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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 September 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)
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(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
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Number of shares outstanding as of the close of business on November 13,
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 Nine months Ended
September 30 September 30
------------------ ------------------
1995 1994 1995 1994
REVENUES: -------- -------- -------- --------
Natural gas.................... $ 24,817 $ 24,062 $ 93,548 $ 96,763
Natural gas liquids............ 16,828 17,753 53,607 50,562
Oil and condensate............. 4,987 1,820 15,554 5,519
Other.......................... 2,335 2,090 7,679 7,326
-------- -------- -------- --------
48,967 45,725 170,388 160,170
-------- -------- -------- --------
COSTS AND EXPENSES:
Lease operating................ 14,351 11,806 37,551 39,036
Production and other taxes..... 4,690 5,206 13,917 15,745
Exploration charges............ 824 2,259 3,061 4,115
General and administrative..... 9,210 7,479 21,617 20,034
Depreciation, depletion
and amortization.............. 19,673 21,040 60,969 68,262
-------- -------- -------- --------
48,748 47,790 137,115 147,192
-------- -------- -------- --------
OPERATING INCOME (LOSS)............. 219 (2,065) 33,273 12,978
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest income................ 4,108 3,837 12,208 9,538
Interest expense............... (37,589) (35,393) (110,701) (108,368)
Gains (losses) on futures and
securities investments........ (627) 8,512 1,122 3,191
Gain from collection of
interest from Bicoastal
Corporation................... 1,699 -- 6,352 16,577
Other.......................... (283) (798) 3,426 (2,927)
-------- -------- -------- --------
(32,692) (23,842) (87,593) (81,989)
-------- -------- -------- --------
NET LOSS............................ $(32,473) $(25,907) $(54,320) $(69,011)
======== ======== ======== ========
NET LOSS PER COMMON SHARE........... $ (.51) $ (.40) $ (.85) $ (1.21)
======== ======== ======== ========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING................ 64,050 64,050 64,050 57,111
======== ======== ======== ========
(See accompanying notes to consolidated financial statements.)
MESA INC.
=========
Consolidated Balance Sheets
---------------------------
(in thousands, except share data)
September 30, December 31,
ASSETS 1995 1994
------------- ------------
(unaudited)
CURRENT ASSETS:
Cash and cash investments.................... $ 143,773 $ 143,422
Marketable securities and futures contracts.. 17,061 19,112
Accounts and notes receivable................ 38,201 38,938
Other........................................ 5,534 3,372
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Total current assets.................... 204,569 204,844
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Oil and gas properties, wells and
equipment using the successful
efforts method of accounting............... 1,889,376 1,867,842
Office and other............................. 41,477 43,836
Accumulated depreciation, depletion
and amortization........................... (836,639) (781,230)
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1,094,214 1,130,448
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OTHER ASSETS:
Restricted cash of subsidiary partnership.... 57,875 61,299
Gas balancing receivable..................... 55,201 54,971
Other........................................ 32,186 32,397
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145,262 148,667
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$1,444,045 $1,483,959
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities on long-term debt......... $ 111,566 $ 30,537
Accounts payable and accrued liabilities..... 30,264 40,468
Interest payable............................. 26,204 18,184
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Total current liabilities............... 168,034 89,189
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LONG-TERM DEBT.................................... 1,135,284 1,192,756
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DEFERRED REVENUE.................................. 17,797 21,900
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OTHER LIABILITIES................................. 52,678 55,542
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CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, authorized
10,000,000 shares; no shares issued and
outstanding................................ -- --
Common stock, $.01 par value, authorized
100,000,000 shares; outstanding
64,050,009 shares.......................... 640 640
Additional paid-in capital................... 398,965 398,965
Accumulated deficit.......................... (329,353) (275,033)
---------- ----------
70,252 124,572
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$1,444,045 $1,483,959
========== ==========
(See accompanying notes to consolidated financial statements.)
MESA INC.
=========
Consolidated Statements of Cash Flows
-------------------------------------
(in thousands)
(unaudited)
Nine months Ended
September 30
-------------------
1995 1994
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................... $(54,320) $(69,011)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation, depletion and amortization..... 60,969 68,262
Accreted interest on discount notes.......... 39,064 59,833
Litigation settlement........................ -- (42,750)
Gains on futures and securities investments.. (1,122) (3,191)
Changes in operating receivables and payables (6,673) (3,799)
Changes in marketable securities and futures
contracts, net............................. 3,473 (10,373)
Other........................................ 336 2,567
-------- --------
Cash provided by operating activities........ 41,727 1,538
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.............................. (30,462) (18,509)
Other............................................. 1,313 (7,336)
-------- --------
Cash used in investing activities............ (29,149) (25,845)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock.......................... -- 93,091
Long-term borrowings.............................. -- 42,750
Repayments of long-term debt...................... (15,507) (137,517)
Other............................................. 3,280 2,010
-------- --------
Cash provided by (used in)
financing activities....................... (12,227) 334
-------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH INVESTMENTS................................. 351 (23,973)
CASH AND CASH INVESTMENTS AT BEGINNING OF PERIOD....... 143,422 138,709
-------- --------
CASH AND CASH INVESTMENTS AT END OF PERIOD............. $143,773 $114,736
======== ========
(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.................. -- -- -- (54,320)
------ ---- -------- ---------
BALANCE, September 30, 1995.... 64,050 $640 $398,965 $(329,353)
====== ==== ======== =========
(See accompanying notes to consolidated financial statements.)
MESA INC.
=========
Notes to Consolidated Financial Statements
------------------------------------------
September 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- and
nine-month periods ended September 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 (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles and
goodwill. SFAS No. 121 requires a review for impairment whenever
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 may adopt the provisions of
SFAS No. 121 in the fourth quarter of 1995 or the first quarter of 1996.
The Company has not yet determined what amount of impairment, if any, will
result from adoption of this standard; however, preliminary estimates
indicate that any such impairment would be primarily related to Gulf Coast
oil and gas properties and would likely be between $10 and $20 million.
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 September 30, 1995, the Company had produced and sold a net
21.3 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 $2.3
million in the third quarter of 1995 and $13.5 million in the nine months
ended September 30, 1995, related to hedging activities. The Company
recognized hedge losses of $3.4 million in the third quarter of 1994 and for
the nine months ended September 30, 1994. At September 30, 1995, the Company
had deferred losses of $.8 million resulting from hedging a portion of the
Company's anticipated natural gas production for the remainder of 1995.
These deferred losses will be recognized as natural gas revenues when the
hedged production occurs. The Company had no open hedge positions at
September 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, including current maturities. The major components of the Company's
debt are (1) $505 million of secured notes due in installments through 2012
at Hugoton Capital Limited Partnership ("HCLP"), an indirect, wholly owned
subsidiary, (2) $71 million (plus $11.4 million in letter of credit
obligations) outstanding under a bank credit facility, due in installments
through 1997, with the majority of such debt due on June 30, 1997, (3) $40
million of unsecured discount notes due on June 30, 1996, and (4) $617
million of secured discount notes due on June 30, 1998. Both the secured
and unsecured discount notes are subordinate to the bank credit facility.
See Note 4 for a complete description of the Company's long-term debt.
On December 31, 1995, the Company is required to begin making cash
interest payments on both series of discount notes. Interest due on the
discount notes will total $42 million on December 31, 1995, $42 million on
June 30, 1996, and $39 million on December 31, 1996. Including the $40
million principal amount of unsecured discount notes due in June 1996, the
Company is required to make $123.5 million of principal and interest
payments related to its discount notes and $32.5 million of principal
payments related to its bank credit facility by June 30, 1996.
The Company's bank credit facility contains a covenant requiring the
Company to maintain tangible adjusted equity, as defined, of at least $50
million. At September 30, 1995, tangible adjusted equity was $67.9 million.
Assuming no changes in its capital structure and that no significant
transactions are completed, the Company expects to continue to report
substantial net losses and expects its tangible adjusted equity to fall
below $50 million. The Company may determine in the first quarter of 1996,
upon completion of year-end financial statements and reserve reports, that
tangible adjusted equity was less than $50 million as of December 31, 1995.
If and when the Company determines that tangible adjusted equity is
below $50 million, an event of default would occur under the bank credit
facility and the bank would have the right to accelerate the payment of all
outstanding principal and require cash collateralization of letters of
credit. An event of default under the bank credit facility would cause a
cross default under the Company's secured and unsecured discount note
indentures unless and until the bank credit facility default were cured or
waived or the debt under the bank credit facility were repaid or otherwise
discharged. In addition, pursuant to the subordination provisions of such
indentures, the Company would be prohibited from making any payments on such
notes for specified periods upon and during the continuance of any event of
default under the bank credit facility.
At September 30, 1995, the Company had approximately $144 million of
cash and $17 million of securities on hand. Of this amount, $20 million of
the cash was subject to the HCLP debt mortgage. The Company's current
financial forecasts, assuming no changes in capital structure and that no
significant transactions are completed, indicate that its cash generated by
operating activities, together with its cash and securities balances, will
be insufficient to make all of its debt principal and interest obligations
due in June 1996. If amounts outstanding under the bank credit facility
were to be accelerated in the first quarter of 1996, the Company would
expect to have sufficient cash to meet the bank credit facility obligations
and cure an event of default under the bank credit facility and avoid, at
that time, cross defaults under the terms of its discount note indentures.
However, such a payment, coupled with the payment of $42 million of interest
due on the discount notes on December 31, 1995, would substantially deplete
the Company's remaining cash and securities balances. The Company will
make decisions regarding such principal and interest payments after it has
evaluated the proposals submitted pursuant to the solicitation process
developed as a part of the exploration of strategic alternatives discussed
below.
Exploration of Strategic Alternatives
- -------------------------------------
In an effort to address its liquidity issues and to position the
Company for expansion through exploration and development, in December 1994
the Company announced its intent to sell all or a portion of its interests
in the Hugoton field. In the first quarter of 1995 the Company began an
auction process to sell such properties. The Company concluded the auction
process in the second quarter after no acceptable bids were received for the
Hugoton properties.
On July 6, 1995, the Company's Board of Directors (the "Board")
approved a proposal to expand its exploration of strategic alternatives to
include consideration of the sale of the Company, a stock-for-stock merger,
joint ventures, asset sales, equity infusions, and refinancing transactions.
The Company engaged an independent financial advisor to assist in these
efforts and to solicit proposals on its behalf. The solicitation process
commenced in August of this year and the Company has requested that
proposals be submitted on November 20, 1995. There can be no assurance that
any such transaction will be completed, or if completed, what the terms or
timing thereof will be.
The ability of the Company to continue as a going concern is dependent
upon several factors including the successful resolution of its strategic
alternatives solicitation process. The consolidated financial statements of
the Company do not include any adjustments reflecting any treatment other
than going concern accounting, which adjustments may be required depending
on the outcome of the strategic alternatives solicitation process.
The Company has been advised by its independent public accountants
that, unless the Company is able to improve its financial condition and
resolve its liquidity issues, their auditors' report on the financial
statements for the year ending December 31, 1995, will be modified to
include a discussion of substantial doubt about the Company's ability to
continue as a going concern.
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):
September 30, December 31,
1995 1994
------------- ------------
Equity Securities:
Cost................................... $10,574 $ 9,489
Unrealized loss........................ (899) (1,381)
Futures Contracts:
Margin cash............................ 6,896 1,337
Unrealized gain in hedge contracts..... -- 6,823
Unrealized gain in investment contracts 490 2,844
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Total market value..................... $17,061 $19,112
======= =======
For the nine months ended September 30, 1995, the Company recognized a
net gain of $1.1 million from its investments in marketable securities and
futures contracts compared with a net gain for the same period in 1994 of
$3.2 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 nine-month period ended September 30, 1995, the Company
realized net gains of $3.0 million from securities transactions and futures
contracts. The Company realized net losses from securities transactions and
futures contracts of $1.0 million during the nine-month period ended
September 30, 1994.
(4) LONG-TERM DEBT
==============
Long-term debt and current maturities are as follows (in thousands):
September 30, December 31,
1995 1994
------------- ------------
HCLP Secured Notes.......................... $ 504,673 $ 520,180
Credit Agreement............................ 71,131 71,131
12-3/4% secured discount notes.............. 618,626 581,942
12-3/4% unsecured discount notes............ 39,725 37,345
13-1/2% subordinated notes.................. 7,390 7,390
Other....................................... 5,305 5,305
---------- ----------
1,246,850 1,223,293
Current maturities.......................... (111,566) (30,537)
---------- ----------
Long-term debt.............................. $1,135,284 $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 September 30, 1995, bear interest at fixed
rates ranging from 8.80% to 11.30% per annum (weighted average 10.31%).
Principal payments, if required, and interest payments are made
semiannually. Provisions in the HCLP Secured Note agreements require
interest rate premiums to be paid to the noteholders in the event that the
HCLP Secured Notes are repaid more rapidly or slowly than under the initial
scheduled amortization. Beginning in August 1994, HCLP elected to make
principal payments on the HCLP Secured Notes based on actual production,
rather than according to the initial scheduled amortization. As a result,
interest rate premiums at a rate of 1.5% per annum will be applied to those
principal amounts not paid according to the initial scheduled amortization
and .35% per annum will be applied to the remaining notes. Such premiums
have increased the effective weighted average interest rate payable on the
remaining HCLP Secured Notes outstanding to 10.79% per annum at September
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 (10.31% at September 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):
September 30, December 31,
1995 1994
------------- ------------
Subject to the mortgage..................... $19,729 $48,087
Not subject to the mortgage................. 16,450 1,551
------- -------
Cash included in current assets............. $36,179 $49,638
======= =======
Restricted cash included in
noncurrent assets......................... $57,875 $61,299
======= =======
Refundable GIC fee included in
noncurrent assets......................... $ 9,298 $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
$9.8 million for the nine months of 1995 and $9.0 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
- ----------------
As of September 30, 1995, the Company had outstanding borrowings of
approximately $71.1 million and letter of credit obligations of $11.4
million under its $82.5 million bank credit facility, as amended (the
"Credit Agreement"). The Credit Agreement requires principal payments of
$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).
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 September 30, 1995, the Company's tangible adjusted equity was
approximately $67.9 million and available cash was $140.6 million. See Note
2 for discussion of the tangible adjusted equity covenant and its potential
effect on the Company's liquidity.
The Credit Agreement also restricts, among other things, the Company's
ability to incur additional indebtedness, create liens, pay dividends,
acquire stock or make investments, loans and advances.
Discount Notes
- --------------
In conjunction with a debt exchange transaction consummated in 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.
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.
Beginning July 1, 1995, each series of Discount Notes began to accrue
interest at an annual rate of 12-3/4%, payable in cash semiannually in
arrears, with the first payment due December 31, 1995.
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.
13-1/2% 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 nine months ended
September 30, 1995 and 1994, were $61.0 million and $59.9 million,
respectively. In addition, payment of approximately $39.1 million and $59.8
million of interest expense incurred during the nine-month periods ended
September 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
nine-month periods ended September 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................. $ -- $ 34.0 $ 37.4 $ 40.1 $ 49.7
Credit Agreement(a)(b)............. 10.0 22.5 38.6 -- --
12-3/4% secured discount notes(c).. -- -- -- 617.4 --
12-3/4% unsecured discount notes(c) -- 39.7 -- -- --
13-1/2% subordinated notes......... -- -- -- -- 7.4
Other.............................. -- 5.3 -- -- --
------ ------ ------ ------ ------
Total......................... $ 10.0 $101.5 $ 76.0 $657.5 $ 57.1
====== ====== ====== ====== ======
- ----------
(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 falls
below $50 million. (See Note 2.)
(c) Maturities may be accelerated if an event of default occurs and
continues under the Credit Agreement. (See Note 2.)
Fair Value of Long-term Debt
- ----------------------------
The following is a summary of estimated fair value of the Company's
long-term debt (in thousands):
September 30, 1995 December 31, 1994
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
HCLP Secured Notes.............. $504,673 $555,140 $520,180 $535,135
Credit Agreement................ 71,131 71,131 71,131 71,131
12-3/4% secured discount notes.. 618,626 574,514 581,942 528,688
12-3/4% unsecured discount notes 39,725 36,907 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 as required, and then to retire other debt or
supplement cash reserves. In the event of a sale or merger of the Company,
provision may 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 September 30, 1995, such premiums for early
retirement of the HCLP Secured Notes would have totaled approximately $65.2
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.
(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 operations.
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 was a defendant in certain 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.
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. Following an
appeal by the plaintiffs, the Fifth Circuit Court of Appeals entered an
opinion on June 19, 1995, affirming the judgment of the District Court. The
time for additional appeal by the plaintiffs has expired and the judgment in
favor of the Company is final and nonappealable.
Lease Termination
- -----------------
In 1991 the Company sold certain producing oil and gas properties to
Seagull Energy Company ("Seagull"). In 1994 two lawsuits were filed against
Seagull in Carson County, Texas, by certain land and royalty owners claiming
that certain of the oil and gas leases owned by Seagull has terminated due
to cessation of production prior to 1991. In the third quarter of 1995
Seagull filed third-party complaints against the Company claiming breach of
warranty and false representation in connection with the sale of such
properties to Seagull. The Company believes it has several defenses to
these lawsuits including a two-year limitation set forth in the purchase and
sale agreement covering this indemnification.
Seagull filed a similar third-party complaint against the Company
covering a different lease in Moore County, Texas. The Company has similar
defenses in this case.
The plaintiffs in the cases against Seagull are seeking to terminate
the leases. Seagull, in its complaint against the Company, is seeking
unspecified damages relating to any leases which are terminated.
The Company does not expect the resolution of this lawsuit to have a
material adverse effect on its financial position or results of operations.
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) EMPLOYEE BENEFIT PLANS
======================
In October 1995 the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," which establishes accounting and reporting
standards
for stock-based employee compensation plans. Such plans include all
arrangements by which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to employees
in amounts based on the price of the employer's stock. The accounting
standard covers stock purchase plans, stock options, restricted stock, and
stock appreciation rights.
SFAS No. 123 defines a fair value-based method of accounting for stock
options or similar equity instruments, but allows companies to continue to
measure compensation cost using the intrinsic value-based method prescribed
by Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock
Issued to Employees." Under the fair value-based method, compensation cost
is measured at the grant date based on the value of the award and is
recognized over the service period (generally, the vesting period). Under
the intrinsic value-based method, compensation cost is the excess, if any,
of the quoted market price of the stock at the date of grant over the
exercise price.
In December 1991 the stockholders of the Company approved the 1991
Stock Option Plan of the Company (the "Option Plan"). Under the Option
Plan, as amended, the Company may grant options to purchase up to 4 million
shares of common stock to officers and key employees. At December 31, 1994,
the Company had options outstanding to purchase approximately 2.9 million
common shares at exercise prices ranging from $4.25 per share to $11.69 per
share. The exercise price for each option granted was the market price on
the date of grant. Upon exercise, the grantee may elect to receive either
shares of common stock or, at the discretion of the Option Committee of the
Board, cash or certain combinations of cash and stock in an amount equal to
the excess of the fair market value of the common stock at the time of
exercise over the exercise price.
Under the provisions of SFAS No. 123, a company may elect to measure
compensation cost associated with its stock option and similar plans as a
component of compensation expense in its statement of operations. Companies
may also elect to continue to measure compensation cost under the provisions
of APB No. 25. Companies which elect to continue measurement under APB No.
25 are required to provide pro forma disclosure in the notes to financial
statements reflecting the difference, if any, between compensation cost
included in net income and the cost if the fair value-based method were
used. Since the inception of the Option Plan, the Company has not
recognized any compensation cost related to grants of stock options. The
disclosure requirements of this statement are effective for financial
statements for fiscal years beginning after December 15, 1995. At this
time, the Company does not expect to adopt the fair value-based method of
accounting for its stock option plans and, accordingly, adoption of this
statement will have no impact on the Company's results of operations.
(7) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
============================================
The Company conducts its operations through various direct and indirect
subsidiaries. On September 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
September 30, 1995 Inc. HCLP MOC Subs. Elimin. Consol'd
- ------------------ ------ ------ ------ -------- -------- --------
Assets:
Cash and cash
investments.........$ - $ 36 $ 45 $ 63 $ - $ 144
Other current assets. - 12 38 11 - 61
------ ----- ------ ------ ------ ------
Total current
assets............ - 48 83 74 - 205
------ ----- ------ ------ ------ ------
Property, plant
and equipment, net.. - 606 485 3 - 1,094
Investment in
subsidiaries........ 79 - 113 9 (201) -
Intercompany
receivables......... - - 9 4 (13) -
Other noncurrent
assets.............. - 82 57 6 - 145
------ ----- ------ ------ ------ ------
$ 79 $ 736 $ 747 $ 96 $ (214) $1,444
====== ===== ====== ====== ====== ======
Liabilities and Equity:
Current liabilities..$ - $ 51 $ 116 $ 1 $ - $ 168
Long-term debt....... - 471 664 - - 1,135
Intercompany payables 9 - 4 - (13) -
Other noncurrent
liabilities......... - - 67 4 - 71
Partners'/Stock-
holders' equity
(deficit)........... 70 214 (104) 91 (201) 70
------ ------- ----- ------ ------ ------
$ 79 $ 736 $ 747 $ 96 $ (214) $1,444
====== ======= ===== ====== ====== ======
Other Consol. The
MESA Company and Company
December 31, 1994 Inc. HCLP MOC Subs. Elimin. Consol'd
- ----------------- ------ ------ ------ -------- -------- --------
Assets:
Cash and cash
investments.........$ - $ 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) $1,484
====== ====== ====== ====== ====== ======
Condensed Consolidating Statements of Operations
- ------------------------------------------------
Nine months Ended:
- -----------------
Other Consol. The
MESA Company and Company
September 30, 1995 Inc. HCLP MOC Subs. Elimin. Consol'd
- ------------------ ------ ------ ------ -------- -------- --------
Revenues...............$ - $ 68 $ 102 $ - $ - $ 170
------ ------ ------ ------ ------ ------
Costs and Expenses:
Operating,
exploration and
taxes............... - 21 33 - - 54
General and
administrative...... - - 19 3 - 22
Depreciation,
depletion and
amortization........ - 25 36 - - 61
------ ------ ------ ------ ------ ------
- 46 88 3 - 137
------ ------ ------ ------ ------ ------
Operating Income
(Loss)................ - 22 14 (3) - 33
------ ------ ------ ------ ------ ------
Interest expense, net
of interest income.... - (35) (67) 4 - (98)
Equity in loss of
subsidiaries.......... (54) - (13) - 67 -
Other.................. - - 4 7 - 11
------ ------ ------ ------ ------ ------
Net Income (Loss)......$ (54) $ (13) $ (62) $ 8 $ 67 $ (54)
====== ====== ====== ====== ====== ======
Other Consol. The
MESA Company and Company
September 30, 1994 Inc. HCLP MOC Subs. Elimin. Consol'd
- ------------------ ------ ------ ------ -------- -------- --------
Revenues...............$ - $ 81 $ 79 $ - $ - $ 160
------ ------ ------ ------ ------ ------
Costs and Expenses:
Operating,
exploration and
taxes............... - 22 37 - - 59
General and
administrative...... - - 18 2 - 20
Depreciation,
depletion and
amortization........ - 25 43 - - 68
------ ------ ------ ------ ------ ------
- 47 98 2 - 147
------ ------ ------ ------ ------ ------
Operating Income
(Loss)................ - 34 (19) (2) - 13
------ ------ ------ ------ ------ ------
Interest expense, net
of interest income.... - (36) (65) 2 - (99)
Loss on repayment of
intercompany debt..... - - - (91)(d) 91 -
Equity in income (loss)
of subsidiaries....... (71) - (2) - 73 -
Other.................. 2 - 20 16 (21) 17
------ ------ ------ ------ ------ ------
Net Loss...............$ (69) $ (2) $ (66) $ (75) $ 143 $ (69)
====== ====== ====== ====== ====== ======
Condensed Consolidating Statements of Cash Flows
- ------------------------------------------------
Nine months Ended:
- -----------------
Other Consol. The
MESA Company and Company
September 30, 1995 Inc. HCLP MOC Subs. Elimin. Consol'd
- ------------------ ------ ------ ------ -------- -------- --------
Cash Flows from
Operating Activities..$ - $ 4 $ 36 $ 2 $ - $ 42
------ ------ ------ ------ ------ ------
Cash Flows from
Investing Activities:
Capital expenditures. - (5) (23) (2) - (30)
Other................ - - 4 (7) 4 1
------ ------ ------ ------ ------ ------
- (5) (19) (9) 4 (29)
------ ------ ------ ------ ------ ------
Cash Flows from
Financing Activities:
Repayments of long-
term debt........... - (16) - - - (16)
Other................ - 3 4 - (4) 3
------ ------ ------ ------ ------ ------
- (13) 4 - (4) (13)
------ ------ ------ ------ ------ ------
Net Increase (Decrease)
in Cash and Cash
Investments...........$ - $ (14) $ 21 $ (7) $ - $ -
====== ====== ====== ====== ====== ======
Other Consol. The
MESA Company and Company
September 30, 1994 Inc. HCLP MOC Subs. Elimin. Consol'd
- ------------------ ------ ------ ------ -------- -------- --------
Cash Flows from
Operating Activities..$ 3 $ 22 $ (43) $ 23 $ (3) $ 2
------ ------ ------ ------ ------ ------
Cash Flows from
Investing Activities:
Capital expenditures. - (4) (14) (1) - (19)
Contributions to
subsidiaries........ (96) - (5) (1) 102 -
Other................ - - 38 (5) (40) (7)
------ ------ ------ ------ ------ ------
(96) (4) 19 (7) 62 (26)
------ ------ ------ ------ ------ ------
Cash Flows from
Financing Activities:
Issuance of common
stock............... 93 - - - - 93
Repayments of
long-term debt...... - (22) (116) - - (138)
Long-term borrowings. - - 43 - - 43
Contributions from
equity holders...... - 6 93 3 (102) -
Other................ - (8) - (33) 43 2
------ ------ ------ ------ ------ ------
93 (24) 20 (30) (59) -
------ ------ ------ ------ ------ ------
Net Decrease in Cash
and Cash Investments..$ - $ (6) $ (4) $ (14) $ - $ (24)
====== ====== ====== ====== ====== ======
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 September 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 nine months ended September 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 $32.5 million in the third
quarter of 1995 compared with a net loss of $25.9 million in the third
quarter of 1994. Mesa incurred a net loss of $54.3 million for the nine
months ended September 30, 1995, compared with a net loss of $69.0 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 Nine months Ended
September 30 September 30
------------------ ------------------
1995 1994 1995 1994
-------- -------- -------- --------
Revenues....................... $ 48,967 $ 45,725 $170,388 $160,170
Operating and
administrative costs.......... (29,075) (26,750) (76,146) (78,930)
Depreciation, depletion
and amortization.............. (19,673) (21,040) (60,969) (68,262)
-------- -------- -------- --------
Operating income (loss)........ 219 (2,065) 33,273 12,978
Interest expense, net
of interest income............ (33,481) (31,556) (98,493) (98,830)
Other.......................... 789 7,714 10,900 16,841
-------- -------- -------- --------
Net loss....................... $(32,473) $(25,907) $(54,320) $(69,011)
======== ======== ======== ========
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 Nine months Ended
September 30 September 30
------------------ ------------------
1995 1994 1995 1994
-------- -------- -------- --------
Revenues (in thousands):
Natural gas............... $ 24,817 $ 24,062 $ 93,548 $ 96,763
Natural gas liquids....... 16,828 17,753 53,607 50,562
Oil and condensate........ 4,987 1,820 15,554 5,519
-------- -------- -------- --------
Total................ 46,632 43,635 162,709 152,844
======== ======== ======== ========
Natural Gas Production
(million cubic feet):
Hugoton................... 10,504 10,115 36,181 35,251
West Panhandle............ 5,412 6,046 14,854 16,706
Other..................... 1,600 1,640 5,337 5,255
-------- -------- -------- --------
Total................ 17,516 17,801 56,372 57,212
======== ======== ======== ========
Natural Gas Liquids Production
(thousand barrels):
Hugoton................... 700 694 2,564 2,446
West Panhandle............ 799 902 2,148 2,489
Other..................... 10 14 39 40
-------- -------- -------- --------
Total................ 1,509 1,610 4,751 4,975
======== ======== ======== ========
Oil and Condensate Production
(thousand barrels):
Hugoton................... -- -- -- --
West Panhandle............ 43 52 78 121
Other..................... 275 64 866 266
-------- -------- -------- --------
Total................. 318 116 944 387
======== ======== ======== ========
Average Prices:
Natural gas (per thousand
cubic feet).............. $ 1.47 $ 1.25 $ 1.64 $ 1.67
Natural gas liquids
(per barrel)............. $ 11.15 $ 11.04 $ 11.31 $ 10.20
Oil and condensate
(per barrel)............. $ 15.68 $ 15.98 $ 16.38 $ 14.44
Mesa's total equivalent natural gas production was slightly higher in
the three- and nine-month periods ended September 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 12 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 nine-month period ended September 30, 1995, compared with
the same period 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 nine-month periods ended September 30, 1995 and 1994:
Three Months Ended Nine months Ended
September 30 September 30
------------------ ------------------
1995 1994 1995 1994
-------- -------- -------- --------
Natural Gas Production
(million cubic feet):
Sold under fixed-price
contracts................ 4,251 4,716 11,222 11,683
Sold at market prices..... 13,265 13,085 45,150 45,529
-------- -------- -------- --------
Total production..... 17,516 17,801 56,372 57,212
======== ======== ======== ========
Percent sold at
market prices............ 76% 74% 80% 80%
======== ======== ======== ========
In addition to its fixed-price contracts, Mesa will, when circumstances
warrant, hedge the price received for its market price-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 nine-month periods ended September 30, 1995 and 1994:
Three Months Ended Nine months Ended
September 30 September 30
------------------ ------------------
1995 1994 1995 1994
-------- -------- -------- --------
Average Natural Gas Prices
(per thousand cubic feet):
Fixed-price contracts..... $ 1.83 $ 1.81 $ 2.09 $ 2.07
======== ======== ======== ========
Market prices received.... $ 1.18 $ 1.31 $ 1.22 $ 1.64
Hedge gains (losses)...... .17 (.26) .30 (.07)
-------- -------- -------- --------
Total market prices.. $ 1.35 $ 1.05 $ 1.52 $ 1.57
======== ======== ======== ========
Total average prices...... $ 1.47 $ 1.25 $ 1.64 $ 1.67
======== ======== ======== ========
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 hedge losses of $3.4 million in the third quarter of 1994 and for
the nine months ended September 30, 1994. At September 30, 1995, Mesa had
deferred losses of $.8 million resulting from hedging a portion of Mesa's
anticipated natural gas production for the remainder of 1995. These
deferred losses will be recognized as natural gas revenues when the hedged
production occurs. Mesa had no open hedge positions at September 30, 1995.
Costs and Expenses
------------------
Mesa's costs and expenses increased from $47.8 million in the third
quarter of 1994 to $48.7 million for the same period in 1995. Lease
operating expense increased due to the timing of certain 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. General and administrative ("G&A") expenses
increased due to legal expenses associated with a challenge by a dissident
shareholder group. 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 $147.2 million to $137.1
million in the nine-month period ended September 30, 1995, compared to the
same period in 1994. Lease operating expense decreased due to a one-time
insurance adjustment reflected in 1994. 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. G&A expenses increased due to legal
and other expenses discussed above. 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 nine-month periods ended September
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 $3.8 million and $9.5 million for the
three- and nine-month periods ended September 30, 1994, respectively, to
$4.1 million and $12.2 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 nine-month periods ended
September 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 Nine months Ended
September 30 September 30
------------------ ------------------
1995 1994 1995 1994
-------- -------- -------- --------
Gains (losses) from futures
and securities investments.... $ (627) $ 8,512 $ 1,122 $ 3,191
Gains from collections
from Bicoastal Corporation.... 1,699 -- 6,352 16,577
Other.......................... 283 (798) 3,426 (2,927)
-------- -------- -------- --------
$ 1,355 $ 7,714 $ 10,900 $ 16,841
======== ======== ======== ========
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 September 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, including 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, 1995, 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 September 30, 1995 (in thousands):
Obligors
------------------
Mesa
and MOC HCLP Total
-------- -------- ----------
Debt:
HCLP Secured Notes(a)............ $ -- $504,673 $ 504,673
Credit Agreement(b).............. 71,131 -- 71,131
12-3/4% secured discount
notes(c)(e).................... 618,626 -- 618,626
12-3/4% unsecured discount
notes(d)(e)..................... 39,725 -- 39,725
Other............................. 12,695 -- 12,695
-------- -------- ----------
742,177 504,673 1,246,850
Current maturities..................... (77,530) (34,036) (111,566)
-------- -------- ----------
Long-term debt......................... $664,647 $470,637 $1,135,284
======== ======== ==========
- ----------
(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
September 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 $ 45,300 $ 46,100 $ 43,100 $ 39,500
Principal repayments.... 21,420 15,500 34,000 37,400 40,100
Capital expenditures(b). 6,957 11,000 5,000 1,000 --
-------- -------- -------- -------- --------
$ 75,192 $ 71,800 $ 85,100 $ 81,500 $ 79,600
======== ======== ======== ======== ========
Other Mesa subsidiaries:
Interest payments,
net(a)................$ 1,945 $ 44,400 $ 95,000 $101,900 $105,700
Credit Agreement(c). 23,021 10,000 22,500 38,600 --
12-3/4% unsecured
discount
notes(d)(e)....... 124,330 -- 39,700 -- --
12-3/4% secured
discount notes(e). -- -- -- -- 617,400
Other............... 6,336 -- 5,300 -- --
Capital expenditures(b). 25,633 32,600 16,500 15,500 2,400
-------- -------- -------- -------- --------
$181,265 $ 87,000 $179,000 $156,000 $725,500
======== ======== ======== ======== ========
- ----------
(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 $37 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 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.
(e) Amounts due under the Discount Notes may be accelerated if there
is a continuing event of default under the Credit Agreement.
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 September 30, 1995, Mesa's tangible adjusted equity was
approximately $67.9 million and available cash was $140.6 million. Assuming
no changes in its capital structure and that no significant transactions are
completed, the Company expects to continue to report substantial net losses
and expects its tangible adjusted equity to fall below $50 million. The
Company may determine in the first quarter of 1996, upon completion of
year-end financial statements and reserve reports, that such tangible
adjusted equity was less than $50 million as of December 31, 1995.
If and when Mesa determines that tangible adjusted equity is below $50
million, an event of default would occur under the Credit Agreement and the
bank would have the right to accelerate the payment of all outstanding
principal and require cash collateralization of letters of credit. An event
of default under the Credit Agreement would cause a cross default under the
Discount Note indentures unless and until the Credit Agreement default were
cured or waived or the debt under the Credit Agreement were repaid or
otherwise discharged. In addition, pursuant to the subordination provisions
of such indentures, Mesa would be prohibited from making any payments on
such notes for specified periods upon and during the continuance of any
event of default under the Credit Agreement.
The indentures governing the Discount Notes restrict, among other
things, Mesa's ability to incur additional indebtedness, pay dividends,
acquire stock or make investments, loans and advances. 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 nine months ended September 30, 1995 (in thousands):
Other
Subsidiaries
MOC HCLP Combined Total
------- ------- ------------ --------
Cash and securities(a)......... $56,413 $36,179 $68,242 $160,834
Working capital (deficit)...... (37,088) (3,107) 76,730 36,535
Restricted cash(b)............. -- 57,875 -- 57,875
Cash flows from
operating activities:
Oil and gas sales, net
of production and
administrative costs..... $45,402 $50,197 $ -- $ 95,599
Interest payments, net(c). (3,274) (47,333) 3,539 (47,068)
Other..................... (6,038) 610 (1,376) (6,804)
------- ------- ------- --------
$36,090 $ 3,474 $ 2,163 $ 41,727
======= ======= ======= ========
- ----------
(a) Included in working capital.
(b) Non-current asset in balance sheet.
(c) Cash interest payments, net of interest income.
Mesa's current financial forecasts, assuming no changes in capital
structure and that no significant transactions are completed, indicate that
its cash generated by operating activities, together with its cash and
securities balances, will be insufficient to make all of its debt principal
and interest obligations due in June 1996. If amounts outstanding under the
Credit Agreement were to be accelerated in the first quarter of 1996, Mesa
would expect to have sufficient cash to meet the Credit Agreement
obligations and cure an event of default under the Credit Agreement and
avoid, at that time, cross defaults under the terms of its Discount Note
indentures. However, such a payment, coupled with the payment of $42
million of interest due on the Discount Notes on December 31, 1995, would
substantially deplete Mesa's remaining cash and securities balances. Mesa
will make decisions regarding such principal and interest payments on its
debt after it has evaluated the proposals submitted pursuant to the
solicitation process developed as a part of the exploration of strategic
alternatives discussed below.
Exploration of Strategic Alternatives
-------------------------------------
In an effort to address its liquidity issues 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, Mesa's Board of Directors (the "Board") approved a
proposal to expand its exploration of strategic alternatives to include
consideration of the sale of Mesa, a stock-for-stock merger, joint ventures,
asset sales, equity infusions, and refinancing transactions. Mesa engaged
an independent financial advisor to assist in these efforts and to solicit
proposals on its behalf. The solicitation process commenced in August of
this year and Mesa has requested that proposals be submitted on November 20,
1995. There can be no assurance that any such transaction will be
completed, or if completed, what the terms or timing thereof will be.
The ability of Mesa to continue as a going concern is dependent upon
several factors including the successful resolution of its strategic
alternatives solicitation process. The consolidated financial statements of
Mesa do not include any adjustments reflecting any treatment other than
going concern accounting, which adjustments may be required depending on the
outcome of the strategic alternatives solicitation process.
Mesa has been advised by its independent public accountants that,
unless Mesa is able to improve its financial condition and resolve its
liquidity issues, their auditors' report on the financial statements for the
year ending December 31, 1995, will be modified to include a discussion of
substantial doubt about Mesa's ability to continue as a going concern.
Other
- -----
See Note 5 to the consolidated 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 (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles and
goodwill. (See Note 1 to the consolidated financial statements in Part I,
Item 1 of this Form 10-Q for discussion of this accounting standard.)
In October 1995 the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," which establishes accounting and reporting
standards for stock-based employee compensation plans. (See Note 6 to the
consolidated financial statements in Part I, Item 1 of this Form 10-Q for
discussion of this accounting standard.)
Mesa recognizes its ownership interest in natural gas production as
revenue. Actual production quantities sold may be different from Mesa's
ownership share of production in a given period. Mesa records these
differences as gas balancing receivables or as deferred revenue. Net gas
balancing underproduction represented approximately 2.5% of total equivalent
production in the nine months ended September 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 "WDB Group") and certain
other persons alleging certain securities laws violations. On August 8,
1995, the WDB Group filed an answer denying the Company's claims and
asserting certain counterclaims against the Company and all directors of the
Company other than Messrs. Batchelder and Parkinson. On September 20, 1995,
the parties to these actions entered into an agreement of compromise and
settlement with respect to these actions and certain related matters. In
light of the Board's confirmation of its previously announced commitment to
explore all alternatives to maximize the value of Mesa for all shareholders,
including the possible sale or merger of Mesa, the WDB Group have agreed not
to seek to call a special meeting of Mesa's shareholders, as previously
announced.
The agreement provides that if Mesa has previously effected a business
combination, sale of assets or equity or similar transaction that meets
certain agreed-upon size and other criteria, including receipt of a fairness
opinion from Lehman Brothers, Inc. (Mesa's independent financial adviser),
the WDB Group will not conduct any proxy solicitation with respect to Mesa's
1996 annual meeting. If Mesa has not effected such a transaction by its
1996 annual meeting or if Mesa submits to a special meeting of shareholders
a transaction that does not meet agreed-upon criteria, the WDB Group may
solicit proxies.
Additionally, under the agreement Joel L. Reed, a principal of
Batchelder & Partners, Inc., has succeeded Mr. Batchelder on the Board.
Dorn Parkinson, Mr. Washington's representative, continues as a member of
the Board.
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 (described in Item 2 below) and filing the complaint against the
members of the group that filed a Schedule 13D with respect to the Company
(the "WDB 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 WDB 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 Reports on Form 8-K dated July 6, 1995, and July 20, 1995, and the
foregoing summary description is qualified in its entirety by reference to
the Rights Plan.
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 (Originally filed as
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 Third Quarter 1995 Form 10-Q.
(b) Reports on Form 8-K
Current Report on Form 8-K filed September 21, 1995, regarding the
Agreement of Compromise and Settlement dated September 20, 1995, among the
Company, Messrs. Pickens, Washington, Davis and Batchelder, and other
parties thereto.
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: November 14, 1995
-----------------
INDEX TO EXHIBITS
-----------------
Exhibit No. Description
- ----------- -----------
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.
27 Article 5 of Regulation S-X Financial Data Schedule
for the Second Quarter 1995 Form 10-Q.