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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
=========
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-10874
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MESA INC.
=========
(Exact name of registrant as specified in its charter)
Texas 75-2394500
----- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1400 Williams Square West
5205 North O'Connor Boulevard
Irving, Texas 75039
---------------------------- -----
(Address of Principal (Zip Code)
Executive Offices)
(214) 444-9001
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(Registrant's telephone number)
(No changes)
------------
(Former name, former address, and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
------- -------
Number of shares outstanding as of the close of business on August 11,
1995: 64,050,009.
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PART I - FINANCIAL INFORMATION
==============================
Item 1. Financial Statements
-----------------------------
MESA INC.
=========
Consolidated Statements of Operations
-------------------------------------
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
1995 1994 1995 1994
-------- -------- -------- --------
REVENUES:
Natural gas.................... $ 32,875 $ 31,995 $ 68,731 $ 72,701
Natural gas liquids............ 18,573 16,537 36,779 32,809
Oil and condensate............. 5,174 2,088 10,567 3,699
Other.......................... 2,552 2,741 5,344 5,236
-------- -------- -------- --------
59,174 53,361 121,421 114,445
-------- -------- -------- --------
COSTS AND EXPENSES:
Lease operating................ 10,626 13,582 23,200 27,230
Production and other taxes..... 4,482 5,317 9,227 10,539
Exploration charges............ 933 1,084 2,237 1,856
General and administrative..... 5,763 6,601 12,407 12,555
Depreciation, depletion
and amortization.............. 20,290 21,910 41,296 47,222
-------- -------- -------- --------
42,094 48,494 88,367 99,402
-------- -------- -------- --------
OPERATING INCOME.................... 17,080 4,867 33,054 15,043
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest income................ 4,191 3,279 8,100 5,701
Interest expense............... (36,449) (36,809) (73,112) (72,975)
Gains (losses) on futures and
securities investments........ (2,804) (4,402) 1,749 (5,321)
Gain from collection of
interest from Bicoastal
Corporation................... -- 9,236 4,653 16,577
Other.......................... 4,029 (1,509) 3,709 (2,129)
-------- -------- -------- --------
(31,033) (30,205) (54,901) (58,147)
-------- -------- -------- --------
NET LOSS............................ $(13,953) $(25,338) $(21,847) $(43,104)
======== ======== ======== ========
NET LOSS PER COMMON SHARE........... $ (0.22) $ (0.43) $ (0.34) $ (0.80)
======== ======== ======== ========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING................ 64,050 59,426 64,050 53,585
======== ======== ======== ========
(See accompanying notes to consolidated financial statements.)
MESA INC.
=========
Consolidated Balance Sheets
---------------------------
(in thousands, except share data)
June 30, December 31,
ASSETS 1995 1994
----------- ------------
(unaudited)
CURRENT ASSETS:
Cash and cash investments.................... $ 182,942 $ 143,422
Marketable securities and futures contracts.. 5,418 19,112
Accounts and notes receivable................ 38,516 38,938
Other........................................ 4,772 3,372
---------- ----------
Total current assets.................... 231,648 204,844
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Oil and gas properties, wells and
equipment using the successful
efforts method of accounting............... 1,880,415 1,867,842
Office and other............................. 40,363 43,836
Accumulated depreciation, depletion
and amortization........................... (817,524) (781,230)
---------- ----------
1,103,254 1,130,448
---------- ----------
OTHER ASSETS:
Restricted cash of subsidiary partnership.... 57,723 61,299
Gas balancing receivable..................... 54,248 54,971
Other........................................ 33,119 32,397
---------- ----------
145,090 148,667
---------- ----------
$1,479,992 $1,483,959
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities on long-term debt......... $ 106,373 $ 30,537
Accounts payable and accrued liabilities..... 24,118 40,468
Interest payable............................. 18,255 18,184
---------- ----------
Total current liabilities............... 148,746 89,189
---------- ----------
LONG-TERM DEBT.................................... 1,156,089 1,192,756
---------- ----------
DEFERRED REVENUE.................................. 19,433 21,900
---------- ----------
OTHER LIABILITIES................................. 52,999 55,542
---------- ----------
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.......................... (296,880) (275,033)
---------- ----------
102,725 124,572
---------- ----------
$1,479,992 $1,483,959
========== ==========
(See accompanying notes to consolidated financial statements.)
MESA INC.
=========
Consolidated Statements of Cash Flows
-------------------------------------
(in thousands)
(unaudited)
Six Months Ended
June 30
-------------------
1995 1994
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................... $(21,847) $(43,104)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation, depletion and amortization..... 41,296 47,222
Accreted interest on discount notes.......... 39,169 40,301
Litigation settlement........................ -- (42,750)
(Gains) losses on futures and
securities investments..................... (1,749) 5,321
Changes in operating receivables and payables (18,268) (7,379)
Changes in marketable securities and
futures contracts, net..................... 15,743 (253)
Other........................................ (907) 1,248
-------- --------
Cash provided by operating activities........ 53,437 606
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.............................. (19,392) (7,647)
Other............................................. 2,025 (3,606)
-------- --------
Cash used in investing activities............ (17,367) (11,253)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock.......................... -- 93,091
Long-term borrowings.............................. -- 42,750
Repayments of long-term debt...................... -- (134,997)
Other............................................. 3,450 2,323
-------- --------
Cash provided by financing activities........ 3,450 3,167
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH INVESTMENTS... 39,520 (7,480)
CASH AND CASH INVESTMENTS AT BEGINNING OF PERIOD....... 143,422 138,709
-------- --------
CASH AND CASH INVESTMENTS AT END OF PERIOD............. $182,942 $131,229
======== ========
(See accompanying notes to consolidated financial statements.)
MESA INC.
=========
Consolidated Statement of Changes in Stockholders' Equity
---------------------------------------------------------
(in thousands)
(unaudited)
Common Stock Additional
--------------- Paid-in Accumulated
Shares Amount Capital Deficit
------ ------ ---------- -----------
BALANCE, December 31, 1994..... 64,050 $640 $398,965 $(275,033)
Net loss.................. -- -- -- (21,847)
------ ---- -------- ---------
BALANCE, June 30, 1995......... 64,050 $640 $398,965 $(296,880)
====== ==== ======== =========
(See accompanying notes to consolidated financial statements.)
MESA INC.
=========
Notes to Consolidated Financial Statements
------------------------------------------
June 30, 1995
(unaudited)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
===========================================================
MESA Inc., a Texas corporation, was formed 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 consolidated financial statements of the Company for the three-
month and six-month periods ended June 30, 1995 and 1994, 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 accompanying financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto contained in the Company's Annual Report on Form 10-K for the year
ended December 31, 1994.
Principles of Consolidation
---------------------------
The Company 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 the
Company and its subsidiaries after elimination of intercompany transactions.
Certain reclassifications have been made to amounts reported in the
previous year 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
-----------
The Company 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.
The Company also enters into various futures contracts which are not
intended to be a hedge of future natural gas or crude oil production.
Investments in such contracts are periodically adjusted to market prices and
gains and losses are included in gains (losses) on futures and securities
investments in the consolidated 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. 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 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 issued Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," which establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill. SFAS No. 121
requires a review for impairment wherever circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company would
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 less than the expected future cash flows
and the amount of impairment is based on the fair value of the asset. SFAS
No. 121 is effective for fiscal years beginning after December 15, 1995.
The Company has not yet determined whether it will adopt the provisions of
SFAS No. 121 in 1995 or what amount of impairment, if any, may result from
adoption of this standard.
Net Loss Per Common Share
-------------------------
The computations of net loss per common share are based on the weighted
average number of common shares outstanding during each period.
Fair Value of Financial Instruments
-----------------------------------
The Company's financial instruments consist of cash, marketable
securities, 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 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 June 30, 1995, the Company had produced and sold a net 20.4
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 $37.9 million. Substantially all of the
Company's gas balancing receivables and deferred revenue are classified as
long-term.
The Company periodically enters into 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 $6.4
million in the second quarter of 1995 and $11.3 million in the six months
ended June 30, 1995, related to hedging activities. The Company recognized
no hedge gains or losses in the first half of 1994. At June 30, 1995, the
Company had deferred gains of $1.5 million resulting from hedging a portion
of the Company's anticipated natural gas production for the remainder of
1995, primarily for the third quarter. These deferred gains and any
increases or decreases after June 30, 1995, in the value of open hedge
contracts related to such production periods will be recognized as natural
gas revenues when the hedged production occurs. The Company had no open
hedge positions at June 30, 1995.
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 and current maturities. Hugoton Capital Limited Partnership ("HCLP")
is the obligor on approximately 41% of the Company's consolidated long-term
debt. HCLP, an indirect, wholly owned subsidiary of the Company, was formed
in 1991 to issue long-term debt which is secured by the Company's Hugoton
field properties, which represent approximately 65% of the Company's total
proved oil and gas reserves. The assets and cash flows of HCLP that are
subject to the mortgage securing HCLP's debt are dedicated to service such
debt and are not available to pay creditors of the Company or its
subsidiaries other than HCLP. On December 31, 1995, the Company is required
to begin making cash interest payments on its secured and unsecured discount
notes. Such notes have an aggregate principal amount of $657 million and
bear interest at a 12-3/4% annual rate, payable semiannually. Such cash
interest payments are expected to total $41.9 million on December 31, 1995,
and $81.3 million in 1996. The Company also has significant debt principal
payments due in 1996 through 1998. See Note 4 for a description of the
Company's long-term debt.
The Company's cash flows from operating activities are substantially
dependent on the amount of oil and gas produced and the price received for
such production. The Company expects that cash generated by its 1995
production, together with available cash and securities balances, will be
sufficient to cover its debt principal and interest obligations and capital
expenditures through December 31, 1995.
The Company's current financial forecasts indicate that it will be
unable to fund its principal and interest obligations in 1996 with cash
flows from operating activities and available cash and securities balances.
The Company has been advised by its independent public accountants that, if
this matter has not been resolved prior to the completion of their audit of
the Company's financial statements for the year ended December 31, 1995,
their auditors' report on those financial statements may contain a
going-concern modification.
Exploration of Strategic Alternatives
-------------------------------------
In an effort to address its cash flow situation 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 concluded the auction
process in the second quarter after no acceptable bids were received for the
Hugoton properties.
On July 6, 1995, the Board of Directors approved a proposal to expand
its review of strategic alternatives to include consideration of the sale of
the Company and a stock-for-stock merger. The Board also determined to
continue to explore the sale of all or a portion of the Company's Hugoton
field properties and to explore other restructuring alternatives, including
possible joint ventures involving the Hugoton properties, asset sales,
equity infusions, and refinancing transactions. The Board engaged
independent financial advisors to manage these efforts and to seek
indications of interest from potential buyers of the Company or its
properties and of potential merger partners for the Company. Data rooms for
the sale of the Hugoton reserves in one, or as many as eight, packages and
for companies interested in purchasing or merging with the Company will open
in September.
There can be no assurance that a sale or merger of the Company or a
sale of its properties will be completed, or if completed, what the terms
thereof will be.
In July 1995, in conjunction with the determination of the Company's
Board of Directors (the "Board") to include the possible sale or merger of
the Company among its strategic alternatives, the Board approved a proposal
that the Company adopt a limited-term stockholder rights plan (the "Rights
Plan"). The provisions of the Rights Plan would be triggered if a person or
group acquired beneficial ownership of 10% or more of the Company's common
stock after July 6, 1995, except pursuant to a "permitted offer" -- a tender
or exchange offer that meets certain criteria, whether or not approved by
the Board. However, if any person or group beneficially owned more than 10%
of the common stock on July 6, 1995, the Rights Plan would not be triggered
unless that person or group were to obtain beneficial ownership of more than
100,000 additional shares. If triggered, the Rights Plan would allow all
stockholders, other than the person or group exceeding the ownership
threshold, to purchase common stock at a 50% discount.
See Note 5 for information regarding the status of certain pending
litigation.
(3) MARKETABLE SECURITIES
=====================
The value of marketable securities and futures contracts are as follows
(in thousands):
June 30, December 31,
1995 1994
--------- ------------
Equity Securities:
Cost...................................... $ -- $ 9,489
Unrealized loss........................... -- (1,381)
Futures Contracts:
Margin cash............................... 6,466 1,337
Unrealized gain in hedge contracts........ -- 6,823
Unrealized gain (loss) in investment
contracts............................... (1,048) 2,844
------- -------
Total market value........................ $ 5,418 $19,112
======= =======
For the six months ended June 30, 1995, the Company recognized a net
gain of $1.7 million from its investments in marketable securities and
futures contracts compared with a net loss for the same period in 1994 of
$5.3 million. The net 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 gains and losses on futures and securities investments
recognized during a period include both realized and unrealized gains and
losses. During the six-month period ended June 30, 1995, the Company
realized net gains of $3.6 million from securities transactions and futures
contracts. The Company realized net losses from securities transactions and
futures contracts of $5.2 million during the six-month period ended June 30,
1994.
(4) LONG-TERM DEBT
==============
Long-term debt and current maturities are as follows (in thousands):
June 30, December 31,
1995 1994
---------- ------------
HCLP Secured Notes........................... $ 520,180 $ 520,180
Credit Agreement............................. 71,131 71,131
12-3/4% secured discount notes............... 618,731 581,942
12-3/4% unsecured discount notes............. 39,725 37,345
13-1/2% subordinated notes................... 7,390 7,390
Other........................................ 5,305 5,305
---------- ----------
1,262,462 1,223,293
Current maturities........................... (106,373) (30,537)
---------- ----------
Long-term debt............................... $1,156,089 $1,192,756
========== ==========
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 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 June 30, 1995, bear interest at fixed rates
ranging from 8.8% to 11.3% per annum (weighted average 10.27%). 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. Such
premiums have increased the effective weighted average interest rate payable
on the remaining HCLP Secured Notes outstanding to 10.37% per annum at June
30, 1995. According to current expectations, principal payments based on
actual production and prices could reduce principal payments from the
initial scheduled amortization by approximately $50 million from August 1994
through 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 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.
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.
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 (10.27% at June 30, 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):
June 30, December 31,
1995 1994
--------- ------------
Subject to the mortgage....................... $51,235 $48,087
Not subject to the mortgage................... 12,650 1,551
------- -------
Cash included in current assets............... $63,885 $49,638
======= =======
Restricted cash included in noncurrent assets. $57,723 $61,299
======= =======
Refundable GIC fee included in
noncurrent assets........................... $ 9,670 $10,295
======= =======
Mesa Operating Co. ("MOC"), a Company subsidiary which owns
substantially all 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, process
remittances of production revenues and perform certain other administrative
functions in exchange for a services fee. The fee totaled approximately
$7.6 million for the first six months of 1995 and $6.9 million for the same
period in 1994.
See Note 2 for discussion of a possible sale or merger of the Company
or sale of the Hugoton properties and "Effect of Potential Sales or Merger"
below.
Credit Agreement
----------------
In the fourth quarter of 1994 the Company negotiated an amendment to
its bank credit agreement, as amended, (the "Credit Agreement") which
extended its final maturity date from June 1995 until June 1997 and
increased the amount that may be borrowed from the then outstanding $47.5
million to $82.5 million, including letters of credit. The Credit Agreement
requires principal payments of $10 million in December 1995, $22.5 million
in 1996, and the remainder in June 1997 (including cash collateralization of
letters of credit outstanding at that time). As of June 30, 1995, the
Company had outstanding borrowings of approximately $71.1 million and letter
of credit obligations of $11.4 million under the Credit Agreement.
The rate of interest payable on borrowings under the Credit Agreement
is 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 Credit Agreement requires the Company to maintain tangible adjusted
equity, as defined, of $50 million and available cash, as defined, of $32.5
million. At June 30, 1995, the Company's tangible adjusted equity, as
defined, was approximately $102.7 million and available cash, as defined,
was $138.2 million. The Company's current financial forecasts indicate that
tangible adjusted equity, as defined, may fall below $50 million in early
1996 unless the Company is able to sell additional equity or recognize gains
from asset sales or other sources. If tangible adjusted equity, as defined,
is less than $50 million, the banks will have the right to accelerate all
outstanding principal and require cash collateralization of letters of
credit. A default under the Credit Agreement would cause an event of
default under the Company's discount notes (see "Discount Notes" below)
unless the default is cured or waived or the debt under the Credit Agreement
is repaid or otherwise discharged.
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
early 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.
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 accrues interest at an annual rate of
12-3/4%, payable in cash semiannually in arrears, with the first payment due
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 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 Credit Agreement to redeem $37.6 million accreted value
($40.0 million face amount at maturity) of 12-3/4% unsecured discount notes
which were due in 1996.
The 12-3/4% secured discount notes are secured by second liens on the
Company's West Panhandle field properties and a 76% limited partner interest
in HCLP, both of which also secure obligations under the Credit Agreement.
The Company's right to maintain first lien debt, as defined, is limited by
the terms of the Discount Notes to $82.5 million.
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 made during the six months ended June
30, 1995 and 1994, were $31.7 million and $31.6 million, respectively. In
addition, payment of approximately $39.2 million and $36.0 million of
interest expense incurred during the six-month periods ended June 30, 1995
and 1994, respectively, has been deferred until maturity under the terms of
the Discount Notes. Such interest is included in interest expense in the
consolidated statements of operations for the six-month periods ended June
30, 1995 and 1994.
The scheduled principal repayments on long-term debt for the remainder
of 1995 and for the four succeeding years are as follows (in millions):
1995 1996 1997 1998 1999
------ ------ ------ ------ ------
HCLP Secured Notes................. $ 15.5 $ 34.0 $ 37.2 $ 38.4 $ 51.9
Credit Agreement(a)(b)............. 10.0 22.5 38.6 -- --
12-3/4% secured discount notes..... -- -- -- 617.4 --
12-3/4% unsecured discount notes... -- 39.7 -- -- --
13-1/2% subordinated notes......... -- -- -- -- 7.4
Other.............................. 5.3 -- -- -- --
------ ------ ------ ------ ------
Total......................... $ 30.8 $ 96.2 $ 75.8 $655.8 $ 59.3
====== ====== ====== ====== ======
----------
(a) Excludes approximately $11.4 million in letter of credit obliga-
tions currently outstanding and required to be cash collateralized
in June 1997.
(b) Maturities may be accelerated if tangible adjusted equity, as
defined, falls below $50 million. See "Credit Agreement" above.
Fair Value of Long-term Debt
----------------------------
The following is a summary of estimated fair value of the Company's
long-term debt (in thousands):
June 30, 1995 December 31, 1994
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
HCLP Secured Notes.............. $520,180 $572,198 $520,180 $535,135
Credit Agreement................ 71,131 71,131 71,131 71,131
12-3/4% secured discount notes.. 618,731 554,833 581,942 528,688
12-3/4% unsecured discount notes 39,725 35,697 37,345 37,591
13-1/2% subordinated notes...... 7,390 7,390 7,390 7,390
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.
Effect of Potential Sales or Mergers
------------------------------------
Proceeds from the sale of the Hugoton field reserves (see Note 2) would
be used to retire debt. In the event of a sale or merger of the Company,
provision would need to be made for the repayment, refinancing, or
assumption of the Company's debt. Any sale of assets might also be
accompanied by a refinancing of the Company's remaining debt. With respect
to sales of the Hugoton assets, any sales proceeds must first be applied
against the outstanding balances related to the HCLP Secured Notes, which
are secured by the Hugoton properties. Such balances include note
principal, accrued interest and any premiums due, including premiums for
early retirement of the HCLP Secured Notes. As of June 30, 1995, such
premiums for early retirement of the HCLP Secured Notes would have totaled
approximately $73.2 million. The actual premiums due in the event of a
redemption of the HCLP Secured Notes will depend upon the prevailing
interest rates at the date of redemption and the amount of debt redeemed.
The restricted cash held at HCLP would be available to repay obligations
under the HCLP Secured Notes. Sales proceeds with respect to the Hugoton
assets remaining after satisfying the HCLP Secured Note obligations would
first be applied to the amounts outstanding under the amended Credit
Agreement, including cash collateralization of outstanding letters of
credit, and then to the Discount Notes.
(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. The Company owns an interest in 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's interest
in the Gas Lease. 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 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 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 operation.
Reference is made to Item 3 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1994, as well as Notes 2 and 9 to the
Company's financial statements included in such Form 10-K, for additional
information regarding this lawsuit.
Preference Unitholders
----------------------
The Company is a defendant in lawsuits related to the Corporate
Conversion filed in the U.S. District Court for the Northern District of
Texas--Dallas Division. The plaintiffs alleged, among other things, that
(i) the proxy materials delivered to unitholders in connection with the
Corporate Conversion contained material misstatements and omissions, (ii)
the General Partner of the Partnership breached fiduciary duties to the
preference unitholders in structuring the transaction and allocating the
common stock of the Company and (iii) the Corporate Conversion was
implemented in breach of the partnership agreement of the Partnership
because defendants allegedly did not obtain the requisite opinion of
independent counsel regarding certain tax effects of the transaction. The
Company and the other defendants have denied the allegations and believe
they are without merit. The plaintiffs sought a declaration declaring the
Corporate Conversion void and rescinding it, an order requiring payment of
$164 million to the former preference unitholders in respect of the
preferential distribution rights of their units, unspecified compensatory
and punitive damages and other relief.
On August 12, 1994, the Court entered an order denying plaintiff's
motion for a summary judgment and granted the Company's motion for a summary
judgment. A final judgment was entered dismissing the case. A notice of
appeal was filed August 19, 1994, by the plaintiffs. The Fifth Circuit
Court of Appeals entered an opinion on June 19, 1995, affirming the judgment
of the District Court.
The Company does not expect the resolution of this lawsuit to have a
material adverse effect on its financial position or results of operations.
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.
(6) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
============================================
The Company conducts its operations through various direct and indirect
subsidiaries. On June 30, 1995, the Company's direct subsidiaries were MOC,
Mesa Holding Co. ("MHC") and Hugoton Management Co. ("HMC"). MOC owns all
of the Company's interest in the West Panhandle field of Texas, the Gulf
Coast and the Rocky Mountain areas, as well as an approximate 99% limited
partnership interest in HCLP. MHC owns cash, an approximate 1% limited
partnership interest in HCLP, and 100% of MESA Environmental Ventures Co.
("Mesa Environmental"), a Company established to compete in the natural gas
vehicle market. HMC owns the general partner interest of HCLP. HCLP owns
substantially all of the Company's Hugoton field natural gas properties and
is liable for the HCLP Secured Notes (see Note 4). The assets and cash
flows of HCLP that are subject to the mortgage securing the HCLP Secured
Notes are dedicated to service the HCLP Secured Notes and are not available
to pay creditors of the Company or its subsidiaries other than HCLP. MOC
and the Company are liable for the amounts outstanding under the amended
Credit Agreement, the 13-1/2% subordinated notes and the Discount Notes.
Mesa Capital Corp. ("Mesa Capital"), a wholly owned financing subsidiary of
MOC, is also an obligor under the 13-1/2% subordinated notes and the
Discount Notes. Mesa Capital, which has insignificant assets and results of
operations, is included with MOC in the condensed consolidating financial
statements. Other Company Subsidiaries in the condensed consolidating
financial statements include MHC, HMC, and Mesa Environmental.
The following are condensed consolidating financial statements of MESA
Inc., HCLP, MOC, and the Company's other direct and indirect subsidiaries
combined (in millions):
Condensed Consolidating Balance Sheets
--------------------------------------
Other Consol. The
MESA Company and Company
June 30, 1995 Inc. HCLP MOC Subs. Elimin. Consol'd
------------- ------ ------ ------ -------- -------- --------
Assets:
Cash and cash
investments....... $ - $ 64 $ 48 $ 71 $ - $ 183
Other current
assets............ - 13 30 6 - 49
------ ------ ------ ------ ------ ------
Total current
assets.......... - 77 78 77 - 232
------ ------ ------ ------ ------ ------
Property, plant
and equipment,
net............... - 611 489 3 - 1,103
Investment in
subsidiaries...... 112 - 120 9 (241) -
Intercompany
receivables....... - - 9 - (9) -
Other noncurrent
assets............ - 83 56 6 - 145
------ ------ ------ ------ ------ ------
$ 112 $ 771 $ 752 $ 95 $ (250) $1,480
====== ====== ====== ====== ====== ======
Liabilities and
Equity:
Current
liabilities....... $ - $ 59 $ 89 $ 1 $ - $ 149
Long-term debt..... - 491 665 - - 1,156
Intercompany
payables.......... 9 - - - (9) -
Other noncurrent
liabilities....... - - 68 4 - 72
Partners'/Stock-
holders' equity
(deficit)......... 103 221 (70) 90 (241) 103
------ ------ ------ ------ ------ ------
$ 112 $ 771 $ 752 $ 95 $ (250) $1,480
====== ====== ====== ====== ====== ======
Other Consol. The
MESA Company and Company
December 31, 1994 Inc. HCLP MOC Subs. Elimin. Consol'd
----------------- ------ ------ ------ -------- -------- --------
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'/Stock-
holders' equity
(deficit)......... 125 228 (43) 85 (270) 125
------ ------ ------ ------ ------ ------
$ 134 $ 780 $ 759 $ 90 $ (279) $1,484
====== ====== ====== ====== ====== ======
Condensed Consolidating Statements of Operations
------------------------------------------------
Six Months Ended:
-----------------
Other Consol. The
MESA Company and Company
June 30, 1995 Inc. HCLP MOC Subs. Elimin. Consol'd
------------- ------ ------ ------ -------- -------- --------
Revenues............. $ - $ 49 $ 72 $ - $ - $ 121
------ ------ ------ ------ ------ ------
Costs and Expenses:
Operating,
exploration and
taxes............. - 15 20 - - 35
General and
administrative.... - - 10 2 - 12
Depreciation,
depletion and
amortization...... - 18 23 - - 41
------ ------ ------ ------ ------ ------
- 33 53 2 - 88
------ ------ ------ ------ ------ ------
Operating Income
(Loss).............. - 16 19 (2) - 33
------ ------ ------ ------ ------ ------
Interest expense, net
of interest income.. - (23) (44) 2 - (65)
Equity in loss of
subsidiaries........ (22) - (7) - 29 -
Other................ - - 5 5 - 10
------ ------ ------ ------ ------ ------
Net Income (Loss)... $ (22) $ (7) $ (27) $ 5 $ 29 $ (22)
====== ====== ====== ====== ====== ======
Other Consol. The
MESA Company and Company
June 30, 1994 Inc. HCLP MOC Subs. Elimin. Consol'd
------------- ------ ------ ------ -------- -------- --------
Revenues............. $ - $ 60 $ 54 $ - $ - $ 114
------ ------ ------ ------ ------ ------
Costs and Expenses:
Operating,
exploration and
taxes............. - 16 23 - - 39
General and
administrative.... - - 12 1 - 13
Depreciation,
depletion and
amortization...... - 18 29 - - 47
------ ------ ------ ------ ------ ------
- 34 64 1 - 99
------ ------ ------ ------ ------ ------
Operating Income
(Loss).............. - 26 (10) (1) - 15
------ ------ ------ ------ ------ ------
Interest expense, net
of interest income.. - (24) (44) 1 - (67)
Losses on
dispositions of oil
and gas properties.. - - - (91)(d) 91 -
Equity in income
(loss) of
subsidiaries........ (45) - 2 - 43 -
Other................ 2 - 12 15 (20) 9
------ ------ ------ ------ ------ ------
Net Income (Loss).... $ (43) $ 2 $ (40) $ (76) $ 114 $ (43)
====== ====== ====== ====== ====== ======
Condensed Consolidating Statements of Cash Flows
------------------------------------------------
Six Months Ended:
-----------------
Other Consol. The
MESA Company and Company
June 30, 1995 Inc. HCLP MOC Subs. Elimin. Consol'd
------------- ------ ------ ------ -------- -------- --------
Cash Flows from
Operating Activities $ - $ 13 $ 33 $ 7 $ - $ 53
------ ------ ------ ------ ------ ------
Cash Flows from
Investing Activities:
Capital
expenditures...... - (3) (14) (2) - (19)
Other.............. - - 5 (4) - 1
------ ------ ------ ------ ------ ------
- (3) (9) (6) - (18)
------ ------ ------ ------ ------ ------
Cash Flows from
Financing Activities:
Other.............. - 4 - - - 4
------ ------ ------ ------ ------ ------
- 4 - - - 4
------ ------ ------ ------ ------ ------
Net Increase (Decrease)
in Cash and Cash
Investments......... $ - $ 14 $ 24 $ 1 $ - $ 39
====== ====== ====== ====== ====== ======
Other Consol. The
MESA Company and Company
June 30, 1994 Inc. HCLP MOC Subs. Elimin. Consol'd
------------- ------ ------ ------ -------- -------- --------
Cash Flows from
Operating Activities $ 2 $ 23 $ (41) $ 19 $ (2) $ 1
------ ------ ------ ------ ------ ------
Cash Flows from
Investing Activities:
Capital
expenditures...... - (1) (6) - - (7)
Contributions to
subsidiaries...... (95) - (5) (1) 101 -
Other.............. - - 26 (2) (29) (5)
------ ------ ------ ------ ------ ------
(95) (1) 15 (3) 72 (12)
------ ------ ------ ------ ------ ------
Cash Flows from
Financing Activities:
Issuance of common
stock............. 93 - - - - 93
Repayments of
long-term debt.... - (21) (114) - - (135)
Long-term
borrowings........ - - 43 - - 43
Contributions from
equity holders.... - 6 93 2 (101) -
Other.............. - 2 (2) (29) 31 2
------ ------ ------ ------ ------ ------
93 (13) 20 (27) (70) 3
------ ------ ------ ------ ------ ------
Net Increase (Decrease)
in Cash and Cash
Investments......... $ - $ 9 $ (6) $ (11) $ - $ (8)
====== ====== ====== ====== ====== ======
Notes to Condensed Consolidating 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 June 30, 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, and (iii) eliminate other transactions between
subsidiaries including contributions and distributions.
(d) The condensed consolidating statement of operations of Other
Company Subsidiaries for the six months ended June 30, 1994,
reflects a $91 million loss from MHC's disposition of an 18%
equity interest in HCLP. The HCLP 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.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
------------------------------------------------------------------------
RESULTS OF OPERATIONS
=====================
MESA Inc. ("Mesa") incurred a net loss of $14.0 million in the second
quarter of 1995 compared with a net loss of $25.3 million in the second
quarter of 1994. Mesa incurred a net loss of $21.8 million for the six
months ended June 30, 1995, compared with a net loss of $43.1 million for
the same period in 1994.
The following table presents a summary of the results of operations of
Mesa for the periods indicated (in thousands):
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
1995 1994 1995 1994
-------- -------- -------- --------
Revenues....................... $ 59,174 $ 53,361 $121,421 $114,445
Operating and
administrative costs.......... 21,804 26,584 47,071 52,180
Depreciation, depletion
and amortization.............. 20,290 21,910 41,296 47,222
-------- -------- -------- --------
Operating income............... 17,080 4,867 33,054 15,043
Interest expense, net
of interest income............ (32,258) (33,530) (65,012) (67,274)
Other.......................... 1,225 3,325 10,111 9,127
-------- -------- -------- --------
Net loss....................... $(13,953) $(25,338) $(21,847) $(43,104)
======== ======== ======== ========
Revenues
--------
The table below presents, for the periods indicated, the revenues,
production and average prices received from sales of natural gas, natural
gas liquids and oil and condensate.
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
1995 1994 1995 1994
-------- -------- -------- --------
Revenues (in thousands):
Natural gas............... $ 32,875 $ 31,995 $ 68,731 $ 72,701
Natural gas liquids....... 18,573 16,537 36,779 32,809
Oil and condensate........ 5,174 2,088 10,567 3,699
-------- -------- -------- --------
Total................ 56,622 50,620 116,077 109,209
Natural Gas Production
(million cubic feet):
Hugoton................... 12,978 12,314 25,677 25,136
West Panhandle............ 4,516 5,444 9,443 10,661
Other..................... 1,487 1,794 3,736 3,614
-------- -------- -------- --------
Total................ 18,981 19,552 38,856 39,411
======== ======== ======== ========
Natural Gas Liquids Production
(thousand barrels):
Hugoton................... 934 873 1,864 1,752
West Panhandle............ 653 762 1,349 1,587
Other..................... 14 10 29 26
-------- -------- -------- --------
Total................ 1,601 1,645 3,242 3,365
======== ======== ======== ========
Oil and Condensate Production
(thousand barrels):
Hugoton................... -- -- -- --
West Panhandle............ 19 36 36 69
Other..................... 285 99 590 202
-------- -------- -------- --------
Total................. 304 135 626 271
======== ======== ======== ========
Average Prices:
Natural gas (per thousand
cubic feet).............. $ 1.71 $ 1.64 $ 1.71 $ 1.86
Natural gas liquids
(per barrel)............. $ 11.60 $ 10.05 $ 11.39 $ 9.79
Oil and condensate
(per barrel)............. $ 16.98 $ 15.18 $ 16.74 $ 13.78
Mesa's total equivalent natural gas production was slightly higher in
the three- and six-month periods ended June 30, 1995, than for the same
periods of 1994. Hugoton field production was slightly higher than the
previous year. West Panhandle field production was approximately 15 percent
lower reflecting decreased demand resulting from warm winter weather in the
market area served. Gulf Coast production increased reflecting the success
of Mesa's offshore drilling in 1994. The increase in oil and condensate
production is attributable to the Gulf Coast.
Prices for natural gas liquids and oil and condensate production
increased in the three- and six-month periods ended June 30, 1995, compared
with the same periods in 1994 as a result of higher market prices in 1995.
See "Natural Gas Prices" below for a discussion of 1995 and 1994 prices for
natural gas production.
Natural Gas Prices
------------------
Substantially all of Mesa's natural gas production is sold under short-
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 for the
three- and six-month periods ended June 30, 1995 and 1994:
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
1995 1994 1995 1994
-------- -------- -------- --------
Natural Gas Production
(million cubic feet):
Sold under fixed-price
contracts................ 3,854 3,240 6,970 6,967
Sold at market prices..... 15,127 16,312 31,886 32,444
-------- -------- -------- --------
Total production..... 18,981 19,552 38,856 39,411
======== ======== ======== ========
Percent sold at
market prices............ 80% 83% 82% 82%
======== ======== ======== ========
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 traded on the New York Mercantile
Exchange. The following table shows the effects of Mesa's fixed-price
contracts and hedging activities on its natural gas prices for the three-
and six-month periods ended June 30, 1995 and 1994:
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
1995 1994 1995 1994
-------- -------- -------- --------
Average Natural Gas Prices
(per thousand cubic feet):
Fixed-price contracts..... $ 1.94 $ 2.05 $ 2.25 $ 2.24
======== ======== ======== ========
Market prices received.... $ 1.23 $ 1.55 $ 1.24 $ 1.78
Hedge gains............... .42 -- .35 --
-------- -------- -------- --------
Total market prices.. $ 1.65 $ 1.55 $ 1.59 $ 1.78
======== ======== ======== ========
Total average prices...... $ 1.71 $ 1.64 $ 1.71 $ 1.86
======== ======== ======== ========
Market prices for natural gas have been significantly lower in 1995
than in 1994 due to a surplus of natural gas and a milder winter in 1995
than in 1994.
Amortization of deferred gains and losses from hedging activities are
included in natural gas revenues when the hedged production occurs. Mesa
recognized gains from hedging activities of $6.4 million in the second
quarter of 1995 and $11.3 million in the six months ended June 30, 1995.
Mesa did not hedge any production in the first half of 1994. Mesa has
hedged a portion of its market-sensitive production for the remainder of
1995, primarily the third quarter.
Costs and Expenses
------------------
Mesa's costs and expenses decreased from $48.5 million in the second
quarter of 1994 to $42.1 million for the same period in 1995. Lease
operating expense decreased due to lower production costs in the West
Panhandle field. Production and other taxes were lower due to lower Kansas
production tax rates implemented beginning in the last half of 1994 in the
Hugoton field. Depreciation, depletion and amortization expense, which is
calculated on a unit-of-production basis, decreased primarily due to
increases at December 31, 1994, in estimated oil and gas reserves in the
Hugoton and West Panhandle fields and reserve discoveries in the Gulf Coast.
Mesa's costs and expenses decreased from $99.4 million to $88.4 million
in the six-month period ended June 30, 1995, compared to the same period in
1994. Lease operating expense decreased due to a one-time insurance
adjustment reflected in 1994 and lower production costs in the West
Panhandle field. Production and other taxes were lower due to lower Kansas
production tax rates implemented beginning in the last half of 1994 in the
Hugoton field. Depreciation, depletion and amortization expense, which is
calculated on a unit-of-production basis, decreased primarily due to
increases at December 31, 1994, in estimated oil and gas reserves in the
Hugoton and West Panhandle fields and reserve discoveries in the Gulf Coast.
Other Income (Expense)
----------------------
Interest expense in the three- and six-month periods ended June 30,
1995, were not materially different from the same periods in 1994 as average
aggregate debt outstanding did not materially change.
Interest income increased from $3.3 million and $5.7 million for the
three- and six-month periods ended June 30, 1994, respectively, to $4.2
million and $8.1 million for the same periods in 1995, respectively, as a
result of higher average cash balances and higher average interest rates
earned on cash balances in 1995.
Results of operations for the three- and six-month periods ended June
30, 1995 and 1994 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 thousands):
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
1995 1994 1995 1994
-------- -------- -------- --------
Gains (losses) from futures
and securities investments.... $ (2,804) $ (4,402) $ 1,749 $ (5,321)
Gains from collections
from Bicoastal Corporation.... -- 9,236 4,653 16,577
Other.......................... 4,029 (1,509) 3,709 (2,129)
-------- -------- -------- --------
$ 1,225 $ 3,325 $ 10,111 $ 9,127
======== ======== ======== ========
The gains from futures and securities investments relate to Mesa's
investments in marketable securities and futures contracts that are not
accounted for as a hedge of future production. 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 June 30, 1995, Mesa had collected the full
amount of its allowed claims plus a portion of the interest due on such
claims. Mesa does not expect to receive substantial additional amounts from
Bicoastal.
Capital Resources and Liquidity
-------------------------------
Mesa is primarily in the business of exploring for, developing,
producing, and processing oil and natural gas. At December 31, 1994, Mesa
owned over 1.8 trillion cubic feet of estimated proved equivalent natural
gas reserves. Mesa is also highly leveraged with over $1.2 billion of
long-term debt and current maturities. Hugoton Capital Limited Partnership
("HCLP"), an indirect, wholly owned subsidiary of Mesa, is the obligor on
approximately 44% of Mesa's consolidated long-term debt. The HCLP debt is
secured by Mesa's Hugoton field properties, which represent approximately
65% of Mesa's oil and gas reserves. The assets and cash flows of HCLP that
are subject to the mortgage securing the HCLP debt are dedicated to service
HCLP's debt and are not available to pay creditors of Mesa or its
subsidiaries other than HCLP. However, any "excess cash," as defined in the
HCLP debt agreements, may be distributed by HCLP to its equity owners, Mesa
Operating Co. ("MOC"), Mesa Holding Co. ("MHC"), and Hugoton Management Co.
("HMC"), which are direct subsidiaries of Mesa, to be used for general
corporate purposes. MOC owns all of Mesa's interest in the West Panhandle
field of Texas and the Gulf Coast and the Rocky Mountain areas and an
approximate 99% limited partnership interest in HCLP. Mesa and MOC are
liable for all of Mesa's consolidated long-term debt other than the HCLP
debt. MHC owns cash, an approximate 1% limited partnership interest in
HCLP, and 100% of Mesa Environmental Ventures Co., a company established to
compete in the natural gas vehicle market. HMC owns the general partner
interest in HCLP.
On December 31, 1995, Mesa is required to begin making cash interest
payments on its secured and unsecured discount notes. Such notes have an
aggregate principal amount of $657 million and bear interest at a 12-3/4%
annual rate, payable semiannually. Such cash interest payments are expected
to total $41.9 million on December 31, 1995, and $81.3 million in 1996.
Prior to June 30, 1993, accreted interest on this debt was added to the
principal of the notes, but payment of such interest was deferred until
repayment of the underlying notes. Mesa also has significant debt principal
payments due in 1996 through 1998.
Following is a discussion of Mesa's debt, resources and alternatives:
Long-term Debt
--------------
The following table provides additional information as to Mesa's long-
term debt at June 30, 1995 (in thousands):
Obligors
-----------------
Mesa
and MOC HCLP Total
-------- -------- ----------
Debt:
HCLP Secured Notes(a)............... $ -- $520,180 $ 520,180
Credit Agreement(b)................. 71,131 -- 71,131
12-3/4% secured discount notes(c)(e) 618,731 -- 618,731
12-3/4% unsecured discount
notes(d)(e)....................... 39,725 -- 39,725
Other............................... 12,695 -- 12,695
-------- -------- ----------
742,282 520,180 1,262,462
Current maturities....................... (77,530) (28,843) (106,373)
-------- -------- ----------
Long-term debt........................... $664,752 $491,337 $1,156,089
======== ======== ==========
----------
(a) These notes are secured by the Hugoton field properties and are
due in semiannual installments through August 2012, but may be
repaid earlier depending on the rate of production from the
properties.
(b) The bank credit facility (the "Credit Agreement") is secured by a
first lien on MOC's West Panhandle properties, Mesa's equity
interest in MOC and a 76% limited partnership interest in HCLP
and is due in various installments through June 1997. At June
30, 1995, the Credit Agreement also supported letters of credit
totaling $11.4 million.
(c) These notes are due in June 1998 and are secured by second liens
on MOC's West Panhandle properties and a 76% limited partnership
interest in HCLP.
(d) These notes are unsecured and are due in June 1996.
(e) The secured and unsecured discount notes (together, the
"Discount Notes") began accruing interest at a rate of 12-3/4% per
annum on July 1, 1995. Semiannual cash interest payments are
payable beginning December 31, 1995.
The following tables summarize Mesa's 1994 actual and 1995 through 1998
forecast cash requirements, assuming no changes in capital structure, for
interest, debt principal and capital expenditures (in thousands):
Actual Forecast
-------- -----------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
HCLP:
Interest payments,
net(a)............... $ 46,815 $ 45,600 $ 45,800 $ 42,100 $ 37,300
Principal repayments... 21,420 15,500 34,000 37,200 38,400
Capital expenditures(b) 6,957 11,100 5,000 1,000 --
-------- -------- -------- -------- --------
$ 75,192 $ 72,200 $ 84,800 $ 80,300 $ 75,700
======== ======== ======== ======== ========
Other Mesa subsidiaries:
Interest payments,
net(a)............... $ 1,945 $ 45,700 $ 94,100 $ 99,300 $100,900
Credit Agreement(c) 23,021 10,000 22,500 38,600 --
12-3/4% unsecured
discount notes(d) 124,330 -- 39,700 -- --
12-3/4% secured
discount notes... -- -- -- -- 617,400
Other.............. 6,336 5,300 -- -- --
Capital expenditures(b) 25,633 32,500 16,500 15,500 2,400
-------- -------- -------- -------- --------
$181,265 $ 93,500 $172,800 $153,400 $720,700
======== ======== ======== ======== ========
----------
(a) Cash interest payments, net of interest income. MOC is required
to begin making semiannual cash interest payments on the Discount
Notes on December 31, 1995.
(b) Forecast capital expenditures represent Mesa's best estimate of
drilling and facilities expenditures required to attain projected
levels of production from its existing properties during the
forecast period and to fund its current exploration and
development program. Capital expenditures include $14.9 million
of committed capital expenditures for 1995, which is included in
the amount set forth in the table. Mesa may incur capital
expenditures in addition to those reflected in the table.
(c) Amounts due under the Credit Agreement may be accelerated if
tangible adjusted equity, as defined, falls below $50 million.
(See discussion below.) Also, principal repayments do not include
$11.4 million in letter of credit obligations currently
outstanding and required to be cash collateralized when final
maturities under the Credit Agreement are repaid.
(d) Principal repayments of $93 million were made in 1994 with net\
proceeds from a $93 million equity offering completed in the
second quarter of 1994. The remaining 1994 principal repayments
were made with the proceeds from additional borrowings under the
Credit Agreement. Such principal was scheduled to mature in 1996.
The Credit Agreement requires Mesa to maintain tangible adjusted
equity, as defined, of $50 million and available cash, as defined, of $32.5
million. At June 30, 1995, Mesa's tangible adjusted equity, as defined, was
approximately $102.7 million and available cash, as defined, was $138.2
million. Mesa's current financial forecasts indicate that tangible adjusted
equity, as defined, may fall below $50 million in early 1996 unless Mesa is
able to sell additional equity or recognize gains from asset sales or other
sources. If tangible adjusted equity, as defined, is less than $50 million,
the banks will have the right to accelerate all outstanding principal and
require cash collateralization of letters of credit. A default under the
Credit Agreement would cause an event of default under the Discount Notes
unless the default is cured or waived or the debt under the Credit Agreement
is repaid or otherwise discharged.
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. 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.
Company Resources and Cash Flows
--------------------------------
The following table sets forth certain of Mesa's near-term resources as
of or for the six months ended June 30, 1995 (in thousands):
Other
Subsidiaries
MOC HCLP Combined Total
------- ------- ------------ --------
Cash and securities(a)......... $53,628 $63,885 $70,847 $188,360
Working capital (deficit)...... (11,004) 18,151 75,755 82,902
Restricted cash(b)............. -- 57,723 -- 57,723
Cash flows from
operating activities:
Oil and gas sales, net
of production and
administrative costs..... $32,920 $36,067 $ -- $ 68,987
Interest payments, net(c). (3,438) (22,550) 2,359 (23,629)
Other..................... 3,819 287 3,973 8,079
------- ------- ------- --------
$33,301 $13,804 $ 6,332 $ 53,437
======= ======= ======= ========
----------
(a) Included in working capital.
(b) Non-current asset in balance sheet.
(c) Cash interest payments, net of interest income.
Mesa's cash flows from operating activities are substantially dependent
on the amount of oil and gas produced and the price received for such
production. Production and prices received from Mesa's properties, together
with available cash and securities balances, are expected, under Mesa's
current operating plan, to generate sufficient cash flow to meet Mesa's
required principal, interest and capital obligations through December 31,
1995.
Mesa's current financial forecasts indicate that it will be unable to
fund its principal and interest obligations in 1996 with cash flows from
operating activities and available cash and securities balances. Mesa has
been advised by its independent public accountants that, if this matter has
not been resolved prior to the completion of their audit of Mesa's financial
statements for the year ended December 31, 1995, their auditors' report on
those financial statements may contain a going-concern modification.
Exploration of Strategic Alternatives
-------------------------------------
In an effort to address its cash flow situation and to position Mesa
for expansion through exploration and development, in December 1994 Mesa
announced its intent to sell all or a portion of its interests in the
Hugoton field. In the first quarter of 1995 Mesa began an auction process to
sell such properties. Mesa concluded the auction process in the second
quarter after no acceptable bids were received for the Hugoton properties.
On July 6, 1995, the Board of Directors approved a proposal to expand
its review of strategic alternatives to include consideration of the sale of
Mesa and a stock-for-stock merger. The Board also determined to continue to
explore the sale of all or a portion of Mesa's Hugoton field properties and
to explore other restructuring alternatives, including possible joint
ventures involving the Hugoton properties, asset sales, equity infusions,
and refinancing transactions. The Board engaged independent financial
advisors to manage these efforts and to seek indications of interest from
potential buyers of Mesa or its properties and of potential merger partners
for Mesa, both domestic and foreign. Data rooms for the sale of the Hugoton
reserves in one, or as many as eight, packages and for companies interested
in purchasing or merging with Mesa will open in September.
There can be no assurance that a sale or merger of Mesa or a sale of
its properties will be completed, or if completed, what the terms thereof
will be.
Proceeds from the sale of the Hugoton field reserves would be used to
retire debt. In the event of a sale or merger of Mesa, provision would need
to be made for the repayment, refinancing, or assumption of Mesa's debt.
Any sale of assets might also be accompanied by a refinancing of Mesa's
remaining debt. With respect to sales of the Hugoton assets, any sales
proceeds must first be applied against the outstanding balances related to
the HCLP Secured Notes, which are secured by the Hugoton properties. Such
balances include note principal, accrued interest and any premiums due,
including premiums for early retirement of the HCLP Secured Notes. As of
June 30, 1995, such premiums for early retirement of the HCLP Secured Notes
would have totaled approximately $73.2 million. The actual premiums due in
the event of a redemption of the HCLP Secured Notes will depend upon the
prevailing interest rates at the date of redemption. The restricted cash
held at HCLP would be available to repay obligations under the HCLP Secured
Notes. Sales proceeds with respect to the Hugoton assets remaining after
satisfying the HCLP Secured Note obligations would first be applied to the
amounts outstanding under the amended Credit Agreement, including cash
collateralization of outstanding letters of credit, and then to the Discount
Notes.
Other
-----
See Note 5 to the financial statements set forth in Part I, Item 1 of
this Form 10-Q for information regarding the status of certain pending
litigation.
In March 1995 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," which establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill. SFAS No. 121
requires a review for impairment wherever circumstances indicate that the
carrying amount of an asset may not be recoverable. Mesa would estimate
future cash flows (undiscounted and without interest changes) expected to
result from use of an asset. Impairment is only recognized if the carrying
amount of an asset is less than the expected future cash flows and the
amount of impairment is based on the fair value of the asset. SFAS No. 121
is effective for fiscal years beginning after December 15, 1995. Mesa has
not yet determined whether it will adopt the provisions of SFAS No. 121 in
1995 or what amount of impairment, if any, may result from adoption of this
standard.
Mesa recognizes its ownership interest in natural gas production as
revenue. Actual production quantities sold may be different from Mesa's
ownership share of production in a given period. Mesa records these
differences as gas balancing receivables or as deferred revenue. Net gas
balancing underproduction represented approximately 1.6% of total equivalent
production in the six months ended June 30, 1995, compared with 5.6% during
the same period in 1994. 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 commodity futures contracts primarily related to
crude oil and natural gas. 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.
PART II - OTHER INFORMATION
===========================
Item 1. Legal Proceedings
--------------------------
Shareholder Litigation
----------------------
On July 3, 1995, MESA Inc. (the "Company") filed a complaint in the
United States District Court for the Northern District of Texas against
Dennis R. Washington, Marvin Davis and certain of his affiliates, David H.
Batchelder, and Dorn Parkinson (collectively, the "13D Group") and certain
other persons. The complaint alleges, among other things, that the
defendants violated Section 13(d) of the Securities Exchange Act because
they had constituted a group owning more than 5% of the Company's common
stock since at least 1994 but did not file a Schedule 13D until June 29,
1995. The complaint further alleges that the Schedule 13D ultimately filed
by the 13D Group was false and misleading in certain respects and failed to
disclose certain material information, including the existence and identity
of other members of the group. The complaint requests the court to
preliminarily and permanently enjoin defendants, their agents and
affiliates, and all other persons acting in concert with them or on their
behalf, directly or indirectly, from (i) voting in person or by proxy any
shares of Company stock, (ii) soliciting any proxies (including any requests
to call a special shareholder meeting) from owners of Company stock, (iii)
purchasing or otherwise acquiring any additional Company stock, (iv) taking
any steps to replace current Company directors with nominees of the
defendants, (v) exercising or attempting to exercise influence and control
over the affairs of the Company, (vi) selling or disposing of Company stock
except by orderly means designed to ensure wide public distribution, and
(vii) encouraging other persons to do any of the foregoing or otherwise
acting in concert with others in the acquisition, holding, voting, and
disposition of Company stock. The complaint also requests entry of a
judgment rescinding an agreement between the Company and Mr. Washington (the
"Washington Agreement") and compelling the resignation of Messrs. Batchelder
and Parkinson from the Company's Board of Directors (the "Board"). Among
other things, the Washington Agreement provided for two of Mr. Washington's
representatives to be elected to the Board. Discovery has commenced. The
court has scheduled a hearing for August 25, 1995, on the Company's request
for a preliminary injunction. On August 8, 1995, the 13D Group filed an
answer denying the Company's claims and asserting a counterclaim against the
Company and all directors of the Company other than Messrs. Batchelder and
Parkinson. The counterclaim alleges, among other things, that (i) there
have been undisclosed arrangements among certain of the defendant directors
pursuant to which they acted together to acquire Company stock in advance of
the public announcements of material events involving the Company, (ii) that
during late 1994, certain of the defendant directors violated federal
securities laws by purchasing Company stock while in possession of material,
non-public information which they obtained pursuant to these alleged
arrangements, (iii) that the Board's adoption of the a shareholder rights
plan (the "Rights Plan") (see Item 2 below) was a breach of fiduciary duty
and inconsistent with Texas law, and (iv) that the Rights Plan has an
unreasonably low trigger, chills proxy contests, and was unreasonable to any
threat that could reasonably have been perceived by the Board at the time of
adoption. The counterclaim seeks, among other things, the invalidation of
the Rights Plan. The defendant directors believe that the claims made
against them in the counterclaim are without merit.
On July 3, 1995, Robert Strougo filed a purported class action lawsuit
in the District Court for Dallas County, Texas, against the Company and
certain directors alleging, among other things, that (i) the defendants have
engaged in a plan and scheme to entrench themselves in their positions of
control over the Company at the expense of the plaintiff and the Company's
public shareholders, (ii) the defendants breached their fiduciary duties,
(iii) the defendants' conduct has prevented and is preventing plaintiff and
the purported class from receiving the maximum value for their shares, and
(iv) plaintiff and other members of the purported class will suffer
irreparable harm if the alleged wrongful acts are not enjoined. The lawsuit
also alleges in particular that the defendants have breached their fiduciary
duties by failing to consider a sale of the entire Company; that the
defendants have evidenced a predisposition and determination to reject and
thwart any effort to enhance shareholder value so as to preserve and protect
their emoluments and positions with the Company, and without regard to the
interests of the Company's shareholders; and that the defendants have failed
to inform themselves as to any and all potential acquirors of the Company so
as to maximize shareholder value. The lawsuit seeks declaratory relief,
preliminary and permanent injunctive relief, compensatory damages together
with interest, counsel and expert fees and expenses and such further relief
as the court deems proper.
On July 8, 1995, Deborah Eigen and Adele Brody filed a purported
derivative class action lawsuit in the United State District Court for the
Northern District of Texas against certain of the Company's directors
alleging, among other things, that the defendants breached their fiduciary
duties by failing to fully inform themselves of all available alternatives,
including the possible sale of the Company, resisting attempts to call
special shareholder meetings to elect new directors, adopting the Rights
Plan and filing the complaint against the members of the group that filed a
Schedule 13D with respect to the Company (the "13D Group"). The complaint
alleges that the defendants have acted in an effort to prevent a change of
control and to protect their positions of control and salaries and other
emoluments. The lawsuit seeks, among other things, money damages, return to
the Company of all salaries and other remuneration paid to the defendants
during the time they were allegedly in breach of fiduciary duties,
institution of policies designed to protect and prevent conduct such as that
alleged in the complaint, counsel and expert fees and such further relief as
the court deems proper.
On July 20, 1995, Herman Krangel, Lillian Krangel and Jacquelyn A. Cady
filed a purported class action lawsuit in the District Court for Dallas
County, Texas, against the Company and certain directors alleging, among
other things, that such directors have breached their fiduciary duties by
impeding rather than seeking the maximization of shareholder value,
including by adopting the Rights Plan, filing the complaint against the
members of the 13D Group, and failing to actively pursue the acquisition of
the Company by other companies or to conduct an adequate market check. In
particular, the complaint alleges that the defendant directors have failed
to inform themselves as to all reasonable alternatives available to the
Company, perform an appropriate market check, solicit bids for the Company,
put the Company up for auction, or otherwise take appropriate steps to
maximize the value of the Company to its stockholders. The complaint
alleges that the defendants' primary concern is the entrenchment and
perpetuation of their positions of control and that statements by the
Chairman of the Board indicate that the defendants have a clear bias in
favor of their restructuring plan and have a bias against and have acted to
discourage any merger, acquisition, or other changes in control transaction.
The lawsuit seeks, among other things, injunctive relief, a declaration that
the Rights Plan is a legal nullity, appointment of a special committee of
independent outside directors of the Company, disclosure of all material
facts to the purported class, the creation of a stockholders' committee to
protect purported class members' interests in connection with measures to
achieve maximum value for the Company's shares, recision of any transactions
inconsistent with the Board's duties, money damages, counsel and expert fees
and expenses and such further relief as the court deems proper.
Other
-----
Reference is made to Part I, Item 1, Note 5 of this Form 10-Q for
information regarding other legal proceedings.
Item 2. Changes in Securities
------------------------------
In July 1995, in conjunction with the determination of the Board to
include the possible sale or merger of the Company among its strategic
alternatives, the Board approved a proposal that the Company adopt a
limited-term stockholder rights plan (the "Rights Plan"). The provisions of
the Rights Plan would be triggered if a person or group acquired beneficial
ownership of 10% or more of the Company's common stock after July 6, 1995,
except pursuant to a "permitted offer" -- a tender or exchange offer that
meets certain criteria, whether or not approved by the Board. However, if
any person or group beneficially owned more than 10% of the common stock on
July 6, 1995, the Rights Plan would not be triggered unless that person or
group were to obtain beneficial ownership of more than 100,000 additional
shares. If triggered, the Rights Plan would allow all stockholders, other
than the person or group exceeding the ownership threshold, to purchase
common stock at a 50% discount.
A copy of the Rights Plan has been filed as an exhibit to the Company's
Current Report on Form 8-K (see Item 6(b) below), and the foregoing summary
description is qualified in its entirety by reference to the Rights Plan.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
The Company's annual meeting of stockholders was held on May 17, 1995.
There were two matters submitted to the stockholders at the meeting. The
results of the votes were as follows:
1. Election of Boone Pickens, Paul W. Cain, David H. Batchelder, John
L. Cox, John S. Herrington, Wales H. Madden, Jr., Fayez S. Sarofim,
Dorn Parkinson, Robert L. Stillwell and J. R. Walsh, Jr., to serve
as directors of the Company.
Votes Cast Votes
Name For Withheld
-------------------- ---------- --------
Boone Pickens......................... 53,513,209 897,927
Paul W. Cain.......................... 53,612,342 798,794
David H. Batchelder................... 53,582,569 829,970
John L. Cox........................... 53,614,055 797,584
John S. Herrington.................... 53,626,301 785,438
Wales H. Madden, Jr................... 53,601,287 810,252
Dorn Parkinson........................ 53,587,906 824,633
Fayez S. Sarofim...................... 53,620,860 790,779
Robert L. Stillwell................... 53,561,616 849,923
J. R. Walsh, Jr....................... 53,600,237 811,302
2. Ratification of Arthur Andersen LLP as the Company's independent
public accountants for 1995.
Votes Cast
-------------------- Number of
For Against Abstentions
---------- ------- -----------
53,931,784 208,689 271,226
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits (Asterisk indicates incorporated by reference herein)
*3.1 - Amended and Restated Articles of Incorporation of MESA Inc.
dated December 31, 1991 (Exhibit 3[a] to the Company's Form
10-K dated December 31, 1991).
*3.2 - Amended and Restated Bylaws of MESA Inc. (Exhibit 3[c] to
the Company's Registration Statement on Form S-4,
Registration No. 33-42102).
*3.3 - Rights Agreement dated July 6, 1995, between MESA Inc. And
American Stock Transfer and Trust Company and First Amendment
to Rights Agreement dated July 20, 1995. [Exhibit 7[c][1] to
the Company's Current Report on Form 8-K dated July 6, 1995,
and Exhibit 7[c]4.1 to the Company's Current Report on Form
8-K/A dated July 20, 1995.]
*4.1 - Indenture dated as of May 1, 1993, among MESA Inc., Mesa
Operating Limited Partnership, Mesa Capital Corporation and
Harris Trust and Savings Bank, as Trustee, relating to the
secured discount notes and including (a) a form of Secured
Notes, (b) a form of Deed of Trust, Assignment of
Production, Security Agreement and Financing Statement,
dated as of May 1, 1993, between Mesa Operating Limited
Partnership and Harris Trust and Savings Bank, as trustee,
securing the Secured Notes, and (c) a form of Security
Agreement, Pledge and Financing Statement dated as of May 1,
1993, between Mesa Operating Limited Partnership and Harris
Trust and Savings Bank, as trustee, securing the Secured
Notes (Exhibit 4[f] to the Company's Form 10-Q/A dated June
30, 1993).
*4.2 - First Supplemental Indenture dated as of January 5, 1994,
among MESA Inc., Mesa Operating Co., Mesa Capital Corporation
and Harris Trust and Savings Bank, as Trustee (Exhibit 4.2 to
the Company's Registration Statement on Form S-1,
Registration No. 33-51909).
*4.3 - First Supplement to Deed of Trust, Assignment of Production,
Security Agreement and Financing Statement dated as of March
2, 1994, between Mesa Operating Co. as Mortgagor and Debtor,
and Harris Trust and Savings Bank, as mortgagee and Secured
Party (Exhibit 4.8 to the Company's Form 10-Q dated March 31,
1994).
*4.4 - First Supplement to Security Agreement, Pledge and Financing
Statement dated as of March 2, 1994, by Mesa Operating Co. in
favor of Harris Trust and Savings Bank, as Trustee for the
pro rata benefit of the Noteholders under the Indenture
(Exhibit 4.9 to the Company's Form 10-Q dated March 31,
1994).
*4.5 - Indenture dated as of May 1, 1993, among MESA Inc., Mesa
Operating Limited Partnership, Mesa Capital Corporation and
American Stock Transfer & Trust Company, as Trustee, relating
to the unsecured discount notes (Exhibit 4[g] to the
Company's Form 10-Q/A dated June 30, 1993).
*4.6 - First Supplemental Indenture dated as of January 5, 1994,
among MESA Inc., Mesa Operating Co., Mesa Capital Corporation
and American Stock Transfer & Trust Company, as Trustee
(Exhibit 4.4 to the Company's Registration Statement on Form
S-1, Registration No. 33-51909).
*4.7 - Third Amended and Restated Credit Agreement dated as of
November 29, 1994, among the Company, Mesa Operating Co., and
the Banks named in this Credit Agreement and Societe
Generale, Southwest Agency, as Agent (Exhibit 4.7 to the
Company's Form 10-K dated December 31, 1994).
*4.8 - Indenture dated May 1, 1989, among Mesa Capital Corporation,
Mesa Limited Partnership, Mesa Operating Limited Partnership,
and Texas Commerce Bank National Association, as Trustee
(Exhibit 4[c] to the Partnership's Form 10-Q dated March 31,
1989).
*4.9 - First Supplemental Indenture dated as of December 31, 1991,
among Mesa Capital Corporation, MESA Inc., Mesa Operating
Limited Partnership, as Issuers, and Texas Commerce Bank
National Association, as Trustee (Exhibit 4[e] to the
Company's Form 10-K dated December 31, 1991).
*4.10 - Second Supplemental Indenture dated as of April 30, 1992,
among Mesa Capital Corporation, MESA Inc., Mesa Operating
Limited Partnership and Texas Commerce Bank National
Association, as Trustee (Exhibit 4[k] to the Company's Form
10-Q dated June 30, 1992).
*4.11 - Third Supplemental Indenture dated as of August 26, 1993,
among Mesa Capital Corporation, MESA Inc., Mesa Operating
Limited Partnership and Texas Commerce Bank National
Association, as Trustee (Exhibit 4[l] to the Company's Form
10-Q/A dated June 30, 1993).
*4.12 - Fourth Supplemental Indenture dated as of January 5, 1994,
among MESA Inc., Mesa Operating Co., Mesa Capital Corporation
and Texas Commerce Bank National Association, as Trustee
(Exhibit 4.16 to the Company's Registration Statement on Form
S-1, Registration No. 33-51909).
*4.13 - Indenture dated as of May 30, 1991, among Hugoton Capital
Limited Partnership, Hugoton Capital Corporation and Bankers
Trust Company (Exhibit 4[e] to the Partnership's Form 10-Q
dated June 30, 1991).
*4.14 - First Supplemental Indenture dated September 1, 1991, among
Hugoton Capital Limited Partnership, Hugoton Capital
Corporation and Bankers Trust Company, as Trustee (Exhibit
4[h] to the Company's Registration Statement on Form S-4,
Registration No. 33-42102).
*4.15 - Amended and Restated Mortgage, Assignment, Security Agreement
and Financing Statement dated June 12, 1991, from Hugoton
Capital Limited Partnership to Bankers Trust Company, as
Collateral Agent (Exhibit 4[f] to the Partnership's Form 10-Q
dated June 30, 1991).
*4.16 - Second Amended and Restated Credit Agreement dated as of May
1, 1993, among the Company, Mesa Operating Limited
Partnership, the Banks, and Societe Generale, Southwest
Agency, as Agent (Exhibit 4.17 to the Company's Registration
Statement on Form S-4, Registration No. 33-53706).
*4.17 - Assignment and Assumption Agreement dated as of January 5,
1994, among Mesa Inc., Mesa Operating Co., Mesa Operating
Limited Partnership, Pickens Operating Co., the Banks party
to the Credit Agreement and the Agent with respect to the
Credit Agreement (Exhibit 4.21 to the Company's Registration
Statement on Form S-4, Registration No. 33-53706).
*4.18 - Intercreditor Agreement dated as of August 26, 1993, among
Societe Generale, Southwest Agency, as agent for the Banks
under the Company's Credit Agreement, Harris Trust and
Savings Bank, as trustee with respect to the Secured Notes,
and American Stock Transfer & Trust Company, as trustee with
respect to the Unsecured Notes and the Convertible Notes
(Exhibit 4.18 to the Company's Registration Statement on Form
S-4, Registration No. 33-53706).
*4.19 - Amended and Restated Pledge Agreement dated as of March 2,
1994, by Mesa Operating Co., in favor of Societe Generale,
Southwest Agency, as Agent for the pro rata benefit of the
banks parties to the Credit Agreement (Exhibit 4.31 to the
Company's Form 10-Q dated March 31, 1994).
The Registrant agrees to furnish to the Securities and
Exchange Commission upon request any instruments defining the
right of holders of long-term debt with respect to which the
total amount outstanding does not exceed 10% of the total
assets of the Registrant and its subsidiaries on a
consolidated basis.
*10.1 - Form of First Amendment to Deferred Compensation Agreement
and Life Insurance Agreement between Mesa Petroleum Co. and
certain officers and key employees (Exhibit 10[i] to the
Company's Form 10-K dated December 31, 1980).
*10.2 - Hugoton (MTR) Gas Purchase Contract between The Kansas Power
and Light Company, buyer, and Mesa Operating Limited
Partnership, seller, dated effective January 1, 1990
(Exhibit 19[a] to the Partnership's Form 10-Q dated June 30,
1989).
*10.3 - Supplemental Gas Purchase Contract between The Kansas Power
and Light Company, buyer, and Mesa Operating Limited
Partnership, seller, dated effective January 1, 1990
(Exhibit 19[b] to the Partnership's Form 10-Q dated June 30,
1989).
*10.4 - Contract dated January 3, 1928, between Colorado Interstate
Gas Company and Amarillo Oil Company (the B Contract)
(Exhibit 10.1 to Pioneer Corporation's Form 10-K dated
December 31, 1985).
*10.5 - Amendments to the "B" Contract (Exhibit 10.2 to Pioneer
Corporation's Form 10-K dated December 31, 1985).
*10.6 - Gathering Charge Agreement dated January 20, 1985, as
amended, with respect to the "B" Contract (Exhibit 10.3 to
Pioneer Corporation's Form 10-K dated December 31, 1985).
*10.7 - Agreement of Compromise and Settlement dated May 29, 1987,
between the Partnership and Colorado Interstate Gas Company
(Confidential Treatment Requested) (Exhibit 10[s] to the
Partnership's Form 10-K dated December 31, 1987).
*10.8 - Agreement of Sale between Pioneer Corporation and Cabot
Corporation dated August 29, 1984 (Exhibit 10.5 to Pioneer
Corporation's Form 10-K dated December 31, 1985).
*10.9 - Gas Purchase Contract dated June 27, 1949, as amended through
October 3, 1985, between Amarillo Oil Company and Energas
Company (Exhibit 10.6 to Pioneer Corporation's Form 10-K
dated December 31, 1985).
*10.10 - Settlement Agreement dated March 15, 1989, by and among Mesa
Operating Limited Partnership and Mesa Limited Partnership,
et al, Energas Company and the City of Amarillo (Exhibit
10[k] to the Partnership's Form 10-K dated December 31,
1990).
*10.11 - Gas Purchase Agreement dated December 1, 1989, between
Williams Natural Gas Company and Mesa Operating Limited
Partnership acting on behalf of itself and as agent for Mesa
Midcontinent Limited Partnership (Exhibit 10.1 to
Registration Statement of the Partnership on Form S-3,
Registration No. 33-32978).
*10.12 - Third Amendment dated December 19, 1991, to the Hugoton
(MTR) Gas Purchase Contract between The Kansas Power and
Light Company, buyer, and Mesa Operating Limited
Partnership, seller, dated effective January 1, 1990
(Exhibit 10[q] to the Company's Form 10-K dated December 31,
1991).
*10.13 - "B" Contract Production Allocation Agreement dated July 29,
1991, and effective as of January 1, 1991, between Colorado
Interstate Gas Company and Mesa Operating Limited
Partnership (Exhibit 10[r] to the Company's Form 10-K dated
December 31, 1991).
*10.14 - Amendment to "B" Contract Production Allocation Agreement
effective as of January 1, 1993, between Colorado Interstate
Gas Company and Mesa Operating Limited Partnership (Exhibit
10.24 to the Company's Registration Statement on Form S-1,
Registration No. 033-51909).
*10.15 - Amended Supplemental Stipulation and Agreement between
Colorado Interstate Gas Company and Mesa Operating Limited
Partnership dated June 19, 1991 (Exhibit 10[w] to the
Company's Registration Statement on Form S-4, Registration
No. 33-42102).
*10.16 - Amended Peak Day Gas Purchase Agreement dated effective June
19, 1991, between Colorado Interstate Gas Company and Mesa
Operating Limited Partnership (Exhibit 10[t] to the
Company's Form 10-K dated December 31, 1991).
*10.17 - Omnibus Amendment to Collateral Instruments to Supplemental
Stipulation and Agreement dated June 19, 1991, between
Colorado Interstate Gas Company and Mesa Operating Limited
Partnership (Exhibit 10[u] to the Company's Form 10-K dated
December 31, 1991).
*10.18 - First Amendment to Settlement and Interim Release Agreement
between Hugoton Capital Limited Partnership, Mesa Operating
Limited Partnership and The Kansas Power and Light Company
dated December 19, 1991, (Exhibit 10[w] to the Company's Form
10-K dated December 31, 1991).
*10.19 - Engagement Agreement dated as of July 1, 1991, between Mesa
Limited Partnership, Mesa Operating Limited Partnership,
Mesa Holding Limited Partnership, Mesa Midcontinent Limited
Partnership, Mesa Acquisition Limited Partnership, and BTC
Partners, Inc. (Exhibit 10[v] to the Company's Registration
Statement on Form S-4, Registration No. 33-42102).
*10.20 - Conversion Agreement dated as of December 31, 1991, between
Mesa, Boone Pickens and Pickens Operating Co. (Exhibit 10[y]
to the Company's Form 10-K dated December 31, 1991).
*10.21 - Amendment to the Gas Purchase Contract dated June 27, 1949,
as amended, between Amarillo Oil Company and Energas Company
dated June 4, 1992 (Exhibit 10[z] to the Company's Form 10-K
dated December 31, 1992).
*10.22 - Agreement of Compromise and Settlement dated January 11,
1994, among Unocal Corporation, David Colan, MESA Inc. and
certain other parties (Exhibit 10.25 to the Company's
Registration Statement on Form S-1, Registration No.
033-51909).
*10.23 - Agreement of merger, dated as of January 5, 1994, entered
into by and among the Company, Boone Pickens and certain
other parties (Exhibit 10.27 to the Company's Form 10-K
dated December 31, 1993).
*10.24 - Gas Transportation Agreement dated June 14, 1994, between
Western Resources, Inc. and Mesa Operating Co., acting on
behalf of itself and as agent for Hugoton Capital Limited
Partnership (Exhibit 10.24 to the Company's Form 10-K dated
December 31, 1994.)
*10.25 - Incentive Bonus Plan of Mesa Operating Limited Partnership,
as amended, dated effective January 1, 1986 (Exhibit 10[s]
to the Partnership's Form 10-K dated December 31, 1990).
*10.26 - Performance Bonus Plan of Mesa Operating Limited Partnership
dated effective January 1, 1990 (Exhibit 10[t] to the
Partnership's Form 10-K dated December 31, 1990).
*10.27 - 1991 Stock Option Plan of Mesa (Exhibit 10[v] to the
Company's Form 10-K dated December 31, 1991).
*10.28 - Split-Dollar Insurance Agreements dated June 29, 1992, by and
between Mesa Operating Limited Partnership and Boone Pickens
and Paul Cain, respectively, and Collateral Assignments
dated as of June 29, 1992, by Boone Pickens and Paul Cain,
respectively (Exhibit 10[aa] to the Company's Form 10-K
dated December 31, 1992).
27 - Article 5 of Regulation S-X Financial Data Schedule
for the Second Quarter 1995 Form 10-Q.
(b) Reports on Form 8-K
1. Current Report on Form 8-K dated July 6, 1995, as amended on August
3, 1995, regarding the adoption of the Rights Plan.
SIGNATURES
==========
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MESA INC.
(Registrant)
/s/ William D. Ballew
---------------------
William D. Ballew
Controller
(Principal accounting officer
duly authorized to sign on
behalf of the Registrant)
Date: August 14, 1995
---------------
INDEX TO EXHIBITS
-----------------
Exhibit No. Description
----------- -----------
27 Article 5 of Regulation S-X Financial Data Schedule
for the Second Quarter 1995 Form 10-Q.