by the Dealer Manager according to the procedures
described in the Prospectus.
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
Signature of Subscriber(s)
- ------------------------------------------------------------------------
Address for delivery of Shares
If permanent change of address, check here / /
Please give your telephone number: ( )
- ---------------------
Tax I.D. Number or Social Security Number:
- ------------------------------------
- --------------------------------------------------------------------------------
SECTION 2. TO TRANSFER RIGHTS (except pursuant to D and E above). For
value received,
- ------------- of the Rights represented by the Subscription Certificate are
assigned to:
- ------------------------------------------------------------------------
(Print Full Name of Assignee)
- ------------------------------------------------------------------------
(Print Full Address)
- ------------------------------------------------------------------------
Signature(s) of Assignor(s)
IMPORTANT: The signature(s) must correspond in every particular, without
alteration, with the name(s) as printed on the face of this
Subscription Certificate.
Your signature must be guaranteed by an Eligible Guarantor Institution which is
a participant in a recognized securities guarantee program
<TABLE>
<S> <C>
Signature ----------------------------------------
(Name of Bank or Firm)
Guaranteed By
----------------------------------------
(Signature of Officer and Title)
</TABLE>
PROCEEDS FROM THE SALE OF RIGHTS MAY BE SUBJECT TO WITHHOLDING OF U.S.
TAXES UNLESS THE SELLER'S CERTIFIED U.S. TAXPAYER IDENTIFICATION NUMBER (OR
CERTIFICATE REGARDING FOREIGN STATUS) IS ON FILE WITH THE SUBSCRIPTION AGENT AND
THE SELLER IS NOT OTHERWISE SUBJECT TO U.S. BACKUP WITHHOLDING.
<PAGE> 1
INSTRUCTIONS AS TO USE OF MESA INC.
SUBSCRIPTION CERTIFICATES
CONSULT THE INFORMATION AGENT, YOUR BANK
OR BROKER AS TO ANY QUESTIONS
The following instructions relate to a rights offering (the "Rights
Offering") by MESA Inc., a Texas corporation ("Mesa"), to the holders of its
Common Stock, par value $.01 per share ("Common Stock"), as described in Mesa's
Prospectus dated , 1996, (the "Prospectus"). Holders of record of
Common Stock at the close of business on , 1996 (the "Record Date")
are receiving .912 transferable subscription rights (the "Rights") for each
share of Common Stock held by them as of the close of business on the Record
Date. An aggregate of approximately 58,407,080 Rights exercisable to purchase an
aggregate of approximately 58,407,080 shares (the "Underlying Shares") of the
Series A 8% Cumulative Convertible Preferred Stock, par value $.01 per share, of
Mesa ("Series A Preferred Stock") are being distributed in connection with the
Rights Offering. Each Right is exercisable, upon payment of $2.26 in cash (the
"Subscription Price"), to purchase one share of Series A Preferred Stock (the
"Basic Subscription Privilege"). In addition, subject to the allocation
described below, each Right also carries the right to subscribe at the
Subscription Price for additional shares of Series A Preferred Stock available
as a result of unexercised Rights, if any (the "Oversubscription Privilege"), up
to the maximum amount offered by the Prospectus. Underlying Shares will be
available for purchase pursuant to the Oversubscription Privilege only to the
extent that all the Underlying Shares are not subscribed for through the
exercise of the Basic Subscription Privilege by the Expiration Date (as defined
below). If the Underlying Shares so available (the "Excess Shares") are not
sufficient to satisfy all subscriptions pursuant to the Oversubscription
Privilege, the available Excess Shares will be allocated pro rata (subject to
the elimination of fractional shares) among the holders of Rights who exercise
the Oversubscription Privilege, in proportion, not to the number of shares
requested pursuant to the Oversubscription Privilege, but to the number of
shares each beneficial holder has purchased pursuant to the Basic Subscription
Privilege; provided, however, that if such pro rata allocation results in any
holder being allocated a greater number of Excess Shares than such holder
subscribed for pursuant to the exercise of such holder's Oversubscription
Privilege, then such holder will be allocated only such number of Excess Shares
as such holder subscribed for and the remaining Excess Shares will be allocated
among all other holders exercising the Oversubscription Privilege. See "The
Rights Offering -- Subscription Privileges" in the Prospectus.
No fractional Rights or cash in lieu thereof will be issued or paid. The
number of Rights distributed to each record holder has been rounded up the
nearest whole number in order to avoid issuing fractional Rights.
The Rights will expire at 5:00 p.m., New York City time, on ,
1996, unless extended by Mesa (as it may be extended, the "Expiration Date").
The Rights are expected to be traded on the New York Stock Exchange (the "NYSE")
until close of business on the last NYSE trading day preceding the Expiration
Date.
The number of Rights to which you are entitled is printed on the face of
your Subscription Certificate. You should indicate your wishes with regard to
the exercise or transfer of your Rights by completing the appropriate form or
forms on the back of your Subscription Certificate and returning the
Subscription Certificate to the Subscription Agent in the envelope provided.
YOUR SUBSCRIPTION CERTIFICATES MUST BE RECEIVED BY THE SUBSCRIPTION AGENT,
OR GUARANTEED DELIVERY REQUIREMENTS WITH RESPECT TO YOUR SUBSCRIPTION
CERTIFICATES MUST BE COMPLIED WITH, AND PAYMENT OF THE SUBSCRIPTION PRICE,
INCLUDING FINAL CLEARANCE OF ANY CHECKS, MUST BE RECEIVED BY THE SUBSCRIPTION
AGENT, ON OR BEFORE THE EXPIRATION DATE. ONCE A HOLDER OF RIGHTS HAS EXERCISED
THE BASIC SUBSCRIPTION PRIVILEGE AND/OR THE OVERSUBSCRIPTION PRIVILEGE, SUCH
EXERCISE MAY NOT BE REVOKED.
<PAGE> 2
1. SUBSCRIPTION PRIVILEGES.
To exercise Rights, complete Section 1 of the Subscription Certificate and
send your properly completed and executed Subscription Certificate, together
with payment in full of the Subscription Price for each Underlying Share
subscribed for pursuant to the Basic Subscription Privilege and the
Oversubscription Privilege, to the Subscription Agent. All payments must be made
in United States dollars by (i) check or bank draft drawn upon a United States
bank or postal, telegraphic or express money order payable to "The American
Stock Transfer & Trust Company, as Subscription Agent"; or (ii) wire transfer of
funds to the account maintained by the Subscription Agent for such purpose at
, Account No. , ABA No. ; or (iii) in the case of
persons acquiring Underlying Shares at an aggregate Subscription Price of $1.5
million or more, an Approved Payment Method as defined in the Prospectus.
Payments will be deemed to have been received by the Subscription Agent only
upon the (a) clearance of any uncertified check, (b) receipt by the Subscription
Agent of any certified check or bank draft drawn upon a United States bank or
postal, telegraphic or express money order, (c) the receipt of good funds in the
Subscription Agent's account designated above, or (d) receipt of funds by the
Subscription Agent through an Approved Payment Method. IF PAYING BY UNCERTIFIED
PERSONAL CHECK, PLEASE NOTE THAT THE FUNDS PAID THEREBY MAY TAKE AT LEAST FIVE
BUSINESS DAYS TO CLEAR. ACCORDINGLY, HOLDERS OF RIGHTS WHO WISH TO PAY THE
SUBSCRIPTION PRICE BY MEANS OF UNCERTIFIED PERSONAL CHECK ARE URGED TO MAKE
PAYMENT SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO ENSURE THAT SUCH
PAYMENT IS RECEIVED AND CLEARS BY SUCH DATE, AND ARE URGED TO CONSIDER PAYMENT
BY MEANS OF CERTIFIED OR CASHIER'S CHECK, MONEY ORDER OR WIRE TRANSFER OF FUNDS.
You may also transfer your Subscription Certificate to your bank or broker in
accordance with the procedures specified in Instruction 3(a) below, make
arrangements for the delivery of funds on your behalf and request such bank or
broker to exercise the Rights represented by such Subscription Certificate on
your behalf. Alternatively, you may cause a written guarantee substantially in
the form available from the Subscription Agent (the "Notice of Guaranteed
Delivery") from a member firm of a registered national securities exchange or a
member of the National Association of Securities Dealers, Inc., a commercial
bank or trust company having an office or correspondent in the United States, or
a member in good standing of a recognized signature guarantee medallion program
(each of the foregoing being an "Eligible Institution"), to be received by the
Subscription Agent on or prior to the Expiration Date guaranteeing delivery of
your properly completed and executed Subscription Certificate within three NYSE
trading days following the date of the Notice of Guaranteed Delivery. If this
procedure is followed, your Subscription Certificates must be received by the
Subscription Agent within three NYSE trading days of the Notice of Guaranteed
Delivery. Additional copies of the Notice of Guaranteed Delivery may be obtained
upon request from the Subscription Agent at the address, or by calling the
telephone number, indicated below.
Banks, brokers and other nominee holders of Rights who exercise the Basic
Subscription Privilege and the Oversubscription Privilege on behalf of
beneficial owners of Rights will be required to certify to the Subscription
Agent and Mesa (by delivery to the Subscription Agent of a Nominee Holder
Certification substantially in the form available from the Subscription Agent),
as to the aggregate number of Rights that have been exercised, and the number of
Underlying Shares that are being subscribed for pursuant to the Oversubscription
Privilege, by each beneficial owner of Rights (including such nominee itself) on
whose behalf such nominee holder is acting. In the event a Nominee Holder
Certification is not delivered in respect of a Subscription Certificate, the
Subscription Agent shall for all purposes (including for purposes of any
allocation in connection with the Oversubscription Privilege) be entitled to
assume that such certificate is exercised on behalf of a single beneficial
owner. If more Excess Shares are subscribed for pursuant to the Oversubscription
Privilege than are available for sale, Excess Shares will be allocated, as
described above, among beneficial owners exercising the Oversubscription
Privilege in proportion to such owners' exercise of Rights pursuant to the Basic
Subscription Privilege.
2
<PAGE> 3
The address and telecopier numbers of the Subscription Agent are as
follows:
If by Mail:
If by Hand:
The American Stock Transfer The American Stock Transfer
& Trust Company & Trust Company
40 Wall Street, 46th Floor 40 Wall Street, 46th Floor
New York, New York 10005 New York, New York 10005
Attention: Corporate Stock Transfer Dept. Attention: Corporate Stock Transfer
Dept.
Telephone: (718) 921-8200
Facsimile: (718) 234-5001
If by Overnight Courier:
The American Stock Transfer
& Trust Company
40 Wall Street, 46th Floor
New York, New York 10005
Attention: Corporate Stock Transfer Dept.
The address and telephone number of Morrow & Co., Inc., the Information
Agent, are as follows:
Morrow & Co., Inc.
909 Third Avenue
New York, New York 10002
(800) 566-9061 (toll free)
If you exercise less than all of the Rights evidenced by your Subscription
Certificate by so indicating in Section 1 of your Subscription Certificate, the
Subscription Agent either (i) will issue to you a new Subscription Certificate
evidencing the unexercised Rights or (ii) if you so indicate in Section 2 of
your Subscription Certificate, will transfer the unexercised Rights in
accordance with your instructions. However, if you choose to have a new
Subscription Certificate sent to you or to a transferee, you or such transferee
may not receive any such new Subscription Certificate in sufficient time to
permit sale or exercise of the Rights evidenced thereby. If you have not
indicated the number of Rights being exercised, or if the dollar amount you have
forwarded is not sufficient (subject to the second sentence of Section 1 above)
to purchase (or exceeds the amount necessary to purchase) the number of shares
subscribed for, you will be deemed to have exercised the Basic Subscription
Privilege with respect to the maximum number of whole Rights which may be
exercised for the Subscription Price payment delivered by you, and, to the
extent that the Subscription Price payment delivered by you exceeds the product
of the Subscription Price multiplied by the number of Rights evidenced by the
Subscription Certificates delivered by you (such excess being the "Subscription
Excess"), you will be deemed to have exercised your Oversubscription Privilege
to purchase, to the extent available, that number of whole shares of Series A
Preferred Stock equal to the quotient obtained by dividing the Subscription
Excess by the Subscription Price.
2. DELIVERY OF STOCK CERTIFICATES, ETC.
The following deliveries and payments will be made to the address shown on
the face of your Subscription Certificate unless you provide instructions to the
contrary in Section 1 of your Subscription Certificate.
(a) Basic Subscription Privilege. As soon as practicable after the
valid exercise of Rights and the Expiration Date, the Subscription Agent
will mail to each exercising Rights holder certificates representing shares
of Series A Preferred Stock purchased pursuant to the Basic Subscription
Privilege.
(b) Oversubscription Privilege. As soon as practicable after the
Expiration Date and after all prorations and adjustments contemplated by
the terms of the Rights Offering have been effected, the Subscription Agent
will mail to each Rights holder who validly exercises the Oversubscription
Privilege the number of shares allocated to such Rights holder pursuant to
the Oversubscription Privilege. See "The Rights Offering -- Subscription
Privileges -- Oversubscription Privilege" in the Prospectus.
3
<PAGE> 4
(c) Excess Payments. As soon as practicable after the Expiration Date
and after all prorations and adjustments contemplated by the terms of the
Rights Offering have been effected, the Subscription Agent will mail to
each Rights holder who exercises the Oversubscription Privilege any excess
funds received in payment of the Exercise Price for Excess Shares that are
subscribed for by such Rights holder but not allocated to such Rights
holder pursuant to the Oversubscription Privilege.
3. TO SELL OR TRANSFER RIGHTS.
(a) Sale of Rights Through a Bank or Broker. To sell all Rights evidenced
by a Subscription Certificate through your bank or broker, so indicate in
Section 1 of your Subscription Certificate and deliver your properly completed
and executed Subscription Certificate to your bank or broker. If Section 1 of
your Subscription Certificate is completed without designating a transferee, the
Subscription Agent may thereafter treat the bearer of the Subscription
Certificate as the absolute owner of all of the Rights evidenced by such
Subscription Certificate for all purposes, and the Subscription Agent shall not
be affected by any notice to the contrary. Because your bank or broker cannot
issue Subscription Certificates, if you wish to sell less than all of the Rights
evidenced by a Subscription Certificate, either you or your bank or broker must
instruct the Subscription Agent as to the action to be taken with respect to the
Rights not sold, or you or your bank or broker must first have your Subscription
Certificate divided into Subscription Certificates of appropriate denominations
by following the procedures set forth in Instruction 4 below. The Subscription
Certificates evidencing the number of Rights you intend to sell can then be
transferred by your bank or broker in accordance with the instructions in this
Instruction 3(a).
(b) Transfer of Rights to a Designated Transferee. To transfer all of your
Rights to a transferee other than a bank or broker, you must complete Section 2
of your Subscription Certificate in its entirety, execute the Subscription
Certificate and have your signature guaranteed by an Eligible Institution. A
Subscription Certificate that has been properly transferred in its entirety may
be exercised by a new holder without having a new Subscription Certificate
issued. In order to exercise, or otherwise take action with respect to, such a
transferred Subscription Certificate, the new holder should deliver the
Subscription Certificate, together with payment of the applicable Subscription
Price (with respect to the exercise of both the Basic Subscription Privilege and
the Oversubscription Privilege) and complete separate instructions signed by the
new holder, to the Subscription Agent in ample time to permit the Subscription
Agent to take the desired action. Because only the Subscription Agent can issue
Subscription Certificates, if you wish to transfer less than all of the Rights
evidenced by your Subscription Certificate to a designated transferee, you must
instruct the Subscription Agent as to the action to be taken with respect to the
Rights not sold or transferred, or you must divide your Subscription Certificate
into Subscription Certificates of appropriate smaller denominations by following
the procedures set forth in Instruction 4 below. The Subscription Certificate
evidencing the number of Rights you intend to transfer can then be transferred
by following the procedures set forth in this Instruction 3(b).
4. TO HAVE A SUBSCRIPTION CERTIFICATE DIVIDED INTO SMALLER DENOMINATIONS.
To have a Subscription Certificate divided into smaller denominations, send
your Subscription Certificate, together with complete separate instructions
(including specification of the denominations into which you wish your Rights to
be divided) signed by you, to the Subscription Agent, allowing a sufficient
amount of time for new Subscription Certificates to be issued and returned so
that they can be used prior to the Expiration Date. Alternatively, you may ask a
bank or broker to effect such actions on your behalf. You signature must be
guaranteed by an Eligible Institution if any of the new Subscription
Certificates are to be issued in a name other than that in which the old
Subscription Certificate was issued. Subscription Certificates may not be
divided into fractional Rights, and any instruction to do so will be rejected.
As a result of delays in the mail, the time of the transmittal, the necessary
processing time and other factors, you or your transferee may not receive such
new Subscription Certificates in time to enable the Rights holder to complete a
sale or exercise by the Expiration Date. Neither Mesa nor the Subscription Agent
will be liable to either a transferor or transferee for any such delays.
4
<PAGE> 5
5. EXECUTION.
(a) Execution by Registered Holder. The signature on the Subscription
Certificate must correspond with the name of the registered holder exactly as it
appears on the face of the Subscription Certificate without any alteration or
change whatsoever. Persons who sign the Subscription Certificate in a
representative or other fiduciary capacity must indicate their capacity when
signing and, unless waived by the Subscription Agent in its sole and absolute
discretion, must present to the Subscription Agent satisfactory evidence of
their authority so to act.
(b) Execution by Person Other than Registered Holder. If the Subscription
Certificate is executed by a person other than the holder named on the face of
the Subscription Certificate, proper evidence of authority of the person
executing the Subscription Certificate must accompany the same unless the
Subscription Agent, in its discretion, dispenses with proof of authority.
(c) Signature Guarantees. Your signature must be guaranteed by an Eligible
Institution if you wish to transfer your Rights, as specified in Instruction
3(b) above, to a transferee other than a bank or broker, if you wish a new
Subscription Certificate or Certificates to be issued in a name other than that
in which the old Subscription Certificate was issued, as specified in
Instruction 4 above, or if you specify special payment or delivery instructions
pursuant to Section 2 of your Subscription Certificate.
6. METHOD OF DELIVERY.
The method of delivery of Subscription Certificates and payment of the
Exercise Price to the Subscription Agent will be at the election and risk of the
Rights holder. If sent by mail, it is recommended that they be sent by
registered mail, properly insured, with return receipt requested, and that a
sufficient number of days be allowed to ensure delivery to the Subscription
Agent and the clearance of any checks sent in payment of the Exercise Price
prior to the Expiration Date.
7. SPECIAL PROVISIONS RELATING TO THE DELIVERY OF RIGHTS THROUGH DEPOSITORY
FACILITY PARTICIPANTS.
In the case of holders of Rights that are held of record through The
Depository Trust Company, Midwest Securities Trust Company, Philadelphia
Depository Trust Company or any other depository (each a "Depository"),
exercises of the Basic Subscription Privilege and the Oversubscription Privilege
may be effected by instructing the Depository to transfer Rights (such Rights,
"Depository Rights") from the Depository account of such holder to the
Depository account of the Subscription Agent, together with payment of the
Subscription Price for each Underlying Share subscribed for pursuant to the
Basic Subscription Privilege and the Oversubscription Privilege.
8. SUBSTITUTE FORM W-9.
Each Rights holder who elects to exercise Rights must provide the
Subscription Agent with a correct Taxpayer Identification Number ("TIN") on
Substitute Form W-9, substantially in the form provided with these instructions.
A copy of Substitute Form W-9 may be obtained upon request from the Subscription
Agent at the address indicated above. Failure to provide the information on the
form may subject such holder to a $50.00 penalty and to 31% back-up federal
income tax withholding with respect to dividends that may be paid by Mesa on
shares of Series A Preferred Stock purchased upon the exercise of Rights and
payments that may be remitted to Rights holders by the Subscription Agent in
respect of Rights sold on such holders' behalf by the Subscription Agent.
5
<PAGE> 1
58,407,080 SHARES OF SERIES A 8% CUMULATIVE CONVERTIBLE PREFERRED STOCK
OFFERED PURSUANT TO RIGHTS
DISTRIBUTED TO SHAREHOLDERS
OF MESA INC.
To Securities Dealers, Commercial Banks,
Trust Companies and Other Nominees:
This letter is being distributed to securities dealers, commercial banks,
trust companies and other nominees in connection with the offering by MESA Inc.
("Mesa") of an aggregate of approximately 58,407,080 shares of Series A 8%
Cumulative Convertible Preferred Stock, par value $.01 per share ("Series A
Preferred Stock"), of Mesa, at a subscription price of $2.26 per share of Series
A Preferred Stock (the "Subscription Price"), pursuant to the exercise of
transferable rights (the "Rights") initially distributed to all holders of
record of shares of Mesa's Common Stock, par value $.01 per share, ("Common
Stock") as of the close of business on , 1996 (the "Record Date").
Each Right also carries the right to "oversubscribe" at the Subscription Price
for shares of Series A Preferred Stock that are not otherwise purchased pursuant
to the exercise of Rights. The Rights are described in the enclosed Prospectus
and evidenced by a Subscription Certificate registered in your name or the name
of your nominee.
Each beneficial owner of shares of Common Stock registered in your name or
the name of your nominee is entitled to .912 Rights for each share of Common
Stock owned by such beneficial owner.
We are asking you to contact your clients for whom you hold shares of
Common Stock registered in your name or in the name of your nominee to obtain
instructions with respect to the Rights.
Enclosed are copies of the following documents:
1. The Prospectus:
2. A form of Notice of Guaranteed Delivery for Subscription Certificates
issued by MESA Inc.;
3. A return envelope addressed to The American Stock Transfer & Trust
Company, as Subscription Agent;
4. A DTC Participation Oversubscription Exercise Form;
5. A Nominee Holder Certification; and
6. A form of Certification and Request for Additional Rights.
Your prompt action is requested. The Rights will expire at 5:00 P.M., New
York City time, on , 1996, unless extended by Mesa (as it may be
extended, the "Expiration Date").
To exercise Rights, properly completed and executed Subscription
Certificates and payment in full for all Rights exercised must be delivered to
the Subscription Agent as indicated in the Prospectus prior to the Expiration
Date, unless the guaranteed delivery procedures described in the Prospectus are
followed.
<PAGE> 2
Additional copies of the enclosed materials may be obtained from Morrow &
Co., Inc., the Information Agent for the Rights Offering. The Information
Agent's toll-free telephone number is (800) 566-9061.
Very truly yours,
MESA INC.
NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY PERSON
AS AN AGENT OF MESA INC., THE SUBSCRIPTION AGENT OR ANY OTHER PERSON MAKING OR
DEEMED TO BE MAKING OFFERS OF THE SERIES A 8% CUMULATIVE CONVERTIBLE PREFERRED
STOCK ISSUABLE UPON VALID EXERCISE OF THE RIGHTS, OR AUTHORIZE YOU OR ANY OTHER
PERSON TO MAKE ANY STATEMENTS ON BEHALF OF ANY OF THEM WITH RESPECT TO THE
OFFERING EXCEPT FOR STATEMENTS MADE IN THE PROSPECTUS.
2
<PAGE> 1
RIGHTS OFFERING
FOR SHARES OF SERIES A 8% CUMULATIVE CONVERTIBLE PREFERRED STOCK
OF
MESA INC.
, 1996
To Our Clients:
We are enclosing for your consideration a Prospectus dated [ ,
1996] describing the issuance to stockholders of record on [ , 1996] of
transferable rights ("Rights") to purchase at the subscription price shares of
Series A 8% Cumulative Convertible Preferred Stock ("Series A Preferred Stock")
of MESA Inc. ("Mesa").
Your attention is directed to the following:
- Shareholders will receive .912 transferable Rights for each share of
Common Stock of MESA Inc. held on the Record Date, [ , 1996]. No
fractional rights or cash in lieu thereof will be paid, and the number of
Rights distributed to each holder of Common Stock will be rounded up to
the nearest whole number of Rights.
- Rights will be admitted for trading on the New York Stock Exchange, the
stock exchange on which Mesa's Common Stock is traded. Assuming a market
exists, Rights may be purchased or sold through normal brokerage channels
or sold through the Subscription Agent up to the last trading day prior to
the Expiration Date, [ , 1996], as more fully described in the
Prospectus.
- Basic Subscription Privilege: One Right will entitle the holder to
purchase one share of Series A Preferred Stock of Mesa at the subscription
price of $2.26 per share.
- Oversubscription Privilege: Any Record Date holder of shares of Common
Stock of Mesa who fully exercises all rights issued to him is entitled to
subscribe at the subscription price for shares that were not otherwise
subscribed for during the basic subscription. However, if such
oversubscriptions exceed the number of shares available, the shares
available will be allocated among those who oversubscribed based on the
number of shares subscribed for by such holder pursuant to the basic
subscription privilege, as more fully described in the Prospectus.
- The expiration date of the rights offering is 5:00 p.m. New York City
time, on [ , 1996], unless extended by Mesa.
Since we are the holder of record of the shares of Common Stock of Mesa
held in your Account, we have received your transferable Rights. We will
exercise or sell your Rights only in accordance with your instructions. If you
do not give us your instructions, your Rights will become valueless after the
Expiration Date.
Please forward your instructions to us immediately by completing the form
on the reverse side. Your Rights will expire at 5:00 p.m. New York City time,
[ , 1996], unless the rights offering is extended by MESA Inc.
<PAGE> 2
LETTER OF INSTRUCTIONS
To My Bank or Broker:
The undersigned acknowledges receipt of the Prospectus relating to the
rights offering by MESA Inc. This letter instructs you to either exercise or
sell the Rights, as indicated below, which you hold for the account of the
undersigned upon the terms and conditions set forth in the Prospectus.
(1) BASIC SUBSCRIPTION PRIVILEGE
- SELL Rights (if no number is specified, all rights will be
sold)
- EXERCISE Rights to purchase shares of Series A Preferred Stock
of Mesa at the subscription price. (One Right is required for the
purchase of each share of Series A Preferred Stock)
I am enclosing a check for $ (equal to the number of shares to
be purchased times the subscription price).
(2) OVERSUBSCRIPTION PRIVILEGE (available only to those who have fully exercised
their Rights in the basic subscription privilege)
- PURCHASE shares of Series A Preferred Stock of Mesa at the
subscription price, subject to availability as described in the
Prospectus.
I have enclosed a check for $ equal to the number of shares to
be purchased pursuant to the oversubscription privilege times the
subscription price. I understand that if I am not allocated the full
amount of shares for which I have subscribed pursuant to the
oversubscription privilege above, any excess payment will be refunded to
me by you.
<TABLE>
<CAPTION>
<S> <C>
DATED:
------------------------------------------- --------------------------------------------
Signature(s)
--------------------------------------------
Account Number
--------------------------------------------
Please type or print name
</TABLE>
<PAGE> 1
SPECIAL NOTICE TO HOLDERS OF
MESA INC.
COMMON STOCK
WHOSE ADDRESSES ARE OUTSIDE
THE UNITED STATES
Dear Stockholder:
Enclosed you will find materials relating to the distribution (the "Rights
Offering") by MESA Inc. (the "Company") to holders of the Company's Common
Stock, par value $.01 per share (the "Common Stock") of record as of the close
of business on , 1996, (the "Record Date") of transferable rights
("Rights") to subscribe for and purchase shares of the Company's Series A 8%
Cumulative Convertible Preferred Stock ("Series A Preferred Stock") on the basis
of .912 Rights for each share of Common Stock held of record on the Record Date.
A Subscription Certificate representing Rights to subscribe for shares of the
Company's Series A Preferred Stock at $2.26 per share is not included in this
mailing, but instead is being held on your behalf by the Subscription Agent, The
American Stock Transfer & Trust Company. If you wish to exercise any or all of
these Rights, you must so instruct the Subscription Agent in the manner
described in the accompanying Prospectus and Instructions as to Use of MESA Inc.
Subscription Certificates by 5:00 p.m., New York City time, on , 1996,
unless the Rights Offering is extended by the Company (as it may be extended,
the "Expiration Date"). Rights not exercised by such time will expire and become
worthless.
ANY QUESTIONS OR REQUESTS FOR ASSISTANCE CONCERNING THE RIGHTS OFFERING
SHOULD BE DIRECTED TO MORROW & CO., INC., THE INFORMATION AGENT, AT (800)
566-9061.
<PAGE> 1
NOTICE OF GUARANTEED DELIVERY FOR SHARES OF
SERIES A 8% CUMULATIVE CONVERTIBLE
PREFERRED STOCK OF MESA INC.
SUBSCRIBED FOR UNDER THE BASIC SUBSCRIPTION
AND THE OVERSUBSCRIPTION PRIVILEGE
As set forth in the Prospectus under "The Rights Offering -- Exercise of
Rights," this form or one substantially equivalent hereto may be used as a means
of effecting subscription and payment for all shares of Mesa's Series A 8%
Cumulative Convertible Preferred Stock. Such form may be delivered by hand or
sent by telex, facsimile transmission, overnight courier or mail to the
Subscription Agent.
The Subscription Agent is:
AMERICAN STOCK TRANSFER AND TRUST COMPANY
Attention: Corporate Stock Transfer Department
<TABLE>
<S> <C> <C>
By Mail By Facsimile By Hand
40 Wall Street, 46th Floor (718) 234-5001 40 Wall Street, 46th Floor
New York, NY 10005 New York, NY 10005
</TABLE>
Confirm by telephone to:
(718) 921-8200
By Overnight Courier:
Corporate Stock Transfer Department
40 Wall Street, 46th Floor
New York, NY 10005
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS
VIA A TELECOPY FACSIMILE NUMBER, OTHER THAN AS SET FORTH ABOVE, DOES NOT
CONSTITUTE A VALID DELIVERY
The New York Stock Exchange member firm or bank or trust company which
completes this form must communicate the guarantee and the number of Shares
subscribed for (under both the Basic Subscription Privilege and the
Oversubscription Privilege) to the Subscription Agent and must deliver this
Notice of Guaranteed Delivery of Payment, guaranteeing delivery of (a) payment
in full for all subscribed shares and (b) a properly completed and signed copy
of the Subscription Certificate to the Subscription Agent prior to 5:00 p.m.,
New York City time, on the Expiration Date. Failure to do so will result in a
forfeiture of the Rights.
GUARANTEE
The undersigned, a member firm of the New York Stock Exchange or a bank or
trust company having an office or correspondent in the United States, guarantees
delivery to the Subscription Agent by the close for business on [ ,
1996], of (a) a properly completed and executed Subscription Form, and (b)
payment of the full Subscription Price for Shares subscribed for pursuant to the
Basic Subscription Privilege and any additional Shares subscribed for pursuant
to the Oversubscription Privilege, a subscription for such Shares is indicated
herein or in the Subscription Form.
Number of Rights to be delivered
------------------------
Method of delivery (circle one) A. Through DTC*
B. Direct to Subscription Agent
<PAGE> 2
<TABLE>
<S> <C>
- ------------------------------------------------------ ------------------------------------------------------
Number of Shares of Basic Subscription Privilege Number of Shares of Oversubscription Privilege
- ------------------------------------------------------ ------------------------------------------------------
Name of Firm Authorized Signature
- ------------------------------------------------------ ------------------------------------------------------
Address Title
- ------------------------------------------------------ Name -------------------------------------------------
Zip Code (Please Type or Print)
- ------------------------------------------------------ ------------------------------------------------------
Contact Name Phone Number
</TABLE>
- ---------------
* IF THE RIGHTS ARE DELIVERED THROUGH DTC, A REPRESENTATIVE OF AMERICAN STOCK
TRANSFER AND TRUST COMPANY WILL PHONE YOU WITH A PROTECT IDENTIFICATION
NUMBER, WHICH NEEDS TO BE RELATED BY YOU TO DTC.
<PAGE> 1
IMPORTANT TAX INFORMATION
Under the federal income tax law, (i) dividend payments that may be made by
MESA Inc. ("Mesa") on shares of Series A 8% Cumulative Convertible Preferred
Stock issued upon the exercise of Rights and (ii) payments that may be remitted
by the Subscription Agent to Rights holders in respect of Rights sold on such
holders' behalf by the Subscription Agent, may be subject to backup withholding.
Generally, such payments will be subject to backup withholding unless (a) the
holder is exempt from backup withholding or (b) the holder furnishes the payer
with his correct tax identification number and certifies that the number
provided is correct and, in the case of backup withholding on dividend payments,
the holder further certifies that such holder is not subject to backup
withholding due to prior underreporting of interest or dividend income. Each
Rights holder who either exercises Rights or requests the Subscription Agent to
sell Rights and wishes to avoid backup withholding must provide the Subscription
Agent (as Mesa's agent, in respect of exercised Rights, and as payer with
respect to Rights sold by the Subscription Agent) with such Rights holder's
correct taxpayer identification number (or with a certification that such Rights
holder is awaiting a taxpayer identification number) and with a certification
that such Rights holder is not subject to backup withholding, by completing
Substitute Form W-9 below.
Exempt Rights holders (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. In general, in order for a foreign individual to qualify
as an exempt recipient, the Rights holder must submit a statement, signed under
the penalties of perjury, attesting to that individual's exempt status. The form
of such statements can be obtained from the Subscription Agent. Exempt Rights
holders, while not required to file, should file Substitute Form W-9 to avoid
possible erroneous backup withholding. See the enclosed Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9 for
additional instructions.
If backup withholding applies, Mesa or the Subscription Agent, as the case
may be, will be required to withhold 31% of any such payments made to the Rights
holder. Backup withholding is not an additional tax. Rather, persons subject to
backup withholding are entitled to credit the amount of tax withheld against
their actual tax liability. If withholding results in an overpayment of taxes, a
refund may be obtained.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on payments remitted by the Subscription
Agent with respect to Rights sold, the Rights holder is required to notify the
Subscription Agent of his correct taxpayer identification number by completing
the form below certifying that the taxpayer identification number provided on
Substitute Form W-9 is correct (or that such Rights holder is awaiting a
taxpayer identification number). To prevent backup withholding on dividend
payments, the Rights holder must, in addition, certify on Substitute Form W-9
that he is not subject to backup withholding due to prior underreporting of
interest or dividend income.
WHAT NUMBER TO GIVE THE SUBSCRIPTION AGENT
The Rights holder is required to give the Subscription Agent the taxpayer
identification number of the record owner of the Rights. If such record owner is
an individual, the taxpayer identification number is his social security number.
If the Rights are held in more than one name or are not in the name of the
actual owner, consult the enclosed Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9 for additional guidelines on which
number to report. If the Subscription Agent is not provided with the correct
taxpayer identification number in connection with such payments, the Rights
holder may be subject to a $50 penalty imposed by the Internal Revenue Service.
<PAGE> 2
PAYER'S NAME: AMERICAN STOCK TRANSFER & TRUST COMPANY
- --------------------------------------------------------------------------------
Name (If joint names, see attached guidelines)
- --------------------------------------------------------------------------------
Business name (Sole proprietors, see attached guidelines)
- --------------------------------------------------------------------------------
Please check appropriate box:
/ / Individual/Sole proprietor / / Corporation / / Partnership / / Other
- --------------------------------------------------------------------------------
Address (number, street, and apt. or suite no.)
- --------------------------------------------------------------------------------
City, state, and ZIP code
<TABLE>
<S> <C> <C> <C>
PART I -- TAXPAYER ----------------------- PART II -- FOR PAYEES
SUBSTITUTE IDENTIFICATION NO. Social Security Number EXEMPT
FROM BACKUP WITHHOLDING
Form W-9 Enter your taxpayer ----------------------- (SEE ENCLOSED
Department of the Treasury identification number in the Employer Identification GUIDELINES)
Internal Revenue Service appropriate box. For most Number
individuals, this is your
Payer's Request for social security number. If
Taxpayer you do not have a number, see
Identification Number (TIN) How to Obtain a "TIN" in the
enclosed Guidelines.
Note: If the account is in
more than
one name, see the chart in
enclosed
Guidelines to determine what
number
to give.
- ----------------------------
</TABLE>
PART III -- CERTIFICATION -- Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct Taxpayer Identification Number
(or I am waiting for a number to be issued to me), and
(2) I am not subject to backup withholding because (a) I have not been
notified by the Internal Revenue Service ("IRS") that I am subject to
backup withholding as a result of a failure to report all interest or
dividends, or (b) the IRS has notified me that I am no longer subject to
backup withholding.
Certification Guidelines -- You must cross out item (2) above if you have been
notified by the IRS that you are subject to backup withholding because of
underreporting interest or dividends on your tax return. However, if after
being notified by the IRS that you are subject to backup withholding you
received another notification from the IRS that you are no longer subject to
backup withholding, do not cross out item (2).
------------------------------------------------------------------------------
SIGNATURE
-------------------------------------------------------------------- DATE
-------------------------------- , 1996
NOTE: FAILURE TO COMPLETE THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF
ANY PAYMENTS MADE TO YOU. PLEASE REVIEW ENCLOSED GUIDELINES FOR
CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR
ADDITIONAL DETAILS.
- --------------------------------------------------------------------------------
<PAGE> 3
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
SPECIFIC INSTRUCTIONS
NAME
If you are an individual, you must generally enter the name shown on your social
security card. However, if you have changed your last name, for instance, due to
marriage, without informing the Social Security Administration of the name
change, please enter your first name, the last name shown on your social
security card, and your new last name. If you are a sole proprietor, you must
enter your individual name. (Enter either your Social Security Number or
Employer Identification Number in Part I.) You may also enter your business name
or "doing business as" name on the business name line. Enter your name as shown
on your social security card and business name as it was used to apply for your
Employer Identification Number on Form SS-4.
PART I -- TAXPAYER IDENTIFICATION NUMBER (TIN)
You must enter your TIN in the appropriate box. If you are a sole proprietor,
you may enter your Social Security Number or Employer Identification Number.
Also see the chart under "Guidelines for Determining Proper Identification
Number to Give to Payer," below, for further clarification of name and TIN
combinations. If you do not have a TIN, follow the instructions under "How To
Obtain a TIN" below.
PART II -- FOR PAYEES EXEMPT FROM BACKUP WITHHOLDING
Individuals (including sole proprietors) are not exempt from backup withholding.
Corporations are exempt from backup withholding for certain payments, such as
interest and dividends. For a complete list of exempt payees, see "Payees Exempt
from Backup Withholding" below.
If you are exempt from backup withholding, you should still complete this form
to avoid possible erroneous backup withholding. Enter your complete TIN in Part
I, write "Exempt" in Part II, and sign and date the form. If you are a
nonresident alien or a foreign entity not subject to backup withholding, give
the payer a completed Form W-8, Certificate of Foreign Status.
PART III -- CERTIFICATION
For a joint account, only the person whose TIN is shown in Part I should sign.
1. INTEREST, DIVIDENDS, AND PAYMENTS OF PROCEEDS RECEIVED BY OR THROUGH A
BROKER. You must sign the certification or backup withholding will apply with
respect to any dividend or interest payments that you receive. If you are
subject to backup withholding and you are merely providing your correct TIN
to the payer, you must cross out item 2 in the certification before signing
the form.
2. OTHER PAYMENTS. You must give your correct TIN, but you do not have to sign
the certification unless you have been notified of an incorrect TIN. Other
payments include payments made in the course of the payer's trade or business
for rents, royalties to a nonemployee for services (including attorney and
accounting fees), and payments to certain fishing boat crew members.
PRIVACY ACT NOTICE
Section 6109 requires you to give your correct TIN to persons who must file
information returns with the IRS to report interest, dividends, and certain
other income paid to you, mortgage interest you paid, the acquisition or
abandonment of secured property, cancellation of debt, or contributions you made
to an IRA. The IRS uses the numbers for identification purposes and to help
verify the accuracy of your tax return. You must provide your TIN whether or not
you are required to file a tax return. Payers must generally withhold 31% of
taxable interest, dividend, and certain other payments to a payee who does not
give a TIN to a payer. Certain penalties may also apply.
<PAGE> 4
GUIDELINES FOR DETERMINING PROPER IDENTIFICATION NUMBER TO GIVE TO PAYER.
Social Security numbers have nine digits separated by two hyphens: i.e.
000-00-0000. Employer identification numbers have nine digits separated by only
one hyphen: i.e. 00-0000000. The table below will help determine the number to
give the payer.
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------
GIVE THE SOCIAL
SECURITY
FOR THIS TYPE OF ACCOUNT: NUMBER OF --
- ------------------------------------------------------------
1. An individual's account The individual account
2. Two or more individuals The actual owner of the
(joint account) account or, if combined
funds, any one of the
individuals(1)
3. Husband and wife (joint The actual owner of the
account) account or, if joint funds,
either person(1)
4. Custodian account of a minor The minor(2)
(Uniform Gift to Minors Act)
5. Adult or minor (joint The adult or, if the minor
account) is the only contributor, the
minor(1)
6. Account in the name of The ward, minor, or
guardian or committee for a incompetent person(6)
designated ward, minor, or
incompetent person
7.a The usual revocable savings The grantor-trustee(1)
trust account (grantor is
also trustee)
7.b So-called trust account that The actual owner(1)
is not a legal or valid
trust under State law
- ------------------------------------------------------------
- ------------------------------------------------------------
GIVE THE EMPLOYER
IDENTIFICATION
FOR THIS TYPE OF ACCOUNT: NUMBER OF --
- ------------------------------------------------------------
8. Sole proprietorship account The Owner(4)
9. A valid trust, estate, or Legal entity (do not furnish
pension the identifying number of
the personal representative
or trustee unless the legal
entity itself is not
designated in the account
title).(5)
10. Corporate account The Corporation
11. Religious, charitable, or The organization
educational organization
account
12. Partnership account held in The partnership
the name of the business
13. Association, club, or other The organization
tax-exempt organization
14. A broker or registered The broker or nominee
nominee
15. Account with the Department The public entity
of Agriculture in the name
of a public entity (such as
a State or local government,
school district, or prison)
that receives agricultural
program payments
- ------------------------------------------------------------
</TABLE>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Circle the ward's, minor's or incompetent person's name and furnish such
person's social security number.
(4) Show the name of the owner. You may use either the owner's social security
number or employer identification number.
(5) List first and circle the name of the legal trust, estate, or pension trust.
NOTE: If no name is circled when there is more than one name, the number will be
considered to be that of the first name listed.
<PAGE> 5
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
PAGE 2
HOW TO OBTAIN A TIN
If you don't have a taxpayer identification number, apply for one immediately.
To apply, obtain Form SS-5, Application for a Social Security Number Card, or
Form SS-4, Application for Employer Identification Number, at the local post
office of the Social Security Administration or the Internal Revenue Service.
If you do not have a TIN, write "Applied For" in the space for the TIN in Part
I, sign and date the form, and give it to the payer. Generally, you will then
have 60 days to get a TIN and give it to the payer. If the payer does not
receive your TIN within 60 days, backup withholding, if applicable, will begin
and continue until you furnish your TIN.
NOTE: Writing "Applied For" on the form means that you have already applied for
a TIN or that you intend to apply for one soon. As soon as you receive your TIN,
complete another Form W-9, include your TIN, sign and date the form, and send it
to the payer.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
Payees specifically exempted from backup withholding on ALL payments of
interest, dividends and gross proceeds from a sale or other disposition include
the following:
- - A corporation.
- - A financial institution.
- - An organization exempt from tax under section 501(a), or an individual
retirement account, or a custodial account under Section 403(b)(7).
- - The United States or any agency or instrumentality thereof.
- - A State, the District of Columbia, a possession of the United States, or any
subdivision or instrumentality thereof.
- - A foreign government, a political subdivision of a foreign government, or any
agency or instrumentality thereof.
- - An international organization or any agency, or instrumentality thereof.
- - A registered dealer in securities or commodities registered in the U.S.
- - A real estate investment trust.
- - A common trust fund operated by a bank under section 584(a).
- - An entity registered at all times under the Investment Act of 1940.
- - A foreign central bank of issue.
Payments of dividends and patronage dividends not generally subject to backup
withholding include the following:
- - Payments to nonresident aliens subject to withholding under section 1441.
- - Payments to partnerships not engaged in a trade or business in the U.S. and
which have at least one nonresident partner.
- - Payments of patronage dividends where a trade or business in the U.S. and
which have at least one nonresident partner.
- - Payments of patronage dividends where the amount received is not paid in
money.
- - Payments made by certain foreign organizations.
- - Payments made to a nominee.
- - Payments to an exempt charitable remainder trust, or a non-exempt trust
described in section 45957(a)(1).
Payments of interest not generally subject to backup withholding include the
following:
- - Payments of interest on obligations issued by individuals. Note: You may be
subject to backup withholding if this interest is $600 or more and is paid in
the course of the payer's trade or business and you have not provided your
correct taxpayer identification number to the payer.
- - Payments of tax-exempt interest (including exempt interest dividends under
section 852).
- - Payments described in section 6049(b)(5) to nonresident aliens.
- - Payments on tax-free covenant bonds under section 1451.
- - Payments to an exempt charitable remainder trust, or a non-exempt trust
described in section 45957(a)(1).
- - Payments made by certain foreign organizations.
- - Payments made to a nominee.
Exempt payees described above should file Form W-9 to avoid possible erroneous
backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR TAXPAYER
IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT TO
THE PAYER, IF THE PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS, ALSO
SIGN AND DATE THE FORM.
Certain payments other than interest, dividends, and gross proceeds from a sale
or other disposition effectuated by or through a broker that are not subject to
information reporting are also not subject to backup withholding. For details,
see the regulations under sections 6041, 6041A(a), 6044, and 6050A.
PENALTIES
(3) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. If you fail
to furnish your taxpayer identification number to a payer, you are subject
to a penalty of $50 for each such failure unless your failure is due to
reasonable cause and not to willful neglect.
(4) FAILURE TO REPORT CERTAIN DIVIDEND AND INTEREST PAYMENTS. If you fail to
include any portion of an includible payment for interest, dividends, or
patronage dividends in gross income, such failure will be treated as being
due to negligence and will be subject to a penalty of 20% on any portion of
an under-payment attributable to that failure unless there is clear and
convincing evidence to the contrary.
(5) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. If you make
a false statement with no reasonable basis which results in no imposition of
backup withholding, you are subject to a penalty of $500.
(6) CRIMINAL PENALTY FOR FALSIFYING INFORMATION. Falsifying certifications or
affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE.
<PAGE> 1
MESA INC.
RIGHTS OFFERING
DTC PARTICIPANT OVERSUBSCRIPTION FORM
THIS FORM IS TO BE USED ONLY BY DEPOSITORY TRUST COMPANY PARTICIPANTS TO
EXERCISE THE OVERSUBSCRIPTION PRIVILEGE IN RESPECT OF RIGHTS WITH RESPECT TO
WHICH THE BASIC SUBSCRIPTION PRIVILEGE WAS EXERCISED AND DELIVERED THROUGH THE
FACILITIES OF THE DEPOSITORY TRUST COMPANY. ALL OTHER EXERCISES OF
OVERSUBSCRIPTION PRIVILEGES MUST BE EFFECTED BY THE DELIVERY OF THE SUBSCRIPTION
FORMS.
---------------------
THE TERMS AND CONDITIONS OF THE RIGHTS OFFERING ARE SET FORTH IN THE PROSPECTUS
OF MESA INC. ("MESA") DATED , 1996 (THE "PROSPECTUS") AND ARE
INCORPORATED HEREIN BY REFERENCE. COPIES OF THE PROSPECTUS ARE AVAILABLE UPON
REQUEST FROM MESA, THE INFORMATION AGENT, THE DEALER MANAGER AND THE
SUBSCRIPTION AGENT.
---------------------
VOID UNLESS RECEIVED BY THE SUBSCRIPTION AGENT WITH PAYMENT IN FULL BY 5:00
P.M., NEW YORK CITY TIME, ON , 1996 (THE "EXPIRATION DATE").
---------------------
1. The undersigned hereby certifies to Mesa and the Subscription Agent that
it is a participant in The Depository Trust Company ("DTC") and that it has
either (i) exercised the Basic Subscription Privilege in respect of Rights and
delivered such exercised Rights to the Subscription Agent by means of transfer
to the DTC account of the Subscription Agent or (ii) delivered to the
Subscription Agent a Notice of Guaranteed Delivery in respect of the exercise of
the Basic Subscription Privilege and will deliver the Rights called for in such
Notice of Guaranteed Delivery to the Subscription Agent by means of transfer to
such DTC account of the Subscription Agent. The undersigned hereby certifies to
Mesa and the Subscription Agent that it owned Shares of Common Stock
on , 1996 (the "Record Date").
2. The undersigned hereby exercises the Oversubscription Privilege to
purchase, to the extent available, shares of Series A 8% Cumulative
Convertible Preferred Stock and certifies to Mesa and the Subscription Agent
that such Oversubscription Privilege is being exercised for the account or
accounts of persons (which may include the undersigned) on whose behalf all
basic subscription privilege rights have been exercised.
<PAGE> 2
3. The undersigned understands that payment of the Subscription Price of
$2.26 per share for each share of Series A 8% Cumulative Convertible Preferred
Stock subscribed for pursuant to the Oversubscription Privilege must be received
by the Subscription Agent at or before 5:00 p.m. New York City time on the
Expiration Date and represents that such payment, in the aggregate amount of
$ either (check appropriate box):
/ / has been or is being delivered to the Subscription Agent pursuant to
the Notice of Guaranteed Delivery referred to above
or
/ / is being delivered to the Subscription Agent herewith
or
/ / has been delivered separately to the Subscription Agent;
and, in the case of funds not delivered pursuant to a Notice of Guaranteed
Delivery, is or was delivered in the manner set forth below (check appropriate
box and complete information relating thereto):
/ / uncertified check
/ / certified check
/ / bank draft
- --------------------------------------
Basic Subscription Confirmation Number
- --------------------------------------
DTC Participant
- --------------------------------------
Name of DTC Participant
By:
- --------------------------------------
Name:
Title:
Contact Name:
- ------------------------------------------
Phone Number:
- ------------------------------------------
Dated:
- ------------------------------------ 1996
<PAGE> 1
NOMINEE HOLDER CERTIFICATION AND REQUEST FOR ADDITIONAL RIGHTS
To the Subscription Agent:
The undersigned hereby certifies that it is a broker-dealer registered with
the Securities and Exchange Commission, a commercial bank or trust company, a
securities depository or participant therein, or a nominee therefor, holding of
record shares of Common Stock, par value $.01 per share ("Common
Stock"), of MESA Inc. ("Mesa") on behalf of beneficial owners as of
the close of business on , 1996, (the "Record Date") for the
offering by Mesa of an aggregate of approximately 58,407,080 shares of Series A
8% Cumulative Convertible Preferred Stock pursuant to transferable subscription
rights (the "Rights") being distributed to record holders of shares of Common
Stock, all as described in Mesa's Prospectus dated , 1996 (the
"Prospectus"), a copy of which the undersigned has received. As stated in the
Prospectus, .912 Rights are being distributed for each share of Common Stock
held of record as of the close of business on the Record Date, and any
fractional Right will be rounded up to the nearest whole number. The undersigned
further certifies that beneficial owners on whose behalf it held, as
of the close of business on the Record Date, an aggregate of shares
of Common Stock registered in the name of the undersigned are each entitled to
an additional Right in accordance with the policy stated in the Prospectus that
any fractional Right to which a beneficial owner would otherwise be entitled
should be rounded up to the nearest whole number. Accordingly, the undersigned
requests that, upon surrender of its Subscription Certificate evidencing
Rights, a Subscription Certificate evidencing Rights
(including additional Rights in lieu of fractional Rights) be
issued. The undersigned further certifies that each such beneficial owner is a
bona fide beneficial owner of shares of Common Stock, that such beneficial
ownership is reflected on the undersigned's records and that all shares of
Common Stock which, to the undersigned's knowledge, are beneficially owned by
any such beneficial owner through the undersigned have been aggregated in
calculating the foregoing. The undersigned agrees to provide Mesa or its
designee with such additional information as Mesa deems necessary to verify the
foregoing.
-----------------------------------------
Name of Record Holder
By:
-----------------------------------------
Name:
Title:
Address:
Telephone Number:
Date:
-------------------------------- , 1996
<PAGE> 1
EXHIBIT 12
MESA INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
The following computation of the ratio of earnings to fixed charges for the
years ended December 31, 1991, 1992, 1993, 1994 and 1995 and each of the
three-month periods ended March 31, 1995 and 1996 represent the actual results
of Mesa's operations for those periods.
The columns entitled "As Adjusted for the Recapitalization" include data
for Mesa after giving effect to the Recapitalization as if such Recapitalization
had occurred on January 1, 1995.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------------------------------------ ------------------------------------
1995 1995 1996
--------------------------- ------- --------------------------
AS ADJUSTED AS ADJUSTED
FOR THE FOR THE
1991 1992 1993 1994 ACTUAL RECAPITALIZATION ACTUAL RECAPITALIZATION
-------- -------- --------- -------- -------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNINGS:
Net income
(loss)...... $(79,163) $(89,232) $(102,448) $(83,353) $(57,568) $ (6,970) $(7,894) $ 1,057 $ 8,527
Adjustments:
Interest
expense... 150,770 143,392 142,002 144,757 148,630 87,549 36,663 37,749 22,617
-------- -------- -------- -------- -------- -------- ------- ------- -------
Total
earnings.... $ 71,607 $ 54,160 $ 39,554 $ 61,404 $ 91,062 $ 80,579 $28,769 $38,806 $ 31,144
======== ======== ======== ======== ======== ======== ======= ======= =======
Fixed charges
Interest
capitalized... $ -- $ 2,365 $ 2,884 $ 104 $ 908 $ 908 $ -- $ 68 $ 68
Interest
expense... 150,770 143,392 142,002 144,757 148,630 87,549 36,663 37,749 22,617
-------- -------- -------- -------- -------- -------- ------- ------- -------
Total fixed
charges..... $150,770 $145,757 $ 144,886 $144,861 $149,538 $ 88,457 $36,663 $37,817 $ 22,685
======== ======== ======== ======== ======== ======== ======= ======= =======
Ratio of
earnings to
fixed
charges..... NM NM NM NM NM NM NM 1.03 1.37
======== ======== ======== ======== ======== ======== ======= ======= =======
Preferred
dividend
requirements... $ 21,845 $ 5,737
======== =======
Total fixed
charges and
preferred
dividends... $110,302 $ 28,422
======== =======
Ratio of
earnings to
combined
fixed
charges and
preferred
dividends... NM 1.10
======== =======
Amount by
which fixed
charges
exceed
earnings.... $ 79,163 $ 91,597 $ 105,332 $ 83,457 $ 58,476 $ 7,908 $ 7,894 $ -- $ --
======== ======== ======== ======== ======== ======== ======= ======= =======
Amount by
which
combined
fixed
charges and
preferred
dividends
exceed
earnings.... $ 29,723 $ --
======== =======
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our firm) included in or made a part of this
Registration Statement and to the incorporation by reference in this
Registration Statement of our report dated March 6, 1996, included in Mesa
Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Houston, Texas
June 12, 1996
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
The undersigned directors and executive officers of MESA Inc. hereby
constitute and appoint Stephen K. Gardner and William D. Ballew, and each of
them, with full power to act without the other and with full power of
substitution and resubstitution, our true and lawful attorneys-in-fact with full
power to execute in our name and behalf in the capacities indicated below any
and all amendments (including post-effective amendments and amendments thereto)
to this Registration Statement and to file the same, with all exhibits thereto
and other documents in connection therewith with the Securities and Exchange
Commission and hereby ratify and confirm all that such attorneys-in-fact, or
either of them, or their substitutes shall lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------- ------------------------------- --------------------
<C> <S> <C>
Chief Executive Officer and
- ------------------------------------------------- Chairman of the Board of
Boone Pickens Directors (Principal
Executive Officer)
President, Chief Operating
- ------------------------------------------------- Officer and Director
Paul W. Cain
Vice President and Chief
- ------------------------------------------------- Financial Officer (Principal
Stephen K. Gardner Financial Officer)
Controller (Principal
- ------------------------------------------------- Accounting Officer)
William D. Ballew
/s/ JOHN S. HERRINGTON Director May 10, 1996
- -------------------------------------------------
John S. Herrington
Director
- -------------------------------------------------
Wales H. Madden, Jr.
Director
- -------------------------------------------------
Dorn Parkinson
Director
- -------------------------------------------------
Joel L. Reed
Director
- -------------------------------------------------
Fayez S. Sarofim
Director
- -------------------------------------------------
Robert L. Stillwell
</TABLE>
