COX & SMITH
I N C O R P O R A T E D
ATTORNEYS COUNSELORS
112 East Pecan Street
Suite 1800
San Antonio, Texas 78205-1521
(210) 554-5500
Fax (210) 226-8395
Writer's Direct Number Writer's E-Mail Address
(210) 554-5255 [email protected]
June 25, 1999
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Registration Statement on Form S-4 for
Abraxas Petroleum Corporation (333-79349)
Ladies and Gentlemen:
On behalf of Abraxas Petroleum Corporation, this letter accompanies the
filing of Amendment No. 1 to the Registration Statement on Form S-4 under the
Securities Act of 1933, as amended (No. 333-79349), for the registration of
$63,500,000 Senior Secured Notes due 2003 of Abraxas Petroleum Corporation .
As required under the EDGAR rules, a paper copy of the Form S-4 is on
file with Abraxas' office of the secretary.
Please direct any communication regarding this filing to the
undersigned at (210) 554-5255 or to Tobin E. Olson of this Firm at (210)
554-5298.
Yours very truly,
/s/ Steven R. Jacobs
Steven R. Jacobs
SRJ/cap/248186.06
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As filed with the Securities and Exchange Commission on June 25, 1999
Registration No. 333-79349
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NUMBER 1
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
ABRAXAS PETROLEUM CORPORATION
NEW CACHE PETROLEUMS LTD.
SANDIA OIL & GAS CORPORATION
CANADIAN ABRAXAS PETROLEUM LIMITED
(Exact name of registrant as specified in the charter)
Nevada 1331 74-2584033
Texas 1331 74-2368968
Alberta 1331 N/A
Alberta 1331 N/A
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Classifiacation Identification Number)
organization) Code Number)
Robert L. G. Watson
500 North Loop 1604 East 500 North Loop 1604 East
Suite 100 Suite 100
San Antonio, Texas 78232 San Antonio, Texas 78232
(210) 490-4788 (210) 490-4788
(Address, including zip code, and (Address, including zip
telephone number, including area code, code, and telephone number,
of registrant's principal executive including area code, of agent
offices) for service)
Copies to:
Cox & Smith Incorporated
112 E. Pecan Street, Suite 1800
San Antonio, Texas 78205
(210) 554-5500
Attention: Steven R. Jacobs
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
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THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED June 24, 1999
OFFER TO EXCHANGE 12 7/8% SENIOR SECURED NOTES DUE 2003, SERIES B
FOR ANY AND ALL OUTSTANDING 12 7/8% SENIOR
SECURED NOTES DUE 2003
OF ABRAXAS PETROLEUM CORPORATION
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON JULY ___, 1999, UNLESS EXTENDED
THE 12 7/8% SENIOR SECURED NOTES DUE 2003 -
o Were originally offered and sold on March 26, 1999.
o Will mature on March 15, 2003.
o Bear interest at the annual rate of 12 7/8%, payable semi-annually
beginning on September 15, 1999.
o Are secured by most of our current and future assets other than certain
excluded assets, and rank senior in right of payment to any of our
subordinated indebtedness and rank equally with any of our senior
indebtedness.
o Are subject to redemption or repurchase by us under certain
circumstances.
THE 12 7/8% SENIOR SECURED NOTES DUE 2003, SERIES B -
o Are offered in exchange for an equal principal amount of our
outstanding Senior Secured Notes.
o Evidence the same indebtedness as our outstanding Senior Secured Notes
and are entitled to the benefits of the indenture under which those
notes were issued.
o Are substantially identical in all material respects to our outstanding
Senior Secured Notes, except for certain transfer restrictions and
registration rights.
THE EXCHANGE OFFER -
o Expires at 5:00 p.m., New York City time, on July ___, 1999, unless
extended
o Is our offer to exchange our Series B Senior Secured Notes for an equal
amount of our outstanding Senior Secured Notes. o Satisfies our
obligations under a registration rights agreement which we entered into
with the initial purchaser of our Senior Secured Notes.
o Terminates the rights of most holders of any outstanding Senior Secured
Notes to exercise registration rights under the registration rights
agreement.
o Is not a taxable exchange for U.S. Federal income tax purposes.
o Is not subject to any condition other than that the exchange offer not
violate applicable law or any applicable interpretation of the staff of
the Securities and Exchange Commission.
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 15 OF THIS
PROSPECTUS BEFORE PARTICIPATING IN THE EXCHANGE OFFER.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE NOTES OR DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is June 25, 1999.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
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NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER THIS CHAPTER WITH THE STATE OF NEW HAMPSHIRE NOR
THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN
THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT
ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER
ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A
SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY
WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO,
ANY PERSON, SECURITY, OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE
MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER, OR CLIENT ANY REPRESENTATION
INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
ENFORCEABILITY OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS
Canadian Abraxas and New Cache are Alberta corporations, certain of
their officers and directors may be residents of various jurisdictions outside
the United States and their Canadian counsel, Bennett Jones, are residents of
Canada. All or a substantial portion of the assets of Canadian Abraxas and New
Cache and of such persons may be located outside the United States. As a result,
it may be difficult for investors to effect service of process within the United
States upon such persons or to enforce judgments obtained against such persons
in United States courts and predicated upon the civil liability provisions of
the Securities Act. Notwithstanding the foregoing, Canadian Abraxas and New
Cache have irrevocably agreed that they may be served with process with respect
to actions based on offers and sales of securities made hereby in the United
States by serving Chris E. Williford, c/o Abraxas Petroleum Corporation, 500
North Loop 1604 East, Suite 100, San Antonio, Texas 78232, Canadian Abraxas' and
New Cache's United States agent appointed for that purpose. Canadian Abraxas and
New Cache have been advised by their Canadian counsel, Bennett Jones, that there
is doubt as to the enforceability in Canada against Canadian Abraxas and New
Cache or against any of their directors, controlling persons, officers or
experts who are not residents of the United States, in original actions for
enforcement of judgments of United States courts, of liabilities predicated
solely upon United States federal securities laws.
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TABLE OF CONTENTS
Page
Summary............................................................... 4
Risk Factors.......................................................... 15
Plan of Distribution.................................................. 25
The Exchange Offer.................................................... 26
Use of Proceeds....................................................... 34
Capitalization........................................................ 35
Unaudited Pro Forma Financial Information............................. 36
Selected Historical Financial Data.................................... 41
Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 44
Business.............................................................. 55
Management............................................................ 71
Executive Compensation ............................................... 74
Certain Transactions ................................................. 78
Principal Stockholders ............................................... 79
Description of the Exchange Notes .................................... 81
Certain United States Income Tax Considerations....................... 127
Where You Can find More Information .................................. 134
Legal Matters......................................................... 134
Experts............................................................... 134
Glossary of Terms..................................................... 135
Index to Financial Statements......................................... F-1
We have not authorized any dealer, salesperson or other person to give
any information or represent anything to you other than the information
contained in this prospectus. You must not rely on unauthorized information or
representations.
Until September _____, 1999, all dealers that effect transactions in
these securities, whether or not participating in this offering, may be required
to deliver a prospectus. This is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
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SUMMARY
The following highlights certain information in this Prospectus that is
important to you. This Prospectus includes the terms of the Exchange Notes we
are offering, as well as information regarding our business and detailed
financial information. We encourage you to read this Prospectus in its entirety.
The terms "Abraxas" or the "Issuer" refer only to Abraxas Petroleum Corporation
and not to any of Abraxas' subsidiaries and the terms "Company," "we," "our,"
"ours" and "us" refer to Abraxas and all of its wholly-owned subsidiaries,
including New Cache, Canadian Abraxas and Sandia, for the relevant time periods.
Except as otherwise noted, our consolidated financial, reserve and operating
information includes the financial, reserve and operating information of Grey
Wolf, which is consolidated for financial reporting purposes but is not
wholly-owned by Abraxas. Except as otherwise noted, the reserve data reported in
this Prospectus are based on the reserve estimates of our independent petroleum
engineers. Except as otherwise noted, the terms "on a pro forma basis" or "pro
forma" refer to what our business might have looked like if the sale of the
Outstanding Notes, the acquisition of New Cache and the sale by Abraxas of the
Wyoming Properties had occurred at the times indicated. You should read the
discussions under the heading "Glossary of Terms" for definitions of certain
terms used in this Prospectus.
The Company
We are an independent energy company engaged primarily in the
acquisition, exploration, exploitation and production of crude oil and natural
gas. Since January 1, 1991, our principal means of growth has been through the
acquisition and subsequent development and exploitation of producing properties
and related assets. We utilize a disciplined acquisition strategy, focusing our
efforts on producing properties and related assets with the following
characteristics:
o A concentration of operations.
o Significant and quantifiable development potential.
o Historically low operating expenses.
o The potential to reduce general and administrative ("G&A") expense per
Mcfe. We seek to complement our acquisition and development activities
by selectively participating in exploration projects with experienced
industry partners. Our principal areas of operation are Texas and
western Canada.
We have completed 20 acquisitions of producing properties totaling 406
Bcfe of estimated proved reserves since January 1, 1991. At December 31, 1998,
on a pro forma basis:
o We owned interests in 1,211,788 gross acres (772,651 net acres).
o Our estimated total proved reserves were 320 Bcfe.
o Our PV-10 was $237 million.
o We operated properties accounting for 69% of our PV-10, affording us
substantial control over the timing and occurrence of operating and
capital expenditures.
o We had net natural gas processing capacity of 121 MMcfpd through our 22
natural gas processing plants in Canada. o Our natural gas processing
assets had a net book value of $44 million.
Abraxas was founded in 1977 by Robert L. G. Watson, Abraxas' Chairman of the
Board, President and Chief Executive Officer. Abraxas' principal offices are
located at 500 North Loop 1604 East, Suite 100, San Antonio, Texas 78232 and its
telephone number is (210) 490-4788.
Business Strategy
Our primary business objectives are to increase reserves, production and
cash flow through the following:
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o Improved Liquidity. The sale of the Outstanding Notes increased our
cash balance to approximately $21 million, allowing us to meet our
near-term debt service requirements and facilitating limited capital
expenditures. We have historically funded operations primarily through
cash flow from operations and borrowings under credit facilities. As a
result of the sale of the Outstanding Notes, our ability to incur
additional indebtedness will be substantially limited causing us to
rely on cash on hand, cash flow from operations, asset sales and equity
issuances to fund crude oil and natural gas exploitation activities and
acquisitions.
o Low Cost Operations. We seek to maintain low operating and G&A expenses
per Mcfe by operating a majority of our producing properties and
related assets and by maintaining a high rate of production on a per
well basis. As a result of this strategy, we have achieved per unit
operating and G&A expenses that compare favorably with similar
companies and that have historically been lower than the currently
depressed crude oil and natural gas prices realized by us.
o Exploitation of Existing Properties. We will allocate a portion of our
operating cash flow to the exploitation of our producing properties. We
believe that the proximity of our undeveloped reserves to existing
production makes development of these properties less risky and more
cost-effective than other drilling opportunities available to us. Given
our high degree of operating control, the timing and incurrence of
operating and capital expenditures is largely within our discretion.
o Producing Property Acquisitions. As cash flow permits, we intend to
continue to acquire producing crude oil and natural gas properties that
can increase cash flow, production and reserves through operational
improvements and additional development. We expect that the combination
of low crude oil and natural gas prices, limited access to liquidity
through the capital markets and reduced availability of commercial bank
facilities will result in an increase in attractive acquisition
opportunities offered by crude oil and natural gas companies seeking
additional liquidity.
o Focused Exploration Activity. In periods of increased crude oil and
natural gas prices, we intend to allocate a portion of our capital
budget to the drilling of exploratory wells that have high reserve
potential. We believe that by devoting a relatively small amount of
capital to high impact, high risk projects while reserving the majority
of our available capital for development projects, we can reduce
drilling risks while still benefiting from the potential for
significant reserve additions.
Recent Developments
In November 1998, Abraxas sold all of its interests in producing properties
located in the Wamsutter area of southwestern Wyoming (the "Wyoming Properties")
to a limited partnership (the "Partnership") for $58.6 million in cash. A
subsidiary of Abraxas owns a one percent equity interest in the Partnership and
acts as general partner of the Partnership. Abraxas also receives a management
fee and reimbursement of certain overhead costs from the Partnership.
In January 1999, Canadian Abraxas, Abraxas' wholly-owned Canadian
subsidiary, acquired all of the outstanding common shares of New Cache
Petroleums Ltd. for an aggregate purchase price of $78 million in cash and the
assumption of approximately $10 million in debt (the "New Cache Debt"). The New
Cache Debt was repaid with a portion of the proceeds from the sale of the
Outstanding Notes. New Cache:
o Owns interests in 285 gross wells (88.5 net wells) and 445,294 gross
(256,524 net) acres located primarily in western Canada.
o Owns three natural gas processing plants.
o Had estimated total proved reserves of 77 Bcfe (75% natural gas), all
of which were proved developed, at December 31, 1998.
In June 1999, Abraxas announced that it is exploring alternatives to
increase its liquidity. The alternatives include potential private equity
issuances and a restructuring of the Company's indebtedness as well as the sale
of certain non-core properties including the potential sale of some or all of
the Company's ownership position in New Cache to Grey Wolf. The Company also
intends to review project financing alternatives.
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The Exchange Offer
On March 26, 1999, Abraxas sold $63.5 million of its 12 7/8% Senior Secured
Notes due 2003 through an unregistered offering. The Outstanding Notes are, and
the Exchange Notes will be, guaranteed by Canadian Abraxas, New Cache and Sandia
Oil & Gas Corporation, Abraxas' wholly-owned United States subsidiary.
Simultaneously with the unregistered offering, the guarantor subsidiaries
and Abraxas agreed to provide the holders of the Outstanding Notes with certain
registration rights pursuant to a Registration Rights Agreement. Under the
Registration Rights Agreement, Abraxas must deliver this Prospectus to the
holders of the Outstanding Notes and must complete the Exchange Offer on or
before September 7, 1999. If the Exchange Offer does not take place on or before
September 7, 1999, we must pay liquidated damages to the holders of the
Outstanding Notes until the Exchange Offer is completed. You may exchange your
Outstanding Notes for Exchange Notes with substantially the same terms in the
Exchange Offer. You should read the discussion under the heading "Summary of
Terms of the Exchange Notes" and "Description of the Exchange Notes" for further
information regarding the Exchange Notes.
We believe that holders of the Outstanding Notes may resell the Exchange
Notes without complying with the registration and prospectus delivery provisions
of the Securities Act, if certain conditions are met. You should read the
discussion under the headings "Summary of the Exchange Offer" and "The Exchange
Offer" for further information regarding the Exchange Offer and resales of the
Exchange Notes.
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SUMMARY OF THE EXCHANGE OFFER
REGISTRATION RIGHTS................. We sold the Outstanding Notes on March 26,
1999 to the initial purchaser - -
Jefferies & Company, Inc. The initial
purchaser then sold the Outstanding Notes
to institutional investors. Simultaneously
with the initial sale of the Outstanding
Notes, we agreed to provide the holders of
the Outstanding Notes with certain
registration rights. The Registration
Rights Agreement provides for the Exchange
Offer.
You may exchange your Outstanding Notes
for Exchange Notes, which have
substantially identical terms. After the
Exchange Offer is over, you will not be
entitled to any exchange or registration
rights with respect to your Outstanding
Notes.
THE EXCHANGE OFFER.................. We are offering to exchange $63.5 million
total principal amount of our 12 7/8%
Senior Secured Notes due 2003, Series B,
which have been registered under the
Securities Act, for your outstanding 12
7/8% Senior Secured Notes due 2003 issued
in the March 1999 unregistered offering.
To exchange your Outstanding Notes, you
must properly tender them, and we must
accept them. We will exchange all
Outstanding Notes that you validly tender
and do not validly withdraw. We will issue
registered Exchange Notes at or promptly
after the end of the Exchange Offer.
RESALES............................. We believe that you can offer for resale,
resell or otherwise transfer the Exchange
Notes without complying with the
registration and prospectus delivery
requirements of the Securities Act if:
- you are acquiring the Exchange Notes in
the ordinary course of your business;
- you are not participating, do not intend
to participate, and have no arrangement or
understanding with any person to
participate, in the distribution of the
Exchange Notes; and
- you are not an "affiliate" of the
Company, as defined in Rule 405 of the
Securities Act.
If any of these conditions is not
satisfied and you transfer any Exchange
Notes without delivering a proper
prospectus or without qualifying for a
registration exemption, you may incur
liability under the Securities Act. We
will not assume or indemnify you against
such liability.
Each broker-dealer that receives Exchange
Notes for its own account in exchange for
Outstanding Notes that such broker-dealer
acquired through market-making or other
trading activities must acknowledge that
it will deliver a proper prospectus when
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it transfers any Exchange Notes. A
broker-dealer may use this Prospectus for
a limited period for an offer to resell, a
resale or other transfer of the Exchange
Notes.
EXPIRATION DATE..................... The Exchange Offer expires at 5:00 p.m.,
New York City time, on July ___,
1999, unless we extend the expiration
date.
CONDITIONS TO THE EXCHANGE The Exchange Offer is subject to customary
OFFER............................... conditions, some of which we may waive.
You should read the discussions under the
heading "The Exchange Offer--Conditions to
the Exchange Offer" for more information.
ACCRUED INTEREST ON THE The Exchange Notes will bear interest from
EXCHANGE NOTES AND THE March 26, 1999. If we accept your
OUTSTANDING NOTES................... Outstanding Notes for exchange, then you
will waive all interest accrued but unpaid
on such Outstanding Notes.
PROCEDURES FOR TENDERING Abraxas issued the Outstanding Notes in
OUTSTANDING NOTES................... global and registered form. When the
Outstanding Notes were issued, Abraxas
deposited the global note with Norwest
Bank Minnesota, National Association, as
book-entry depositary. Norwest Bank
Minnesota, National Association issued a
certificateless depositary interest in the
global note, which represents a 100%
interest in the note, to The Depository
Trust Company ("DTC"). Beneficial
interests in the Outstanding Notes, which
are held by direct or indirect
participants in DTC through the
certificateless depositary interest, are
shown on records maintained in book-entry
form by DTC.
You may tender your Outstanding Notes held
in global form through book-entry transfer
in accordance with DTC's Automated Tender
Offer Program ("ATOP"). To tender your
Outstanding Notes by a means other than
book-entry transfer, a Letter of
Transmittal must be completed and signed
according to the instructions contained in
the letter. The Letter of Transmittal and
any other documents required by the Letter
of Transmittal must be delivered to the
Exchange Agent by mail, facsimile, hand
delivery or overnight carrier. In
addition, you must deliver the Outstanding
Notes to the Exchange Agent or comply with
the procedures for guaranteed delivery.
You should read the discussions under the
heading "The Exchange Offer--Procedures
for Tendering Outstanding Notes" for more
information.
Do not send Letters of Transmittal and
certificates representing Outstanding
Notes to the Company. Send these documents
only to the Exchange Agent. You should
read the discussions under the heading
"The Exchange Offer--Exchange Agent" for
more information.
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SPECIAL PROCEDURES FOR If you are a beneficial owner whose
BENEFICIAL OWMERS................... Outstanding Notes are registered in the
name of a broker, dealer, commercial bank,
trust company or other nominee and wish to
tender your Outstanding Notes in the
Exchange Offer, please contact the
registered holder as soon as possible and
instruct it to tender on your behalf and
comply with our instructions set forth
elsewhere in this Prospectus.
WITHDRAWAL RIGHTS................... You may withdraw the tender of your
Outstanding Notes at any time before 5:00
p.m., New York City time, on the
expiration date.
APPRAISAL OR DISSENTER'S RIGHTS..... Holders of Outstanding Notes do not have
any appraisal or dissenters' rights in the
Exchange Offer. If you do not tender your
Outstanding Notes or Abraxas rejects your
tender, you will not be entitled to any
further registration rights under the
Registration Rights Agreement, except
under limited circumstances. However, your
notes will remain outstanding and entitled
to the benefits of the indenture governing
the notes (the "Indenture"). You should
read the discussion under the heading
"Risk Factors--Consequences of Failure to
Exchange Outstanding Notes" for further
information.
FEDERAL TAX CONSEQUENCES............ The exchange of notes generally is not a
taxable exchange for United States federal
income tax purposes. You generally will
not recognize any taxable gain or loss or
any interest income as a result of such
exchange. For additional information
regarding federal tax consequences, you
should read the discussion under the
heading "Certain United States Federal Tax
Consequences."
EXCHANGE AGENT...................... Norwest Bank Minnesota, National
Association is serving as the Exchange
Agent in the Exchange Offer. The Exchange
Agent's address, and telephone and
facsimile numbers are listed in the
section of this Prospectus entitled "The
Exchange Offer--Exchange Agent" and in the
Letter of Transmittal.
USE OF PROCEEDS..................... We will not receive any proceeds from the
Exchange Offer, and we will pay the
expenses of the Exchange Offer.
You should consider carefully the information set forth under the caption
"Risk Factors" beginning on page 15 and all other information set forth in this
Prospectus before deciding whether to participate in the Exchange Offer.
SUMMARY OF TERMS OF THE EXCHANGE NOTES
The form and terms of the Exchange Notes are the same as the form and
terms of the Outstanding Notes, except that the Exchange Notes will be
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registered under the Securities Act. As a result, the Exchange Notes will not
bear legends restricting their transfer and will not contain the registration
rights and liquidated damage provisions contained in the Outstanding Notes. The
Exchange Notes represent the same debt as the Outstanding Notes. The Outstanding
Notes and the Exchange Notes are governed by the same Indenture.
AGGREGATE AMOUNT.................... $63.5 million principal amount of 12 7/8%
Senior Secured Notes due 2003.
MATURITY DATE....................... March 15, 2003.
INTEREST PAYMENT DATES.............. March 15 and September 15, commencing
September 15, 1999.
RANKING; COLLATERAL................. The Outstanding Notes are and the Exchange
Notes will be senior indebtedness of
Abraxas secured by a first lien on
substantially all of existing and future
Collateral owned by Abraxas, which
initially includes substantially all of
the crude oil and natural gas properties
of Abraxas and the shares of common stock
of Grey Wolf Exploration Inc. owned by
Abraxas.
GUARANTEES; COLLATERAL.............. The Outstanding Notes are and the Exchange
Notes will be jointly and severally
guaranteed (the "Guarantees") on a senior
secured basis by each of the Guarantors.
The initial Guarantors are Canadian
Abraxas, New Cache and Sandia. The
Guarantees are senior obligations of the
Guarantors secured by a first lien or
charge on substantially all existing and
future Collateral owned by the Guarantors,
which initially includes substantially all
of the crude oil and natural gas
properties and natural gas processing
plants of Canadian Abraxas, New Cache and
Sandia, as well as the shares of common
stock of Grey Wolf owned by Canadian
Abraxas. See "Description of the Exchange
Notes -- The Guarantees."
OPTIONAL REDEMPTION................. At our option, we may redeem all or some
of the Exchange Notes on or after March,
2001. In addition, at any time on or prior
to March 15, 2001, we may redeem up to 35%
of the total amount of the notes ever
issued under the Indenture with the net
proceeds of one or more offerings of our
capital stock.
The optional redemption prices for the
Exchange Notes are contained in this
Prospectus under the heading "Description
of the Exchange Notes--Redemption."
CHANGE OF CONTROL................... Upon a change of control of Abraxas,
Abraxas must offer to repurchase your
Exchange Notes at a price of 101% of their
principal amount plus accrued interest to
the repurchase date. For more information,
you should read the discussions under the
heading "Description of the Exchange
Notes-- Repurchase Upon Change of
Control."
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CERTAIN COVENANTS................... The Indenture contains certain covenants
for your benefit which, among other things
and subject to certain exceptions,
restrict our ability to:
o incur additional indebtedness;
o pay dividends;
o create liens;
o make certain payments;
o enter into transactions with affiliates;
o sell assets; or
o consolidate, merge or transfer all or
substantially all of our assets.
FORM OF THE EXCHANGE NOTES.......... The Exchange Notes will be represented by
one or more permanent global securities in
bearer form deposited with Norwest Bank
Minnesota, National Association, as
book-entry depositary, for the benefit of
DTC. You will not receive notes in
registered form unless one of the events
set forth under the heading "Description
of the Exchange Notes--Certificated Notes"
occurs. Instead, beneficial interests in
the Exchange Notes will be shown on, and
transfers of these interests will be
effected only through, records maintained
in book-entry form by DTC with respect to
its participants.
ABSENCE OF A PUBLIC MARKET FOR While the Outstanding Notes are presently
THE EXCHANGE NOTES.................. eligible for trading in the Private
Offerings, Resales and Trading through
Automated Linkages ("PORTAL") market of
the National Association of Securities
Dealers, Inc. ("NASD") by qualified
institutional buyers, there is no existing
market for the Exchange Notes. The initial
purchaser of the Outstanding Notes has
advised Abraxas that it currently intends
to make a market in the Exchange Notes
following the Exchange Offer, but it is
not obligated to do so, and any
market-making may be stopped at any time
without notice. Abraxas does not intend to
apply for a listing of the Exchange Notes
on any securities exchange. We do not know
if an active public market for the notes
will develop or, if developed, will
continue. If an active public market does
not develop or is not maintained, the
market price and liquidity of the notes
may be adversely affected. Abraxas cannot
make any assurances regarding the
liquidity of the market for the Exchange
Notes, the ability of holders to sell
their Exchange Notes or the price at which
holders may sell their Exchange Notes.
For additional information regarding the Exchange Notes, you should
read the discussion under the heading "Description of the Exchange Notes."
11
<PAGE>
Summary Historical and Pro Forma Financial Information
The following table presents summary historical and pro forma consolidated
financial data of the Company for the three years ended December 31, 1998, and
as of and for the three months ended March 31, 1999 and 1998 which have been
derived from the Company's consolidated financial statements and unaudited
historical and pro forma financial data. The unaudited Pro Forma Statement of
Operations for the year ended December 31, 1998 and the three months ended March
31, 1998 reflects the sale of the Outstanding Notes, the sale of the Wyoming
Properties and the acquisition of New Cache, as if all were consummated on
January 1, 1998.
It is important that you read the information in this table along with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Selected Historical Financial Data," the Consolidated Financial
Statements of the Company and the notes thereto and the unaudited Pro Forma
Financial Information and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
----------------------------------- --------------------------------------
Pro Pro Pro
Forma Forma Forma
1996 1997 1998 1998 (1) 1998 1998(1) 1999 1999 (1)
---- ---- ---- -------- ---- ------- ---- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Total operating revenue(2)........... $ 26,653 $ 70,931 $ 60,084 $ 66,175 $ 16,739 $ 17,922 $ 15,970 $15,970
Operating expense(3)................. 6,289 16,429 18,612 22,840 4,761 5,840 4,897 4,897
Depreciation, depletion and
amortization expense................ 9,605 30,581 31,226 41,420 8,252 9,493 9,146 9,146
Proved property impairment........... -- 4,600 61,224 61,224 -- -- -- --
General and administrative expense... 1,933 4,171 5,522 7,732 1,305 1,682 1,323 1,323
Interest expense, net of interest
income............................... 5,987 24,300 30,043 38,399 7,189 9,142 8,497 9,625
Amortization of deferred
financing fee....................... 280 1,260 1,571 2,196 327 483 345 345
Income(loss)from continuing operations
before extraordinary items.......... $ 1,940 $(6,485) $(83,960)$(126,137)$ (5,284)$ (8,008) $ (8,238) 9,366
Other Data:
EBITDA (4)(5)....................... $18,431 $50,331 $35,950 $35,603 $10,675 $ 10,400 $ 9,750 $ 9,750
Capital expenditures (including
acquisitions)...................... $173,155 $87,764 $57,861 $65,821 $18,303 $ 24,410 97,925 97,925
Ratio of earnings to fixed charges(6) 1.34x -- -- -- -- -- -- --
</TABLE>
March 31, 1999
---------------------
Consolidated Balance Sheet Data: (dollars in thousands)
- --------------------------------------
Total assets $355,461
Total debt (7) 344,869
Stockholders' equity (deficit) (8) (66,654)
- ---------
(1) Reflects the sale of the Outstanding Notes, the sale of the Wyoming
Properties and the acquisition of New Cache as if they occurred on January
1, 1998.
(2) Consists of crude oil and natural gas production sales, revenue from rig
operations and processing facilities, and other miscellaneous revenue.
(3) Consists of lease operating expenses, production taxes, rig operating
expenses and processing costs.
(4) Includes $0.2 million, $0.8 million, $3.2 million, $3.2 million, $0.4
million and $1.2 million attributable to Grey Wolf in 1996, 1997, 1998, Pro
Forma 1998, March 31, 1998, Pro Forma March 31, 1998 and March 31, 1999,
respectively.
(5) EBITDA represents net income before interest, income taxes, depreciation and
amortization. EBITDA is presented not as an actual measure of operating
results or cash flow from operations (as determined in accordance with
generally accepted accounting principles), but because it is a widely
accepted financial indicator of a company's ability to service and/or incur
indebtedness. EBITDA, however, should not be construed as an alternative to
12
<PAGE>
net income as a measure of a company's operating results or to operating
cash flow as a measure of liquidity. This methodology may not be consistent
with a similarly captioned item presented by other companies.
(6) Earnings consist of income (loss) from continuing operations before income
taxes plus fixed charges. Fixed charges consist of interest expense,
amortization of deferred financing fees and premium on the Series D Notes.
The Company's earnings were inadequate to cover fixed charges in 1997, 1998,
March 31, 1999 and March 31, 1998 Pro Forma by $10.0 million, $88.1 million,
$6.3 million and 4.6 million, respectively.
(7) Consists of long-term debt, including the premium on the Series D Notes and
capital lease obligations.
(8) Consists of 6,672,456 shares of Abraxas Common Stock of which 171,015 are
treasury shares.
13
<PAGE>
Summary Historical Reserves and Operating Data
The following table sets forth summary information with respect to the
Company's estimated proved crude oil, NGLs and natural gas reserves and certain
summary information with respect to the Company's operations as of the dates or
for the periods indicated.
It is important that you read this table along with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," the Company's
Consolidated Financial Statements and the notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
------------------------------------------------- -------------------------------------
Pro Forma Pro Forma
1996 1997 1998 1998 (1) 1998 1998(1) 1999
-------- --------- --------- --------- --------- -------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Estimated Proved Reserves
(period-end):
Crude oil and NGLs (MBbls).... 18,035 17,777 7,695 10,840 n/a(3) n/a(3) n/a(3)
Natural gas (MMcf)............ 177,260 224,314 197,478 254,559 n/a(3) n/a(3) n/a(3)
Natural gas equivalents (MMcfe) 285,470 330,976 243,648 319,599 n/a(3) n/a(3) n/a(3)
% Proved developed.......... 87% 82% 74% 80% n/a(3) n/a(3) n/a(3)
Estimated future net revenue
before income taxes......... $756,352 $ 464,444 $ 336,232 $ 446,274 n/a(3) n/a(3) n/a(3)
PV-10 (2)..................... 415,908 268,614 181,581 237,162 n/a(3) n/a(3) n/a(3)
% Proved developed.......... 88% 83% 82% 87% n/a(3) n/a(3) n/a(3)
Production:
Crude oil (MBbls)............. 425 937 729 1,148 199.0 322 225.0
NGLs (MBbls).................. 300 992 867 413 241.5 116 73.3
Natural gas (MMcf)............ 6,350 21,050 24,930 28,761 6,139.2 6,759 7,149.5
Mmcfe(3).................... 10,698 32,624 34,506 38,127 8,785 9,386 8,938
Average Sales Price: (4)
Crude oil (per Bbl)................ $ 20.85 $ 18.63 $ 13.65 $ 12.93 $ 14.47 $ 14.40 $ 12.14
NGLs (per Bbl)..................... 14.55 10.75 6.81 6.81 8.24 11.23 7.56
Natural gas (per Mcf).............. 1.97 1.79 1.54 1.47 1.59 1.46 1.48
Per Mcfe...................... 2.40 2.02 1.57 1.54 1.67 1.69 1.55
LOE (per Mcfe)..................... $ 0.55 $ 0.46 $0.49 $0.55 0.53 0.61 0.53
Reserve Life (Years): (5).......... 26.7 10.1 7.1 8.4 n/a(3) n/a(3) n/a(3)
Natural Gas Processing Plants
(period-end):
Number of natural gas
processing plants............ 19 20 19 22 21 24 22
Net plant capacity (MMCfpd)... 128 137 108 121 136 150 121
</TABLE>
- ----------
(1) With respect to period-end information, reflects the acquisition of New
Cache as if it occurred at December 31, 1998. With respect to all other
information, reflects the sale of the Wyoming Properties and the acquisition
of New Cache as if they occurred on January 1, 1998.
(2) Includes $1.0 million, $11.5 million, $27.3 million and $27.3 million
attributable to Grey Wolf in 1996, 1997, 1998 and Pro Forma 1998,
respectively.
(3) Not available. Reserve information for 1998 was prepared by our independent
petroleum engineers at December 31, 1998 and no reserve information has been
prepared in 1999.
(4) Average sales prices include effects of hedging activities. You should read
the discussions under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
(5) Except as otherwise noted, Reserve Life is calculated as proved reserves at
year end divided by annual production, both on an Mcfe basis.
14
<PAGE>
RISK FACTORS
We make forward-looking statements throughout this Prospectus. Whenever you
read a statement that is not simply a statement of historical fact (such as when
we describe what we "believe," "expect" or "anticipate" will occur, and other
similar statements), you must remember that our expectations may not be correct,
even though we believe they are reasonable. We do not guarantee that the
transactions and events described in this Prospectus will happen as described
(or that they will happen at all). The forward-looking information contained in
this Prospectus is generally located in the material set forth under the
headings "Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" but may be found
in other locations as well. These forward-looking statements generally relate to
our plans and objectives for future operations and are based upon our
management's reasonable estimates of future results or trends. The factors that
may affect our expectations of our operations include, among others, the
following:
o Our lack of liquidity
o Our high debt level
o Economic and business conditions
o Our success in completing acquisitions or in development and
exploration activities
o Prices for crude oil and natural gas; and
o Other factors discussed under "Risk Factors" or elsewhere in this
Prospectus.
You should carefully consider the following risk factors in addition to the
other information in this Prospectus before making a decision to exchange your
outstanding Notes in the Exchange Offer.
We Lack Liquidity Due to Our Reduced Cash Flow
We have historically funded our operations primarily through cash flow from
operations and borrowings under our bank credit facility and other credit
sources. Due to severely depressed crude oil and natural gas market prices, our
cash flow from operations has been substantially reduced. We anticipate that we
will have two principal sources of liquidity during the next 12 months: (i) cash
on hand, including the net proceeds from the sale of the Outstanding Notes after
the repayment of our bank credit facility and the New Cache Debt and (ii) cash
generated by operations. We are also considering restructuring some of our
indebtedness other than the Outstanding Notes and the New Notes, the sale of
non-core producing properties and certain project financing alternatives. You
should read the discussions under the headings "-- Leverage Materially Affects
Our Operations," "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources," "Description of
the Exchange Notes," the unaudited Pro Forma Financial Information and the notes
thereto and the Consolidated Financial Statements and the notes thereto included
elsewhere in this Prospectus for more information regarding our lack of
liquidity.
Our ability to raise funds through additional indebtedness will be
substantially limited by the terms of the Indenture and the Indenture governing
our outstanding Series D Notes (the "Series D Indenture"). Additionally, our
ability to raise funds through additional indebtedness will be limited because
substantially all of our crude oil and natural gas properties and natural gas
processing facilities are subject to a lien or floating charge for the benefit
of the holders of the Outstanding Notes and the Exchange Notes. We may also
choose to issue equity securities or sell certain of our assets to fund our
operations, although the Indenture and the Series D Indenture substantially
limit our use of the proceeds of any such asset sales. Because of our diminished
cash flow from operations and the resulting depressed prices for our common
stock, we may not be able to obtain equity financing on satisfactory terms.
We have implemented a number of measures to conserve our cash resources,
including reducing our 1999 capital expenditure budget. However, while these
measures will help conserve our cash resources in the near term, they will also
limit our ability to replenish our depleting reserves. This could negatively
impact our operating cash flow and results of operations in the future. You
should read the discussion under the heading "-- Our Ability to Replace
Production with New Reserves Is Highly Dependent on Acquisitions or Successful
Development and Exploration Activities Which In Turn Are Adversely Affected By
Our Reduced 1999 Capitol Expenditures" for more information.
15
<PAGE>
Leverage Materially Affects Our Operations
We have substantial indebtedness and debt service requirements. Our total
debt and stockholders' equity (deficit) were $344.9 million and $(66.7) million,
respectively, as of March 31, 1999. You should read the discussions under the
heading "Capitalization" for more information regarding our high degree of
leverage. We may incur additional indebtedness in the future in connection with
acquiring, developing and exploiting producing properties, although our ability
to incur additional indebtedness is substantially limited by the terms of the
Series D Indenture and the Indenture. You should read the discussions under the
heading "-- We Lack Liquidity Due To Our Reduced Cash Flow," "Management's
Discussion and Analysis of Financial Condition and Results of Operations
- --Liquidity and Capital Resources," "Description of the Exchange Notes," the
unaudited Pro Forma Financial Information and the notes thereto and the
Consolidated Financial Statements and the notes thereto included elsewhere in
this Prospectus for more information regarding our indebtedness.
Our high level of debt affects our operations in several important ways,
including:
o Substantially all of our cash flow from operations is used to pay
interest on the Outstanding Notes and the Series D Notes;
o The covenants contained in the Indenture and the Series D Indenture
will limit our ability to borrow additional funds or to dispose of
assets and may affect our flexibility in planning for, and reacting to,
changes in our business, including possibly limiting acquisition
activities;
o Our debt level may impair our ability to obtain additional financing in
the future for working capital, capital expenditures, acquisitions,
interest payments, scheduled principal payments, general corporate
purposes or other purposes; and
o The terms of the Indenture and the Series D Indenture permit the
holders of the Outstanding Notes and the Series D Notes to accelerate
payments upon an event of default or a change of control.
Our Ability to Service Our Debt is Limited By Factors Beyond Our Control
Our ability to meet our debt obligations and to reduce our indebtedness,
including the Outstanding Notes and the Exchange Notes, will depend on our
future performance. Our performance, to a certain extent, is subject to general
economic conditions and financial, business and other factors that are beyond
our control. Based upon the current level of operations and the historical
production of the producing properties and related assets currently owned by us,
we believe that the net proceeds from the sale of Outstanding Notes and cash
flow from operations will be adequate to meet our anticipated requirements for
working capital, capital expenditures, interest payments, scheduled principal
payments and general corporate or other purposes for the remainder of 1999. We
cannot assure you however, that we will continue to generate cash flow from
operations at or above current levels, that we will be able to meet our interest
payments on all of our debt or that the historical production of the producing
properties and related assets currently owned by us can be sustained in the
future. Our cash flow from operations will be negatively affected by, among
other things, depressed commodity prices. Further, our operating cash flow could
be negatively affected by our limited ability, due to our diminished liquidity
and ability to borrow funds, to acquire producing properties, to undertake
exploration and development projects and to otherwise replenish our depleting
reserves.
16
<PAGE>
If we are unable to generate cash flow from operations in the future to
service the Outstanding Notes, Exchange Notes, the Series D Notes and our other
debt, we may try to refinance all or a portion of our debt or repay such debt
with the proceeds of an equity offering. We cannot assure you that we will be
able to generate sufficient cash flow to pay the interest on our debt or that
future borrowings or equity financing will be available to pay or refinance our
debt. Our ability to refinance all or a portion of our debt or to obtain
additional financing is substantially limited under the terms of the Indenture
and the Series D Indenture. Also, substantially all of our crude oil and natural
gas properties and natural gas processing facilities are subject to a lien or
floating charge for the benefit of the holders of the Outstanding Notes and the
Exchange Notes. In addition, the Outstanding Notes and the Series D Notes are,
and the Exchange Notes will be, subject to certain limitations on redemption.
You should read the discussions under the heading "-- We Lack Liquidity Due To
Our Reduced Cash Flow," "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources,"
"Description of Existing Indebtedness" and "Description of the Exchange Notes --
Redemption" for more information regarding the factors which may limit our
ability to service our debt, redeem the Outstanding Notes, the Exchange Notes
and the Series D Notes and to refinance our debt.
The Collateral Securing the Outstanding Notes and The Exchange Notes May Not Be
Adequate
The Outstanding Notes and the Guarantees are, and the Exchange Notes and the
Guarantees will be, secured by a first lien or charge on substantially all of
the crude oil and natural gas properties and natural gas processing facilities
of Abraxas and the Guarantors, as well as the shares of Grey Wolf common stock
owned by Abraxas and Canadian Abraxas (collectively, the "Collateral"),
including crude oil and natural gas properties with a PV-10 of $209.3 million at
December 31, 1998. The reserve data with respect to such interests, however,
represent estimates only and should not be construed as exact. Moreover, the
PV-10 estimates should not be construed as the current market value of the
estimated proved reserves attributable to Abraxas', Sandia's, Canadian Abraxas'
and New Cache's properties. You should read the discussions under the heading
"-- Estimates of Proved Reserves and Future Net Revenue Are Uncertain and
Inherently Imprecise" and "Business -- Reserves Information" for more
information regarding our reserves. We cannot assure you that if an event of
default occurs that the liquidation of the Collateral would produce proceeds
sufficient to pay all of our obligations under the Outstanding Notes and the
Exchange Notes. The ability of the trustee to foreclose upon the Collateral will
be subject to certain procedural limitations described in "Description of the
Exchange Notes -- Events of Default and Remedies", in the Security Documents (as
defined herein) and the Indenture and would be further restricted by applicable
law in the event of a bankruptcy proceeding involving the Company.
Fraudulent Conveyance Laws Could Allow a Court to Void the Guarantees
Under the federal bankruptcy law and comparable provisions of state
fraudulent transfer laws, a guarantee could be voided, or claims in respect of a
guarantee could be subordinated to all other debts of that guarantor if, among
other things, the guarantor, at the time it incurred the indebtedness evidenced
by its guarantee:
o received less than reasonably equivalent value or fair consideration
for the incurrence of such guarantee; and
o was insolvent or rendered insolvent by reason of such incurrence; or
o was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or
o intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they mature.
17
<PAGE>
In addition, any payment by that guarantor pursuant to its guarantee could
be voided and required to be returned to the guarantor, or to a fund for the
benefit of the creditors of the guarantor.
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, a guarantor would be
considered insolvent if:
o the sum of its debts, including contingent liabilities, were greater
than the fair saleable value of all of its assets, or
o if the present fair saleable value of its assets were less than the
amount that would be required to pay its probable liability on its
existing debts, including contingent liabilities, as they become
absolute and mature, or
o it could not pay its debts as they become due.
We believe that Abraxas and Sandia received reasonably equivalent value at
the time they incurred the indebtedness under the Outstanding Notes or
Guarantees, as applicable, and granted the security interests in the Collateral
securing the Outstanding Notes and the Guarantees. In addition, Abraxas and
Sandia believe that neither of them were, at the time of or as a result of the
issuance of the Outstanding Notes or the Guarantees and the granting of the
security interests in the Collateral securing the Outstanding Notes and the
Guarantees, insolvent under the foregoing standards, that neither Abraxas nor
Sandia will be engaged in a business or transaction for which its remaining
assets constitute unreasonably small capital and that neither intends or will
intend to incur debts beyond its ability to pay such debts as they mature. These
beliefs are based upon management's analysis of internal cash flow projections
and estimated values of assets and liabilities of Abraxas and Sandia. There can
be no assurance, however, that a court passing on such questions would agree
with Abraxas.
Under applicable provisions of Canadian federal bankruptcy law or comparable
provisions of provincial fraudulent preference laws, if a court in an action
brought by an unpaid creditor of Canadian Abraxas or New Cache or by a
bankruptcy trustee of Canadian Abraxas or New Cache were to find that the liens
granted by Canadian Abraxas or New Cache over its assets were intended to prefer
the holders of the Outstanding Notes and the Exchange Notes over other
creditors, such liens could be set aside. This would become an issue if Canadian
Abraxas or New Cache became insolvent or bankrupt within a certain period after
granting the liens. However, to the extent that the grant of security is to
secure new loan advances, there would be no fraudulent preference under Canadian
bankruptcy or fraudulent preference laws. The liens granted by Canadian Abraxas
and New Cache when the Outstanding Notes were issued secure new loan advances
represented by the Outstanding Notes and as such should not be subject to
attack.
Bankruptcy Laws Could Impair Your Rights
In the event Abraxas or any of the Guarantors were to become a debtor
subject to insolvency proceedings under the United States Bankruptcy Code
("Bankruptcy Code"), Canadian Federal bankruptcy law or general state or
provincial laws (to the extent not superseded by respective federal laws), it is
likely delays may occur in payment of the Outstanding Notes and the Exchange
Notes and in enforcing remedies under the Outstanding Notes and the Exchange
Notes, any Guarantee or the liens securing the Outstanding Notes and the
Exchange Notes and the Guarantees because of specific provisions of such laws or
by a court applying general principles of equity. Provisions under the
Bankruptcy Code or general principles of equity that could result in the
impairment of your rights include, but are not limited to:
o the automatic stay,
18
<PAGE>
o avoidance of preferential transfers by a trustee or
debtor-in-possession,
o substantive consolidation,
o limitations on collectability of unmatured interest or attorney fees
and forced restructuring of the Outstanding Notes or the Exchange
Notes.
There are similar provisions under Canadian law.
Under the Bankruptcy Code, a trustee or debtor-in-possession may generally
recover payments or transfers of property of a debtor if such payment or
transfer was:
o to or for the benefit of a creditor,
o in payment of an antecedent debt owed before the transfer was made,
o made while the debtor was insolvent,
o within ninety (90) days (or one year if the payment was to an "insider"
of the debtor) before the filing of the bankruptcy case that
o enabled the creditor to receive more than it would have received in a
liquidation under Chapter 7 of the Bankruptcy Code, the transfer had
not been made and the creditor received payment of the debt as provided
in the Bankruptcy Code.
As an example, if payments were made on the Outstanding Notes or the
Exchange Notes prior to the filing of a bankruptcy case and a court subsequently
determined that the value of the collateral pledged by the entity making the
payment was less than the debt owed, such payments could be subject to avoidance
as a preferential transfer.
Our financial failure could also result in impairment of payment of the
Outstanding Notes or the Exchange Notes if a bankruptcy court were to
"substantially consolidate" Abraxas and its subsidiaries. If a bankruptcy court
substantially consolidated Abraxas and its subsidiaries, the assets of each
entity would be subject to the claims of creditors for all entities. Such a
consolidation would expose the holders of the Outstanding Notes or the Exchange
Notes not only to the usual impairments arising from bankruptcy, but also to
potential dilution of the amount ultimately recoverable because of the larger
creditor base.
Forced restructuring of the Outstanding Notes or the Exchange Notes could
occur through the "cram-down" provision of the Bankruptcy Code. Under this
provision, the Outstanding Notes or the Exchange Notes could be restructured
over objections of holders of the Outstanding Notes or the Exchange Notes as to
their general terms, primarily interest rate and maturity. Additionally, the
Outstanding Notes or the Exchange Notes could be bifurcated into a secured debt
and unsecured debt if a bankruptcy court were to find that the debt owed by
Abraxas exceeded the value of the collateral. If this were to occur, the
unsecured portion of the debt could be afforded different treatment than the
secured portion of the debt, including the disallowance of the accrual of post
petition interest on the Outstanding Notes or the Exchange Notes.
Additionally, due to Abraxas' and the Guarantors' being domiciled in Canada
and in the United States, Abraxas and the Guarantors could be subject to
multi-jurisdictional insolvency proceedings in Canada and the United States. If
multi-jurisdictional insolvency proceedings were to occur, this could result in
additional delay in payment of the Outstanding Notes or the Exchange Notes, as
well as delay in or prevention from enforcing remedies under the Outstanding
Notes or the Exchange Notes, any Guarantee and the liens securing the
Outstanding Notes or the Exchange Notes and the Guarantees. Likewise, the
Outstanding Notes or the Exchange Notes could be subject to different treatment
inasmuch as the multiple insolvency proceedings would be conducted by different
courts applying different laws.
19
<PAGE>
Our Ability to Replace Production with New Reserves Is Highly Dependent On
Acquisitions or Successful Development and Exploration Activities Which In Turn
Are Adversely Affected By Our Reduced 1999 Capital Expenditures
The rate of production from crude oil and natural gas properties declines as
reserves are depleted. Our proved reserves will decline as reserves are produced
unless we acquire additional properties containing proved reserves, conduct
successful exploration and development activities or, through engineering
studies, identify additional behind-pipe zones or secondary recovery reserves.
Our future crude oil and natural gas production is therefore highly dependent
upon our level of success in acquiring or finding additional reserves. Our
ability to acquire or find additional reserves in the near future will be
severely diminished by our lack of available funds for acquisition, exploration
and development projects. We have implemented a number of measures to conserve
our cash resources, including postponement of exploration and development
projects. While these measures will help conserve our cash resources in the near
term, they will also limit our ability to replenish our depleting reserves.
Our ability to continue to acquire producing properties or companies that
own such properties assumes that major integrated oil companies and independent
oil companies will continue to divest many of their crude oil and natural gas
properties. We cannot assure you that such divestitures will continue or that
the Company will be able to acquire such properties at acceptable prices or
develop additional reserves in the future. In addition, under the terms of the
Indenture and the Series D Indenture, our ability to obtain additional financing
in the future for acquisitions and capital expenditures will be limited.
Crude Oil and Natural Gas Price Declines and Their Volatility Could Adversely
Affect Our Revenue, Cash Flows and Profitability
Our revenue, profitability and future rate of growth depend substantially
upon prevailing prices for crude oil and natural gas. Crude oil and natural gas
prices fluctuate and in recent years have declined significantly. Prices also
affect the amount of cash flow available for capital expenditures and our
ability to borrow money or raise additional capital. We have reduced our 1999
capital expenditures budget because of lower crude oil and natural gas prices.
In addition, we may have ceiling test writedowns when prices decline. Lower
prices may also reduce the amount of oil and natural gas that we can produce
economically.
We cannot predict future crude oil and natural gas prices and prices may
decline further. Factors that can cause this fluctuation include:
o relatively minor changes in the supply of and demand for crude oil and
natural gas;
o market uncertainty;
o the level of consumer product demand;
o weather conditions;
o domestic and foreign governmental regulations;
o the price and availability of alternative fuels;
o political conditions in the Middle East;
o the foreign supply of crude oil and natural gas;
o the price of oil and natural gas imports; and
o overall economic conditions.
We enter into energy swap agreements and other financial arrangements at
various times to attempt to minimize the effect of crude oil and natural gas
price fluctuations. We cannot assure you that such transactions will reduce risk
20
<PAGE>
or minimize the effect of any decline in oil or natural gas prices. Any
substantial or extended decline in oil or natural gas prices would have a
material adverse effect on our business and financial results. Energy swap
agreements may limit the risk of declines in prices, but such arrangements may
also limit additional revenues from price increases.
Lower Oil and Gas Prices Increase the Risk of Ceiling Limitation Writedowns
We use the full cost method to account for our crude oil and natural gas
operations. Accordingly, we capitalize the cost to acquire, explore for and
develop crude oil and natural gas properties. Under full cost accounting rules,
the net capitalized cost of crude oil and natural gas properties may not exceed
a "ceiling limit" which is based upon the present value of estimated future net
cash flows from proved reserves, discounted at 10%, plus the lower of cost or
fair market value of unproved properties. If net capitalized costs of crude oil
and natural gas properties exceed the ceiling limit, we must charge the amount
of the excess to earnings. This is called a "ceiling limitation writedown." This
charge does not impact cash flow from operating activities, but does reduce our
stockholders' equity. The risk that we will be required to write down the
carrying value of crude oil and natural gas properties increases when crude oil
and natural gas prices are low or volatile. In addition, writedowns may occur if
we experience substantial downward adjustments to our estimated proved reserves
or if purchasers cancel long-term contracts for our natural gas production. In
1998, we recorded a writedown of $61.2 million. The subsequent significant
declines in natural gas prices increase the risk that we will have a ceiling
limitation writedown in the second quarter of 1999. We cannot assure you that we
will not experience ceiling limitation writedowns in the future.
Estimates of Proved Reserves and Future Net Revenue Are Uncertain and Inherently
Imprecise
This Prospectus contains estimates of our proved crude oil and natural gas
reserves and the estimated future net revenue from such reserves. The process of
estimating crude oil and natural gas reserves is complex and involves decisions
and assumptions in the evaluation of available geological, geophysical,
engineering and economic data. Therefore, these estimates are imprecise.
Actual future production, crude oil and natural gas prices, revenues, taxes,
development expenditures, operating expenses and quantities of recoverable oil
and gas reserves most likely will vary from those estimated. Any significant
variance could materially affect the estimated quantities and present value of
reserves set forth in this Prospectus. In addition, we may adjust estimates of
proved reserves to reflect production history, results of exploration and
development, prevailing oil and gas prices and other factors, may of which are
beyond our control.
You should not assume that the present value of future net revenues referred
to in this Prospectus is the current market value of our estimated oil and gas
reserves. In accordance with SEC requirements, the estimated discounted future
net cash flows from proved reserves are generally based on prices and costs as
of the end of the year of the estimate. Actual future prices and costs may be
materially higher or lower than the prices and costs as of the end of the year
of the estimate. Recent significant declines in crude oil and natural gas prices
have reduced our present value of future net revenues. Any changes in
consumption by natural gas purchasers or in governmental regulations or taxation
will also affect actual future net cash flows. The timing of both the production
and the expenses from the development and production of oil and gas properties
will affect the timing of actual future net cash flows from proved reserves and
their present value. For example, we have reduced our 1999 capital expenditure
budget. This reduction will delay cash flows and thereby reduce present value.
In addition, the 10% discount factor, which is required by the SEC to be used in
calculating discounted future net cash flows for reporting purposes, is not
necessarily the most accurate discount factor. The effective interest rate at
various times and the risks associated with us or the oil and gas industry in
general will affect the accuracy of the 10% discount factor.
The estimates are based upon various assumptions about future production
levels, prices and costs that may not prove to be correct over time. In
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particular, estimates of crude oil and natural gas reserves, future net revenue
from proved reserves and the PV-10 thereof for the crude oil and natural gas
properties described in this Prospectus are based on the assumption that future
crude oil and natural gas prices remain the same as crude oil and natural gas
prices at December 31, 1998. The average sales prices as of such date used for
purposes of such estimates of the Company except for New Cache were $9.95 per
Bbl of crude oil, $8.97 per Bbl of NGLs and $1.90 per Mcf of natural gas and the
average sales prices used for purposes of such estimate of New Cache were $10.42
per Bbl of crude oil and $1.47 per Mcf of natural gas. It is also assumed that
New Cache will make future capital expenditures of approximately $0.8 million in
the aggregate, which are necessary to develop and realize the value of proved
undeveloped reserves on its properties. Any significant variance in actual
results from these assumptions could also materially affect the estimated
quantity and value of reserves set forth herein. You should read the discussions
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" and "Business --
Reserves Information."
Net Losses
We have experienced recurring losses. The following table shows the losses
we had in 1994, 1995, 1997 and 1998:
Year Ended December 31,
---------------------------------------------
1994 1995 1997 1998
(in millions)
Net loss applicable to Common
Stockholders ............... $(2.4) $(2.4) $(6.7) $(84.0)
You should read the discussions under the heading "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements and the notes thereto included elsewhere in
this Prospectus for more information regarding these losses. We cannot assure
you that the Company will become profitable in the future.
The Terms of Our Indebtedness Will Restrict Our Future Activities
The Series D Indenture and the Indenture restrict, among other things, our
ability to :
o incur additional indebtedness
o incur liens
o pay dividends or make certain other restricted payments
o consummate certain asset sales
o enter into certain transactions with affiliates
o merge or consolidate with any other person; or
o sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of the assets of the Company.
You should read the discussions under the heading "Description of the Notes
- -- Certain Covenants," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" for more
information regarding these restrictions. A breach of any of these covenants
could result in a default under the Series D Indenture and/or the Indenture.
Our Future Operations Depend on Integrating New Cache
Our future operations and earnings will depend, in part, upon our ability to
integrate the operations of New Cache. We cannot assure you that we will be able
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to successfully integrate New Cache's operations with ours, and a failure to do
so would have a material adverse effect on our financial position, results of
operations and cash flows. In addition, although we do not currently have any
specific acquisition plans, the need to focus attention on New Cache's
integration, as well as other factors, may limit our ability to successfully
pursue acquisitions or other opportunities related to our business for the
foreseeable future. Successful integration of operations will be subject to
numerous contingencies, some of which are beyond our control, including general
and regional economic conditions, prices for crude oil and natural gas,
competition and changes in regulation.
Canadian Operations Are Subject to the Risks of Currency Fluctuations and In
Some Instances Economic and Political Developments
We have significant operations in Canada. The expenses of such operations
are payable in Canadian dollars while most of the revenue from natural gas and
oil sales is based upon U.S. dollar price indices. As a result, Canadian
operations are subject to the risk of fluctuations in the relative values of the
Canadian and U.S. dollars. We are also required to recognize foreign currency
translation gains or losses related to the debt issued by our Canadian
subsidiary because the debt is denominated in U.S. dollars and the functional
currency of such subsidiary is the Canadian dollar. Our foreign operations may
also be adversely affected by local political and economic developments, royalty
and tax increases and other foreign laws or policies, as well as U.S. policies
affecting trade, taxation and investment in other countries.
Our Operations are Subject to Numerous Risks of Crude Oil and Natural Gas
Drilling and Production Activities
Crude oil and natural gas drilling and production activities are subject to
numerous risks, many of which are beyond our control. These risks include the
following:
o that no commercially productive crude oil or natural gas reservoirs
will be found;
o that oil and gas drilling and production activities may be shortened,
delayed or canceled; and
o that our ability to develop, produce and market our reserves may be
limited by:
o title problems,
o weather conditions,
o compliance with governmental requirements, and
o mechanical difficulties or shortages or delays in the
delivery of drilling rigs, work boats and other equipment.
In the past, we have had difficulty securing drilling equipment in certain
of our core areas. We cannot assure you that the new wells we drill will be
productive or that we will recover all or any portion of our investment.
Drilling for oil and natural gas may be unprofitable. Dry wells and wells that
are productive but do not produce sufficient net revenues after drilling,
operating and other costs are unprofitable. In addition, our properties may be
susceptible to hydrocarbon draining from production by other operations on
adjacent properties.
Our industry also experiences numerous operating risks. These operating
risks include the risk of fire, explosions, blow-outs, pipe failure, abnormally
pressured formations and environmental hazards. Environmental hazards include
oil spills, gas leaks, ruptures or discharges of toxic gases. If any of these
industry operating risks occur, we could have substantial losses. Substantial
losses may be caused by injury or loss of life, severe damage to or destruction
of property, clean-up responsibilities, regulatory investigation and penalties
and suspension of operations. In accordance with industry practice, we maintain
insurance against some, but not all, of the risks described above. We cannot
assure you that our insurance will be adequate to cover losses or liabilities.
Also, we cannot predict the continued availability of insurance at premium
levels that justify its purchase.
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We Operate in a Highly Competitive Industry Which May Adversely Affect Our
Operations
We operate in a highly competitive environment. Competition is particularly
intense with respect to the acquisition of desirable undeveloped crude oil and
natural gas properties. The principal competitive factors in the acquisition of
such undeveloped crude oil and natural gas properties include the staff and data
necessary to identify, investigate and purchase such properties, and the
financial resources necessary to acquire and develop such properties. We compete
with major and independent crude oil and natural gas companies for properties
and the equipment and labor required to develop and operate such properties.
Many of these competitors have financial and other resources substantially
greater than ours.
The principal resources necessary for the exploration and production of
crude oil and natural gas are leasehold prospects under which crude oil and
natural gas reserves may be discovered, drilling rigs and related equipment to
explore for such reserves and knowledgeable personnel to conduct all phases of
crude oil and natural gas operations. We must compete for such resources with
both major crude oil and natural gas companies and independent operators.
Although we believe our current operating and financial resources are adequate
to preclude any significant disruption of our operations in the immediate future
we cannot assure you that such materials and resources will be available to us.
We face significant competition for obtaining additional natural gas
supplies for gathering and processing operations, for marketing NGLs, residue
gas, helium, condensate and sulfur, and for transporting natural gas and
liquids. Our principal competitors include major integrated oil companies and
their marketing affiliates and national and local gas gatherers, brokers,
marketers and distributors of varying sizes, financial resources and experience.
Certain competitors, such as major crude oil and natural gas companies, have
capital resources and control supplies of natural gas substantially greater than
the Company. Smaller local distributors may enjoy a marketing advantage in their
immediate service areas.
We compete against other companies in its natural gas processing business
both for supplies of natural gas and for customers to which it will sell its
products. Competition for natural gas supplies is based primarily on location of
natural gas gathering facilities and natural gas gathering plants, operating
efficiency and reliability and ability to obtain a satisfactory price for
products recovered. Competition for customers is based primarily on price and
delivery capabilities.
We May Not Be Able to Finance A Change of Control Offer
Upon the occurrence of certain kinds of change of control events, we will be
required to offer to repurchase all of the Outstanding Notes and Exchange Notes.
However, it is possible that we will not have sufficient funds at the time of
the change of control to make the required repurchase of such Notes.
Our Oil and Gas Operations are Subject to Various U.S. Federal, State and Local
and Canadian Federal and Provincial Governmental Regulation That Materially
Affect Our Operations
Matters regulated include discharge permits for drilling operations,
drilling and abandonment bonds, reports concerning operations, the spacing of
wells and unitization and pooling of properties and taxation. At various times,
regulatory agencies have imposed price controls and limitations on production.
In order to conserve supplies of oil and gas, these agencies have restricted the
rates of flow of oil and gas wells below actual production capacity. In
addition, the Oil Pollution Act of 1990 requires operators of offshore
facilities to prove that they have the financial responsibility to address
potential oil spills. Under such law and other federal and state environmental
statutes, owners and operators of certain defined facilities are strictly liable
for such spills, subject to certain limitations. A substantial spill from one of
our facilities could have a materially adverse effect on our results of
operations, competitive position or financial condition. Federal, state,
provincial and local laws regulate production, handling, storage, transportation
and disposal of oil and gas, by-products from oil and gas and other substances
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and materials produced or used in connection with oil and gas operations. To
date, our expenditures related to complying with these laws and for remediation
of existing environmental contamination have not been significant. We believe
that we are in substantial compliance with all applicable laws and regulations.
However, the requirements of such laws and regulations are frequently changed.
We cannot predict the ultimate cost of compliance with these requirements or
their effect on our operations.
Dependence on Key Personnel
The Company depends to a large extent on Robert L. G. Watson, its Chairman
of the Board, President and Chief Executive Officer, for its management and
business and financial contacts. You should read the discussions under the
heading "Management." The unavailability of Mr. Watson would have a materially
adverse effect on the Company's business. The Company's success is also
dependent upon its ability to employ and retain skilled technical personnel.
While the Company has not to date experienced difficulties in employing or
retaining such personnel, its failure to do so in the future could adversely
affect its business.
Absence of a Public Market for the Outstanding Notes
Prior to this offering, there was no public market for these Outstanding
Notes. We have been informed by the initial purchaser that it intends to make a
market in the Exchange Notes after this offering is completed. However, the
initial purchaser may cease its market-making at any time. In addition, the
liquidity of the trading market in the Exchange Notes, and the market price
quoted for these notes, may be adversely affected by changes in the overall
market for high yield securities and by changes in our financial performance or
prospects in the prospects for companies in our industry generally. As a result,
you cannot be sure that an active trading market will develop for the Exchange
Notes.
Consequences of Failure to Exchange Outstanding Notes
We did not register the Outstanding Notes under the Securities Act or any
state securities laws and we do not intend to after the Exchange Offer. As a
result, the Outstanding Notes may only be transferred in limited circumstances
under the securities laws. If the holders of the Outstanding Notes do not
exchange their notes in the Exchange Offer, they lose their right to have the
Outstanding Notes registered under the Securities Act, subject to certain
limitations. A holder of Outstanding Notes after the Exchange Offer may be
unable to sell the notes.
PLAN OF DISTRIBUTION
Based on interpretations by the SEC set forth in no-action letters issued to
third parties in similar transactions, we believe that the Exchange Notes issued
in the Exchange Offer in exchange for the Outstanding Notes may be offered for
resale, resold and otherwise transferred by holders without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that the Exchange Notes are acquired in the ordinary course of such holders'
business and the holders are not engaged in, and do not intend to engage in, and
have no arrangement or understanding with any person to participate in, a
distribution of Exchange Notes. This position does not apply to any holder that
is (1) an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act, (2) a broker-dealer who acquired Exchange Notes directly from
the Company or (3) broker-dealers who acquired Exchange Notes as a result of
market-making or other trading activities. Any broker-dealers ("Participating
Broker-Dealers") receiving Exchange Notes in the Exchange Offer are subject to a
prospectus delivery requirement with respect to resales of the Exchange Notes.
To date, the SEC has taken the position that Participating Broker-Dealers may,
for a limited period, fulfill their prospectus delivery requirements with
respect to transactions involving an exchange of securities such as the exchange
pursuant to the Exchange Offer (other than a resale of an unsold allotment from
the sale of the Outstanding Notes to the initial purchasers) with this
Prospectus.
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Each broker-dealer receiving Exchange Notes for its own account in the
Exchange Offer must acknowledge that it will deliver a Prospectus in any resale
of the Exchange Notes. Participating Broker-Dealers may use this Prospectus in
reselling Exchange Notes, if the Outstanding Notes were acquired for their own
accounts as a result of market-making activities or other trading activities.
The Company has agreed that a Participating Broker-Dealer may use this
Prospectus in reselling Exchange Notes for a period ending 180 days after the
Expiration Date or, if earlier, when a Participating Broker-Dealer has disposed
of all Exchange Notes. A Participating Broker-Dealer intending to use this
Prospectus in the resale of Exchange Notes must notify the Company on or before
the Expiration Date, that it is a Participating Broker-Dealer. This notice may
be given in the space provided for in the Letter of Transmittal or may be
delivered to the Exchange Agent. The Company has agreed that, for a period of
180 days after the Expiration Date, it will make this Prospectus, and any
amendment or supplement to this Prospectus, available to any broker-dealer that
requests these documents in the Letter of Transmittal. See "The Exchange Offer
- -- Resales of Exchange Notes" for more information.
The Company will not receive any cash proceeds from any sale of the Exchange
Notes by broker-dealers. Broker-dealers acquiring Exchange Notes for their own
accounts may sell the notes in one or more transactions in the over-the-counter
market, in negotiated transactions, through writing options on the Exchange
Notes or a combination of such methods. Any resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any broker-dealer and/or the
purchasers of Exchange Notes.
Any broker-dealer reselling Exchange Notes that it received in the Exchange
Offer and any broker or dealer that participates in a distribution of Exchange
Notes may be deemed to be an "underwriter" within the meaning of the Securities
Act. Any profit on any resale of Exchange Notes and any commissions or
concessions received by any persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that by
acknowledging that it will deliver and by delivering a Prospectus, a
dealer-broker will not admit that it is an "underwriter" within the meaning of
the Securities Act.
THE EXCHANGE OFFER
Purpose Of The Exchange Offer
Abraxas issued and sold the Outstanding Notes to the initial purchaser on
March 26, 1999, pursuant to the terms and conditions of a purchase agreement
dated as of March 19, 1999. We agreed in the Purchase Agreement to provide the
holders of the Outstanding Notes with registration rights. The registration
rights with respect to the Outstanding Notes are set forth in a Registration
Rights Agreement dated as of March 26, 1999, among Abraxas, the Subsidiary
Guarantors and the initial purchaser of the Original Notes.
Abraxas is conducting the Exchange Offer to satisfy its contractual
obligations under the Registration Rights Agreement. The form and terms of the
Exchange Notes are the same as the form and terms of the Outstanding Notes,
except that the Exchange Notes will be registered under the Securities Act, and
holders of the Exchange Notes will not be entitled to liquidated damages.
Exchange Offer Registration Statement
The Registration Rights Agreement requires us to:
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o file with the Securities and Exchange Commission (the "SEC") by June 9,
1999 a registration statement with respect to an offer to exchange the
Outstanding Notes for the Exchange Notes, which would have terms
substantially identical in all material respects to the Outstanding
Notes;
o use our best efforts to cause such exchange offer registration
statement to become effective under the Securities Act by August 9,
1999;
o keep the exchange offer registration statement effective until the
consummation of the Exchange Offer pursuant to its terms; and
o commence the Exchange Offer and use our best efforts to issue by
September 7, 1999 Exchange Notes in exchange for all Outstanding Notes
tendered prior thereto in the Exchange Offer.
Abraxas has agreed to keep the Exchange Offer open for not less than 30
days, or longer if required by applicable law, after the date notice thereof is
mailed to the holders of Outstanding Notes.
Shelf Registration Statement
The Registration Rights Agreement requires us to file a shelf registration
statement with respect to the resale of the Outstanding Notes if:
o applicable interpretations of the staff (the "Staff") of the SEC would
not permit the completion of the Exchange Offer;
o certain holders of the Outstanding Notes notify the Company that they
are not eligible to participate in the exchange of Outstanding Notes
for Exchange Notes or would not receive freely tradeable Exchange Notes
in exchange for tendered Outstanding Notes;
o the initial purchaser so requests under certain circumstances; or
o the Exchange Offer is not completed by September 7, 1999.
Abraxas has agreed to use its best efforts to keep the shelf registration
statement effective until two years after its date of effectiveness.
Liquidated Damages
The Registration Rights Agreement requires Abraxas to pay liquidated damages
to the holders of the Outstanding Notes if:
o neither the exchange offer registration statement nor the shelf
registration statement has been filed with the SEC by June 9, 1999;
o neither the exchange offer registration statement nor the shelf
registration statement is declared effective by the SEC by August 9,
1999;
o Abraxas has not exchanged Exchange Notes for Outstanding Notes validly
tendered in accordance with the terms of the Exchange Offer within 45
days after the date on which an exchange offer registration statement
is declared effective by the SEC; or
o a shelf registration statement is filed and declared effective by the
SEC but thereafter ceases to be effective without being succeeded
within 30 days by a subsequent shelf registration statement filed and
declared effective.
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Upon the completion of the Exchange Offer, holders of Outstanding Notes will
not be entitled to any liquidated damages on the Outstanding Notes or any
further registration rights, except under limited circumstances. See "Risk
Factors--Consequences of Failure to Exchange Outstanding Notes" and "Description
of the Exchange Notes" for further information regarding the rights of holders
of Outstanding Notes after the Exchange Offer. The Exchange Offer is not
extended to holders of Outstanding Notes in any jurisdiction where the Exchange
Offer does not comply with the securities or blue sky laws of that jurisdiction.
The term "holder" as used in this section of the Prospectus entitled "The
Exchange Offer" means (1) any person in whose name the Outstanding Notes are
registered on the books of the Company, or (2) any other person who has obtained
a properly completed bond power from the registered holder, or (3) any person
whose Outstanding Notes are held of record by DTC and who wants to deliver such
Outstanding Notes by book-entry transfer at DTC.
Terms Of The Exchange Offer
We are offering to exchange up to $63.5 million total principal amount of
Exchange Notes for a like total principal amount of Outstanding Notes. The
Outstanding Notes must be tendered properly on or before the Expiration Date and
not withdrawn. In exchange for Outstanding Notes properly tendered and accepted,
we will issue a like total principal amount of up to $63.5 million in Exchange
Notes.
The Exchange Offer is not conditioned upon holders tendering a minimum
principal amount of Outstanding Notes. As of the date of this Prospectus, $63.5
million aggregate principal amount of Outstanding Notes are outstanding.
Holders of the Outstanding Notes do not have any appraisal or dissenters'
rights in the Exchange Offer. If holders do not tender Outstanding Notes or
tender Outstanding Notes that the Company does not accept, their Outstanding
Notes will remain outstanding. Any Outstanding Notes will be entitled to the
benefits of the Indenture, but will not be entitled to any further registration,
except under limited circumstances. See "Risk Factors--Consequences of Failure
to Exchange Outstanding Notes" for further information regarding the rights of
holders of Outstanding Notes after the Exchange Offer.
After the Expiration Date, the Company will return to the holder any
tendered Outstanding Notes that the Company did not accept for exchange.
Holders exchanging Outstanding Notes will not have to pay brokerage
commissions or fees or transfer taxes if they follow the instructions in the
Letter of Transmittal. The Company will pay the charges and expenses, other than
certain taxes described below, in the Exchange Offer. See "The Exchange
Offer--Fees and Expenses" for further information regarding fees and expenses.
NEITHER ABRAXAS NOR ITS BOARD OF DIRECTORS RECOMMENDS YOU TO TENDER OR NOT
TENDER OUTSTANDING NOTES IN THE EXCHANGE OFFER. IN ADDITION, THE COMPANY HAS NOT
AUTHORIZED ANYONE TO MAKE ANY RECOMMENDATION. YOU MUST DECIDE WHETHER TO TENDER
IN THE EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF OUTSTANDING NOTES TO
TENDER.
The Expiration Date is 5:00 p.m., New York City time, on July ____,
1999, unless the Company extends the Exchange Offer.
The Company has the right, in accordance with applicable law, at any time:
o to delay the acceptance of the Outstanding Notes;
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o to terminate the Exchange Offer if the Company determines that any of
the conditions to the Exchange Offer have not occurred or have not been
satisfied;
o to extend the Expiration Date of the Exchange Offer and keep all
Outstanding Notes tendered other than those notes properly withdrawn;
and
o to waive any condition or amend the terms of the Exchange Offer.
If the Company materially changes the Exchange Offer, or if the Company
waives a material condition of the Exchange Offer, the Company will promptly
distribute a prospectus supplement to the holders of the Outstanding Notes
disclosing the change or waiver. The Company also will extend the Exchange Offer
as required by Rule 14e-1 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act").
If the Company exercises any of the rights listed above, it will promptly
give oral or written notice of the action to the Exchange Agent and will issue a
release to an appropriate news agency. In the case of an extension, an
announcement will be made no later than 9:00 a.m., New York City time, on the
next business day after the previously scheduled Expiration Date.
Acceptance For Exchange And Issuance Of Exchange Notes
Promptly after the Expiration Date, the Company will issue Exchange Notes to
the Exchange Agent for Outstanding Notes tendered and accepted and not
withdrawn. The Exchange Agent might not deliver the Exchange Notes to all
tendering holders at the same time. The timing of delivery depends upon when the
Exchange Agent receives and processes the required documents.
The Company will be deemed to have exchanged Outstanding Notes validly
tendered and not withdrawn when the Company gives oral or written notice to the
Exchange Agent of their acceptance. The Exchange Agent is an agent for the
Company for receiving tenders of Outstanding Notes, Letters of Transmittal and
related documents. The Exchange Agent is also an agent for tendering holders for
receiving Outstanding Notes, Letters of Transmittal and related documents and
transmitting Exchange Notes to validly tendering holders. If for any reason, the
Company (1) delays the acceptance or exchange of any Outstanding Notes; (2)
extends the Exchange Offer; or (3) is unable to accept or exchange Outstanding
Notes, then the Exchange Agent may, on behalf of the Company and subject to Rule
14e-1(c) under the Exchange Act, retain tendered notes. Notes retained by the
Exchange Agent may not be withdrawn, except according to the withdrawal
procedures outlined in the section entitled "--Withdrawal Rights" below.
In tendering Outstanding Notes, you must warrant in the Letter of
Transmittal or in an Agent's Message (described below) that:
o you have full power and authority to tender, exchange, sell, assign and
transfer Outstanding Notes;
o the Company will acquire good, marketable and unencumbered title to the
tendered Outstanding Notes, free and clear of all liens, restrictions,
charges and other encumbrances, and
o the Outstanding Notes tendered for exchange are not subject to any
adverse claims or proxies.
You also must warrant and agree that you will, upon request, execute and
deliver any additional documents requested by the Company or the Exchange Agent
to complete the exchange, sale, assignment and transfer of the Outstanding
Notes.
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Procedures For Tendering Outstanding Notes
Valid Tender
You may tender your Outstanding Notes by book-entry transfer or by other
means. For book-entry transfer, you must deliver to the Exchange Agent either
(1) a completed and signed Letter of Transmittal or (2) an Agent's Message,
meaning a message transmitted to the Exchange Agent by DTC stating that you
agree to be bound by the terms of the Letter of Transmittal. You must deliver
your Letter of Transmittal or the Agent's Message by mail, facsimile, hand
delivery or overnight carrier to the Exchange Agent on or before the Expiration
Date. In addition, to complete a book-entry transfer, you must also either (1)
have DTC transfer the Outstanding Notes into the Exchange Agent's account at DTC
using the ATOP procedures for transfer, and obtain a confirmation of such a
transfer, or (2) follow the guaranteed delivery procedures described below under
"--Guaranteed Delivery Procedures."
If you tender fewer than all of your Outstanding Notes, you should fill in
the amount of notes tendered in the appropriate box on the Letter of
Transmittal. If you do not indicate the amount tendered in the appropriate box,
the Company will assume you are tendering all Outstanding Notes that you hold.
For tendering your Outstanding Notes other than by book-entry transfer, you
must deliver a completed and signed Letter of Transmittal to the Exchange Agent.
Again, you must deliver the Letter of Transmittal by mail, facsimile, hand
delivery or overnight carrier to the Exchange Agent on or before the Expiration
Date. In addition, to complete a valid tender you must either (1) deliver your
Outstanding Notes to the Exchange Agent on or before the Expiration Date, or (2)
follow the guaranteed delivery procedures set forth below under "--Guaranteed
Delivery Procedures."
DELIVERY OF REQUIRED DOCUMENTS BY WHATEVER METHOD YOU CHOOSE IS AT YOUR SOLE
RISK. DELIVERY IS COMPLETE WHEN THE EXCHANGE AGENT ACTUALLY RECEIVES THE ITEMS
TO BE DELIVERED. DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH DTC'S
PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. IF DELIVERY IS BY
MAIL, THEN REGISTERED MAIL, RETURN RECEIPT REQUESTED, PROPERLY INSURED, OR AN
OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN ALL CASES, YOU SHOULD ALLOW
SUFFICIENT TIME TO ENSURE TIMELY DELIVERY.
Signature Guarantees
You do not need to endorse certificates for the Outstanding Notes or provide
signature guarantees on the Letter of Transmittal, unless (a) someone other than
the registered holder tenders the certificate or (b) you complete the box
entitled "Special Issuance Instructions" or "Special Delivery Instructions" in
the Letter of Transmittal. In the case of (a) or (b) above, you must sign your
Outstanding Notes or provide a properly executed bond power, with the signature
on the bond power and on the Letter of Transmittal guaranteed by a firm or other
entity identified in Rule 17Ad-15 under the Exchange Act as an "eligible
guarantor institution." Eligible Guarantor Institutions include: (1) a bank; (2)
a broker, dealer, municipal securities broker or dealer or government securities
broker or dealer; (3) a credit union; (4) a national securities exchange,
registered securities association or clearing agency; or (5) a savings
association that is a participant in a securities transfer association.
Guaranteed Delivery Procedures
If you want to tender your Outstanding Notes in the Exchange Offer and (1)
the certificates for the Outstanding Notes are not immediately available or all
required documents are unlikely to reach the Exchange Agent on or before the
Expiration Date, or (2) a book-entry transfer cannot be completed in time, you
may tender your Outstanding Notes if you comply with the following guaranteed
delivery procedures:
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o the tender is made by or through an Eligible Guarantor Institution;
o you deliver a properly completed and signed Notice of Guaranteed
Delivery, similar to the form provided with the Letter of Transmittal,
to the Exchange Agent on or before the Expiration Date;
o you deliver the certificates or a confirmation of book-entry transfer
and a properly completed and signed Letter of Transmittal to the
Exchange Agent within three New York Stock Exchange trading days after
the Notice of Guaranteed Delivery is executed; and
o you may deliver the Notice of Guaranteed Delivery by hand, facsimile or
mail to the Exchange Agent and must include a guarantee by an Eligible
Guarantor Institution in the form described in the notice.
The Company's acceptance of properly tendered Outstanding Notes is a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions of the Exchange Offer.
Determination Of Validity
The Company will resolve all questions regarding the form of documents,
validity, eligibility (including time of receipt) and acceptance for exchange of
any tendered Outstanding Notes. The Company's resolution of these questions as
well as the Company's interpretation of the terms and conditions of the Exchange
Offer (including the Letter of Transmittal) is final and binding on all parties.
A tender of Outstanding Notes is invalid until all irregularities have been
cured or waived. Neither the Company, any affiliates or assigns of the Company,
the Exchange Agent nor any other person is under any obligation to give notice
of any irregularities in tenders nor will they be liable for failing to give any
such notice. The Company reserves the absolute right, in its sole and absolute
discretion, to reject any tenders determined to be in improper form or unlawful.
The Company also reserves the absolute right to waive any of the conditions of
the Exchange Offer or any condition or irregularity in the tender of Outstanding
Notes by any holder. The Company need not waive similar conditions or
irregularities in the case of other holders.
If any Letter of Transmittal, endorsement, bond power, power of attorney, or
any other document required by the Letter of Transmittal is signed by a trustee,
executor, administrator, guardian, attorney-in-fact, officer of a corporation or
other person acting in a fiduciary or representative capacity, that person must
indicate that capacity when signing. In addition, unless waived by the Company,
the person must submit proper evidence satisfactory to the Company, in its sole
discretion, of his or her authority to so act.
A beneficial owner of Outstanding Notes that is held by or registered in the
name of a broker, dealer, commercial bank, trust company or other nominee or
custodian should contact that entity promptly if the holder wants to participate
in the Exchange Offer.
Resales Of Exchange Notes
Abraxas is exchanging the Outstanding Notes for Exchange Notes based upon
the position of the Staff set forth in interpretive letters to third parties in
other similar transactions. Abraxas will not seek its own interpretive letter.
As a result, Abraxas cannot assure you that the Staff will take the same
position on this Exchange Offer as it did in interpretive letters to other
parties. Based on the Staff's letters to other parties, the Company believes
that holders of Exchange Notes, other than broker-dealers, can offer the notes
for resale, resell and otherwise transfer the Exchange Notes without delivering
a prospectus to prospective purchasers. However, prospective holders must
acquire the Exchange Notes in the ordinary course of business and have no
intention of engaging in a distribution of the notes, as a "distribution" is
defined by the Securities Act.
31
<PAGE>
Any holder of Outstanding Notes who is an "affiliate" of the Company or who
intends to distribute Exchange Notes, or any broker-dealer who purchased
Outstanding Notes from the Company to resell pursuant to Rule 144A or any other
available exemption under the Securities Act:
o cannot rely on the Staff's interpretations in the above-mentioned
interpretive letters;
o cannot tender Outstanding Notes in the Exchange Offer; and
o must comply with the registration and prospectus delivery requirements
of the Securities Act to transfer the Outstanding Notes, unless the
sale is exempt.
In addition, if any broker-dealer acquired Outstanding Notes for its own
account as a result of market-making or other trading activities and exchanges
the Outstanding Notes for Exchange Notes, the broker-dealer must deliver a
prospectus with any resales of the Exchange Notes.
If you want to exchange your Outstanding Notes for Exchange Notes, you will
be required to affirm that:
o you are not an "affiliate" of the Company;
o you are acquiring the Exchange Notes in the ordinary course of your
business;
o you have no arrangement or understanding with any person to participate
in a distribution of the Exchange Notes (within the meaning of the
Securities Act); and
o you are not a broker-dealer, not engaged in, and do not intend to
engage in, a distribution of the Exchange Notes (within the meaning of
the Securities Act).
In addition, the Company may require you to provide information regarding
the number of "beneficial owners" (within the meaning of Rule 13d-3 under the
Exchange Act) of the Outstanding Notes. Each broker-dealer that receives
Exchange Notes for its own account must acknowledge that it acquired the
Outstanding Notes for its own account as the result of market-making activities
or other trading activities and must agree that it will deliver a prospectus
meeting the requirements of the Securities Act in connection with any resale of
Exchange Notes. By making this acknowledgment and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" under the
Securities Act. Based on the Staff's position in certain interpretive letters,
the Company believes that broker-dealers who acquired Outstanding Notes for
their own accounts as a result of market-making activities or other trading
activities may fulfill their prospectus delivery requirements with respect to
the Exchange Notes with a prospectus meeting the requirements of the Securities
Act. Accordingly, a broker-dealer may use this Prospectus to satisfy such
requirements. The Company has agreed that a broker-dealer may use this
Prospectus for a period ending 180 days after the Expiration Date or, if
earlier, when a broker-dealer has disposed of all Exchange Notes. See "Plan of
Distribution" for further information. A broker-dealer intending to use this
Prospectus in the resale of Exchange Notes must notify the Company, on or prior
to the Expiration Date, that it is a Participating Broker-Dealer (as defined in
"Plan of Distribution"). This notice may be given in the Letter of Transmittal
or may be delivered to the Exchange Agent. Any Participating Broker-Dealer who
is an "affiliate" of the Company may not rely on the Staff's interpretive
letters and must comply with the registration and prospectus delivery
requirements of the Securities Act when reselling Exchange Notes.
Withdrawal Rights
You can withdraw tenders of Outstanding Notes at any time on or before the
Expiration Date.
32
<PAGE>
For a withdrawal to be effective, you must deliver a written, telegraphic,
telex or facsimile transmission of a Notice of Withdrawal to the Exchange Agent
on or before the Expiration Date. The Notice of Withdrawal must specify the name
of the person tendering the Outstanding Notes to be withdrawn, the total
principal amount of Outstanding Notes withdrawn, and the name of the registered
holder of the Outstanding Notes if different from the person tendering the
Outstanding Notes. If you delivered Outstanding Notes to the Exchange Agent, you
must submit the serial numbers of the Outstanding Notes to be withdrawn and the
signature on the Notice of Withdrawal must be guaranteed by an Eligible
Guarantor Institution, except in the case of Outstanding Notes tendered for the
account of an Eligible Guarantor Institution. If you tendered Outstanding Notes
as a book-entry transfer, the Notice of Withdrawal must specify the name and
number of the account at DTC to be credited with the withdrawal of Outstanding
Notes and you must deliver the Notice of Withdrawal to the Exchange Agent by
written, telegraphic, telex or facsimile transmission. You may not rescind
withdrawals of tender. Outstanding Notes properly withdrawn may again be
tendered at any time on or before the Expiration Date.
The Company will determine all questions regarding the validity, form and
eligibility of withdrawal notices. The Company's determination will be final and
binding on all parties. Neither the Company, any affiliate or assign of the
Company, the Exchange Agent nor any other person is under any obligation to give
notice of any irregularities in any Notice of Withdrawal, nor will they be
liable for failing to give any such notice. Withdrawn Outstanding Notes will be
returned to the holder after withdrawal.
Interest On The Exchange Notes
The Exchange Notes will bear interest at 12 7/8% per annum, payable
semi-annually, on March 15 and September 15 of each year, commencing September
15, 1999. Holders of Exchange Notes will receive interest on September 15, 1999,
from the date of initial issuance of the Exchange Notes, plus an amount equal to
the accrued but unpaid interest on the Outstanding Notes. If we accept your
Outstanding Notes for exchange, then you will waive all interest accrued but
unpaid on such Outstanding Notes.
Conditions To The Exchange Offer
The Company need not exchange any Outstanding Notes, may terminate the
Exchange Offer or may waive any conditions to the Exchange Offer or amend the
Exchange Offer, if any of the following conditions have occurred:
o the Staff no longer allows the Exchange Notes to be offered for resale,
resold and otherwise transferred by certain holders without compliance
with the registration and prospectus delivery provisions of the
Securities Act;
o a governmental body passes any law, statute, rule or regulation which,
in the Company's opinion, prohibits or prevents the Exchange Offer;
o the SEC or any state securities authority issues a stop order
suspending the effectiveness of the registration statement or initiates
or threatens to initiate a proceeding to suspend the effectiveness of
the registration statement; or
o the Company is unable to obtain any governmental approval that the
Company believes is necessary to complete the Exchange Offer.
If the Company reasonably believes that any of the above conditions has
occurred, it may (1) terminate the Exchange Offer, whether or not any
Outstanding Notes have been accepted for exchange, (2) waive any condition to
the Exchange Offer or (3) amend the terms of the Exchange Offer in any respect.
33
<PAGE>
If the Company's waiver or amendment materially changes the Exchange Offer, the
Company will promptly disclose the waiver or amendment through a prospectus
supplement, distributed to the registered holders of the Outstanding Notes. The
prospectus supplement also will extend the Exchange Offer as required by Rule
14e-1 of the Exchange Act.
Exchange Agent
The Company has appointed Norwest Bank Minnesota, National Association as
Exchange Agent for the Exchange Offer. Holders should direct questions and
requests for assistance, requests for additional copies of this Prospectus or of
the Letter of Transmittal and requests for Notice of Guaranteed Delivery to the
Exchange Agent addressed as follows:
BY REGISTERED OR REGULAR MAIL OR BY HAND DELIVERY:
CERTIFIED MAIL: COURIERS:
Norwest Bank Norwest Bank Norwest Bank
Minnesota, N.A. Minnesota, N.A. Minnesota, N.A.
Corporate Trust Corporate Trust Northstar East Building
Operations Operations 608 2nd Avenue South
P.O. Box 1517 6th & Marquette Avenue 12th Floor-Corporate
Minneapolis, MN 55480-1517 Minneapolis, MN 55479-0113 Trust Services
Minneapolis, MN
If you deliver Letters of Transmittal or any other required documents to an
address or facsimile number other than those listed above, your tender is
invalid.
Fees And Expenses
The Company will pay the Exchange Agent reasonable and customary fees for
its services and reasonable out-of-pocket expenses. The Company also will pay
brokerage houses and other custodians, nominees and fiduciaries their reasonable
out-of-pocket expenses for sending copies of this Prospectus and related
documents to holders of Outstanding Notes, and in handling or tendering for
their customers.
The Company will pay the transfer taxes for the exchange of the Outstanding
Notes in the Exchange Offer. If, however, Exchange Notes are delivered to or
issued in the name of a person other than the registered holder, or if a
transfer tax is imposed for any reason other than for the exchange of
Outstanding Notes in the Exchange Offer, then the tendering holder will pay the
transfer taxes. If a tendering holder does not submit satisfactory evidence of
payment of taxes or exemption from taxes with the Letter of Transmittal, the
taxes will be billed directly to the tendering holder.
The Company will not make any payment to brokers, dealers or other nominees
soliciting acceptances in the Exchange Offer.
USE OF PROCEEDS
Abraxas will not receive any proceeds from the Exchange Offer. The net
proceeds of the Offering, after deducting estimated offering expenses payable by
Abraxas, were approximately $61 million. The Company used the net proceeds to
repay outstanding indebtedness under the Credit Facility and the New Cache Debt
and for additional working capital for general corporate purposes, including,
without limitation, the payment of interest on the Series D Notes. Indebtedness
under the Credit Facility was incurred in connection with certain acquisitions
and for general corporate purposes, had an initial revolving term that expired
in April 1999 followed by a reducing period of three years from April 30, 1999,
and bore interest based on an adjusted rate of the London Inter-Bank Offered
Rate or the prime rate. The New Cache Debt was incurred by New Cache prior to
its acquisition by the Company in January 1999. The New Cache Debt represented
the unpaid principal balance owed by New Cache under a demand debenture. The New
Cache Debt bore interest at a rate equal to two percentage points above the
lender's prime rate in effect from time to time.
34
<PAGE>
CAPITALIZATION
The following table sets forth the total consolidated capitalization of the
Company at March 31, 1999. This table should be read in conjunction with the
Consolidated Financial Statements of the Company and the notes thereto, the
unaudited Pro Forma Financial Information and the notes thereto and the other
financial information included elsewhere in this Prospectus.
March 31, 1999
-----------------
(dollars in
thousands)
Cash and cash equivalents............................ $ 14,725
Total debt, including current maturities:
Credit Facility due to a Canadian bank (1) ........ 4,610
12 7/8% Senior Secured Notes due 2003.............. 63,500
111/2% Senior Notes due 2004, Series D(2).......... 276,748
Other long-term obligations........................ 11
Total debt................................. 344,869
Stockholders' equity:
Common stock....................................... 65
Treasury stock, 171,015 shares..................... (1,167)
Additional paid-in capital......................... 51,708
Foreign currency translation....................... (7,821)
Accumulated deficit................................ (109,439)
------------
Total stockholders' equity................. (66,654)
------------
Total capitalization....................... $ 278,215
-----------
- ----------
(1) Indebtedness of Grey Wolf, which is non-recourse to the Company.
(2) Includes a debt issuance premium of $3.5 million.
35
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information is derived from the
historical financial statements of the Company and New Cache set forth elsewhere
in this Prospectus and is adjusted to reflect the following:
The Unaudited Pro Forma Condensed Balance Sheet of the Company as of
December 31, 1998, has been prepared assuming the Offering and the acquisition
of New Cache were consummated on December 31, 1998. The Unaudited Pro Forma
Statement of Operations of the Company for the year ended December 31, 1998 and
for the three month period ended March 31, 1998 has been prepared assuming the
Offering, the acquisition of New Cache and the sale of the Wyoming Properties
were consummated at the beginning of the reporting period. The historical
revenues and expenses of New Cache and the Wyoming Properties represent amounts
recorded by or with respect to such businesses or properties for the periods
indicated.
The historical financial statements of New Cache were prepared in Canadian
dollars in accordance with Canadian generally accepted accounting principles.
The New Cache historical statement of operations included in the Unaudited Pro
Forma Statement of Operations of the Company for the year ended December 31,
1998 represents the historical results of operations of New Cache for the twelve
months ended November 30, 1998, has been adjusted to present the results in
accordance with United States generally accepted accounting principles and has
been translated into U.S. dollars at the average exchange rate of $0.6792 to one
Canadian dollar. The balance sheet information of New Cache as of March 31,
1999, has been translated at the period-end exchange rate of $0.6647 to one
Canadian dollar. See "Business -- Primary Operating Areas -- Western Canada."
The Unaudited Pro Forma Financial Information should be read in conjunction
with the notes thereto, the Consolidated Financial Statements of the Company and
the notes thereto and the historical financial statements and the notes thereto
of New Cache included elsewhere in this Offering Memorandum.
The Unaudited Pro Forma Financial Information is not indicative of the
financial position or results of operations of the Company which would actually
have occurred if the Offering, the acquisition of New Cache and the sale of the
Wyoming Properties had occurred at the dates presented or which may be obtained
in the future. In addition, future results may vary significantly from the
results reflected in such statements due to normal crude oil and natural gas
production declines, reductions in prices paid for crude oil and natural gas,
future acquisitions and other factors.
36
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
Historical
--------------------------
Abraxas New Cache Sale of
Petroleum Pro Forma Wyoming Offering
Corporation New Cache Adjustments Properties Adjustments Pro Forma
------------ ----------- ------------- ----------- ------------- ---------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Oil and gas production
revenues................. $ 54,263 $ 16,896 -- $ (11,805) -- $ 59,354
Gas processing revenues.... 3,159 -- -- -- -- 3,159
Rig revenues............... 469 -- -- -- -- 469
Other revenues............. 2,193 902 -- 98 -- 3,193
-------- --------- -------- --------- ------- ---------
Total revenue....... 60,084 17,798 -- (11,707) -- 66,175
Operating costs and expenses:
Lease operating and
production taxes............. 16,841 6,237 -- (2,009) -- 21,069
Gas processing costs....... 1,250 -- -- -- -- 1,250
Depreciation, depletion and
amortization............. 31,226 13,609 $ 3,300(a) (3,415) -- 44,720
Proved property impairment. 61,224 32,616 (32,616)(b) -- -- 90,862
29,638(b)
Rig operations............. 521 -- -- -- -- 521
General and administrative
expense.................. 5,522 2,210 -- -- -- 7,732
-------- --------- -------- --------- ------- ---------
Total operating
expenses.......... 116,584 54,672 322 (5,424) -- 166,154
-------- --------- -------- --------- ------- ---------
Operating income (loss)...... (56,500) (36,874) (322) (6,283) -- (99,979)
Other (income) expense:
Interest income............ (805) (6) -- -- -- (811)
Amortization of deferred
financing fee............ 1,571 -- -- -- $ 625(c) 2,196
Interest expense........... 30,848 1,372 -- -- 6,990(d) 39,210
Minority interest.......... 4 -- -- -- -- 4
-------- --------- -------- --------- ------- ---------
Income (loss) before tax..... (88,118) (38,240) (322) (6,283) (7,615) (140,578)
Income tax (expense) benefit:
Current.................... (231) (189) -- -- -- (420)
Deferred................... 4,389 14,782 8,410(e) -- -- 14,861
(12,720)(e)
Net (loss) applicable to
common stockholders.......... $(83,960) $ (23,647) $ (4,632) $ (6,283) $(7,615) $(126,137)
======== ========= ======== ========= ======= =========
Net (loss) per share:........ $ (13.26) $ (19.92)
======== =========
</TABLE>
See notes to unaudited proforma financial information.
37
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 1998
Historical
--------------------------
Abraxas New Cache Sale of
Petroleum Pro Forma Wyoming Offering
Corporation New Cache Adjustments Properties Adjustments Pro Forma
------------ ----------- ------------- ----------- ------------- ---------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenue:
Oil and gas production
revenues................. $ 14,655 $ 4,927 -- $ (3,744) -- $ 15,838
Gas processing revenues.... 735 -- -- -- -- 735
Rig revenues............... 116 -- -- -- -- 116
Other revenues............. 1,233 -- -- -- -- 1,233
-------- --------- -------- --------- ------- ---------
Total revenue....... 16,739 4,927 -- (3,744) -- 17,922
Operating costs and expenses:
Lease operating and
production taxes......... 4,639 1,781 -- (702) -- 5,718
Depreciation, depletion and
Amortization............. 8,252 2,709 850 (a) (2,318) -- 9,493
Rig operations............. 122 -- -- -- -- 122
General and administrative
expense.................. 1,303 379 -- -- -- 1,682
-------- --------- -------- --------- ------- ---------
Total operating
expenses.......... 14,316 4,869 850 (3,020) -- 17,015
-------- --------- -------- --------- ------- ---------
Operating income (loss)...... 2,423 58 (850) (724) -- 907
Other (income) expense:
Interest income............ (136) (4) -- -- -- (140)
Amortization of deferred
financing fee............ 327 -- -- -- $ 156(b) 483
Interest expense........... 7,516 237 -- -- 1,529(c) 9,282
Minority interest.......... (77) -- -- -- -- (77)
-------- --------- -------- --------- ------- ---------
Income (loss) before tax..... (5,207) (175) (850) (724) (1,685) (8,641)
-------- --------- -------- --------- ------- ---------
Income tax (expense) benefit:
Current.................... (60) (47) -- -- -- (107)
Deferred................... 695 45 -- -- -- 740
-------- --------- ---------
Net (loss) applicable to
common stockholders.......... $ (4,572) $ (177) $ (850) $ (724) $(1,685) $ (8,008)
======== ========= ========= ========= ======= =========
Net (loss) per share:........ $ (0.72) $ (1.26)
======== =========
</TABLE>
See notes to unaudited pro forma financial information.
38
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 1999
Historical
Abraxas
Petroleum Offering
Corporation Adjustments Pro Forma
------------- ------------ -----------
(dollars in thousands, except per share data)
<S> <C> <C> <C>
Revenue
Oil and gas production Revenues................ $ 13,838 $ -- $ 13,838
Gas processing revenues........................ 865 -- 865
Rig revenues................................... 90 -- 90
Other revenues................................. 1,177 -- 1,177
-------- ---------- ---------
Total revenue........................... 15,970 -- 15,970
Operating costs and expenses:
Lease operating and production taxes........... 4,758 -- 4,758
Depreciation, depletion and Amortization....... 9,146 -- 9,146
Rig operations................................. 139 -- 139
General and administrative Expense............. 1,323 -- 1,323
-------- ---------- ---------
Total operating expenses................ 15,366 -- 15,366
Operating income (loss).......................... 604 -- 604
Other (income) expense:
Interest income................................ (186) -- (186)
Amortization of deferred Financing fee......... 345 -- 345
Interest expense............................... 8,683 1,128 (a) 9,811
Minority interest.............................. (7) -- (7)
--------- --------- ----------
Income (loss) before tax......................... (8,231) (1,128) (9,359)
Income tax (expense) benefit:
Current........................................ 102 -- 102
Deferred....................................... (2,039) -- (2,039)
--------- ----------- ------------
Net (loss) applicable to common stockholders
$ (6,294) $ (1,128) $ (7,422)
======== ========== ==========
Net (loss) per share:........ $ (0.99) $ (1.17)
======== ==========
</TABLE>
See notes to unaudited pro forma financial information
<PAGE>
39
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
As of December 31, 1998
Historical
-----------------------------
Abraxas New Cache Pro
Petroleum Forma Offering
Corporation New Cache Adjustments Adjustments Pro Forma
-------------- ----------- --------------- ----------- --------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Assets:
Cash........................... $ 61,390 $ 7 $ (61,724)(a) $ 18,820(b) $ 18,493
Accounts receivable............ 10,505 5,359 -- -- 15,864
Other.......................... 1,348 -- -- -- 1,348
---------- -------- --------- -------- -------------
Total current assets.......... 73,243 5,366 (61,724) 18,820 35,705
Property and equipment........... 374,316 128,282 32,938 (c) -- 535,536
Less accumulated DD&A............ (165,867) (64,727) (32,938)(d) -- (263,532)
---------- -------- --------- -------- -------------
Net property and equipment..... 208,449 63,555 -- -- 272,004
Deferred financing fees.......... 8,059 -- -- 2,500(b) 10,559
Other assets..................... 1,747 -- -- -- 1,747
---------- -------- --------- -------- -------------
Total assets............ $ 291,498 $ 68,921 $ (61,724) $ 21,320 $ 320,015
========== ======== ========= ======== =============
Liabilities and stockholders'
equity (deficit):
Total current liabilities $ 22,554 $ 29,190 1,949 (e) $ (9,730) $ 27,213
(16,750)(d)
Long-term debt:
Credit facility................ 15,700 16,750 (d) (32,450) --
Senior secured notes........... -- -- -- 63,500(b) 63,500
Senior notes................... 277,471 -- -- -- 277,471
Other.......................... 6,527 -- -- --(b) 6,527
---------- -------- --------- -------- -------------
Total................... 299,698 29,190 16,750 31,050 374,711
Deferred income taxes............ 19,820 2,105 -- -- 21,925
Minority interest................ 9,672 -- -- -- 9,672
Other liabilities................ 3,276 430 -- -- 3,706
Stockholders' equity (deficit):
Common stock................... 65 64,752 (64,752)(f) -- 65
Additional paid-in capital..... 51,695 -- -- -- 51,695
Accumulated deficit............ (103,145) (18,418) 18,418 (f) -- (129,622)
(24,528)(g)
(1,949)(h)
Foreign currency translation
adjustment................... (10,970) (9,138) 9,138 (f) -- (10,970)
Treasury stock................. (1,167) -- -- -- (1,167)
---------- -------- --------- -------- -------------
Total stockholders' equity
(deficit)................... (63,522) 37,196 (63,673) -- (89,999)
---------- -------- --------- -------- -------------
Total liabilities and
stockholders' equity
(deficit)............. $ 291,498 $ 68,921 $ (61,724) $ 21,320 $ 320,015
========== ======== ========= ======== =============
</TABLE>
See notes to unaudited pro forma financial information.
40
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
NOTE 1. The Unaudited Pro Forma Statement of Operations for the year ended
December 31, 1998, reflects the Offering, the acquisition of New Cache on and
the sale of the Wyoming Properties as if all were consummated on January 1,
1998.
a. Adjust depletion expense for the acquisition of New Cache.
b. Reverse New Cache ceiling writedown and record ceiling writedown based on
purchase price.
c. Adjust amortization of deferred financing fee to reflect amortization of
additional fees incurred in connection with the issuance of the Notes.
d. Adjust interest expense using an annual interest rate of 12 7/8% for the
issuance of the Notes, 11.5% for the Series D Notes, and to reflect the
repayment of the Credit Facility and the New Cache Debt.
e. Reverse New Cache deferred tax benefit relating to ceiling writedown and
record deferred tax benefit for writedown of properties based on purchase
price.
NOTE 2. The Unaudited Pro Forma Statement of Operations for the three months
ended March 31, 1998 reflects the Offering, the acquisition of New Cache on and
the sale of the Wyoming Properties as if all were consummated on January 1,
1998.
a. Adjust depletion expense for the acquisition of New Cache.
b. Adjust amortization of deferred financing fee to reflect amortization of
additional fees incurred in connection with the issuance of the Notes.
c. Adjust interest expense using an annual interest rate of 12.875% for the
issuance of the Notes and reducing interest expense interest incurred
during the period on the existing Credit Facility which was paid off with
the proceeds of the Notes.
NOTE 3. The Unaudited Pro Forma Statement of Operations for the three months
ended March 31, 1999 reflects the Offering as if it were consummated on January
1, 1999.
a. Adjust interest expense using an annual interest rate of 12.875% for the
issuance of the Notes and reducing interest expense interest incurred
during the period on the existing Credit Facility which was paid off with
the proceeds of the Notes.
NOTE 4. The Unaudited Pro Forma Condensed Balance Sheet as of December 31,
1998, reflects the Offering and the acquisition of New Cache as if they had
occurred as of December 31, 1998:
To reflect the sale of $63.5 million principal amount of the Notes. The
proceeds are to be used to repay the Credit Facility and the New Cache Debt and
for general corporate purposes.
(in thousands)
a. Cash expenditure for the acquisition of New Cache.... $ (61,724)
b. Allocation of proceeds for sale of the Notes:
Increase in senior secured notes..................... 63,500
Paydown of credit facility........................... (32,450)
Reduction of current liabilities..................... (9,730)
Increase in deferred financing fees.................. (2,500)
------------
Increase in cash..................................... 18,820
------------
c. Increase in basis of oil and gas properties
attributable to New Cache acquisition.............. 32,938
d. Reduce basis in oil and gas properties due to ceiling
writedown.......................................... (32,938)
41
<PAGE>
e. Increase in New Cache current liabilities at December 31,
1998 for costs incurred in connection
with the acquisition of New Cache............... 1,949
f. To eliminate New Cache's equity:
Common stock.................................... (64,752)
Accumulated deficit............................. 18,418
Foreign currency translation adjustment......... 9,138
g. Reduce equity for after tax impact of ceiling writedown (24,528)
h. Reduce equity for increase in current liabilities.... (1,949)
42
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following historical selected consolidated financial data are derived
from, and qualified by reference to, the Company's Consolidated Financial
Statements and the notes thereto. The statement of operations data for the three
months ended March 31, 1999, is not necessarily indicative of results for a full
year. The consolidated financial data for each of the three months ended March
31, 1998 and 1999, are derived from the unaudited financial statements and, in
the opinion of management, include all adjustments that are of a normal and
recurring nature and necessary for a fair presentation. The selected historical
consolidated financial information should be read in conjunction with the
Consolidated Financial Statements of the Company and the notes thereto included
elsewhere in this Offering Memorandum and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
---------------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ---------- ---------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations:
Operating revenue:
Oil and gas production revenues. $ 11,114 $13,660 $25,749 $ 65,826 $ 54,263 $ 14,655 $ 13,838
Gas processing revenues......... -- -- 600 3,568 3,159 735 865
Other revenue................... 235 157 304 1,537 2,662 1,349 1,267
-------- ------- ------- -------- -------- -------- --------
Total operating revenue. 11,349 13,817 26,653 70,931 60,084 16,739 15,970
-------- ------- ------- -------- -------- -------- --------
Operating costs and expenses:
Lease operating and production
taxes......................... 3,693 4,333 6,120 16,133 18,091 4,639 4,758
Depreciation, depletion and
amortization expense.......... 3,790 5,434 9,605 30,581 31,226 8,252 9,146
General and administrative expense. 810 1,042 1,933 4,171 5,522 1,303 1,323
Other........................... 133 125 169 296 521 122 139
Proved property impairment...... -- -- -- 4,600 61,224 -- --
-------- ------- ------- -------- -------- -------- ---------
Total operating expenses... 8,426 10,934 17,827 55,781 116,584 14,316 15,366
-------- ------- ------- -------- -------- -------- ---------
Operating income (loss)........... 2,923 2,883 8,826 15,150 (56,500) 2,423 604
Net interest expense.............. 2,343 3,877 5,987 24,300 30,042 7,189 8,499
Amortization of deferred financing
fees(1)......................... 400 214 280 1,260 1,571 327 345
Other (income) expense............ 67 -- 443 (34) 4 (136) (186)
-------- ------- ------- -------- -------- --------- ---------
Income (loss)from continuing
operations before tax and
extraordinary items.............. 113 (1,208) 2,116 (10,376) (88,118) (5,284) (8,238)
Deferred income tax (expense) benefit -- -- (176) 3,891 4,158 (635) 1,937
Loss from discontinued operations(2). (1,335) -- -- -- -- -- --
-------- ------- ------- -------- -------- -------- --------
Minority interest in income (loss)
of consolidated foreign subsidiary. (77) (7)
-------- ------- ------- -------- -------- -------- --------
Income (loss) before extraordinary
items........................... (1,222) (1,208) 1,940 (6,485) (83,960) (4,572) (6,294)
Extraordinary items(3)............ (1,172) -- (427) -- -- -- --
-------- ------- ------- -------- -------- -------- --------
Net income (loss)................. (2,394) (1,208) 1,513 (6,485) (83,960) (4,572) (6,294)
Preferred dividends............... (183) (366) (366) (183) -- -- --
-------- ------- ------- -------- -------- -------- --------
Net income (loss) applicable to
common stockholders............... $ (2,577) $(1,574) $ 1,147 $ (6,668) $(83,960) $ (14,572) $ (6,294)
======== ======= ======= ======== ======== ======== =========
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
----------------------------------------------------------- ------------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------- ---------- ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings per share:
Income (loss) from continuing
operations................... $ (0.02) $ (0.34) $ 0.23 $ (1.11) $ (13.26) $ (0.72) $ (0.99)
Discontinued operations......... (0.31) -- -- -- -- -- --
Extraordinary items............. (0.27) -- (.06) -- -- -- --
-------- ------- -------- -------- -------- -------- --------
Net income (loss) per common share... $ (0.60) $ (0.34) $ 0.17 $ (1.11) $ (13.26) $ (0.72) $ (0.99)
======== ======== ======== ========= ========= ========= =========
Weighted average shares outstanding.. 4,310 4,635 6,794 6,025 6,331 6,360 6,333
======== ======== ======== ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
At December 31, At March 31,
--------------------------------------------------------------------------------
1994 1995 1996 1997 1998 1998 1999
-------- ---------- ---------- ---------- ---------- --------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Total assets...................... $ 75,361 $ 85,067 $304,842 $338,528 $ 291,498 $ 364,507 $355,461
Long-term debt(4)................. 41,235 41,557 215,000 248,617 299,698 280,934 344,889
Stockholders' equity (deficit).... 28,502 37,063 35,656 26,813 (63,522) 22,545 (66,654)
Other Data:
EBITDA(5)......................... $ 6,713 $ 8,317 $ 18,431 $ 50,331 $ 35,950 $ 10,675 $ 9,750
Capital expenditures (including
acquisitions)................... 40,906 12,330 173,155 87,764 57,861 18,303 97,925
Ratio (deficiency) of earnings to
fixed charges(6).................. -- -- 1.34x -- -- -- --
</TABLE>
- ----------
(1) Consists of financing fees incurred in connection with the acquisition of
crude oil and natural gas producing properties and financing.
(2) Discontinued operations consist primarily of coal operations which were
terminated in January 1995. The Company anticipates no additional costs
associated with coal operations in the future. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Results of
Operations."
(3) Consists of loss incurred in connection with extinguishment of debt.
(4) Excludes current maturities of long-term debt and capital lease obligations.
Includes the premium on the Series D Notes and capital lease obligations.
(5) EBITDA represents net income before interest, income taxes, depreciation and
amortization. EBITDA is presented not as an actual measure of operating
results or cash flow from operation (as determined in accordance with
generally accepted accounting principles), but because it is a widely
accepted financial indicator of a company's ability to service and/or incur
indebtedness. EBITDA, however, should not be construed as an alternative to
net income as a measure of a company's operating results or to operating
cash flow as a measure of liquidity. This methodology may not be consistent
with a similarly captioned item presented by other companies. Includes $0.2
million, $0.8 million, $3.2 million, $3.2 million, $1.2 million and $0.4
million attributable to Grey Wolf in 1996, 1997, 1998, March 31, 1999 and
March 31, 1998, respectively.
44
<PAGE>
(6) Earnings consist of income (loss) from continuing operations before income
taxes plus fixed charges. Fixed charges consist of interest expense,
amortization of deferred financing fees and premium on the Series D Notes.
The Company's earnings were inadequate to cover fixed charges in 1997, 1998,
March 31, 1999 and March 31, 1998 by $10.0 million, $88.1 million, $5.3
million and $8.2 million, respectively.
45
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the Company's financial condition, results
of operations, liquidity and capital resources. This discussion should be read
in conjunction with the Consolidated Financial Statements of the Company and the
notes thereto included elsewhere in this Prospectus.
General
The Company has incurred net losses for a number of years. The Company's
revenues, profitability and future rate of growth are substantially dependent
upon prevailing prices for crude oil and natural gas and the volumes of crude
oil, natural gas and natural gas liquids produced by the Company. Natural gas
and crude oil prices weakened somewhat during 1997 and continued to decrease
during 1998. Crude oil and natural gas prices have generally remained low in
1999. The average natural gas prices realized by the Company were $1.54 per Mcf
in 1998 compared with $1.79 per Mcf in 1997 and $1.97 per Mcf in 1996. During
1998, crude oil prices averaged $13.65 per Bbl compared to $18.63 during 1997
and $20.85 during 1996. Although the Company had net income during 1996, losses
were incurred in 1997 and 1998, and there can be no assurance that operating
income and net earnings will be achieved in future periods. In addition, because
the Company's proved reserves will decline as crude oil, natural gas and natural
gas liquids are produced, unless the Company is successful in acquiring
properties containing proved reserves or conducts successful exploration and
development activities, the Company's reserves and production will decrease. The
Company's ability to acquire or find additional reserves in the near future will
be severely diminished by its lack of available funds for acquisition,
exploration and development projects. If crude oil and natural gas prices remain
at depressed levels, or if the Company's production levels decrease, the
Company's revenues, cash flow from operations and financial condition will be
materially adversely affected.
Results of Operations
The factors which most significantly affect the Company's results of
operations are (1) the sales prices of crude oil, natural gas liquids and
natural gas, (2) the level of total sales volumes of crude oil, natural gas
liquids and natural gas, (3) the level of borrowings and interest rates thereon
and (4) the level and success of exploration and development activity.
46
<PAGE>
Selected Operating Data. The following table sets forth certain operating
data of the Company for the periods presented:
<TABLE>
<CAPTION>
Three Months Ended March
Years Ended December 31, 31,
----------------------------------------- --------------------------
1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ -----------
(dollars in thousands, except per unit data)
<S> <C> <C> <C> <C> <C>
Operating revenue:
Crude oil sales....................... $ 8,864 $ 17,453 $ 9,948 $ 2,880 $ 2,731
NGLs sales............................ 4,359 10,668 5,905 1,989 552
Natural gas sales..................... 12,526 37,705 38,410 9,786 10,555
Gas processing revenue................ 600 3,568 3,159 736 865
Other................................. 304 1,537 2,662 1,348 1,267
-------- --------- --------- --------- ---------
Total operating revenue....... $ 26,653 $ 70,931 $ 60,084 $ 16,739 $ 15,970
======== ========= ========= ========= =========
Operating income(loss).................. $ 8,826 $ 15,150 $ (56,500) $ 2,423 $ 604
Crude oil production(MBbls)............. 425.2 936.7 728.6 199.0 225.0
NGLs production(MBbls).................. 299.5 992.3 867.4 241.5 73.3
Natural gas production(MMcf)............ 6,350.1 21,050.0 24,929.9 6,139.2 27,149.5
Average crude oil sales prices(per Bbl). $ 20.85 $ 18.63 $ 13.65 $ 14.47 $ 12.14
Average NGLs sales price(per Bbl)....... $ 14.55 $ 10.75 $ 6.81 $ 8.24 $ 7.56
Average natural gas sales price(per Mcf) $ 1.97 $ 1.79 $ 1.54 $ 1.59 $ 1.48
</TABLE>
Comparison of the Three Months Ended March 31, 1999 to Three Months Ended March
31, 1998
Operating Revenue. During the three months ended March 31, 1999, operating
revenue from crude oil, natural gas and natural gas liquid sales decreased 5.6%
to $13.8 million compared to $14.7 million in the three months ended March 31,
1998. The decrease in revenue was primarily due to a decrease in crude oil,
natural gas and natural gas liquids prices realized during the period. Average
sales prices were $12.14 per Bbl of crude oil, $7.53 per Bbl of natural gas
liquid and $1.48 per Mcf of natural gas for the quarter ended March 31, 1999
compared with $14.47 per Bbl of crude oil, $8.24 per Bbl of natural gas liquid
and $1.59 per Mcf of natural gas in the same period of 1998. The decline in
prices contributed $1.1 million of the decrease in revenue which was partially
offset by $0.2 million attributable to increased crude oil and natural gas
volumes. Natural gas volumes increased 16.5% from 6,139 MMcf for the period
ended March 31,1998 to 7,149 MMcf for the same period in 1999. The increase in
natural gas volumes was primarily attributable to the Company's ongoing
development program and from the acquisition of New Cache in January 1999. New
Cache contributed 1,777 MMcf for the period ended March 31, 1999. This natural
gas production replaced the production from the Company's Wyoming Properties
which were sold in the fourth quarter of 1999. The Wyoming Properties
contributed 1,511 MMcf for the three months ended March 31, 1998. Crude oil
volumes increased 13.1% from 199.0 MBbls in the first three months of 1998 to
225.0 MBbls. The increase in crude oil volumes was primarily due to the New
Cache acquisition. The New Cache properties contributed 89.2 MBbls during the
first three months of 1999 compared to 22.9 MBbls produced from the Wyoming
Properties during the same period of 1998. Crude oil from the Company's existing
properties declined by approximately 40.2 MBbls as a result of the de-emphasis
of the Company's oil exploration and development, due to the decline in crude
oil prices during the later part of 1998 and the first quarter of 1999. Natural
gas liquids volumes declined 69.6% for the period ended March 31, 1999 to 73.2
MBbls compared to 241.5 MBbls for the same period of 1998. The decline in
natural gas liquids volumes was due to the divestiture of the Wyoming properties
in the fourth quarter of 1998 and the Company's decision to shut down two
natural gas processing plants in South Texas. The Wyoming Properties contributed
125.5 MBbls of natural gas liquids during the first three months of 1998 which
was offset by only 21.0 MBbls from the New Cache properties acquired in January
1999. The Company shut down it's East White Point processing plant during the
fourth quarter of 1998 and shut down it's Portilla Plant in January 1999. The
East White Point plant produced 13.0 MBbls of natural gas liquids during the
47
<PAGE>
first three months of 1998, the Portilla Plant contributed 11.4 MBbls of natural
gas liquids during the first three months of 1998 compared to 2.1 MBbls in 1999.
The Company began processing the East White Point gas through a third party
plant in April 1999. The Company also elected not to process it's West Texas gas
during the first quarter of 1999 due to the depressed prices of natural gas
liquids. Processing of the West Texas gas resumed in April 1999.
Lease Operating Expenses. Lease operating expenses and natural gas
processing costs ("LOE") for the three months ended March 31, 1999 increased to
$4.7 million compared to $4.6 million for the same period in 1998. The Company's
LOE on a per Mcfe basis for the three months ended March 31, 1999 and March 31,
1998 remained the same at $0.53 per Mcfe.
G&A Expenses. G&A expenses were unchanged at $1.3 million for the first
three months of 1999 and 1998. G&A expense on a per Mcfe basis was $0.148 for
each of the three month periods ended March 31, 1999 and 1998.
Depreciation, Depletion and Amortization Expenses. Depreciation, depletion
and amortization ("DD&A") expense increased by $0.89 million to $9.1 million for
the three months ended March 31, 1999, from $8.3 million in the same period of
1998. The increase is primarily due to increased production during the first
three months of 1999. The Company's DD&A on a per Mcfe basis for the three
months ended March 31, 1999 was $1.02 per Mcfe compared to $0.94 in 1998. The
per Boe increase is due to higher finding costs added to the full cost pool in
1998 and the first quarter of 1999.
Interest Expense . Interest expense increased to $8.7 million for the first
three months of 1999 from $7.5 million for the same period of 1998. This
increase is attributable to increased borrowings by the Company during the first
quarter of 1999. Long-term debt increased from $277.4 million at March 31, 1998
to $344.9 million at March 31, 1999. The increase in debt levels is the result
of the Company's issuing the Outstanding Notes in March 1999.
General . The Company's revenues, profitability and future rate of growth
are substantially dependent upon prevailing prices for crude oil and natural gas
and the volumes of crude oil, natural gas and natural gas liquids produced by
the Company. The prices of natural gas, crude oil and natural gas liquids
received by the Company declined during the first quarter of 1999. The average
natural gas price realized by the Company declined to $1.48 per Mcf during the
first three months of 1999 compared with $1.59 per Mcf during the same period of
1998. Crude oil prices declined from $14.47 per Bbl during the first three
months of 1998, to $12.14 per Bbl for the same period of 1999. Natural gas
liquids prices declined to $7.53 per Bbl compared to $8.24 per Bbl in the first
quarter of 1998. In addition, the Company's proved reserves will decline as
crude oil, natural gas and natural gas liquids are produced unless the Company
is successful in acquiring properties containing proved reserves or conducts
successful exploration and development activities. In the event crude oil,
natural gas and natural gas liquids prices remain at depressed levels or if the
Company's production levels decrease, the Company's revenues, cash flow from
operations and profitability will be materially adversely affected.
Comparison of Year Ended December 31, 1998 to Year Ended December 31, 1997
Operating Revenue. During the year ended December 31, 1998, operating
revenue from crude oil, natural gas and natural gas liquids sales, and natural
gas processing revenues decreased by $12.0 million from $69.4 million in 1997 to
$57.4 million in 1998, of which $11.8 million was attributable to the Wyoming
Properties. This decrease was primarily attributable to a decline in commodity
prices. Production volumes increased 5.8% from 32,622 MMcfe in 1997 to 34,505
MMcfe for the year ended December 1998, of which 8,609 MMcfe were attributable
to the Wyoming Properties. Crude oil and natural gas liquids sales volumes
decreased by 17.2% from 1,930 MBbls in 1997 to 1,596 MBbls during 1998, and
natural gas sales volumes increased by 18.4% from 21.1 Bcf in 1997 to 38.4 Bcf
in 1998. The increase in natural gas sales volumes was attributable to increased
production attributable to the Company's ongoing development program on existing
48
<PAGE>
and acquired properties. Crude oil sales volumes decreased 22.2% to 729 MBbls
during 1998 from 937 MBbls in 1997 due primarily to the Company's decreased
emphasis on crude oil development projects during 1998 in response to the
continuing decline in crude oil prices. Natural gas liquids sales volumes
decreased 12.6% to 867 MBbls in 1998 from 992 MBbls in 1997. Approximately 66
MBbls of the decline in natural gas liquids was attributable to the loss of
production from the Wyoming Properties. In the ten and one-half months that the
Company owned the Wyoming Properties during 1998, they contributed 89 MBbls of
crude oil, 454 MBbls of natural gas liquids and 5.4 Bcf of natural gas
production. Average sales prices in 1998 were $13.65 per Bbl of crude oil, $6.81
per Bbl of natural gas liquids and $1.54 per Mcf of natural gas compared to
$18.63 per Bbl of crude oil, $10.75 per Bbl of natural gas liquids and $1.79 per
Mcf of natural gas in 1997. The Company also had natural gas processing revenues
of $3.1 million in 1998 as compared to $3.6 million in 1997.
Lease Operating Expense. Lease operating expense ("LOE") and natural gas
processing costs increased by $2.0 million from $16.1 million for the year ended
December 31, 1997 to $18.1 million for the same period of 1998, of which $2.0
million was attributable to the Wyoming Properties. The increase was due
primarily to the greater number of wells owned by the Company for the year ended
December 31, 1998 compared to the year ended December 31, 1997. The Company's
LOE on a per Mcfe basis for 1998 was $0.49 per Mcfe as compared to $0.46 per
Mcfe in 1997. Natural gas processing costs remained constant at $1.2 million in
1998 as compared to $1.2 million in 1997.
G&A Expense. G&A expense increased from $4.2 million for the year ended
December 31, 1997 to $5.3 million for the year ended December 31, 1998, as a
result of the Company's hiring additional staff. The sale of the Wyoming
Properties has not had a material effect on G&A expense. The Company's G&A
expense on a per Mcfe basis was $0.16 per Mcfe in 1998 compared to $0.13 per
Mcfe for 1997.
DD&A Expense. Due to the increase in sales volumes of crude oil and natural
gas, depreciation, depletion and amortization ("DD&A") expense increased by
$600,000 from $30.6 million for the year ended December 31, 1997 to $31.2
million for the year ended December 31, 1998, of which $3.4 million was
attributable to the Wyoming Properties. The Company's DD&A expense on a per Mcfe
basis for 1998 was $0.90 per Mcfe as compared to $0.94 per Mcfe in 1997.
Interest Expense and Preferred Dividends. Interest expense and preferred
dividends increased by $6.2 million from $24.6 million to $30.8 million for the
year end December 31, 1998 compared to 1997. This increase was attributable to
increased borrowings by the Company during 1998. In January 1998, Abraxas and
Canadian Abraxas issued $60.0 million in principal amount of 11.5% Senior Notes
due 2004, Series C ("Series C Notes"), and in June 1998, Abraxas and Canadian
Abraxas exchanged all of their outstanding Series C Notes and their 11.5% Senior
Notes due 2004, Series B in the original principal amount of $215.0 million
("Series B Notes") for $275.0 million of the Series D Notes. During 1998, the
Company also made additional borrowings under its revolving credit facility (the
"Credit Facility"). Long-term debt increased from $248.6 million at December 31,
1997 to $299.7 million at December 31, 1998. During 1998, the Company paid no
preferred dividends as compared to $183,000 in 1997. Preferred dividends were
eliminated on July 1, 1997 as the result of the conversion of all outstanding
preferred stock into Abraxas common stock.
Ceiling Limitation Writedown. The Company records the carrying value of its
crude oil and natural gas properties using the full cost method of accounting
for oil and gas properties. Under this method, the Company capitalizes the cost
to acquire, explore for and develop oil and gas properties. Under the full cost
accounting rules, the net capitalized cost of crude oil and natural gas
properties less related deferred taxes, are limited by country, to the lower of
the unamortized cost or the cost ceiling, defined as the sum of the present
value of estimated unescalated future net revenues from proved reserves,
discounted at 10%, plus the cost of properties not being amortized, if any, plus
the lower of cost or estimated fair value of unproved properties included in the
costs being amortized, if any, less related income taxes. If the net capitalized
cost of crude oil and natural gas properties exceeds the ceiling limit, the
Company is subject to a ceiling limitation writedown to the extent of such
excess. A ceiling limitation writedown is a charge to earnings which does not
impact cash flow from operating activities. However, such writedowns do impact
49
<PAGE>
the amount of the Company's stockholders' equity. The risk that the Company will
be required to writedown the carrying value of its crude oil and natural gas
assets increases when crude oil and natural gas prices are depressed or
volatile. In addition, writedowns may occur if the Company has substantial
downward revisions in its estimated proved reserves or if purchasers or
governmental action cause an abrogation of, or if the Company voluntarily
cancels, long-term contracts for its natural gas. For the year ended December
31, 1998, the Company recorded a writedown of $61.2 million related to its
United States properties. No assurance can be given that the Company will not
experience additional writedowns in the future. Should commodity prices continue
to decline, a further writedown of the carrying value of the Company's crude oil
and natural gas properties may be required. See Note 16 of Notes to Consolidated
Financial Statements.
Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996
Operating Revenue. During the year ended December 31, 1997, operating
revenue from crude oil, natural gas and natural gas liquids sales, and natural
gas processing revenues increased by $43.1 million from $26.3 million in 1996 to
$69.4 million in 1997. This increase was primarily attributable to increased
volumes which were partially offset by a decline in commodity prices. Production
volume increased from 10,698 MMcfe to 32,624 MMcfe for the year ended December
1997. Crude oil and natural gas liquids sales volumes increased by 166% to
11,573 MMcfe during 1997 compared to 4,350 MMcfe in 1996, and natural gas sales
volumes increased by 231% to 21.1 Bcf in 1997 compared to 6.3 Bcf in 1996. The
increases in volumes were attributable to a full year of production from
property acquisitions completed during the fourth quarter of 1996 as well as
increased production attributable to the Company's ongoing development program
on existing and acquired properties. Acquisitions and the subsequent development
of the acquired properties contributed 1,182 MBbls of oil and natural gas
liquids and 15.9 Bcf of natural gas. Development of existing properties
contributed 747 MBbls of oil and natural gas liquids and 5.2 Bcf of natural gas
during 1997. Average sales prices in 1997 were $18.63 per Bbl of crude oil,
$10.75 per Bbl of natural gas liquid and $1.79 per Mcf of natural gas compared
to $20.85 per Bbl of crude oil, $14.55 per Bbl of natural gas liquids and $1.97
per Mcf of natural gas in 1996. The Company also had gas processing revenue of
$3.6 million in 1997 as a result of the acquisition of CGGS Canadian Gas
Gathering Systems Inc. ("CGGS") in November 1996. Prior to the acquisition, the
Company was not engaged in third party gas processing.
Lease Operating Expense. LOE and natural gas processing costs increased by
$10.0 million from $6.1 million for the year ended December 31, 1996 to $16.1
million for the same period of 1997. LOE increased by $9.0 million to $14.9
million primarily due to the greater number of wells owned by the Company for
the year ended December 31, 1997 compared to the year ended December 31, 1996.
The Company's LOE on a per Mcfe basis for 1997 was $0.46 per Mcfe as compared to
$0.55 per Mcfe in 1996. Natural gas processing costs increased to $1.3 million
in 1997 as compared to $262,000 in 1996. The increase in gas processing expense
was due to the acquisition of CGGS in November 1996. Prior to the acquisition,
the Company was not engaged in third party gas processing
G&A Expense. G&A expense increased by $2.3 million from $1.9 million for the
year ended December 31, 1996 to $4.2 million for the year ended December 31,
1997, as a result of the Company's hiring additional staff, including an
increase in personnel to manage and develop properties acquired in the fourth
quarter of 1996. The Company's G&A expense on a per Mcfe basis was $0.13 per
Mcfe in 1997 compared to $0.18 per Mcfe for 1996.
DD&A Expense. Due to the increase in sales volumes of crude oil and natural
gas, DD&A expense increased by $21.0 million from $9.6 million for the year
ended December 31, 1996 to $30.6 million for the year ended December 31, 1997.
The Company's DD&A expense on a per Mcfe basis for 1997 was $0.94 per Mcfe as
compared to $0.90 per Mcfe in 1996.
Interest Expense and Preferred Dividends. Interest expense and preferred
dividends increased by $18.1 million from $6.4 million to $24.5 million for the
50
<PAGE>
year end December 31, 1997, compared to 1996. This increase was attributable to
increased borrowings by the Company to finance the acquisitions consummated
during 1996. In November 1996, the Company issued $215 million in principal
amount of the Series B Notes. During 1997, the Company made additional
borrowings under the Credit Facility. Long-term debt increased from $215.0
million at December 31, 1996 to $248.6 million at December 31, 1997. During
1997, the Company paid $183,000 in preferred dividends as compared to $366,000
in 1996. Preferred dividends were eliminated on July 1, 1997 as the result of
the conversion of all outstanding preferred stock into Abraxas common stock.
Ceiling Limitation Writedown. For the year ended December 31, 1997, the
Company recorded a writedown of $4.6 million, $3.0 million after tax, related to
its Canadian properties
Liquidity and Capital Resources
Current Liquidity Needs. The Company has historically funded its operations
and acquisitions primarily through its cash flow from operations and borrowings
under the Credit Facility and other credit sources. Due to severely depressed
prices for crude oil and natural gas, the Company's cash flow from operations
has been substantially reduced.
The Company will have two principal sources of liquidity during the next 12
months: (i) cash on hand, including the net proceeds of the offering of the
Outstanding Notes after the repayment of the Credit Facility and the New Cache
Debt and (ii) cash generated by operations. While the availability of capital
resources cannot be predicted with certainty and is dependent upon a number of
factors including factors outside of management's control, management believes
that the net proceeds of the offering of the Outstanding Notes plus the
Company's cash flow from operations will be adequate to fund operations and
planned capital expenditures for the remainder of 1999. In June 1999, Abraxas
announced that it is exploring alternatives to increase its liquidity. The
alternatives include potential private equity issuances and a restructuring of
the Company's indebtedness as well as the sale of certain non-core properties
including the potential sale of some or all of the Company's ownership position
in New Cache to Grey Wolf. The Company also intends to review project financing
alternatives.
The Company's ability to obtain additional financing will be substantially
limited under the terms of the Indenture and the Series D Indenture. Also, as a
result of the sale of the Outstanding Notes, substantially all of the Company's
crude oil and natural gas properties and natural gas processing facilities are
subject to a first lien or charge for the benefit of the holders of the
Outstanding Notes. Thus, the Company is required to rely on its cash flow from
operations to fund its operations and service its debt. The Company may also
choose to issue equity securities or sell certain of its assets to fund its
operations, although the Indenture and the Series D Indenture will substantially
limit the Company's use of the proceeds of any such asset sales. Due to the
Company's diminished cash flow from operations and the resulting depressed
prices for its common stock, there can be no assurance that the Company would be
able to obtain equity financing on terms satisfactory to the Company.
51
<PAGE>
General. Capital expenditures in 1996, 1997 and 1998 were $173.2 million,
$87.8 million and $57.9 million, respectively. The table below sets forth the
components of these capital expenditures on a historical basis for the three
years ended December 31, 1996, 1997 and 1998 and the three months ended March
31, 1998 and 1999.
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
----------------------------------- -----------------------
1996 1997 1998 1998 1999
---------- ---------- --------- ---------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Expenditure category:
Property acquisitions(1)... $ 154,484 $24,210 $ 2,729 $ 2,359 $86,103
Development................ 18,465 61,414 51,821 15,945 13,319
Divestitures............... -- -- -- (129) (1,497)
Facilities and other....... 206 2,140 3,311 128 --
--------- ------- ------- ------- -------
Total.............. $ 173,155 $87,764 $57,861 $18,303 $97,925
========= ======= ======= ======= =======
</TABLE>
- ----------
(1) Acquisition cost includes 7,585,000 common shares and 4,000,000 special
warrants of Grey Wolf valued at approximately $3.7 million in 1997 related
to the acquisition of certain crude oil and natural gas properties.
Acquisitions of crude oil and natural gas producing properties during 1996
accounted for the majority of the capital expenditures made by the Company
during 1996. During 1997 and 1998, expenditures were primarily for the
development of existing properties. These expenditures were funded through
internally generated cash flow, the issuance of the Series C Notes and
borrowings under the Credit Facility.
At March 31, 1999, the Company had current assets of $28.4 million and
current liabilities of $34.5 million resulting in a working capital deficit of
$6.1 million. The material components of the Company's current liabilities at
March 31, 1999 included trade accounts payable of $13.5 million, revenues due
third parties of $6.6 million and accrued interest of $13.5 million.
Stockholders' equity [decreased from] a deficit of $(64.0) million at December
31, 1998 to $(66.7) million at March 31, 1999, primarily due to the net loss for
the period ended March 31, 1999.
The Company's current budget for capital expenditures for 1999 other than
acquisition expenditures is $13.0 million, approximately $10.0 million of which
has been spent to date. The remaining portion of such expenditures is largely
discretionary and will be made primarily for the development of existing
properties. Additional capital expenditures may be made for acquisition of
producing properties if such opportunities arise, but the Company currently has
no agreements, arrangements or undertakings regarding any material acquisitions.
The Company has no material long-term capital commitments and is consequently
able to adjust the level of its expenditures as circumstances dictate.
Additionally, the level of capital expenditures will vary during future periods
depending on market conditions and other related economic factors. Should the
prices of crude oil and natural gas continue to decline, the Company's cash
flows will decrease which may result in a further reduction of the capital
expenditure budget.
Operating activities during the three months ended March 31, 1999 provided
$7.8 million cash to the Company compared to $4.4 million in the same period in
1998. Net income plus non-cash expense items during 1999 and net changes in
operating assets and liabilities accounted for most of these funds. Investing
activities required $97.9 million net during the first three months of 1999,
$86.1 million of which was used for the purchase of New Cache, $13.3 million of
which was utilized for the development of crude oil and natural gas properties
and other facilities. This compares to $18.3 million required during the same
period of 1998 of which $15.9 million was utilized for the development of crude
52
<PAGE>
oil and natural gas properties and other facilities, and $2.4 million of which
was used for acquisition of oil and gas properties. Financing activities
provided $43.5 million for the first three months of 1999 compared to requiring
$30.7 million for the same period of 1998. Financing activities include the
proceeds of the $63.5 million from the issuance of the Secured Notes in March
1999 and borrowings under the Credit Facility of $19.5 million, which were
offset by the repayment of the existing Credit Facility in the amount of $35.2
million.
Operating activities for the year ended December 31, 1998 provided $4.8
million of cash to the Company. Investing activities provided $2.0 million
during 1998 primarily for the acquisition and development of producing
properties. Financing provided $52.5 million during 1998.
Operating activities for the year ended December 31, 1997 provided $36.6
million of cash to the Company. Investing activities required $74.5 million
during 1997 primarily for the acquisition and development of producing
properties. Financing provided $33.3 million during 1997.
Operating activities for the year ended December 31, 1996, provided $13.5
million of cash. Investing activities required $172.6 million primarily for the
acquisition of producing properties. Financing provided $163.0 million during
1996.
The Company is heavily dependent on crude oil and natural gas prices which
have historically been volatile. Although the Company has hedged a portion of
its natural gas production and intends to continue this practice, future crude
oil and natural gas price declines would have a material adverse effect on the
Company's overall results, and therefore, its liquidity. Furthermore, low crude
oil and natural gas prices could affect the Company's ability to raise capital
on terms favorable to the Company.
Description Of Existing Indebtedness. On November 14, 1996, Abraxas and
Canadian Abraxas consummated the offering of $215.0 million of their 11.5%
Senior Notes due 2004, Series A, which were exchanged for the Series B Notes in
February 1997. On January 27, 1998, Abraxas and Canadian Abraxas completed the
sale of $60.0 million of the Series C Notes. The Series B Notes and the Series C
Notes were subsequently exchanged for $275.0 million in principal amount the
Series D Notes in June 1998.
Interest on the Series D Notes is payable semi-annually in arrears on May 1
and November 1 of each year at the rate of 11.5% per annum. The Series D Notes
are redeemable, in whole or in part, at the option of Abraxas and Canadian
Abraxas, on or after November 1, 2000, at the redemption prices set forth below,
plus accrued and unpaid interest to the date of redemption, if redeemed during
the 12-month period commencing on November 1 of the years set forth below:
Year Percentage
--------------------------- -----------------------
2000 105.750%
2001 102.875%
2002 and thereafter 100.000%
In addition, at any time on or prior to November 1, 1999, Abraxas and
Canadian Abraxas may, at their option, redeem up to 35% of the aggregate
principal amount of the Series D Notes originally issued with the net cash
proceeds of one or more equity offerings, at a redemption price equal to 111.5%
of the aggregate principal amount of the Series D Notes to be redeemed, plus
accrued and unpaid interest to the date of redemption; provided, however, that
after giving effect to any such redemption, at least 65% of the aggregate
principal amount of the Series D Notes remains outstanding.
The Series D Notes are joint and several obligations of Abraxas and Canadian
Abraxas, and rank pari passu in right of payment to all existing and future
unsubordinated indebtedness of Abraxas and Canadian Abraxas. The Series D Notes
rank senior in right of payment to all future subordinated indebtedness of
53
<PAGE>
Abraxas and Canadian Abraxas. The Series D Notes will, however, be effectively
subordinated to the Notes to the extent of the value of the Collateral. The
Series D Notes are unconditionally guaranteed, jointly and severally, by the
Subsidiary Guarantors. The guarantees are general unsecured obligations of the
Subsidiary Guarantors and rank pari passu in right of payment to all
unsubordinated indebtedness of the Subsidiary Guarantors and senior in right of
payment to all subordinated indebtedness of the Subsidiary Guarantors. The
Guarantees are effectively subordinated to the Notes to the extent of the value
of the Collateral.
Upon a Change of Control (as defined in the Series D Indenture), each holder
of the Series D Notes will have the right to require Abraxas and Canadian
Abraxas to repurchase all or a portion of such holder's Series D Notes at a
redemption price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest to the date of repurchase. In addition, Abraxas and Canadian
Abraxas will be obligated to offer to repurchase the Series D Notes at 100% of
the principal amount thereof plus accrued and unpaid interest to the date of
repurchase in the event of certain asset sales.
The Series D Indenture provides, among other things, that the Company may
not, and may not cause or permit certain of its subsidiaries, including Canadian
Abraxas, to, directly or indirectly, create or otherwise cause to permit to
exist or become effective any encumbrance or restriction on the ability of such
subsidiary to pay dividends or make distributions on or in respect of its
capital stock, make loans or advances or pay debts owed to Abraxas, guarantee
any indebtedness of Abraxas or transfer any of its assets to Abraxas except for
such encumbrances or restrictions existing under or by reason of: (i) applicable
law; (ii) the Indenture; (iii) the Credit Facility; (iv) customary
non-assignment provisions of any contract or any lease governing leasehold
interest of such subsidiaries; (v) any instrument governing indebtedness assumed
by the Company in an acquisition, which encumbrance or restriction is not
applicable to such subsidiaries or the properties or assets of such subsidiaries
other than the entity or the properties or assets of the entity so acquired;
(vi) customary restrictions with respect to subsidiaries of the Company pursuant
to an agreement that has been entered into for the sale or disposition of
capital stock or assets of such subsidiaries to be consummated in accordance
with the terms of the Indenture solely in respect of the assets or capital stock
to be sold or disposed of; (vii) any instrument governing certain liens
permitted by the Indenture, to the extent and only to the extent such instrument
restricts the transfer or other disposition of assets subject to such lien; or
(viii) an agreement governing indebtedness incurred to refinance the
indebtedness issued, assumed or incurred pursuant to an agreement referred to in
clause (ii), (iii) or (v) above; provided, however, that the provisions relating
to such encumbrance or restriction contained in any such refinancing
indebtedness are no less favorable to the holders of the Notes in any material
respect as determined by the Board of Directors of the Company in their
reasonable and good faith judgment that the provisions relating to such
encumbrance or restriction contained in the applicable agreement referred to in
such clause (ii), (iii) or (v).
Hedging Activities. In November 1996, the Company assumed hedge agreements
extending through October 2001 with a counterparty involving various quantities
and fixed prices. These hedge agreements provided for the Company to make
payments to the counterparty to the extent the market prices, based on the price
for crude oil on the NYMEX and the Inside FERC, Tennessee Gas Pipeline Co. Texas
(Zone O) price for natural gas exceeded certain hedged prices and for the
counterparty to make payments to the Company to the extent the market prices
were less than such hedged prices. The Company accounted for the related gains
or losses (a loss of $952,000 in 1997 and a gain of $268,000 in 1998) in crude
oil and natural gas revenue in the period of the hedged production. The Company
terminated these hedge agreements in January 1999 and was paid $750,000 by the
counterparty for such termination.
54
<PAGE>
In March 1998, the Company entered into a costless collar hedge agreement
with Enron Capital and Trade Resources Corp. for 2,000 Bbls of crude oil per day
with a floor price of $14.00 per Bbl and a ceiling price of $22.30 per Bbl for
crude oil on the NYMEX. The agreement was effective April 1, 1998 and extends
through March 31, 1999. Under the terms of the agreement, the Company will be
paid when the average monthly price for crude oil on the NYMEX is below the
floor price and will pay the counterparty when the average monthly price exceeds
the ceiling price. During 1998, the Company realized a gain of $282,000 on this
agreement, which is accounted for in crude oil and natural gas revenue. The
Company has also entered into a hedge agreement with Barrett Resources
Corporation ("Barrett") covering 2,000 Bbls per day of crude oil calling for the
Company to realize an average NYMEX price of $14.23 per Bbl over the period
April 1, 1999 to October 31, 1999. In May 1999, the Company and Barrett amended
this hedge agreement resulting in the Company being paid an average NYMEX price
of $17.00 per Bbl from June through October 1999. A new agreement was entered
into in May of 1999 for the period November 1999 through October 2000. This
agreement is for 1,000 Bbls per day with the Company being paid $17.02 per Bbl.
Additionally, Barrett has a call on either 1,000 Bbls of crude oil or 20,000
MMBtu of natural gas per day at Barrett's option over the term of the agreement
at fixed prices.
As of March 1, 1999, the Company had 37.0 MMBTUpd hedged at an average NYMEX
price of approximately $1.93 per MMBTU from April 1, 1999 to October 31, 1999
and 2.4 MMBTUpd at an average NYMEX price of approximately $1.10 per MMBTU from
November 1, 1998 to October 31, 2000. Of the 37.0 MMBTUpd hedged at $1.93 per
MMBTU, 20.0 MMBTUpd is hedged with Barrett Resources Corporation, 11.0 MMBTUpd
is hedged with Engage Energy Capital Canada LP, and 6.0 MMBTUpd is hedged with
Amoco. The 2.4 MMBTUpd hedged at $1.10 per MMBTU is hedged with Barrett and was
assumed by the Company in connection with the acquisition of New Cache.
Net Operating Loss Carryforwards. At December 31, 1998, the Company had,
subject to the limitations discussed below, $46.6 million of net operating loss
carryforwards for U.S. tax purposes, of which approximately $43.8 million are
available for utilization without limitation. These loss carryforwards will
expire from 2002 through 2010 if not utilized. At December 31, 1998, the Company
had approximately $11.9 million of net operating loss carryforwards for Canadian
tax purposes which expire in varying amounts in 2002-2005. As a result of the
acquisition of certain partnership interests and crude oil and natural gas
properties in 1990 and 1991, an ownership change under Section 382, occurred in
December 1991. Accordingly, it is expected that the use of $4.9 million in net
operating loss carryforwards generated prior to December 31, 1991 will be
limited to approximately $235,000 per year. As a result of the issuance of
additional shares of common stock for acquisitions and sales of stock, an
additional ownership change under Section 382 occurred in October 1993.
Accordingly, it is expected that the use of all U.S. net operating loss
carryforwards generated through October 1993, or $8.9 million, will be limited
to approximately $1 million per year subject to the lower limitations described
above. Of the $8.9 million net operating loss carryforwards, it is anticipated
that the maximum net operating loss that may be utilized before it expires is
$6.1 million. Future changes in ownership may further limit the use of the
Company's carryforwards. In addition to the Section 382 limitations,
uncertainties exist as to the future utilization of the operating loss
carryforwards under the criteria set forth under FASB Statement No. 109.
Therefore, the Company has established a valuation allowance of $5.9 million and
$32.8 million for deferred tax assets at December 31, 1997 and 1998,
respectively.
Year 2000
The "Year 2000" issue is a general term used to refer to certain business
implications of the arrival of the year 2000. Many existing computer programs
were designed and developed to use only two digits to identify a year in the
date field. If not addressed, these programs could result in system failures
with possible material adverse effects on the Company's operations at the
beginning of the year 2000.
55
<PAGE>
The Company has been and is assessing the impact of the Year 2000 issue on
its operations, including the development and implementation of project plans
and cost estimates required to make its information system infrastructure Year
2000 compliant. Substantially all of the Company's computer software has been
obtained from third-party vendors. The Company has been advised by the vendors
of each of its most material hardware and software systems that such systems are
Year 2000 compliant. The Company has not undertaken independent testing to
verify the accuracy of such assertions.
To date, the Company has spent approximately $100,000 in replacing computer
hardware and software it did not believe to be Year 2000 compliant, some of
which the Company had already anticipated replacing for other reasons. Such
expenditures have been funded out of the Company's operational cash flows. Based
on existing information, the Company does not anticipate having to spend any
material further amounts to become Year 2000 compliant and that any such
required amounts will not have a material effect on the financial position, cash
flows or results of operations of the Company.
There is a risk of Year 2000 related failures. These failures could result
in an interruption in, or a failure of, certain business activities or
functions. Such failures could materially and adversely affect the Company's
results of operations, liquidity or financial condition. Due to the uncertainty
surrounding the Year 2000 problem, including the uncertainty of the Year 2000
readiness of the Company's customers and contractors, the Company is unable at
this time to determine the true impact of the Year 2000 problem to the Company.
The principal areas of risk are thought to be oil and gas production control
systems, other embedded operations control systems and third party Year 2000
readiness. There can be no assurance, however, that there will not be a delay
in, or increased costs associated with the implementation of measures to address
the Year 2000 issue or that such measures will prove effective in resolving all
Year 2000 related issues. Furthermore, there can be no assurance that critical
contractors, customers or other parties with which the Company does business
will not experience failures. A likely worst case scenario is that despite the
Company's efforts, there could be failures of control systems, which might cause
some processes to be shut down. Such failures could have a material adverse
impact on the Company's operations. Their failure due to a Year 2000 problem
could prevent the Company from delivering product and cause a material impact to
Company cash flow.
Quantitative and Qualitative Disclosures about Market Risk; Commodity Price Risk
Commodity Price Risk. The Company's exposure to market risks rest primarily
with the volatile nature of crude oil, natural gas and natural gas liquids
prices. The Company manages crude oil and natural gas prices through the
periodic use of commodity price hedging agreements. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources." Assuming 1998 production levels, a 5% further decline in
crude oil, natural gas and natural gas liquid prices would have reduced the
Company's operating revenue cash flow and net income by approximately $2.5
million for the year ended December 31, 1998.
Interest Rate Risk. At December 31, 1998, approximately 8% of the Company's
long-term debt bears interest at variable rates. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources." Accordingly, the Company's earnings and after tax cash flow
are affected by changes in interest rates. Assuming the current level of
borrowings at variable interest rates and assuming a two percentage point change
in the 1998 average interest rate under these borrowings, it is estimated that
the Company's interest expense would have changed by approximately $560,000. The
borrowings by the Company subject to variable interest rates are not material to
the Company's total debt. All borrowings subject to variable interest rates were
paid in full by fixed rate debt in March 1999. At December 31, 1998, $274
million of the Company's debt was at a fixed rate with a market value of
$212,350 million. The assumed 2% change in the interest rate would not have a
material impact on this market value.
Foreign Currency. The Company's Canadian operations are measured in the
local currency of Canada. As a result, the Company's financial results could be
affected by changes in foreign currency exchange rates or weak economic
conditions in the foreign markets. Canadian operations reported a pre tax loss
56
<PAGE>
of $9.6 million for the year ended December 31, 1998. It is estimated that a 5%
change in the value of the U.S. dollar to the Canadian dollar would have changed
the Company's net income by approximately $.27 million. The Company does not
maintain any derivative instruments to mitigate the exposure to translation
risk. However, this does not preclude the adoption of specific hedging
strategies in the future.
57
<PAGE>
BUSINESS
General
We are an independent energy company engaged primarily in the acquisition,
exploration, exploitation and production of crude oil and natural gas. Since
January 1, 1991, our principal means of growth has been through the acquisition
and subsequent development and exploitation of producing properties and related
assets. We utilize a disciplined acquisition strategy, focusing our efforts on
producing properties and related assets with the following characteristics:
o A concentration of operations.
o Significant and quantifiable development potential.
o Historically low operating expenses.
o The potential to reduce general and administrative ("G&A") expense per
Mcfe.
We seek to complement our acquisition and development activities by selectively
participating in exploration projects with experienced industry partners. Our
principal areas of operation are Texas and western Canada.
We have completed 20 acquisitions of producing properties totaling 406 Bcfe
of estimated proved reserves since January 1, 1991. At December 31, 1998, on a
pro forma basis:
o We owned interests in 1,211,788 gross acres (772,651 net acres).
o Our estimated total proved reserves were 320 Bcfe.
o Our PV-10 was $237 million.
o We operated properties accounting for 69% of our PV-10, affording us
substantial control over the timing and occurrence of operating and
capital expenditures.
o We had net natural gas processing capacity of 121 MMcfpd through our 22
natural gas processing plants in Canada.
o Our natural gas processing assets had a net book value of $44 million.
Abraxas was founded in 1977 by Robert L. G. Watson, Abraxas' Chairman of the
Board, President and Chief Executive Officer. Abraxas' principal offices are
located at 500 North Loop 1604 East, Suite 100, San Antonio, Texas 78232 and its
telephone number is (210) 490-4788.
Business Strategy
The Company's primary business objectives are to increase its recoverable
reserves, production and cash flow through the following:
o Improved Liquidity. The sale of the Notes will increase the Company's
cash balance to approximately $21 million, allowing the Company to meet
its near-term debt service requirements and facilitating limited
capital expenditures. The Company has historically funded its
operations primarily through cash flow from operations and borrowings
under its Credit Facility. As a result of the Offering, the Company's
ability to incur additional indebtedness will be substantially limited
causing us to rely on cash on hand, cash flow from operations, asset
sales and equity issuances to fund crude oil and natural gas
exploitation activities and acquisitions.
o Low Cost Operations. The Company seeks to maintain low operating and
G&A expenses per Mcfe by operating a majority of its producing
properties and related assets and by maintaining a high rate of
production on a per well basis. As a result of this strategy, the
Company has achieved per unit operating and G&A expenses that compare
favorably with similar
58
<PAGE>
companies and that have historically been lower than the currently
depressed crude oil and natural gas prices realized by the Company.
o Exploitation of Existing Properties. The Company will allocate a
portion of its operating cash flow to the exploitation of its producing
properties. Management believes that the proximity of the Company's
undeveloped reserves to existing production makes development of these
properties less risky and more cost-effective than other drilling
opportunities available to the Company. Given the Company's high degree
of operating control, the timing and incurrence of operating and
capital expenditures is largely within the Company's discretion.
o Producing Property Acquisitions. As cash flow permits, the Company
intends to continue to acquire producing crude oil and natural gas
properties that can increase cash flow, production and reserves through
operational improvements and additional development. The Company
expects that the combination of low crude oil and natural gas prices,
limited access to liquidity through the capital markets and reduced
availability on commercial bank facilities will result in an increase
in attractive acquisition opportunities offered by crude oil and
natural gas companies seeking additional liquidity.
o Focused Exploration Activity. In periods of increased oil and gas
prices, the Company intends to allocate a portion of its capital budget
to the drilling of exploratory wells that have high reserve potential.
The Company believes that by devoting a relatively small amount of
capital to high impact, high risk projects while reserving the majority
of its available capital for development projects, it can reduce
drilling risks while still benefiting from the potential for
significant reserve additions.
Recent Developments
In November 1998, Abraxas sold all of its interests in the Wyoming
Properties to the Partnership for $58.6 million in cash. A subsidiary of Abraxas
owns a one percent equity interest in the Partnership and acts as general
partner of the Partnership. Abraxas also receives a management fee and
reimbursement of certain overhead costs from the Partnership.
In January 1999, Canadian Abraxas acquired all of the outstanding common
shares of New Cache for an aggregate purchase price of $78 million in cash and
the assumption of the New Cache Debt. The New Cache Debt will be repaid with
part of the proceeds of the Offering. New Cache is an independent energy company
engaged in the acquisition, exploration, development, production and gathering
of natural gas and crude oil. New Cache owns interests in 285 gross wells (88.5
net wells) and 445,294 gross (256,524 net) acres located primarily in western
Canada, as well as three natural gas processing plants. At December 31, 1998,
New Cache had estimated total proved reserves of 77 Bcfe (75% natural gas), all
of which were proved developed.
In June 1999, Abraxas announced that it is exploring alternatives to
increase its liquidity. The alternatives include potential private equity
issuances and a restructuring of the Company's indebtedness as well as the sale
of certain non-core properties including the potential sale of some or all of
the Company's ownership position in New Cache to Grey Wolf. The Company also
intends to review project financing alternatives.
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<PAGE>
Primary Operating Areas
Texas
The Company's U.S. operations are concentrated in South and West Texas with
over 99% of the PV-10 of the Company's U.S. crude oil and natural gas properties
located in those two regions. The Company operates 84% of its wells in Texas.
Operations in South Texas are concentrated along the Edwards trend in Live Oak
and Dewitt Counties and in the Frio/Vicksburg trend in San Patricio County. The
Company owns an average 71% working interest in 115 wells with average daily
production of 863 net Bbls of crude oil and NGLs and 10,285 net Mcf of natural
gas per day for the year ended December 31, 1998. The Company's West Texas
operations are concentrated along the deep Devonian/Ellenberger formations and
shallow Cherry Canyon sandstones in Ward County, the Spraberry trend in Midland
County and in the Sharon Ridge Clearfork Field in Scurry County. The Company
owns an average 72% working interest in 264 wells with average daily production
of 1,264 net Bbls of crude oil and NGLs and 6,926 net Mcf of natural gas per day
for the year ended December 31, 1998. During 1998, a total of 11 new wells (9.6
net) were drilled by the Company in Texas with a 100% success rate.
Western Canada
In January 1996, the Company invested $3.0 million in Grey Wolf Exploration
Ltd. ("Grey Wolf"), a privately held Canadian corporation, which, in turn,
invested these proceeds in newly-issued shares of Cascade Oil & Gas, Ltd.
("Cascade"), an Alberta-based corporation whose common shares were traded on The
Alberta Stock Exchange. In November 1997, Grey Wolf merged with Cascade, which
later changed its name to Grey Wolf Exploration Inc. The Company owns
approximately 48% of the outstanding capital stock of Grey Wolf. The shares of
Grey Wolf are traded on the Alberta Stock Exchange and the Toronto Stock
Exchange under the symbol "GWX." Grey Wolf manages the operations of Canadian
Abraxas pursuant to a management agreement between Canadian Abraxas and Grey
Wolf. Under the management agreement, Canadian Abraxas reimburses Grey Wolf for
reasonable costs or expenses attributable to Canadian Abraxas and for
administrative expenses based upon the percentage that Canadian Abraxas' gross
revenue bears to the total gross revenue of Canadian Abraxas and Grey Wolf.
The Company owns producing properties in Western Canada, consisting
primarily of natural gas reserves, and interests ranging from 10% to 100% in
approximately 200 miles of natural gas gathering systems and 22 natural gas
processing plants. As of December 31, 1998, on a pro forma basis, Canadian
Abraxas and New Cache had estimated net proved reserves of 175,459 MMcfe (82%
natural gas) with a PV-10 of $142.9 million, 97% of which was attributable to
proved developed reserves. For the year ended December 31, 1998, on a pro forma
basis, the properties produced an average of approximately 1,980 net Bbls of
crude oil and NGLs per day and 52,583 net Mcf of natural gas per day from 105.5
net wells. The natural gas processing plants had aggregate capacity of
approximately 306 gross MMcf of natural gas per day (121 net MMcf).
Exploratory and Developmental Acreage
Abraxas' principal crude oil and natural gas properties consist of producing
and non-producing crude oil and natural gas leases, including reserves of crude
oil and natural gas in place. The following table indicates the Company's
interest in developed and undeveloped acreage as of December 31, 1998, on a pro
forma basis:
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Developed and Undeveloped Acreage -- Pro Forma(1)
As of December 31, 1998
Developed Acreage Undeveloped Acreage
-------------------------- ------------------------
Gross Acres Net Acres Gross Acres Net Acres
------------- --------- ----------- -----------
Canada....... 280,765 156,168 818,074 532,733
Texas........ 43,659 27,090 17,704 14,646
Wyoming...... 9,139 6,965 36,182 32,314
Oklahoma..... 3,041 1,405 -- --
Colorado..... 160 36 -- --
N. Dakota.... 1,544 985 -- --
Kansas....... 1,280 277 -- --
New Mexico... 160 30 -- --
Mississippi.. 40 2 -- --
Alabama...... 40 -- -- --
------- ------- ------- -------
Total 339,828 192,958 871,960 579,693
======= ======= ======= =======
- ----------
(1) Reflects the acquisition of New Cache as if it occurred at December 31,
1998.
Productive Wells
The following table sets forth the total gross and net productive wells of
the Company, expressed separately for crude oil and natural gas, as of December
31, 1998, on a pro forma basis:
Productive Wells -- Pro Forma(1)
As of December 31, 1998
Crude Oil Natural Gas
------------------ -----------------
State/Country Gross Net Gross Net
- ------------------ ----- --- ----- -----
Canada........ 208.0 49.0 253.0 105.5
Texas......... 276.0 201.1 103.0 78.5
Colorado...... 1.0 0.2 -- --
N. Dakota..... 2.0 1.4 -- --
New Mexico.... 1.0 0.2 -- --
Alabama....... 1.0 -- -- --
Kansas........ 3.0 0.7 1.0 0.2
Oklahoma...... 5.0 1.8 5.0 2.0
Mississippi... 1.0 0.1 -- --
Wyoming....... -- -- 13.0 2.0
------ -------- --------- -------
Total 498.0 254.5 375.0 188.2
====== ======== ========= =======
- ---------
(1) Reflects the acquisition of New Cache as if it occurred at December 31,
1998.
Reserves Information
The crude oil and natural gas reserves of Abraxas have been estimated as of
December 31, 1998, by DeGolyer & MacNaughton, Dallas, Texas. The crude oil and
natural gas reserves of Canadian Abraxas have been estimated as of December 31,
1998, by McDaniel & Associates Consultants Ltd., Calgary, Alberta. The crude oil
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and natural gas reserves of New Cache have been estimated by the Company as of
December 31, 1998, and reviewed by McDaniel & Associates Consultants Ltd.,
Calgary, Alberta. Crude oil and natural gas reserves, and the estimates of the
present value of future net revenue therefrom, were determined based on then
current prices and costs. Reserve calculations involved the estimate of future
net recoverable reserves of crude oil and natural gas and the timing and amount
of future net revenue to be received therefrom. Such estimates are not precise
and are based on assumptions regarding a variety of factors, many of which are
variable and uncertain.
The following table sets forth certain information regarding estimates of
the Company's crude oil, NGLs and natural gas reserves as of December 31, 1996,
1997 and 1998, on a historical basis, as well as December 31, 1998, on a pro
forma basis:
<TABLE>
<CAPTION>
Estimated Proved Reserves
--------------------------------------------------------
Proved
Proved Developed Undeveloped Total Proved
<S> <C> <C> <C>
As of December 31, 1996(1)
Crude oil (MBbls)....................... 7,871 1,930 9,801
NGLs (MBbls)............................ 7,090 1,144 8,234
Natural gas (MMcf)...................... 157,660 19,600 177,260
As of December 31, 1997(1)
Crude oil (MBbls)....................... 7,075 1,873 8,948
NGLs (MBbls)............................ 7,178 1,651 8,829
Natural gas (MMcf)...................... 186,490 34,824 224,314
As of December 31, 1998(1)
Crude oil (MBbls)....................... 3,985 1,628 5,613
NGLs (MBbls)............................ 1,834 248 2,082
Natural gas (MMcf)...................... 144,588 52,890 197,478
Pro Forma (as of December 31, 1998)(1)(2)
Crude oil (MBbls)....................... 6,483 1,628 8,011
NGLs (MBbls)............................ 2,581 248 2,829
Natural gas (MMcf)...................... 201,669 52,890 254,559
</TABLE>
- ----------
(1) Includes the following amounts with respect to Grey Wolf: 120 MBbls of crude
oil in 1996; 129 MBbls of crude oil, 131 MBbls of NGLs and 7,446 MMcf of
natural gas in 1997; and 32 MBbls of crude oil, 444 MBbls of NGLs and 28,610
MMcf of natural gas in 1998.
(2) Reflects the acquisition of New Cache as if it occurred at December 31,
1998.
There are numerous uncertainties inherent in estimating quantities of proved
reserves and in projecting future rates of production and the timing of
development expenditures, including many factors beyond the control of the
Company. The reserve data included in this Offering Memorandum represent only
estimates. In addition, the estimates of future net revenue from proved reserves
of the Company and the present value thereof are based upon certain assumptions
about future production levels, prices, and costs that may not prove to be
correct over time. In particular, estimates of crude oil and natural gas
reserves, future net revenue from proved reserves and the PV-10 thereof for the
Company's crude oil and natural gas properties included in this Offering
Memorandum are based on the assumption that future oil and gas prices remain the
same as crude oil and natural gas prices at December 31, 1998, with respect to
the Company's then existing properties. The average sales prices as of December
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<PAGE>
31, 1998, used for purposes of such estimates were $9.95 per Bbl of crude oil,
$8.97 per Bbl of NGLs and $1.90 per Mcf of natural gas, on a historical basis,
and $10.22 per Bbl of crude oil, $8.84 per Bbl of NGLs and $1.81 per Mcf of
natural gas, on a pro forma basis. Any significant variance in these assumptions
could also materially affect the estimated quantity and value of reserves set
forth herein. See "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
In general, the volume of production from crude oil and natural gas
properties declines as reserves are depleted. Except to the extent the Company
acquires properties containing proved reserves or conducts successful
exploration and development activities, or both, the proved reserves of the
Company will decline as reserves are produced. The Company's future crude oil
and natural gas production is therefore highly dependent upon its level of
success in acquiring or finding additional reserves. The Company's ability to
acquire or find additional reserves in the near future will be severely
diminished by its lack of available funds for acquisition, exploration and
development projects. The Company has implemented a number of measures to
conserve its cash resources, including postponement of exploration and
development projects. However, while these measures will help conserve the
Company's cash resources in the near term, they will also limit the Company's
ability to replenish its depleting reserves, which could negatively impact the
Company's operating cash flow in the future. See "Risk Factors -- Depletion of
Reserves."
The Company files reports of its estimated crude oil and natural gas
reserves with the Department of Energy and the Bureau of the Census. The
reserves reported to these agencies are required to be reported on a gross
operated basis and therefore are not comparable to the reserve data reported
herein.
Crude Oil, NGLs and Natural Gas Production and Sales Prices
The following table presents the net crude oil, net NGLs and net natural gas
production for the Company, the average sales price per Bbl of crude oil and
NGLs and per Mcf of natural gas produced and the average LOE per Mcfe of
production sold, for the years ended December 31, 1996, 1997 and 1998:
Pro Forma
1996 1997 1998 1998(1)
---------- --------- --------- ---------
Production:(2)
Crude oil (MBbls) ...... 425.2 936.7 728.6 1,147.6
NGLs (MBbls) ........... 299.5 992.3 867.4 413.4
Natural gas (MMcf) ..... 6,350.1 21,050.0 24,929.9 28,761.3
MMcfe(3) ............... 10,698.3 32,624.0 34,505.9 38,127.3
Average Sales Price:(4)
Crude oil (per Bbl) ... $ 20.85 $ 18.63$ 13.65 $ 12.93
NGLs (per Bbl) ......... 14.55 10.75 6.81 6.81
Natural gas (per Mcf) .. 1.97 1.79 1.54 1.47
Per Mcfe ............... 2.40 2.02 1.57 1.54
LOE (per Mcfe) ........... $ 0.55 $ 0.46 $ 0.49 $ 0.55
- ----------
(1) Reflects the sale of the Wyoming Properties and the acquisition of New Cache
as if they occurred on January 1, 1998.
(2) Includes the following amounts with respect to Grey Wolf: 32 MBbls of crude
oil, 0 MBbls of NGLs, 35 MMcf of natural gas and 226 MMcfe in 1996; 18 MBbls
of crude oil, 8 MBbls of NGLs, 531 MMcf of natural gas and 686 MMcfe in
1997; and 21 MBbls of crude oil, 37 MBbls of NGLs, 3,262 MMcf of natural gas
and 3,605 MMcfe in 1998.
(3) Crude oil and natural gas were combined by converting crude oil and NGLs to
Mcfe on the basis of 6 Mcf natural gas to 1 Bbl of crude oil.
(4) Average sales prices include effects of hedging activities.
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<PAGE>
Drilling Activities
The following table sets forth the Company's gross and net working interests
in exploratory, development, and service wells drilled during the three years
ended December 31, 1996, 1997 and 1998:
1996 1997 1998
------------- ---------------- ---------------
Gross Net Gross Net Gross Net
Exploratory
Productive
Crude oil ........ 2.0 1.2 -- -- 1.0 1.0
Natural gas ...... 2.0 1.2 10.1 7.9 7.0 5.6
Dry holes ........ 4.0 1.4 2.0 1.8 9.0 7.3
---- ---- ---- ---- ---- ----
Total ....... 8.0 3.8 12.0 9.7 17.0 13.9
==== ==== ==== ==== ==== ====
Development
Productive
Crude oil ........ 20.0 15.8 25.0 22.3 3.0 2.4
Natural gas ...... 10.0 3.7 20.0 14.9 30.0 23.9
Service ............. -- -- -- -- 1.0 1.0
Dry holes ........... 1.0 1.0 3.0 2.0 3.0 2.2
---- ---- ---- ---- ---- ----
Total ....... 31.0 20.5 48.0 39.2 37.0 29.5
==== ==== ==== ==== ==== ====
Markets and Customers
The revenue generated by the Company's operations are highly dependent upon
the prices of, and demand for crude oil and natural gas. Historically, the
markets for crude oil and natural gas have been volatile and are likely to
continue to be volatile in the future. The prices received by the Company for
its crude oil and natural gas production and the level of such production are
subject to wide fluctuations and depend on numerous factors beyond the Company's
control including seasonality, the condition of the United States economy
(particularly the manufacturing sector), foreign imports, political conditions
in other oil-producing and natural gas-producing countries, the actions of the
Organization of Petroleum Exporting Countries and domestic regulation,
legislation and policies. Decreases in the prices of crude oil and natural gas
have had, and could have in the future, an adverse effect on the carrying value
of the Company's proved reserves and the Company's revenue, profitability and
cash flow from operations.
In order to manage its exposure to price risks in the marketing of its crude
oil and natural gas, the Company from time to time has entered into fixed price
delivery contracts, financial swaps and crude oil and natural gas futures
contracts as hedging devices. To ensure a fixed price for future production, the
Company may sell a futures contract and thereafter either (i) make physical
delivery of crude oil or natural gas to comply with such contract or (ii) buy a
matching futures contract to unwind its futures position and sell its production
to a customer. Such contracts may expose the Company to the risk of financial
loss in certain circumstances, including instances where production is less than
expected, the Company's customers fail to purchase or deliver the contracted
quantities of crude oil or natural gas, or a sudden, unexpected event materially
impacts crude oil or natural gas prices. Such contracts may also restrict the
ability of the Company to benefit from unexpected increases in crude oil and
natural gas prices. See "Management's Discussion and Analysis of Financial
Condition And Results of Operations -- Liquidity and Capital Resources."
Substantially all of the Company's crude oil and natural gas is sold at
current market prices under short term contracts, as is customary in the
industry. During the year ended December 31, 1998, four purchasers accounted for
approximately 58% of the Company's crude oil and natural gas sales. The Company
believes that there are numerous other companies available to purchase the
Company's crude oil and natural gas and that the loss of any or all of these
purchasers would not materially affect the Company's ability to sell crude oil
and natural gas.
64
<PAGE>
Competition
The Company encounters strong competition from major oil companies and
independent operators in acquiring properties and leases for the exploration
for, and production of, crude oil and natural gas. Competition is particularly
intense with respect to the acquisition of desirable undeveloped crude oil and
natural gas leases. The principal competitive factors in the acquisition of such
undeveloped crude oil and natural gas leases include the staff and data
necessary to identify, investigate and purchase such leases, and the financial
resources necessary to acquire and develop such leases. Many of the Company's
competitors have financial resources, staff and facilities substantially greater
than those of the Company. In addition, the producing, processing and marketing
of crude oil and natural gas is affected by a number of factors which are beyond
the control of the Company, the effect of which cannot be accurately predicted.
The principal resources necessary for the exploration and production of
crude oil and natural gas are leasehold prospects under which crude oil and
natural gas reserves may be discovered, drilling rigs and related equipment to
explore for such reserves and knowledgeable personnel to conduct all phases of
crude oil and natural gas operations. The Company must compete for such
resources with both major crude oil companies and independent operators.
Although the Company believes its current operating and financial resources are
adequate to preclude any significant disruption of its operations in the
immediate future, the continued availability of such materials and resources to
the Company cannot be assured.
The Company will face significant competition for obtaining additional
natural gas supplies for gathering and processing operations, for marketing
NGLs, residue gas, helium, condensate and sulfur, and for transporting natural
gas and liquids. The Company's principal competitors will include major
integrated oil companies and their marketing affiliates and national and local
gas gatherers, brokers, marketers and distributors of varying sizes, financial
resources and experience. Certain competitors, such as major crude oil and
natural gas companies, have capital resources and control supplies of natural
gas substantially greater than the Company. Smaller local distributors may enjoy
a marketing advantage in their immediate service areas.
The Company will compete against other companies in its natural gas
processing business both for supplies of natural gas and for customers to which
it will sell its products. Competition for natural gas supplies is based
primarily on location of natural gas gathering facilities and natural gas
gathering plants, operating efficiency and reliability and ability to obtain a
satisfactory price for products recovered. Competition for customers is based
primarily on price and delivery capabilities.
Regulatory Matters
The Company's operations are affected from time to time in varying degrees
by political developments and federal, state, provincial and local laws and
regulations. In particular, oil and gas production operations and economics are,
or in the past have been, affected by price controls, taxes, conservation,
safety, environmental, and other laws relating to the petroleum industry, by
changes in such laws and by constantly changing administrative regulations.
Price Regulations
In the recent past, maximum selling prices for certain categories of crude
oil, natural gas, condensate and NGLs in the United States were subject to
federal regulation. In 1981, all federal price controls over sales of crude oil,
condensate and NGLs were lifted. In 1993, the Congress deregulated natural gas
prices for all "first sales" of natural gas. As a result, all sales of the
Company's United States produced crude oil, natural gas, condensate and NGLs may
be sold at market prices, unless otherwise committed by contract.
65
<PAGE>
Crude oil and natural gas exported from Canada is subject to regulation by
the National Energy Board ("NEB") and the government of Canada. Exporters are
free to negotiate prices and other terms with purchasers, provided that export
contracts in excess of two years must continue to meet certain criteria
prescribed by the NEB and the government of Canada. Crude oil and natural gas
exports for a term of less than two years must be made pursuant to an NEB order,
or, in the case of exports for a longer duration, pursuant to an NEB license and
Governor in Council approval.
The provincial governments of Alberta, British Columbia and Saskatchewan
also regulate the volume of natural gas that may be removed from these provinces
for consumption elsewhere based on such factors as reserve availability,
transportation arrangements and marketing considerations.
The North American Free Trade Agreement
On January 1, 1994, the North American Free Trade Agreement ("NAFTA") among
the governments of the United States, Canada and Mexico became effective. In the
context of energy resources, Canada remains free to determine whether exports to
the U.S. or Mexico will be allowed provided that any export restrictions do not:
(i) reduce the proportion of energy resources exported relative to the total
supply of the energy resource (based upon the proportion prevailing in the most
recent 36 month period); (ii) impose an export price higher than the domestic
price; or (iii) disrupt normal channels of supply. All three countries are
prohibited from imposing minimum export or import price requirements.
NAFTA contemplates the reduction of Mexican restrictive trade practices in
the energy sector and prohibits discriminatory border restrictions and export
taxes. The agreement also contemplates clearer disciplines on regulators to
ensure fair implementation of any regulatory changes and to minimize disruption
of contractual arrangements, which is important for Canadian natural gas
exports.
United States Natural Gas Regulation
Historically, interstate pipeline companies in the United States generally
acted as wholesale merchants by purchasing natural gas from producers and
reselling the gas to local distribution companies and large end users.
Commencing in late 1985, the Federal Energy Regulatory Commission (the "FERC")
issued a series of orders that have had a major impact on interstate natural gas
pipeline operations, services, and rates, and thus have significantly altered
the marketing and price of natural gas. The FERC's key rule making action, Order
No. 636 ("Order 636"), issued in April 1992, required each interstate pipeline
to, among other things, "unbundle" its traditional bundled sales services and
create and make available on an open and nondiscriminatory basis numerous
constituent services (such as gathering services, storage services, firm and
interruptible transportation services, and standby sales and gas balancing
services), and to adopt a new ratemaking methodology to determine appropriate
rates for those services. To the extent the pipeline company or its sales
affiliate makes natural gas sales as a merchant, it does so pursuant to private
contracts in direct competition with all of the sellers, such as the Company;
however, pipeline companies and their affiliates were not required to remain
"merchants" of natural gas, and most of the interstate pipeline companies have
become "transporters only," although many have affiliated marketers. In
subsequent orders, the FERC largely affirmed the major features of Order 636. By
the end of 1994, the FERC had concluded the Order 636 restructuring proceedings,
and, in general, accepted rate filings implementing Order 636 on every major
interstate pipeline. The federal appellate courts have largely affirmed the
significant features of Order No. 636 and numerous related orders pertaining to
the individual pipelines. The Company does not believe that Order 636 and the
related restructuring proceedings affect it any differently than other natural
gas producers and marketers with which it competes.
In recent years the FERC also has pursued a number of other important policy
initiatives which could significantly affect the marketing of natural gas in the
United States. Some of the more notable of these regulatory initiatives include
(i) a series of orders in individual pipeline proceedings articulating a policy
of generally approving the voluntary divestiture of interstate pipeline owned
gathering facilities by interstate pipelines to their affiliates (the so-called
"spin down" of previously regulated gathering facilities to the pipeline's
nonregulated affiliates), (ii) the completion of rule-making involving the
regulation of pipelines with marketing affiliates under Order No. 497, (iii)
various FERC orders adopting rules proposed by the Gas Industry Standards Board
which are designed to further standardize pipeline transportation tariffs and
business practices, (iv) a notice of proposed rulemaking that, among other
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<PAGE>
things, proposes (aa) to eliminate the cost-based price cap currently imposed on
natural gas transactions of less than one year in duration, (bb) to establish
mandatory "transparent" capacity auctions of short-term capacity on a daily
basis, and (cc) to permit interstate pipelines to negotiate terms and conditions
of service with individual customers, (v) a notice of inquiry which continues
the FERC's review of its regulatory policies with respect to the pricing of
long-term pipeline transportation services by presenting a range of questions to
the industry dealing with current cost-based pricing of new and existing
capacity and alternative rate mechanism options, including the desirability of
pricing interstate pipeline capacity utilizing market-based rates, incentive
rates, or indexed rates, and (vi) a notice of proposed rulemaking that proposes
generic procedures to expedite the FERC's handling of complaints against
interstate pipelines with the goals of encouraging and supporting consensual
resolutions of complaints and organizing the complaint procedures so that all
complaints are handled in a timely and fair manner. Several of these initiatives
are intended to enhance competition in natural gas markets, although some, such
as "spin downs," may have the adverse effect of increasing the cost of doing
business on some in the industry, including the Company as a result of the
monopolization of those facilities by their new, unregulated owners. As to all
of these FERC initiatives, the ongoing, or, in some instances, preliminary and
evolving nature of these regulatory initiatives makes it impossible at this time
to predict their ultimate impact on the Company's business. However, the Company
does not believe that these FERC initiatives will affect it any differently than
other natural gas procedures and marketers with which it competes.
Since Order 636 FERC decisions involving onshore facilities have been more
liberal in their reliance upon traditional tests for determining what facilities
are "gathering" and therefore exempt from federal regulatory control. In many
instances, what was once classified as "transmission" may now be classified as
"gathering." The Company ships certain of its natural gas through gathering
facilities owned by others, including interstate pipelines, under existing long
term contractual arrangements. Although these FERC decisions have created the
potential for increasing the cost of shipping the Company's gas on third party
gathering facilities, the Company's shipping activities have not been materially
affected by these decisions.
Commencing in October 1993, the FERC issued a series of rules (Order Nos.
561 and 561-A) establishing an indexing system under which oil pipelines will be
able to change their transportation rates, subject to prescribed ceiling levels.
The indexing system, which allows or may require pipelines to make rate changes
to track changes in the Producer Price Index for Finished Goods, minus one
percent, became effective January 1, 1995. In certain circumstances, these rules
permit oil pipelines to establish rates using traditional cost of service or
other methods of rate making. The Company does not believe that these rules
affect it any differently than other crude oil producers and marketers with
which it competes.
Additional proposals and proceedings that might affect the natural gas
industry in the United States are considered from time to time by Congress, the
FERC, state regulatory bodies and the courts. The Company cannot predict when or
if any such proposals might become effective or their effect, if any, on the
Company's operations. The oil and gas industry historically has been very
heavily regulated; thus there is no assurance that the less stringent regulatory
approach recently pursued by the FERC and Congress will continue indefinitely
into the future.
State and Other Regulation
All of the jurisdictions in which the Company owns producing crude oil and
natural gas properties have statutory provisions regulating the exploration for
and production of crude oil and natural gas, including provisions requiring
permits for the drilling of wells and maintaining bonding requirements in order
to drill or operate wells and provisions relating to the location of wells, the
method of drilling and casing wells, the surface use and restoration of
properties upon which wells are drilled and the plugging and abandoning of
wells. The Company's operations are also subject to various conservation laws
and regulations. These include the regulation of the size of drilling and
spacing units or proration units and the density of wells which may be drilled
and the unitization or pooling of crude oil and natural gas properties. In this
regard, some states and provinces allow the forced pooling or integration of
tracts to facilitate exploration while other states and provinces rely on
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<PAGE>
voluntary pooling of lands and leases. In addition, state and provincial
conservation laws establish maximum rates of production from crude oil and
natural gas wells, generally prohibit the venting or flaring of natural gas and
impose certain requirements regarding the ratability of production. Some states,
such as Texas and Oklahoma, have, in recent years, reviewed and substantially
revised methods previously used to make monthly determinations of allowable
rates of production from fields and individual wells. The effect of these
regulations is to limit the amounts of crude oil and natural gas the Company can
produce from its wells, and to limit the number of wells or the location at
which the Company can drill.
State and provincial regulation of gathering facilities generally includes
various safety, environmental, and in some circumstances, non-discriminatory
take requirements, but does not generally entail rate regulation. In the United
States, natural gas gathering has received greater regulatory scrutiny at both
the state and federal levels in the wake of the interstate pipeline
restructuring under Order 636. For example, on August 19, 1997, the Texas
Railroad Commission enacted a Natural Gas Transportation Standards and Code of
Conduct to provide regulatory support for the State's more active review of
rates, services and practices associated with the gathering and transportation
of gas by an entity that provides such services to others for a fee, in order to
prohibit such entities from unduly discriminating in favor of their affiliates.
In the event the Company conducts operations on federal or Indian oil and
gas leases, such operations must comply with numerous regulatory restrictions,
including various non-discrimination statutes, and certain of such operations
must be conducted pursuant to certain on-site security regulations and other
permits issued by various federal agencies. In addition, in the United States,
the Minerals Management Service ("MMS") has recently issued a final rule to
clarify the types of costs that are deductible transportation costs for purposes
of royalty valuation of production sold off the lease. In particular, MMS will
not allow deduction of costs associated with marketer fees, cash out and other
pipeline imbalance penalties, or long-term storage fees. Further, the MMS has
been engaged in a three-year process of promulgating new rules and procedures
for determining the value of oil produced from federal lands for purposes of
calculating royalties owed to the government. The oil and gas industry as a
whole has resisted the proposed rules under an assumption that royalty burdens
will substantially increase. The Company cannot predict what, if any, effect any
new rule will have on its operations.
Canadian Royalty Matters
In addition to Canadian federal regulation, each province has legislation
and regulations that govern land tenure, royalties, production rates,
environmental protection and other matters. The royalty regime is a significant
factor in the profitability of crude oil and natural gas production. Royalties
payable on production from lands other than Crown lands are determined by
negotiations between the mineral owner and the lessee. Crown royalties are
determined by governmental regulation and are generally calculated as a
percentage of the value of the gross production, and the rate of royalties
payable generally depends in part on prescribed preference prices, well
productivity, geographical location, field discovery date and the type and
quality of the petroleum product produced.
From time to time the governments of Canada, Alberta and Saskatchewan have
established incentive programs which have included royalty rate reductions,
royalty holidays and tax credits for the purpose of encouraging crude oil and
natural gas exploration or enhanced planning projects.
Regulations made pursuant to the Mines and Minerals Act (Alberta) provide
various incentives for exploring and developing crude oil reserves in Alberta.
Crude oil produced from horizontal extensions commenced at least five years
after the well was originally spudded may qualify for a royalty reduction. A
24-month, 8,000 cubic metres exemption is available to production from a well
that has not produced for a 12-month period, if resuming production after
January 31, 1993. In addition, crude oil production from eligible new field and
new pool wildcat wells and deeper pool test wells spudded or deepened after
September 30, 1992, is entitled to a 12-month royalty exemption (to a maximum of
CDN$1 million). Crude oil produced from low productivity wells, enhanced
recovery schemes (such as injection wells) and experimental projects is also
subject to royalty reductions.
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<PAGE>
The Alberta government also introduced the Third Tier Royalty with a base
rate of 10% and a rate cap of 25% from oil pools discovered after September 30,
1992. The new oil royalty reserved to the Crown has a base rate of 10% and a
rate cap of 30% and for old oil a base rate of 10% and a rate cap of 35%.
Effective January 1, 1994, the calculation and payment of natural gas
royalties became subject to a simplified process. The royalty reserved to the
Crown, subject to various incentives, is between 15% or 30%, in the case of new
natural gas, and between 15% and 35%, in the case of old natural gas, depending
upon a prescribed or corporate average reference price. Natural gas produced
from qualifying exploratory gas wells spudded or deepened after July 1, 1985 and
before June 1, 1988 continues to be eligible for a royalty exemption for a
period of 12 months, or such later time that the value of the exempted royalty
quantity equals a prescribed maximum amount. Natural gas produced from
qualifying intervals in eligible natural gas wells spudded or deepened to a
depth below 2,500 meters is also subject to a royalty exemption, the amount of
which depends on the depth of the well.
In Alberta, a producer of crude oil or natural gas is entitled to credit
against the royalties payable to the Crown by virtue of the Alberta Royalty Tax
Credit ("ARTC") program. The ARTC program is based on a price-sensitive formula,
and the ARTC rate currently varies between 75% for prices for crude oil at or
below CDN $100 per cubic metre and 35% for prices above CDN $210 per cubic
metre. The ARTC rate is currently applied to a maximum of CDN $2.0 million of
Alberta Crown royalties payable for each producer or associated group of
producers. Crown royalties on production from producing properties acquired from
corporations claiming maximum entitlement to ARTC will generally not be eligible
for ARTC. The rate is established quarterly based on average "par price", as
determined by the Alberta Department of Energy for the previous quarterly
period. On December 22, 1997, the Government of Alberta gave notice that they
intended to review the ARTC program with expected changes to take effect prior
to 2001.
The Government of Saskatchewan's fiscal regime for the oil and gas industry
provides an incentive to encourage the drilling of new vertical oil wells
through a revised royalty/tax structure for new vertical oil wells and
incremental production from new or expanded water flood projects. This "third
tier" Crown royalty rate is price sensitive and varies between heavy and
non-heavy oil (from a minimum of 10% for heavy oil at a base price to a maximum
of 35% for non-heavy oil at a price above the base price). Previous time-based
royalty/tax holidays applicable to vertically drilled oil wells have been
replaced with volume-based royalty/tax reduction incentives in which a maximum
royalty of 5% will apply to various volumes depending on the depth and nature of
the well (up to 25,000 cubic meters of oil in the case of deep exploratory
wells). The maximum royalty applicable to the first 12,000 cubic meters of oil
has been increased from 5% to 10% for production from certain horizontal wells.
In addition, royalty/tax holidays for deep horizontal oil wells have been
replaced with a 25,000 cubic meters volume incentive (5% maximum royalty). Oil
production from qualifying reactivated oil wells are subject to a maximum new
royalty rate of 5% for the first 5 years following re-activation in the case of
wells reactivated after 1993 and shut-in or suspended prior to January 1, 1993.
With respect to qualifying exploratory natural gas wells, the first 25 million
cubic meters of natural gas produced will be subject to an incentive maximum
royalty rate of 5%. On February 9, 1998, the Government of Saskatchewan
announced further royalty incentive programs to encourage oil and gas
exploration.
Producers of oil and natural gas in British Columbia are also required to
pay annual rental payments in respect of Crown leases and royalties and freehold
production taxes in respect of oil and gas produced from Crown and freehold
lands respectively. The amount payable as a royalty in respect of oil depends on
the vintage of the oil (whether it was produced from a pool discovered before or
after October 31, 1975), the quantity of oil produced in a month and the value
of the oil. Oil produced from newly discovered pools may be exempt from the
payment of a royalty for the first 36 months of production. The royalty payable
on natural gas is determined by a sliding scale based on a reference price which
is the greater of the amount obtained by the producer and at prescribed minimum
price. Gas produced in association with oil has a minimum royalty of 8% while
the royalty in respect of other gas may not be less than 15%.
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<PAGE>
Crude oil and natural gas royalty holidays and reductions for specific wells
reduce the amount of Crown royalties paid to the provincial governments. The
ARTC program provides a rebate on Crown royalties paid in respect of eligible
producing properties.
Environmental Matters
The Company's operations are subject to numerous federal, state, provincial
and local laws and regulations controlling the generation, use, storage, and
discharge of materials into the environment or otherwise relating to the
protection of the environment. These laws and regulations may require the
acquisition of a permit or other authorization before construction or drilling
commences; restrict the types, quantities, and concentrations of various
substances that can be released into the environment in connection with
drilling, production, and gas processing activities; suspend, limit or prohibit
construction, drilling and other activities in certain lands lying within
wilderness, wetlands, and other protected areas; require remedial measures to
mitigate pollution from historical and on-going operations such as use of pits
and plugging of abandoned wells; restrict injection of liquids into subsurface
strata that may contaminate groundwater; and impose substantial liabilities for
pollution resulting from the Company's operations. Environmental permits
required for the Company's operations may be subject to revocation,
modification, and renewal by issuing authorities. Governmental authorities have
the power to enforce compliance with their regulations and permits, and
violations are subject to injunction, civil fines, and even criminal penalties.
Management of the Company believes that it is in substantial compliance with
current environmental laws and regulations, and that the Company will not be
required to make material capital expenditures to comply with existing laws.
Nevertheless, changes in existing environmental laws and regulations or
interpretations thereof could have a significant impact on the Company as well
as the oil and gas industry in general, and thus the Company is unable to
predict the ultimate cost and effects of future changes in environmental laws
and regulations.
In the United States, the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA"), also known as "Superfund," and comparable state
statutes impose strict, joint, and several liability on certain classes of
persons who are considered to have contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
a disposal site or sites where a release occurred and companies that generated,
disposed or arranged for the disposal of the hazardous substances released at
the site. Under CERCLA such persons or companies may be retroactively liable for
the costs of cleaning up the hazardous substances that have been released into
the environment and for damages to natural resources, and it is common for
neighboring land owners and other third parties to file claims for personal
injury, property damage, and recovery of response costs allegedly caused by the
hazardous substances released into the environment. The Resource Conservation
and Recovery Act ("RCRA") and comparable state statutes govern the disposal of
"solid waste" and "hazardous waste" and authorize imposition of substantial
civil and criminal penalties for failing to prevent surface and subsurface
pollution, as well as to control the generation, transportation, treatment,
storage and disposal of hazardous waste generated by oil and gas operations.
Although CERCLA currently contains a "petroleum exclusion" from the definition
of "hazardous substance," state laws affecting the Company's operations impose
cleanup liability relating to petroleum and petroleum related products,
including crude oil cleanups. In addition, although RCRA regulations currently
classify certain oilfield wastes which are uniquely associated with field
operations as "non-hazardous," such exploration, development and production
wastes could be reclassified by regulation as hazardous wastes thereby
administratively making such wastes subject to more stringent handling and
disposal requirements.
The Company currently owns or leases, and has in the past owned or leased,
numerous properties that for many years have been used for the exploration and
production of oil and gas. Although the Company utilized standard industry
operating and disposal practices at the time, hydrocarbons or other wastes may
have been disposed of or released on or under the properties owned or leased by
the Company or on or under other locations where such wastes have been taken for
disposal. In addition, many of these properties have been operated by third
parties whose treatment and disposal or release of hydrocarbons or other wastes
69
<PAGE>
was not under the Company's control. These properties and the wastes disposed
thereon may be subject to CERCLA, RCRA, and analogous state laws. The Company's
operations are also impacted by regulations governing the disposal of naturally
occurring radioactive materials ("NORM"). The Company must comply with the Clean
Air Act and comparable state statutes which prohibit the emissions of air
contaminants, although a majority of the Company's activities are exempted under
a standard exemption. Moreover, owners, lessees and operators of oil and gas
properties are also subject to increasing civil liability brought by surface
owners and adjoining property owners. Such claims are predicated on the damage
to or contamination of land resources occasioned by drilling and production
operations and the products derived therefrom, and are usually causes of action
based on negligence, trespass, nuisance, strict liability and fraud.
United States federal regulations also require certain owners and operators
of facilities that store or otherwise handle oil, such as the Company, to
prepare and implement spill prevention, control and countermeasure plans and
spill response plans relating to possible discharge of oil into surface waters.
The federal Oil Pollution Act ("OPA") contains numerous requirements relating to
prevention of, reporting of, and response to oil spills into waters of the
United States. For facilities that may affect state waters, OPA requires an
operator to demonstrate $10 million in financial responsibility. State laws
mandate crude oil cleanup programs with respect to contaminated soil.
The Company's Canadian operations are also subject to environmental
regulation pursuant to local, provincial and federal legislation which generally
require operations to be conducted in a safe and environmentally responsible
manner. Canadian environmental legislation provides for restrictions and
prohibitions relating to the discharge of air, soil and water pollutants and
other substances produced in association with certain crude oil and natural gas
industry operations, and environmental protection requirements, including
certain conditions of approval and laws relating to storage, handling,
transportation and disposal of materials or substances which may have an adverse
effect on the environment. Environmental legislation can affect the location of
wells and facilities and the extent to which exploration and development is
permitted. In addition, legislation requires that well and facilities sites be
abandoned and reclaimed to the satisfaction of provincial authorities. A breach
of such legislation may result in the imposition of fines or issuance of
clean-up orders.
Certain federal environmental laws that may affect the Company include the
Canadian Environmental Assessment Act which ensures that the environmental
effects of projects receive careful consideration prior to licenses or permits
being issued, to ensure that projects that are to be carried out in Canada or on
federal lands do not cause significant adverse environmental effects outside the
jurisdictions in which they are carried out, and to ensure that there is an
opportunity for public participation in the environmental assessment process;
the Canadian Environmental Protection Act ("CEPA") which is the most
comprehensive federal environmental statute in Canada, and which controls toxic
substances (broadly defined), includes standards relating to the discharge of
air, soil and water pollutants, provides for broad enforcement powers and
remedies and imposes significant penalties for violations; the National Energy
Board Act which can impose certain environmental protection conditions on
approvals issued under the Act; the Fisheries Act which prohibits the depositing
of a deleterious substance of any type in water frequented by fish or in any
place under any condition where such deleterious substance may enter any such
water and provides for significant penalties; the Navigable Waters Protection
Act which requires any work which is built in, on, over, under, through or
across any navigable water to be approved by the Minister of Transportation, and
which attracts severe penalties and remedies for non-compliance, including
removal of the work.
In Alberta, environmental compliance has been governed by the Alberta
Environmental Protection and Enhancement Act ("AEPEA") since September 1, 1993.
In addition to consolidating a variety of environmental statutes, the AEPEA also
imposes certain new environmental responsibilities on oil and natural gas
operators in Alberta. The AEPEA sets out environmental standards and compliance
for releases, clean-up and reporting. The Act provides for a broad range of
liabilities, enforcement actions and penalties.
70
<PAGE>
British Columbia's Environmental Assessment Act became effective June 30,
1995. This legislation rolls the previous processes for the review of major
energy projects into a single environmental assessment process which
contemplates public participation in the environmental review.
Saskatchewan's Environmental Management and Protection Act is the primary
environmental legislation for that province. This Act provides significant
enforcement and penalty provisions, and includes a compensation scheme
respecting losses or damage from spills. The Clean Air Act provides a permitting
scheme for certain industrial activities, broad enforcement provisions and
significant penalties for non-compliance. The Environmental Assessment Act
provides that certain development activities which can affect the environment
must undergo environmental assessment and approval from the provincial
government.
The Company is not currently involved in any administrative, judicial or
legal proceedings arising under domestic or foreign federal, state, or local
environmental protection laws and regulations, or under federal or state common
law, which would have a material adverse effect on the Company's financial
position or results of operations. Moreover, the Company maintains insurance
against costs of clean-up operations, but it is not fully insured against all
such risks. A serious incident of pollution may, as it has in the past, also
result in the suspension or cessation of operations in the affected area.
The Company has a Corporate Environmental Policy and a detailed
Environmental Management System in place to ensure continued compliance with
environmental, health and safety laws and regulations. The Company believes that
it has obtained and is in compliance with all material environmental permits,
authorizations and approvals.
Title to Properties
As is customary in the crude oil and natural gas industry, the Company makes
only a cursory review of title to undeveloped crude oil and natural gas leases
at the time they are acquired by the Company. However, before drilling
commences, the Company requires a thorough title search to be conducted, and any
material defects in title are remedied prior to the time actual drilling of a
well begins. To the extent title opinions or other investigations reflect title
defects, the Company, rather than the seller of the undeveloped property, is
typically obligated to cure any title defect at its expense. If the Company were
unable to remedy or cure any title defect of a nature such that it would not be
prudent to commence drilling operations on the property, the Company could
suffer a loss of its entire investment in the property. The Company believes
that it has good title to its crude oil and natural gas properties, some of
which are subject to immaterial encumbrances, easements and restrictions. The
crude oil and natural gas properties owned by the Company are also typically
subject to royalty and other similar non-cost bearing interests customary in the
industry. The Company does not believe that any of these encumbrances or burdens
will materially affect the Company's ownership or use of its properties.
Employees
As of March 1, 1999, Abraxas had 51 full-time employees, including three
executive officers, three non-executive officers, four petroleum engineers, one
geologist, one landman, five managers, 11 secretarial and clerical personnel and
23 field personnel. Additionally, Abraxas retains contract pumpers on a
month-to-month basis. The Company retains independent geological and engineering
consultants from time to time on a limited basis and expects to continue to do
so in the future.
As of March 1, 1999, Grey Wolf had 35 full-time employees, including three
executive officers, three non-executive officers, two managers, two petroleum
engineers, three geologists, one geophysicist, 17 secretarial and clerical
personnel and four field personnel.
71
<PAGE>
Office Facilities
The Company's executive and administrative offices are located at 500 North
Loop 1604 East, Suite 100, San Antonio, Texas 78232. The Company owns a 16%
limited partnership interest in the partnership which owns this office building.
The Company also has an office in Midland, Texas. These offices, consisting of
approximately 12,650 square feet in San Antonio and 960 square feet in Midland,
are leased until March 2005 at an aggregate rate of $18,000 per month.
New Cache leases 7,427 square feet of office space in Calgary, Alberta
pursuant to a lease which expires on July 1, 2001.
Grey Wolf leases 8,683 square feet of office space in Calgary, Alberta
pursuant to a lease which expires on December 31, 2001.
Other Properties
The Company owns 10 acres of land, an office building, workshop, warehouse
and house in Sinton, Texas, 160 acres of land in Coke County, Texas and a 50%
interest in approximately two acres of land in Bexar County, Texas. All three
properties are used for the storage of tubulars and production equipment. The
Company also owns 19 vehicles which are used in the field by employees.
Litigation
General. From time to time, the Company is involved in litigation relating
to claims arising out of its operations in the normal course of business. The
Company is not currently engaged in any legal proceedings that are expected,
individually or in the aggregate, to have a material adverse effect on the
Company.
Hornburg Litigation. In May 1995, certain plaintiffs filed a lawsuit against
the Company alleging negligence and gross negligence, tortious interference with
contract, conversion and waste. In March 1998, a jury found against the Company
and on May 22, 1998 final judgment in the amount of $1.3 million was entered.
The Company has filed an appeal. Management believes that the plaintiffs' claims
are without merit and that damages should not be recoverable under this action;
however, the ultimate effect on the Company's financial position and results of
operations cannot be determined at this time. The Company had not established a
reserve for this matter at December 31, 1998.
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<PAGE>
MANAGEMENT
Directors and Executive Officers
Set forth below are the names, ages, years of service and positions of the
executive officers and directors of Abraxas, as well as certain executive
officers of Grey Wolf, Canadian Abraxas and New Cache. The term of the Class I
directors of Abraxas expires in 2000, the term of the Class II directors expires
in 1999 and the term of the Class III directors expires in 2001.
Name Age Office Class
------------------ ----- ------------------------------------------
Robert L. G. Watson...... 48 Chairman of the Board, President III
and Chief Executive Officer of
Abraxas; Chairman of the Board
and director of Grey Wolf;
Chairman of the Board, President
and director of Canadian Abraxas;
Chairman of the Board and
director of New Cache
Chris E. Williford....... 48 Executive Vice President, Chief III
Financial Officer, Treasurer and
director of Abraxas; Vice
President and Assistant Secretary
of Canadian Abraxas; Assistant
Secretary of New Cache
Robert W. Carington, Jr.. 38 Executive Vice President of II
Abraxas and director of Abraxas
Franklin A. Burke........ 64 Director of Abraxas I
Harold D. Carter......... 59 Director of Abraxas I
Robert D. Gershen........ 45 Director of Abraxas I
Richard M. Kleberg, III.. 56 Director of Abraxas II
James C. Phelps.......... 76 Director of Abraxas III
Paul A. Powell, Jr....... 53 Director of Abraxas II
Richard M. Riggs......... 78 Director of Abraxas II
Roger L. Bruton.......... 66 Executive Vice President and --
director of Grey Wolf,
Canadian Abraxas and New Cache
Donald A. Engle.......... 55 President and director of Grey --
Wolf; Secretary and director
of Canadian Abraxas; President
and director of New Cache
S. Blair Patrick......... 50 Vice President of Canadian --
Abraxas, Grey Wolf and New
Cache
Robert L. G. Watson has served as Chairman of the Board, President, Chief
Executive Officer and a director of Abraxas since 1977. Since May 1996, Mr.
Watson has also served as Chairman of the Board and a director of Grey Wolf. In
November 1996, Mr. Watson was elected Chairman of the Board, President and as a
director of Canadian Abraxas. In January 1999, Mr. Watson was elected Chairman
of the Board and director of New Cache. Prior to joining Abraxas, Mr. Watson was
employed in various petroleum engineering positions with Tesoro Petroleum
Corporation, a crude oil and natural gas exploration and production company,
from 1972 through 1977, and DeGolyer & McNaughton, an independent petroleum
engineering firm, from 1970 to 1972. Mr. Watson received a Bachelor of Science
degree in Mechanical Engineering from Southern Methodist University in 1972 and
a Master of Business Administration degree from the University of Texas at San
Antonio in 1974.
Chris E. Williford was elected Vice President, Treasurer and Chief Financial
Officer of Abraxas in January 1993, and as Executive Vice President and a
director of Abraxas in May 1993. In November 1996, Mr. Williford was elected
Vice President and Assistant Secretary of Canadian Abraxas. In January 1999, Mr.
Williford was elected Assistant Secretary of New Cache. Prior to joining
Abraxas, Mr. Williford was Chief Financial Officer of American Natural Energy
Corporation, a crude oil and natural gas exploration and production company,
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<PAGE>
from July 1989 to December 1992 and President of Clark Resources Corp., a crude
oil and natural gas exploration and production company, from January 1987 to May
1989. Mr. Williford received a Bachelor of Science degree in Business
Administration from Pittsburgh State University in 1973.
Robert W. Carington, Jr. was elected Executive Vice President and a director
of Abraxas in July 1998. Prior to joining Abraxas, Mr. Carington was a Managing
Director with Jefferies & Company, Inc. Prior to joining Jefferies & Company,
Inc. in January 1993, Mr. Carington was a Vice President at Howard, Weil,
Labouisse, Friedrichs, Inc. Prior to joining Howard, Weil, Labouisse,
Friedrichs, Inc., Mr. Carington was a petroleum engineer with Unocal Corporation
from 1983 to 1990.
Franklin A. Burke, a director of Abraxas since June 1992, has served as
- -resident and Treasurer of Venture Securities Corporation since 1971, where he
is in charge of research and portfolio management. He has also been a general
partner and director of Burke, Lawton, Brewer & Burke, a securities brokerage
firm, since 1964, where he is responsible for research and portfolio management.
Mr. Burke also serves as a director of NB Instruments, Inc., an instrument
products company, Omega Institute, a job training entity, and Starkey Chemical
Process Co., a chemical processing company. Mr. Burke received a Bachelor of
Science degree in Finance from Kansas State University in 1955, a Master's
degree in Finance from University of Colorado in 1960 and studied at the
graduate level at the London School of Economics from 1962 to 1963.
Harold D. Carter has served as a director of Abraxas since May 1996. Mr.
Carter has more than 30 years experience in the oil and gas industry and has
been an independent consultant since 1990. Prior to consulting, Mr. Carter
served as Executive Vice President of Pacific Enterprises Oil Company (USA).
Before that, Mr. Carter was associated for 20 years with Sabine Corporation,
ultimately serving as President and Chief Operating Officer from 1986 to 1989.
Mr. Carter consults for Endowment Advisors, Inc. with respect to its EEP
Partnerships and Associated Energy Managers, Inc. with respect to its Energy
Income Fund, L.P. and is a director of Brigham Exploration Company. Mr. Carter
has a B.B.A. in Petroleum Land Management from the University of Texas and has
completed the Program for Management Development at the Harvard University
Business School.
Robert D. Gershen, a director of Abraxas since May 1995, has served as
President of Associated Energy Managers, Inc., an investment manager
specializing in structuring and managing private investments in the energy
industry, since July 1989. Mr. Gershen has served as an investment advisor to
Endowment Energy Partners, L.P. and Endowment Energy Partners II, Limited
Partnership, limited partnerships formed to make loans to companies in the crude
oil and natural gas business, since October 1989 and January 1993, respectively.
Richard M. Kleberg, III, a director of Abraxas since December 1983, has held
the position of President of SFD Enterprises, LLC, a private investment company,
since 1980. Mr. Kleberg has served on the boards of directors of Cullen Frost
Bankers, Inc., a bank holding company, since 1992; 1776 Restaurants, Inc., a
restaurant concern, since 1983; The Frost National Bank of San Antonio, a
national banking association, since 1984; and Kleberg & Co. Bankers, Inc., a
bank holding company, since 1980. Mr. Kleberg holds a Bachelor of Science degree
in Political Science from Trinity University.
James C. Phelps, a director of Abraxas since December 1983, has been a
consultant to crude oil and natural gas exploration and production companies
such as Panhandle Producing Company and Tesoro Petroleum Corporation since April
1981. Mr. Phelps has served as a director of Grey Wolf since January 1996. From
April 1995 to May 1996, Mr. Phelps served as Chairman of the Board and Chief
Executive Officer of Grey Wolf, and from January 1996 to May 1996, he served as
President of Grey Wolf. From March 1983 to September 1984, he served as
President of Osborn Heirs Company, a privately owned crude oil exploration and
production company based in San Antonio. Mr. Phelps was President and Chief
Operating Officer of Tesoro Petroleum Corporation from 1971 to 1981 and prior to
74
<PAGE>
that was Senior Vice President and Assistant to the President of Continental Oil
Company. He received a Bachelor of Science degree in Industrial Engineering and
a Master of Science degree in Industrial Engineering from Oklahoma State
University.
Paul A. Powell, Jr., a director of Abraxas since 1987, is currently Trustee
of the Paul A. Powell Trust and has served as Vice President and Director of
Mechanical Development Co., Inc., a tool and die and production machine company,
since 1984. He also serves as trustee of sixteen investment trusts. Mr. Powell
is a director and officer of Frameco, Inc., a tool and die and production
machine company, Somerset Investments, Ltd., an investment company, and Powell
Lake Properties, a real estate investment and management company. He attended
Emory and Henry College and graduated from National Business College with a
degree in Accounting.
Richard M. Riggs, a director of Abraxas since 1985, is a self-employed
geological consultant. He served as Vice President of Petro Consultants Energy
Corporation, a crude oil and natural gas exploration and production company,
from June 1978 to December 1984. Mr. Riggs has served as a director of Grey Wolf
since May 1996. He has previously been employed by Tesoro Petroleum Corporation,
a crude oil and natural gas exploration and production company, as Exploration
Vice President for North America, and prior to that time was Manager of Domestic
Exploration for Ashland Oil, Inc., a crude oil and natural gas exploration and
production company. Mr. Riggs graduated with a Bachelors degree in Geology from
Dartmouth College and a Masters degree in Geology from Columbia University.
Roger L. Bruton is currently Executive Vice President and a director of Grey
Wolf. From January 1996 to October 1996, he served as President of Grey Wolf. In
November 1996, Mr. Bruton was elected Vice President of Canadian Abraxas and in
December 1996 was elected as a director of Canadian Abraxas. In January 1999,
Mr. Bruton was elected Vice President and director of New Cache. Prior to
joining Grey Wolf, Mr. Bruton served as a geologist with Panhandle Eastern
Pipeline Company from 1958 to 1963. From 1976 to 1977 he served as Regional
Exploration Manager for Anadarko Production Company. He also served as
Exploration Manager for the western United States and Canada for General Crude
Oil Company from 1977 to 1979. From 1984 to 1990, Mr. Bruton served as President
of Western Oil Corporation and Plains Petroleum Corporation, both of which are
subsidiaries of KN Energy. Mr. Bruton was Regional General Manager of Anadarko
Petroleum of Canada Ltd. from 1972 to 1976. Mr. Bruton received a Bachelors of
Science degree in Geology and a Masters of Science degree in Geology from Kansas
State University.
Donald A. Engle is currently President and a director of Grey Wolf. From
January 1996 to October 1996, he served as Vice President of Grey Wolf. In
November 1996, Mr. Engle was elected Secretary and as a director of Canadian
Abraxas. In January 1999, Mr. Engle was elected President and director of New
Cache. From 1985 to 1995, he was President of Sapphire Resources, Ltd. Prior to
that, Mr. Engle served as President of Neomar Resources Limited from 1980 to
1985 and as General Manager of Anadarko Petroleum of Canada Limited from 1976 to
1979. Mr. Engle received a Bachelor of Commerce degree from the University of
Saskatchewan.
S. Blair Patrick has served as Vice President of Finance of Grey Wolf and
Canadian Abraxas since 1997. In January 1999, Mr. Patrick was elected Vice
President of Finance of New Cache. Prior to joining the Company, Mr. Patrick
served as an independent consultant from 1995 through 1997, as Vice President of
Finance of TVI Pacific Inc. from 1994 through 1995 and as Vice President of
Finance of Hillcrest Resources Limited from 1990 through 1994. Mr. Patrick
graduated from McGill University with a Bachelor of Commerce degree and obtained
his Chartered Accountant designation in 1975. Mr. Patrick is a member of the
Canadian Institute of Chartered Accountants and the Institute of Chartered
Accountants of Alberta.
75
<PAGE>
EXECUTIVE COMPENSATION
Compensation Summary
The following table sets forth a summary of compensation for the fiscal
years ended December 31, 1996, 1997 and 1998 paid by the Company to Robert L.G.
Watson, the Chairman of the Board, President and Chief Executive Officer of the
Company, Chris E. Williford, the Executive Vice President, Chief Financial
Officer and Treasurer of the Company, and Stephen T. Wendel, the Company's Vice
President-Land and Marketing, Robert E. Patterson, the Company's former Vice
President of Operations and to Robert W. Carington, Jr., the Company's Executive
Vice President for the fiscal year ended December 31, 1998. Abraxas did not have
any executive officers other than Messrs. Watson, Williford, Patterson and
Wendel whose total annual salary and bonus exceeded $100,000 for the years ended
December 31, 1996 and 1997, and Messrs. Watson, Williford, Patterson and Wendel
for the year ended December 31, 1998.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Compensation
------------------
Annual Compensation Awards
------------------------------------------------- ------------------
Options
Name and Principal /SARs
Position Year Salary ($) Bonus ($) (#)
------------------------------ -------- -------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Robert L. G. Watson, 1996 $ 133,187 (1) $ 135,550 (2) 140,000
Chairman of the Board and 1997 $ 211,154 $ 39,373 (3) 100,000
President 1998 $ 253,367 -- 140,000
Chris E. Williford, 1996 $ 121,315 $ 72,000 (3) 40,000
Executive Vice President, 1997 $ 148,269 $ 26,250 (3) 40,000
Chief Financial Officer 1998 $ 155,770 $ -- 35,000
and Treasurer
Robert W. Carington, Jr., 1998 $ 103,846 -- 320,000
Executive Vice President
Robert E. Patterson, 1996 $ 124,615 $ 35,000 (3) 60,000
Vice President of Operations 1997 $ 148,269 $ 9,375 (3) 50,000
(4) 1998 $ 155,770 $ -- 30,000
-
Stephen T. Wendel, 1996 $ 76,577 $ 40,000 (3) 18,660
Vice President - Land and 1997 $ 106,731 $ 13,750 (3) 25,000
Marketing 1998 $ 114,231 $ -- 20,000
-----------------------------------------------------------------------------------------------
</TABLE>
(1) Includes $1,093 of stock awards and $107,188 of salary.
(2) Includes $95,000 in cash and $40,550 of stock awards.
(3) One-half paid in cash and one-half in stock awards.
(4) Mr. Patterson left the Company in March 1999.
76
<PAGE>
Grants of Stock Options and Stock Appreciation Rights During the Fiscal Year
Ended December 31, 1998
Pursuant to the Abraxas Petroleum Corporation 1984 Incentive Stock Option
Plan (the "ISO Plan"), the Abraxas Petroleum Corporation 1993 Key Contributor
Stock Option Plan (the "1993 Plan") and the Abraxas Petroleum Corporation 1994
Long Term Incentive Plan (the "LTIP"), the Company grants to employees and
officers of the Company (including directors of the Company who are also
employees) incentive stock options and non-qualified stock options. The ISO
Plan, the 1993 Plan and the LTIP are administered by the Compensation Committee
which, based upon the recommendation of the Chief Executive Officer, determines
the number of shares subject to each option.
The table below contains certain information concerning stock options
granted to Messrs. Watson, Williford, Carington, Patterson and Wendel during
1998:
<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL YEAR
- --------------------------------------------------------------------------------------------------------
% of Total Potential Realizable Value
Options Exercise at Assumed Annual Rates of
Options Granted to Price Per Expiration Stock Price Appreciation
Name Granted Employees Share Date for Option Term
================ ============== ============= ============== ============= ============== ==============
5% 10%
<S> <C> <C> <C> <C> <C> <C> <C>
Robert L. G. 100,000 (1) 15.1 14.38 1/08 $904,000 $2,292,000
Watson 40,000 (1) 6.0 5.56 11/08 140,000 354,400
Chris E. 15,000(1) 2.3 14.38 1/08 135,600 343,800
Williford 20,000(1) 3.0 5.56 11/08 70,000 177,200
Robert W. 300,000(1) 45.2 8.75 5/08 1,650,000 4,185,000
Carington, Jr. 20,000(1) 3.0 5.56 11/08 70,000 177,200
Robert E. 10,000(1)(2) 1.5 14.38 1/08 90,400 229,200
Patterson 10,000(1)(2) 1.5 5.56 11/08 35,000 88,600
Stephen T. 15,000 2.3 14.38 1/08 135,600 343,800
Wendel 15,000 2.3 5.56 11/08 52,500 132,900
- --------------
</TABLE>
(1) One-fourth of the options become exercisable on each of the first four
anniversaries of the date of grant. (2) Mr. Patterson left the Company in March
1999 before any of the options became exercisable.
77
<PAGE>
The table below contains certain information concerning exercises of stock
options during the fiscal year ended December 31, 1998 by Messrs. Watson,
Williford, Carington, Patterson and Wendel and the fiscal year end value of
unexercised options held by Messrs. Watson, Williford, Carington, Patterson and
Wendel.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Fiscal 1998
and Fiscal Year End Option Values
Value of
Number of Unexercised
Unexercised Options in-the-Money
on December 31,1998 Options on
(#) December 31,
Exercisable/ 1998 ($)
Shares Acquired By Unexercisable Exercisable/
Name Exercise (#) Value Realized ($) Unexercisable
---- ------------ -------------- --------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert L. G. Watson 0 0 165,000/275,000 0 / 0
Chris E. Williford 0 0 68,750/86,250 0 / 0
Robert W. Carington, Jr. 0 0 0 /320,000 0 / 0
Robert E. Patterson (1) 0 0 44,420/50,580 0 / 0
Stephen T. Wendel 0 0 56,250/83750 0 / 0
- ----------------
</TABLE>
(1) Mr. Patterson left the Company in March 1999.
Long Term Incentive Plan Awards During the Fiscal Year Ended December 31, 1998
The Company did not make any awards to any of Messrs. Watson, Williford,
Carington, Patterson and Wendel under a long term incentive plan during the
fiscal year ended December 31, 1998.
Employment Agreements
The Company has entered into Employment Agreements (the "Employment
Agreements") with each of Messrs. Watson, Williford, Carington and Wendel as
well as with Jack M. Roney, Abraxas' Vice President-Corporate Development, and
Lee T. Billingsley, Abraxas' Vice President of Exploration, pursuant to which
each of Messrs. Watson, Williford, Carington, Wendel and Roney and Dr.
Billingsley will receive compensation as determined from time to time by the
Board in its sole discretion. The Employment Agreements, originally scheduled to
terminate on December 31, 1998, were automatically extended for one year and
will terminate on December 31, 1999, and may be automatically extended for an
additional year if by December 1 of the prior year neither the Company nor
Messrs. Watson, Williford, Carington, Wendel and Roney or Dr. Billingsley, as
the case may be, has given notice that he or it, as the case may be, does not
wish to extend the term. Except in the event of a change in control, at all
times during the term of the Employment Agreements, each of Messrs. Watson's,
Williford's, Carington's, Wendel's and Roney's and Dr. Billingsley's employment
is at will and may be terminated by the Company for any reason without notice or
cause. If a change in control occurs during the term of the Employment Agreement
or any extension thereof, the expiration date of Mr. Watson's Employment
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Agreement is automatically extended to a date no earlier than five years
following the effective date of such change in control, the expiration date of
each of Messrs. Williford's and Carington's Employment Agreement is
automatically extended to a date no earlier than four years following the
effective date of such change in control and the expiration date of each of
Messrs. Wendel's, Roney's and Dr. Billingsley's Employment Agreement is
automatically extended to a date no earlier than three years following the
effective date of such change in control. If, following a change in control,
Messrs. Watson's, Williford's, Carington's, Wendel's or Roney's or Dr.
Billingsley's employment is terminated other than for Cause (as defined in each
of the Employment Agreements) or Disability (as defined in each of the
Employment Agreements), by reason of Messrs. Watson's, Williford's, Carington's,
Wendel's or Roney's or Dr. Billingsley's death or retirement or by Messrs.
Watson, Williford, Carington, Wendel or Roney or Dr. Billingsley, as the case
may be, other than for Good Reason (as defined in each of the Employment
Agreements), then Mr. Watson will be entitled to receive a lump sum payment
equal to five times his annual base salary, Messrs. Williford and Carington will
be entitled to receive a lump sum payment equal to four times his annual base
salary and Messrs. Wendel and Roney and Dr. Billingsley will each be entitled to
receive a lump sum payment equal to three times his annual base salary. If any
such lump sum payment would individually or together with any other amounts paid
or payable constitute an "excess parachute payment" within the meaning of
Section 280G of the Internal Revenue Code of 1986, as amended ("Section 280G"),
and applicable regulations thereunder (the "Code"), the amounts to be paid will
be increased so that Messrs. Watson, Williford, Carington, Wendel or Roney or
Dr. Billingsley, as the case may be, will be entitled to receive the amount of
compensation provided in his contract after payment of the tax imposed by
Section 280G.
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CERTAIN TRANSACTIONS
Wind River Resources Corporation ("Wind River"), all of the capital stock of
which is owned by Mr. Watson, owns a twin-engine airplane. The airplane is
available for business use by employees of the Company from time to time at Wind
River's cost. The Company paid Wind River a total of $302,289 for use of the
plane during 1998.
Grey Wolf owns a 10% interest in certain producing properties owned by
Canadian Abraxas and in Canadian Abraxas' natural gas processing plants and
manages the operations of Canadian Abraxas pursuant to a management agreement
between Canadian Abraxas and Grey Wolf. Under the management agreement, Canadian
Abraxas reimburses Grey Wolf for reasonable costs or expenses attributable to
Canadian Abraxas and for administrative expenses based upon the percentage that
Canadian Abraxas' gross revenue bears to the total gross revenue of Canadian
Abraxas and Grey Wolf. In 1998, Canadian Abraxas paid CDN $1,485.155 to Grey
Wolf pursuant to the management agreement.
Abraxas has adopted a policy that transactions, including loans, between
Abraxas and its officers, directors, principal stockholders, or affiliates of
any of them, will be on terms no less favorable to Abraxas than can be obtained
on an arm's length basis in transactions with third parties and must be approved
by the vote of at least a majority of the disinterested directors.
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PRINCIPAL STOCKHOLDERS
Based upon information received from the persons concerned, each person
known to the Company to be the beneficial owner of more than five percent of the
outstanding shares of Common Stock of the Company, each director and nominee for
director, each of the named executive officers and all directors and officers of
the Company as a group, owned beneficially as of March 31, 1999 the number and
percentage of outstanding shares of Common Stock of the Company indicated in the
following table:
Name and Address of
Beneficial Owner Number of Shares (1) Percentage
- -------------------------------- ------------------------ -------------
Robert L. G. Watson 549,967 (2) 7.95
Endowment Advisors, Inc. 534,739 (3) 12.49
450 Post Road East
Westport, CT 06881
Wellington Management Company 610,000 (4) 8.82
75 State Street
19th Floor
Boston, MA 02109
Dimensional Fund Advisors, Inc. 397,700 (5) 5.75
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
Franklin A. Burke 297,772 (6) 4.30
Paul A. Powell, Jr. 68,583 (7) *
James C. Phelps 61,586 (8) *
Richard M. Kleberg, III 36,884 (9) *
Robert D. Gershen 29,744 (10) *
Chris E. Williford 89,859 (11) *
Richard M. Riggs 20,117 (12) *
Harold D. Carter 18,258 (13) *
Stephen T. Wendel 61,249 (14) *
Jack M. Roney 23,975 (15)
Lee T. Billingsley 39,300 (16)
All Officers and Directors as a 1,297,294 (2)(7)(8) 18.18
Group (12 persons) (9)(10)(11)(12)
(13)(14)(15)(16)
- ---------
* Less than 1%
(1) Unless otherwise indicated, all shares are held directly with sole voting
and investment power.
(2) Includes 20,316 shares owned by Wind River Resources Corporation, a
corporation owned by Mr. Watson, as to which Mr. Watson has sole voting and
investment power, 30,459 shares issuable upon exercise of options granted
pursuant to Abraxas Petroleum Corporation 1993 Key Contributor Stock Option
Plan and 174,541 shares issuable upon exercise of options granted pursuant
to the Abraxas Petroleum Corporation 1994 Long Term Incentive Plan. Does not
include a total of 75,880 shares owned by the Robert L. G. Watson, Jr. Trust
and the Carey B. Watson Trust, the trustees of which are Mr. Watson's
brothers and the beneficiaries of which are Mr. Watson's children. Mr.
Watson disclaims beneficial ownership of the shares owned by these trusts.
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(3) Includes 643,585 shares of Common Stock owned by Endowment Energy Partners,
L.P. ("EEP") and 220,205 shares of Common Stock owned by Endowment Energy
Partners II, Limited Partnership ("EEP II"). EEP and EEP II are limited
partnerships whose investors are educational institutions and which were
formed to make loans to companies in the crude oil and natural gas business.
The general partner of both EEP and EEP II is Fairfield Partners, Inc.
(Del.) ("Fairfield") which is a wholly-owned subsidiary of Endowment
Advisers, Inc. ("EAI"), a Delaware nonstock corporation controlled by its
trustees and management. Voting and investment power over the shares held by
EEP and EEP II is exercised by the Board of Trustees of EAI, and by Susan J.
Carter, the Senior Vice President and Chief Operating Officer of both EAI
and Fairfield. The trustees of EAI are principally individuals who are
financial officers of educational institutions that have invested in
investment partnerships sponsored by EAI, including EEP and EEP II.
(4) Wellington Management Company is an investment manager which has the power
to make investment decisions for unrelated clients.
(5) Persons who are officers of Dimensional Fund Advisors Inc. also serve as
officers of DFA Investment Dimensions Group, Inc. (the "Fund") and The DFA
Investment Trust Company (the "Trust"), each an open-end management
investment company registered under the Investment Company Act of 1940. In
their capacities as officers of the Fund and the Trust, these persons vote
50,000 shares which are owned by the Fund and 57,200 shares which are owned
by the Trust.
(6) Includes 8,900 shares issuable upon exercise of options granted pursuant to
the Abraxas Petroleum Corporation 1984 Non-Qualified Stock Option Plan and
4,500 shares issuable upon exercise of options granted pursuant to the
Amended and Restated Director Stock Option Plan (the "Director Option
Plan").
(7) Includes 4,228 shares owned by Mechanical Development Co., Inc., all of the
outstanding capital stock of which is owned by members of Mr. Powell's
family, 18,470 shares owned by the Paul A. Powell Trust of which Mr. Powell
is a trustee and his family members are the primary beneficiaries, 51 shares
owned by the Paul A. Powell Individual Trust of which Mr. Powell is a
trustee, and 63 shares owned by NAD Properties of which Mr. Powell is a
general partner. Mr. Powell shares voting and investment power as to all of
such shares. Also includes 4,500 shares issuable upon exercise of options
granted pursuant to the Director Option Plan.
(8) Includes 56,000 shares owned by Marie Phelps, Mr. Phelps' wife and 4,500
shares issuable upon exercise of options granted pursuant to the Director
Option Plan.
(9) Includes 16,688 shares owned by SFD Enterprises, LLC, a private investment
company, and 4,500 shares issuable upon exercise of options granted pursuant
to the Director Option Plan. Mr. Kleberg shares voting and investment power
as to the shares owned by SFD Enterprises.
(10) Includes warrants to purchase 13,500 shares of Common Stock at a price of
$7.00 per share owned by Associated Energy Managers, Inc., the principal
shareholder and Chief Executive Officer of which is Mr. Gershen, and 4,500
shares issuable upon exercise of options granted pursuant to the Director
Option Plan.
(11) Includes 1,786 shares issuable upon exercise of options granted pursuant to
the Abraxas Petroleum Corporation 1984 Incentive Stock Option Plan, 18,214
shares issuable upon exercise of options granted pursuant to the Abraxas
Petroleum Corporation 1993 Key Contributor Stock Option Plan and 63,750
shares issuable upon exercise of options granted pursuant to the Abraxas
Petroleum Corporation 1994 Long Term Incentive Plan.
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(12) Includes 700 shares owned by the Riggs Family Trust of which Mr. Riggs is
one of the trustees, 1,000 shares owned jointly by Mr. Riggs and his wife
and 4,500 shares issuable upon exercise of options granted pursuant to the
Director Option Plan.
(13) Includes 4,500 shares issuable upon exercise of options granted pursuant to
the Director Option Plan.
(14) Includes 1,340 shares issuable upon exercise of options granted pursuant to
the Abraxas Petroleum Corporation 1984 Incentive Stock Option Plan, 10,000
shares issuable upon exercise of options granted pursuant to the Abraxas
Petroleum Corporation 1993 Key Contributor Stock Option Plan and 47,898
shares issuable upon exercise of options granted pursuant to the Abraxas
Petroleum Corporation 1994 Long Term Incentive Plan.
(15) Includes 10,000 shares issuable upon exercise of options granted pursuant
to the Abraxas Petroleum Corporation 1993 Key Contributor Stock Option Plan
and 13,500 shares issuable upon exercise of options granted pursuant to the
Abraxas Petroleum Corporation 1994 Long Term Incentive Plan.
(16) Includes 1,000 shares in retirement account.
DESCRIPTION OF THE EXCHANGE NOTES
You can find definitions of certain terms used in this description under the
subheading "Certain Definitions." In this description, the word "Issuer" refers
to Abraxas Petroleum Corporation and not to any of its subsidiaries.
The Issuer issued the Outstanding Notes and will issue the Exchange Notes
pursuant to an indenture (the "Indenture") by and among the Issuer, the
Subsidiary Guarantors and Norwest Bank Minnesota, National Association, as
Trustee (the "Trustee"). The Indenture is governed by certain provisions
contained in the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"). The terms of the Outstanding Notes and the Exchange Notes include those
stated in the Indenture and those made part of the Indenture by reference to the
Trust Indenture Act.
The following description is a summary of the material provisions of the
Exchange Notes, the Indenture and the Security Documents. It does not restate
those agreements in their entirety. We urge you to read the Indenture and the
Security Documents because they, not this description, define your rights as
holders of the Exchange Notes. A copy of the form of Indenture and the Security
Documents may be obtained from the Issuer or the Initial Purchaser.
Brief Description of the Exchange Notes and the Guarantees
The Exchange Notes
The Exchange Notes:
o will be general obligations of the Issuer;
o will be secured by a first lien and a first fixed or floating charge on
substantially all of the Oil and Gas Assets of the Issuer and its Wholly
Owned Restricted Subsidiaries and the common stock of Grey Wolf owned by
the Issuer;
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o will rank equally with all of the Issuer's current and future senior
Indebtedness;
o will rank senior to all of the Issuer's future Subordinated Indebtedness;
and
o will be unconditionally guaranteed by the Subsidiary Guarantors.
The Guarantees
The Issuer's payment obligations under the Exchange Notes will be jointly
and severally guaranteed (the "Guarantees") by the Issuer's Wholly Owned
Restricted Subsidiaries, Sandia, Canadian Abraxas and New Cache and certain
future subsidiaries of the Issuer (the "Subsidiary Guarantors"). Each Subsidiary
Guarantor will unconditionally guarantee, on a senior basis, jointly and
severally, to each Holder and the Trustee, the full and prompt performance of
the Issuer's obligations under the Indenture and the Exchange Notes, including
the payment of principal of and interest on the Exchange Notes. Substantially
all of the Oil and Gas Assets of the Subsidiary Guarantors will be pledged to
secure the obligations under the Guarantees. All Guarantees will rank equally
with all of the Subsidiary Guarantors' current and future senior Indebtedness,
and senior to all of the Subsidiary Guarantors' future Subordinated
Indebtedness. The obligations of each Subsidiary Guarantor in the United States
will be limited to the maximum amount which, after giving effect to all other
contingent and fixed liabilities of such Subsidiary Guarantor and after giving
effect to any collections from or payments made by or on behalf of any other
Subsidiary Guarantor in respect of the obligations of such other Subsidiary
Guarantor under its Guarantee or pursuant to its contribution obligations under
the Indenture, will result in the obligations of such Subsidiary Guarantor under
its Guarantee not constituting a fraudulent conveyance or fraudulent transfer
under Federal or state law. Each Subsidiary Guarantor that makes a payment or
distribution under its Guarantee shall be entitled to a contribution from each
other Subsidiary Guarantor in an amount pro rata, based on the net assets of
each Subsidiary Guarantor, determined in accordance with GAAP.
Each Subsidiary Guarantor may consolidate with or merge into or sell its
assets to the Issuer or another Subsidiary Guarantor that is a Wholly Owned
Restricted Subsidiary without limitation, or with or to other Persons upon the
terms and conditions set forth in the Indenture. See "-- Certain Covenants --
Merger, Consolidation and Sale of Assets." In the event all of the Capital Stock
of a Subsidiary Guarantor is sold by the Issuer and/or one or more of its
Restricted Subsidiaries and the sale complies with the provisions set forth in
"-- Certain Covenants -- Limitation on Asset Sales," such Subsidiary Guarantor's
Guarantee and any related Collateral will be released.
Principal, Maturity and Interest
The Indenture will provide for the issuance of up to $63.5 million of
Exchange Notes thereunder. The Notes will be issued in full registered form
only, without coupons, in denominations of $1,000 and integral multiples of
$1,000. The Exchange Notes will mature on March 15, 2003.
Interest on the Exchange Notes will accrue at the rate of 12 7/8% per annum
and will be payable semi-annually on each March 15 and September 15, commencing
on September 15, 1999, to the Persons who are registered Holders at the close of
business on the March 1 and September 1 immediately preceding the applicable
interest payment date. Interest shall accrue and be payable both before and
after the filing of any bankruptcy petition at the rate of 12 7/8% per annum.
Interest on the Exchange Notes will accrue from and including the most
recent date to which interest has been paid or, if no interest has been paid,
from and including the Issue Date. Interest will be computed on the basis of a
360-day year comprised of twelve 30-day months.
Additional Amounts
All payments made by any Subsidiary Guarantor under or with respect to the
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Exchange Notes or its Subsidiary Guarantee will be made free and clear of, and
without withholding or deduction for or on account of, any present or future
tax, duty, levy, impost, assessment or other governmental charge imposed or
levied by or on behalf of the Government of Canada or of any province or
territory thereof or by any authority or agency therein or thereof having power
to tax (or the jurisdiction of incorporation of any successor of any Subsidiary
Guarantor) (hereunder "Taxes"), unless the applicable Subsidiary Guarantor or
any successor, as the case may be, is required to withhold or deduct Taxes by
law or by the interpretation or administration thereof by the relevant
governmental authority or agency. If any Subsidiary Guarantor or any successor,
as the case may be, is so required to withhold or deduct any amount for or on
account of Taxes from any payment made under or with respect to the Exchange
Notes or any Subsidiary Guarantee, such Subsidiary Guarantor will pay such
additional amounts ("Additional Amounts") as may be necessary so that the net
amount received by each Holder (including Additional Amounts) after such
withholding or deduction will not be less than the amount the Holder would have
received if such Taxes had not been withheld or deducted; provided that no
Additional Amounts will be payable with respect to a payment made to a Holder
(an "Excluded Holder") in respect of a beneficial owner (a) with which the
Issuer or such Subsidiary Guarantor does not deal at arm's-length (within the
meaning of the Income Tax Act (Canada)) at the time of making such payment or
(b) which is subject to such Taxes by reason of its being connected with Canada
or any province or territory thereof otherwise than by the mere acquisition,
holding or disposition of the Exchange Notes or the receipt of payments
thereunder. The Subsidiary Guarantors will also (i) make such withholding or
deduction and (ii) remit the full amount deducted or withheld to the relevant
governmental authority in accordance with applicable law. The Subsidiary
Guarantors will furnish to the Holders, within 30 days after the date the
payment of any Taxes is due pursuant to applicable law, certified copies of tax
receipts evidencing such payment. The Subsidiary Guarantors will, jointly and
severally, indemnify and hold harmless each Holder (other than an Excluded
Holder) and upon written request reimburse each such Holder for the amount of
(A) any Taxes so levied or imposed on and paid by such Holder as a result of
payments made under or with respect to the Notes or any Subsidiary Guarantee,
(B) any liability (including penalties, interest and expenses) arising therefrom
or with respect thereto, and (C) any Taxes imposed with respect to any
reimbursement under (A) or (B) so that the net amount received by such Holder
after such reimbursement will not be less than the net amount the Holder would
have received if Taxes on such reimbursement had not been imposed. At least 30
days prior to each date on which any payment under or with respect to the Notes
is due and payable, if a Subsidiary Guarantor will be obligated to pay
Additional Amounts with respect to such payment, such Subsidiary Guarantor will
deliver to the Trustee an officer's certificate stating the fact that such
Additional Amounts will be payable, the amounts so payable and will set forth
such other information necessary to enable the Trustee to pay such Additional
Amounts to Holders on the payment date. Whenever in the Indenture there is
mentioned, in any context, the payment of principal (and premium, if any),
redemption price, Change of Control payment, purchase price, interest or any
other amount payable under or with respect to any Exchange Note, such mention
shall be deemed to include mention of the payment of Additional Amounts to the
extent that, in such context, Additional Amounts are, were or would be payable
in respect thereof.
The Issuer will pay any present or future stamp, court or documentary taxes
or any other excise or property taxes, charges or similar levies that arise in
any jurisdiction from the execution, delivery, enforcement or registration of
the Exchange Notes or any other document or instrument in relation thereto, or
from the receipt of any payments with respect to the Exchange Notes, excluding
such taxes, charges or similar levies imposed by any jurisdiction outside of
Canada, the jurisdiction of incorporation of any successor of the Issuer or any
jurisdiction in which a paying agent is located, and has agreed to indemnify the
Holders for any such taxes paid by such Holders.
The foregoing obligations shall survive any termination, defeasance or
discharge of the Indenture and the payment of all amounts owing under or with
respect to the Exchange Notes and any Subsidiary Guarantee.
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Paying Agent and Registrar; Transfer and Exchange
Initially, the Trustee will act as Registrar for the Exchange Notes and as
Paying Agent. The Exchange Notes may be presented for registration of transfer
and exchange at the office of the Registrar, which currently is the Trustee's
corporate trust office at Sixth and Marquette, Minneapolis, Minnesota
55479-0069. The Issuer will pay principal (and premium, if any) and interest on
the Exchange Notes at the office of the Paying Agent in New York, New York,
which currently is Norwest Corporate Trust c/o The Depository Trust Company at
First Floor, TADS Department, 55 Water Street, New York, New York 10041. In
addition, in the event the Exchange Notes do not remain in book-entry form,
interest may be paid, at the Issuer's option, by wire transfer or check mailed
to the registered addresses of the Holders as shown on the Note Register. The
Issuer may change the Paying Agent and Registrar without notice to Holders of
the Exchange Notes. Any Outstanding Notes that remain outstanding after the
completion of the Exchange Offer, together with the Exchange Notes issued in
connection with the Exchange Offer, will be treated as a single class of
securities under the Indenture and are hereinafter referred to together as
"Notes".
Redemption
Optional Redemption
The Issuer may redeem the Exchange Notes, at its option, in whole at any
time part from time to time, on and after March 15, 2001, at the following
redemption prices (expressed as percentages of the principal amount thereof) if
redeemed during the twelve-month period commencing on March 15 of the years set
forth below, plus, in each case, accrued and unpaid interest, if any, thereon to
the date of redemption:
Year Percentage
2001 103.000%
2002 and thereafter 100.000%
Optional Redemption upon Equity Offerings
At any time, or from time to time, prior to March 15, 2001, the Issuer may,
at its option, use all or a portion of the net cash proceeds of one or more
Equity Offerings (as defined below) to redeem up to 35% of the aggregate
original principal amount of the Notes at a redemption price equal to 112.875%
of the aggregate principal amount of the Notes to be redeemed, plus accrued and
unpaid interest and liquidated damages, if any, thereon to the date of
redemption; provided, however, that
(1) at least 65% of the aggregate original principal amount of the
Notes remains outstanding immediately after giving effect to any such
redemption (it being expressly agreed that for purposes of determining
whether this condition is satisfied, Notes owned by the Issuer or any of its
Affiliates shall be deemed not to be outstanding), and
(2) redemption occurs within 60 days after the consummation of any such
Equity Offering.
Selection and Notice of Redemption
In the case of any partial redemption, selection of such Notes for
redemption will be made by the Trustee in compliance with the requirements of
the principal national securities exchange, if any, on which the Notes are
listed or, if the Notes are not then listed on a national securities exchange,
on a pro rata basis, by lot or by such other method as the Trustee shall deem
fair and appropriate; provided, however, that no Notes of a principal amount of
$1,000 or less shall be redeemed in part; and provided, further, that if a
partial redemption is made with the proceeds of an Equity Offering, selection of
the Notes or portions thereof for redemption shall be made by the Trustee only
on a pro rata basis or on as nearly a pro rata basis as is practicable (subject
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to the procedures of DTC), unless such method is otherwise prohibited. Notice of
redemption shall be mailed by first-class mail at least 30 but not more than 60
days before the redemption date to each Holder of Notes to be redeemed at its
registered address. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in a principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the applicable redemption date,
interest will cease to accrue on Notes or portions thereof called for redemption
as long as the Issuer has deposited with the Paying Agent for the Notes funds in
satisfaction of the applicable redemption price pursuant to the Indenture.
Security
All of the Obligations of the Issuer under the Exchange Notes and the
Indenture will be secured by a first priority Lien, but subject to Permitted
Liens, on substantially all of the Oil and Gas Assets of the Issuer and its
Wholly Owned Restricted Subsidiaries owned on the Issue Date, and by a first
priority Lien, subject to Permitted Liens, on substantially all of such Oil and
Gas Assets acquired thereafter (other than assets securing Acquired Indebtedness
to the extent granting additional Liens would be prohibited by the terms of the
instruments relating to such Acquired Indebtedness), as well as the common stock
of Grey Wolf owned by the Issuer. The Oil and Gas Assets that will initially
secure such Obligations represent approximately 99% of the PV-10 value at
December 31, 1998.
If the Exchange Notes become due and payable prior to the Stated Maturity
Date or are not paid in full at the Stated Maturity Date, the Trustee may take
all actions it deems necessary or appropriate, including, but not limited to,
foreclosing upon the Collateral in accordance with the Security Documents and
applicable law. The proceeds received from the sale of any Collateral that is
the subject of a foreclosure or collection suit shall be applied first to pay
the expenses of such foreclosure or suit and amounts then payable to the Trustee
and thereafter to pay the principal of and interest on the Exchange Notes. The
Trustee has the power to institute and maintain such suits and proceedings as it
may deem expedient to prevent impairment of, or to preserve or protect its and
the Holders' interest in, the Collateral.
There can be no assurance that the Trustee will be able to sell the
Collateral without substantial delays or compromises or that the proceeds
obtained will be sufficient to pay all amounts owing to Holders of the Exchange
Notes. See "Risk Factors -- Adequacy of Collateral." To the extent that third
parties enjoy Permitted Liens, such third parties may have rights and remedies
with respect to the property subject to such Liens that, if exercised, could
adversely affect the value of the Collateral. In addition, the ability of the
Holders to realize upon the Collateral may be subject to certain bankruptcy law
limitations in the event of a bankruptcy. See "Risk Factors -- Substantive
Consolidation/Bankruptcy."
The collateral release provisions of the Indenture will permit the release
of Collateral without substitution of collateral of equal value under certain
circumstances. See "-- Possession, Use and Release of Collateral." As described
under "-- Certain Covenants --Limitation on Asset Sales," the Net Cash Proceeds
of certain Asset Sales may under specified circumstances be required to be
utilized to make an offer to purchase Exchange Notes.
Change of Control
The Indenture will provide that upon the occurrence of a Change of Control,
each Holder will have the right to require that the Issuer purchase all or a
portion of such Holder's Exchange Notes pursuant to the offer described below
(the "Change of Control Offer"), at a purchase price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest, if any, thereon to
the date of purchase.
Within 30 days following the date upon which the Change of Control occurred,
the Issuer must send, by first class mail, a notice to each Holder, with a copy
to the Trustee, which notice shall govern the terms of the Change of Control
Offer. Such notice shall state, among other things, the purchase date, which
must be no earlier than 30 days nor later than 45 days from the date such notice
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is mailed, other than as may be required by law (the "Change of Control Payment
Date"). A Change of Control Offer shall remain open for a period of 20 Business
Days or such longer period as may be required by law. Holders electing to have
an Exchange Note purchased pursuant to a Change of Control Offer will be
required to surrender the Exchange Note, with the form entitled "Option of
Holder to Elect Purchase" on the reverse of the Exchange Note completed, to the
paying agent for the Exchange Notes at the address specified in the notice prior
to the close of business on the third Business Day prior to the Change of
Control Payment Date.
The Issuer shall not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer at the
Change of Control purchase price, at the same times and otherwise in compliance
with the requirements applicable to a Change of Control Offer made by the Issuer
and purchases all Exchange Notes validly tendered and not withdrawn under such
Change of Control Offer.
If a Change of Control Offer is made, there can be no assurance that the
Issuer will have available funds sufficient to pay the Change of Control
purchase price for all the Exchange Notes that might be delivered by Holders
seeking to accept the Change of Control Offer. In addition, the indenture
governing the terms of the outstanding Series D Notes has identical change of
control provisions as the Indenture, which may further restrict the ability of
the Issuer to purchase the Exchange Notes. In the event the Issuer is required
to purchase Exchange Notes pursuant to a Change of Control Offer, the Issuer
expects that it would seek third party financing to the extent it does not have
available funds to meet its purchase obligations. However, there can be no
assurance that the Issuer would be able to obtain such financing.
Neither the Board of Directors of the Issuer nor the Trustee may waive the
covenant relating to the Issuer's obligation to make a Change of Control Offer.
Restrictions in the Indenture described herein on the ability of the Issuer and
its Restricted Subsidiaries to incur additional Indebtedness, to grant liens on
their property, to make Restricted Payments and to make Asset Sales may also
make more difficult or discourage a takeover of the Issuer, whether favored or
opposed by the management of the Issuer. Consummation of any such transaction in
certain circumstances may require repurchase of the Exchange Notes, and there
can be no assurance that the Issuer or the acquiring party will have sufficient
financial resources to effect such repurchase. Such restrictions and the
restrictions on transactions with Affiliates may, in certain circumstances, make
more difficult or discourage any leveraged buyout of the Issuer by the
management of the Issuer. While such restrictions cover a wide variety of
arrangements which have traditionally been used to effect highly leveraged
transactions, the Indenture may not afford the Holders of Exchange Notes
protection in all circumstances from the adverse aspects of a highly leveraged
transaction, reorganization, restructuring, merger or similar transaction.
The Issuer will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Issuer shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
Certain Covenants
The Indenture will contain, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness
The Issuer will not, and will not cause or permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, assume, guarantee,
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acquire, become liable, contingently or otherwise, with respect to, or otherwise
become responsible for payment of (collectively, "incur") any Indebtedness;
provided, however, that if no Default or Event of Default shall have occurred
and be continuing at the time of or as a consequence of the incurrence of any
such Indebtedness, the Issuer and the Subsidiary Guarantors or any of them may
incur Indebtedness (including, without limitation, Acquired Indebtedness), in
each case, if on the date of the incurrence of such Indebtedness, after giving
pro forma effect to the incurrence thereof and the receipt and application of
the proceeds therefrom,
(1) both (A) the Issuer's Consolidated EBITDA Coverage Ratio would have
been at least equal to 2.5 to 1.0 and (B) the Issuer's Adjusted Consolidated
Net Tangible Assets are equal to or greater than 150% of the aggregate
consolidated Indebtedness of the Issuer and its Restricted Subsidiaries, or
(2) the Issuer's Adjusted Consolidated Net Tangible Assets are equal to
or greater than 200% of the aggregate consolidated Indebtedness of the
Issuer and its Restricted Subsidiaries.
Notwithstanding the preceding, if no Event of Default shall have occurred
and be continuing at the time or as a consequence of the incurrence of such
Indebtedness, the Issuer and any of its Restricted Subsidiaries may incur
Permitted Indebtedness.
For purposes of determining any particular amount of Indebtedness under this
covenant, guarantees of Indebtedness otherwise included in the determination of
such amount shall not also be included.
Indebtedness of a Person existing at the time such Person becomes a
Restricted Subsidiary (whether by merger, consolidation, acquisition of Capital
Stock or otherwise) or is merged with or into the Issuer or any Restricted
Subsidiary or which is secured by a Lien on an asset acquired by the Issuer or a
Restricted Subsidiary (whether or not such Indebtedness is assumed by the
acquiring Person) shall be deemed incurred at the time the Person becomes a
Restricted Subsidiary or at the time of the asset acquisition, as the case may
be.
The Issuer will not, and will not permit any Subsidiary Guarantor to incur
any Indebtedness which by its terms (or by the terms of any agreement governing
such Indebtedness) is subordinated in right of payment to any other Indebtedness
of the Issuer or such Subsidiary Guarantor unless such Indebtedness is also by
its terms (or by the terms of any agreement governing such Indebtedness) made
expressly subordinate in right of payment to the Exchange Notes or the Guarantee
of such Subsidiary Guarantor, as the case may be, pursuant to subordination
provisions that are substantively identical to the subordination provisions of
such Indebtedness (or such agreement) that are most favorable to the holders of
any other Indebtedness of the Issuer or such Subsidiary Guarantor, as the case
may be.
Limitation on Restricted Payments
The Issuer will not, and will not cause or permit any of its Restricted
Subsidiaries to, directly or indirectly,
(1) declare or pay any dividend or make any distribution (other than
dividends or distributions payable solely in Qualified Capital Stock of the
Issuer) on or in respect of shares of the Issuer's Capital Stock to holders
of such Capital Stock,
(2) purchase, redeem or otherwise acquire or retire for value any
Capital Stock of the Issuer or any warrants, rights or options to purchase
or acquire shares of any class of such Capital Stock other than through the
exchange therefor solely of Qualified Capital Stock of the Issuer or
warrants, rights or options to purchase or acquire shares of Qualified
Capital Stock of the Issuer,
(3) make any principal payment on, purchase, defease, redeem, prepay,
decrease or otherwise acquire or retire for value, prior to any scheduled
final maturity, scheduled repayment or scheduled sinking fund payment, any
Subordinated Indebtedness of the Issuer or a Subsidiary Guarantor, as the
case may be, or
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(4) make any Investment (other than a Permitted Investment)
(each of the foregoing actions set forth in clauses (1) through (4) being
referred to as a "Restricted Payment"), if at the time of such Restricted
Payment or immediately after giving effect thereto,
(A) a Default or an Event of Default shall have occurred and be
continuing,
(B) the Issuer is not able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with "--
Limitation on Incurrence of Additional Indebtedness" above, or
(C) the aggregate amount of Restricted Payments (including such
proposed Restricted Payment) made subsequent to the Issue Date (the amount
expended for such purposes, if other than in cash, being the fair market
value of such property as determined reasonably and in good faith by the
Board of Directors of the Issuer) shall exceed the sum of:
(i) 50% of the cumulative Consolidated Net Income (or if cumulative
Consolidated Net Income shall be a loss, minus 100% of such loss) of the
Issuer earned subsequent to the Issue Date and on or prior to the last date
of the Issuer's fiscal quarter immediately preceding such Restricted Payment
(the "Reference Date") (treating such period as a single accounting period),
plus
(ii) 100% of the aggregate net cash proceeds received by the Issuer
from any Person (other than a Restricted Subsidiary of the Issuer) from the
issuance and sale subsequent to the Issue Date and on or prior to the
Reference Date of Qualified Capital Stock of the Issuer, plus
(iii) without duplication of any amounts included in clause (C)(ii)
above, 100% of the aggregate net cash proceeds of any equity contribution
received by the Issuer from a holder of the Issuer's Capital Stock
(excluding, in the case of clauses (C)(ii) and (iii), any net cash proceeds
from an Equity Offering to the extent used to redeem the Notes), plus
(iv) an amount equal to the net reduction in Investments in Unrestricted
Subsidiaries resulting from dividends, interest payments, repayments of
loans or advances, or other transfers of cash, in each case to the Issuer or
to any Restricted Subsidiary of the Issuer from Unrestricted Subsidiaries
(but without duplication of any such amount included in calculating
cumulative Consolidated Net Income of the Issuer), or from redesignations of
Unrestricted Subsidiaries as Restricted Subsidiaries (in each case valued as
provided in "-- Limitation on Designation of Unrestricted Subsidiaries"
below), not to exceed, in the case of any Unrestricted Subsidiary, the
amount of Investments previously made by the Issuer or any Restricted
Subsidiary in such Unrestricted Subsidiary and which was treated as a
Restricted Payment under the Indenture, plus
(v) without duplication of the immediately preceding subclause (iv), an
amount equal to the lesser of the cost or net cash proceeds received upon
the sale or other disposition of any Investment made after the Issue Date
which had been treated as a Restricted Payment (but without duplication of
any such amount included in calculating cumulative Consolidated Net Income
of the Issuer), plus
(vi) $5,000,000.
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph shall not prohibit:
(1) the payment of any dividend or redemption payment within 60 days
after the date of declaration of such dividend or the applicable redemption
if the dividend or redemption payment, as the case may be, would have been
permitted on the date of declaration,
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(2) if no Default or Event of Default shall have occurred and be
continuing, the acquisition of any shares of Capital Stock of the Issuer,
either (A) solely in exchange for shares of Qualified Capital Stock of the
Issuer or (B) through the application of net proceeds of a substantially
concurrent sale for cash (other than to a Restricted Subsidiary of the
Issuer) of shares of Qualified Capital Stock of the Issuer,
(3) if no Default or Event of Default shall have occurred and be
continuing, the acquisition of any Indebtedness of the Issuer or a
Subsidiary Guarantor that is subordinate or junior in right of payment to
the Notes or such Subsidiary Guarantor's Guarantee, as the case may be,
either (A) solely in exchange for shares of Qualified Capital Stock of the
Issuer, or (B) through the application of net proceeds of a substantially
concurrent sale for cash (other than to a Restricted Subsidiary of the
Issuer) of (I) shares of Qualified Capital Stock of the Issuer or (II)
Refinancing Indebtedness, and
(4) the initial designation of Western Associated Energy Corporation
and Grey Wolf as Unrestricted Subsidiaries under the Indenture. In
determining the aggregate amount of Restricted Payments made subsequent to
the Issue Date in accordance with clause (C) of the immediately preceding
paragraph, amounts expended pursuant to clauses (1) and (2)(B) shall be
included in such calculation.
Limitation on Asset Sales
The Issuer will not, and will not cause or permit any of its Restricted
Subsidiaries to, consummate an Asset Sale unless
(1) the Issuer or the applicable Restricted Subsidiary, as the case may
be, receives consideration at the time of such Asset Sale at least equal to
the fair market value of the assets sold or otherwise disposed of (as
determined in good faith by the Issuer's Board of Directors or senior
management of the Issuer), and
(2) (A) at least 70% of the consideration received by the Issuer or
such Restricted Subsidiary, as the case may be, from such Asset Sale shall
be in the form of cash or Cash Equivalents and is received at the time of
such disposition and (B) at least 15% of such consideration received if in a
form other than cash or Cash Equivalents is converted into or exchanged for
cash or Cash Equivalents within 90 days of such disposition.
Within 180 days after the receipt of any Net Cash Proceeds from an Asset
Sale, the Issuer or such Restricted Subsidiary shall apply the Net Cash Proceeds
of such Asset Sale as follows:
(1) to the extent such Net Cash Proceeds are received from an Asset
Sale not involving the sale, transfer or disposition of Collateral
("Non-Collateral Proceeds"), to repay any Indebtedness secured by the assets
involved in such Asset Sale together with a concomitant permanent reduction
in the amount of such Indebtedness so repaid; and
(2) with respect to any Non-Collateral Proceeds remaining after
application pursuant to the preceding paragraph (1) and any Net Cash
Proceeds received from an Asset Sale involving Collateral, the Issuer shall
make an offer to purchase (the "Net Proceeds Offer") from all Holders up to
a maximum principal amount (expressed as an integral multiple of $1,000) of
Notes equal to the Available Proceeds Amount at a purchase price equal to
100% of the principal amount thereof plus accrued and unpaid interest
thereon to the date of purchase; provided that the Issuer will not be
required to apply pursuant to this clause (2) Net Cash Proceeds received
from any Asset Sale if, and only to the extent that such Net Cash Proceeds
are applied to, within 180 days of such Asset Sale, (i) an investment or
investments in Crude Oil and Natural Gas Related Assets or (ii) an
investment or investments in properties or assets that replace the
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properties or assets that were the subject of such Asset Sale or in
properties or assets that will be used in the Crude Oil and Natural Gas
Business of the Issuer and its Restricted Subsidiaries ("Replacement
Assets"), and the assets constituting such Crude Oil and Natural Gas Related
Assets or Replacement Assets and any non-cash consideration received are
made subject to the Lien of the Indenture and the Security Documents in the
manner contemplated in the Indenture to the extent the Net Cash Proceeds
used to purchase such assets arose from the sale of Property that was
subject to such Lien, provided that any such assets that are Oil and Gas
Assets shall be made subject to such Lien in any event; further provided,
however, that if at the end of the 180 day period referred to above, the
Issuer or one of its Restricted Subsidiaries has delivered to the Trustee an
officer's certificate (A) otherwise in compliance with the terms of the
Indenture, (B) stating that attached thereto is a definitive, executed
purchase and sale agreement for a Crude Oil and Natural Gas Related Assets
investment or for Replacement Assets, and (C) setting forth the aggregate
cash consideration to be paid in connection with such purchase from the
Available Proceeds Amount, then the Issuer shall have an additional 90 day
period during which it may defer making a Net Proceeds Offer with respect to
the Available Proceeds Amount subject of such purchase and sale.
If at any time any consideration (other than cash or Cash Equivalents)
received by the Issuer or any Restricted Subsidiary of the Issuer, as the case
may be, in connection with any Asset Sale is converted into or sold or otherwise
disposed of for cash, then such conversion or disposition shall be deemed to
constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be
applied in accordance with this "Limitation on Asset Sales" covenant.
The Issuer may defer the Net Proceeds Offer until there is an aggregate
unutilized Available Proceeds Amount equal to or in excess of $5,000,000
resulting from one or more Asset Sales (at which time the entire unutilized
Available Proceeds Amount, and not just the amount in excess of $5,000,000,
shall be applied as required pursuant to this paragraph). To the extent the Net
Proceeds Offer is not fully subscribed to by Holders, the Issuer may obtain a
release of the unutilized portion of the Collateral Proceeds from the Lien of
the Indenture and the Security Documents.
Notwithstanding the terms of the four preceding paragraphs above, the Issuer
and its Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent (a) the consideration for
such Asset Sale constitutes Replacement Assets and/or Crude Oil and Natural Gas
Related Assets and (b) such Asset Sale is for fair market value; provided,
however, that any consideration not constituting Replacement Assets and Crude
Oil and Natural Gas Related Assets received by the Issuer or any of its
Restricted Subsidiaries in connection with any Asset Sale permitted to be
consummated under this paragraph shall constitute Net Cash Proceeds subject to
the provisions of this covenant; further provided, however, that, to the extent
that the property transferred or conveyed constitutes an Oil and Gas Asset, the
property received in exchange therefor constitutes an Oil and Gas Asset.
All Collateral Proceeds shall constitute Trust Moneys and shall be delivered
by the Issuer to the Trustee and shall be deposited in the Collateral Account in
accordance with the Indenture. Collateral Proceeds so deposited may be withdrawn
from the Collateral Account for application by the Issuer in accordance with
clause (2) above or otherwise pursuant to the Indenture as summarized in
"--Deposit; Use and Release of Trust Moneys."
In the event of the transfer of substantially all (but not all) of the
consolidated assets of the Issuer as an entirety to a Person in a transaction
permitted under "-- Merger, Consolidation and Sale of Assets," the successor
corporation shall be deemed to have sold the consolidated assets of the Issuer
not so transferred for purposes of this covenant, and shall comply with the
provisions of this covenant with respect to such deemed sale as if it were an
Asset Sale. In addition, the fair market value of such consolidated assets of
the Issuer deemed to be sold shall be deemed to be Net Cash Proceeds for
purposes of this covenant.
Notice of a Net Proceeds Offer will be mailed to the Holders as shown on the
register of Holders not less than 30 days nor more than 60 days before the
payment date for the Net Proceeds Offer, with a copy to the Trustee, and shall
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comply with the procedures set forth in the Indenture. Upon receiving notice of
the Net Proceeds Offer, Holders may elect to tender their Exchange Notes in
whole or in part in integral multiples of $1,000 principal amount in exchange
for cash. To the extent Holders properly tender Exchange Notes in an amount
exceeding the Available Proceeds Amount, Exchange Notes of tendering Holders
will be repurchased on a pro rata basis (based on amounts tendered). A Net
Proceeds Offer shall remain open for a period of 20 Business Days or such longer
periods as may be required by law.
The Issuer will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Exchange Notes pursuant to a Net Proceeds Offer. To the extent
that the provisions of any securities laws or regulations conflict with the
"Asset Sale" provisions of the Indenture, the Issuer shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Asset Sale" provisions of the Indenture by
virtue thereof.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
The Issuer will not, and will not cause or permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or permit to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary to
(1) pay dividends or make any other distributions on or in respect of
its Capital Stock,
(2) make loans or advances, or to pay any Indebtedness or other
obligation owed, to the Issuer or any other Restricted Subsidiary,
(3) guarantee any Indebtedness or any other obligation of the Issuer or
any Restricted Subsidiary, or
(4) transfer any of its property or assets to the Issuer or any other
Restricted Subsidiary (each such encumbrance or restriction, a "Payment
Restriction").
The preceding will not apply, however, to encumbrances or restrictions
existing under or by reason of the following (which are excluded from the term
"Payment Restriction"):
(1) applicable law,
(2) the Indenture, the indenture governing the Series D Notes or any
Security Document,
(3) customary non-assignment provisions of any contract or any lease
governing a leasehold interest of any Restricted Subsidiary,
(4) any instrument governing Acquired Indebtedness, which encumbrance or
restriction is not applicable to such Restricted Subsidiary, or the
properties or assets of such Restricted Subsidiary, other than the Person
or the properties or assets of the Person so acquired,
(5) agreements existing on the Issue Date to the extent and in the
manner such agreements were in effect on the Issue Date,
(6) customary restrictions with respect to a Restricted Subsidiary of
the Issuer pursuant to an agreement that has been entered into for the sale
or disposition of Capital Stock or assets of such Restricted Subsidiary to
be consummated in accordance with the terms of the Indenture solely in
respect of the assets or Capital Stock to be sold or disposed of,
(7) any instrument governing a Permitted Lien, to the extent and only to
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the extent such instrument restricts the transfer or other disposition of
assets subject to such Permitted Lien, or
(8) an agreement governing Refinancing Indebtedness incurred to
Refinance the Indebtedness issued, assumed or incurred pursuant to an
agreement referred to in clause (2), (4) or (5) above; provided, however,
that the provisions relating to such encumbrance or restriction contained
in any such Refinancing Indebtedness are no less favorable to the Holders
in any material respect as determined by the Board of Directors of the
Issuer in its reasonable and good faith judgment than the provisions
relating to such encumbrance or restriction contained in the applicable
agreement referred to in such clause (2), (4) or (5).
Limitation on Preferred Stock of Restricted Subsidiaries
The Issuer will not cause or permit any of its Restricted Subsidiaries to
issue any Preferred Stock (other than to the Issuer or to a Wholly Owned
Restricted Subsidiary) or permit any Person (other than the Issuer or a Wholly
Owned Restricted Subsidiary) to own any Preferred Stock of any Restricted
Subsidiary.
Limitation on Liens
The Issuer will not, and will not cause or permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, assume or permit or
suffer to exist or remain in effect any Liens:
(1) upon any item of Collateral other than the Liens created by the
Indenture and the Security Documents and the Liens expressly permitted by
the applicable Security Documents, and
(2) upon any other properties or assets of the Issuer or of any of its
Restricted Subsidiaries, whether owned on the Issue Date or acquired after
the Issue Date, or on any income or profits therefrom, or assign or
otherwise convey any right to receive income or profits thereon other than,
with respect to this clause (2):
(a) Liens existing on the Issue Date to the extent and in the manner
such Liens are in effect on the Issue Date, and
(b) Permitted Liens.
Merger, Consolidation and Sale of Assets
The Issuer will not, in a single transaction or series of related
transactions, consolidate or merge with or into any Person, or sell, assign,
transfer, lease, convey or otherwise dispose of (or cause or permit any
Restricted Subsidiary to sell, assign, transfer, lease, convey or otherwise
dispose of) all or substantially all of the Issuer's assets (determined on a
consolidated basis for the Issuer and its Restricted Subsidiaries), whether as
an entirety or substantially as an entirety to any Person unless:
(1) either (A) the Issuer or such Restricted Subsidiary, as the case may
be, shall be the surviving or continuing corporation or (B) the Person (if
other than the Issuer) formed by such consolidation or into which the
Issuer is merged or the Person which acquires by sale, assignment,
transfer, lease, conveyance or other disposition the properties and assets
of the Issuer and its Restricted Subsidiaries substantially as an entirety
(the "Surviving Entity") (i) shall be a corporation organized and validly
existing under the laws of the United States or any state thereof or the
District of Columbia (or if such Restricted Subsidiary was formed under the
laws of Canada or any province or territory thereof, such Surviving Entity
shall be a corporation organized and validly existing under the laws of
Canada or any province or territory thereof) and (ii) shall expressly
assume, by supplemental indenture (in form and substance satisfactory to
the Trustee), executed and delivered to the Trustee, the due and punctual
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payment of the principal of, premium, if any, and interest on all of the
Exchange Notes and the performance of every covenant of the Exchange Notes,
the Indenture, the Security Documents and the Registration Rights Agreement
on the part of the Issuer to be performed or observed;
(2) immediately after giving effect to such transaction and the
assumption contemplated by clause (1)(B)(ii) above (including giving effect
to any Indebtedness incurred or anticipated to be incurred and any Lien
granted in connection with or in respect of such transaction), the Issuer
or such Surviving Entity, as the case may be, (A) shall have a Consolidated
Net Worth equal to or greater than the Consolidated Net Worth of the Issuer
immediately prior to such transaction and (B) shall be able to incur at
least $1.00 of additional Indebtedness (other than Permitted Indebtedness)
pursuant to "-- Limitation on Incurrence of Additional Indebtedness" above;
(3) immediately before and immediately after giving effect to such
transaction and the assumption contemplated by clause (1)(B)(ii) above
(including, without limitation, giving effect to any Indebtedness incurred
or anticipated to be incurred and any Lien granted in connection with or in
respect of the transaction), no Default or Event of Default shall have
occurred or be continuing; and
(4) the Issuer or the Surviving Entity, as the case may be, shall have
delivered to the Trustee an officer's certificate and an opinion of
counsel, each stating that such consolidation, merger, sale, assignment,
transfer, lease, conveyance or other disposition and, if a supplemental
indenture is required in connection with such transaction, such
supplemental indenture comply with the applicable provisions of the
Indenture and that all conditions precedent in the Indenture relating to
such transaction have been satisfied; provided, however, that such counsel
may rely, as to matters of fact, on a certificate or certificates of
officers of the Issuer.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries the Capital Stock of which constitutes all or substantially all of
the properties and assets of the Issuer, shall be deemed to be the transfer of
all or substantially all of the properties and assets of the Issuer.
Upon any consolidation, combination or merger or any transfer of all or
substantially all of the assets of the Issuer in accordance with the foregoing,
in which the Issuer is not the continuing corporation, the successor Person
formed by such consolidation or into which the Issuer is merged or to which such
conveyance, lease or transfer is made shall succeed to, and be substituted for,
and may exercise every right and power of, the Issuer under the Indenture and
the Exchange Notes with the same effect as if such surviving entity had been
named as such.
Each Subsidiary Guarantor (other than any Subsidiary Guarantor whose
Guarantee is to be released in accordance with the terms of the Guarantee and
the Indenture in connection with any transaction complying with the provisions
of the Indenture described under "Merger, Consolidation and Sale of Assets")
will not, and the Issuer will not cause or permit any Subsidiary Guarantor to,
consolidate with or merge with or into any Person other than the Issuer or
another Subsidiary Guarantor that is a Wholly Owned Restricted Subsidiary
unless:
(1) the entity formed by or surviving any such consolidation or merger
(if other than the Subsidiary Guarantor) or to which such sale, lease,
conveyance or other disposition shall have been made is a corporation
organized and existing under the laws of the United States or any state
thereof or the District of Columbia (or if such Restricted Subsidiary was
formed under the laws of Canada or any province or territory thereof, such
Surviving Entity shall be a corporation organized and validly existing
under the laws of Canada or any province or territory thereof),
(2) such entity assumes by execution of a supplemental indenture all of
the obligations of the Subsidiary Guarantor under its Guarantee,
(3) immediately after giving effect to such transaction, no Default or
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Event of Default shall have occurred and be continuing, and
(4) immediately after giving effect to such transaction and the use of
any net proceeds therefrom on a pro forma basis, the Issuer could satisfy
the provisions of clause (2) of the first paragraph of this covenant.
Any merger or consolidation of a Subsidiary Guarantor with and into the Issuer
(with the Issuer being the Surviving Entity) or another Subsidiary Guarantor
that is a Wholly Owned Restricted Subsidiary need only comply with clause (4) of
the first paragraph of this covenant.
Limitations on Transactions with Affiliates
(1) The Issuer will not, and will not cause or permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into, amend or permit or suffer
to exist any transaction or series of related transactions (including, without
limitation, the purchase, sale, lease or exchange of any property, the
guaranteeing of any Indebtedness or the rendering of any service) with, or for
the benefit of, any of its respective Affiliates (each an "Affiliate
Transaction"), other than (A) Affiliate Transactions permitted under paragraph
(2) of this covenant and (B) Affiliate Transactions that are on terms that are
fair and reasonable to the Issuer or the applicable Restricted Subsidiary and
are no less favorable to the Issuer or the applicable Restricted Subsidiary than
those that might reasonably have been obtained in a comparable transaction at
such time on an arm's-length basis from a Person that is not an Affiliate of the
Issuer or such Restricted Subsidiary. All Affiliate Transactions (and each
series of related Affiliate Transactions which are similar or part of a common
plan) involving aggregate payments or other property with a fair market value in
excess of $1,000,000 shall be approved by the Board of Directors of the Issuer,
such approval to be evidenced by a Board Resolution stating that such Board of
Directors has determined that such transaction complies with the foregoing
provisions. If the Issuer or any Restricted Subsidiary enters into an Affiliate
Transaction (or a series of related Affiliate Transactions related to a common
plan) that involves an aggregate fair market value of more than $10,000,000, the
Issuer shall, prior to the consummation thereof, obtain a favorable opinion as
to the fairness of such transaction or series of related transactions to the
Issuer or the relevant Restricted Subsidiary, as the case may be, from a
financial point of view, from an Independent Advisor and file the same with the
Trustee.
(2) The restrictions set forth in clause (1) of this covenant shall not
apply to (A) reasonable fees and compensation paid to and indemnity provided on
behalf of, officers, directors, employees or consultants of the Issuer or any
Restricted Subsidiary as determined in good faith by the Board of Directors or
senior management of the Issuer or such Restricted Subsidiary, as the case may
be; (B) transactions exclusively between or among the Issuer and any of its
Restricted Subsidiaries or exclusively between or among such Restricted
Subsidiaries; provided, however, that such transactions are not otherwise
prohibited by the Indenture; and (C) Restricted Payments permitted by the
Indenture.
Limitation on Restricted and Unrestricted Subsidiaries
The Indenture provides that the Board of Directors may, if no Default or
Event of Default shall have occurred and be continuing or would arise therefrom,
designate an Unrestricted Subsidiary to be a Restricted Subsidiary; provided,
however, that
(1) any such redesignation shall be deemed to be an incurrence as of the
date of such redesignation by the Issuer and its Restricted Subsidiaries of
the Indebtedness (if any) of such redesignated Subsidiary for purposes of
"-- Limitation on Incurrence of Additional Indebtedness" above,
(2) unless such redesignated Subsidiary shall not have any Indebtedness
outstanding, other than Indebtedness which would be Permitted Indebtedness,
no such designation shall be permitted if immediately after giving effect to
such redesignation and the incurrence of any such additional Indebtedness
the Issuer could not incur $1.00 of additional Indebtedness (other than
Permitted Indebtedness) pursuant to "-- Limitation on Incurrence of
Additional Indebtedness" above, and
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(3) such Subsidiary assumes by execution of a supplemental indenture all
of the obligations of a Subsidiary Guarantor under a Guarantee.
The Board of Directors of the Issuer also may, if no Default or Event of
Default shall have occurred and be continuing or would arise therefrom,
designate any Restricted Subsidiary none of whose Properties are subject to any
Liens of any Security Documents to be an Unrestricted Subsidiary if
(1) such designation is at that time permitted under "-- Limitation on
Restricted Payments" above, and
(2) immediately after giving effect to such designation, the Issuer
could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) pursuant to "-- Limitation on Incurrence of Additional
Indebtedness" above.
Any such designation by the Board of Directors shall be evidenced to the
Trustee by the filing with the Trustee of a certified copy of the resolution of
the Board of Directors giving effect to such designation or redesignation and an
officer's certificate certifying that such designation or redesignation complied
with the foregoing conditions and setting forth in reasonable detail the
underlying calculations. In the event that any Restricted Subsidiary is
designated an Unrestricted Subsidiary in accordance with this covenant, such
Restricted Subsidiary's Guarantee will be released.
For purposes of the covenant described under "-- Limitation on Restricted
Payments" above,
(1) an "Investment" shall be deemed to have been made at the time any
Restricted Subsidiary is designated as an Unrestricted Subsidiary in an
amount (proportionate to the Issuer's equity interest in such Subsidiary)
equal to the net worth of such Restricted Subsidiary at the time that such
Restricted Subsidiary is designated as an Unrestricted Subsidiary,
(2) at any date the aggregate amount of all Restricted Payments made as
Investments since the Issue Date shall exclude and be reduced by an amount
(proportionate to the Issuer's equity interest in such Subsidiary) equal to
the net worth of any Unrestricted Subsidiary at the time that such
Unrestricted Subsidiary is designated a Restricted Subsidiary, not to
exceed, in the case of any such redesignation of an Unrestricted Subsidiary
as a Restricted Subsidiary, the amount of Investments previously made by
the Issuer and its Restricted Subsidiaries in such Unrestricted Subsidiary
(in each case (1) and (2), "net worth" to be calculated based upon the fair
market value of the assets of such Subsidiary as of any such date of
designation), and
(3) any property transferred to or from an Unrestricted Subsidiary shall
be valued at its fair market value at the time of such transfer.
Notwithstanding the foregoing, the Board of Directors may not designate any
Subsidiary of the Issuer to be an Unrestricted Subsidiary if, after such
designation,
(1) the Issuer or any Restricted Subsidiary (A) provides credit support
for, or a guarantee of, any Indebtedness of such Subsidiary (including any
undertaking, agreement or instrument evidencing such Indebtedness) or (B)
is directly or indirectly liable for any Indebtedness of such Subsidiary,
or
(2) such Subsidiary owns any Capital Stock of, or owns or holds any Lien
on any property of, any Restricted Subsidiary which is not a Subsidiary of
the Subsidiary to be so designated.
The Subsidiaries of the Issuer that are not designated by the Board of
Directors as Restricted or Unrestricted Subsidiaries will be deemed to be
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Restricted Subsidiaries. Notwithstanding any provisions of this covenant, all
Subsidiaries of an Unrestricted Subsidiary will be Unrestricted Subsidiaries.
Additional Subsidiary Guarantees
If the Issuer or any of its Restricted Subsidiaries transfers or causes to
be transferred, in one transaction or a series of related transactions, any
property to any Restricted Subsidiary that is not a Subsidiary Guarantor, or if
the Issuer or any of its Restricted Subsidiaries shall organize, acquire or
otherwise invest in or hold an Investment in another Restricted Subsidiary
having total consolidated assets with a book value in excess of $500,000 that is
not a Subsidiary Guarantor, then such transferee or acquired or other Restricted
Subsidiary shall
(1) execute and deliver to the Trustee a supplemental indenture in form
reasonably satisfactory to the Trustee pursuant to which such Restricted
Subsidiary shall unconditionally guarantee all of the Issuer's obligations
under the Notes and the Indenture on the terms set forth in the Indenture,
and
(2) grant to the Trustee a Lien on substantially all its Oil and Gas
Assets; and
(3) deliver to the Trustee an opinion of counsel that such supplemental
indenture has been duly authorized, executed and delivered by such
Restricted Subsidiary and constitutes a legal, valid, binding and
enforceable obligation of such Restricted Subsidiary. Thereafter, such
Restricted Subsidiary shall be a Subsidiary Guarantor for all purposes of
the Indenture.
Limitation on Impairment of Security Interest
Neither the Issuer nor any of its Subsidiaries will take or omit to take any
action which action or omission would have the result of adversely affecting or
impairing the security interest in favor of the Trustee, on behalf of itself and
the Holders, with respect to the Collateral, and neither the Issuer nor any of
its Subsidiaries shall grant to any Person, or suffer any Person (other than the
Issuer and its Restricted Subsidiaries) to have (other than to the Trustee on
behalf of the Trustee and the Holders) any interest whatsoever in the Collateral
other than Permitted Liens. Neither the Issuer nor any of its Subsidiaries will
enter into any agreement or instrument that by its terms requires the proceeds
received from any sale of Collateral to be applied to repay, redeem, defease or
otherwise acquire or retire any Indebtedness, other than pursuant to the
Indenture and the Security Documents.
Limitation on the Sale or Issuance of Capital Stock of Restricted Subsidiaries
The Issuer will not, and will not permit any Restricted Subsidiary to, sell
or otherwise dispose of any shares of Capital Stock of any Restricted
Subsidiary, and shall not permit any of its Restricted Subsidiaries, directly or
indirectly, to issue or sell or otherwise dispose of any of its Capital Stock
except:
(1) to the Issuer or a Wholly Owned Restricted Subsidiary of the Issuer,
or
(2) if all shares of Capital Stock of such Restricted Subsidiary are
sold or otherwise disposed of. In connection with any sale or disposition
of Capital Stock of any Restricted Subsidiary of the Issuer, the Issuer
will be required to comply with the covenant described under the caption
"Limitation on Asset Sales."
Limitation on Conduct of Business
The Issuer will not, and will not permit any of its Restricted Subsidiaries
to, engage in the conduct of any business other than the Crude Oil and Natural
Gas Business.
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Reports to Holders
The Issuer will deliver to the Trustee within 15 days after the filing of
the same with the Commission, copies of the quarterly and annual reports and of
the information, documents and other reports, if any, which the Issuer is
required to file with the Commission pursuant to Section 13 or 15(d) of the
Exchange Act. Notwithstanding that the Issuer may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Issuer
will file with the Commission, to the extent permitted, and provide the Trustee
and Holders with such annual reports and such information, documents and other
reports specified in Sections 13 and 15(d) of the Exchange Act. The Issuer will
also comply with the other provisions of Section 314(a) of the TIA.
Events of Default
Each of the following will be an Event of Default:
(1) the failure to pay interest (including any Additional Interest) on
any Notes when the same becomes due and payable and the default continues
for a period of 20 days,
(2) the failure to pay the principal on any Notes, when such principal
becomes due and payable, at maturity, upon redemption or otherwise
(including the failure to make a payment to purchase Notes tendered
pursuant to a Change of Control Offer or a Net Proceeds Offer),
(3) a default in the observance or performance of any other covenant or
agreement contained in the Indenture which default continues for a period
of 20 days after the Issuer receives written notice specifying the default
(and demanding that such default be remedied) from the Trustee or the
Holders of at least 25% of the outstanding principal amount of the Notes
(except in the case of a default with respect to observance or performance
of any of the terms or provisions of "-- Change of Control" or "Certain
Covenants -- Merger, Consolidation and Sale of Assets" or "-- Limitation on
Asset Sales" which will constitute an Event of Default with such notice
requirement but without such passage of time requirement),
(4) a default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness of the Issuer or of any Restricted Subsidiary (or the payment
of which is guaranteed by the Issuer or any Restricted Subsidiary), whether
such Indebtedness now exists or is created after the Issue Date, which
default (A) is caused by a failure to pay principal of or premium, if any,
or interest on such Indebtedness after any applicable grace period provided
in such Indebtedness (a "payment default") or (B) results in the
acceleration of such Indebtedness prior to its express maturity and, in
each case, the principal amount of any such Indebtedness, together with the
principal amount of any other such Indebtedness under which there has been
a payment default or the maturity of which has been so accelerated,
aggregates at least $5,000,000,
(5) one or more judgments in an aggregate amount in excess of $5,000,000
(unless covered by insurance by a reputable insurer as to which the insurer
has acknowledged coverage) shall have been rendered against the Issuer or
any of its Restricted Subsidiaries and such judgments remain undischarged,
unvacated, unpaid or unstayed for a period of 60 days after such judgment
or judgments become final and non-appealable,
(6) certain events of bankruptcy affecting the Issuer or any of its
Subsidiaries, or
(7) any of the Guarantees cease to be in full force and effect or any of
the Guarantees are declared to be null and void or invalid and
unenforceable or any of the Subsidiary Guarantors denies or disaffirms its
liability under its Guarantees (other than by reason of release of a
Subsidiary Guarantor in accordance with the terms of the Indenture).
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If an Event of Default (other than an Event of Default specified in clause
(6) above) occurs and is continuing, the Trustee or the Holders of at least 25%
in principal amount of outstanding Notes may declare the principal of, premium,
if any, and accrued and unpaid interest on all the Notes to be due and payable
by notice in writing to the Issuer and the Trustee specifying the Event of
Default and that it is a "notice of acceleration", and the same shall become
immediately due and payable. If an Event of Default specified in clause (6)
above occurs and is continuing, then all unpaid principal of, and premium, if
any, and accrued and unpaid interest on all of the outstanding Notes will be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holder.
At any time after a declaration of acceleration with respect to the Notes as
described in the preceding paragraph, the Holders of a majority in principal
amount of the Notes may rescind and cancel such declaration and its
consequences:
(1) if the rescission would not conflict with any judgment or decree,
(2) if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of
such acceleration,
(3) if, to the extent the payment of such interest is lawful, interest
on overdue installments of interest and overdue principal, which has become
due otherwise than by such declaration of acceleration, has been paid,
(4) if the Issuer has paid the Trustee its reasonable compensation and
reimbursed the Trustee for its expenses, disbursements and advances, and
(5) in the event of the cure or waiver of an Event of Default of the
type described in clause (6) of the description of Events of Default above,
the Trustee shall have received an officer's certificate and an opinion of
counsel that such Event of Default has been cured or waived; provided,
however, that such counsel may rely, as to matters of fact, on a
certificate or certificates of officers of the Issuer.
No such rescission shall affect any subsequent Default or impair any right
consequent thereto.
Prior to the declaration of acceleration of the Notes, the Holders of a
majority in principal amount of the Notes may waive any existing Default or
Event of Default under the Indenture, and its consequences, except a default in
the payment of the principal of or interest on any Notes.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture and under the TIA. During the existence of an Event of
Default, the Trustee is required to exercise such rights and powers vested in it
under the Indenture and use the same degree of care and skill in its exercise
thereof as a prudent man would exercise or use under the circumstances in the
conduct of his own affairs. Subject to the provisions of the Indenture relating
to the duties of the Trustee, whether or not an Event of Default shall occur and
be continuing, the Trustee is under no obligation to exercise any of its rights
or powers under the Indenture at the request, order or direction of any of the
Holders, unless such Holders have offered to the Trustee reasonable indemnity.
Subject to all provisions of the Indenture and applicable law, the Holders of a
majority in aggregate principal amount of the then outstanding Notes have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
the Trustee.
The Issuer is required to provide an officer's certificate to the Trustee
promptly upon any such officer obtaining knowledge of any Default or Event of
Default (provided that such officers shall provide such certification at least
annually whether or not they know of any Default or Event of Default) that has
occurred and, if applicable, describe such Default or Event of Default and the
status thereof.
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Possession, Use and Release of Collateral
Unless an Event of Default shall have occurred and be continuing, the Issuer
will have the right to remain in possession and retain exclusive control of the
Collateral securing the Exchange Notes (other than any cash, securities,
obligations and Cash Equivalents constituting part of the Collateral and
deposited with the Trustee in the Collateral Account and other than as set forth
in the Security Documents), to freely operate the Collateral and to collect,
invest and dispose of any income thereon.
Release of Collateral
Upon compliance by the Issuer with the conditions set forth below in respect
of any sale, transfer or other disposition, the Trustee will release the
Released Interests (as defined below) from the Lien of the Indenture and the
Security Documents and reconvey the Released Interests to the Issuer or the
grantor of the Lien on such property. The Issuer will have the right to obtain a
release of items of Collateral (the "Released Interests") subject to any sale,
transfer or other disposition, or owned by a Restricted Subsidiary the Capital
Stock of which is sold in compliance with the Indenture such that it ceases to
be a Restricted Subsidiary, upon compliance with the condition that the Issuer
deliver to the Trustee the following:
(1) a notice from the Issuer requesting the release of Released
Interests:
(A) describing the proposed Released Interests,
(B) specifying the value of such Released Interests or such Capital
Stock, as the case may be, on a date within 60 days of the Issuer notice
(the "Valuation Date"),
(C) stating that the consideration to be received is at least equal to
the fair market value of the Released Interests,
(D) stating that the release of such Released Interests will not
interfere with the Trustee's ability to realize the value of the remaining
Collateral and will not impair the maintenance and operation of the
remaining Collateral,
(E) confirming the sale or exchange of, or an agreement to sell or
exchange, such Released Interests or such Capital Stock, as the case may
be, is a bona fide sale to or exchange with a Person that is not an
Affiliate of the Issuer or, in the event that such sale or exchange is to
or with a Person that is an Affiliate, confirming that such sale or
exchange is made in compliance with the provisions set forth in "-- Certain
Covenants -- Limitation on Transactions with Affiliates," and
(F) in the event there is to be a contemporaneous substitution of
property for the Collateral subject to the sale, transfer or other
disposition, specifying the property intended to be substituted for the
Collateral to be disposed of;
(2) an officer's certificate of the Issuer stating that:
(A) such sale, transfer or other disposition or such redesignation, as
the case may be, complies with the terms and conditions of the Indenture,
including the provisions set forth in "-- Certain Covenants -- Limitation
on Asset Sales," "-- Certain Covenants --Limitation on Transactions with
Affiliates," "-- Certain Covenants -- Limitation on Restricted and
Unrestricted Subsidiaries" and "--Certain Covenants -- Limitation on
Restricted Payments" above, to the extent any of the foregoing are
applicable,
(B) all Net Cash Proceeds from the sale, transfer or other disposition
of any of the Released Interests or such Capital Stock, as the case may be,
will be applied pursuant to the provisions of the Indenture in respect of
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the deposit of proceeds into the Collateral Account as contemplated by the
Indenture and in respect of Asset Sales, to the extent applicable,
(C) there is no Default or Event of Default in effect or continuing on
the date thereof or the date of such sale, transfer or other disposition or
such redesignation, as the case may be,
(D) the release of the Collateral will not result in a Default or Event
of Default under the Indenture,
(E) upon delivery of such officer's certificate, all conditions
precedent in the Indenture relating to the release in question will have
been complied with,
(F) such sale, transfer or other disposition is not between the Issuer
or any Restricted Subsidiary or between Restricted Subsidiaries, and
(G) such sale, transfer or other disposition is not a sale, transfer or
other disposition that is excluded from the definition of "Asset Sale"
because it was a sale, lease, conveyance, disposition or other transfer of
all or substantially all of the assets of the Issuer in a transaction which
made in compliance with the provisions of "-- Certain Covenants -- Merger,
Consolidation and Sale of Assets,"
(3) all documentation required by the TIA, if any, prior to the release
of Collateral by the Trustee and, in the event there is to be a
contemporaneous substitution of property for the Collateral subject to such
sale, transfer or other disposition, all documentation necessary to effect
the substitution of such new Collateral.
Notwithstanding the provisions of "-- Release of Collateral" above, so long
as no Event of Default shall have occurred and be continuing, the Issuer may,
without satisfaction of the conditions precedent above dispose of Hydrocarbons
or other mineral products for value in the ordinary course and engage in any
number of ordinary course activities in respect of the Collateral, in limited
dollar amounts specified by the TIA, upon satisfaction of certain conditions.
For example, among other things, subject to certain dollar limitations and
conditions, the Issuer would be permitted to:
(1) sell or otherwise dispose of any property subject to the Lien of the
Indenture and the Security Documents, which may have become worn out or
obsolete,
(2) abandon, terminate, cancel, release or make alterations in or
substitutions of any leases or contracts subject to the Lien of the
Indenture or any of the Security Documents,
(3) surrender or modify any franchise, license or permit subject to the
Lien of the Indenture or any of the Security Documents which it may own or
under which it may be operating,
(4) alter, repair, replace, change the location or position of and add
to its structures, machinery, systems, equipment, fixtures and
appurtenances,
(5) demolish, dismantle, tear down or scrap any Collateral or abandon
any thereof, and
(6) grant farm-outs, leases or sub-leases in respect of real property to
the extent the foregoing does not constitute an Asset Sale.
Deposit; Use and Release of Trust Moneys
The Net Cash Proceeds associated with any Asset Sale and any Net Cash
Proceeds associated with any sale, transfer or other disposition of Collateral,
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to the extent such sale, transfer or other disposition is not an Asset Sale by
virtue of clause (H) of the definition thereof, insurance proceeds and
condemnation (or similar) proceeds shall be deposited into a securities account
maintained by the Trustee at its corporate trust offices or at any securities
intermediary selected by the Trustee having a combined capital and surplus of at
least $250,000,000 and having a long-term debt rating of at least "A3" by
Moody's and at least "A--" by S&P styled the "Abraxas Collateral Account" (such
account being the "Collateral Account") which shall be under the exclusive
dominion and control of the Trustee. All amounts on deposit in the Collateral
Account shall be treated as financial assets and cash funds on deposit in the
Collateral Account may be invested by the Trustee, at the direction of the
Issuer, in Cash Equivalents; provided, however, in no event shall the Issuer
have the right to withdraw funds or assets from the Collateral Account except in
compliance with the terms of the Indenture and all assets credited to the
Collateral Account shall be subject to a Lien in favor of the Trustee and the
Holders.
Any such funds may be released to the Issuer by its delivering to the
Trustee an officer's certificate stating:
(1) no Event of Default has occurred and is continuing as of the date of
the proposed release; and
(2) (A) if such Trust Moneys represent Collateral Proceeds in respect of
an Asset Sale, that the application of such funds are otherwise being
applied in accordance with the covenant "Limitation on Asset Sales" above,
or (B) if such Trust Moneys represent proceeds in respect of a casualty,
expropriation or taking, that the application of such funds will be applied
to repair or replace property subject of a casualty or condemnation or
reimburse the Issuer for amounts spent to repair or replace such property
and that attached thereto are invoices or other evidence reflecting the
amounts spent or to be spent, or (C) if such Trust Moneys represent
proceeds derived from any other manner, that such amounts are being
utilized in connection with business of the Issuer and its Restricted
Subsidiaries in compliance with the terms of the Indenture; and
(3) all conditions precedent in the Indenture relating to the release in
question have been complied with; and
(4) all documentation required by the TIA, if any, prior to the release
of such Trust Moneys by the Trustee has been delivered to the Trustee.
Notwithstanding the foregoing, (A) if the maturity of the Exchange Notes has
been accelerated, which acceleration has not been rescinded as permitted by the
Indenture, the Trustee shall apply the Trust Moneys credited to the Collateral
Account to pay the principal of, premium, if any and accrued and unpaid interest
on the Exchange Notes to the extent of such Trust Moneys, (B) if the Issuer so
elects, by giving written notice to the Trustee, the Trustee shall apply Trust
Moneys credited to the Collateral Account to the payment of interest due on any
interest payment date, and (C) if the Issuer so elects, by giving written notice
to the Trustee, the Trustee shall apply Trust Moneys credited to the Collateral
Account to the payment of the principal of, and premium, if any, and accrued and
unpaid interest on any Exchange Notes on the Stated Maturity Date or upon
redemption or to the purchase of Exchange Notes upon tender or in the open
market or at private sale or upon any exchange or in any one or more of such
ways, in each case in compliance with the Indenture.
Legal Defeasance and Covenant Defeasance
The Issuer may, at its option and at any time, elect to have its obligations
and the corresponding obligations of the Subsidiary Guarantors discharged with
respect to the outstanding Notes ("Legal Defeasance"). Such Legal Defeasance
means that the Issuer and the Subsidiary Guarantors shall be deemed to have paid
and discharged the entire indebtedness represented by the outstanding Notes, and
satisfied all of their obligations with respect to the Notes, each Guarantee,
the Indenture and the Security Documents, except for
(1) the rights of Holders to receive payments in respect of the
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principal of, premium, if any, and interest on the Notes when such payments
are due,
(2) the Issuer's obligations with respect to the Notes concerning
issuing temporary Notes, registration of Notes, mutilated, destroyed, lost
or stolen Notes and the maintenance of an office or agency for payments,
(3) the rights, powers, trust, duties and immunities of the Trustee and
the Issuer's obligations in connection therewith, and
(4) the Legal Defeasance provisions of the Indenture.
In addition, the Issuer may, at its option and at any time, elect to have
the obligations of the Issuer released with respect to certain covenants that
are described in the Indenture ("Covenant Defeasance") and thereafter any
omission to comply with such obligations shall not constitute a Default or Event
of Default with respect to the Exchange Notes. In the event Covenant Defeasance
occurs, certain events (other than non-payment, bankruptcy, receivership,
reorganization and insolvency events) described under "--Events of Default" will
no longer constitute an Event of Default with respect to the Exchange Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance,
(1) the Issuer must irrevocably deposit with the Trustee, in trust, for
the benefit of the Holders cash in United States dollars, non-callable
United States government obligations, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of, premium,
if any, and interest on the Notes on the stated date for payment thereof or
on the applicable redemption date, as the case may be;
(2) in the case of Legal Defeasance, the Issuer shall have delivered to
the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Issuer has received from,
or there has been published by, the Internal Revenue Service a ruling or
(B) since the Issue Date, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon such
opinion of counsel shall confirm that, the Holders will not recognize
income, gain or loss for federal income tax purposes as a result of such
Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the
case if such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, the Issuer shall have delivered
to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the Holders will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the
case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be continuing
on the date of such deposit or insofar as Events of Default from bankruptcy
or insolvency events are concerned, at any time in the period ending on the
91st day after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under the Indenture or any
other agreement or instrument to which the Issuer or any of its Restricted
Subsidiaries is a party or by which the Issuer or any of its Restricted
Subsidiaries is bound;
(6) the Issuer shall have delivered to the Trustee an officer's
certificate stating that the deposit was not made by the Issuer with the
intent of preferring the Holders over any other creditors of the Issuer or
with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Issuer or others;
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(7) the Issuer shall have delivered to the Trustee an officer's
certificate and an opinion of counsel, each stating that all conditions
precedent provided for or relating to the Legal Defeasance or the Covenant
Defeasance, as the case may be, have been complied with; provided, however,
that such counsel may rely, as to matters of fact, on a certificate or
certificates of officers of the Issuer;
(8) the Issuer shall have delivered to the Trustee an opinion of counsel
to the effect that after the 91st day following the deposit, the trust
funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; provided, however, that such counsel may rely, as to matters of
fact, on a certificate or certificates of officers of the Issuer; and
(9) certain other customary conditions precedent are satisfied.
Satisfaction and Discharge
The Indenture, each Guarantee and each of the Security Documents will be
discharged and will cease to be of further effect (except as to surviving rights
of registration of transfer or exchange of the Notes, as expressly provided for
in the Indenture) as to all outstanding Notes when
(1) either (A) all the Notes, theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid
and Notes for whose payment money has theretofore been deposited in trust
or segregated and held in trust by the Issuer and thereafter repaid to the
Issuer or discharged from such trust) have been delivered to the Trustee
for cancellation or (B) all Notes not theretofore delivered to the Trustee
for cancellation have become due and payable and the Issuer has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together
with irrevocable instructions from the Issuer directing the Trustee to
apply such funds to the payment thereof at maturity or redemption, as the
case may be;
(2) the Issuer has paid all other sums payable under the Indenture by
the Issuer; and
(3) the Issuer has delivered to the Trustee an officer's certificate and
an opinion of counsel stating that all conditions precedent under the
Indenture relating to the satisfaction and discharge of the Indenture have
been complied with; provided, however, that such counsel may rely, as to
matters of fact, on a certificate or certificates of officers of the
Issuer.
Modification of the Indenture
From time to time, the Issuer, the Subsidiary Guarantors and the Trustee,
without the consent of the Holders, may amend the Indenture or any Security
Document for certain specified purposes, including curing ambiguities, defects
or inconsistencies, to comply with any requirements of the Commission in order
to effect or maintain the qualification of the Indenture under the TIA or to
make any change that would provide any additional benefit or rights to the
Holders or that does not adversely affect the rights of any Holder. In
formulating its opinion on such matters, the Trustee will be entitled to rely on
such evidence as it deems appropriate, including, without limitation, solely on
an opinion of counsel; provided, however, that in delivering such opinion of
counsel, such counsel may rely, as to matters of fact, on a certificate or
certificates of officers of the Issuer. Other modifications and amendments of
the Indenture or any Security Document may be made with the consent of the
Holders of not less than a majority of the principal amount of the then
outstanding Notes issued under the Indenture, except that, without the consent
of each Holder affected thereby, no amendment may:
(1) reduce the amount of Notes whose Holders must consent to an
amendment;
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(2) reduce the rate of or change or have the effect of changing the time
for payment of interest, including defaulted interest, on any Notes;
(3) reduce the principal of or change or have the effect of changing the
fixed maturity of any Notes, or change the date on which any Notes may be
subject to redemption or repurchase, or reduce the redemption or repurchase
price therefor;
(4) make any Notes payable in money other than that stated in the Notes;
(5) make any change in provisions of the Indenture or any Security
Document protecting the right of each Holder to receive payment of
principal of and interest on such Note on or after the due date thereof or
to bring suit to enforce such payment, or permitting Holders of a majority
in principal amount of Notes to waive Defaults or Events of Default;
(6) amend, change or modify in any material respect the obligation of
the Issuer to make and consummate a Change of Control Offer in the event of
a Change of Control or make and consummate a Net Proceeds Offer with
respect to any Asset Sale that has been consummated or modify any of the
provisions or definitions with respect thereto;
(7) modify or change any provision of the Indenture, any Security
Document or the related definitions affecting ranking of the Notes or any
Guarantee in a manner which adversely affects the Holders; or
(8) release any Collateral from the Liens created pursuant to the
Indenture and the Security Documents or release any Subsidiary Guarantor
from any of its obligations under its Guarantee, in any case otherwise than
in accordance with the terms of the Indenture.
Governing Law
The Indenture, the Exchange Notes, the Guarantees and the Security Documents
relating to Collateral located in the U.S. will be governed by, and construed in
accordance with, the laws of the State of New York, except to the extent the
laws of another jurisdiction may be mandatorily applicable to certain matters
under the Security Documents. The Security Documents relating to Collateral
located in Canada will be governed by Alberta law.
The Trustee
Norwest Bank Minnesota, National Association will act as Trustee whose
address is Sixth and Marquette, Minneapolis, Minnesota 55479-0069, attn:
Corporate Trust Department.
Except during the continuance of an Event of Default, the Trustee will
perform only such duties as are specifically set forth in the Indenture. During
the existence of an Event of Default, the Trustee will exercise such rights and
powers vested in it by the Indenture, and use the same degree of care and skill
in its exercise as a prudent man would exercise or use under the circumstances
in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Issuer or a
Subsidiary Guarantor, to obtain payments of claims in certain cases or to
realize on certain property received in respect of any such claim as security or
otherwise. Subject to the TIA, the Trustee will be permitted to engage in other
transactions; provided, however, that if the Trustee acquires any conflicting
interest as described in the TIA, it must eliminate such conflict or resign.
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Form, Denomination and Registration
Global Notes; Book Entry Form
Except as set forth in the next paragraph, the Exchange Notes will be
evidenced initially by one or more global notes (the "Global Note") which will
be deposited with, or on behalf of, The Depository Trust Company ("DTC") and
registered in the name of Cede & Co., as DTC's nominee. Except as set forth
below, record ownership of the Global Note may be transferred, in whole or in
part, only to another nominee of DTC or to a successor of DTC or its nominee.
Exchange Notes (1) originally purchased by or transferred to Institutional
Accredited Investors who are not Qualified Institutional Buyers or (2) held by
Qualified Institutional Buyers who elect to take physical deliver of their
certificates instead of holding their interests through the Global Note (and
which are thus ineligible to trade through DTC) (collectively referred to herein
as the "Non-Global Purchasers") will be issued in registered certificated form
("Certificated Notes"). Upon the transfer to a Qualified Institutional Buyer of
any Certificated Note initially issued to a Non-Global Purchaser, such
Certificated Note will, unless the transferee requests otherwise or the Global
Note has previously been exchanged in whole for Certificated Notes as described
below, be exchanged for an interest in the Global Note.
Owners of beneficial interests in the Global Note may hold their interest in
the Global Note directly through DTC if such person is a participant in DTC or
indirectly through organizations that are participants in DTC (the
"Participants"). Persons who are not Participants may beneficially own interests
in the Global Note held by DTC only through Participants or certain banks,
brokers, dealers, trust companies and other parties that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants"). So long as Cede & Co., as the nominee of
DTC, is the registered owner of the Global Note, Cede & Co. for all purposes
will be considered the sole holder of the Global Note. Owners of beneficial
interests in the Global Note will be entitled to have certificates registered in
their names and to receive physical delivery of Certificated Notes.
Payment of principal of and premium, interest and Liquidated Damages, if
any, on the Global Note will be made to Cede & Co., the nominee for DTC, as
registered owner of the Global Note, by wire transfer of immediately available
funds on the applicable payment date. Neither the Issuer nor the Trustee will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of beneficial ownership interests in the Global Note
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interest.
The Issuer has been informed by DTC that, with respect to any payment of
principal of, or premium, interest or Liquidated Damages, if any, on the Global
Note, DTC's practice is to credit Participants' accounts on the applicable
payment date, with payments in amounts proportionate to their respective
beneficial interests in the Notes represented by the Global Note as shown on the
records of DTC, unless DTC has reason to believe that it will not receive
payment on such payment date. Payments by Participants to owners of beneficial
interests in the Notes represented by the Global Note held through such
Participants will be the responsibility of such Participants, as is now the case
with securities held for the accounts of customers registered in "street name."
Transfers between Participants will be effected in the ordinary way in
accordance with DTC's rules and will be settled in immediately available funds.
The laws of some states require that certain persons take physical delivery of
securities in definitive form. Consequently, the ability to transfer beneficial
interests in the Global Note to such persons may be limited. Because DTC can
only act on behalf of Participants, who in turn act on behalf of Indirect
Participants and certain banks and other parties, the ability of a person having
a beneficial interest in the Notes represented by the Global Note to pledge such
interest to persons or entities that do not participate in the DTC system, or
otherwise take actions in respect of such interest, may be affected by the lack
of a physical certificate evidencing such interest.
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Neither the Issuer nor the Transfer Agent will have responsibility for the
performance of DTC or its Participants or Indirect Participants of their
respective obligations under the rules and procedures governing their
operations. DTC has advised the Issuer that it will take any action permitted to
be taken by a holder of Exchange Notes (including, without limitation, the
presentation of Notes for exchange as described below) only at the direction of
one or more Participants to whose account with DTC interests in the Global Note
are credited, and only in respect of the Exchange Notes represented by the
Global Note as to which such Participant or Participants has or have given such
direction.
DTC has also advised the Issuer that DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "clearing agency" registered pursuant to the provisions of
Section 17A of the Exchange Act. DTC was created to hold securities for its
Participants and to facilitate the clearance and settlement of securities
transactions between Participants through electronic book-entry changes to
accounts of its Participants, thereby eliminating the need for physical movement
of certificates. Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and may include certain other
organizations such as the Initial Purchaser. Certain of such Participants (or
their representatives), together with other entities, own DTC. Indirect access
to the DTC system is available to others such as banks, brokers, dealers and
trust companies that clear through, or maintain a custodial relationship with, a
Participant, either directly or indirectly.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among Participants, it is under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. If DTC is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
the Issuer within 90 days, the Issuer will cause Certificated Notes to be issued
in exchange for the Global Notes.
Certificated Notes
Investors in the Exchange Notes may request that Certificated Notes be
issued in exchange for Exchange Notes represented by the Global Note.
Furthermore, Certificated Notes may be issued in exchange for Exchange Notes
represented by the Global Note if no successor depositary is appointed by the
Issuer as set forth above.
Certain Definitions
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries
(1) existing at the time such Person becomes a Restricted Subsidiary or
at the time it merges or consolidates with the Issuer or any of its
Restricted Subsidiaries, or
(2) which becomes Indebtedness of the Issuer or a Restricted Subsidiary
in connection with the acquisition of assets from such Person,
in each case not incurred in connection with, or in anticipation or
contemplation of, such Person becoming a Restricted Subsidiary or such
acquisition, merger or consolidation.
"Adjusted Consolidated Net Tangible Assets" means (without duplication), as
of the date of determination:
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(1) the sum of:
(A) discounted future net revenues from proved oil and gas reserves of
the Issuer and its consolidated Restricted Subsidiaries, calculated in
accordance with Commission guidelines (before any state or federal income
tax), as estimated by a nationally recognized firm of independent petroleum
engineers as of a date no earlier than the date of the Issuer's latest
annual consolidated financial statements, as increased by, as of the date
of determination, the estimated discounted future net revenues from (i)
estimated proved oil and gas reserves acquired since the date of such
year-end reserve report and (ii) estimated oil and gas reserves
attributable to upward revisions of estimates of proved oil and gas
reserves since the date of such year-end reserve report due to exploration,
development or exploitation activities, in each case calculated in
accordance with Commission guidelines (utilizing the prices utilized in
such year-end reserve report), and decreased by, as of the date of
determination, the estimated discounted future net revenues from (iii)
estimated proved oil and gas reserves produced or disposed of since the
date of such year-end reserve report and (iv) estimated oil and gas
reserves attributable to downward revisions of estimates of proved oil and
gas reserves since the date of such year-end reserve report due to changes
in geological conditions or other factors which would, in accordance with
standard industry practice, cause such revisions, in each case calculated
in accordance with Commission guidelines (utilizing the prices utilized in
such year-end reserve report); provided, however, that, in the case of each
of the determinations made pursuant to clauses (i) through (iv), such
increases and decreases shall be as estimated by the Issuer's petroleum
engineers, unless in the event that there is a Material Change as a result
of such acquisitions, dispositions or revisions, then the discounted future
net revenues utilized for purposes of this clause (1)(A) shall be confirmed
in writing, by a nationally recognized firm of independent petroleum
engineers (which may be the Issuer's independent petroleum engineers who
prepare the Issuer's annual reserve report), plus
(B) the capitalized costs that are attributable to oil and gas
properties of the Issuer and its consolidated Restricted Subsidiaries to
which no proved oil and gas reserves are attributable, based on the
Issuer's books and records as of a date no earlier than the date of the
Issuer's latest annual or quarterly financial statements, plus
(C) the Net Working Capital on a date no earlier than the date of the
Issuer's latest consolidated annual or quarterly financial statements, plus
(D) with respect to each other tangible asset of the Issuer or its
consolidated Restricted Subsidiaries specifically including, but not to the
exclusion of any other qualifying tangible assets, the Issuer's or its
consolidated Restricted Subsidiaries' gas producing facilities and unproved
oil and gas properties (less any remaining deferred income taxes which have
been allocated to such gas processing facilities in connection with the
acquisition thereof), land, equipment, leasehold improvements, investments
carried on the equity method, restricted cash and the carrying value of
marketable securities, the greater of (i) the net book value of such other
tangible asset on a date no earlier than the date of the Issuer's latest
consolidated annual or quarterly financial statements or (ii) the appraised
value, as estimated by a qualified Independent Advisor, of such other
tangible assets of the Issuer and its Restricted Subsidiaries, as of a date
no earlier than the date of the Issuer's latest audited financial
statements, minus
(2) minority interests and, to the extent not otherwise taken into
account in determining Adjusted Consolidated Net Tangible Assets, any gas
balancing liabilities of the Issuer and its consolidated Restricted
Subsidiaries reflected in the Issuer's latest audited financial statements.
In addition to, but without duplication of, the foregoing, for purposes of
this definition, "Adjusted Consolidated Net Tangible Assets" shall be calculated
after giving effect, on a pro forma basis, to:
(1) any Investment not prohibited by the Indenture, to and including the
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date of the transaction giving rise to the need to calculate Adjusted
Consolidated Net Tangible Assets (the "Assets Transaction Date"), in any
other Person that, as a result of such Investment, becomes a Restricted
Subsidiary of the Issuer,
(2) the acquisition, to and including the Assets Transaction Date (by
merger, consolidation or purchase of stock or assets), of any business or
assets, including, without limitation, Permitted Industry Investments, and
(3) any sales or other dispositions of assets permitted by the Indenture
(other than sales of Hydrocarbons or other mineral products in the ordinary
course of business) occurring on or prior to the Assets Transaction Date.
"Affiliate" means, with respect to any specified Person,
(1) any other Person who directly or indirectly through one or more
intermediaries controls, or is controlled by, or under common control with,
such specified Person, and
(2) any Related Person of such Person.
For purposes of this definition, the term "control" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative of the foregoing.
"Affiliate Transaction" has the meaning set forth under "-- Certain
Covenants -- Limitation on Transactions with Affiliates."
"Asset Acquisition" means:
(1) an Investment by the Issuer or any Restricted Subsidiary in any
other Person pursuant to which such Person shall become a Restricted
Subsidiary, or shall be merged with or into the Issuer or any Restricted
Subsidiary, or
(2) the acquisition by the Issuer or any Restricted Subsidiary of the
assets of any Person (other than a Restricted Subsidiary) which constitute
all or substantially all of the assets of such Person or comprises any
division or line of business of such Person or any other properties or
assets of such Person other than in the ordinary course of business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, exchange, lease (other than operating leases entered into in the
ordinary course of business), assignment or other transfer for value by the
Issuer or any of its Restricted Subsidiaries (including any Sale and Leaseback
Transaction) to any Person other than the Issuer or a Restricted Subsidiary of:
(1) any Capital Stock of any Restricted Subsidiary, or
(2) any other property or assets (including any interests therein) of
the Issuer or any Restricted Subsidiary, including any disposition by means
of a merger, consolidation or similar transaction;
provided, however, that the following will not be deemed to be an Asset Sale:
(A) the sale, lease, conveyance, disposition or other transfer of all or
substantially all of the assets of the Issuer in a transaction which is
made in compliance with the provisions of "-- Certain Covenants -- Merger,
Consolidation and Sale of Assets,"
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(B) any Investment in an Unrestricted Subsidiary which is made in
compliance with the provisions of "-- Certain Covenants -- Limitation on
Restricted Payments" above,
(C) disposals or replacements of obsolete equipment in the ordinary
course of business,
(D) the sale, lease, conveyance, disposition or other transfer by the
Issuer or any Restricted Subsidiary of assets or property to the Issuer or
one or more Wholly Owned Restricted Subsidiaries,
(E) any disposition of Hydrocarbons or other mineral products for value
in the ordinary course of business,
(F) the abandonment, surrender, termination, cancellation, release,
farmout, lease or sublease of undeveloped oil and gas properties in the
ordinary course of business or oil and gas properties which are not capable
of production in economic quantities,
(G) the contemporaneous trade or exchange by the Issuer or any of its
Restricted Subsidiaries of any oil and gas property or interest therein
owned or held by such Person for any oil and gas property or interest
therein owned or held by another Person which the Board of Directors of the
Issuer determines in good faith by resolution to be of approximately equal
value, including any cash or Cash Equivalents necessary in order to achieve
an exchange of equivalent value; provided that such cash and Cash
Equivalents are subject to the covenant "Limitation on Asset Sales";
provided, further, to the extent not prohibited by the terms of any
instruments evidencing Acquired Indebtedness associated with the property
received, that the property received by the Issuer or such Restricted
Subsidiary is made subject to the Lien of the Indenture and the Security
Documents to the extent that such property traded or exchanged was subject
to such Lien, provided that any such property received that constitutes Oil
and Gas Assets shall be made subject to such Lien in any event; and
provided, further, that to the extent the property traded or exchanged by
the Issuer and/or a Restricted Subsidiary contains proved reserves, the
property received contains an approximately equal value of proved reserves,
including cash or Cash Equivalents to achieve an exchange of equivalent
value, or
(H) the sale, lease, conveyance, disposition or other transfer by the
Issuer or any Restricted Subsidiary of assets or property in the ordinary
course of business; provided, however, that the aggregate amount (valued at
the fair market value of such assets or property at the time of such sale,
lease, conveyance, disposition or transfer) of all such assets and property
so sold, leased, conveyed, disposed or transferred since the Issue Date
pursuant to this clause (H) shall not exceed $1,000,000 in any one year.
"Available Proceeds Amount" means (i) the sum of all Collateral Proceeds and
all Non-Collateral Proceeds remaining after application to repay any
Indebtedness secured by the assets the subject of the Asset Sale giving rise to
such Non-Collateral Proceeds; and (ii) for purposes of determining whether a Net
Proceeds Offer must be made as of any day and the amount of such offer, an
amount equal to: the amount set forth under clause (i) above minus the aggregate
amount of all such Asset Sale proceeds previously spent in compliance with the
terms of the section described "Deposit; Use and Release of Trust Moneys."
"Board of Directors" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a resolution
certified by the Secretary or an Assistant Secretary of such Person to have been
duly adopted by the Board of Directors of such Person and to be in full force
and effect on the date of such certification, and delivered to the Trustee.
"Business Day" means any day other than a Saturday, Sunday or any other day
on which banking institutions in the City of New York are required or authorized
by law or other governmental action to be closed.
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"Canadian Abraxas" means Canadian Abraxas Petroleum Limited.
"Capitalized Lease Obligation" means, as to any Person, the discounted
present value of the rental obligations of such Person under a lease of (or
other agreement conveying the right to use) any property (whether real, personal
or mixed) that is required to be classified and accounted for as a capital lease
obligation at such date, determined in accordance with GAAP.
"Capital Stock" means:
(1) with respect to any Person that is a corporation, any and all
shares, interests, participations or other equivalents (however designated
and whether or not voting) of corporate stock, including each class of
Common Stock and Preferred Stock of such Person and including any warrants,
options or rights to acquire any of the foregoing and instruments
convertible into any of the foregoing, and
(2) with respect to any Person that is not a corporation, any and all
partnership or other equity interests of such Person.
"Cash Equivalents" means:
(1) marketable direct obligations issued by, or unconditionally
guaranteed by, the United States Government or issued by any agency thereof
and backed by the full faith and credit of the United States, in each case
maturing within one year from the date of acquisition thereof;
(2) marketable direct obligations issued by any state of the United
States of America or any political subdivision of any such state or any
public instrumentality thereof maturing within one year from the date of
acquisition thereof and, at the time of acquisition, having one of the two
highest ratings obtainable from either Standard & Poor's Corporation
("S&P") or Moody's Investors Service, Inc. ("Moody's");
(3) commercial paper maturing no more than one year from the date of
creation thereof and, at the time of acquisition, having a rating of at
least A-1 from S&P or at least P-1 from Moody's;
(4) certificates of deposit or bankers' acceptances maturing within one
year from the date of acquisition thereof issued by any bank organized
under the laws of the United States of America or any state thereof or the
District of Columbia or any United States branch of a foreign bank having
at the date of acquisition thereof combined capital and surplus of not less
than $250,000,000;
(5) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (1) above entered
into with any bank meeting the qualifications specified in clause (4)
above; and
(6) money market mutual or similar funds having assets in excess of
$100,000,000.
"Change of Control" means the occurrence of one or more of the following
events:
(1) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets
of the Issuer to any Person or group of related Persons for purposes of
Section 13(d) of the Exchange Act (a "Group") (whether or not otherwise in
compliance with the provisions of the Indenture);
(2) the approval by the holders of Capital Stock of the Issuer of any
plan or proposal for the liquidation or dissolution of the Issuer (whether
or not otherwise in compliance with the provisions of the Indenture);
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(3) any Person or Group shall become the owner, directly or indirectly,
beneficially or of record, of shares representing more than 35% of the
aggregate ordinary voting power represented by the issued and outstanding
Capital Stock of the Issuer; or
(4) the replacement of a majority of the Board of Directors of the
Issuer over a two-year period from the directors who constituted the Board
of Directors of the Issuer at the beginning of such period with directors
whose replacement shall not have been approved (by recommendation,
nomination or election, as the case may be) by a vote of at least a
majority of the Board of Directors of the Issuer then still in office who
either were members of such Board of Directors at the beginning of such
period or whose election as a member of such Board of Directors was
previously so approved.
"Change of Control Offer" has the meaning set forth under "-- Change of
Control."
"Change of Control Payment Date" has the meaning set forth under "-- Change
of Control."
"Collateral" means, collectively, all of the property and assets (including,
without limitation, Trust Moneys) that are from time to time subject to, or
purported to be subject to, the Lien of the Indenture or any of the Security
Documents.
"Collateral Account" has the meaning given to it in the section described
herein under the heading "Use of Trust Moneys."
"Collateral Proceeds" means any Net Cash Proceeds received from an Asset
Sale involving Collateral.
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"Commission" means the Securities and Exchange Commission.
"Consolidated EBITDA" means, for any period, the sum (without duplication)
of:
(1) Consolidated Net Income, and
(2) to the extent Consolidated Net Income has been reduced thereby, (A)
all income taxes of the Issuer and its Restricted Subsidiaries paid or
accrued in accordance with GAAP for such period (other than income taxes
attributable to extraordinary, unusual or nonrecurring gains or losses or
taxes attributable to sales or dispositions outside the ordinary course of
business), (B) Consolidated Interest Expense, (C) the amount of any
Preferred Stock dividends paid by the Issuer and its Restricted
Subsidiaries, and (D) Consolidated Non-cash Charges, less any non-cash
items increasing Consolidated Net Income for such period, all as determined
on a consolidated basis for the Issuer and its Restricted Subsidiaries in
accordance with GAAP.
"Consolidated EBITDA Coverage Ratio" means, with respect to the Issuer, the
ratio of:
(1) Consolidated EBITDA of the Issuer during the four full fiscal
quarters for which financial information in respect thereof is available
(the "Four Quarter Period") ending on or prior to the date of the
transaction giving rise to the need to calculate the Consolidated EBITDA
Coverage Ratio (the "Transaction Date") to
(2) Consolidated Fixed Charges of the Issuer for the Four Quarter
Period.
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For purposes of this definition, "Consolidated EBITDA" and "Consolidated
Fixed Charges" shall be calculated after giving effect (without duplication) on
a pro forma basis for the period of such calculation to:
(1) the incurrence or repayment of any Indebtedness of the Issuer or any
of its Restricted Subsidiaries (and the application of the proceeds
thereof) giving rise to the need to make such calculation and any
incurrence or repayment of other Indebtedness (and the application of the
proceeds thereof), other than the incurrence or repayment of indebtedness
in the ordinary course of business for working capital purposes pursuant to
working capital facilities, occurring during the Four Quarter Period or at
any time subsequent to the last day of the Four Quarter Period and on or
prior to the Transaction Date, as if such incurrence or repayment, as the
case may be (and the application of the proceeds thereof), occurred on the
first day of the Four Quarter Period, and
(2) any Asset Sales or Asset Acquisitions (including, without
limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of the Issuer or one of its Restricted Subsidiaries
(including any Person who becomes a Restricted Subsidiary as a result of
the Asset Acquisition) incurring, assuming or otherwise being liable for
Acquired Indebtedness, and also including, without limitation, any
Consolidated EBITDA attributable to the assets which are the subject of the
Asset Acquisition or Asset Sale during the Four Quarter Period) occurring
during the Four Quarter Period or at any time subsequent to the last day of
the Four Quarter Period and on or prior to the Transaction Date, as if such
Asset Sale or Asset Acquisition (including the incurrence, assumption or
liability for any such Acquired Indebtedness) occurred on the first day of
the Four Quarter Period. If the Issuer or any of its Restricted
Subsidiaries directly or indirectly guarantees Indebtedness of a third
Person, the preceding sentence shall give effect to the incurrence of such
guaranteed Indebtedness as if the Issuer or the Restricted Subsidiary, as
the case may be, had directly incurred or otherwise assumed such guaranteed
Indebtedness.
Furthermore, in calculating "Consolidated Fixed Charges" for purposes of
determining the denominator (but not the numerator) of this "Consolidated EBITDA
Coverage Ratio":
(1) interest on outstanding Indebtedness determined on a fluctuating
basis as of the Transaction Date and which will continue to be so
determined thereafter shall be deemed to have accrued at a fixed rate per
annum equal to the rate of interest on such Indebtedness in effect on the
Transaction Date;
(2) if interest on any Indebtedness actually incurred on the Transaction
Date may optionally be determined at an interest rate based upon a factor
of a prime or similar rate, a eurocurrency interbank offered rate, or other
rates, then the interest rate in effect on the Transaction Date will be
deemed to have been in effect during the Four Quarter Period;
(3) notwithstanding clauses (1) and (2) above, interest on Indebtedness
determined on a fluctuating basis, to the extent such interest is covered
by agreements relating to Interest Swap Obligations, shall be deemed to
accrue at the rate per annum resulting after giving effect to the operation
of such agreements.
"Consolidated Fixed Charges" means, with respect to the Issuer for any
period, the sum, without duplication, of:
(1) Consolidated Interest Expense (including any premium or penalty paid
in connection with redeeming or retiring Indebtedness of the Issuer and its
Restricted Subsidiaries prior to the stated maturity thereof pursuant to
the agreements governing such Indebtedness), plus
(2) the product of (A) the amount of all dividend payments on any series
of Preferred Stock of the Issuer (other than dividends paid in Qualified
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Capital Stock) paid, accrued or scheduled to be paid or accrued during such
period times (B) a fraction, the numerator of which is one and the
denominator of which is one minus the then current effective consolidated
federal, state and local income tax rate of such Person, expressed as a
decimal.
"Consolidated Interest Expense" means, with respect to the Issuer for any
period, the sum of, without duplication:
(1) the aggregate of the interest expense of the Issuer and its
Restricted Subsidiaries for such period determined on a consolidated basis
in accordance with GAAP, including without limitation, (A) any amortization
of original issue discount, (B) the net costs under Interest Swap
Obligations, (C) all capitalized interest and (D) the interest portion of
any deferred payment obligation; and
(2) the interest component of Capitalized Lease Obligations paid,
accrued and/or scheduled to be paid or accrued by the Issuer and its
Restricted Subsidiaries during such period, as determined on a consolidated
basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to the Issuer for any period,
the aggregate net income (or loss) of the Issuer and its Restricted Subsidiaries
for such period on a consolidated basis, determined in accordance with GAAP;
provided, however, that there shall be excluded therefrom:
(1) after-tax gains from Asset Sales or abandonments or reserves
relating thereto,
(2) after-tax items classified as extraordinary or nonrecurring gains,
(3) the net income of any Person acquired in a "pooling of interests"
transaction accrued prior to the date it becomes a Restricted Subsidiary or
is merged or consolidated with the Issuer or any Restricted Subsidiary,
(4) the net income (but not loss) of any Restricted Subsidiary to the
extent that the declaration of dividends or similar distributions by that
Restricted Subsidiary of that income is restricted by charter, contract,
operation of law or otherwise,
(5) the net income of any Person in which the Issuer has an interest,
other than a Restricted Subsidiary, except to the extent of cash dividends
or distributions actually paid to the Issuer or to a Restricted Subsidiary
by such Person,
(6) income or loss attributable to discontinued operations (including,
without limitation, operations disposed of during such period whether or
not such operations were classified as discontinued), and
(7) in the case of a successor to the Issuer by consolidation or merger
or as a transferee of the Issuer's assets, any net income (or loss) of the
successor corporation prior to such consolidation, merger or transfer of
assets.
"Consolidated Net Worth" of any Person as of any date means the consolidated
stockholders' equity of such Person, determined on a consolidated basis in
accordance with GAAP, less (without duplication) amounts attributable to
Disqualified Capital Stock of such Person.
"Consolidated Non-cash Charges" means, with respect to the Issuer, for any
period, the aggregate depreciation, depletion, amortization and other non-cash
expenses of the Issuer and its Restricted Subsidiaries reducing Consolidated Net
Income of the Issuer for such period, determined on a consolidated basis in
accordance with GAAP (excluding any such charges constituting an extraordinary
item or loss or any such charge which requires an accrual of or a reserve for
cash charges for any future period).
"consolidation" means, with respect to any Person, the consolidation of the
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accounts of the Restricted Subsidiaries of such Person with those of such
Person, all in accordance with GAAP; provided, however, that "consolidation"
will not include consolidation of the accounts of any Unrestricted Subsidiary of
such Person with the accounts of such Person. The term "consolidated" has a
correlative meaning to the foregoing.
"Covenant Defeasance" has the meaning set forth under "-- Legal Defeasance
and Covenant Defeasance."
"Crude Oil and Natural Gas Business" means (i) the acquisition, exploration,
development, operation and disposition of interests in oil, gas and other
hydrocarbon properties located in North America, and (ii) the gathering,
marketing, treating, processing, storage, selling and transporting of any
production from such interests or properties of the Issuer or of others.
"Crude Oil and Natural Gas Hedge Agreements" means, with respect to any
Person, any oil and gas agreements and other agreements or arrangements or any
combination thereof entered into by such Person in the ordinary course of
business and that is designed to provide protection against oil and natural gas
price fluctuations.
"Crude Oil and Natural Gas Properties" means all Properties, including
equity or other ownership interests therein, owned by any Person which have been
assigned "proved oil and gas reserves" as defined in Rule 4-10 of Regulation S-X
of the Securities Act as in effect on the Issue Date.
"Crude Oil and Natural Gas Related Assets" means any Investment or capital
expenditure (but not including additions to working capital or repayments of any
revolving credit or working capital borrowings) by the Issuer or any Restricted
Subsidiary of the Issuer which is related to the business of the Issuer and its
Restricted Subsidiaries as it is conducted on the date of the Asset Sale giving
rise to the Net Cash Proceeds to be reinvested.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Issuer or any Restricted Subsidiary of the Issuer against fluctuations in
currency values.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"Disqualified Capital Stock" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is mandatorily redeemable at the sole option of the holder thereof, in whole or
in part, in either case, on or prior to the final maturity of the Notes.
"Equity Offering" means an offering of Qualified Capital Stock of the
Issuer.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or any
successor statute or statutes thereto.
"fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between an informed and willing seller and an informed and willing buyer,
neither of whom is under undue pressure or compulsion to complete the
transaction. Fair market value shall be determined by the Board of Directors of
the Issuer acting reasonably and in good faith and shall be evidenced by a Board
Resolution of the Issuer delivered to the Trustee; provided, however, that
(1) if the aggregate non-cash consideration to be received by the Issuer
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or any Restricted Subsidiary from any Asset Sale shall reasonably be
expected to exceed $5,000,000 or
(2) if the net worth of any Restricted Subsidiary to be designated as an
Unrestricted Subsidiary shall reasonably be expected to exceed $10,000,000,
then fair market value shall be determined by an Independent Advisor.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board as of any date of determination.
"Grey Wolf" means Grey Wolf Exploration Inc., an Alberta corporation.
"Holder" means any Person holding a Note.
"Hydrocarbons" means oil, gas, casinghead gas, drip gasoline, natural
gasoline, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons and
all constituents, elements or compounds thereof and products processed
therefrom.
"incur" has the meaning set forth under "-- Certain Covenants -- Limitation
on Incurrence of Additional Indebtedness."
"Indebtedness" means with respect to any Person, without duplication:
(1) all Obligations of such Person for borrowed money,
(2) all Obligations of such Person evidenced by bonds, debentures, notes
or other similar instruments,
(3) all Capitalized Lease Obligations of such Person,
(4) all Obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations and all
Obligations under any title retention agreement (but excluding trade
accounts payable),
(5) all Obligations for the reimbursement of any obligor on a letter of
credit, banker's acceptance or similar credit transaction,
(6) guarantees and other contingent obligations in respect of
Indebtedness referred to in clauses (1) through (5) above and clause (8)
below,
(7) all Obligations of any other Person of the type referred to in
clauses (1) through (6) above which are secured by any Lien on any property
or asset of such Person, the amount of such Obligation being deemed to be
the lesser of the fair market value of such property or asset or the amount
of the Obligation so secured,
(8) all Obligations under Currency Agreements and Interest Swap
Obligations, and
(9) all Disqualified Capital Stock issued by such Person with the amount
of Indebtedness represented by such Disqualified Capital Stock being equal
to the greater of its voluntary or involuntary liquidation preference and
its maximum fixed redemption price or repurchase price.
For purposes hereof, the "maximum fixed repurchase price" of any
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Disqualified Capital Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Capital Stock as if
such Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the fair market value of such Disqualified
Capital Stock, such fair market value shall be determined reasonably and in good
faith by the Board of Directors of the Issuer. The "amount" or "principal
amount" of Indebtedness at any time of determination as used herein represented
by:
(1) any Indebtedness issued at a price that is less than the principal
amount at maturity thereof shall be the face amount of the liability in
respect thereof,
(2) any Capitalized Lease Obligation shall be the amount determined in
accordance with the definition thereof,
(3) any Interest Swap Obligations included in the definition of
Permitted Indebtedness shall be zero,
(4) all other unconditional obligations shall be the amount of the
liability thereof determined in accordance with GAAP, and
(5) all other contingent obligations shall be the maximum liability at
such date of such Person.
"Independent Advisor" means a reputable accounting, appraisal or nationally
recognized investment banking, engineering or consulting firm which:
(1) does not, and whose directors, officers and employees or Affiliates
do not, have a direct or indirect material financial interest in the
Issuer, and
(2) in the judgment of the Board of Directors of the Issuer, is
otherwise disinterested, independent and qualified to perform the task for
which it is to be engaged.
"Initial Purchaser" means Jefferies & Company, Inc.
"Interest Swap Obligation" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"Investment" means, with respect to any Person, any direct or indirect:
(1) loan, advance or other extension of credit (including, without
limitation, a guarantee) or capital contribution (by means of any transfer
of cash or other property (valued at the fair market value thereof as of
the date of transfer) to others or any payment for property or services for
the account or use of others),
(2) purchase or acquisition by such Person of any Capital Stock, bonds,
notes, debentures or other securities or evidences of Indebtedness issued
by, any other Person (whether by merger, consolidation, amalgamation or
otherwise and whether or not purchased directly from the issuer of such
securities or evidences of Indebtedness),
(3) guarantee or assumption of the Indebtedness of any other Person
(other than the guarantee or assumption of Indebtedness of such Person or a
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Restricted Subsidiary of such Person which guarantee or assumption is made
in compliance with the provisions of "-- Certain Covenants -- Limitation on
Incurrence of Additional Indebtedness" above), and
(4) other items that would be classified as investments on a balance
sheet of such Person prepared in accordance with GAAP.
Notwithstanding the foregoing, "Investment" shall exclude extensions of
trade credit by the Issuer and its Restricted Subsidiaries on commercially
reasonable terms in accordance with normal trade practices of the Issuer or such
Restricted Subsidiary, as the case may be. The amount of any Investment shall
not be adjusted for increases or decreases in value, or write-ups, write-downs
or write-offs with respect to such Investment. If the Issuer or any Restricted
Subsidiary sells or otherwise disposes of any Capital Stock of any Restricted
Subsidiary such that, after giving effect to any such sale or disposition, it
ceases to be a Subsidiary of the Issuer, the Issuer shall be deemed to have made
an Investment on the date of any such sale or disposition equal to the fair
market value of the Capital Stock of such Restricted Subsidiary not sold or
disposed of.
"Issue Date" means the date of original issuance of the Notes.
"Issuer" means Abraxas Petroleum Corporation, a Nevada corporation.
"Issuer Properties" means all Properties, and equity, partnership or other
ownership interests therein, that are related or incidental to, or used or
useful in connection with, the conduct or operation of any business activities
of the Issuer or any of its Restricted Subsidiaries, which business activities
are not prohibited by the terms of the Indenture.
"Legal Defeasance" has the meaning set forth under "-- Legal Defeasance and
Covenant Defeasance."
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
floating or other charge or encumbrance of any kind (including any conditional
sale or other title retention agreement, any lease in the nature thereof and any
agreement to give any security interest).
"Material Change" means an increase or decrease of more than 10% during a
fiscal quarter in the discounted future net cash flows (excluding changes that
result solely from changes in prices) from proved oil and gas reserves of the
Issuer and consolidated Restricted Subsidiaries (before any state or federal
income tax); provided, however, that the following will be excluded from the
Material Change calculation:
(1) any acquisitions during the quarter of oil and gas reserves that
have been estimated by independent petroleum engineers and on which a
report or reports exist,
(2) any disposition of properties existing at the beginning of such
quarter that have been disposed of as provided in "Limitation on Asset
Sales," and
(3) any reserves added during the quarter attributable to the drilling
or recompletion of wells not included in previous reserve estimates, but
which will be included in future quarters.
"Mortgage" means a mortgage (or deed of trust) dated as of the Issue Date
granted by the Issuer or any Restricted Subsidiary of the Issuer for the benefit
of the Trustee and the Holders, as the same may be amended, supplemented or
modified from time to time in accordance with the terms thereof and of the
Indenture.
"Net Cash Proceeds" means, with respect to any Asset Sale, sale, transfer or
other disposition, the proceeds in the form of cash or Cash Equivalents
including payments in respect of deferred payment obligations when received in
the form of cash or Cash Equivalents received by the Issuer or any of its
Restricted Subsidiaries from such Asset Sale, sale, transfer or other
disposition net of:
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(1) reasonable out-of-pocket expenses and fees relating to such Asset
Sale, sale, transfer or other disposition (including, without limitation,
legal, accounting and investment banking fees and sales commissions),
(2) taxes paid or payable after taking into account any reduction in
consolidated tax liability due to available tax credits or deductions and
any tax sharing arrangements, and
(3) appropriate amounts (determined by the Chief Financial Officer of
the Issuer) to be provided by the Issuer or any Restricted Subsidiary, as
the case may be, as a reserve, in accordance with GAAP, against any post
closing adjustments or liabilities associated with such Asset Sale, sale,
transfer or other disposition and retained by the Issuer or any Restricted
Subsidiary, as the case may be, after such Asset Sale, sale, transfer or
other disposition, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated
with such Asset Sale, sale, transfer or other disposition (but excluding
any payments which, by the terms of the indemnities will not, be made
during the term of the Notes), and
(4) the aggregate amount of cash and Cash Equivalents so received which
is used to retire any then existing Indebtedness (other than Indebtedness
under the Notes) of the Issuer or such Restricted Subsidiary which is
secured by a Lien on the property subject of the Asset Sale, sale, transfer
or other disposition.
"Net Working Capital" means:
(1) all current assets of the Issuer and its consolidated Subsidiaries,
minus
(2) all current liabilities of the Issuer and its consolidated
Subsidiaries, except current liabilities included in Indebtedness,
in each case as set forth in financial statements of the Issuer prepared in
accordance with GAAP.
"Non-Recourse Indebtedness" with respect to any Person means Indebtedness of
such Person for which:
(1) the sole legal recourse for collection of principal and interest on
such Indebtedness is against the specific property identified in the
instruments evidencing or securing such Indebtedness and such property was
acquired with the proceeds of such Indebtedness or such Indebtedness was
incurred within 90 days after the acquisition of such property, and
(2) no other assets of such Person may be realized upon in collection of
principal or interest on such Indebtedness;
provided, however, that any such Indebtedness shall not cease to be
"Non-Recourse Indebtedness" solely as a result of the instrument governing such
Indebtedness containing terms pursuant to which such Indebtedness becomes
recourse upon:
(A) fraud or misrepresentation by the Person in connection with such
Indebtedness,
(B) such Person failing to pay taxes or other charges that result in the
creation of liens on any portion of the specific property securing such
Indebtedness or failing to maintain any insurance on such property required
under the instruments securing such Indebtedness,
(C) the conversion of any of the collateral for such Indebtedness,
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(D) such Person failing to maintain any of the collateral for such
Indebtedness in the condition required under the instruments securing the
Indebtedness,
(E) any income generated by the specific property securing such
Indebtedness being applied in a manner not otherwise allowed in the
instruments securing such Indebtedness,
(F) the violation of any applicable law or ordinance governing hazardous
materials or substances or otherwise affecting the environmental condition
of the specific property securing the Indebtedness, or
(G) the rights of the holder of such Indebtedness to the specific
property becoming impaired, suspended or reduced by any act, omission or
misrepresentation of such Person;
provided, further, that upon the occurrence of any of the foregoing clauses (A)
through (G) above, any such Indebtedness which shall have ceased to be
"Non-Recourse Indebtedness" shall be deemed to have been Indebtedness incurred
by such Person at such time.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Oil and Gas Assets" means the Crude Oil and Natural Gas Properties and
natural gas processing facilities of the Issuer and/or Restricted Subsidiary,
except that for purposes of the Issuer's obligation to secure substantially all
of its Oil & Gas Assets acquired after the Issue Date, the T-Gas Assets shall be
excluded but only if the sale or other disposition thereof results in Net Cash
Proceeds to the Issuer in excess of $500,000.
"Payment Restriction" has the meaning set forth under "-- Certain Covenants
- -- Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries."
"Permitted Indebtedness" means, without duplication, each of the following:
(1) Indebtedness under the Notes, the Exchange Notes, the Private
Exchange Notes, if any, the Indenture, the Guarantees and the Security
Documents;
(2) Interest Swap Obligations of the Issuer or a Restricted Subsidiary
covering Indebtedness of the Issuer or any of its Restricted Subsidiaries;
provided, however, that such Interest Swap Obligations are entered into to
protect the Issuer and its Restricted Subsidiaries from fluctuations in
interest rates on Indebtedness incurred in accordance with the Indenture to
the extent the notional principal amount of such Interest Swap Obligations
does not exceed the principal amount of the Indebtedness to which such
Interest Swap Obligation relates;
(3) Indebtedness of a Restricted Subsidiary to the Issuer or to a Wholly
Owned Restricted Subsidiary for so long as such Indebtedness is held by the
Issuer or a Wholly Owned Restricted Subsidiary, in each case subject to no
Lien held by a Person other than the Issuer or a Wholly Owned Restricted
Subsidiary; provided, however, that if as of any date any Person other than
the Issuer or a Wholly Owned Restricted Subsidiary owns or holds any such
Indebtedness or holds a Lien in respect of such Indebtedness, such date
shall be deemed the incurrence of Indebtedness not constituting Permitted
Indebtedness by the issuer of such Indebtedness;
(4) Indebtedness of the Issuer to a Wholly Owned Restricted Subsidiary
for so long as such Indebtedness is held by a Wholly Owned Restricted
Subsidiary, in each case subject to no Lien; provided, however, that (A)
any Indebtedness of the Issuer to any Wholly Owned Restricted Subsidiary
that is not a Subsidiary Guarantor is unsecured and subordinated, pursuant
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to a written agreement, to the Issuer's obligations under the Indenture and
the Notes and (B) if as of any date any Person other than a Wholly Owned
Restricted Subsidiary owns or holds any such Indebtedness or holds a Lien
in respect of such Indebtedness, such date shall be deemed the incurrence
of Indebtedness not constituting Permitted Indebtedness by the Issuer;
(5) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except
in the case of daylight overdrafts) drawn against insufficient funds in the
ordinary course of business; provided, however, that such Indebtedness is
extinguished within two Business Days of incurrence;
(6) Indebtedness of the Issuer or any of its Restricted Subsidiaries
represented by letters of credit for the account of the Issuer or such
Restricted Subsidiary, as the case may be, in order to provide security for
workers' compensation claims, payment obligations in connection with
self-insurance or similar requirements in the ordinary course of business;
(7) Refinancing Indebtedness;
(8) Capitalized Lease Obligations of the Issuer outstanding on the Issue
Date;
(9) Capitalized Lease Obligations and Purchase Money Indebtedness of the
Issuer or any of its Restricted Subsidiaries not to exceed $5,000,000 at
any one time outstanding;
(10) Permitted Operating Obligations;
(11) Obligations arising in connection with Crude Oil and Natural Gas
Hedge Agreements of the Issuer or a Restricted Subsidiary;
(12) Non-Recourse Indebtedness;
(13) Indebtedness under Currency Agreements; provided, however, that in
the case of Currency Agreements which relate to Indebtedness, such Currency
Agreements do not increase the Indebtedness of the Issuer and its
Restricted Subsidiaries outstanding other than as a result of fluctuations
in foreign currency exchange rates or by reason of fees, indemnities and
compensation payable thereunder;
(14) additional Indebtedness of the Issuer or any of its Restricted
Subsidiaries in an aggregate principal amount at any time outstanding not
to exceed the greater of (i) $5,000,000 or (ii) 2.5% of Adjusted
Consolidated Net Tangible Assets; and
(15) Indebtedness, including, but not limited to, the Series D Notes,
outstanding on the Issue Date (to the extent not repaid with the proceeds
of the sale of the Notes).
"Permitted Industry Investments" means:
(1) capital expenditures, including, without limitation, acquisitions of
Issuer Properties and interests therein;
(2) (A) entry into operating agreements, joint ventures, working
interests, royalty interests, mineral leases, unitization agreements,
pooling arrangements or other similar or customary agreements,
transactions, properties, interests or arrangements, and Investments and
expenditures in connection therewith or pursuant thereto, in each case made
or entered into in the ordinary course of the oil and gas business, and (B)
exchanges of Issuer Properties for other Issuer Properties of at least
equivalent value as determined in good faith by the Board of Directors of
the Issuer; and
(3) Investments of operating funds on behalf of co-owners of Crude Oil
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and Natural Gas Properties of the Issuer or the Subsidiaries pursuant to
joint operating agreements.
"Permitted Investments" means:
(1) Investments by the Issuer or any Restricted Subsidiary in any Person
that is or will become immediately after such Investment a Restricted
Subsidiary or that will merge or consolidate into the Issuer or a
Restricted Subsidiary that is not subject to any Payment Restriction;
(2) Investments in the Issuer by any Restricted Subsidiary; provided,
however, that any Indebtedness evidencing any such Investment held by a
Restricted Subsidiary that is not a Subsidiary Guarantor is unsecured and
subordinated, pursuant to a written agreement, to the Issuer's obligations
under the Notes and the Indenture;
(3) investments in cash and Cash Equivalents;
(4) Investments made by the Issuer or its Restricted Subsidiaries as a
result of consideration received in connection with an Asset Sale made in
compliance with "-- Certain Covenants -- Limitation on Asset Sales" above;
and
(5) Permitted Industry Investments.
"Permitted Liens" means each of the following types of Liens:
(1) Liens arising under the Indenture or the Security Documents;
(2) Liens securing the Notes and the Guarantees;
(3) Liens for taxes, assessments or governmental charges or claims
either (A) not delinquent or (B) contested in good faith by appropriate
proceedings and as to which the Issuer or a Restricted Subsidiary, as the
case may be, shall have set aside on its books such reserves as may be
required pursuant to GAAP;
(4) statutory and contractual Liens of landlords to secure rent arising
in the ordinary course of business to the extent such Liens relate only to
the tangible property of the lessee which is located on such property and
Liens of carriers, warehousemen, mechanics, builders, suppliers,
materialmen, repairmen and other Liens imposed by law incurred in the
ordinary course of business for sums not yet delinquent or being contested
in good faith, if such reserve or other appropriate provision, if any, as
shall be required by GAAP shall have been made in respect thereof;
(5) Liens incurred or deposits made in the ordinary course of business:
(A) in connection with workers' compensation, unemployment insurance and
other types of social security, including any Lien securing letters of
credit issued in the ordinary course of business consistent with past
practice in connection therewith, or
(B) to secure the performance of tenders, statutory obligations, surety
and appeal bonds, bids, leases, government contracts, performance and
return-of-money bonds and other similar obligations (exclusive of
obligations for the payment of borrowed money);
(6) easements, rights-of-way, zoning restrictions, restrictive
covenants, minor imperfections in title and other similar charges or
encumbrances in respect of real property not interfering in any material
respect with the ordinary conduct of the business of the Issuer or any of
its Restricted Subsidiaries;
(7) any interest or title of a lessor under any Capitalized Lease
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Obligation; provided that such Liens do not extend to any property or
assets which is not leased property subject to such Capitalized Lease
Obligation;
(8) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
(9) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Issuer
or any of its Restricted Subsidiaries, including rights of offset and
set-off;
(10) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture and Liens securing Crude Oil and Natural Gas Hedge Agreements;
(11) Liens on pipeline or pipeline facilities, Hydrocarbons or
properties and assets of the Issuer and its Subsidiaries which arise out of
operation of law;
(12) royalties, overriding royalties, revenue interests, net revenue
interests, net profit interests, revisionary interests, production
payments, production sales contracts, operating agreements and other
similar interests, properties, arrangements and agreements, all as
ordinarily exist with respect to Properties and assets of the Issuer and
its Subsidiaries or otherwise as are customary in the oil and gas business;
(13) with respect to any Properties and assets of the Issuer and its
Subsidiaries, Liens arising under, or in connection with, or related to,
farm-out, farm-in, joint operation, area of mutual interest agreements
and/or other similar or customary arrangements, agreements or interests
that the Issuer or any Subsidiary determines in good faith to be necessary
for the economic development of such Property;
(14) any (A) interest or title of a lessor or sublessor under any lease,
(B) restriction or encumbrance that the interest or title of such lessor or
sublessor may be subject to (including, without limitation, ground leases
or other prior leases of the demised premises, mortgages, mechanics' liens,
builders' liens, tax liens, and easements), or (C) subordination of the
interest of the lessee or sublessee under such lease to any restrictions or
encumbrance referred to in the preceding clause (B);
(15) Liens in favor of collecting or payor banks having a right of
setoff, revocation, refund or chargeback with respect to money or
instruments of the Issuer or any Restricted Subsidiary on deposit with or
in possession of such bank;
(16) Liens securing Non-recourse Indebtedness;
(17) judgment and attachment Liens not giving rise to an Event of
Default;
(18) Liens securing Acquired Indebtedness not to exceed $10,000,000 in
the aggregate at any one time outstanding incurred in accordance with "--
Certain Covenants -- Limitation on Incurrence of Additional Indebtedness"
above; provided, however, that (A) such Liens secured such Acquired
Indebtedness at the time of and prior to the incurrence of such Acquired
Indebtedness by the Issuer or a Restricted Subsidiary and were not granted
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in connection with, or in anticipation of, the incurrence of such Acquired
Indebtedness by the Issuer or a Restricted Subsidiary and (B) such Liens do
not extend to or cover any property or assets of the Issuer or of any of
its Restricted Subsidiaries other than the property or assets that secured
the Acquired Indebtedness prior to the time such Indebtedness became
Acquired Indebtedness of the Issuer or a Restricted Subsidiary and are no
more favorable to the lienholders than those securing the Acquired
Indebtedness prior to the incurrence of such Acquired Indebtedness by the
Issuer or a Restricted Subsidiary; and
(19) Liens existing on the Issue Date (other than to the extent such
Liens secure Indebtedness being repaid with the proceeds of the Notes) and
Liens securing Refinancing Indebtedness which is incurred to Refinance any
Indebtedness permitted under the Indenture and which has been incurred in
accordance with the provisions of the Indenture; provided, however, that
with respect to such Liens that already secure such Indebtedness being
Refinanced, such Liens (x) are no less favorable to the Holders and are not
more favorable to the lienholders with respect to such Liens than the Liens
in respect of the Indebtedness being Refinanced and (y) do not extend to or
cover any new or additional property or assets, and with respect to such
Liens that are newly created, (A) such Liens are expressly junior to the
Liens securing the Notes, (B) such Refinancing results in an improvement on
a pro forma basis in the Issuer's Consolidated EBITDA Coverage Ratio, and
(C) the instruments creating such Liens expressly subject the foreclosure
rights of the holders of the Indebtedness being Refinanced to a stand-still
of not less than 179 days.
"Permitted Operating Obligations" means Indebtedness of the Issuer or any
Restricted Subsidiary in respect of one or more standby letters of credit, bid,
performance or surety bonds, or other reimbursement obligations, issued for the
account of, or entered into by, the Issuer or any Restricted Subsidiary in the
ordinary course of business (excluding obligations related to the purchase by
the Issuer or any Restricted Subsidiary of Hydrocarbons for which the Issuer or
such Restricted Subsidiary has contracts to sell), or in lieu of any thereof or
in addition to any thereto, guarantees and letters of credit supporting any such
obligations and Indebtedness (in each case, other than for an obligation for
borrowed money, other than borrowed money represented by any such letter of
credit, bid, performance or surety bond, or reimbursement obligation itself, or
any guarantee and letter of credit related thereto).
"Person" means an individual, partnership, corporation, unincorporated
organization, limited liability company, trust, estate, or joint venture, or a
governmental agency or political subdivision thereof.
"Pledge Agreement" means those certain Security Agreements (Pledge) dated as
of the Issue Date pursuant to which the Capital Stock of Grey Wolf owned by the
Issuer and/or the Restricted Subsidiaries of the Issuer is pledged to the
Trustee for the benefit of the Holders, as the same may be amended, modified or
supplemented from time to time.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Property" means, with respect to any Person, any interests of such Person
in any kind of property or asset, whether real, personal or mixed, or tangible
or intangible, including, without limitation, Capital Stock, partnership
interests and other equity or ownership interests in any other Person.
"Purchase Money Indebtedness" means Indebtedness the net proceeds of which
are used to finance the cost (including the cost of construction) of property or
assets acquired in the normal course of business by the Person incurring such
Indebtedness.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Reference Date" has the meaning set forth under "-- Certain Covenants --
Limitation on Restricted Payments."
"Refinance" means, in respect of any security or Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a
security or Indebtedness in exchange or replacement for, such security or
Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have
correlative meanings.
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"Refinancing Indebtedness" means any Refinancing by the Issuer or any
Restricted Subsidiary of the Issuer of Indebtedness incurred in accordance with
"-- Certain Covenants -- Limitation on Incurrence of Additional Indebtedness"
above (other than pursuant to clause (2), (3), (4), (5), (6), (9), (10), (11),
(13) or (14) of the definition of Permitted Indebtedness), in each case that
does not:
(1) result in an increase in the aggregate principal amount of
Indebtedness of such Person as of the date of such proposed Refinancing
(plus the amount of any premium required to be paid under the terms of the
instrument governing such Indebtedness and plus the amount of reasonable
expenses incurred by the Issuer and its Restricted Subsidiaries in
connection with such Refinancing), or
(2) create Indebtedness with (A) a Weighted Average Life to Maturity
that is less than the Weighted Average Life to Maturity of the Indebtedness
being Refinanced or (B) a final maturity earlier than the final maturity of
the Indebtedness being Refinanced; provided, however, that (a) if such
Indebtedness being Refinanced is Indebtedness of the Issuer or a Subsidiary
Guarantor, then such Refinancing Indebtedness shall be Indebtedness solely
of the Issuer and/or such Subsidiary Guarantor and (b) if such Indebtedness
being Refinanced is subordinate or junior to the Notes or a Guarantee, then
such Refinancing Indebtedness shall be subordinate to the Notes or such
Guarantee, as the case may be, at least to the same extent and in the same
manner as the Indebtedness being Refinanced.
"Registration Rights Agreement" means the Registration Rights Agreement
dated as of the Issue Date among the Issuer and the Initial Purchaser.
"Related Person" of any Person means any other Person directly or indirectly
owning 10% or more of the outstanding voting Common Stock of such Person (or, in
the case of a Person that is not a corporation, 10% or more of the equity
interest in such Person).
"Replacement Assets" has the meaning set forth under "-- Certain Covenants
- -- Limitation on Asset Sales."
"Restricted Payment" has the meaning set forth under "-- Certain Covenants
- -- Limitation on Restricted Payments."
"Restricted Subsidiary" means any Subsidiary of the Issuer (including,
without limitation, Canadian Abraxas and New Cache Petroleums Ltd.) that has not
been designated by the Board of Directors of the Issuer, by a Board Resolution
delivered to the Trustee, as an Unrestricted Subsidiary pursuant to and in
compliance with "-- Certain Covenants -- Limitation on Restricted and
Unrestricted Subsidiaries" above. Any such designation may be revoked by a Board
Resolution of the Issuer delivered to the Trustee, subject to the provisions of
such covenant.
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Issuer or a Restricted Subsidiary of any property, whether owned
by the Issuer or any Restricted Subsidiary at the Issue Date or later acquired
which has been or is to be sold or transferred by the Issuer or such Restricted
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such property.
"Sandia" means Sandia Oil & Gas Corporation.
"Security Documents" means, collectively, the Mortgages, the Pledge
Agreement and all security agreements, mortgages, deeds of trust, collateral
assignments or other instruments evidencing or creating any security interests
in favor of the Trustee in all or any portion of the Collateral, in each case as
amended, supplemented or modified from time to time in accordance with their
terms and the terms of the Indenture.
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"Series D Notes" means the $275,000,000 11 1/2% Senior Notes due 2004,
Series D of the Issuer and Canadian Abraxas.
"Stated Maturity Date" means March 15, 2003.
"Subordinated Indebtedness" means Indebtedness of the Issuer or a Subsidiary
Guarantor that is subordinated or junior in right of payment to the Notes, the
relevant Subsidiary Guarantee and the Security Documents, as applicable,
pursuant to a written agreement to that effect.
"Subsidiary," with respect to any Person, means:
(1) any corporation of which the outstanding Capital Stock having at
least a majority of the votes entitled to be cast in the election of
directors under ordinary circumstances shall at the time be owned, directly
or indirectly, by such Person, or
(2) any other Person of which at least a majority of the voting
interests under ordinary circumstances is at the time, directly or
indirectly, owned by such Person.
"Subsidiary Guarantor" means each of the Issuer's Restricted Subsidiaries
that in the future executes a supplemental indenture in which such Restricted
Subsidiary agrees to be bound by the terms of the Indenture as a Subsidiary
Guarantor; provided, however, that any Person constituting a Subsidiary
Guarantor as described above shall cease to constitute a Subsidiary Guarantor
when its Guarantee is released in accordance with the terms of the Indenture.
"Surviving Entity" has the meaning set forth under "-- Certain Covenants --
Merger, Consolidation and Sale of Assets."
"T-Gas Assets" means (i) those certain oil and gas leasehold rights and
interests in Sweetwater and Carbon Counties, Wyoming, conveyed by Dalen
Resources Oil & Gas Co., as assignor, to Tgas Investments, L.L.C., by that
certain Assignment of Oil and Gas Leases with Reservation of Production Payment
dated effective August 1, 1995, as amended, the same interests being covered by
that certain Option to Purchase Oil and Gas Interests dated August 25, 1995,
between Tgas Investments, L.L.C., and Dalen Resources Oil & Gas Co., as amended,
said option now being held by the Issuer and/or Abraxas Wamsutter L.P., and (ii)
those certain Credit Payments respecting tax credits to be made by Tgas
Investments, L.L.C. to Dalen Resources Oil & Gas Co. in that certain Purchase
and Sale Agreement dated August 1, 1995, evidenced by a Promissory Note
(Recourse) dated effective August 25, 1995, from Tgas Investments, L.L.C., to
Dalen Resources Oil & Gas Co., as renewed and amended, now held by the Issuer.
"Trust Moneys" means all cash or Cash Equivalents received by the Trustee:
(1) upon the release of Collateral from the Lien of the Indenture and
the Security Documents, including investment earnings thereon; or
(2) pursuant to the provisions of any Mortgage; or
(3) as proceeds of any other sale or other disposition of all or any
part of the Collateral by or on behalf of the Trustee or any collection,
recovery, receipt, appropriation or other realization of or from all or any
part of the Collateral pursuant to the Indenture or any of the Security
Documents or otherwise; or
(4) for application under the Indenture as provided for in the Indenture
or the Security Documents, or whose disposition is not elsewhere
specifically provided for in the Indenture or in the Security Documents;
provided, however, that Trust Moneys shall not include any property
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deposited with the Trustee pursuant to any Change of Control Offer, Net
Proceeds Offer or redemption or defeasance of any Notes.
"Unrestricted Subsidiary" means any Subsidiary of the Issuer designated as
such pursuant to and in compliance with "-- Certain Covenants -- Limitation on
Restricted and Unrestricted Subsidiaries" above; provided, however, that
Unrestricted Subsidiaries shall initially include Western Associated Energy
Corporation, a Texas corporation, and Grey Wolf, to the extent, if any, it now
or hereafter constitutes a "Subsidiary". Any such designation may be revoked by
a Board Resolution of the Issuer delivered to the Trustee, subject to the
provisions of such covenant.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the then outstanding aggregate principal amount of such Indebtedness
into
(2) the sum of the total of the products obtained by multiplying:
(A) the amount of each then remaining installment, sinking fund, serial
maturity or other required payment of principal, including payment at final
maturity, in respect thereof, by
(B) the number of years (calculated to the nearest one-twelfth) which
will elapse between such date and the making of such payment.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary of
which all the outstanding voting securities normally entitled to vote in the
election of directors are owned by the Issuer or another Wholly Owned Restricted
Subsidiary.
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CERTAIN UNITED STATES INCOME TAX CONSIDERATIONS
The discussion below is intended to be a general description of the United
States and Canadian income tax considerations material to an investment in the
Notes. It does not take into account the individual circumstances of any
particular investor and does not purport to discuss all of the possible tax
consequences of the purchase, ownership or disposition of the Notes and is not
intended as tax advice. Therefore, prospective investors are urged to consult
their own tax advisors with respect to the income tax consequences of an
investment in the Notes, including application of state, provincial, local,
foreign and other tax laws.
U.S. Holders
The following is a general summary of certain United States federal income
tax consequences associated with the acquisition, ownership, and disposition of
the Notes. The following summary does not discuss all of the aspects of federal
income taxation that may be relevant to a prospective holder of the Notes in
light of his or her particular circumstances, or to certain types of holders
which are subject to special treatment under the federal income tax laws
(including persons who hold the Notes as part of a conversion, straddle or
hedge, dealers in securities, insurance companies, tax-exempt organizations,
financial institutions, broker-dealers and S corporations). Further, this
summary pertains only to U.S. Holders that will hold the Notes as capital assets
within the meaning of section 1221 of the Internal Revenue Code of 1986, as
amended (the "Code"). A "U.S. Holder" is a beneficial owner of Notes that is (i)
an individual who is a citizen or resident of the United States, (ii) a
corporation or partnership created or organized in the United States or under
the laws of the United States or of any State thereof (including the District of
Columbia), (iii) an estate the income of which is subject to U.S. federal income
tax regardless of its source, (iv) a trust whose administration is subject to
the primary supervision of a United States court and which has one or more
United States persons who have the authority to control all substantial
decisions of the trust, or (v) a person whose income or gain with respect to the
Note is otherwise subject to U.S. federal income tax on a net income basis. In
addition, this summary does not describe any tax consequences under state,
local, or foreign tax laws.
This summary is based upon the provisions of the Code, Treasury Regulations
(the Regulations), rulings and pronouncements issued by the Internal Revenue
Service (IRS) and judicial decisions now in effect, all of which are subject to
change at any time by legislative, judicial or administrative action. Any such
changes may be applied retroactively in a manner that could adversely affect the
U.S. Holders of the Notes. The Issuer has not sought and will not seek any
rulings from the IRS or opinions from counsel with respect to the matters
discussed below. There can be no assurance that the IRS will not take positions
concerning the tax consequences of the purchase, ownership or disposition of the
Notes which are different from those discussed herein.
Tax Consequences of the Exchange Offer
An exchange of the Outstanding Notes for the Exchange Notes pursuant to the
Exchange Offer should not be treated as a significant modification of the
Outstanding Notes; accordingly, an Exchange Note should be treated as a
continuation of the corresponding Outstanding Note and an exchanging holder
should not recognize any gain or loss as a result of participating in the
Exchange Offer. In addition, an exchanging Holder's basis in an Exchange Note
should be equal to the basis of the corresponding Outstanding Note and the
holding period for an Exchange Note would include such holder's holding period
for the corresponding Outstanding Note.
The Exchange Offer will not have any federal income tax consequences to a
non-exchanging holder.
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Each exchanging holder should consult with his or her individual tax advisor
concerning any foreign, state or local tax consequences of the Exchange Offer as
well as to the effect of his or her particular facts and circumstances on the
matters discussed herein.
Payments of Interest
Stated interest paid on each Exchange Note will generally be taxable in each
tax year held by a U.S. Holder as ordinary interest income without regard to the
time it otherwise accrues or is received in accordance with the U.S. Holder's
method of accounting for federal income tax purposes. Special rules governing
the treatment of market discount or amortizable premium are described below.
Market Discount
If a U.S. Holder purchases a Note, other than in connection with the
Offering, for less than the stated redemption price of the Exchange Note at
maturity, the difference is considered market discount, unless such difference
is de minimis, i.e., less than one-fourth of one percent of the stated
redemption price of the Note at maturity multiplied by the number of complete
years to maturity (after the U.S. Holder acquires the Exchange Note). Under
market discount rules, any gain realized by the U.S. Holder on a taxable
disposition of an Exchange Note having market discount, as well as any partial
principal payment made with respect to such an Exchange Note, will be treated as
ordinary income to the extent of the then accrued market discount of the
Exchange Note. The rules concerning the calculation of accrued market discount
are set forth in the paragraph immediately below. In addition, a U.S. Holder of
such an Exchange Note may be required to defer the deduction of all or a portion
of the interest expense on any indebtedness incurred or continued to purchase or
carry the Exchange Note until the deferred income is realized.
Any market discount will accrue ratably from the date of acquisition to the
maturity date of the Exchange Note, unless the U.S. Holder elects, irrevocably,
to accrue market discount on a constant interest rate method under which
marginally less market discount would accrue in early years and marginally
greater amounts would accrue in later years. The election to accrue market
discount on a constant interest rate method is irrevocable but may be made
separately as to each Exchange Note held by the holder.
Accrual of market discount will not cause the accrued amounts to be included
currently in a U.S. Holder's taxable income, in the absence of a disposition of,
or principal payment on, the Exchange Note. Nevertheless, a U.S. Holder may
elect to currently include market discount in income as it accrues on either a
ratable or constant interest rate method. In such event, interest expense
relating to the acquisition of an Exchange Note which would otherwise be
deferred would be currently deductible to the extent otherwise permitted by the
Code. The election to include market discount in income currently, once made,
applies to all market discount obligations acquired by such U.S. Holder on or
after the first day of the first taxable year to which the election applies and
all subsequent years unless revoked with the consent of the IRS.
Amortizable Premium
If a subsequent U.S. Holder acquires an Exchange Note for an amount which is
greater than its principal amount, such U.S. Holder will be considered to have
purchased such Exchange Note with amortizable bond premium equal to the amount
of such excess. The subsequent U.S. Holder may elect to amortize the premium
using a constant yield method employing six month compounding over the period
from the acquisition date to the maturity date of the Exchange Note. Amortized
amounts may be offset only against interest paid with respect to the Exchange
Note. Once made, an election to amortize and offset interest on the Note may be
revoked only with the consent of the IRS and will apply to all Exchange Notes
held by the subsequent U.S. Holder on the first day of the taxable year to which
the election relates and to subsequent taxable years and to all Exchange Notes
subsequently acquired by such U.S. Holder.
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Sale, Redemption or Other Taxable Disposition of the Exchange Notes
The sale, redemption or certain other taxable dispositions of an Exchange
Note will result in the recognition of gain or loss to the U.S. Holder in an
amount equal to the difference, if any, between (i) the amount realized upon the
disposition or redemption and (ii) the U.S. Holder's adjusted tax basis in such
Exchange Note. A U.S. Holder's tax basis for determining gain or loss on the
disposition or redemption of an Exchange Note will be the cost of such Exchange
Note to such U.S. Holder, increased by the amount of any market discount
includible in such U.S. Holder's gross income with respect to such Exchange
Note, and decreased by the amount of any payments under the Note that are part
of its stated redemption price at maturity and by the portion of any premium
applied to reduce interest payments as described above. Such gain or loss will
be capital gain or loss (except to the extent the gain represents market
discount on the Exchange Note not previously included in gross income, to which
extent such gain would be treated as ordinary income).
Any gain or loss on the sale, redemption or other taxable disposition of a
Note will be capital gain or loss, except to the extent of any accrued market
discount. In the case of an individual U.S. Holder, such capital gain generally
will be subject to a maximum federal tax rate of 20% if the individual has held
the Note for more than one year and otherwise will be short-term capital gain or
loss. The deductibility of capital losses is subject to certain limitations.
Prospective investors should consult their own tax advisors in this regard.
Payments on such disposition for accrued stated interest not previously included
in income will be treated as ordinary interest income.
Purchase or Redemption of Exchange Notes
Effect of Change of Control and Asset Sale. Upon a Change of Control, the
Issuer is required to offer to redeem all outstanding Exchange Notes for a price
equal to 101% of the principal amount thereof plus accrued and unpaid stated
interest. See "Description of the Exchange Notes -- Redemption -- Optional
Redemption." Under the Regulations, such a Change of Control redemption
requirement will not affect the yield or maturity date of the Exchange Notes
unless, based on all the facts and circumstances as of the issue date, it is
significantly more likely than not that a Change of Control giving rise to the
redemption will occur. Upon certain asset sales, the Issuer will be obligated to
offer to repurchase the Exchange Notes at one hundred percent (100%) of the
principal amount thereof plus accrued and unpaid interest to the date of
redemption. The Issuer will not treat the Change of Control or the asset sale
redemption provisions of the Exchange Notes as affecting the calculation of the
yield to maturity of any Exchange Note.
Optional Redemption. The Issuer, at its option, may redeem part or all of
the Exchange Notes at any time on or after March 15, 2001, at the redemption
prices set forth herein. In addition, if the Issuer consummates an Equity
Offering on or before March 15, 2001, the Issuer may, at its option, use all or
a portion of the proceeds from such Equity Offering to redeem up to thirty-five
percent (35%) of the aggregate original principal amount of the Exchange Notes
in the Offering at a redemption price equal to 112 7/8%, together with accrued
and unpaid interest to the date of redemption; provided, however, that, after
giving effect to any such redemption, at least 65% of the aggregate principal
amount of the Exchange Notes remains outstanding and the redemption occurs
within 60 days after the consummation of such Equity Offering. See "Description
of the Exchange Notes -- Redemption -- Optional Redemption." For purposes of
determining whether the Exchange Notes are issued with any original issue
discount, the Regulations generally provide that an issuer will be treated as
exercising any such option if its exercise would lower the yield of the debt
instrument. A redemption of the Exchange Notes at the optional redemption
prices, however, would increase rather than decrease the effective yield of the
debt instrument as calculated from the issue date.
The Issuer does not currently intend to exercise any of the options
described above with respect to the Notes. Should the Issuer exercise an option
and redeem an Exchange Note, the U.S. Holder of the Exchange Note would be
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required to treat any amount paid by the Issuer which exceeds the Note's then
principal balance and all accrued and unpaid interest thereon as an amount
received in exchange for the Exchange Note.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to interest
payments on the Notes made to U.S. Holders other than certain exempt recipients
(such as corporations) and to proceeds realized by such holders on dispositions
of the Exchange Notes. A 31% backup withholding tax will apply to such amounts
only if the U.S. Holder: (i) fails to furnish its social security or other
taxpayer identification number ("TIN") within a reasonable time after request
therefor, (ii) furnishes an incorrect TIN, (iii) fails to report properly
interest or dividend income, or (iv) fails under certain circumstances, to
provide a certified statement, signed under penalty of perjury, that the TIN
provided is its correct number and that it is not subject to backup withholding.
Any amount withheld from a payment to a U.S. Holder under the backup withholding
rules is allowable as a refund or as a credit against such holder's federal
income tax liability, provided that the required information is furnished to the
IRS. Furthermore, certain penalties may be imposed by the IRS on a U.S. Holder
who is required to supply information but who does not do so in the proper
manner. U.S. Holders of the Exchange Notes should consult their tax advisors as
to their qualification for exemption from backup withholding and the procedure
for obtaining such an exemption.
THE FEDERAL TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION
ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A U.S. HOLDER'S PARTICULAR
SITUATION. INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE TAX
IMPLICATIONS OF HOLDING AND DISPOSING OF THE EXCHANGE NOTES UNDER APPLICABLE
STATE OR LOCAL LAWS. FOREIGN INVESTORS SHOULD ALSO CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX CONSEQUENCES UNIQUE TO INVESTORS WHO ARE NOT U.S.
PERSONS.
Non-U.S. Holders
The following is a general discussion of certain U.S. federal tax
consequences of the ownership and disposition of Exchange Notes applicable to
beneficial owners that are Non-U.S. Holders ("Non-U.S. Holders") of the Exchange
Notes. A "Non-U.S. Holder" is any person other than (i) an individual who is a
citizen or resident of the United States, (ii) a corporation or partnership
created or organized in the United States or under the laws of the United States
or of any State thereof (including the District of Columbia), (iii) an estate
the income of which is subject to U.S. federal income tax regardless of its
source, (iv) a trust whose administration is subject to the primary supervision
of a United States court and which has one or more United States persons who
have the authority to control all substantial decisions of the trust, or (v) a
person whose income or gain with respect to the Note is otherwise subject to
U.S. federal income tax on a net income basis. Subject to certain exceptions, an
individual may be treated as a resident of the United States for federal income
tax purposes if the individual is present in the United States for an aggregate
of 183 days during the current and two preceding calendar years and for at least
31 days during the current calendar year. This discussion is for general
information only and does not deal with all aspects of U.S. federal income and
estate taxation that may be relevant to Non-U.S. Holders in view of their
particular circumstances, nor does it address the effect of any applicable state
and local or foreign tax law. Furthermore, this summary is based upon provisions
of the Code, Regulations, rulings and pronouncements issued by the IRS and
judicial decisions now in effect, all of which are subject to change at any time
by legislative, judicial or administrative action. Any such changes may be
applied retroactively in a manner that could adversely affect the Non-U.S.
Holders of the Notes. The Issuer has not sought and will not seek any rulings
from the IRS or opinions from counsel with respect to the matters discussed
below. There can be no assurance that the IRS will not take positions concerning
the tax consequences of the purchase, ownership or disposition of the Notes
which are different from those discussed herein.
PROSPECTIVE FOREIGN INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING
THE FEDERAL, STATE AND LOCAL, AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES OF
OWNING AND DISPOSING OF THE NOTES.
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Payments of Interest from U.S. Sources
Interest paid from U.S. sources on the Exchange Notes to a Non-U.S. Holder
should qualify as "portfolio interest" on which no withholding of U.S. income
tax is imposed, provided (a) the Non-U.S. Holder (i) does not own, actually or
constructively 10% or more of the total combined voting power of all classes of
stock of the Issuer, (ii) is not a controlled foreign corporation within the
meaning of section 957(a) of the Code that is related directly or indirectly to
the Issuer, (iii) is not a bank which acquired the Notes in consideration for an
extension of credit made pursuant to a loan agreement entered into in the
ordinary course of its business and (iv) such amounts are not considered
payments of "contingent interest" described in Section 871(h)(4) of the Code
(relating primarily to interest based on or determined by reference to income,
profits, cash flow, sales, dividends or other comparable attributes of the
Issuer or a party related to the Issuer), and (b) the Issuer receives a
statement that the beneficial owner of the Exchange Notes is a Non-U.S. Holder.
Such statement is made on an IRS Form W-8, or a successor form, which is signed
by the beneficial owner under penalties of perjury, certifies that the
beneficial owner of the Exchange Notes is a Non-U.S. person and provides the
name and address of the beneficial owner. Otherwise, interest paid from U.S.
sources to a Non-U.S. Holder of Notes will be subject to the withholding of U.S.
income tax at the rate of 30% of the gross amount of interest paid or a lower
rate under an applicable income tax treaty.
Interest paid from U.S. sources to a Non-U.S. Holder may also be exempt from
U.S. federal withholding taxes provided such Non-U.S. Holder delivers (i) IRS
Form 1001, or a successor form, signed by the Non-U.S. Holder of the Exchange
Note or such Non-U.S. Holder's agent claiming exemption from or reduction of
withholding under an applicable tax treaty, or (ii) IRS Form 4224, or a
successor form, signed by the Non-U.S. Holder of the Exchange Note or such
Non-U.S. Holder's agent claiming exemption from withholding tax on income
effectively connected with the conduct of a trade or business within the United
States; provided that, in any such case (x) the applicable form is delivered
pursuant to applicable procedures and is properly transmitted to the person
otherwise required to withhold tax and (y) none of the persons receiving the
form has actual knowledge that the Non-U.S. Holder is not a Non-U.S. Holder or
that any certification on the form is false. Non-U.S. Holders that are
classified as partnerships for U.S. federal income tax purposes but classified
as corporations for non-United States tax purposes may, however, not be entitled
to the benefits of an otherwise applicable tax treaty. In addition, a Non-U.S.
Holder that is a corporation, may be subject to a branch profits tax equal to
30% or such lower rate as may be specified in an applicable tax treaty.
Sale, Redemption or Other Taxable Disposition of the Exchange Notes
Generally, a Non-U.S. Holder of an Exchange Note will not be subject to U.S.
federal income tax on any gain realized on the sale, redemption or other
disposition of an Exchange Note unless (i) such gain or income is effectively
connected with a trade or business in the United States of the Non-U.S. Holder
or, under an applicable tax treaty, is attributable to a United States permanent
establishment maintained by the Non-U.S. Holder, (ii) in the case of a Non-U.S.
Holder who is an individual, the Non-U.S. Holder is present in the United States
for 183 days or more in the taxable year of such sale and certain other
requirements are met; or (iii) the Non-U.S. Holder is subject to tax pursuant to
the provisions of the Code applicable to certain former citizens and residents
of the United States.
Information Reporting and Backup Withholding
The Issuer must report annually to the IRS and to each Non-U.S. Holder the
amount of interest paid to, and any tax withheld with respect to, each Non-U.S.
Holder. This information may also be made available to the tax authorities in
the country in which the Non-U.S. Holder resides under the provisions of a
treaty or information exchange agreement. U.S. backup withholding tax (which is
a withholding tax imposed at the rate of 31% on certain payments to persons who
133
<PAGE>
fail to furnish the information required under U.S. information reporting
requirements) generally will not apply to interest paid on the Notes to a
Non-U.S. Holder who has provided the Issuer (or its agent) with a Form W-8, or a
successor form, provided the payor does not have actual knowledge that the payee
is not a Non-U.S. person.
Payment of the proceeds from a sale of the Exchange Notes to or through a
U.S. office of a broker will be subject to information reporting and backup
withholding unless the owner certifies as to its status as a Non-U.S. Holder
under penalties of perjury or otherwise establishes an exemption. Payment of the
proceeds from a sale of Notes to or through a non-U.S. office of a broker
generally will not be subject to information reporting or backup withholding;
however, if such broker is (i) a United States person, (ii) a "controlled
foreign corporation", or (iii) a foreign person that derives 50% or more of its
gross income from the conduct of a trade or business in the United States, such
payment will be subject to information reporting (but currently not backup
withholding, although the issue of whether backup withholding should apply is
under consideration by the IRS) unless such broker has documentary evidence in
its records that the owner is a Non-U.S. Holder and certain other conditions are
met or the owner otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules will be credited
against the Non-U.S. Holder's federal income tax liability, if any, or refunded,
provided the required information is furnished to the IRS.
THE FEDERAL TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A NON-U.S. HOLDER'S
PARTICULAR SITUATION. INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING
THE TAX IMPLICATIONS OF HOLDING AND DISPOSING OF THE EXCHANGE NOTES UNDER
APPLICABLE STATE OR LOCAL LAWS. FOREIGN INVESTORS SHOULD ALSO CONSULT THEIR OWN
TAX ADVISORS REGARDING THE TAX CONSEQUENCES UNIQUE TO INVESTORS WHO ARE NOT U.S.
PERSONS.
BOOK-ENTRY; DELIVERY AND FORM
The Certificates representing the Exchange Notes will be issued in fully
registered form, without coupons and will be deposited with, or on behalf of,
the Depositary, and registered in the name of Cede & Co., as the Depository's
nominee, in the form of a global Exchange Note certificate (the "Global
Certificate") or will remain in the custody of the Trustee.
Except as set forth below, the Global Certificate may be transferred, in
whole and not in part, only by the Depositary to its nominee to such Depositary
or another nominee of the Depositary or by the Depositary or its nominee to a
successor of the Depositary or a nominee of such successor.
The Issuers understand that the Depositary is a limited-purpose trust
company which was created to hold securities for its participating organizations
(the "Participants") and to facilitate the clearance and settlement of
transactions in such securities between Participants through electronic
book-entry changes in accounts of its Participants. Participants include
securities brokers and dealers (including the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organizations. Access to the
Depository's book-entry system is also available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("indirect
participants"). Persons who are not participants may beneficially own securities
held by the Depositary through Participants or indirect participants.
Pursuant to procedures established by the Depositary (i) upon deposit of the
Global Certificate, the Depositary will credit the accounts of Participants with
portions of the principal amount of the Global Certificate and (ii) ownership of
the Exchange Notes will be shown on, and the transfer of ownership thereof will
be effected only through, records maintained by the Depositary (with respect to
the interest on the Depository's participants), the Depository's Participants
and the Depository's indirect participants.
134
<PAGE>
The laws of some jurisdictions require that certain persons take physical
delivery in definitive form of securities that they own. Consequently, the
ability to transfer interests in the Global Certificate will be limited to such
extent.
So long as the nominee of the Depositary is the registered owner of the
Global Certificate, such nominee will be considered the sole owner or holder of
the Exchange Notes for all purposes under the Indenture. Except as provided
below, the owners of interests in the Global Certificate will not be entitled to
have Exchange Notes registered in their names, will not receive or be entitled
to receive physical delivery of Exchange Notes in definitive form and will not
be considered the owners or holders thereof under the Indenture. As a result,
the ability of a person having a beneficial interest in Exchange Notes
represented by the Global Certificate to pledge such interest to persons or
entities that do not participate in the Depository's system or to otherwise take
actions in respect to such interest may be affected by the lack of a physical
certificate evidencing such interest.
Neither the Issuer, the Trustee nor any paying agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of interests in the Global Certificate or for
maintaining, supervising or reviewing any records relating to such interests.
Principal and interest payments on the Global Certificate registered in the
name of the Depository's nominee will be made by the Issuers or through a paying
agent to the Depository's nominee as the registered owner of the Global
Certificate. Under the terms of the Indenture, the Issuers and the Trustee will
treat the persons in whose names the Exchange Notes are registered as the owners
of such Exchange Notes for the purpose of receiving payments of principal and
interest on such Exchange Notes and for all other purposes whatsoever.
Therefore, neither Abraxas, the Trustee nor any paying agent has any direct
responsibility or liability for the payment of principal or interest on the
Exchange Notes to owners of interests in the Global Certificate. The Depositary
has advised Abraxas and the Trustee that its present practice is, upon receipt
of any payment of principal or interest, to credit immediately the account of
the Participants with payments in amounts proportionate to their respective
holdings in principal amount of interests in the Global Certificate as shown on
the records of the Depositary. Payments by Participants and indirect
participants to owners of interests in the Global Certificate will be governed
by standing instructions and customary practices, as is now the case with
securities held for the accounts of customers in bearer form or registered in
"street name," and will be the responsibility of such participants or indirect
participants.
If the Depositary is at any time unwilling or unable to continue as
depositary and a successor depositary is not appointed by Abraxas within 90
calendar days, Abraxas will issue Exchange Notes in certificated form in
exchange for the Global Certificate. In addition, Abraxas may at any time
determine not to have the Exchange Notes represented by a Global Certificate,
and, in such event, will issue Exchange Notes in certificated form in exchange
for the Global Certificate. In either instance, an owner of an interest in the
Global Certificate would be entitled to physical delivery of such Exchange Notes
in certificated form. Exchange Notes so issued in certificated form will be
issued in denominations of $1,000 and integral multiples thereof and will be
issued in registered form only.
Neither Abraxas nor the Trustee shall be liable for any delay by the
Depositary or its nominee in identifying the beneficial owners or the related
Exchange Notes, and each such person may conclusively rely on, and shall be
protected in relying on, instructions from the Depositary or its nominee for all
purposes (including with respect to the registration and delivery, and the
respective principal amounts, of the Exchange Notes to be issued).
135
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Abraxas has filed the Registration Statement regarding the Exchange Notes
with the SEC. This Prospectus does not contain all of the information included
in the Registration Statement. Any statement made in this Prospectus concerning
the contents of any other document is not necessarily complete. If we have filed
any other document as an exhibit to the Registration Statement, you should read
the exhibit for a more complete understanding of the document or matter. Each
statement regarding any other document does not necessarily contain all of the
information important to you.
Abraxas files annual, quarterly and special reports and other information
with the SEC. You may read and copy any Abraxas files at the SEC's public
reference rooms at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the SEC's regional offices located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center,
Suite 1300, New York, New York 10048. Please call the SEC at 1-800-SEC-0300 for
further information on the public reference rooms. Abraxas' SEC filings also are
available to the public at the SEC's web site at http://www.sec.gov. The
Indenture governing the Outstanding Notes and the Exchange Notes requires
Abraxas to file reports and other information required to be filed under the
Exchange Act with the SEC and provide such information to you, upon request,
regardless of whether Abraxas is subject to the reporting requirements of the
Exchange Act.
LEGAL MATTERS
Certain legal matters related to the Exchange Notes offered hereby are being
passed upon for Abraxas by Cox & Smith Incorporated, San Antonio, Texas and
Bennett Jones, Calgary, Alberta, Canada.
EXPERTS
The consolidated financial statements of Abraxas Petroleum Corporation at
December 31, 1997 and 1998, and for each of the three years in the period ended
December 31, 1998, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein, and is included in reliance upon
such report given on the authority of such firm as experts in accounting and
auditing.
The financial statements of New Cache Petroleums Ltd. as of November 30,
1998 and for the year then ended included in this Offering Memorandum have been
audited by Ernst & Young LLP, independent auditors.
The historical reserve information prepared by DeGolyer and MacNaughton and
McDaniel & Associates Consultants Ltd. included in this Prospectus has been
included herein in reliance upon the authority of such firms as experts with
respect to matters contained in such reserve report.
136
<PAGE>
GLOSSARY OF TERMS
Unless otherwise indicated in this Offering Memorandum, natural gas volumes
are stated at the legal pressure base of the State or area in which the reserves
are located at 60 degrees Fahrenheit. Natural gas equivalents are determined
using the ratio of six Mcf of natural gas to one barrel of crude oil, condensate
or NGLs.
The following definitions shall apply to the technical terms used in this
Offering Memorandum.
"Bbl" means barrel or barrels.
"Bcf" means billion cubic feet.
"Bcfe" means billion cubic feet equivalent.
"BOPD" means barrels of crude oil per day.
"Charge" means an encumbrance, lien, claim or other interest in property
securing payment or performance of an obligation.
"DD&A" means depletion, depreciation and amortization.
"Developed acreage" means acreage which consists of acres spaced or
assignable to productive wells.
"Development well" means a well drilled within the proved area of a crude
oil or natural gas reservoir to the depth of stratigraphic horizon (rock layer
or formation) known to be productive for the purpose of extraction of proved
crude oil or natural gas reserves.
"Dry hole" means an exploratory or development well found to be incapable of
producing either crude oil or gas in sufficient quantities to justify completion
as a crude oil or natural gas well.
"EBITDA" means earnings from continuing operations before income taxes,
interest expense, DD&A and other non-cash charges.
"Exploratory well" means a well drilled to find and produce crude oil or
natural gas in an unproved area, to find a new reservoir in a field previously
found to be producing crude oil or natural gas in another reservoir, or to
extend a known reservoir.
"Gross" natural gas and crude oil wells or "gross" wells or acres is the
number of wells or acres in which the Company has an interest.
"LOE" means lease operating expenses and production taxes.
"MBbl" means thousand barrels.
"Mcf" means thousand cubic feet.
"Mcfe" means thousand cubic feet equivalent.
"MMBbls" means million barrels.
"MMBTU" means million British Thermal Units.
137
<PAGE>
"MMBTUpd" means million British Thermal Units per day.
"MMcf" means million cubic feet.
"MMcfe" means million cubic feet equivalent.
"MMcfpd" means million cubic feet per day.
"n.m." means not meaningful.
"Net" natural gas and crude oil wells or "net" acres are determined by
multiplying "gross" wells or acres by the Company's working interest in such
wells or acres.
"NGL" means natural gas liquid.
"NYMEX" means the New York Mercantile Exchange.
"PV-10" means estimated future net revenue, discounted at a rate of 10% per
annum, before income taxes and with no price or cost escalation or de-escalation
in accordance with guidelines promulgated by the Securities and Exchange
Commission.
"Productive wells" mean producing wells and wells capable of production.
"Proved reserves" or "reserves" means natural gas and crude oil, condensate
and NGLs on a net revenue interest basis, found to be commercially recoverable.
"Proved undeveloped reserves" includes those proved reserves expected to be
recovered from new wells on undrilled acreage or from existing wells where a
relatively major expenditure is required for recompletion.
"Service Well" is a well used for water injection in secondary recovery
projects or for the disposal of produced water.
"Undeveloped acreage" means leased acres on which wells have not been
drilled or completed to a point that would permit the production of commercial
quantities of crude oil and natural gas, regardless whether or not such acreage
contains proved reserves.
138
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Abraxas Petroleum Corporation and Subsidiaries
Report of Independent Auditors...................................... F-2
Consolidated Balance Sheets at December 31, 1997 and 1998........... F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998.................................. F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1996, 1997 and 1998.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998.................................. F-6
Notes to Consolidated Financial Statements.......................... F-7
New Cache Petroleums Ltd.
Report of Independent Auditors...................................... F-28
Balance Sheet at November 30, 1998.................................. F-29
Statement of Loss and Retained Earnings (Deficiency) for the
year ended November 30, 1998...................................... F-30
Statement of Cash Flows for the year ended November 30, 1998........ F-31
Notes to Consolidated Financial Statements.......................... F-32
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Abraxas Petroleum Corporation
We have audited the accompanying consolidated balance sheets of Abraxas
Petroleum Corporation and Subsidiaries as of December 31, 1997 and 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Abraxas
Petroleum Corporation and Subsidiaries at December 31, 1997 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
San Antonio, Texas
March 17, 1999,
except for Note 2, as to which the date is
March 27, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
1997 1998
(In thousands)
----------------------
<S> <C> <C>
Current assets:
Cash ............................................................... $ 2,876 $ 61,390
Accounts receivable, less allowance for doubtful accounts:
Joint owners ..................................................... 2,149 3,337
Oil and gas production sales ..................................... 11,194 6,098
Other ............................................................ 1,259 1,070
--------- ---------
14,602 10,505
Equipment inventory ................................................ 367 504
Other current assets ............................................... 508 844
--------- ---------
Total current assets ......................................... 18,353 73,243
Property and equipment ............................................... 385,442 374,316
Less accumulated depreciation, depletion, and amortization ........... 74,597 165,867
--------- ---------
Net property and equipment based on the full cost
method of accounting for oil and gas properties
of which $11,519 and $10,675 at December 31, 1997
and 1998, respectively, were excluded from amortization .......... 310,845 208,449
Deferred financing fees, net of accumulated amortization
of $1,540 and $2,911 at December 31, 1997 and 1998,
respectively ..................................................... 8,072 8,059
Other assets ......................................................... 1,258 1,747
--------- ---------
Total assets ................................................. $ 338,528 $ 291,498
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ................................................... $ 17,120 $ 10,499
Oil and gas production payable ..................................... 2,819 5,846
Accrued interest ................................................... 4,622 5,522
Income taxes payable ............................................... 164 160
Other accrued expenses ............................................. 2,732 527
--------- ---------
Total current liabilities .................................... 27,457 22,554
Long-term debt:
Credit facility .................................................... 31,500 15,700
Senior notes ....................................................... 215,000 277,471
Other .............................................................. 2,117 6,527
--------- ---------
248,617 299,698
Deferred income taxes ................................................ 27,751 19,820
Minority interest in foreign subsidiary .............................. 4,813 9,672
Future site restoration .............................................. 3,077 3,276
Commitments and contingencies
Stockholders' equity (Deficit):
Convertible preferred stock, 8%, authorized 1,000,000
shares; -0- shares issued and outstanding ........................ -- --
Common stock, par value $.01 per share, authorized 50,000,000
shares; issued 6,422,540 and 6,501,441 shares at
December 31, 1997 and 1998, respectively ......................... 63 65
Additional paid-in capital ......................................... 51,118 51,695
Accumulated deficit ................................................ (19,185) (103,145)
Treasury stock, at cost, 53,023 and 171,015 shares at
December 31, 1997 and 1998, respectively ......................... (281) (1,167)
Accumulated other comprehensive loss ............................... (4,902) (10,970)
--------- ---------
Total stockholders' equity (deficit) ......................... 26,813 (63,522)
--------- ---------
Total liabilities and stockholders' equity (deficit) ......... $ 338,528 $ 291,498
========= =========
</TABLE>
See accompanying notes.
F-3
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31
1996 1997 1998
----------- ----------- ----------
(In thousands except per share data)
<S> <C> <C> <C>
Revenue:
Oil and gas production revenues ................... $ 25,749 $ 65,826 $ 54,263
Gas processing revenues ........................... 600 3,568 3,159
Rig revenues ...................................... 139 334 469
Other ............................................. 165 1,203 2,193
--------- --------- ---------
26,653 70,931 60,084
Operating costs and expenses:
Lease operating and production taxes .............. 5,858 14,881 16,841
Gas processing costs .............................. 262 1,252 1,250
Depreciation, depletion, and amortization ......... 9,605 30,581 31,226
Rig operations .................................... 169 296 521
Proved property impairment ........................ -- 4,600 61,224
General and administrative ........................ 1,933 4,171 5,522
--------- --------- ---------
17,827 55,781 116,584
--------- --------- ---------
Operating income (loss) ............................. 8,826 15,150 (56,500)
Other (income) expense:
Interest income ................................... (254) (320) (805)
Amortization of deferred financing fee ............ 280 1,260 1,571
Interest expense .................................. 6,241 24,620 30,848
Other ............................................. 373 (369) --
--------- --------- ---------
6,640 25,191 31,614
--------- --------- ---------
Income (loss) before taxes and extraordinary item ... 2,186 (10,041) (88,114)
Income tax expense (benefit):
Current ........................................... 176 244 231
Deferred .......................................... -- (4,135) (4,389)
Minority interest in income of consolidated foreign
subsidiary ........................................ 70 335 4
--------- --------- ---------
Income (loss) before extraordinary item ............. 1,940 (6,485) (83,960)
Extraordinary item:
Debt extinguishment costs ......................... $ (427) $ -- $ --
--------- --------- ---------
Net income (loss) ................................... 1,513 (6,485) (83,960)
Less dividend requirement on cumulative
preferred stock ................................... (366) (183) --
--------- --------- ---------
Net income (loss) applicable to common stock ....... $ 1,147 $ (6,668) $ (83,960)
========= ========= =========
Earnings (loss) per common share:
Income (loss) before extraordinary item ........... $ 0.27 $ (1.11) $ (13.26)
Extraordinary item ................................ (0.07) -- --
--------- --------- ---------
Net income (loss) per common share ........ $ 0.20 $ (1.11) $ (13.26)
========= ========= =========
Earnings (loss) per common share-- assuming dilution:
Income (loss) before extraordinary item ........... $ 0.23 $ (1.11) $ (13.26)
Extraordinary item ................................ (0.06) -- --
--------- --------- ---------
Net income (loss) per common share assuming dilution $ 0.17 $ (1.11) $ (13.26)
========= ========= =========
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands except share amounts)
Other
Compre-
hesnive
Preferred Stock Common Stock Treasury Stock Paid in Accumulated Income
Shares Amount Shares Amount Shares Amount Capital Deficit (Loss) Total
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995........ 45,741 $ -- 5,799,762 $ 58 2,571 $ (1) $ 50,914 $ (13,664) $ (244) $ 37,063
Comprehensive income (loss):
Net income...................... -- -- -- -- -- -- -- 1,513 -- 1,513
Other comprehensive income:
Change in unrealized holding
loss on Securities.......... -- -- -- -- -- -- -- -- 244 244
Foreign currency translation
adjustment -- -- -- -- -- -- -- -- (2,406) (2,406)
------ ---- -------- ---- ------- ------- -------- --------- -------- --------
Comprehensive income (loss)....... -- -- -- -- -- -- -- 1,513 (2,162) (649)
Issuance of common stock for
compensation -- -- 5,050 -- (2,500) 1 41 -- -- 42
Expenses paid related to private
placement offering.............. -- -- -- -- -- -- (42) -- -- (42)
Options exercised................. -- -- 2,000 -- -- -- 13 -- -- 13
Treasury stock purchased.......... -- -- -- -- 74,640 (405) -- -- -- (405)
Dividend on preferred stock....... -- -- -- -- -- -- -- (366) -- (366)
------ ---- -------- ---- ------- ------- -------- --------- -------- --------
Balance at December 31, 1996........ 45,741 $ -- 5,806,812 $ 58 74,711 $ (405) $ 50,926 $ (12,517) $ (2,406) $ 35,656
Comprehensive income (loss):
Net loss........................ -- -- -- -- -- -- -- (6,485) -- (6,485)
Other comprehensive income:
Foreign currency translation
adjustment -- -- -- -- -- -- -- -- (2,496) (2,496)
------ ---- -------- ---- ------- ------- -------- --------- -------- --------
Comprehensive income (loss)....... -- -- -- -- -- -- -- (6,485) (2,496) (8,981)
Issuance of common stock
for compensation -- -- 7,735 -- (21,688) 124 186 -- 310
Conversion of preferred stock
into common stock...............(45,741) -- 508,183 5 -- -- (5) -- -- --
Options exercised................. -- -- 2,000 -- -- -- 11 -- -- 11
Dividend on preferred stock....... -- -- -- -- -- -- -- (183) -- (183)
Warrants exercised................ -- -- 97,810 -- -- -- -- -- -- --
------ ---- -------- ---- ------- ------- -------- --------- -------- --------
Balance at December 31, 1997........ -- $ -- 6,422,540 $ 63 53,023 $ (281) $ 51,118 $ (19,185) $ (4,902) $ 26,813
Comprehensive income (loss):
Net loss........................ (83,960) (83,960)
Other comprehensive income:
Foreign currency translation
adjustment................. (6,067) (6,067)
--------
Comprehensive income (loss)....... (90,027)
Issuance of common stock for
compensation.................... 4,838 (18,263) 94 114 207
Purchase of treasury stock........ 136,255 (980) (980)
Options exercised................. 3,000 16 16
Issuance of common stock for
acquisition of oil and gas 71,063 2 447 449
properties......................
------ ---- -------- ---- ------- ------- -------- --------- -------- --------
Balance at December 31, 1998........ -- $ -- 6,501,441 $ 65 171,015 $(1,167) $ 51,695 $(103,145) $(10,970) $(63,522)
====== ==== ========= ==== ======= ======= ======== ========= ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
1996 1997 1998
----------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Operating Activities
Net income (loss) ........................................ $ 1,513 $ (6,485) $ (83,960)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Minority interest in income of foreign subsidiary ...... 70 335 4
Depreciation, depletion, and amortization .............. 9,605 30,581 31,226
Proved property impairment ............................. -- 4,600 61,224
Deferred income tax benefit ............................ -- (4,135) (4,389)
Amortization of deferred financing fees ................ 280 1,260 1,571
Issuance of common stock for compensation .............. 42 310 207
Loss on marketable securities .......................... 235 -- --
Net loss from debt restructurings ...................... 427 -- --
Changes in operating assets and liabilities:
Accounts receivable .................................. (6,013) (444) 4,739
Equipment inventory .................................. (82) 76 (137)
Other assets ......................................... (133) (325) (468)
Accounts payable and accrued expenses ................ 7,009 10,402 (5,770)
Oil and gas production payable ....................... 591 466 598
--------- --------- ---------
Net cash provided by operating activities ................ 13,544 36,641 4,845
Investing Activities
Capital expenditures, including purchases
and development of properties .......................... (87,793) (84,111) (57,412)
Payment for purchase of CGGS, net of cash acquired ....... (85,362) -- --
Proceeds from sale of oil and gas properties and equipment
inventory .............................................. 242 9,606 59,389
Proceeds from sale of marketable securities .............. 335 -- --
--------- --------- ---------
Net cash (used) provided by investing activities ......... (172,578) (74,505) 1,977
Financing Activities
Preferred stock dividends ................................ (366) (183) --
Issuance of common stock, net of expenses ................ (29) 11 3,926
Purchase of treasury stock, net .......................... (405) -- (979)
Proceeds from long-term borrowings ....................... 305,400 33,620 83,691
Payments on long-term borrowings ......................... (131,969) -- (32,433)
Deferred financing fees .................................. (9,688) (123) (1,688)
Other .................................................... 87 -- --
--------- --------- ---------
Net cash provided by financing activities ................ 163,030 33,325 52,517
--------- --------- ---------
Increase (decrease) in cash .............................. 3,996 (4,539) 59,339
--------- --------- ---------
Effect of exchange rate changes on cash .................. -- (1,005) (825)
--------- --------- ---------
Increase (decrease) in cash .............................. 3,996 (5,544) 58,514
Cash at beginning of year ................................ 4,384 8,380 2,876
--------- --------- ---------
Cash at end of year ...................................... $ 8,380 $ 2,836 $ 61,390
========= ========= =========
Supplemental Disclosures
Supplemental disclosures of cash flow information:
Interest paid .......................................... $ 3,863 $ 24,170 $ 30,362
========= ========= =========
</TABLE>
Supplemental schedule of noncash investing and financing activities:
During 1996, the Company purchased all of the capital stock of CGGS
Canadian Gas Gathering Systems, Inc. for $85,362,000, net of cash acquired.
In conjunction with the acquisition, liabilities assumed were as follows
(in thousands):
Fair value of assets acquired................. $123,970
Cash paid for the capital stock............... (85,362)
--------
Liabilities assumed........................... $ 38,608
========
See accompanying notes.
F-6
<PAGE>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997, and 1998
1. Organization and Significant Accounting Policies
Nature of Operations
Abraxas Petroleum Corporation (the Company or Abraxas) is an independent
energy company engaged in the exploration for and the acquisition, development,
and production of crude oil and natural gas primarily along the Texas Gulf
Coast, in the Permian Basin of western Texas, and in Canada and the processing
of natural gas primarily in Canada. The consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Management
believes that it is reasonably possible that estimates of proved crude oil and
natural gas revenues could significantly change in the future.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to credit risk
consist principally of trade receivables, interest rate and crude oil and
natural gas price swap agreements. Accounts receivable are generally from
companies with significant oil and gas marketing activities. The Company
performs ongoing credit evaluations and, generally, requires no collateral from
its customers.
Equipment Inventory
Equipment inventory principally consists of casing, tubing, and compression
equipment and is carried at the lower of cost or market.
Oil and Gas Properties
The Company follows the full cost method of accounting for crude oil and
natural gas properties. Under this method, all costs associated with acquisition
of properties and successful as well as unsuccessful exploration and development
activities are capitalized. The Company does not capitalize internal costs.
Depreciation, depletion, and amortization (DD&A) of capitalized crude oil and
natural gas properties and estimated future development costs, excluding
unevaluated, unproved properties, are based on the unit-of-production method
based on proved reserves. Net capitalized costs of crude oil and natural gas
properties, less related deferred taxes, are limited, by country, to the lower
of unamortized cost or the cost ceiling, defined as the sum of the present value
of estimated future net revenues from proved reserves based on unescalated
discounted at 10 percent, plus the cost of properties not being amortized, if
any, plus the lower of cost or estimated fair value of unproved properties
included in the costs being amortized, if any, less related income taxes. Excess
costs are charged to proved property impairment expense. No gain or loss is
recognized upon sale or disposition of crude oil and natural gas properties,
except in unusual circumstances.
Unevaluated properties not currently being amortized included in oil and gas
properties were approximately $11,519,000 and $10,675,000 at December 31, 1997
and 1998, respectively. The properties represented by these costs were
undergoing exploration activities or are properties on which the Company intends
to commence activities in the future. The Company believes that the unevaluated
F-7
<PAGE>
properties at December 31, 1998 will be substantially evaluated in six to
thirty-six months and it will begin to amortize these costs at such time.
Other Property and Equipment
Other property and equipment are recorded on the basis of cost. Depreciation
of gas gathering and processing facilities and other property and equipment is
provided over the estimated useful lives using the straight-line method. Major
renewals and betterments are recorded as additions to the property and equipment
accounts. Repairs that do not improve or extend the useful lives of assets are
expensed.
Hedging
The Company periodically enters into contracts to hedge the risk of future
crude oil and natural gas price fluctuations. Such contracts may either fix or
support crude oil and natural gas prices or limit the impact of price
fluctuations with respect to the Company's sales of crude oil and natural gas.
Gains and losses on such hedging activities are recognized in oil and gas
production revenues when hedged production is sold.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("Statement 123") encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock.
Foreign Currency Translation
The functional currency for the Company's Canadian operations is the
Canadian dollar. The Company translates the functional currency into U.S.
dollars based on the current exchange rate at the end of the period for the
balance sheet and a weighted average rate for the period on the statement of
operations. Translation adjustments are reflected as Accumulated Other
Comprehensive Income (Loss) in Stockholders' Equity (Deficit).
Fair Value of Financial Instruments
The Company includes fair value information in the notes to consolidated
financial statements when the fair value of its financial instruments is
materially different from the book value. The Company assumes the book value of
those financial instruments that are classified as current approximates fair
value because of the short maturity of these instruments. For noncurrent
financial instruments, the Company uses quoted market prices or, to the extent
that there are no available quoted market prices, market prices for similar
instruments.
Restoration, Removal and Environmental Liabilities
The estimated costs of restoration and removal of major processing
facilities are accrued on a straight-line basis over the life of the property.
The estimated future costs for known environmental remediation requirements are
accrued when it is probable that a liability has been incurred and the amount of
remediation costs can be reasonably estimated. These amounts are the
undiscounted, future estimated costs under existing regulatory requirements and
using existing technology. F-8
<PAGE>
Revenue Recognition
The Company recognizes crude oil and natural gas revenue from its interest
in producing wells as crude oil and natural gas is sold from those wells net of
royalties. Revenue from the processing of natural gas is recognized in the
period the service is performed.
Deferred Financing Fees
Deferred financing fees are being amortized on a level yield basis over the
term of the related debt.
Federal Income Taxes
The Company records income taxes using the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Reclassifications
Certain balances for 1996 and 1997 have been reclassified for comparative
purposes.
2. Liquidity
The Company's operating results have been adversely effected by the decline
in prices of crude oil and natural gas during 1998. In addition, the Company has
significant interest payments due on its Series D Notes in May and November
1999. As a result of these conditions, the Company has issued $63.5 million of
debt securities ("Senior Notes") in March 1999. The Senior Notes are secured by
substantially all of the Company's crude oil and natural gas properties and
natural gas processing facilities and the shares of Grey Wolf owned by the
Company and bear interest at 12 7/8%, payable semi-annually on March 15 and
September 15, commencing September 15, 1999. The Senior Notes will mature in
2003. Proceeds from the Senior Notes will be used to pay-off the Company's
existing Credit Facility, pay-off approximately $10 million of debt assumed in
connection with the Company's acquisition of New Cache in January 1999 with the
remainder being used for general corporate purposes.
The Company has implemented a number of measures to conserve its cash
resources, including postponement of exploration and development projects.
However, while these measures will help conserve the Company's cash resources in
the near term, they will also limit the Company's ability to replenish its
depleting reserves, which could negatively impact the Company's operating cash
flow and results of operations in the future.
3. Acquisitions and Divestitures
Pacalta Properties Acquisition
In October 1997, Canadian Abraxas Petroleum Limited (Canadian Abraxas), a
wholly owned subsidiary of the Company, and Grey Wolf Exploration, Inc. (Grey
Wolf) completed the acquisition of the Canadian assets of Pacalta Resources Ltd.
(Pacalta Properties) for approximately $14,000,000 (CDN$20,000,000) and four
million Grey Wolf special warrants valued at approximately $1,375,000. Canadian
Abraxas acquired an approximate 92% interest in the Pacalta Properties, and Grey
Wolf acquired an approximate 8% interest. In July 1998, Grey Wolf acquired the
remaining interest in the Pacalta Properties from Canadian Abraxas.
The acquisition was accounted for as a purchase, and the purchase price was
allocated to the crude oil and natural gas properties based on the fair values
of the properties acquired. The transaction was financed through an advance from
the Company with funds which were obtained through borrowings under the
Company's Credit Facility. Results of operations from the Pacalta Properties
have been included in the consolidated financial statements since October 1997.
F-9
<PAGE>
CGGS Acquisition
In November 1996, the Company, through its wholly owned subsidiary, Canadian
Abraxas purchased 100% of the outstanding capital stock of CGGS Canadian Gas
Gathering Systems Inc. (CGGS) for approximately $85,500,000, net of the CGGS
cash acquired and including transaction costs. CGGS owns producing oil and gas
properties in western Canada and adjacent gas gathering and processing
facilities as well as undeveloped leasehold properties. Immediately after the
purchase, CGGS was merged with and into Canadian Abraxas. The acquisition was
accounted for as a purchase and the purchase price was allocated to the assets
and liabilities based on estimated fair values. The transaction was financed by
a portion of the proceeds from the offering of $215,000,000 of Series A Notes.
Results of operations from Canadian Abraxas have been included in the
consolidated financial statements since November 1996.
Wyoming Properties Acquisition and Divestiture
In September 1996, the Company acquired interests in certain producing crude
oil and natural gas properties located in the Wamsutter area of southwestern
Wyoming (the Wyoming Properties) from Enserch Exploration, Inc. for $47,500,000.
The acquisition was accounted for as a purchase and the purchase price was
allocated to crude oil and natural gas properties based on the fair values of
the properties acquired. The transaction was financed through borrowings under
the Company's bridge facility referred to in Note 4. Results of operations from
the Wyoming Properties have been included in the consolidated financial
statements since September 1996.
In November 1998, the Company sold its interest in the Wyoming Properties to
Abraxas Wamsutter L.P. a Texas limited partnership (the "Partnership") for
approximately $58.6 million and a minority equity ownership in the Partnership.
A subsidiary of the Company, Wamsutter Holdings, Inc. a Wyoming corporation,
(the "General Partner"), will initially own a one percent interest and act as
General Partner of the Partnership. After certain payback requirements are
satisfied, the Company's interest will increase to 35% initially and could
increase to as high as 65%. The Company will also receive a management fee and
reimbursement of certain overhead costs from the Partnership.
Portilla and Happy Fields Acquisition
In March 1996, the Company sold all of its interest in its Portilla and
Happy Fields to an unrelated purchaser (Purchaser or Limited Partner).
Simultaneously with this sale, the Limited Partner also acquired the 50%
overriding royalty interest in the Portilla Field owned by the Commingled
Pension Trust Fund Petroleum II, the trustee of which is Morgan Guaranty Trust
Company of New York (Pension Fund). In connection with the purchase of both the
Company's interest in the Portilla and Happy Fields and the Pension Fund's
interest in the Portilla Field (together, the Portilla and Happy Properties),
the Limited Partner obtained a loan (Bank Loan) secured by the Properties and
contributed the Properties to Portilla-1996, L.P., a Texas limited partnership
(Partnership). A subsidiary of the Company, Portilla-Happy Corporation
(Portilla-Happy), was the general partner of the Partnership. The aggregate
purchase price received by the Company was $17,600,000, of which $2,000,000 was
used to purchase a minority interest in the Partnership.
In November 1996, the Company closed an agreement with the Limited Partner
and certain noteholders (Noteholders) of the Partnership, pursuant to which the
Company obtained the Limited Partner's interest in the Partnership and the
Noteholders' notes in the aggregate principal amount of $5,920,000 (Notes),
resulting in the Company's owning, on a consolidated basis, all of the equity
interests in the Partnership. The aggregate consideration paid to the Limited
Partner and the Noteholders was $6,961,000. The Company also paid off the Bank
Loan which had an outstanding principal balance of approximately $20,051,000,
and assumed a crude oil and natural gas price swap agreement.
As a result of obtaining the Limited Partner's interest in the Partnership,
the Company reacquired those interests in the Portilla and Happy Fields which it
previously owned, as well as the interest in the Portilla Field previously owned
F-10
<PAGE>
by the Pension Fund. The Company has included in its balance sheet the amount
previously removed from oil and gas properties in connection with the sale of
its interest in the Portilla and Happy Fields during the quarter ended March 31,
1996, as well as the amount of the purchase price paid for the Pension Fund's
interest in the Portilla Field, and all development drilling expenditures
incurred on the properties, less the amount of DD&A related to the properties
from the formation of the Partnership through the closing of the transaction.
The purchase was financed by a portion of the proceeds from the offering of the
Senior Notes. The Company recorded its share of the net loss of the Partnership
from March 1996 to November 1996 of $513,000. The Company also assumed and wrote
off the remaining deferred financing fees and organization costs of the
Partnership. Gross revenues and expenses from both the Company's original
interest in the Portilla and Happy Fields as well as the interest in the
Portilla Field previously owned by the Pension Fund have been included in the
consolidated financial statements since November 1996.
Grey Wolf Acquisition
In January 1996, the Company made a $3,000,000 investment in Grey Wolf
Exploration Ltd. (Grey Wolf), a privately-held Canadian corporation, which, in
turn, invested these proceeds in newly-issued shares of Cascade, an Alberta,
Canada corporation whose common shares are traded on The Alberta Stock Exchange.
The acquisition was accounted for as a purchase and the purchase price was
allocated to the assets and liabilities based on the fair values. Results of
operations of Cascade have been included in the consolidated financial
statements since January 1996. During 1997, Cascade acquired 100% of the common
stock of Grey Wolf in exchange for the issuance of additional Cascade common
shares to the Grey Wolf shareholders and the cancellation of the common shares
of Cascade held by Grey Wolf. This transaction resulted in the share ownership
of Cascade previously held by Grey Wolf being passed to the Grey Wolf
shareholders, and Grey Wolf was merged into Cascade.
East White Point and Stedman Island Fields Acquisition
In November 1996, the Company obtained a release of the 50% overriding
royalty interest in the East White Point Field in San Patricia County, Texas and
the Stedman Island Field in Nueces County, Texas from the Pension Fund for
$9,271,000 before adjustment for accrual of net revenue to closing. The
acquisition was accounted for as a purchase and the purchase price was allocated
to crude oil and natural gas properties based on the fair values of the
properties acquired. The transaction was financed through proceeds of the sale
of the Senior Notes. Results of operations from these properties have been
included in the consolidated financial statements since November 1, 1996. The
Company recorded the net purchase price of approximately $9,271,000 to its oil
and gas properties.
4. Property and Equipment
The major components of property and equipment, at cost, are as follows:
Estimated
Useful Life 1997 1998
----------- -------------------
Years (In thousands)
Land, buildings, and improvements..... 15 $ 291 $ 309
Crude oil and natural gas properties.. -- 344,199 335,207
Natural gas processing plants......... 18 39,113 36,583
Equipment and other................... 7 1,839 2,217
--------- ---------
$385,442 $374,316
========= =========
F-11
<PAGE>
5. Long-Term Debt
<TABLE>
<CAPTION>
Long-term debt consists of the following:
December 31
1997 1998
-------------------
(In thousands)
<S> <C> <C>
11.5% Senior Notes due 2004, Series B (see below) ...... $215,000 $274,000
Unamortized premium on Series D Notes .................. -- 3,471
Credit facility due to Bankers Trust Company, ING
Capital and Union Bank of California (see below) .... 31,500 15,700
Credit facility due to a Canadian bank, providing for
borrowings to approximately $11,630,000 at the bank's
prime rate plus .125%, 6.20% at December 31, 1998 ... 2,096 6,515
Other .................................................. 21 12
-------- --------
248,617 299,698
Less current maturities ................................ -- --
-------- --------
$248,617 $299,698
======== ========
</TABLE>
On November 14, 1996, the Company and Canadian Abraxas completed the sale of
$215,000,000 aggregate principal amount of Senior Notes due November 1, 2004,
Series A (Series A Notes). In January 1997, the Series A Notes were exchanged
for Series B Notes, which have been registered under the Securities Act of 1933
(Series B Notes). In January 1998, the Company and Canadian Abraxas completed
the sale of $60,000,000 aggregate principal amount of Senior Notes due November
1, 2004, Series C (Series C Notes). The Company and Canadian Abraxas sold the
Series C Notes at a premium of $4,050,000 which will be amortized over the life
of the Series C Notes resulting in an effective rate of interest of 10.5%. The
net proceeds, after deducting estimated offering costs, were $62,750,000,
$33,400,000 of which was used to repay outstanding indebtedness under the Credit
Facility, except for $100,000 which remained outstanding with the remainder used
for general corporate purposes. In June 1998, the Series B Notes and Series C
Notes were exchanged for the Series D Notes, which have been registered under
the Securities Act of 1933. Interest at 11.5% is payable semi-annually in
arrears on May 1 and November 1 of each year, commencing on May 1, 1997. The
Series D Notes are general unsecured obligations of the Company and Canadian
Abraxas and rank pari passu in right of payment to all future subordinated
indebtedness of the Company and Canadian Abraxas. The Series D Notes are,
however, effectively subordinated in right of payment to all existing and future
secured indebtedness to the extent of the value of the assets securing such
indebtedness. The Company and Canadian Abraxas are joint and several obligors on
the Series D Notes. The Series D Notes are redeemable, in whole or in part, at
the option of the Company and Canadian Abraxas on or after November 1, 2000, at
the redemption price of 105.75% through October 31, 2001, 102.87% through
October 31, 2002 and 100.00% thereafter plus accrued interest. In addition, any
time on or prior to November 1, 1999, the Company and Canadian Abraxas may
redeem up to 35% of the aggregate principal amount of the Series D Notes
originally issued with the cash proceeds of one or more equity offerings at a
redemption price of 111.5% of the aggregate principal amount of the Series D
Notes to be redeemed plus accrued interest, provided, however, that after giving
effect to such redemption, at least 65% of the aggregate principal amount of
Series D Notes remains outstanding. The Series D Notes were issued under the
terms of an Indenture dated January 27, 1998 (the Series D Indenture) that
contains, among others, certain covenants which generally limit the ability of
the Company to incur additional indebtedness other than specific indebtedness
permitted under the Series D Indenture, including the Credit Facility discussed
below, provided however, if no event of default is continuing, the Company may
F-12
<PAGE>
incur indebtedness if after giving pro forma effect to the incurrence of such
debt both the Company's consolidated earnings before interest, taxes, depletion
and amortization (EBITDA) coverage ratio would be greater than 2.25 to 1.0 if
prior to November 1, 1997, and at least equal to 2.5 to 1.0 thereafter, and the
Company's adjusted consolidated net tangible assets, as defined, are greater
than 150% of the aggregate consolidated indebtedness of the Company or the
Company's adjusted consolidated net tangible assets are greater than 200% of the
aggregate consolidated indebtedness of the Company. The Series D Indenture also
contains other covenants affecting the Company's ability to pay dividends on its
common stock, sell assets and incur liens.
On September 30, 1996, the Company entered into a credit facility with
Bankers Trust Company (BTCo) and ING Capital (together the Lenders), providing a
bridge facility in the total amount of $90,000,000 and borrowed $85,000,000
which was used to repay all amounts due under its previous credit agreement and
to finance the purchase of the Wyoming Properties.
On November 14, 1996, the Company repaid all amounts outstanding under the
bridge facility with proceeds from the offering of $215,000,000 of Series A
Notes described above and entered into an amended and restated credit agreement
(Credit Facility) with the Lenders and Union Bank of California. On October 14,
1997, the Company amended the Credit Facility to provide for a revolving line of
credit with an availability of $40,000,000, subject to a borrowing base
condition. At December 31, 1997 and 1998, $31,500,000 and $15,700,000 were
outstanding under the Credit Facility.
Commitments available under the Credit Facility are subject to borrowing
base redeterminations to be performed semi-annually and, at the option of each
of the Company and the Lenders, one additional time per year. Amounts due under
the Credit Facility will be secured by the Company's oil and gas properties and
plants. Any outstanding principal balance in excess of the borrowing base will
be due and payable in three equal monthly payments after a borrowing base
redetermination. The borrowing base will be determined in the agent's sole
discretion, subject to the approval of the Lenders, based on the value of the
Company's reserves as set forth in the reserve report of the Company's
independent petroleum engineers, with consideration given to other assets and
liabilities.
The Credit Facility has an initial revolving term of two years and a
reducing period of three years from the end of the initial two-year period. The
commitment under the Credit Facility will be reduced during such reducing period
by eleven equal quarterly reductions. Quarterly reductions will equal 8.2% per
quarter with the remainder due at the end of the three-year reducing period.
The applicable interest rate charged on the outstanding balance of the
Credit Facility is based on a facility usage grid. If the borrowings under the
Credit Facility represent an amount less than or equal to 33.3% of the available
borrowing base, then the applicable interest rate charged on the outstanding
balance will be either (a) an adjusted rate of the London Inter-Bank Offered
Rate ("LIBOR") plus 1.25% or (b) the prime rate of the agent (which is based on
the agent's published prime rate) plus 0.50%. If the borrowings under the Credit
Facility represent an amount greater than or equal to 33.3% but less than 66.7%
of the available borrowing base, then the applicable interest rate on the
outstanding principal will be either (a) LIBOR plus 1.75% or (b) the prime rate
of the agent plus 0.50%. If the borrowings under the Credit Facility represent
an amount greater than or equal to 66.7% of the available borrowing base, then
the applicable interest rate on the outstanding principal will be either (a)
LIBOR plus 2.00% or (b) the prime rate of the agent plus 0.50%. LIBOR elections
can be made for periods of one, three or six months. The interest rate at
December 31, 1998 was 6.57%.
The Credit Facility contains a number of covenants that, among other things,
restrict the ability of the Company to (i) incur certain indebtedness or
guarantee obligations, (ii) prepay other indebtedness including the Notes, (iii)
make investments, loans or advances, (iv) create certain liens, (v) make certain
payments, dividends and distributions, (vi) merge with or sell assets to another
person or liquidate, (vii) sell or discount receivables, (viii) engage in
F-13
<PAGE>
certain intercompany transactions and transactions with affiliates, (ix) change
its business, (x) experience a change of control and (xi) make amendments to its
charter, by-laws and other debt instruments. In addition, under the Credit
Facility the Company is required to comply with specified financial ratios and
tests, including minimum debt service coverage ratios, maximum funded debt to
EBITDA tests, minimum net worth tests and minimum working capital tests. The
Company is obligated to pay the Lenders on a quarterly basis a commitment fee of
0.50% per annum on the average unused portion of the commitment in effect from
time to time. The Credit Facility contains customary events of default,
including nonpayment of principal, interest or fees, violation of covenants,
inaccuracy of representations or warranties in any material respect, cross
default and cross acceleration to certain other indebtedness, bankruptcy,
material judgments and liabilities and change of control. As of December 31,
1998, the Company was not in compliance with the EBITDA to interest expense
ratio requirement under the Credit Facility. This Credit Facility, however, was
fully redeemed with proceeds from the Company's issuance of the Senior Secured
Notes on March 26, 1999 as discussed in Note 2. Should crude oil prices continue
to decline, a further write-down of the Company's oil and gas properties may be
required (see Note 16).
The Company's principal source of funds to meet debt service and capital
requirements is net cash flow provided by operating activities, which is
sensitive to the prices the Company receives for its crude oil and natural gas.
The Company periodically enters into hedge agreements to reduce its exposure to
price risk in the spot market for natural gas. However, a substantial portion of
the Company's production will remain subject to such price risk. Additionally,
significant capital expenditures are required for drilling and development, and
other equipment additions. The Company believes that cash provided by operating
activities and other financing sources, including, if necessary, the sale of
certain assets and additional long-term debt, will provide adequate liquidity
for the Company's operations, including its capital expenditure program, for the
next twelve months. No assurance, however, can be given that the Company's cash
flow from operating activities will be sufficient to meet planned capital
expenditures and debt service in the future. Should the Company be unable to
generate sufficient cash flow from operating activities to meet its obligations
and make planned capital expenditures, the Company could be forced to reduce
such expenditures, sell assets or be required to refinance all or a portion of
its existing debt or to obtain additional financing. There can be no assurance
that such refinancing would be possible or that any additional financing could
be obtained.
During 1996, 1997 and 1998, the Company capitalized $465,000, $966,000 and
$414,000 of interest expense, respectively.
The fair value of the Series D Notes was approximately $212,350,000 as of
December 31, 1998. The fair values of the credit facilities approximate their
carrying values as of December 31, 1998. The Company has approximately
$1,980,000 of standby letters of credit and a $30,000 performance bond open at
December 31, 1998. Approximately $30,000 of cash is restricted and in escrow
related to certain of the letters of credit and bond.
6. Stockholders' Equity
Common Stock
In 1994, the Board of Directors adopted a Stockholders' Rights Plan and
declared a dividend of one Common Stock Purchase Right (Rights) for each share
of common stock. The Rights are not initially exercisable. Subject to the Board
of Directors' option to extend the period, the Rights will become exercisable
and will detach from the common stock ten days after any person has become a
beneficial owner of 20% or more of the common stock of the Company or has made a
tender offer or exchange offer (other than certain qualifying offers) for 20% or
more of the common stock of the Company.
F-14
<PAGE>
Once the Rights become exercisable, each Right entitles the holder, other
than the acquiring person, to purchase for $20 one-half of one share of common
stock of the Company having a value of four times the purchase price. The
Company may redeem the Rights at any time for $.01 per Right prior to a
specified period of time after a tender or exchange offer. The Rights will
expire in November 2004, unless earlier exchanged or redeemed.
Treasury Stock
In March 1996, the Board of Directors authorized the purchase in the open
market of up to 500,000 shares of the Company's outstanding common stock, the
aggregate purchase price not to exceed $3,500,000. During the year ended
December 31, 1998 the Company purchased 136,255 shares of its common stock at a
cost of $980,000, which were recorded as treasury stock.
7. Stock Option Plans and Warrants
Stock Options
The Company grants options to its officers, directors, and key employees
under various stock option and incentive plans.
The Company's various stock option plans have authorized the grant of
options to management personnel and directors for up to approximately 1,395,000
shares of the Company's common stock. All options granted have ten year terms
and vest and become fully exercisable over four years of continued service at
25% on each anniversary date. At December 31, 1998 approximately 279,000 options
remain available for grant.
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1996, 1997, and 1998, respectively: risk-free interest rates of
6.25%, 6.25% and 6.25%, respectively; dividend yields of -0-%; volatility
factors of the expected market price of the Company's common stock of .383, .529
and .667, respectively; and a weighted-average expected life of the option of
six years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for earnings (loss) per share
information):
1996 1997 1998
-------- ------- -------
(In thousands)
Pro forma net income (loss)................. $ 1,250 $(7,325) $ (85,619)
Pro forma net income (loss) per common share $ .15 $ (1.25) $ (13.52)
Pro forma net income (loss) per common
share assuming dilution................... $ .13 $ (1.25) $ (13.52)
F-15
<PAGE>
A summary of the Company's stock option activity, and related information
for the years ended December 31, follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------------------------- --------------------------- ----------------------------
Options Weighted-Average Options Weighted-Average Options Weighted-Average
(000s) Exercise Price (000s) Exercise Price (000s) Exercise Price
-------- ---------------- --------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of
year................... 219 $ 6.71(1) 551 $ 6.63 834 $ 8.27
Granted................... 358 6.58 285 11.26 792 7.37
Exercised................. (2) 6.75 (2) 5.50 (3) 5.33
Forfeited................. (24) 9.21 -- -- (51) 7.39
--- --- ----
Outstanding -- end of year.
551 $ 6.63 834 $ 8.27 1,572 $ 7.33
=== === =====
Exercisable at end of year... 93 $ 6.65 222 $ 6.66 501 $ 6.71
=== === ====
Weighted-average fair value
of options granted during
the year............... $ 3.46 $ 8.00 $ 5.15
- ----------
</TABLE>
(1) In March 1996, the Company amended the exercise price to $6.75 per share on
all previously issued options with an exercise price greater than $6.75 per
share. In March 1998, the Company amended the exercise price to $7.44 per
share on all options with an existing exercise price greater than $7.44.
Exercise prices for options outstanding as of December 31, 1998 ranged from
$5.00 to $8.75. The weighted-average remaining contractual life of those options
is 8.9 years.
Stock Awards
In addition to stock options granted under the plans described above, the
Long-Term Incentive Plan also provides for the right to receive compensation in
cash, awards of common stock, or a combination thereof. In 1996, 1997, and 1998,
the Company made direct awards of common stock of 1,000 shares, 14,748 shares
and 18,263 shares, respectively, at weighted average fair values of $5.00,
$10.75 and $5.13 per share, respectively.
The Company also has adopted the Restricted Share Plan for Directors which
provides for awards of common stock to nonemployee directors of the Company who
did not, within the year immediately preceding the determination of the
director's eligibility, receive any award under any other plan of the Company.
In 1996, 1997, and 1998, the Company made direct awards of common stock of 4,050
shares, 7,235 shares and 4,838 shares, respectively, at weighted average fair
values of $6.25, $9.87 and $14.75 per share, respectively.
During 1996, the Company's stockholders approved the Abraxas Petroleum
Corporation Director Stock Option Plan (Plan), which authorizes the grant of
nonstatutory options to acquire an aggregate of 104,000 common shares to those
persons who are directors and not officers of the Company. During 1996, each of
the seven eligible directors was granted an option to purchase 8,000 common
shares at $6.75. These options are included in the above table. No options were
granted during 1997, during 1998 each of the seven eligible directors were
granted an option to purchase 2,000 common shares at $7.44 and 3,000 common
shares at $5.56. An additional option was granted to an eligible director to
purchase 4,000 common shares at $7.44.
Stock Warrants
In connection with an amendment to one of the Company's previous credit
agreements, the Company granted stock warrants to the lender covering 424,000
shares of its common stock at an average price of $9.79 a share. The warrants
are exercisable in whole or in part through December 1999 and are
nontransferable without the consent of the Company. During 1997, the lender
exercised 212,000 of its warrants on a cashless basis and was issued 97,810
shares of the Company's common stock.
Additionally, warrants to purchase 13,500 shares of the Company's common
stock at $7.00 per share remain outstanding from previous grants.
F-16
<PAGE>
At December 31, 1998, the Company has approximately 5,036,000 shares
reserved for future issuance for conversion of its stock options, warrants,
Rights, and incentive plans for the Company's directors and employees.
8. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
December 31
1997 1998
---------- -----------
(In thousands)
Deferred tax liabilities:
U.S. full cost pool...................... $ 3,444 $ --
Canadian full cost pool.................. 27,684 19,753
State taxes.............................. 67 67
Other.................................... 103 14
-------- --------
Total deferred tax liabilities... 31,298 19,834
Deferred tax assets:
U.S. full cost pool...................... -- 15,803
Depletion................................ 930 1,075
Net operating losses..................... 8,520 15,841
Other.................................... 12 117
-------- --------
Total deferred tax assets........ 9,462 32,836
Valuation allowance for deferred tax assets (5,915) (32,822)
-------- --------
Net deferred tax assets.......... 3,547 14
-------- --------
Net deferred tax liabilities..... $ 27,751 $ 19,820
======== ========
Significant components of the provision (benefit) for income taxes are as
follows:
1997 1998
Current:
Federal..... $ -- $ --
State....... -- --
Foreign..... 244 231
-------- --------
$ 244 $ 231
======== ========
Deferred:
Federal..... $ -- $ --
State....... -- --
Foreign..... (4,135) (4,389)
-------- --------
$ (4,135) $ (4,389)
======== ========
At December 31, 1998, the Company had, subject to the limitations discussed
below, $46,591,000 of net operating loss carryforwards for U.S. tax purposes, of
which it is estimated a maximum of $43,836,000 may be utilized before it
expires. These loss carryforwards will expire from 2002 through 2018 if not
utilized. At December 31, 1998, the Company had approximately $11,900,000 of net
operating loss carryforwards for Canadian tax purposes of which $200,000 will
expire in 2002, $4,970,000 will expire in 2003, $3,200,000 will expire in 2004
and $3,530,000 will expire in 2005.
F-17
<PAGE>
As a result of the acquisition of certain partnership interests and crude
oil and natural gas properties in 1990 and 1991, an ownership change under
Section 382 of the Internal Revenue Code of 1986, as amended (Section 382),
occurred in December 1991. Accordingly, it is expected that the use of the U.S.
net operating loss carryforwards generated prior to December 31, 1991 of
$4,909,000 will be limited to approximately $235,000 per year.
During 1992, the Company acquired 100% of the common stock of an unrelated
corporation. The use of net operating loss carryforwards of $837,000 acquired in
the acquisition are limited to approximately $115,000 per year.
As a result of the issuance of additional shares of common stock for
acquisitions and sales of common stock, an additional ownership change under
Section 382 occurred in October 1993. Accordingly, it is expected that the use
of all U.S. net operating loss carryforwards generated through October 1993
(including those subject to the 1991 and 1992 ownership changes discussed above)
of $8,875,000 will be limited to approximately $1,034,000 per year, subject to
the lower limitations described above. Of the $8,875,000 net operating loss
carryforwards existing at October 1993, it is anticipated that the maximum net
operating loss that may be utilized before it expires is $6,120,000. Future
changes in ownership may further limit the use of the Company's carryforwards.
In addition to the Section 382 limitations, uncertainties exist as to the
future utilization of the operating loss carryforwards under the criteria set
forth under FASB Statement No. 109. Therefore, the Company has established a
valuation allowance of $5,915,000 and $32,822,000 for deferred tax assets at
December 31, 1997 and 1998, respectively.
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense is:
December 31
1996 1997 1998
------- ------ --------
(In thousands)
Tax (expense) benefit at U.S. statutory rates
(34%).................................... $ (743) $3,414 $ 29,958
(Increase) decrease in deferred tax asset
valuation allowance...................... (1) (259) (26,907)
Higher effective rate of foreign operations. (49) (244) (231)
Percentage depletion........................ 189 499 146
Other....................................... 428 481 1,192
------- ------- --------
$ (176) $3,891 $ 4,158
======= ======= ========
9. Related Party Transactions
Accounts receivable from affiliates, officers, and stockholders represent
amounts receivable relating to joint interest billings on properties which the
Company operates and advances made to officers.
In January 1996, Grey Wolf purchased newly issued shares of Cascade
representing 66 2/3% of Cascade's capital stock. As described in Note 3, in 1997
Grey Wolf merged with Cascade and the name was changed to Grey Wolf Exploration,
Inc. ("Grey Wolf"). At December 31, 1998, the Company owns approximately 48% of
Grey Wolf. The Company's President as well as certain directors directly own
approximately 5% of Grey Wolf. Additionally the Company's President owns options
to purchase up to 800,000 shares of Grey Wolf capital stock at an exercise price
of CDN$.20 per share, and certain of the Company's directors own options to
purchase in the aggregate up to 1,000,000 shares of Grey Wolf capital stock at
an exercise price of CDN$.20 per share. Grey Wolf currently has approximately
127,000,000 shares of capital stock outstanding.
F-18
<PAGE>
Grey Wolf owns a 10% interest in the Canadian Abraxas oil and gas properties
and the Canadian Abraxas gas processing plants acquired by Canadian Abraxas in
November 1996 from CGGS and a 100% interest in the Pacalta Properties and
manages the operations of Canadian Abraxas, pursuant to a management agreement
between Canadian Abraxas and Grey Wolf. Under the management agreement, Canadian
Abraxas reimburses Grey Wolf for reasonable costs or expenses attributable to
Canadian Abraxas and for administrative expenses based upon the percentage that
Canadian Abraxas' gross revenue bears to the total gross revenue of Canadian
Abraxas and Grey Wolf.
10. Commitments and Contingencies
Operating Leases
During the years ended December 31, 1996, 1997, and 1998, the Company
incurred rent expense of approximately $179,000, $228,000 and $292,000,
respectively. Future minimum rental payments are as follows at December 31,
1998: 1999............. $299,000 2000............. 313,000 2001.............
354,000 2002............. 247,000 2003............. 228,000 Thereafter.. 626,000
Contingencies
In May 1995, certain plaintiffs filed a lawsuit against the Company alleging
negligence and gross negligence, tortious interference with contract, conversion
and waste. In March 1998, a jury found against the Company, on May 22, 1998
final judgment in the amount of approximately $1.3 million was entered. The
Company has filed an appeal. As of March 4, 1999, no ruling has been made on the
appeal. Management believes, based on the advice of legal counsel, that the
plaintiffs' claims are without merit and that damages should not be recoverable
under this action; however, the ultimate effect on the Company's financial
position and results of operations cannot be determined at this time. The
Company has not established a reserve for this matter at December 31, 1998.
Additionally, from time to time, the Company is involved in litigation
relating to claims arising out of its operations in the normal course of
business. At December 31, 1998, the Company was not engaged in any legal
proceedings that are expected, individually or in the aggregate, to have a
material adverse effect on the Company.
F-19
<PAGE>
11. Earnings per Share
<TABLE>
<CAPTION>
The following table sets forth the computation of basic and diluted earnings
per share:
1996 1997 1998
----------- ------------ ---------
<S> <C> <C> <C>
Numerator:
Net income (loss)........................ $ 1,513,000 $(6,485,000) $(83,960,000)
Preferred stock dividends................ 366,000 183,000 --
----------- ------------ ------------
Numerator for basic earnings per share --
income (loss) available to common
stockholders............................ 1,147,000 (6,668,000) (83,960,000)
Effect of dilutive securities:
Preferred stock dividends............. -- -- --
----------- ----------- ------------
Numerator for diluted earnings per share--
income available to common stockholders
after assumed conversions............... 1,147,000 (6,668,000) (83,960,000)
Denominator:
Denominator for basic earnings per share --
weighted-average shares................. 5,757,105 6,025,294 6,331,292
Effect of dilutive securities:
Stock options and warrants............ 24,277 -- --
Convertible preferred stock........... -- -- --
Assumed issuance under the CVR Agreement 1,013,060 -- --
----------- ------------ ------------
1,037,337 -- --
----------- ------------ ------------
Dilutive potential common shares
Denominator for diluted earnings per
share adjusted weighted-average shares
and assumed conversions................. 6,794,442 6,025,294 6,331,292
Basic earnings (loss) per share:
Income (loss) before extraordinary item $ .27 $ (1.11) $ (13.26)
Extraordinary item.................... (.07) -- --
----------- ------------ -------------
$ .20 $ (1.11) $ (13.26)
=========== ============ =============
Diluted earnings (loss) per share:
Income (loss) before extraordinary item $ .23 $ (1.11) $ (13.26)
Extraordinary item.................... (.06) -- --
----------- ------------ -------------
$ .17 $ (1.11) $ (13.26)
=========== ============ =============
</TABLE>
For the year ended December 31, 1998 none of the shares issuable in
connection with stock options or warrants are included in diluted shares. For
the year ended December 31, 1997, none of the shares issuable in connection with
stock options, warrants, or the conversion of preferred stock are included in
diluted shares. Inclusion of these shares would be antidilutive due to losses
incurred in those years. In addition, for the year ended December 31, 1996
shares issuable in connection with the conversion of the preferred stock were
not included in diluted shares because the effect was antidilutive.
Stock options and warrants to purchase approximately 875,000 shares of
common stock at a weighted average per share price of $8.36 were outstanding
during 1996. Since the exercise price of these warrants and options was greater
than the average market price of the common shares, they were not included in
the computations of diluted earnings per share. Inclusion of these shares would
be antidilutive.
F-20
<PAGE>
12. Quarterly Results of Operations (Unaudited)
<TABLE>
<CAPTION>
Selected results of operations for each of the fiscal quarters during the
years ended December 31, 1997 and 1998 are as follows:
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
---------- --------- --------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Year Ended December 31, 1997
Net revenue............................. $ 19,216 $ 15,772 $ 15,703 $ 20,240
Operating income (loss)................. 7,791 4,090 3,902 (633)
Net income (loss)....................... 1,454 (2,010) (2,042) (3,887)
Earnings (loss) per common share........ .24 (.37) (.33) (.61)
Earnings (loss) per common share-
assuming dilution...................... .22 (.37) (.33) (.61)
Year Ended December 31, 1998
Net revenue............................. $ 16,739 $ 15,471 $ 13,799 $ 14,075
Operating income (loss)................. 2,423 577 (765) (58,735)
Net income (loss)....................... (4,572) (6,105) (5,795) (67,488)
Earnings (loss) per common share........ (.72) (.96) (.92) (10.66)
Earnings (loss) per common share-
assuming dilution...................... (.72) (.96) (.92) (10.66)
</TABLE>
During the fourth quarter of 1997, the Company recorded a write-down of its
Canadian proved crude oil and natural gas properties of approximately $4,600,000
($3,000,000 net of taxes). During the fourth quarter of 1998, the Company
recorded a write-down of its United States proved crude oil and properties of
approximately $61,224,000 under the ceiling limitation.
13. Benefit Plans
The Company has a defined contribution plan (401(k)) covering all eligible
employees of the Company. During 1996, 1997, and 1998 the Company contributed
2,500, 7,440, and 10,329 shares, respectively, of its common stock held in the
treasury to the Plan and recorded the fair value of $12,500, $41,850, and
$76,847 respectively, as compensation expense. The employee contribution
limitations are determined by formulas which limit the upper one-third of the
plan members from contributing amounts that would cause the plan to be
top-heavy. The employee contribution is limited to the lesser of 20% of the
employee's annual compensation or $10,000.
14. Summary Financial Information of Canadian Abraxas Petroleum Ltd.
The following is summary financial information of Canadian Abraxas, a wholly
owned subsidiary of the Company. Canadian Abraxas is jointly and severally
liable for the entire balance of the Series D Notes $(275,000,000), of which
$84,612,000 was utilized by Canadian Abraxas in connection with the acquisition
F-21
<PAGE>
of CGGS. The Company has not presented separate financial statements and other
disclosures concerning Canadian Abraxas because management has determined that
such information is not material to the holders of the Series D Notes and the
Senior Notes.
<TABLE>
<CAPTION>
December 31,
1997 1998
---------- ---------
(In thousands)
<S> <C> <C>
BALANCE SHEET
Assets
Total current assets................................ $ 4,738 $ 6,144
Oil and gas and processing properties............... 109,968 91,115
Other assets........................................ 3,761 3,854
-------- --------
$118,467 $101,113
Liabilities and Stockholder's
Equity
Total current liabilities........................... $ 3,625 $ 3,030
11.5% Senior Notes due 2004......................... 74,682 74,682
Notes payable to Abraxas Petroleum Corporation...... 18,844 20,355
Other liabilities................................... 30,295 22,519
Stockholder's equity (deficit)...................... (8,979) (19,473)
-------- --------
$118,467 $101,113
</TABLE>
<TABLE>
<CAPTION>
November 14, 1996,
Date of Acquisition, Year Ended Year Ended
to December 31, 1996 December 31, 1997 December 31, 1998
-------------------- ----------------- -----------------
(In thousands)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS
Revenues......................... $ 3,972 $ 19,264 $ 18,624
Operating costs and expenses..... (2,292) (16,617) (18,026)
Proved property impairment....... -- (4,600) --
Interest expense................. (1,331) (9,952) (10,356)
Other income..................... 23 202 191
Income tax (expense) benefit..... (175) 3,815 4,158
------- -------- --------
Net income (loss)................ $ 197 $ (7,888) $ (5,409)
======= ======== ========
</TABLE>
15. Business Segments
The Company conducts its operations through two geographic segments, the
United States and Canada, and is engaged in the acquisition, development and
production of crude oil and natural gas and the processing of natural gas in
each country. The Company's significant operations are located in the Texas Gulf
Coast, the Permian Basin of western Texas and Canada. Identifiable assets are
those assets used in the operations of the segment. Corporate assets consist
primarily of deferred financing fees and other property and equipment. The
Company's revenues are derived primarily from the sale of crude oil, condensate,
natural gas liquids and natural gas to marketers and refiners and from
processing fees from the custom processing of natural gas. As a general policy,
collateral is not required for receivables; however, the credit of the Company's
customers is regularly assessed. The Company is not aware of any significant
credit risk relating to its customers and has not experienced significant credit
losses associated with such receivables.
In 1998 four customers accounted for approximately 58% of oil and natural
F-22
<PAGE>
gas production and gas processing revenues. Three customers accounted for
approximately 54% of United States revenue and three customers accounted for
approximately 83% of revenue in Canada. In 1997 three customers accounted for
approximately 40% of oil and natural gas production revenues and gas processing
revenues. In 1996 four customers accounted for approximately 63% of oil and
natural gas production revenues and gas processing revenues.
Business segment information about the Company's 1996 operations in
different geographic areas is as follows:
<TABLE>
<CAPTION>
U.S. Canada Total
--------- ---------- ---------
(In thousands)
<S> <C> <C> <C>
Revenues................................... $ 21,999 $ 4,654 $ 26,653
======== ========= =========
Operating profit........................... $ 8,987 $ 1,694 $ 10,681
======== =========
General corporate.......................... (2,044)
Interest expense and amortization of
deferred financing fees................. (6,521)
---------
Income before income taxes............... $ 2,116
=========
Identifiable assets at December 31, 1996... $168,141 $ 126,266 $ 294,407
======== =========
Corporate assets........................... 10,435
---------
Total assets..................... $ 304,842
=========
</TABLE>
Business segment information about the Company's 1997 operations in
different geographic areas is as follows:
<TABLE>
<CAPTION>
U.S. Canada Total
-------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Revenues................................... $ 50,172 $ 20,759 $ 70,931
======== ========= =========
Operating profit (loss).................... $ 19,938 $ (2,125) $ 17,813
======== =========
General corporate.......................... (2,309)
Interest expense and amortization of
deferred financing fees............... (25,880)
---------
Loss before income taxes................. $ (10,376)
=========
Identifiable assets at December 31, 1997... $198,277 $ 130,969 $ 329,246
======== =========
Corporate assets........................... 9,282
---------
Total assets..................... $ 338,528
=========
</TABLE>
F-23
<PAGE>
Business segment information about the Company's 1998 operations in
different geographic areas is as follows:
<TABLE>
<CAPTION>
U.S. Canada Total
-------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Revenues................................... $ 36,267 $ 23,817 $ 60,084
======== ========= =========
Operating profit (loss).................... $(53,016) $ 877 $ (52,139)
======== =========
General corporate.......................... (3,556)
Interest expense and amortization of
deferred financing fees................. (32,419)
---------
Loss before income taxes................. $ (88,114)
=========
Identifiable assets at December 31, 1998... $153,030 $ 129,301 $ 282,331
======== =========
Corporate assets........................... 9,167
---------
Total assets..................... $ 291,498
=========
</TABLE>
16. Commodity Swap Agreements
The Company enters into commodity swap agreements (Hedge Agreements) to
reduce its exposure to price risk in the spot market for crude oil and natural
gas. Pursuant to the Hedge Agreements, either the Company or the counterparty
thereto is required to make payment to the other at the end of each month.
In November 1996, the Company assumed Hedge Agreements extending through
October 2001 with a counterparty involving various quantities and fixed prices.
These Hedge Agreements provide for the Company to make payments to the
counterparty to the extent the market prices determined based on the price for
west Texas intermediate light sweet crude oil on the NYMEX for crude oil and the
Inside FERC, Tennessee Gas Pipeline Co.; Texas (Zone O) price for natural gas
exceeds the above fixed prices and for the counterparty to make payments to the
Company to the extent the market prices are less than the above fixed prices.
The Company accounts for the related gains or losses (a loss of $952,000 in 1997
and a gain of $268,000 in 1998) in crude oil and natural gas revenue in the
period of the hedged production. The Company terminated these hedge agreements
in January 1999 and was paid $750,000 by the counterparty for such termination
In March 1998, the Company entered into a costless collar for 2,000 barrels
of crude oil with a floor price of $14.00 and a ceiling price of $22.30. The
agreement was effective April 1, 1998 and extends through March 31, 1999. Under
the terms the Company will be paid when the average crude price is below the
floor price and pay the counterparty when the average price exceeds the ceiling
price. During 1998, the Company realized a gain of $282,000 on this agreement,
which is accounted for in crude oil and natural gas revenue.
17. Proved Property Impairment
In 1997 and 1998 the Company recorded a write-down of its proved crude oil
and natural gas properties of approximately $4,600,000, $3,000,000 after taxes,
and $61,224,000 under the ceiling limitation prescribed for companies following
the full cost method of accounting for its oil and gas properties. The 1997
write-down was related to the Company's Canadian oil and gas properties, the
1998 write down was related to the Company's United States oil and gas
properties. These writedowns were due primarily to a decrease in spot market
prices for the Company's crude oil and natural gas. Under full cost accounting
rules, the net capitalized costs of oil and gas properties, less related
deferred taxes, are limited by country, to the lower of unamortized cost or the
cost ceiling as discussed in Note 1. The risk that the Company will be required
F-24
<PAGE>
to write-down the carrying value of its crude oil and natural gas properties
increases when crude oil and natural gas prices are depressed or volatile.
Should prices continue to decline, a further write-down of the Company's crude
oil and natural gas properties may be required. If such a write-down were large
enough, it could result in the occurrence of an event of default under the
Credit Facility that could require the sale of some of the Company's producing
properties under unfavorable market conditions or require the Company to seek
additional equity capital.
18. Subsequent Event
On January 13, 1999 the Company acquired approximately 14,026,467 common
shares and associated rights, representing approximately 98.8 percent of New
Cache Petroleums, Ltd. ("New Cache") for approximately $78 million in cash and
the assumption of approximately $10 million of debt. The Company intends to
integrate the operations of New Cache into the existing operations of its wholly
owned subsidiary Canadian Abraxas.
19. Supplemental Oil and Gas Disclosures (Unaudited)
The accompanying table presents information concerning the Company's crude
oil and natural gas producing activities as required by Financial Accounting
Standards 69, "Disclosures about Oil and Gas Producing Activities." Capitalized
costs relating to oil and gas producing activities are as follows:
December 31
----------------------
1997 1998
---------- ----------
(In thousands)
Proved crude oil and natural gas properties..... $ 332,680 $ 324,532
Unproved properties............................. 11,519 10,675
--------- ----------
Total................................. 344,199 335,207
Accumulated depreciation, depletion, and
amortization, and impairment................. (70,717) (161,593)
--------- ----------
Net capitalized costs................. $ 273,482 $ 173,614
========= ==========
Costs incurred in oil and gas property acquisitions, exploration and
development activities are as follows:
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------------------------------------------------------------------------------
1996 1997 1998
----------------------------- -------------------------------- ------------------------------
Total U.S. Canada Total U.S. Canada Total U.S. Canada
-------- -------- -------- ---------- -------- -------- --------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Property acquisition costs:
Proved............. $ 87,005 $ 37,609 $ 49,396 $ 13,800 $ -- $ 13,800 $ 2,729 $ 1,319 $ 1,410
Unproved........... 37,268 8,230 29,038 8,958 -- 8,958 -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
$124,273 $ 45,839 $ 78,434 $ 22,758 $ -- $ 22,758 $ 2,729 $ 1,319 $ 1,410
======== ======== ======== ======== ======== ======== ======== ======== ========
Property development and
exploration costs.. $ 18,133 $ 18,115 $ 18 $ 61,414 $ 53,363 $ 8,051 $ 51,821 $ 35,421 $ 16,400
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
F-25
<PAGE>
The results of operations for oil and gas producing activities are as
follows:
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------------------------------------------------------------------------
1996 1997 1998
----------------------------- -------------------------------- ----------------------------------
Total U.S. Canada Total U.S. Canada Total U.S. Canada
--------- --------- --------- ---------- ---------- --------- --------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............... $ 25,749 $ 21,758 $ 3,991 $ 65,826 $ 49,031 $ 16,795 $ 54,263 $ 33,705 $ 20,558
Production costs....... (5,858) (5,193) (665) (14,881) (10,749) (4,132) (16,841) (10,299) (6,542)
Depreciation, depletion,
and amortization..... (9,103) (7,695) (1,408) (27,803) (18,992) (8,811) (30,832) (17,239) (13,593)
Proved property impairment -- -- -- (4,600) -- (4,600) (61,223) (61,223) --
General and administrative (483) (401) (82) (1,042) (721) (321) (1,381) (992) (389)
Income taxes........... (148) -- (148) 427 -- 427 (14) -- (14)
-------- -------- -------- --------- --------- -------- --------- --------- ---------
Results of operations from
oil and gas producing
activities (excluding
corporate overhead and
interest costs)......
$ 10,157 $ 8,469 $ 1,688 $ 17,927 $ 18,569 $ (642) $ (56,028) $ (56,048) $ 20
======== ======== ======== ========= ========= ======== ========= ========= =========
Depletion rate per barrel
of oil equivalent.... $ 5.12 $ 5.10 $ 5.29 $ 5.62 $ 5.05 $ 6.98 $ 5.36 $ 5.26 $ 5.49
========= ========= ======== ========= ========= ======== ========= ========= =========
</TABLE>
Estimated Quantities of Proved Oil and Gas Reserves
The following table presents the Company's estimate of its net proved crude
oil and natural gas reserves as of December 31, 1995, 1996, and 1997. The
Company's management emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of producing
oil and gas properties. Accordingly, the estimates are expected to change as
future information becomes available. The estimates have been prepared by
independent petroleum reserve engineers.
F-26
<PAGE>
<TABLE>
<CAPTION>
Total United States Canada
----------------------- --------------------------- ----------------------------
Liquid Natural Liquid Natural Liquid Natural
Hydrocarbons Gas Hydrocarbons Gas Hydrocarbons Gas
(Barrels) (Mcf) (Barrels) (Mcf) (Barrels) (Mcf)
------------ -------- ------------ ----------- -------------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Proved developed and undeveloped reserves:
Balance at December 31, 1995......... 8,267 54,569 8,267 54,569 -- --
Revisions of previous estimates.... 680 (2,561) 680 (2,561) -- --
Extensions and discoveries......... 1,752 10,194 1,746 10,060 6 134
Purchase of minerals in place...... 8,062 121,408 6,694 65,135 1,368 56,273
Production......................... (724) (6,350) (670) (5,042) (54) (1,308)
Sale of minerals in place.......... (2) -- (2) -- -- --
------ ------- ------ ------- ----- -------
Balance at December 31, 1996......... 18,035 177,260 16,715 122,161 1,320 (1) 55,099
Revisions of previous estimates.... (1,083) (4,554) (1,096) (10,343) 13 5,789
Extensions and discoveries......... 2,262 48,405 2,190 40,877 72 7,528
Purchase of minerals in place...... 585 27,575 197 150 388 27,425
Production......................... (1,929) (21,050) (1,736) (12,508) (193) (8,542)
Sale of minerals in place.......... (93) (6,322) (9) (42) (84) (6,280)
------ ------- ------ ------- ----- -------
Balance at December 31, 1997......... 17,777 221,314 16,261 140,295 1,516 (1) 81,019 (2)
Revisions of previous estimates.... (3,323) (7,834) (3,903) (17,501) 580 9,667
Extensions and discoveries......... 266 49,403 237 43,900 29 5,503
Purchase of minerals in place...... 464 15,167 126 2,033 338 13,134
Production......................... (1,596) (24,930) (1,322) (11,707) (274) (13,223)
Sale of minerals in place.......... (5,893) (55,642) (5,648) (46,781) (245) (8,861)
------ ------- ------ ------- ----- -------
Balance at December 31, 1998......... 7,695 197,478 5,751 110,239 1,944 (1) 87,239 (2)
====== ======= ====== ======= ===== =======
Proved developed reserves:
December 31, 1996.................... 14,961 157,660 13,641 103,639 1,320 54,021
====== ======= ====== ======= ===== =======
December 31, 1997.................... 14,254 186,490 12,750 109,456 1,504 77,034
====== ======= ====== ======= ===== =======
December 31, 1998.................... 5,819 144,588 4,138 65,075 1,681 79,513
====== ======= ====== ======= ===== =======
</TABLE>
- ----------
(1) Includes 120,400 and 260,200 barrels of liquid hydrocarbon reserves owned
by Grey Wolf of which approximately 57,600 and 140,200 barrels are
applicable to the minority interest's share of these reserves at December
31, 1996 and 1997, respectively.
(2) Includes 7,446 MMcf of natural gas reserves owned by Grey Wolf of which
4,012 MMcf are applicable to the minority interest's share of these
reserves at December 31, 1997.
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil
and Gas Reserves
The following disclosures concerning the standardized measure of future cash
flows from proved crude oil and natural gas reserves are presented in accordance
with Statement of Financial Accounting Standards No. 69. The standardized
measure does not purport to represent the fair market value of the Company's
proved crude oil and natural gas reserves. An estimate of fair market value
would also take into account, among other factors, the recovery of reserves not
classified as proved, anticipated future changes in prices and costs, and a
discount factor more representative of the time value of money and the risks
inherent in reserve estimates.
Under the standardized measure, future cash inflows were estimated by
applying period-end prices at December 31, 1998, adjusted for fixed and
determinable escalations, to the estimated future production of year-end proved
reserves. Future cash inflows were reduced by estimated future production and
development costs based on year-end costs to determine pre-tax cash inflows.
F-27
<PAGE>
Future income taxes were computed by applying the statutory tax rate to the
excess of pre-tax cash inflows over the tax basis of the properties. Operating
loss carryforwards, tax credits, and permanent differences to the extent
estimated to be available in the future were also considered in the future
income tax calculations, thereby reducing the expected tax expense.
Future net cash inflows after income taxes were discounted using a 10%
annual discount rate to arrive at the Standardized Measure.
Set forth below is the Standardized Measure relating to proved oil and gas
reserves for:
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------------------------------------------------------------------------------
1996 1997 1998
----------------------------------- ---------------------------------- -------------------------------
Total U.S. Canada Total U.S. Canada Total U.S. Canada
----------- ---------- --------- ---------- ---------- --------- ---------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Future cash inflows... $ 1,009,420 $ 824,776 $ 184,644 $ 714,048 $ 530,627 $183,421 $ 474,263 $268,821 $205,442
Future production and
development costs.. (251,749) (201,498) (50,251) (249,604) (186,445) (63,159) (169,736) (99,187) (70,549)
Future income tax expense (207,834) (157,508) (50,326) (82,998) (48,736) (34,262) (20,655) -- (20,655)
----------- ---------- --------- ---------- ---------- -------- ---------- -------- --------
Future net cash flows. 549,837 465,770 84,067 381,446 295,446 86,000 283,871 169,634 114,238
Discount.............. (220,016) (193,221) (26,795) (129,367) (107,259) (22,108) (97,498) (75,389) (22,109)
----------- ---------- --------- ---------- ---------- -------- ---------- -------- --------
Standardized Measure of
discounted future net
cash relating to
proved reserves.... $ 329,821 $ 272,549 $ 57,272 $ 252,079 $ 188,187 $ 63,892 $ 186,374 $ 94,245 $ 92,129
=========== ========== ========= ========== ========== ======== ========== ======== ========
</TABLE>
Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves
The following is an analysis of the changes in the Standardized Measure:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------
1996 1997 1998
----------- ----------- ----------
(In thousands)
<S> <C> <C> <C>
Standardized Measure, beginning of year........ $ 87,160 $ 329,821 $252,079
Sales and transfers of oil and gas produced,
net of production costs..................... (19,887) (50,945) (37,722)
Net changes in prices and development and
production costs from prior year............ 65,917 (190,174) (26,858)
Extensions, discoveries, and improved recovery,
less related costs.......................... 30,699 49,471 36,187
Purchases of minerals in place............... 244,930 27,586 28,079
Sales of minerals in place................... (24) (5,720) (58,099)
Revision of previous quantity estimates...... 2,257 (8,150) (12,514)
Change in future income tax expense.......... (87,393) 70,858 (14,798)
Other........................................ (2,554) (12,389) (7,140)
Accretion of discount........................ 8,716 41,721 26,861
-------- --------- --------
Standardized Measure, end of year.............. $329,821 $ 252,079 $186,374
======== ========= ========
</TABLE>
F-28
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholder of
New Cache Petroleums Ltd.
We have audited the balance sheet of New Cache Petroleums Ltd. as at
November 30, 1998 and the statements of loss and retained earnings (deficiency)
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at November 30, 1998 and the
results of its operations and its cash flows for the year then ended in
accordance with accounting principles generally accepted in the United States.
Calgary, Canada ERNST & YOUNG LLP
March 12, 1999 Chartered Accountants
F-29
<PAGE>
<TABLE>
<CAPTION>
NEW CACHE PETROLEUMS LTD.
BALANCE SHEET
ASSETS
As at
November 30,
1998
-------------
<S> <C> <C>
Current
Cash................................................. $ 7,455
Accounts receivable
Trade.............................................. $ 5,154,577
Other.............................................. 204,295 5,358,872
----------- -------------
5,366,327
Fixed assets
Petroleum and natural gas properties................. 128,281,750
Less accumulated depletion and depreciation.......... (64,726,771)
-------------
63,554,979
-------------
$ 68,921,306
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Bank production loan................................. $ 24,769,475
Accounts payable and accrued liabilities............. 4,392,481
Large corporations tax payable....................... 27,894
-------------
29,189,850
Deferred income taxes................................ 2,105,318
Site restoration liability........................... 430,091
-------------
31,725,259
Shareholders' equity
Share capital, no par value, unlimited number of authorized
shares, 14,185,128 shares issued and outstanding.. 64,751,866
Cumulative translation adjustment
Opening balance.................................... $(4,591,329)
Translation adjustments for the year............... (4,546,975)
-----------
Closing balance.................................... (9,138,304)
Deficiency........................................... (18,417,515)
-------------
37,196,047
-------------
Contingency
$ 68,921,306
=============
</TABLE>
See accompanying notes.
F-30
<PAGE>
NEW CACHE PETROLEUMS LTD.
STATEMENT OF LOSS AND
RETAINED EARNINGS (DEFICIENCY)
Year Ended
November 30,
1998
---------------
Revenue
Oil and gas sales...................... $ 20,497,973
Crown royalties........................ (2,930,136)
Other royalties........................ (671,770)
---------------
16,896,067
Alberta royalty tax credit............. 902,002
Interest income........................ 6,095
---------------
17,804,164
---------------
Expenses
Production and operating............... 6,237,251
General and administration............. 2,210,012
Interest on the bank production loan... 1,372,159
Depletion and depreciation............. 46,007,667
Provision for site restoration......... 216,667
---------------
56,043,756
---------------
Loss before income taxes............... (38,239,592)
---------------
Income taxes
Large corporations tax................. (189,208)
Deferred tax recovery.................. 14,781,557
---------------
14,592,349
Loss for the year...................... (23,647,243)
Retained earnings, beginning of the year 5,229,728
---------------
Deficiency, end of the year............ $ (18,417,515)
===============
Loss per share
Basic and fully diluted................ $ (1.67)
===============
See accompanying notes
F-31
<PAGE>
NEW CACHE PETROLEUMS LTD.
STATEMENT OF CASH FLOWS
Year Ended
November 30,
1998
Operating activities
Loss for the year...................................... $(23,647,243)
Add items not affecting cash
Depletion and depreciation........................... 46,007,667
Provision for site restoration....................... 216,667
Deferred income taxes................................ (14,781,557)
------------
Funds from operations.................................. 7,795,534
Net change in non-cash working capital items........... (1,328,724)
------------
6,466,810
------------
Investing activities
Acquisition of petroleum and natural gas properties.... (2,508,458)
Expenditures on petroleum and natural gas properties... (15,129,731)
Proceeds on disposal of petroleum and natural gas
properties.......................................... 144,147
Expenditures on site restoration and abandonment....... (25,494)
Net change in non-cash working capital items........... (4,642,013)
------------
(22,161,549)
------------
Financing activities
Shares issued.......................................... 223,626
Share issue costs...................................... (56,474)
Repurchase of common shares............................ (112,137)
Bank production loan................................... 14,973,041
Decrease in note receivable............................ 52,330
------------
15,080,386
-----------
Decrease in cash during the year....................... (614,353)
Cash, beginning of the year............................ 621,808
------------
Cash, end of the year.................................. $ 7,455
============
See accompanying notes.
F-32
<PAGE>
NEW CACHE PETROLEUMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended November 30, 1998
1. Summary of Significant Accounting Policies
The financial statements of New Cache Petroleums Ltd. (the "Company") have
been prepared in accordance with accounting principles generally accepted in the
United States. Because a precise determination of many assets and liabilities is
dependent upon future events, the preparation of financial statements
necessarily involves the use of estimates and approximations which have been
made using careful judgment. The financial statements have, in management's
opinion, been properly prepared within reasonable limits of materiality and
within the framework of the accounting policies summarized below.
Incorporation and Description of Business
The Company is incorporated under the laws of the Province of Alberta,
Canada and is engaged in the production, development and exploration of oil and
natural gas solely in Canada.
Petroleum and Natural Gas Properties
The Company follows the full cost method of accounting for petroleum and
natural gas properties. Under this method, all costs associated with acquisition
of properties and successful as well as unsuccessful exploration and development
activities are capitalized. The Company does not capitalize internal costs.
Depreciation, depletion, and amortization (DD&A) of capitalized crude oil and
natural gas properties and estimated future development costs are based on the
unit-of-production method. Net capitalized costs of crude oil and natural gas
properties are limited to the lower of unamortized cost or the cost ceiling,
defined as the sum of the present value of estimated unescalated future net
revenues from proved reserves discounted at 10 percent, plus the cost of
properties not being amortized, if any, plus the lower of cost or estimated fair
value of unproved properties included in the costs being amortized, if any, less
related income taxes. The provision for depletion and depreciation for the year
ended November 30, 1998 includes an amount of $32,615,786 as a result of a
ceiling test write down.
No gain or loss is recognized upon sale or disposition of crude oil and
natural gas properties, except in unusual circumstances.
Unevaluated properties not currently being amortized included in oil and gas
properties were $9,545,821 at November 30, 1998. The properties represented by
these costs were undergoing exploration activities or are properties on which
the Company intends to commence activities in the future.
Substantially all of the exploration and production activities of the
Company are conducted jointly with others. These financial statements reflect
only the Company's proportionate interest in such activities.
Site Restoration
The estimated cost of future site restoration and abandonment, including the
removal of production facilities, net of expected salvage values is based on
current estimates, standards and technology. An annual provision is calculated
on a unit-of-production basis. Actual restoration and abandonment costs are
applied against the liability as incurred.
Stock Options
The Company applies the intrinsic value method prescribed by APB Opinion 25
and related interpretations in accounting for share option transactions.
Accordingly, no compensation cost is recognized in the accounts as options are
granted with exercise prices greater than the prevailing market price.
F-33
<PAGE>
Hedging Activity
The Company enters into forward and swap contracts to manage price risk on
anticipated future sales. These contracts are considered speculative for
accounting purposes. The estimated amount required to settle or to be received
on settlement of forward contracts at the year end is recorded as income or
expense.
Financial Instruments
Financial instruments of the Company comprise cash, accounts receivable,
bank production loan, accounts payable and accrued liabilities, large
corporations tax payable and the natural gas swap agreement (note 7). As at
November 30, 1998 there are no significant differences between the carrying
values of these amounts and their estimated market values.
Foreign Currency Translation
The reporting currency of these financial statements is the U.S. Dollar. The
Company's functional currency is the Canadian dollar. The Company translates the
functional currency of its balance sheet accounts to U.S. dollars based on the
November 30, 1998 exchange rate. The statement of loss is translated using the
average exchange rate for the year ended November 30, 1998. Translation
adjustments are reflected as Cumulative translation adjustment in Shareholders'
equity.
Measurement Uncertainty
The amounts recorded for depletion and depreciation of the petroleum and
natural gas properties and for site restoration and abandonment are based on
estimates of reserves and future costs. By their nature, these estimates and
those related to the future cash flows used to assess impairment, are subject to
measurement uncertainty and the impact on the financial statements of future
periods could be material.
Income Taxes
The Company records income taxes under Financial Accounting Standards Board
Statement No. 109 using the liability method. Under this method, deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
2. Bank Production Loan
The Company has arranged a bank production loan of up to Cdn $45,000,000 (US
$29,354,207 at November 30, 1998) that will revolve and fluctuate until April
30, 1999 at which time the lender has the option to call the loan. Accordingly,
the loan has been classified as current in these financial statements. The loan
bears interest at bank prime rate (November 30, 1998 -- 6.75%). A fixed and
first floating charge debenture of Cdn $50,000,000 (US $32,615,786 at November
30, 1998) over all assets and a general assignment of accounts receivable have
been pledged as collateral. At November 30, 1998 $24,769,475 was drawn under the
loan facility.
The Company paid $1,372,159 in interest during the year.
F-34
<PAGE>
3. Share Capital
Authorized
Unlimited common shares without nominal or par value
Number of Consideration
Issued common shares $
------ -------------- --------------
Balance, November 30, 1997.................. 14,133,567 $ 64,696,854
Shares issued for cash on exercise of stock
options.................................. 77,855 223,626
Repurchase of common shares................. (26,294) (112,137)
Share issue costs........................... -- (56,477)
------------ --------------
Balance, November 30, 1998.................. 14,185,128 $ 64,751,866
============ ==============
4. Stock Options
The Company has reserved 1,320,013 shares for issuance under stock option
agreements with certain directors, officers and employees. The stock options for
officers and employees are vested at the rate of 25% each year on a cumulative
basis and for non-management directors are vested immediately on issuance.
Issued
------
Balance, beginning of the year..... 868,458
Issued............................. 494,500
Exercised.......................... (77,855)
Cancelled.......................... (70,250)
--------------
Balance, end of the year........... 1,214,853
==============
The exercise prices of the outstanding options range from $2.06 to $6.21 per
share and expiry dates are from December 14, 1998 to January 1, 2003.
Under FAS 123 the effect on loss and loss per share of the value of options
granted computed using the Black-Scholes option pricing model, applying a
risk-free interest rate of 6% for 1998, assuming five year expected option
lives, no dividend yields and a 37% volatility on a weighted average basis would
be an increase of $882,000 and $0.07 respectively. These effects are not
necessarily indicative of those to be expected in future years.
5. Income taxes
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
Deferred tax liabilities:
Full cost pool, including intangible drilling
costs......................................... $ 25,818,111
Other.......................................... 445,458
------------
Total deferred tax liabilities......... 26,263,569
------------
Deferred tax assets:
Depletion...................................... 23,226,849
Net operating losses........................... 931,402
------------
Total deferred tax assets.............. 24,158,251
------------
Net deferred tax liabilities..................... $ 2,105,318
============
F-35
<PAGE>
At November 30, 1998, the Company had operating losses for income tax
purposes of approximately $2,100,000 which are available for application against
future taxable income and which expire in the years 2000 $(115,000), 2001
$(240,000), 2002 $(123,000), 2003 $(162,000) and 2004 $(1,460,000).
The provision for income taxes recorded on the financial statements differ
from the amounts which would be obtained by applying the statutory income tax
rate to loss before income taxes as follows:
Computed income taxes at the statutory rate (44.62%)........ $(17,062,503)
Depletion and depreciation on assets that were
acquired without full tax basis.......................... 2,448,947
Non-deductible royalties and other payments to the Crown.... 1,326,437
Alberta Royalty Tax Credits................................. (402,473)
Resource allowance.......................................... (1,024,227)
Large corporations tax...................................... 189,208
Other....................................................... (67,738)
------------
$(14,592,349)
============
Income taxes paid during 1998 were $256,005.
6. Loss per share
For purposes of computing loss per share, the Company's weighted average
shares outstanding during 1998 were 14,179,890. Any potential conversions would
be anti-dilutive.
7. Financial Instruments
The Company has entered into a natural gas basis swap contract to hedge
against exposure to variations in the realization, in Canadian Dollars, of
anticipated future natural gas sales. The basis swap outstanding at November 30,
1998 results in the Company receiving NYMEX minus $0.82/MMBTU in exchange for
paying the AECO C indexed price (denominated in Canadian Dollars) on 2,500
MMBTU/d (approximately 2.3 mmcf/d) until October 31, 2000. The fair value of the
natural gas basis swap agreement at November 30, 1998 is approximately
($393,941).
8. Pending Accounting Standards
In 1997 Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("FAS 130") was issued. FAS 130 will be adopted in the
first quarter of fiscal 1999 and the Company will provide the additional
disclosure as required. The sole component of comprehensive income, in addition
to that noted below, will be the change in the cumulative translation account
associated with the Company's Canadian Dollar functional currency.
In 1998, Statement of Financial Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133") was issued. FAS 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. The Company will adopt FAS 133 for its 2000 fiscal year.
Under FAS 133, the gains and losses associated with the Company's swap and
forward contracts will no longer be recorded to income as the estimated fair
value of such contracts changes. Under FAS 133 changes in the estimated fair
values of swap and forward contracts will be recognized in comprehensive income
in the period of the change. These changes will be recorded as adjustments to
the hedged anticipated oil and gas sales in the period the sales occur.
F-36
<PAGE>
9. Contingency
The Company has been named as defendant, along with a number of other
defendants, in an action filed November 19, 1996. The claim pertains to certain
petroleum and natural gas properties of the Company. It is not possible at this
time to determine the outcome of this claim. The Company believes that there is
very little likelihood that any damages will be incurred as a result of the
claim.
10. Subsequent Event
On January 5, 1999, Canadian Abraxas Petroleum Limited, a subsidiary of
Abraxas Petroleum Corporation acquired all of the Company's issued and
outstanding common shares for cash consideration of $4.25 per common share. As a
result of the acquisition, the Company's share options were cancelled.
F-37
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Abraxas' Articles of Incorporation contain a provision that eliminates the
personal monetary liability of directors and officers to Abraxas and its
stockholders for a breach of fiduciary duties to the extent currently allowed
under the Nevada General Corporation Law (the "Nevada Statute"). In respect of
Canadian Abraxas, the Alberta Business Corporation Act ("ABCA") does not permit
any such limitations of a director's liability. If a director or officer of
Abraxas were to breach his fiduciary duties, neither Abraxas nor its
stockholders could recover monetary damages, and the only course of action
available to Abraxas' stockholders would be equitable remedies, such as an
action to enjoin or rescind a transaction involving a breach of fiduciary duty.
To the extent certain claims against directors or officers are limited to
equitable remedies, this provision of Abraxas' Articles of Incorporation may
reduce the likelihood of derivative litigation and may discourage stockholders
or management from initiating litigation against directors or officers for
breach of their duty of care. Additionally, equitable remedies may not be
effective in many situations. If a stockholder's only remedy is to enjoin the
completion of the Board of Director's action, this remedy would be ineffective
if the stockholder did not become aware of a transaction or event until after it
had been completed. In such a situation, it is possible that the stockholders
and the Company would have no effective remedy against the directors or
officers.
Liability for monetary damages has not been eliminated for acts or omissions
which involve intentional misconduct, fraud or a knowing violation of law or
payment of an improper dividend in violation of section 78.300 of the Nevada
Statute. The limitation of liability also does not eliminate or limit director
liability arising in connection with causes of action brought under the Federal
securities laws.
The Nevada Statute permits a corporation to indemnify certain persons,
including officers and directors, who are (or are threatened to be made) parties
against all expenses (including attorneys' fees) actually and reasonably
incurred by, or imposed upon, him in connection with the defense by reason of
his being or having been a director or officer if he acted in good faith and in
a manner which he reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful, except
where he has been adjudged by a court of competent jurisdiction (and after
exhaustion of all appeals) to be liable for gross negligence or willful
misconduct in the performance of duty. The Bylaws of Abraxas provide
indemnification to the same extent allowed pursuant to the foregoing provisions
of the Nevada Statute.
Nevada corporations also are authorized to obtain insurance to protect
officers and directors from certain liabilities, including liabilities against
which the corporation cannot indemnify its directors and officers. CBCA
corporations are permitted to obtain such insurance also, accept for liability
relating to the failure to act honestly and in good faith with a view to the
best interests of the corporation. Abraxas currently has a directors' and
officers' liability insurance policy in effect providing $3.0 million in
coverage and an additional $1.0 million in coverage for certain employment
related claims.
Abraxas has entered into indemnity agreements with each of its directors and
officers. These agreements provide for indemnification to the extent permitted
by the Nevada Statute.
Item 21. Exhibits and Financial Statement Schedules.
3.1 Articles of Incorporation of Abraxas. (Filed as Exhibit 3.1 to the Company's
Registration Statement on Form S-4, No. 33-36565 (the "S-4 Registration
Statement")).
II-1
<PAGE>
3.2 Articles of Amendment to the Articles of Incorporation of Abraxas dated
October 22, 1990 (Filed as Exhibit 3.3 to the S-4 Registration Statement).
3.3 Articles of Amendment to the Articles of Incorporation of Abraxas dated
December 18, 1990. (Filed as Exhibit 3.4 to the S-4 Registration Statement).
3.4 Articles of Amendment to the Articles of Incorporation of Abraxas dated June
8, 1995. (Filed as Exhibit 3.4 to the Company's Registration Statement on Form
S-3, No. 333-398 (the "S-3 Registration Statement")).
3.5 Amended and Restated Bylaws of Abraxas. (Filed as Exhibit 3.5 to the S-3
Registration Statement).
3.6 Articles of Incorporation of Canadian Abraxas (Filed as Exhibit 3.7 to
Abraxas and Canadian Abraxas' Registration Statement on Form S-4, 33-18673, (the
"Exchange Offer Registration Statement"))
** 3.7 Articles of Incorporation of Sandia.
** 3.8 Articles of Incorporation of New Cache.
3.9 By-Laws of Canadian Abraxas (Filed as Exhibit 3.8 to the Exchange Offer
Registration Statement).
** 3.10 By-Laws of Sandia.
** 3.11 By-Laws of New Cache.
4.1 Specimen Common Stock Certificate of Abraxas. (Filed as Exhibit 4.1 to the
S-4 Registration Statement).
4.2 Specimen Preferred Stock Certificate of Abraxas. (Filed as Exhibit 4.2 to
the Company's Annual Report on Form 10-K filed on March 31, 1995).
4.3 Rights Agreement dated as of December 6, 1994 between Abraxas and First
Union National Bank of North Carolina ("FUNB"). (Filed as Exhibit 4.1 to the
Company's Registration Statement on Form 8-A filed on December 6, 1994).
4.4 Amendment to Rights Agreement dated as of July 14, 1997 by and between
Abraxas and American Stock Transfer and Trust Company (Filed as Exhibit 1 to
Amendment No. 1 to the Company's Registration Statement on Form 8-A filed on
August 20, 1997).
4.5 Indenture dated January 27, 1998 by and among the Company, Canadian Abraxas
and IBJ Schroder Bank & Trust Company (filed as Exhibit 4.1 to the Company's
Current Report on Form 8-K dated February 5, 1998).
4.6 Indenture dated March 26, 1999 by and among the Company, Canadian Abraxas,
New Cache, Sandia and Norwest Bank Minnesota, National Association (Filed as
Exhibit 4.6 to the Company's Annual Report on Form 10-K dated March 31, 1999).
4.7 Form of Series D Note (Filed as Exhibit A to Exhibit 4.5)
4.8. Form of Secured Note (filed as Exhibit A to Exhibit 4.6).
** 4.10 Form of Letter of Transmittal.
** 5.1 Opinion of Cox & Smith Incorporated.
** 5.2 Opinion of Bennett Jones.
II-2
<PAGE>
*10.1 Abraxas Petroleum Corporation 1984 Non-Qualified Stock Option Plan, as
amended and restated. (Filed as Exhibit 10.7 to the Company's Annual Report on
Form 10-K filed April 14, 1993).
*10.2 Abraxas Petroleum Corporation 1984 Incentive Stock Option Plan, as amended
and restated. (Filed as Exhibit 10.8 to the Company's Annual Report on Form 10-K
filed April 14, 1993).
*10.3 Abraxas Petroleum Corporation 1993 Key Contributor Stock Option Plan.
(Filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K filed April
14, 1993)
*10.4 Abraxas Petroleum Corporation 401(k) Profit Sharing Plan. (Filed as
Exhibit 10.4 to the Exchange Offer Registration Statement).
*10.5 Abraxas Petroleum Corporation Director Stock Option Plan. (Filed as
Exhibit 10.5 to the Exchange Offer Registration Statement).
*10.6 Abraxas Petroleum Corporation Restricted Share Plan for Directors. (Filed
as Exhibit 10.20 to the Company's Annual Report on Form 10-K filed on April 12,
1994).
*10.7 Abraxas Petroleum Corporation 1994 Long Term Incentive Plan. (Filed as
Exhibit 10.21 to the Company's Annual Report on Form 10-K filed on April 12,
1994).
*10.8 Abraxas Petroleum Corporation Incentive Performance Bonus Plan. (Filed as
Exhibit 10.24 to the Company's Annual Report on Form 10-K filed on April 12,
1994).
10.9 Registration Rights and Stock Registration Agreement dated as of August 11,
1993 by and among Abraxas, EEP and Endowment Energy Partners II, Limited
Partnership ("EEP II"). (Filed as Exhibit 10.33 to the Company's Registration
Statement on Form S-1, Registration No. 33-66446 (the "S-1 Registration
Statement")).
10.10 First Amendment to Registration Rights and Stock Registration Agreement
dated June 30, 1994 by and among Abraxas, EEP and EEP II. (Filed as Exhibit 10.3
to the Registrant's Current Report on Form 8-K filed on July 14, 1994).
10.11 Second Amendment to Registration Rights and Stock Registration Agreement
dated September 2, 1994 by and among Abraxas, EEP and EEP II. (Filed as Exhibit
10.3 to the Company's Annual Report on Form 10-K filed March 31, 1995)
10.12 Third Amendment to Registration Rights and Stock Registration Agreement
dated November 17, 1995 by and among Abraxas, EEP and EEP II. (Filed as Exhibit
10.17 to the Company's Annual Report on Form 10-K filed March 31, 1995)
10.13 Common Stock Purchase Warrant dated as of December 18, 1991 between
Abraxas and EEP. (Filed as Exhibit 12.3 to the Company's Current Report on Form
8-K filed January 9, 1992).
10.14 Common Stock Purchase Warrant dated as of August 1, 1993 between Abraxas
and EEP. (Filed as Exhibit 10.35 to the S-1 Registration Statement).
10.15 Common Stock Purchase Warrant dated August 11, 1993 between Abraxas and
EEP II. (Filed as Exhibit 10.36 to the S-1 Registration Statement).
10.16 Common Stock Purchase Warrant dated August 11, 1993 between Abraxas and
Associated Energy Managers, Inc. (Filed as Exhibit 10.37 to the S-1 Registration
Statement).
II-3
<PAGE>
10.17 Letter dated September 2, 1994 from Abraxas to EEP and EEP II. (Filed as
Exhibit 10.13 to the Company's Annual Report on Form 10-K filed March 31, 1995)
10.18 Warrant Agreement dated as of July 27, 1994 between Abraxas and FUNB.
(Filed as Exhibit 10.3 to the Company's Current Report on Form 8-K filed August
5, 1994).
10.19 Warrant Agreement dated as of December 16, 1994, between Abraxas and FUNB.
(Filed as Exhibit 10.23 to the Company's Annual Report on Form 10-K filed March
31, 1995).
10.20 First Amendment to Warrant Agreement dated as of August 31, 1995 between
Abraxas and FUNB. (Filed as Exhibit 10.21 to the S-3 Registration Statement).
10.21 Form of Indemnity Agreement between Abraxas and each of its directors and
officers. (Filed as Exhibit 10.30 to the S-1 Registration Statement).
*10.22 Employment Agreement between Abraxas and Robert L. G. Watson. (Filed as
Exhibit 10.23 to the S-3 Registration Statement).
*10.23 Employment Agreement between Abraxas and Chris E. Williford. (Filed as
Exhibit 10.24 to the S-3 Registration Statement).
*10.24 Employment Agreement between Abraxas and Stephen T. Wendel. (Filed as
Exhibit 10.26 to the S-3 Registration Statement).
*10.25 Employment Agreement between Abraxas and Robert W. Carington, Jr. (Filed
as Exhibit 10.25 to the Company's Annual Report on Form 10-K dated March 31,
1999).
**10.26 Registration Rights Agreement dated as of March 26, 1999 by and among
Abraxas, Canadian Abraxas, New Cache, Sandia and Jefferies & Company, Inc..
10.27 Management Agreement dated November 14, 1996 by and between Canadian
Abraxas and Cascade Oil & Gas Ltd. (Filed as Exhibit 10.36 to the Exchange Offer
Registration Statement).
10.28 Agreement of Limited Partnership of Abraxas Wamsutter L.P. dated as of
November 12, 1998 by and between Wamsutter Holdings, Inc. and TIFD III-X Inc.
(Filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed
November 30, 1998).
21.1 Subsidiaries of Abraxas. (Filed as Exhibit 21.1 to the Company's Annual
Report on Form 10-K dated March 31, 1999)
23.1 Consent of Ernest & Young LLP. (Filed herewith).
** 23.2 Consent of DeGolyer & MacNaughton..
** 23.3 Consent of McDaniel & Associates Consultants, Ltd..
23.4 Consent of Ernst & Young LLP Chartered Accountants (Filed herewith).
** 23.5 Consent of Cox & Smith Incorporated (Included in Exhibit 5.1).
** 23.6 Consent of Bennett Jones (Included in Exhibit 5.2).
** 24.1 Power of Attorney of Franklin Burke.
II-4
<PAGE>
** 24.2 Power of Attorney of Harold D. Carter.
** 24.3 Power of Attorney of Robert D. Gershen.
** 24.4 Power of Attorney of Richard M. Kleberg, III.
** 24.5 Power of Attorney of James C. Phelps.
** 24.6 Power of Attorney of Paul A. Powell, Jr..
** 24.7 Power of Attorney of Richard M. Riggs.
** 25.1 Form T-1 Statement Eligibility and Qualification of Norwest Bank
Minnesota, National Association, as Trustee.
27.1 Financial Data Schedule. (Filed herewith).
* Management Compensatory Plan or Agreement.
** Previously Filed.
II-5
<PAGE>
Item 22. Undertakings
A. Each of the undersigned registrants hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the Registration Statement
through the date of responding to the request.
B. Each of the undersigned registrants hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934 that is incorporated by reference
in the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
C. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of each of the registrants pursuant to the foregoing provisions, or
otherwise, the registrants have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrants of expenses incurred or paid by a director, officer or
controlling person in the successful defense of any action, suit or proceedings)
is asserted by such director, officer or controlling person in connection with
the securities being registered, the registrants will, unless in the opinion of
their counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
either of them is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
D. Each of the undersigned registrants hereby undertakes to supply by
means of a post-effective amendment all information concerning a transaction,
and the company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the undersigned
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San
Antonio, Texas, on June 25, 1999.
ABRAXAS PETROLEUM CORPORATION
By: /s/ Robert L. G. Watson
------------------------------------------
Robert L. G. Watson, Chairman of the Board,
Chief Executive Officer and President
II-7
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
Signature Name and Title Date
/s/ Robert L. G. Watson Chairman of the Board, June 25, 1999
- --------------------------- President, Chief Executive Officer
(Principal Executive Officer) and
Director of the Company
Robert L.G. Watson
/s/ Chris E. Williford Executive Vice President, June 25, 1999
- ----------------------------- Treasurer, Chief Financial
Officer and Director (Principal
Financial and Accounting Officer)
of the Company
Chris E. Williford
/s/ Robert W. Carington, Jr. Executive Vice President and
Robert W. Carington, Jr. Director of the Company June 25, 1999
* Director of the Company June 25, 1999
- -----------------------------
Franklin Burke
* Director of the Company June 25, 1999
- -----------------------------
Harold D. Carter
* Director of the Company June 25, 1999
- -----------------------------
Robert D. Gershen
* Director of the Company June 25, 1999
- -----------------------------
Richard M. Kleberg, III
* Director of the Company June 25, 1999
- -----------------------------
James C. Phelps
* Director of the Company June 25, 1999
- -----------------------------
Paul A. Powell, Jr.
* Director of the Company June 25, 1999
- -----------------------------
Richard M. Riggs
By: /s/ Chris E. Williford
Chris E. Williford
Attorney-in-fact
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the undersigned
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San
Antonio, Texas, on June 25, 1999.
CANADIAN ABRAXAS PETROLEUM LIMITED
By: /s/ Robert L. G. Watson
--------------------------------
Robert L. G. Watson, President
II-9
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
Signature Name and Title Date
/s/ Robert L. G. Watson Chairman of the Board, June 25, 1999
- --------------------------- President, and Director of
Robert L.G. Watson Canadian Abraxas
(Principal Executive Officer)
/s/S. Blaire Patrick Vice President of Finance June 25 1999
- -------------------------------
S. Blaire Patrick of Canadian Abraxas
(Principal Accounting Officer)
/s/Donald A. Engle Secretary and Director of June 25, 1999
- -------------------------------
Donald A. Engle Canadian Abraxas
/s/Roger L. Bruton Executive Vice President and June 25, 1999
- -------------------------------
Roger L. Bruton Director of Canadian Abraxas
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the undersigned
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San
Antonio, Texas, on June 25, 1999.
SANDIA OIL & GAS CORPORATION
By:/s/ Robert L. G. Watson
---------------------------
Robert L. G. Watson, President
II-11
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
Signature Name and Title Date
/s/ Robert L. G. Watson President (Principal Executive
Robert L.G. Watson Officer) and Director of June 25, 1999
Sandia
/s/ Chris E. Williford Vice President, and Director June 25, 1999
Chris E. Williford (Principal Financial and
Accounting Officer) of Sandia
/s/ Robert W. Carington, Jr. Vice President and Director
Robert W. Carington, Jr. of Sandia June 25, 1999
II-12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the undersigned
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San
Antonio, Texas, on June 25, 1999.
NEW CACHE PETROLEUMS LTD.
By: /s/ Robert L. G. Watson
------------------------------------
Robert L. G. Watson, Chairman of the
Board of Directors
II-13
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
Signature Name and Title Date
/s/ Robert L. G. Watson Chairman of the Board and June 25, 1999
- --------------------------- Director of New Cache
(Principal Executive Officer)
Robert L.G. Watson
/s/Donald A. Engle President and Director of June 25, 1999
- ---------------------------- New Cache
Donald A. Engle
/s/S. Blaire Patrick Vice President of Finance June 25 1999
- ---------------------------- of New Cache
S. Blaire Patrick (Principal Accounting Officer
/s/Roger L. Bruton Executive Vice President and June 25, 1999
- ---------------------------- Director of New Cache
Roger L. Bruton
II-14
EXHIBIT INDEX
Exhibit Number: Exhibit Page Number
23.1 Consent of Ernst & Young LLP.
23.4 Consent of Ernst & Young LLP Chartered Accountants
27.1 Financial Data Schedule
1
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts"
Amendment No. 1 to the Registration Statement (Form S-4) and related Prospectus
of Abraxas Petroleum Corporation for the registration of $63,500,000 of 12-7/8%
Senior Secured Notes due 2003 and to the inclusion therein of our report dated
March 17, 1999, (except for Note 2, as to which the date is March 27, 1999),
with respect to the consolidated financial statements of Abraxas Petroleum
Corporation for the year ended December 31, 1998, as filed with the Securities
and Exchange Commission.
/s/ Ernst & Young LLP
San Antonio, Texas
June 25, 1999
2
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" in
Amendment No. 1 to the Registration Statement (Form S-4) and related Prospectus
of Abraxas Petroleum Corporation for the registration of $63,500,000 of 12-7/8%
Senior Secured Notes due 2003 and to the inclusion therein of our report dated
March 12, 1999, with respect to the financial statements of New Cache Petroleums
Ltd. for the year ended November 30, 1998, as filed with the Securities and
Exchange Commission.
Calgary, Canada
June 24, 1999 Ernst & Young LLP
3
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> MAR-31-1999
<CASH> 14725
<SECURITIES> 0
<RECEIVABLES> 12199
<ALLOWANCES> (36)
<INVENTORY> 489
<CURRENT-ASSETS> 28390
<PP&E> 490512
<DEPRECIATION> (175189)
<TOTAL-ASSETS> 355461
<CURRENT-LIABILITIES> 34528
<BONDS> 344869
0
0
<COMMON> 65
<OTHER-SE> (66719)
<TOTAL-LIABILITY-AND-EQUITY> 355461
<SALES> 15970
<TOTAL-REVENUES> 15970
<CGS> 0
<TOTAL-COSTS> 15366
<OTHER-EXPENSES> 186
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9028
<INCOME-PRETAX> (8283)
<INCOME-TAX> (4533)
<INCOME-CONTINUING> (1944)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6294)
<EPS-BASIC> (0.99)
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