As filed with the Securities and Exchange Commission on January 24, 2000.
Registration No. 333-_________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Abraxas Petroleum Corporation
Canadian Abraxas Petroleum Limited
Sandia Oil & Gas Corporation
Wamsutter Holdings, Inc.
- -------------------------------------------------------------------------------
(Exact Name of Registrants as Specified in their Charters)
Nevada 1331 74-2584033
Alberta 1331 N/A
Texas 1331 74-2368968
Wyoming 1331 74-2897013
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification
Number)
500 North Loop 1604 East, Suite 100, San Antonio, Texas 78232, (210)490-4788
300 5th Avenue SW, # 1200, Calgary, Alberta, Canada T2P 3C4, (403)262-1949
- -------------------------------------------------------------------------------
(Address, including zip code, and
telephone number, including area code, of
registrants' principal executive offices)
Robert L. G. Watson
President and Chief Executive Officer
Abraxas Petroleum Corporation
500 North Loop 1604 East, Suite 100
San Antonio, Texas 78232
(210) 490-4788.
-------------------------------------------------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
With a copy to:
Cox & Smith Incorporated
112 East Pecan, Suite 1800
San Antonio, Texas 78205
Attn: Steven R. Jacobs and David C. Giles
(210) 554-5500
- --------------------------------------------------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 check the following box. [x]
<PAGE>
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED PER UNIT PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
11 1/2% Senior Secured
Notes Due 2004, Series A $5,000,000 100% $5,000,000 $1,320.00
Guarantees (1) - - None (2)
Common stock, par value
$.01 per share 1,226,249 (3) $1.359 (4) $1,666,672 $440.00
Contingent Value Rights 163,354 - - None (5)
</TABLE>
(1) The 11 1/2% Senior Secured Notes due 2004, Series A of Abraxas Petroleum
Corporation and Canadian Abraxas Petroleum Limited being registered will be
guaranteed on a senior secured basis by each of the Subsidiary Guarantors.
(2) Pursuant to Rule 457(n).
(3) Includes 1,062,895 shares of Common Stock issuable pursuant to the
Contingent Value Rights.
(4) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c).
(5) Pursuant to Rule 457(g), no registration fee is required for the Contingent
Value Rights because the shares of Common Stock issuable pursuant thereto
are being registered hereby.
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.
ii
<PAGE>
PROSPECTUS
ABRAXAS PETROLEUM CORPORATION
CANADIAN ABRAXAS PETROLEUM LIMITED
$5,000,000 Principal Amount 11 1/2% Senior Secured Notes due 2004, Series A
163,354 Shares of Abraxas Common Stock
163,354 Contingent Value Rights
----------------------
The selling security holders identified in this prospectus are offering
$5,000,000 principal amount 11 1/2% Senior Secured Notes due 2004, Series A, of
Abraxas Petroleum Corporation and Canadian Abraxas Petroleum Limited and 163,354
shares of common stock and 163,354 contingent value rights of Abraxas Petroleum
Corporation. We are not offering any notes, shares of common stock, or
contingent value rights for sale under this prospectus and we will not receive
any of the proceeds from the sale of these securities by the selling security
holders.
The notes
o accrue interest from November 1, 1999, at a fixed annual rate of 11
1/2% paid every six months on May 1 and November 1, commencing May
1, 2000
o are secured by a second lien or charge on substantially all of our
proved crude oil and natural gas assets, natural gas processing
plants and Grey Wolf stock owned by us
o are guaranteed by Sandia Oil & Gas Corp. and Wamsutter Holdings,
Inc.
The Abraxas common stock
o is currently traded on the OTC Bulletin Board under the symbol
"AXAS." On January 18, 2000, the closing "bid" price of Abraxas
common stock was $1.375 per share
The contingent value rights
o may result in the distribution of additional shares of Abraxas
common stock under certain circumstances
--------------------
You should carefully consider the risk factors beginning on page 8 of this
prospectus in evaluating an investment in the notes, common stock, or contingent
value rights.
----------------------
Neither the Securities and Exchange Commission nor any State securities
commission has approved or disapproved of the notes, the Abraxas common stock or
the contingent value rights or determined if this Prospectus is accurate or
complete. Any representation to the contrary is a criminal offense.
January __, 2000
1
<PAGE>
TABLE OF CONTENTS
Page
Summary................................................................. 4
Forward-Looking Information............................................. 9
Risk Factors............................................................ 9
Use of Proceeds......................................................... 18
Capitalization.......................................................... 18
Price Range of Our Common Stock......................................... 19
Dividend Policy......................................................... 19
Unaudited Pro Forma Financial Information............................... 20
Selected Historical Financial Data...................................... 28
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 30
Business................................................................ 42
Management.............................................................. 56
Executive Compensation ................................................. 59
Certain Transactions.................................................... 62
Principal Stockholders.................................................. 63
Selling Security Holders................................................ 66
Plan of Distribution.................................................... 67
Description of the Second Lien Notes.................................... 68
Description of Capital Stock............................................ 111
Legal Matters........................................................... 118
Experts................................................................. 118
Where You Can Find More Information .................................... 118
Glossary of Terms....................................................... 119
Index to Financial Statements........................................... F-1
----------------------
You should rely only on the information contained in this prospectus or a
document that we have referred you to. We have not authorized anyone to
provide you with information that is different. The delivery of this
prospectus shall not, under any circumstances, create any implication that
the information herein is correct as of any time subsequent to the date
hereof. ----------------------
The distribution of this prospectus and the sale of the second lien notes,
shares of Abraxas common stock or contingent value rights may be restricted
by law in certain jurisdictions. Persons who receive this prospectus or any
of the second lien notes, shares of Abraxas common stock or contingent value
rights must inform themselves about, and observe, any such restrictions.
----------------------
ENFORCEABILITY OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS
Canadian Abraxas is an Alberta corporation, certain of its officers and
directors may be residents of various jurisdictions outside the United States
and its Canadian counsel, Osler, Hoskin & Harcourt, LLP, are residents of
Canada. All or a substantial portion of the assets of Canadian Abraxas 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 has
irrevocably agreed that it 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' United
2
<PAGE>
States agent appointed for that purpose. Canadian Abraxas has been advised by
its Canadian counsel, Osler, Hoskin & Harcourt, LLP, that there is doubt as
to the enforceability in Canada against Canadian Abraxas or against any of
its 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.
3
<PAGE>
SUMMARY
The following highlights certain information in this prospectus that
is important to you. This prospectus includes the terms of the notes, shares of
Abraxas common stock and contingent value rights the selling security holders
are offering, as well as information regarding our business and detailed
financial information. We encourage you to read this prospectus in its entirety.
The term "Abraxas" refers only to Abraxas Petroleum Corporation and not to any
of Abraxas' subsidiaries, the term the "Issuers" refers to Abraxas and Canadian
Abraxas and the terms "Company," "we," "our," "ours" and "us" refer to Abraxas
and all of its wholly-owned subsidiaries, including Canadian Abraxas, Sandia and
Wamsutter, for the relevant time periods. The term "second lien notes" refers to
the notes offered by this prospectus, the term "first lien notes" refers to the
Abraxas' 12 7/8% Senior Secured Notes due 2003 and the term "old notes" refers
to the Issuers' 11 1/2% Senior Notes due 2004, Series D. Except as otherwise
noted, our consolidated financial, reserve and operating information includes
the financial, reserve and operating information of Grey Wolf Exploration, Inc.,
which is consolidated for financial reporting purposes but is not wholly-owned
by us. 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 first lien notes,
the acquisition of New Cache Petroleums, Ltd., the sale by Abraxas of properties
in Wyoming and the exchange of the second lien notes, Abraxas common stock and
the contingent value rights (in each case including the second lien notes,
Abraxas common stock and contingent value rights issued to Houlihan and second
lien notes issued to Jefferies for payment of their fees and expenses) had
occurred at the times indicated. You should read the discussions under the
heading "Glossary of Terms" for definitions of technical terms used in this
prospectus.
About Abraxas
We are an independent energy company engaged primarily in the acquisition,
exploitation, development and production of crude oil and natural gas. Our
principal areas of operation are South Texas, West Texas and Canada. Since
January 1, 1991, our principal means of growth has been through the acquisition
and subsequent exploitation and development of producing properties and related
assets.
Abraxas was founded in 1977 by Robert L. G. Watson, the Company's Chairman
of the Board, President and Chief Executive Officer. Our principal offices are
located at 500 North Loop 1604 East, Suite 100, San Antonio, Texas 78232 and its
telephone number is (210) 490-4788. Canadian Abraxas was formed in 1996.
Canadian Abraxas' principal offices are located at 300 5th Avenue SW, #1200,
Calgary, Alberta, Canada T2P 3C4 and its telephone number is (403) 262-1949.
1999 Developments
On December 31, 1999, New Cache, which had been owned by Abraxas and
Canadian Abraxas, was amalgamated or merged with Canadian Abraxas. New Cache
originally guaranteed the second lien notes; however, as a result of the
amalgamation, New Cache is no longer a guarantor of the second lien notes.
In December 1999, Abraxas and Canadian Abraxas completed an exchange offer
whereby they exchanged the second lien notes, Abraxas common stock, and
contingent value rights for approximately 98.43% of their outstanding old notes.
The second lien notes are senior obligations of Abraxas and Canadian Abraxas and
are jointly and severally guaranteed by Sandia and Wamsutter. The second lien
notes and the guarantees are secured by a second lien or charge on substantially
all of the crude oil and natural gas properties and natural gas processing
plants owned by Abraxas, Canadian Abraxas, Sandia and Wamsutter, as well as the
shares of common stock of Grey Wolf owned by Abraxas and Canadian Abraxas. The
exchange offer reduced our long term debt by $76.6 million.
In October 1999, Abraxas sold a dollar denominated production payment for
$4.0 million, relating to existing natural gas wells in the Edwards Trend, to a
unit of Southern Energy, Inc. In January 2000, Abraxas sold an additional
production payment for $2.0 million relating to additional natural gas wells in
the Edwards Trend to Southern. Under the terms of this production payment,
Abraxas has the ability to sell up to a total of $50.0 million in production
payments to Southern for additional drilling opportunities in the Edwards Trend.
4
<PAGE>
In March 1999, Abraxas sold $63.5 million of its first lien notes to
refinance bank debt, meet near-term debt service requirements and make limited
capital expenditures. The first lien notes are senior obligations of Abraxas and
are jointly and severally guaranteed by Canadian Abraxas, Sandia and Wamsutter.
The first lien notes and the guarantees are secured by a first lien or charge on
substantially all of the crude oil and natural gas properties and natural gas
processing plants owned by Abraxas, Canadian Abraxas and Sandia, as well as the
shares of common stock of Grey Wolf owned by Abraxas and Canadian Abraxas.
In January 1999, Canadian Abraxas 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
debt was repaid with a portion of the proceeds from the sale of the first lien
notes.
Summary of the Offering
On December 21, 1999, Abraxas and Canadian Abraxas issued $1.7 million
principal amount of the second lien notes, 163,354 shares of Abraxas common
stock, and 163,354 contingent value rights through an unregistered offering to
Houlihan Lokey Howard & Zukin Capital and $3.3 million principal amount of the
second lien notes to Jefferies & Company, Inc. for payment of financial advisory
fees and expenses related to the exchange offer.
Pursuant to the offering, Jefferies is offering to sell up to $3.3 million
principal amount of the second lien notes and Houlihan is offering to sell up to
$1.7 million principal amount of the second lien notes, 163,354 shares of
Abraxas common stock and 163,354 contingent value rights that may result in the
issuance of up to 1,043,652 shares of Abraxas common stock. We will not receive
any proceeds from the sale of the second lien notes, common stock or contingent
value rights. You should read the discussions under the headings "Description of
the Second Lien Notes" and "Description of Capital Stock" for further
information regarding the second lien notes, common stock and contingent value
rights.
Summary of the Second Lien Notes
Amount Offered.......................... 11 1/2% Senior Secured Notes due 2004,
Series A, with principal amount of
up to $5.0 million.
Issuers................................. Abraxas Petroleum Corporation and
Canadian Abraxas Petroleum Limited.
Maturity Date........................... November 1, 2004.
Interest Rate and Payment Dates......... Annual rate - 11 1/2%.
Payment frequency -- every six months
on May 1 and November 1.
First payment -- May 1, 2000.
Guarantees.............................. Initially, Sandia, New Cache and
Wamsutter guaranteed the second lien
notes. As a result of the amalgamation
of New Cache with Canadian Abraxas,
Sandia and Wamsutter are currently the
guarantors of the second lien notes.
Later, possibly some of our other
subsidiaries will guarantee the second
lien notes. If the issuers cannot make
payments on the second lien notes when
they are due, the guarantors must make
them instead.
Ranking................................. The second lien notes and the
guarantees constitute senior debts.
They rank equally with all of the
issuers' and each guarantor's current
and future indebtedness. They are,
however, effectively subordinated to
the first lien notes and related
guarantees to the extent the value of
the collateral securing the second
lien notes and related guarantees and
the first lien notes and related
5
<PAGE>
guarantees is insufficient to pay both
the second lien notes and the first
lien notes.
Collateral.............................. The second lien notes are secured by a
second lien or charge on substantially
all of our proved crude oil and
natural gas properties and natural gas
processing plants and the shares of
Grey Wolf common stock owned by us.
Holders of the second lien notes may
not foreclose on the collateral for
180 days after an event of default
under the second lien notes.
Optional Redemption..................... On or after December 1, 2000, the
issuers may redeem some or all of the
second lien notes at any time at the
redemption prices listed in the
section "Description of the Second
Lien Notes" under the heading
"Optional Redemption."
Before December 1, 2000, the issuers
may redeem up to 50% of the second
lien notes with the proceeds of
certain public offerings of equity in
Abraxas or asset sales at the prices
listed in the section "Description of
the Second Lien Notes" under the
heading "Optional Redemption."
Mandatory Offer to Repurchase........... If the issuers sell certain assets or
experience specific kinds of changes
of control, the issuers must offer to
repurchase the second lien notes,
subject to certain limitations in the
case of assets sales, at the prices
listed in the section "Description of
the Second Lien Notes."
Basic Covenants of the Indenture........ The issuers issued the second lien
notes under an indenture with Firstar
Bank, National Association. The
indenture, among other things,
restricts the issuers' ability and the
ability of their subsidiaries to:
o borrow money or issue preferred
stock;
o pay dividends on stock or purchase
stock;
o pay dividends or make other asset
transfers;
o transact business with affiliates;
o sell stock in subsidiaries;
o engage in any new line of
business;
o impair the security interest in
any collateral for the new notes;
o use assets as security in other
transactions; and
o sell certain assets or merge with
or into other companies.
The Common Stock
Abraxas is authorized to issue a total of 50,000,000 shares of common
stock, par value $.01 per share, and 1,000,000 shares of preferred stock, par
value $.01 per share. As of January 20, 2000, there were 22,747,118 shares of
Abraxas common stock outstanding (including 163,354 shares of Abraxas common
stock owned by Houlihan) and no shares of preferred stock outstanding.
The Contingent Value Rights
As part of the exchange offer, Abraxas issued contingent value rights
or CVRs which may entitle the holders thereof to receive up to a total of
105,408,978 shares of Abraxas common stock (including approximately 1,043,652
shares issuable under the CVRs issued to Houlihan). On December 21, 2000, or at
the election of Abraxas, on May 21, 2001, Abraxas may be required to issue
6
<PAGE>
additional shares of common stock to the holders of the contingent value rights.
The actual number of shares issued will depend on the market price of Abraxas
common stock. The CVRs will terminate if the market price of Abraxas common
stock exceeds certain target prices for a period of 30 trading days during any
45 consecutive trading day period prior to the expiration date. The target price
on any given date will equal $5.03 plus daily interest at an annual rate of
11.5%. On December 21, 2000, the target price will be $5.68 and on May 21, 2001,
the target price will be $5.97. If the number of shares ultimately issuable
under the CVRs is greater than the number of authorized and unissued shares we
have available at that time, we will be required either to increase the
authorized number of shares of Abraxas common stock or to effect a reverse stock
split in order to increase the number of authorized and unissued shares of
Abraxas common stock to an amount sufficient to satisfy the number of shares
issuable under the CVRs.
Risk Factors
Prior to deciding whether to invest in the second lien notes, common
stock or CVRs, you should carefully consider all of the information contained in
this prospectus. See "Risk Factors" for a discussion of certain important
factors that should be considered in evaluating such an investment. You are
urged to carefully read all of the discussion under "Risk Factors."
Summary Historical and Pro Forma Financial Information
The following table presents summary historical consolidated financial
data of the Company as of and for the three years ended December 31, 1998, and
as of and for the nine months ended September 30, 1998 and 1999, and pro forma
financial data of the Company as of and for the year ended December 31, 1998,
and as of and for the nine months ended September 30, 1998 and 1999, which have
been derived from the Company's consolidated financial statements and unaudited
historical and pro forma financial data.
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>
Nine Months Ended September 30,
Year Ended December 31, (unaudited)
----------------------------------------- -------------------------------
Pro Pro
Forma Forma
1996 1997 1998 1998 (1) 1998 1999 1999 (2)
------------------------------------------ -------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Total operating revenue (3)......... $26,653 $70,931 $ 60,084 $ 66,175 $46,009 $49,704 $49,704
Operating expense (4)............... 6,289 16,429 18,612 22,840 13,768 14,438 14,438
Depreciation, depletion and
amortization expense............... 9,605 30,581 31,226 44,720 26,049 25,801 25,801
Proved property impairment.......... -- 4,600 61,224 90,862 -- -- --
General and administrative expense.. 1,933 4,171 5,522 7,732 3,957 4,187 4,187
Interest expense, net of interest
income............................. 5,987 24,300 30,043 29,840 22,377 27,929 21,510
Amortization of deferred financing
fee................................ 280 1,260 1,571 1859 913 1,073 1,008
Income (loss) from continuing
operations before extraordinary
items.............................. $ 1,940 $(6,485) $(83,960) $(117,241) $(16,472) $(19,954) $(15,217)
Preferred stock dividends........... 366 183 -- -- -- -- --
Net income (loss) applicable to
common stock....................... $ 1,147 $ (6,668) $(83,960) (117,241) $(16,472) $(19,954) $(15,217)
Net income (loss) per common share:
Basic.............................. $ 0.20. $ (1.11) $ (13.26) $ (5.23) $ (2.60) $ (3.15) $ (0.67)
Diluted............................ $ 0.17 . $ (1.11) $ (13.26) $ (5.23) $ (2.60) $ (3.15) $ (0.67)
Other Data:
Capital expenditures (including $173,155 $87,764 $57,861 $65,821 $ 41,661 $115,250 $115,250
acquisitions)........................
Ratio of earnings to fixed charges (5) 1.34x -- -- -- -- -- --
</TABLE>
7
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<TABLE>
<CAPTION>
September 30, 1999
(dollars in thousands)
(unaudited)
----------------------------------
Historical Pro Forma (6)
<S> <C> <C>
Consolidated Balance Sheet Data:
Total assets......................... $347,325 $344,349
Total debt (7) ...................... 346,243 269,608
Stockholders' equity (deficit) (8) .. (75,340) 2,003
</TABLE>
- ---------
(1) Reflects the sale of the first lien notes, the sale of certain
properties in Wyoming, the acquisition of New Cache and the exchange
offer as if they occurred on January 1, 1998.
(2) Reflects the sale of the first lien notes, the acquisition of New Cache
and the exchange offer as if they occurred on January 1, 1999.
(3) Consists of crude oil and natural gas production sales, revenue from
rig operations and processing facilities, and other miscellaneous
revenue.
(4) Consists of lease operating expenses, production taxes, rig operating
expenses and processing costs.
(5) 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 old
notes. The Company's earnings were inadequate to cover fixed charges in
1997, 1998, September 30, 1999 and Pro Forma September 30, 1999 by
$10.0 million, $88.1 million, $23.7 million and $19.5 million,
respectively.
(6) Reflects the sale of the first lien notes, the acquisition of New Cache
and the exchange offer, including $5.0 million of second lien notes
issued to Houlihan and Jefferies for payment of their fees and
expenses, as if they occurred on September 30, 1999.
(7) Consists of long-term debt, including the premium on the old notes and
capital lease obligations.
(8) Consists of 6,352,672 issued and outstanding shares of Abraxas common
stock on a historical basis and 22,747,118 issued and outstanding
shares of Abraxas common stock on a pro forma basis.
8
<PAGE>
FORWARD-LOOKING INFORMATION
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.
RISK FACTORS
You should carefully consider the following risk factors in addition to the
other information in this prospectus before making an investment in the second
lien notes, Abraxas common stock and contingent value rights offered by the
selling security holders.
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 facilities and other credit sources. Due to severely depressed
crude oil and natural gas market prices, our cash flow from operations in 1998
was substantially reduced. In 1999, our sale of the first lien notes, the
production payment to Southern and certain non-core properties together with
cash generated by operations provided us with the liquidity necessary to service
our debt and pay operating expenses. We anticipate that we will have two
principal sources of liquidity during the next 12 months: (i) cash on hand and
(ii) cash generated by operations. You should read the discussions under the
heading "-- Lack of Liquidity," "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources," "Description of the Second Lien 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 ability to raise funds through additional indebtedness will be
substantially limited by the terms of the indenture governing the first lien
notes, the indenture governing the old notes and the indenture governing the
second lien notes, although many of the restrictive covenants contained in the
indenture governing the old notes were eliminated in connection with the
exchange offer.
The first lien notes indenture and the second lien notes 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.
9
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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 first lien notes and a
second lien or floating charge for the benefit of the holders of the second lien
notes. We may also choose to issue equity securities or sell certain of our
assets to fund our operations, although the first lien notes indenture and the
second lien notes indenture will 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 capital expenditures. However, while these measures have
helped to conserve our cash resources in the near term, they also have limited
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
Capital Expenditures" for more information.
Our debt levels and our debt covenants may limit our ability to pursue
business opportunities and to obtain additional financing. We have substantial
indebtedness and debt service requirements. Our total debt and stockholders'
equity (deficit) were $346.2 million and $(75.3) million, respectively, as of
September 30, 1999, and $269.6 million and $2.0 million on a pro forma basis as
of September 30, 1999. You should read the discussion 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 first lien
notes indenture and the second lien notes 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 Second
Lien 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 A substantial amount of our cash flow from operations will be used to pay
interest on the first lien notes, any outstanding old notes and the
second lien notes;
o The covenants contained in the first lien notes indenture and the second
lien notes 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 first lien notes indenture, the old notes indenture and
the second lien notes indenture will permit the holders of the first lien
notes, any outstanding old notes and the second lien 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 first lien notes, any outstanding old notes and the second lien
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 and the reduction in our indebtedness as a result
of the exchange offer, we believe that our current cash reserves 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 2000. 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
10
<PAGE>
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.
If we are unable to generate cash flow from operations in the future to
service the first lien notes, any outstanding old notes, the second lien 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 will be substantially limited under the terms of the
first lien notes indenture, and the second lien notes 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 first lien notes and are subject to a second lien or
floating charge for the benefit of the holders of the second lien notes. In
addition, the first lien notes, the old notes, and the second lien notes are
subject to certain limitations on redemption. You should read the discussions
under the heading "-- We Lack Liquidity Due to Our Reduced Cash Flow" and
"Description of the Second Lien Notes -- Redemption" for more information
regarding the factors which may limit our ability to service our debt, to redeem
the first lien notes, any outstanding old notes and the second lien notes and to
refinance our debt.
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 capital expenditures. 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 we will be able to
acquire such properties at acceptable prices or develop additional reserves in
the future. In addition, under the terms of the first lien notes indenture, the
old notes indenture and the second lien notes 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. In 1998 we reduced our 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 crude oil and natural gas that we can produce economically.
We cannot predict future crude oil and natural gas prices. 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 hedge 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 or
minimize the effect of any decline in crude 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. Hedging
activities may limit the risk of declines in prices, but such arrangements may
11
<PAGE>
also limit additional revenues from price increases. You should read the
discussion under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Liquidity and Capital Resources -
Hedging Activities" for more information regarding our hedging activities.
Lower crude oil and natural 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. 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 crude oil and natural 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 crude oil and
natural gas prices and other factors, many of which are beyond our control.
You should not assume that the present value of future net revenues
referred to in prospectus is the current market value of our estimated crude oil
and natural 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. Significant declines during 1998 in crude oil
and natural gas prices 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 crude oil
and natural gas properties will affect the timing of actual future net cash
flows from proved reserves and their present value. For example, we 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 crude oil and natural gas industry in general will affect the accuracy of
the 10% discount factor.
12
<PAGE>
The estimates of our reserves are based upon various 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 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 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.
Net Losses. We have experienced recurring losses. The following table shows
the losses we had in 1994, 1995, 1997, 1998 and the first nine months of 1999:
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months
Ended
September 30,
-----------------------------------------------
1994 1995 1997 1998 1999
---------- ----------- ----------- ---------- ----------------
(in millions)
<S> <C> <C> <C> <C> <C>
Net loss applicable to common stock ............. $(2.6) $(1.6) $(6.7) $(84.0) $(20.0)
</TABLE>
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 we will become profitable in the future.
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 crude oil and natural gas 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 crude oil and natural 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:
- title problems,
- weather conditions,
- compliance with governmental requirements, and
13
<PAGE>
- 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 crude 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 also may result from 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.
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 our natural gas processing business
both for supplies of natural gas and for customers to which we sell our
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.
Our crude oil and natural gas operations are subject to various U.S.
federal, state and local and Canadian federal and provincial governmental
regulations 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
crude oil and natural gas, these agencies have restricted the rates of flow of
crude oil and natural gas wells below actual production capacity. Federal,
state, provincial and local laws regulate production, handling, storage,
14
<PAGE>
transportation and disposal of crude oil and natural gas, by-products from crude
oil and natural gas and other substances and materials produced or used in
connection with crude oil and natural 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. We depend to a large extent on Robert L.G.
Watson, our Chairman of the Board, President and Chief Executive Officer, for
our management and business and financial contacts. The unavailability of Mr.
Watson would have a materially adverse effect on our business. Mr. Watson has a
three--year employment contract with Abraxas which provides that he can be
terminated for cause only. Our success is also dependent upon our ability to
employ and retain skilled technical personnel. While we have not experienced
difficulties in employing or retaining such personnel, our failure to do so in
the future could adversely affect our business.
The security for the second lien notes may be inadequate to satisfy all
amounts due and owing under the first lien notes and the second lien notes. The
second lien notes are secured by a second lien or charge on substantially all of
our proved crude oil and natural gas assets, natural gas processing plants and
Grey Wolf stock owned by us. There can be no assurance that, following an
acceleration after an event of default under the second lien notes indenture,
the proceeds from the sale of the collateral and allocable to the second lien
notes would be sufficient, either alone or when combined with proceeds from the
sale of other assets not constituting collateral and allocable to the second
lien notes, to satisfy all amounts due on the second lien notes. The ability of
the holders of second lien notes to realize upon the collateral is also subject
to certain limitations in the second lien notes indenture, the accompanying
mortgage and the pledge agreement, including a prohibition on foreclosing on the
collateral for 180 days after an event of default under the second lien notes.
In addition, if we become a debtor in a case under the United States Bankruptcy
Code (the "Bankruptcy Code"), the automatic stay imposed by the Bankruptcy Code
would prevent the Trustee from selling or otherwise disposing of the collateral
without bankruptcy court authorization. In that case, the foreclosure might be
delayed indefinitely. You should read the discussion under the heading
"Description of the Second Lien Notes -- Security" for more information
regarding the rights of holders of the second lien notes to the collateral.
The guarantees may not be enforceable in bankruptcy. Abraxas' and Canadian
Abraxas' obligations under the second lien notes are guaranteed by Sandia and
Wamsutter. Various fraudulent conveyance laws have been enacted for the
protection of creditors and may be utilized by courts to subordinate or void
such guarantees. It is also possible that under certain circumstances a court
could hold that the direct obligations of a guarantor could be superior to the
obligations under its guarantee.
To the extent that a court were to find that at the time a guarantor
entered into a guarantee either:
(1) the guarantee was incurred by the guarantor with the intent to
hinder, delay or defraud any present or future creditor or that
the guarantor contemplated insolvency with a design to favor one
or more creditors to the exclusion in whole or in part of others,
or
(2) the guarantor did not receive fair consideration or reasonably
equivalent value for issuing the guarantee and, at the time it
issued the guarantee, the guarantor
o was insolvent or rendered insolvent by reason of the issuance
of the guarantee,
o was engaged or about to engage in a business or transaction for
which the remaining assets of the guarantor 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 matured,
the court could void or subordinate the guarantee in favor of the guarantor's
other creditors. Among other things, a legal challenge of a guarantee issued by
15
<PAGE>
a guarantor on fraudulent conveyance grounds may focus on the benefits, if any,
realized by the guarantor as a result of our issuance of the second lien notes.
A court might find that the guarantors did not benefit from incurrence of the
indebtedness represented by the second lien notes.
To the extent that a guarantee is voided as a fraudulent conveyance or
found unenforceable for any other reason, holders of the second lien notes would
cease to have any claim in respect of the applicable guarantor. In such event,
the claims of the holders of the second lien notes against such guarantor would
be subject to the prior payment of all liabilities and preferred stock claims of
such guarantor. There can be no assurance that, after providing for all claims
and preferred stock interests, if any, there would be sufficient assets to
satisfy the claims of the holders of the second lien notes relating to any
voided portion of such guarantee.
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 by a bankruptcy
trustee of Canadian Abraxas were to find that the liens granted by Canadian
Abraxas over its assets were intended to prefer the holders of the second lien
notes over other creditors, such liens could be set aside. This would become an
issue if Canadian Abraxas became insolvent or bankrupt within a certain period
after granting the liens.
Under certain circumstances a bankruptcy court could order the
repayment of interest payments made under the second lien notes or under the
security interests. The bankruptcy code allows the bankruptcy trustee (or us,
acting as debtor-in-possession) to avoid certain transfers of a debtor's
property as a "preference." Under the bankruptcy code a preference is:
o a transfer of the debtor's property,
o to or for the benefit of a creditor on account of an existing debt,
o made while the debtor was insolvent (presumed in the 90 days before a
bankruptcy filing),
o if the creditor receives more than it would have received in a bankruptcy
liquidation if the transfer had not been made, and
o if the transfer/payment was made in the 90 days before the bankruptcy
filing, or, if the creditor was an "insider" within one year before the
bankruptcy filing (a creditor that is also a director, officer or
controlling stockholder of a debtor may be deemed to be an insider).
Our payment of principal and/or accrued interest, or our grant of a
lien or security interest, including payments made or liens or security
interests granted pursuant to the exchange offer, may be deemed to be a
preference if all of the factors discussed above are present. If such transfers
were deemed to be preferential transfers, the payments could be recovered from
the noteholders and the lien or security interest could be avoided.
If the second lien notes are fully secured (i.e., the value of
collateral exceeds the amount it secures, including the first lien notes),
payments on the second lien notes would not constitute preferential transfers.
However, if, or to the extent, the second lien notes are undersecured (i.e., the
value of the collateral is less than the amount which it secures), payments
would be deemed to have been applied, first, to the unsecured portion of the
second lien notes and, second, to the secured portion of the second lien notes
and the payments attributable to the unsecured portion could be considered
preferential transfers. Therefore, if we are involved in a bankruptcy
proceeding, holders of second lien notes may be required to disgorge payments
made on the second lien notes to the extent such second lien notes are
undersecured.
Additionally, due to Abraxas', Canadian Abraxas' and the Guarantors'
being domiciled in Canada and in the United States, Abraxas, Canadian 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 first lien notes or the second lien notes, as well as delay in or prevention
from enforcing remedies under the first lien notes or the second lien notes, any
guarantee thereunder and the liens securing the first lien notes or the second
lien notes and the guarantees. Likewise, the first lien notes or the second lien
notes could be subject to different treatment inasmuch as the multiple
insolvency proceedings would be conducted by different courts applying different
laws.
16
<PAGE>
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 first lien notes, any outstanding old notes and
the second lien 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.
There is no assurance that an active market will develop for the second
lien notes, the Abraxas common stock or CVRs. The second lien notes and CVRs
have recently been issued and we cannot assure you that an active market will
develop, or, if such a market develops, that such market will be liquid. The
second lien notes and CVRs will not be listed on any national securities
exchange. Accordingly, we cannot assure you that a holder of the second lien
notes or the CVRs will be able to sell such second lien notes or the CVRs in the
future or as to the price at which such sale may occur. The liquidity of the
market for the second lien notes and CVRs and the prices at which such second
lien notes and CVRs trade will depend upon the amount outstanding, the number of
holders thereof, the interest of securities dealers in maintaining a market in
such second lien notes and CVRs and other factors beyond our control. In
addition, no assurance can be given as to the relationship that the market price
of the second lien notes will bear to the market prices of the old notes, either
currently or in the future.
The liquidity of, and trading market for, the second lien notes also
may be adversely affected by general declines in the market for high yield
securities. Such declines may adversely affect the liquidity and trading markets
for the second lien notes.
The Abraxas common stock is quoted on the OTC Bulletin Board. While
there are currently 14 market makers in the Abraxas common stock, none of these
market makers are obligated to continue to make a market in the Abraxas common
stock. In this event, the liquidity of the Abraxas common stock could be
adversely impacted and a stockholder could have difficulty obtaining accurate
stock quotes.
Anti-takeover provisions could make a third party acquisition of
Abraxas difficult. Abraxas' articles of incorporation and by-laws provide for a
classified board of directors, with each member serving a three-year term and
eliminate the ability of stockholders to call special meetings or take action by
written consent. Abraxas has also adopted a stockholder rights plan. Each of the
provisions in the articles of incorporation and by-laws and the stockholder
rights plan could make it more difficult for a third party to acquire Abraxas
without the approval of Abraxas' board. In addition, the Nevada corporate
statute also contains certain provisions which could make an acquisition by a
third party more difficult. You should read the discussions under the heading
"Description of Capital Stock -- Anti-takeover Effects of Certain Provisions of
the Articles of Incorporation and Bylaws," "--Stockholders Rights Plan" and "--
Anti-Takeover Statutes" for more information regarding these anti-takeover
provisions.
Lack of Dividends on Abraxas Common Stock. Abraxas has never paid a
cash dividend on its common stock and the terms of the first lien notes
indenture and the second lien notes indenture limit the ability of Abraxas to
pay dividends on its common stock.
17
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the sale of the second lien
notes, the Abraxas common stock or the contingent value rights by the selling
security holders pursuant to this prospectus.
CAPITALIZATION
The following table sets forth the total consolidated capitalization of
the Company at September 30, 1999, on a historical and pro forma basis. 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.
<TABLE>
<CAPTION>
September 30, 1999
(unaudited)
-----------------------------------
Historical Pro Forma (1)
(dollars in thousands)
<S> <C> <C>
Total debt, including current maturities:
Credit Facility due to a Canadian bank (2) ....................... $ 6,277 $ 6,277
12 7/8% Senior Secured Notes due 2003............................. 63,500 63,500
11 1/2% Senior Secured Notes due 2004, Series A (3)(4)............ -- 195,495
11 1/2% Senior Notes due 2004, Series D (4)....................... 276,459 4,329
Other long-term obligations................................. 7 7
---------- ----------
Total debt........................................................... 346,243 269,608
---------- ----------
Stockholders' equity:
Common stock...................................................... 65 226
Treasury stock, 171,015 shares.................................... (1,071) (1,071)
Additional paid-in capital........................................ 51,651 131,762
Foreign currency translation...................................... (2,886) (2,886)
Accumulated deficit............................................... (123,099) (126,028)
---------- ----------
Total stockholders' equity (deficit)........................ (75,340) 2,003
---------- ----------
Total capitalization........................................ $ 270,903 $ 271,611
========== ==========
</TABLE>
- ----------
(1) Reflects the exchange offer as if it occurred at September 30, 1999.
(2) Indebtedness of Grey Wolf, which is non-recourse to the Company.
(3) Includes $5.0 million of second lien notes issued to Houlihan and Jefferies
as payment for their fees and expenses.
(4) Includes a debt issuance premium of $2.5 million on a historical basis and
$1.7 million on a pro forma basis.
18
<PAGE>
PRICE RANGE OF ABRAXAS COMMON STOCK
Abraxas common stock is currently traded on the OTC Bulletin Board
under the symbol "AXAS." Abraxas common stock was formerly listed on the NASDAQ
Stock Market under the symbol "AXAS," however, effective June 16, 1999, Abraxas
common stock was delisted from quotation on the NASDAQ Stock Market for failure
to satisfy NASDAQ's listing and maintenance standards. As of January 20, 2000,
Abraxas had 22,747,118 shares of common stock outstanding and had approximately
1,561 stockholders of record.
The following table sets forth certain information as to the high and
low bid quotations quoted on the NASDAQ Stock Market for 1997, 1998 and 1999
(through June 16, 1999) and on the OTC Bulletin Board for the remainder of 1999
and through January 14, 2000. Information with respect to over-the-counter bid
quotations represents prices between dealers, does not include retail mark-ups,
mark-downs or commissions, and may not necessarily represent actual
transactions.
Period High Low
1997
First Quarter.............................$14.00 $8.88
Second Quarter.............................14.13 10.00
Third Quarter..............................15.75 12.50
Fourth Quarter.............................19.50 13.88
1998
First Quarter.............................$15.00 $7.00
Second Quarter.............................11.25 8.25
Third Quarter.............................. 9.50 5.31
Fourth Quarter............................. 7.56 4.00
1999
First Quarter..............................$3.19 $1.19
Second Quarter..............................2.82 0.88
Third Quarter...............................2.97 0.88
Fourth Quarter..............................2.44 0.81
2000
First Quarter (through January 14, 2000)...$1.44 $1.06
DIVIDEND POLICY
Abraxas has not paid any cash dividends on its common stock and it is not
presently determinable when, if ever, Abraxas will pay cash dividends in the
future. The first lien notes and second lien notes indentures prohibit the
payment of cash dividends and stock dividends on Abraxas' common stock.
19
<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 of the first lien
notes, the acquisition of New Cache and the exchange offer were consummated on
December 31, 1998. The Unaudited Pro Forma Condensed Balance Sheet of the
Company as of September 30, 1999, has been prepared assuming the exchange offer
was consummated on September 30, 1999. The Unaudited Pro Forma Statements of
Operations of the Company for the year ended December 31, 1998 and for the nine
month period ended September 30, 1998 have been prepared assuming the offering
of the first lien notes, the acquisition of New Cache, the sale by Abraxas of
its Wyoming Properties and the exchange offer were consummated at the beginning
of the reporting period. The Unaudited Pro Forma Statement of Operations of the
Company for the nine month period ended September 30, 1999 has been prepared
assuming the exchange offer was 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 September 30, 1999, has been translated at the period-end exchange
rate of $0.6523 to one Canadian dollar. See "Business -- Primary Operating Areas
- -- 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 prospectus.
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 of the first lien notes, the acquisition of New
Cache, the sale of the Wyoming Properties and the exchange offer 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.
20
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
Historical
--------------------
Abraxas New Cache Sale of Exchange
Petroleum New Pro Forma Wyoming Offering Offer
Corporation Cache Adjustments Properties Adjustments Adjustments Pro Forma
----------- ------ ------------ ----------- ----------- ----------- ---------
(dollars in thousands, except per share data)
<S> <C> <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........ 18,091 6,237 -- (2,009) -- -- 22,319
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) $ (337) (f) 1,859
Interest expense.......... 30,848 1,372 -- -- 6,990 (d) (8,559) (g) 30,651
-------- -------- --------- --------- --------- ---------- ---------
Total other expenses.. 31,614 1,366 -- -- 7,615 (8,896) 31,699
-------- -------- --------- --------- --------- ---------- ---------
Income (loss) before tax..... (88,114) (38,240) (322) (6,283) (7,615) 8,896 (131,678)
Income tax (expense) benefit:
Current................... (231) (189) -- -- -- -- (420)
Deferred.................. 4,389 14,782 8,410 (e) -- -- -- 14,861
(12,720)(e)
Minority interest income
(loss)....................... (4) -- -- -- -- -- (4)
-------- -------- --------- --------- --------- ---------- ---------
Net (loss) applicable to
common stockholders....... $(83,960) $(23,647) $ (4,632) $ (6,283) $(7,615) $ 8,896 $(117,237)
======== ======== ========= ========= ========= ========== =========
Net (loss) per share......... $ (13.26) $ (5.23)
======== =========
</TABLE>
See notes to unaudited pro forma financial information.
21
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1998
Historical
Abraxas New Cache Sale of Exchange
Petroleum New Cache Pro Forma Wyoming Offering Offer
Corporation Adjustments Properties Adjustments Adjustments Pro Forma
----------- ---------- ------------ ---------- ----------- ----------- ---------
(dollars in thousands, except per share data)
Revenue:
Oil and gas production
<S> <C> <C> <C> <C> <C> <C> <C>
revenues................ $ 41,406 $ 12,409 $ -- $(10,189) -- -- $ 43,626
Gas processing revenues... 2,369 -- -- -- -- -- 2,369
Rig revenues.............. 350 -- -- -- -- -- 350
Other revenues............ 1,884 661 -- 84 -- -- 2,629
-------- -------- --------- ---------- ------ ------- ---------
Total revenue....... 46,009 13,070 -- (10,105) -- -- 48,974
Operating costs and expenses:
Lease operating and
production taxes........ 13,387 4,838 -- (1,775) -- -- 16,450
Depreciation, depletion
and amortization........ 26,049 8,184 $ 2,475 (a) (3,415) -- -- 33,293
Rig operations............ 381 -- -- -- -- -- 381
General and administrative
expense................. 3,957 1,367 -- -- -- -- 5,324
-------- ------- --------- -------- ------ ------- ---------
Total operating
expenses.......... 43,774 14,389 2,475 (5,190) -- -- 55,448
-------- ------- --------- --------- ------ ------- ---------
Operating income (loss)...... 2,235 (1,319) (2,475) (4,915) -- -- (6,474)
Other (income) expense:
Interest income........... (418) -- -- -- -- -- (418)
Amortization of deferred
financing fee........... 913 -- -- -- $ 469 (b) $ (186)(d) 1,196
Interest expense.......... 22,795 769 -- -- 5,243 (c) (6,419)(e) 22,388
-------- ------- --------- --------- ------ ------- ---------
Total other expenses.. 23,290 769 -- -- 5,712 (6,605) 23,166
-------- ------- --------- --------- ------ ------- ---------
Income (loss) before tax..... (21,055) (2,088) (2,475) (4,915) (5,712) 6,605 (29,640)
Income tax (expense) benefit:
Current................... (208) (146) -- -- -- -- (354)
Deferred.................. 4,741 479 -- -- -- -- 5,220
Minority interest income..... 50 -- -- -- -- -- 50
-------- ------- --------- --------- ------ ------- ---------
Net (loss) applicable to
common stockholders....... $(16,472) $ (1,755) $ (2,475) $ (4,915) $(5,712) $ 6,605 $(24,724)
======== ======== ========= ========= ======= ======== ==========
Net (loss) per share......... $ (2.60) $ (1.10)
======== ==========
</TABLE>
See notes to unaudited pro forma financial information.
22
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1999
Abraxas Exchange
Petroleum Offering Offer
Corporation Adjustments Adjustments Pro Forma
------------ ----------- ------------ ----------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenue:
Oil and gas production revenues.......... $ 43,884 -- -- $ 43,884
Gas processing revenues.................. 2,733 -- -- 2,733
Rig revenues............................. 328 -- -- 328
Other revenues........................... 2,759 -- -- 2,759
---------- --------- --------- ----------
Total revenue..................... 49,704 -- -- 49,704
Operating costs and expenses:
Lease operating and production taxes..... 13,986 -- -- 13,986
Depreciation, depletion and amortization. 25,801 -- -- 25,801
Rig operations........................... 452 -- -- 452
General and administrative expense....... 4,187 -- -- 4,187
---------- --------- ---------- ----------
Total operating expenses.......... 44,426 -- -- 44,426
---------- --------- ---------- ----------
Operating income (loss).................... 5,278 -- -- 5,278
Other (income) expense:
Interest income.......................... (493) -- -- (493)
Amortization of deferred financing fee... 1,073 $ 156(a) $ (221)(b) 1,008
Interest expense......................... 28,422 1,747(a) (6,419)(c) 23,750
---------- --------- ---------- --------
Total other expenses.............. 29,002 1,903 (6,640) 24,265
---------- --------- ---------- --------
Income (loss) before tax................... (23,724) (1,903) 6,640 (18,987)
Income tax (expense) benefit:
Current.................................. (305) -- -- (305)
Deferred................................. 4,247 -- -- 4,247
Minority interest income (loss)............ (172) -- -- (172)
---------- --------- ---------- --------
Net (loss) applicable to common stockholders $ (19,954) $ (1,903) 6,640 $ (15,217)
========== ========= ========== ========
Net (loss) per share....................... $ (3.15) $ (0.67)
=========== ========
</TABLE>
See notes to unaudited pro forma financial information.
23
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
As of December 31, 1998
Historical
---------------------------
Abraxas New Cache Pro
Petroleum Forma Offering Exchange Offer
Corporation New Cache Adjustments Adjustments Adjustments Pro Forma
------------ ----------- ------------- ------------ -------------- -----------
(dollars in thousands)
<S> <C> <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) $ (2,380)(j) 8,179
Other assets..................... 1,747 -- -- -- -- 1,747
---------- -------- --------- -------- ----------- -----------
Total assets............ $ 291,498 $ 68,921 $ (61,724) $ 21,320 $ (2,380) $ 317,635
========== ======== ========= ======== =========== ===========
Liabilities and stockholders'
equity (deficit):
Total current liabilities $ 22,554 $ 29,190 $ 1,949 (e) $ (9,730) $ (1,455)(k) $ 25,758
(16,750)(i)
Long-term debt................... 299,698 -- 16,750 (i) 31,050 (b) (76,635)(l) 270,863
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) -- 161 (m) 226
Additional paid-in capital..... 51,695 -- -- -- 77,929 (m) 129,624
Accumulated deficit............ (103,145) (18,418) 18,418 (f) -- (2,380)(n) (132,002)
(24,528)(g)
(1,949)(h)
Accumulated other comprehensive
income....................... (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) -- 75,710 (14,289)
---------- -------- --------- -------- ----------- ------------
Total liabilities and
stockholders' equity
(deficit)............. $ 291,498 $ 68,921 $ (61,724) $ 21,320 $ (2,380) $ 317,635
========== ======== ========= ======== ============ ===========
</TABLE>
See notes to unaudited pro forma financial information.
24
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
As of September 30, 1999
Abraxas
Petroleum Exchange Offer
Corporation Adjustments Pro Forma
------------- -------------- ------------
(dollars in thousands)
<S> <C> <C> <C>
Assets:
Cash............................................. $ 14,421 -- $ 14,421
Accounts receivable.............................. 17,145 -- 17,145
Other............................................ 916 -- 916
--------- ---------- -----------
Total current assets...................... 32,482 -- 32,482
Property and equipment............................. 495,082 -- 495,082
Less accumulated DD&A.............................. 191,398 -- 191,398
--------- ---------- -----------
Net property and equipment....................... 303,684 -- 303,684
Deferred financing fees............................ 9,919 $ (2,929)(a) 6,990
Other assets....................................... 1,240 -- 1,240
--------- ---------- -----------
Total assets.............................. $ 347,325 $ (2,929) $ 344,396
========= ========== ===========
Liabilities and stockholders' equity (deficit):
Total current liabilities................. $ 34,333 $ (3,637)(b) $ 30,696
Long-term debt..................................... 346,243 (76,635)(c) 269,608
Deferred income taxes.............................. 27,429 -- 27,429
Minority interest.................................. 10,286 -- 10,286
Future site restoration............................ 4,374 -- 4,374
Stockholders' equity (deficit):
Common stock..................................... 65 161 (d) 226
Additional paid-in capital....................... 51,651 80,111 (d) 131,762
Accumulated deficit.............................. (123,099) (2,929)(e) (126,028)
Treasury stock................................... (1,071) -- (1,071)
Accumulated other comprehensive income........... (2,886) -- (2,886)
--------- ---------- -----------
Total stockholders' equity (deficit)...... (75,340) 77,343 2,003
--------- ---------- -----------
Total liabilities and stockholders' equity
(deficit).............................. $ 347,325 $ (2,929) $ 344,396
========= ========== ===========
</TABLE>
See notes to unaudited pro forma financial information.
25
<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 of the first lien notes, the
acquisition of New Cache, the sale of the Wyoming Properties and the exchange
offer 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 old notes.
d. Adjust interest expense using an annual interest rate of 12 7/8% for
the issuance of the first lien notes and to reflect the repayment of
previous credit facility and indebtedness incurred in connection
with acquisition of New Cache.
e. Reverse New Cache deferred tax benefit relating to ceiling writedown
and record deferred tax benefit for writedown of properties based on
purchase price.
f. Adjust amortization of deferred financing fee to reflect fees
associated with old notes.
g. Adjust interest expense to reflect reduced debt as a result of the
exchange offer.
NOTE 2. The Unaudited Pro Forma Statement of Operations for the nine
months ended September 30, 1998 reflects the offering of the first lien notes,
the acquisition of New Cache, the sale of the Wyoming Properties and the
exchange offer 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 old notes.
c. Adjust interest expense using an annual interest rate of 12 7/8% for
the issuance of the first lien notes and reducing interest expense
interest incurred during the period on previous credit facility,
which was paid off with the proceeds of the first lien notes.
d. Adjust deferred financing fees for amount associated with old notes.
e. Adjust interest expense to reflect reduced debt as a result of the
exchange offer.
NOTE 3. The Unaudited Pro Forma Statement of Operations for the nine
months ended September 30, 1999 reflects the exchange offer as if it was
consummated on January 1, 1999.
a. Adjust interest expense and amortization of dererred financing
fees related to reflect issuance of 12 7/8% notes.
b. Adjust amortization of deferred financing fees to reflect fees
associated with reduced amount.
c. Adjust interest expense to reflect reduced debt as a result of the
exchange offer.
26
<PAGE>
NOTE 4. The Unaudited Pro Forma Condensed Balance Sheet as of December
31, 1998, reflects the offering of the first lien notes, the acquisition of New
Cache and the exchange offer as if they had occurred as of December 31, 1998:
To reflect the sale of $63.5 million principal amount of the first lien
notes. The proceeds were used to repay the credit facility and 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 first lien 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)
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)
i. Refinance short term debt with long-term debt......... 16,750
Exchange Offer Adjustments:
j. Adjust deferred financing fees to reflect fees associated with
old notes.
k. Adjust accrued interest to reflect reduced debt as a result of
the exchange offer.
l. Adjust senior notes to reflect the exchange offer.
m. Adjust common stock and additional paid-in capital to
reflect the exchange offer.
n. Record impact of income statement ajustments to accumulated
deficit.
NOTE 5. The Unaudited Pro Forma Condensed Balance Sheet as of September
30, 1999, reflects the exchange offer as if it had occurred as of September 30,
1999:
a. Adjust deferred financing fees to reflect fees associated with
old notes.
b. Adjust accrued interest to reflect the exchange offer.
c. Adjust senior notes to reflect the exchange offer.
d. Adjust common stock and additional paid-in capital to reflect
the exchange offer.
e. Record impact of income statement adjustments to accumulated
deficit
27
<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 nine months ended September 30, 1999, is not necessarily indicative of
results for a full year. The consolidated financial data for each of the nine
months ended September 30, 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 prospectus and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
---------------------------------------------------------- -----------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ---------- ---------- -----------
(in thousands, except per share data) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Operating revenue:
Oil and gas production revenues...... $ 11,114 $13,660 $25,749 $ 65,826 $ 54,263 $41,406 $43,884
Gas processing revenues.............. -- -- 600 3,568 3,159 2,369 2,733
Other revenue........................ 235 157 304 1,537 2,662 2,234 3,087
-------- ------- ------- -------- -------- --------- ---------
Total operating revenue...... 11,349 13,817 26,653 70,931 60,084 46,009 49,704
-------- ------- ------- -------- -------- --------- ---------
Operating costs and expenses:
Lease operating and production taxes... 3,693 4,333 6,120 16,133 18,091 13,387 13,986
Depreciation, depletion and
amortization expense.............. 3,790 5,434 9,605 30,581 31,226 26,049 25,801
General and administrative expense... 810 1,042 1,933 4,171 5,522 3,957 4,187
Other................................ 133 125 169 296 521 381 452
Proved property impairment........... -- -- -- 4,600 61,224 -- --
-------- ------- ------- -------- -------- ---------- ----------
Total operating expenses..... 8,426 10,934 17,827 55,781 116,584 43,774 44,426
-------- ------- ------- -------- -------- - ------ - ------
Operating income (loss)................ 2,923 2,883 8,826 15,150 (56,500) 2,235 5,278
Net interest expense................... 2,343 3,877 5,987 24,300 30,043 22,377 27,929
Amortization of deferred financing
fees(1)............................ 400 214 280 1,260 1,571 913 1,073
Other (income) expense................. 67 -- 443 (34) 4 (50) 172
-------- ------- ------- -------- -------- --------- ----------
Income (loss) from continuing
operations before taxes and
extraordinary items................. 113 (1,208) 2,116 (10,376) (88,118) (21,005) (23,896)
Income tax (expense) benefit........... -- -- (176) 3,891 4,158 4,533 3,942
Loss from discontinued operations(2)... (1,336) -- -- -- -- -- --
-------- ------- ------- -------- -------- -------- ---------
Income (loss) before extraordinary
items............................... (1,223) (1,208) 1,940 (6,485) (83,960) (16,472) (19,954)
Extraordinary items(3)................. (1,175) -- (427) -- -- -- --
-------- ------- ------- -------- -------- -------- ---------
Net income (loss)...................... (2,394) (1,208) 1,513 (6,485) (83,960) (16,472) (19,954)
Preferred dividends.................... (183) (366) (366) (183) -- -- --
-------- ------- ------- -------- -------- -------- ---------
Net income (loss) applicable to
common stockholders................ $(2,578) $ (1,574) $ 1,147 $ (6,668) $(83,960) $(16,472) $(19,954)
======== ======== ======= ======== ========= ========= =========
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30
(unaudited)
---------------------------------------------------------- ---------------------
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) $(2.60) $(3.15)
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) $(2.60) $(3.15)
======= ======== ======== ========= ========= ========== =========
Weighted average shares
outstanding assuming dilution.. 4,310 4,635 6,794 6,025 6,331 6,323 6,342
======= ======= ======= ======== ======== ========== =========
</TABLE>
<TABLE>
<CAPTION>
At December 31, At September 30
(unaudited)
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 $351,030 $347,325
Long-term debt(4)................. 41,235 41,557 215,000 248,617 299,698 282,176 346,243
Stockholders' equity (deficit).... 28,502 37,062 35,656 26,813 (63,522) 3.477 (75,340)
Other Data:
Capital expenditures (including
acquisitions).................. 40,906 12,330 173,155 87,764 57,861 41,661 115,250
Ratio (deficiency) of earnings to
fixed charges(5) -- -- 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 old notes and capital lease obligations.
(5) 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 old notes. The
Company's earnings were inadequate to cover fixed charges in 1997, 1998 and
September 30, 1999 by $10.0 million, $88.1 million and $23.7 million,
respectively.
29
<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 increased somewhat
in 1999. The average natural gas prices realized by the Company were $1.59 per
Mcf during the first nine months of 1999 compared with $1.54 per Mcf in 1998
compared with $1.79 per Mcf in 1997 and $1.97 per Mcf in 1996. During the first
nine months of 1999, crude oil prices averaged $13.98 per Bbl compared with
$13.65 per Bbl in 1998 compared with $18.63 per Bbl during 1997 and $20.85 per
Bbl during 1996. Although the Company had net income during 1996, losses were
incurred in 1997, 1998 and the first nine months of 1999, 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.
30
<PAGE>
Selected Operating Data. The following table sets forth certain operating
data of the Company for the periods presented:
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
----------------------------------------- ----------------------------
1996 1997 1998 1998 1999
(dollars in thousands, except per (unaudited)
unit data)
<S> <C> <C> <C> <C> <C>
Operating revenue:
Crude oil sales....................... $ 8,864 $ 17,453 $ 9,948 $7,768 $8,506
NGLs sales............................ 4,359 10,668 5,905 4,939 3,366
Natural gas sales..................... 12,526 37,705 38,410 28,699 32,012
Gas processing revenue................ 600 3,568 3,159 2,370 2,783
Other................................. 304 1,537 2,662 2,233 3,087
-------- --------- --------- ---------- ---------
Total operating revenue....... $ 26,653 $ 70,931 $ 60,084 $ 46,009 $ 49,704
======== ========= ========= ========== =========
Operating income(loss).................. $ 8,826 $ 15,150 $ (56,500) $ 2,235 $ 5,278
Crude oil production(MBbls)............. 425.2 936.7 728.6 565 609
NGLs production(MBbls).................. 299.5 992.3 867.4 715 282
Natural gas production(MMcf)............ 6,350.1 21,050.0 24,929.9 18,874 20,155
Average crude oil sales prices(per Bbl). $ 20.85 $ 18.63 $ 13.65 $ 13.75 $ 13.98
Average NGLs sales price(per Bbl)....... $ 14.55 $ 10.75 $ 6.81 $ 6.90 $ 11.96
Average natural gas sales price(per Mcf) $ 1.97 $ 1.79 $ 1.54 $ 1.52 $ 1.59
</TABLE>
Comparison of Nine Months Ended September 30, 1999 to Nine Months Ended
September 30, 1998
Operating Revenue. During the nine months ended September 30, 1999,
operating revenue from crude oil, natural gas and natural gas liquid sales
increased from $41.4 million in the nine months ended September 30, 1998 to
$43.9 million for the same period in 1999. Increased production of crude oil and
natural gas contributed $2.6 million in additional revenue, while higher crude
oil and natural gas prices added revenue of $1.4 million. Lower production of
natural gas liquids had a negative impact of $5.2 million offset by $3.6 million
from higher prices.
Crude oil production increased from 564.9 MBbls for the first nine months of
1998 to 608.6 MBbls for the same period of 1999. Production from the New Cache
properties (acquired in January 1999) contributed 228.1 MBbls in 1999 which was
offset by declines in the production from the Company's existing properties and
from the divestiture of the Company's properties in Wyoming which were sold in
November 1998. The Wyoming Properties contributed 74.6 MBbls of crude oil in the
nine months ended September 30, 1998. The decline in the production from
existing properties was as a result of the de-emphasis of the Company's crude
oil exploration and development program in 1999 due to depressed crude oil
prices during the first part of 1999. Crude oil prices improved in the third
quarter. The average price received for crude oil for the first nine months of
1999 was $13.98 per Bbl compared to $13.75 per Bbl for the same period of 1998.
Natural gas production increased by 1,281 MMcf for the first nine months of
1999 to 20,155 MMcf from 18,874 MMcf for the same period of 1998. The
acquisition of New Cache contributed 5,200 MMcf during the nine months ended
September 30, 1999 which offset the loss of production from the Wyoming
Properties, which were sold in the fourth quarter of 1998. For the nine months
ended September 30, 1998 the Wyoming Properties contributed 4,599 MMcf. The
increase in natural gas volumes contributed $2.0 in additional revenue.
Increased natural gas prices received during the nine months ended September 30,
1999 contributed an additional $1.3 to revenue for the period. The average
natural gas price received during the first none months of 1999 was $1.59 per
Mcf compared to $1.52 per Mcf for the same period of 1998.
Revenue from natural gas liquids declined $1.6 million from $4.9 million for
the nine months ended September 30, 1998 to $3.4 million for the same period of
1999. Reduced production of natural gas liquids had a negative impact of $5.2
million on revenue for the nine months ended September 30, 1999 which was offset
by $3.6 million of increased revenue due to higher prices for the period.
Average natural gas liquids sales prices for the six months ended September 30,
1999 were $11.96 per Bbl compared to $6.90 for the same period of 1998. Natural
gas liquid production declined to 281.5 MBbls for the nine months ended
31
<PAGE>
September 30, 1999 from 715.4 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 the East
White Point and Portilla plants in South Texas. The Wyoming Properties
contributed 385.5 MBbls of natural gas liquids during the first nine months of
1998 which was partially offset by 57.2 MBbls from the New Cache properties
acquired in January 1999. The Company shut down its East White Point processing
plant during the fourth quarter of 1998 and shut down its Portilla Plant in
January 1999. The East White Point plant produced 40.4 MBbls of natural gas
liquids during the first nine months of 1998 and the Portilla Plant contributed
38.0 MBbls of natural gas liquids during the first nine 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. Total East White Point production
through this facility was 37.7 MBbls during the period ended September 30, 1999.
The Company also elected not to process its 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 contributing 41.7 MBbls during the
period ended September 30, 1999.
Lease Operating Expenses. Lease Operating Expense ("LOE") and natural gas
processing expenses were $14.0 million for the nine months ended September 30,
1999 compared to $13.4 million for the same period in 1998. The increase of $0.6
million was due to an increase in the number of wells the Company owned as of
September 30, 1998 compared to the same period of the prior year. LOE on a per
Mcfe basis increased to $0.55 per Mcfe for the nine months ended September 30,
1999 from $0.50 for the same period of 1998. The increase per Mcfe was due to a
general increase in the cost of services from 1998 to 1999 as well as from the
divestiture of the Wyoming Properties which was a low cost operating area with
LOE of $0.16 per Mcfe.
G&A Expenses. General and Administrative ("G&A") expenses increased from
$4.0 million for the nine months ended September 30, 1998 to $4.2 million for
the same period of 1999. The increase was primarily due to the hiring of
additional staff to manage and develop the Company's properties including the
addition of several staff members associated with the New Cache acquisition. G&A
expense on a per Mcfe basis increased to $0.16 per Mcfe from $0.15 for the same
period of 1998.
Depreciation, Depletion and Amortization Expenses. Depreciation, Depletion
and Amortization ("DD&A") expense decreased to $25.8 million for the nine months
ended September 30, 1999, from $26.0 million for the same period of 1998. DD&A
expense on a per Mcfe basis was $1.01 per Mcfe for the nine months ended
September 30, 1999 compared to $0.98 per Mcfe for the nine months ended June 30,
1998. The increase on a per Mcfe basis was due to higher finding cost during
1999, including the acquisition of New Cache, in the Company's Canadian
operations and the loss of reserves resulting from low commodity prices that
forced some of the Company's oil properties to their economic limits much
sooner. The increases were partially offset by lower DD&A per Mcfe from the U.S.
operations as a result of the ceiling test write down of the U.S. full cost pool
as of December 31, 1998.
Interest Expense. Interest increased to $28.4 million for the nine months
ended September 30, 1999 from $22.8 million for the nine months ended September
30, 1998. The increase was due to increased levels of borrowings by the Company
during the first nine months of 1999. Long-term debt increased from $299.7
million at December 31, 1998 to $346.2 million at September 30, 1999, as a
result of the Company's issuing $63.5 million of the first lien notes.
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 improved during the first nine months of 1999. The average
natural gas price realized by the Company increased to $1.59 per Mcf during the
first nine months of 1999 compared with $1.52 per MCF during the same period of
1998. Crude oil prices increased from $13.75 per Bbl during the nine months of
September 1998, to $13.98 per Bbl for the same period of 1999. Natural gas
liquids prices increased to $11.96 per Bbl compared to $6.90 per Bbl in 1998.
The prices of crude oil and natural gas have strengthened in the third quarter
and continued to strengthen in the fourth quarter. 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 liquid prices return to
depressed levels or if the Company's production levels decrease, the Company's
32
<PAGE>
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
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. 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, 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 old 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
33
<PAGE>
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
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
year end December 31, 1997, compared to 1996. This increase was attributable to
increased borrowings by the Company to finance the acquisitions consummated
34
<PAGE>
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
General. Capital expenditures excluding property divestitures during the
nine months ended September 30, 1999 were $115.3 million compared to $41.7
million during the same period of 1998. The table below sets forth the
components of these capital expenditures on a historical basis for the six
months ended September 30, 1999 and 1998.
Nine Months Ended
September 30
---------------------
1999 1998
---------- --------
Expenditure category (in thousands):
Acquisitions $ 92,586 $ 2,400
Development 21,006 35,475
Facilities and other 1,658 3,786
--------- -------
Total $ 115,250 $ 41,661
========= =======
At September 30, 1999, the Company had current assets of $32.5 million and
current liabilities of $34.3 million resulting in a working capital deficit of
$1.8 million. This compares to working capital of $50.7 million at December 31,
1998 and a working capital deficit of $9.1 million at September 30, 1998. The
material components of the Company's current liabilities at September 30, 1999
include trade accounts payable of $8.5 million, revenues due third parties of
$10.5 million and accrued interest of $13.6 million.
Operating activities during the nine months ended September 30, 1999
provided $9.3 million in cash to the Company compared to $6.1 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 $100.4 million net during the first nine months of
1999, $92.6 million of which was utilized for the acquisition of oil and gas
properties, $21.0 million of which was utilized for the development of crude oil
and natural gas properties and other facilities, and $1.7 million of which was
utilized for facilities and other. Divestitures of oil and gas properties
provided $14.8 million. This compares to $41.7 million required during the same
period of 1998, $35.5 million of which was utilized for the development of crude
oil and natural gas properties and other facilities, and $2.4 million for the
acquisition of oil and gas properties. Financing activities provided $43.9
million for the first nine months of 1999 compared to providing $39.5 million
for the same period of 1998. Financing activities include the proceeds of $63.5
million from the issuance of the first lien notes in March 1999 and borrowings
under the Credit Facility of $19.5 million, which were offset by the repayment
of the Credit Facility in the amount of $35.2 million in March 1999.
The Company's budget for capital expenditures for 2000 other than
acquisition expenditures is approximately $49.0 million. Such expenditures will
be made primarily for the development of existing properties. Additional capital
expenditures may be made for acquisitions 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 commodity prices remain at depressed
levels or decline further, reductions in the capital expenditure budget may be
required.
35
<PAGE>
Current Liquidity Needs. The Company has historically funded its operations
and acquisitions primarily through its cash flow from operations and borrowings
under a credit facility and other credit sources. In March 1999, the Company
issued $63.5 million principal amount of the first lien notes and repaid all
amounts outstanding under the credit facility and approximately $10.0 million of
debt assumed in connection with the acquisition of New Cache. Due to severely
depressed prices for crude oil and natural gas during the early part of 1999,
the Company's cash flow from operations has been substantially reduced.
In October 1999, the Company sold a dollar denominated production payment
for $4.0 million relating to existing natural gas wells in the Edwards Trend in
South Texas to a unit of Southern Energy, Inc. In January 2000, Abraxas sold an
additional production payment for $2.0 million relating to additional natural
gas wells in the Edwards Trend to Southern. The Company has the ability to sell
up to $50 million to Southern for drilling opportunities in the Edwards Trend.
In December 1999, Abraxas and Canadian Abraxas completed an exchange offer
whereby they exchanged the second lien notes, Abraxas common stock, and
contingent value rights for approximately 98.43% of their outstanding old notes.
The second lien notes are senior obligations of Abraxas and Canadian Abraxas and
are jointly and severally guaranteed by Sandia and Wamsutter. The second lien
notes and the guarantees are secured by a second lien or charge on substantially
all of the crude oil and natural gas properties and natural gas processing
plants owned by Abraxas, Canadian Abraxas, Sandia and Wamsutter, as well as the
shares of common stock of Grey Wolf owned by Abraxas and Canadian Abraxas. The
exchange offer reduced our long term debt by $76.6 million on a pro forma basis.
The Company will have four principal sources of liquidity going forward: (i)
cash on hand, (ii) cash flow from operations, (iii) the Production Payment and
(iv) proceeds from the sale of non-core assets. 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 cash flow from operations plus cash on hand, cash
available under the Production Payment and the proceeds from the sale of certain
non-core properties will be adequate to fund operations and planned capital
expenditures.
The Company's ability to obtain additional financing will be substantially
limited under the terms of the old notes, the first lien notes and the second
lien 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 first lien notes and a second lien
or charge for the benefit of the holders of the second lien notes. Thus, the
Company will be 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 additional assets to fund its operations, although the
indentures governing the old notes, first lien notes and second lien notes
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.
Long-Term Indebtedness
Old Notes. On November 14, 1996, the Issuers 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, the
Issuers 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 of the old notes in June 1998.
Interest on the old 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 old notes are
redeemable, in whole or in part, at the option of the Issuers, 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%
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The old notes are joint and several obligations of the Issuers and rank pari
passu in right of payment to all existing and future unsubordinated indebtedness
of the Issuers. The old notes rank senior in right of payment to all future
subordinated indebtedness of the Issuers. The old notes are, however,
effectively subordinated to the first lien notes to the extent of the value of
the collateral securing the first lien notes and the second lien notes to the
extent of the value of the collateral securing the second lien notes. The old
notes are unconditionally guaranteed, on a senior basis by Sandia. The guarantee
is a general unsecured obligation of Sandia and ranks pari passu in right of
payment to all unsubordinated indebtedness of Sandia and senior in right of
payment to all subordinated indebtedness of Sandia. The guarantee is effectively
subordinated to the first lien notes and the second lien notes to the extent of
the value of the Collateral.
Upon a Change of Control (as defined in the old notes indenture), each
holder of the old notes will have the right to require the Issuers to repurchase
all or a portion of such holder's old 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, the Issuers will be obligated to offer to repurchase
the old 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.
First Lien Notes. In March 1999, Abraxas consummated the sale of $63.5
million of the first lien notes. Interest on the first lien notes is payable
semi-annually in arrears on March 15 and September 15, commencing September 15,
1999. The first lien notes are redeemable, in whole or in part, at the option of
Abraxas on or after March 15, 2001, 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 March 15 of the years set forth below:
Year Percentage
---- ----------
2001...................................... 103.000%
2002 and thereafter....................... 100.000%
At any time, or from time to time, prior to March 15, 2001, Abraxas may, at
its option, use all or a portion of the net cash proceeds of one or more equity
offerings to redeem up to 35% of the aggregate original principal amount of the
fist lien notes at a redemption price equal to 112.875% of the aggregate
principal amount of the first lien notes be redeemed, plus accrued and unpaid
interest.
The first lien notes are senior indebtedness of Abraxas secured by a first
lien on substantially all of the crude oil and natural gas properties of Abraxas
and the shares of Grey Wolf owned by Abraxas. The first lien notes are
unconditionally guaranteed on a senior basis, jointly and severally, by Canadian
Abraxas, Sandia and Wamsutter. The guarantees are secured by substantially all
of the crude oil and natural gas properties of the guarantors and the shares of
Grey Wolf owned by Canadian Abraxas.
Upon a Change of Control, each holder of the first lien notes will have the
right to require Abraxas to repurchase such holder's first lien 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 will be
obligated to offer to repurchase the first lien notes at 100% of the principal
amount thereof plus accrued and unpaid interest to the date of redemption in the
event of certain asset sales.
The first lien notes indenture contains certain covenants that limit the
ability of Abraxas and certain of its subsidiaries, including the guarantors of
the first lien notes (the "Restricted Subsidiaries") to, among other things,
incur additional indebtedness, pay dividends or make certain other restricted
payments, consummate certain asset sales, enter into certain transactions with
affiliates, incur liens, merge or consolidate with any other person or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of the assets of Abraxas.
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The first lien notes indenture provides, among other things, that Abraxas
may not, and may not cause or permit the Restricted Subsidiaries, 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 or any other Restricted
Subsidiary, guarantee any indebtedness of Abraxas or any other Restricted
Subsidiary or transfer any of its assets to Abraxas or any other Restricted
Subsidiary except for such encumbrances or restrictions existing under or by
reason of: (i) applicable law; (ii) the first lien notes indenture; (iii)
customary non-assignment provisions of any contract or any lease governing
leasehold interest of such subsidiaries; (iv) any instrument governing
indebtedness assumed by the Company in an acquisition, which encumbrance or
restriction is not applicable to such Restricted Subsidiary or the properties or
assets of such subsidiary other than the entity or the properties or assets of
the entity so acquired; (v) agreements existing on the Issue Date (as defined in
the first lien notes indenture) to the extent and in the manner such agreements
were in effect on the Issue Date; (vi) customary restrictions with respect to
subsidiaries of Abraxas 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 first lien notes indenture
or any Security Documents (as defined in the first lien notes 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 first lien notes 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), (iv) 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 first lien notes in any material respect as determined by
the Board of Directors of Abraxas 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), (iv) or (v) and do not
extend to or cover any new or additional property or assets and, with respect to
newly created liens, (A) such liens are expressly junior to the liens securing
the first lien notes, (B) the refinancing results in an improvement on a pro
forma basis in Abraxas' Consolidated EBITDA Coverage Ratio (as defined in the
first lien notes indenture) and (C) the instruments creating such liens
expressly subject the foreclosure rights of the holders of the refinanced
indebtedness to a stand-still of not less than 179 days.
Second Lien Notes. In December 1999, the Issuers consummated an exchange
offer whereby $188,778,000 of the second lien notes were exchanged for
$269,699,000 of the old notes. An additional $5,000,000 of the second lien notes
were issued to Houlihan and Jefferies in payment of fees and expenses. You
should read the discussion under the heading "Summary of the Second Lien Notes"
for more information regarding the second lien notes.
Hedging Activities. The Company's results of operations are significantly
affected by fluctuations in commodity prices and seeks to reduce its exposure to
price volatility by hedging its production through swaps, options and other
commodity derivative instruments.
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, determined 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 fixed prices and for the
counterparty to make payments to the Company to the extent the market prices
were less than such fixed prices. The Company accounted for the related gains or
losses (a gain of $204,600 during the first quarter of 1999) 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. This amount is included in other income in
the accompanying financial statements.
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 extended
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<PAGE>
through March 31, 1999. Under the terms of the agreement the Company was 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 the nine months ended September 30, 1999 the Company
realized a gain of $204,000 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 October 1999 for the period November 1999
through October 2000. This agreement is for 1,000 Bbls per day with the Company
being paid $20.30 and 1,000 barrels per day with a floor price of $18.00 per
barrel and a ceiling of $22.00 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 at fixed prices through October 31, 2002. The Company realized
a loss of $0.9 million on this agreement which is accounted for in crude oil and
natural gas revenue during the nine months ended September 30, 1999.
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 MMBtuUpd 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 hedged with Barrett Resources Corporation, 11.0 MMBtupd is
hedged with Engage Energy Capital Canada LP, and 6.0 MMBtupd is hedged with
Amoco. New agreements were entered into for the term November 1, 1999 through
October 31, 2000 with Barrett Resources. The new agreement is for 20.0 MMBtupd
with a ceiling of $2.39 and a floor of $2.07 based on an AECO index. Barrett
Resources has an option to extend the agreement through October 2002 at fixed
prices. 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. In
connection with the 20.0 MMBtuAd Barrett hedge, the Company realized a loss of
$1.8 million for the nine months ended September 30, 1999, which is accounted
for in crude oil and natural gas revenue.
Net Operating Loss Carryforwards. At December 31, 1998, the Company had,
subject to the limitations discussed below, $59.2 million of net operating loss
carryforwards for U.S. tax purposes, of which approximately $55.0 million are
available for utilization without limitation. These loss carryforwards will
expire from 1999 through 2019 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.
Based upon the current level of operations, the Company believes that cash
on hand, cash flow from operations, proceeds from the Production Payment,
reduced interest expense as a result of the exchange offer and proceeds from the
sale of non-core assets will be adequate to meet its anticipated requirements
for working capital, capital expenditures and scheduled interest payments
through 2000. Depressed prices for natural gas, crude oil or natural gas liquids
will have a material adverse effect on the Company's cash flow from operations
and anticipated levels of working capital, and could force the Company to revise
its planned capital expenditures.
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<PAGE>
Year 2000
The Company has assessed 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,
information systems and embedded technology Year 2000 compliant. Substantially
all of the Company's computer hardware and 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 performed independent testing of critical
applications to verify the accuracy of such assertions. The Company believes
that all of its information system infrastructure, information systems and
embedded technology are compliant and Year 2000 ready.
In the area of third party suppliers and customers, the company has
monitored and assessed the readiness of such third parties. The Company monitors
third party readiness based on correspondence received from its major vendors
and suppliers, review of Year 2000 disclosure in documents filed with the SEC
and verbal communications. The Company has not identified any material problems
associated with the Year 2000 readiness efforts of its major suppliers and
customers and, other than correspondence, documents filed with the SEC and
verbal communications, the Company has not received any assurances that such
customers and suppliers will be Year 2000 compliant.
The Company's current emphasis in this area is focused on contingency
planning in recognition of the uncertainties inherent in evaluating third party
readiness. The Company's contingency planning involves all areas of readiness.
The process includes identifying critical dependencies and developing proactive
prevention plans.
To date, the Company has spent approximately $120,000 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
further material 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 suppliers, 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
imbedded operations control systems and third party Year 2000 readiness. There
can be no assurance, however, that there will not be 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.
The Company believes that the "most reasonably likely worst case" scenarios
are as follows: (i) unanticipated Year 2000 induced failures in information
systems could cause a reliance on manual contingency procedures and
significantly reduce efficiencies in the performance of certain normal business
activities; (ii) unanticipated failures in embedded operations process control
systems due to Year 2000 causes could result in temporarily suspending
operations at certain operating facilities with consequent loss of revenue; and
(iii) slowdowns or disruptions in the third party supply chain due to Year 2000
performance of certain normal business activities.
As of January 19, 2000, neither the Company nor, to the Company's knowledge,
any of its third-party suppliers or customers have experienced any Year 2000
related failures. However, there is a continuing risk of such failures for both
the Company and the Company's third-party suppliers and customers.
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
40
<PAGE>
price hedging agreements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources". Assuming
the production levels attained by the Company during the nine months ended
September 30, 1999, a 5% decline in crude oil, natural gas and natural gas
liquids prices would have reduced the Company's operating revenue, cash flow and
net income (loss) by approximately $2.2 million for the nine months ended
September 30, 1999. . Interest rate risk
At September 30, 1999, substantially all of the Company's long-term debt is
at fixed interest rates and not subject to fluctuations in market rates.
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 of $6.4 million for
the nine months ended September 30, 1999. 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 $0.13 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.
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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.
Abraxas was founded in 1977 by Robert L. G. Watson, the Company's Chairman
of the Board, President and Chief Executive Officer. Our principal offices are
located at 500 North Loop 1604 East, Suite 100, San Antonio, Texas 78232 and its
telephone number is (210) 490-4788. Canadian Abraxas was formed in 1996.
Canadian Abraxas' principal offices are located at 300 5th Avenue SW, #1200,
Calgary, Alberta, Canada T2P 3C4 and its telephone number is (403) 262-1949.
1999 Developments
On December 31, 1999, New Cache, which had been owned by Abraxas and
Canadian Abraxas, was amalgamated or merged with Canadian Abraxas. New Cache
originally guaranteed the second lien notes; however, as a result of the
amalgamation, New Cache is no longer a guarantor of the second lien notes.
In December 1999, Abraxas and Canadian Abraxas completed an exchange offer
whereby they exchanged the second lien notes, Abraxas common stock, and
contingent value rights for approximately 98.43% of their outstanding old notes.
The second lien notes are senior obligations of Abraxas and Canadian Abraxas and
are jointly and severally guaranteed by Sandia and Wamsutter. The second lien
notes and the guarantees are secured by a second lien or charge on substantially
all of the crude oil and natural gas properties and natural gas processing
plants owned by Abraxas, Canadian Abraxas, Sandia and Wamsutter, as well as the
shares of common stock of Grey Wolf owned by Abraxas and Canadian Abraxas. The
exchange offer reduced our long term debt by $76.6 million.
In October 1999, Abraxas sold a dollar denominated production payment for
$4.0 million, relating to existing natural gas wells in the Edwards Trend, to a
unit of Southern Energy, Inc. In January 2000, Abraxas sold an additional
production payment for $2.0 million relating to additional natural gas wells in
the Edwards Trend to Southern. Under the terms of this production payment,
Abraxas has the ability to sell up to a total of $50.0 million in production
payments to Southern for additional drilling opportunities in the Edwards Trend.
In March 1999, Abraxas sold $63.5 million of its first lien notes to
refinance bank debt, meet near-term debt service requirements and make limited
capital expenditures. The first lien notes are senior obligations of Abraxas and
are jointly and severally guaranteed by Canadian Abraxas and Sandia.
Additionally, Wamsutter will become a guarantor of the first lien notes in
connection with the exchange offer. The first lien notes and the guarantees are
secured by a first lien or charge on substantially all of the crude oil and
natural gas properties and natural gas processing plants owned by Abraxas,
Canadian Abraxas and Sandia, as well as the shares of common stock of Grey Wolf
owned by Abraxas and Canadian Abraxas.
In January 1999, Canadian Abraxas 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
debt was repaid with a portion of the proceeds from the sale of the first lien
notes.
Primary Operating Areas
Our U.S. operations are concentrated in South and West Texas with over 99%
of the PV-10 of our U.S. crude oil and natural gas properties at December 31,
1998 located in those two regions. We operate approximately 80% of our wells in
Texas.
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South Texas
Our operations in South Texas are concentrated along the Edwards Trend in
Live Oak and Dewitt Counties and in the Frio/Vicksburg area in San Patricio
County. We own an average 71% working interest in and operate 80% of our 115
wells. These properties had 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, and 557 net Bbls of crude oil and NGLs and 12,679 net Mcf of
natural gas per day for the quarter ended September 30, 1999. During the first
ten months of 1999, we drilled a total of 4 new wells (4.0 net) in South Texas,
with a 100% success rate.
Our wells in the Edwards Trend are characterized by high working interests
and are substantially all natural gas. We have identified numerous drilling
locations in the Edwards Trend and we believe that we have the necessary
technical expertise and significant competitive advantage over other operations
in the trend through our proprietary drilling techniques.
West Texas
Our operations in West Texas are concentrated along the deep
Devonian/Ellenberger formation and shallow Cherry Canyon sandstones in Ward
County, the Spraberry Trend in Midland County and in the Sharon Ridge Clearfork
Field in Scurry County. We own an average 73% working interest in and operate
approximately 80% of our 264 wells. These properties had 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, and 644 net Bbls of crude oil
and NGLs and 4,969 net Mcf of natural gas per day for the quarter ended
September 30, 1999. During the first ten months of 1999, we drilled a total of 4
new wells (3.9 net) in West Texas with a 100% success rate. Our wells in West
Texas have a drilling profile which is similar to that of the Edwards Trend we
have identified several drilling locations in West Texas. Recent successful
horizontal wells in similar fields by Texaco, Mobil, and Titan have enabled us
to properly delineate our drilling prospects.
Canada
We own producing properties in Western Canada, consisting primarily of
natural gas reserves. We also own interests ranging from 10% to 100% in
approximately 200 miles of natural gas gathering systems and 19 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 Bcfe (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.
For the quarter ended September 30, 1999, these properties had average daily
production of 1,472 net Bbls of crude oil and NGLs and 47,637 net Mcf of natural
gas per day. The natural gas processing plants had aggregate capacity of
approximately 306 gross MMcf of natural gas per day (121 net MMcf).
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.
Exploratory and Developmental Acreage
Our 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 and MacNaughton, Dallas, Texas. The crude oil and
natural gas reserves of Canadian Abraxas have been estimated as of December 31,
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1998, by McDaniel & Associates Consultants Ltd., Calgary, Alberta. The crude oil
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:
Estimated Proved Reserves
-----------------------------
Proved Proved Total
Developed Undeveloped Proved
--------- ----------- ------
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
- ----------
(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.
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 crude
oil and natural 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 crude oil and natural gas prices and
other factors, many of which are beyond our control.
You should not assume that the present value of future net revenues referred
to in prospectus is the current market value of our estimated crude oil and
natural 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
45
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and costs may be materially higher or lower than the prices and costs as of the
end of the year of the estimate. Significant declines during 1998 in crude oil
and natural gas prices 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 crude oil
and natural gas properties will affect the timing of actual future net cash
flows from proved reserves and their present value. For example, we 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 crude oil and natural gas industry in general will affect the accuracy of
the 10% discount factor.
The estimates of our reserves are based upon various 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 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 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.
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 our 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 and the
nine months ended September 30, 1999:
Nine months ended
September 30,
1996 1997 1998 1999
---------- -------- --------- -----------------
Production:(1)
Crude oil (MBbls) . 425.2 936.7 728.6 608.6
NGLs (MBbls) ...... 299.5 992.3 867.4 281.5
Natural gas (MMcf) 6,350.1 21,050.0 24,929.9 20,154.6
MMcfe(2) .......... 10,698.3 32,624.0 34,505.9 25,495.2
Average Sales Price:(3)
Crude oil (per Bbl) $ 20.85 $ 18.63 $ 13.65 $ 13.98
NGLs (per Bbl) .... 14.55 10.75 6.81 11.96
Natural gas (per Mcf) 1.97 1.79 1.54 1.59
Per Mcfe .......... 2.40 2.02 1.57 1.72
LOE (per Mcfe) ...... $ 0.55 $ 0.46 $ 0.49 $ 0.55
- ----------
(1) 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.
(2) 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.
(3) Average sales prices include effects of hedging activities.
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Drilling Activities
The following table sets forth our gross and net working interests in
exploratory, development, and service wells drilled during the three years ended
December 31, 1996, 1997 and 1998 and the nine months ended September 30, 1999:
<TABLE>
<CAPTION>
Nine months ended
1996 1997 1998 September 30, 1999
-------------- -------------- -------------- ------------------
Gross Net Gross Net Gross Net Gross Net
----- --- ----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 4.0 1.7
Dry holes.............. 4.0 1.4 2.0 1.8 9.0 7.3 4.0 1.2
----- ----- ----- ----- ----- ----- ----- -----
Total............ 8.0 3.8 12.0 9.7 17.0 13.9 8.0 2.9
===== ===== ===== ===== ===== ===== ===== =====
Development
Productive
Crude oil............ 20.0 15.8 25.0 22.3 3.0 2.4 9.0 3.6
Natural gas.......... 10.0 3.7 20.0 14.9 30.0 23.9 18.0 11.6
Service................ -- -- -- -- 1.0 1.0 -- --
Dry holes.............. 1.0 1.0 3.0 2.0 3.0 2.2 10.0 5.8
----- ----- ----- ----- ----- ----- ----- -----
Total............ 31.0 20.5 48.0 39.2 37.0 29.5 37.0 21.0
===== -===== ===== -===== ===== ===== ===== =====
</TABLE>
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.
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<PAGE>
Competition
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 our natural gas processing business
both for supplies of natural gas and for customers to which we sell our
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.
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.
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<PAGE>
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
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
49
<PAGE>
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
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
50
<PAGE>
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.
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
51
<PAGE>
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%.
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
52
<PAGE>
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
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
53
<PAGE>
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.
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.
54
<PAGE>
Employees
As of January 1, 2000, Abraxas had 48 full-time employees, including 3
executive officers, 2 non-executive officers, 4 petroleum engineers, 1
geologist, 5 managers, 9 secretarial and clerical personnel and 24 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 January 1, 2000, Grey Wolf had 43 full-time employees, including 4
executive officers, 2 non-executive officers, 1 manager, 2 petroleum engineers,
4 geologists, 1 geophysicist, 15 secretarial and clerical personnel and 14 field
personnel.
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 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.
Canadian Abraxas 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.
55
<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 and Canadian Abraxas. The term of the Class I directors of
Abraxas expires in 2000, the term of the Class II directors expires in 2002 and
the term of the Class III directors expires in 2001.
<TABLE>
<CAPTION>
Name Age Office Class
-------------------------- ---- ---------------------------------------------------- ------
<S> <C> <C> <C>
Robert L. G. Watson....... 49 Chairman of the Board, President and Chief Executive III
Officer of Abraxas; Chairman of the
Board and director of Grey Wolf;
Chairman of the Board, President and
director of Canadian Abraxas
Chris E. Williford........ 48 Executive Vice President, Chief Financial Officer, --
and Treasurer of Abraxas; Vice President and
Assistant Secretary of Canadian Abraxas
Robert W. Carington, Jr... 38 Executive Vice President of Abraxas --
Craig S. Bartlett, Jr..... 66 Director of Abraxas II
Franklin A. Burke......... 65 Director of Abraxas I
Ralph F. Cox ............. 67 Director of Abraxas II
Frederick M. Pevow, Jr.... 37 Director of Abraxas II
James C. Phelps........... 77 Director of Abraxas III
Joseph A. Wagda........... 56 Director of Abraxas II
Roger L. Bruton........... 67 Executive Vice President and director of Grey Wolf --
and Canadian Abraxas
Donald A. Engle........... 56 President and director of Grey Wolf; Secretary and --
director of Canadian Abraxas
</TABLE>
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 and served in that position until the
amalgamation of New Cache with and into Canadian Abraxas in December 1999. 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 and
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 and served in that
position until the amalgamation of New Cache with and into Canadian Abraxas in
December 1999 in December 1999. In December 1999, Mr. Williford resigned as a
director of Abraxas. 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, 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.
56
<PAGE>
Robert W. Carington, Jr. was elected Executive Vice President and a director
of Abraxas in July 1998. In December, 1999, Mr. Carington resigned as a director
of Abraxas. 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.
Craig S. Bartlett Jr., a director of Abraxas since December 1999, has over
forty years of commercial banking experience, the most recent being with
National Westminster Bank USA, rising to the position of Executive Vice
President, Senior Lending Officer and Chairman of the Credit Policy Committee.
Mr. Bartlett continues to serve on numerous boards and is active in independent
consulting roles. Mr. Bartlett is a graduate of Princeton University with an
advanced Management Degree from Pennsylvania State University.
Franklin A. Burke, a director of Abraxas since June 1992, has served as
President 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.
Ralph F. Cox, a director of Abraxas since December 1999, has over 45 years
of oil and gas industry experience, over thirty of which was with Arco. Mr. Cox
retired from Arco in 1985 after having become Vice Chairman. Mr. Cox then joined
what is now Union Pacific Resources, retiring in 1989 as President and Chief
Operating Officer. Mr. Cox then joined Greenhill Petroleum Corporation as
President until leaving in 1994 to pursue his consulting business. Mr. Cox has
in the past and continues to serve on many boards including Arco, Fidelity
Investments, and the Kansas City Federal Reserve Board. Mr. Cox earned Petroleum
and Mechanical Engineering degrees from Texas A&M University with advanced
studies at Emory University.
Frederick M. Pevow, Jr., a director of Abraxas since December 1999, has
almost fifteen years of investment banking experience with firms such as Smith
Barney, Dillon Read, Salomon Smith Barney, and most recently CIBC World Markets
where he was Managing Director and headed the worldwide Investment Banking
practice covering the oilfield services and equipment industries. Mr. Pevow
currently pursues capital market transactions through Pevow & Associates, a
boutique investment and merchant banking firm. Mr. Pevow holds an undergraduate
degree from the University of Texas with further studies at Rice 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
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.
Joseph A. Wagda, a director of Abraxas since December 1999, has a varied
thirty-year business career developing legal and business development expertise
as an employee of Price Waterhouse, Ford Motor Company, Chevron Corporation and
in private practice with the law firm of Hiscock & Barclay. Mr. Wagda also
brings experience in workout and turnaround situations, having provided such
services to airline, insurance and power producing companies. Mr. Wagda received
an undergraduate degree from Fordham College, an MBA from Cornell University and
a JD from Rutgers University. Mr. Wagda has been admitted to the bar in
California, Michigan, and New York.
57
<PAGE>
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 and served in
that position until the amalgamation of New Cache with and into Canadian Abraxas
in December 1999. Prior to joining Grey Wolf, Mr. Bruton served as a geologist
with Panhandle Eastern Pipe Line 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 were subsidiaries of K N Energy, Inc. 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 and served in that position until the amalgamation of New Cache with and
into Canadian Abraxas in December 1999. 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.
Messrs. Bartlett, Cox, Pevow and Wagda were elected to the Board of
Directors of Abraxas in December 1999 in connection with the exchange offer. In
connection with their election, Messrs. Carington, Carter, Gershen, Kleberg,
Powell, Riggs and Williford submitted resignations of their director positions.
58
<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 $100,000 for the years ended
December 31, 1996 and 1997, and Messrs. Watson, Williford, Carington, Patterson
and Wendel for the year ended December 31, 1998.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Compensation
------------------
Annual Compensation Awards
------------------------------------------------- ------------------
Options
Name and Principal /SARs
Position Year Salary ($) 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.
59
<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>
Robert L. G. 100,000 (1) 15.1 14.38 1/08 $904,000 $2,292,000
Watson 40,000 (1) 6.0 5.56 11/08 140,000 354,400
Chris E. 15,000 (1) 2.3 14.38 1/08 135,600 343,800
Williford 20,000 (1) 3.0 5.56 11/08 70,000 177,200
Robert W. 300,000(1) 45.2 8.75 5/08 1,650,000 4,185,000
Carington, Jr. 20,000(1) 3.0 5.56 11/08 70,000 177,200
Robert E. 10,000(1)(2) 1.5 14.38 1/08 90,400 229,200
Patterson 10,000(1)(2) 1.5 5.56 11/08 35,000 88,600
Stephen T. 15,000 2.3 14.38 1/08 135,600 343,800
Wendel 15,000 2.3 5.56 11/08 52,500 132,900
- --------------
</TABLE>
(1) One-fourth of the options become exercisable on each of the first four
anniversaries of the date of grant.
(2) Mr. Patterson left the Company in March 1999 before any of the options
became exercisable.
60
<PAGE>
The table below contains certain information concerning exercises of stock
options during the fiscal year ended December 31, 1998 by Messrs. Watson,
Williford, Carington, Patterson and Wendel and the fiscal year end value of
unexercised options held by Messrs. Watson, Williford, Carington, Patterson and
Wendel.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Fiscal 1998
and Fiscal Year End Option Values
Value of
Number of Unexercised
Unexercised Options in-the-Money
on December 31,1998 Options on
(#) December 31,
Exercisable/ 1998 ($)
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 56,250/83,750 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 with each of Messrs.
Watson, Williford, Carington and Wendel as well as with Dr. Lee T. Billingsley,
Abraxas' Vice President of Exploration, pursuant to which each of Messrs.
Watson, Williford, Carington, Wendel and Dr. Billingsley will receive
compensation as determined from time to time by the Board in its sole discretion
The employment agreements for Messrs. Watson, Williford, and Carington are
scheduled to terminate on December 21, 2002, and shall be automatically extended
for additional one-year terms unless the Company gives Messrs. Watson,
Williford, and Carington 120 days notice prior of the expiration of the original
term or any extension thereof of its intention not to renew the employment
agreement. If, during the term of Messrs. Watson's, Williford's and Carington's
employment agreements, Messrs. Watson, Williford or Carington'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 or Carington's death or retirement or by
Messrs. Watson, Williford or Carington, as the case may be, other than for good
reason (as defined in each of the employment agreements), then Messrs. Watson,
Williford and Carington will be entitled to receive a lump sum payment equal to
the greater of (a) his annual base salary for the last full year during which he
was employed by the company or (b) his annual base salary for the remainder of
the term of each of his respective employment agreements.
61
<PAGE>
If a change of control occurs during the term of Messrs. Watson's
Williford's and Carington's employment agreements, and if subsequent to such
change of control, Messrs. Watson, Williford, or Carington's employment is
terminated other than for cause or disability by reason of Messrs. Watson's,
Williford's or Carington's death or retirement or by Messrs. Watson, Williford
or Carington, as the case may be, other than for good reason, then Mr. Watson
will be entitled to the following: (1) if such termination occurs prior to the
end of the first year of the initial term of his employment agreement, a lump
sum payment equal to five (5) times his annual base salary; (2) if such
termination occurs after the end of the first year of the initial term of his
employment agreement but prior to the end of the second year of the initial term
of his employment agreement, a lump sum payment equal to four (4) times his
annual base salary; (3) if such termination occurs after the end of the second
year of the initial term of his employment agreement but prior to the end of the
third year of the initial term of his employment agreement, a lump sum payment
equal to three (3) times his annual base salary; and (4) if such termination
occurs after the end of the third year of the initial term of his employment
agreement a lump sum payment equal to 2.99 times his annual base salary and
Messrs. Williford and Carington will be entitled to the following: (1) if such
termination occurs prior to the end of the first year of the initial term of his
respective employment agreement, a lump sum payment equal to four (4) times his
annual base salary; (2) if such termination occurs after the end of the first
year of the initial term of his respective employment agreement but prior to the
end of the second year of the initial term of his respective employment
agreement, a lump sum payment equal to three (3) times his annual base salary;
and (3) if such termination occurs after the end of the second year of the
initial term of his respective employment agreement, a lump sum payment equal to
2.99 times his annual base salary.
The employment agreements for Mr. Wendel and Dr. Billingsley, originally
scheduled to terminate on December 31, 1998, have been automatically extended
for three years and will terminate on December 31, 2000, and may be
automatically extended for an additional year if by December 1 of the prior year
neither the Company nor Mr. Wendel 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 Mr. Wendel'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.
Wendel'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, Mr. Wendel's or Dr. Billingsley's
employment is terminated other than for cause or disability by reason of Mr.
Wendel's or Dr. Billingsley's death or retirement or by Mr. Wendel or Dr.
Billingsley, as the case may be, other than for good reason, then Mr. Wendel and
Dr. Billingsley will each be entitled to receive a lump sum payment equal to
three times his annual base salary.
If any lump sum payment to Messrs. Watson, Williford, Carington, Wendel or
Dr. Billingsley 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, and applicable
regulations thereunder, the amounts to be paid will be increased so that Messrs.
Watson, Williford, Carington, Wendel 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.
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
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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.
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, each of the
named executive officers and all directors and officers of the Company as a
group, owned beneficially as of January 20, 2000, the number and percentage of
outstanding shares of Common Stock of the Company indicated in the following
table:
<TABLE>
<CAPTION>
Name and Address of
Beneficial Owner Number of Shares (1) Percentage
- -------------------------------------------- --------------------- ------------
<S> <C> <C>
Halcyon/Alan B. Slifka Management Company LLC 2,957,549 (2) 13.04%
477 Madison Avenue, 8th Floor
New York, NY 10022
Franklin Resources, Inc. 3,081,079 (3) 13.7%
777 Mariners Island Blvd., 6th Floor
San Mateo, CA 94404
Robert L. G. Watson 576,558 (4) 2.5%
Franklin A. Burke 601,584 (5) 2.64%
James C. Phelps 184,461 (6) *
Chris E. Williford 120,503 (7) *
Stephen T. Wendel 70,884 (8) *
Lee T. Billingsley 56,975 (9) *
Robert W. Carington, Jr. 118,518(10) *
Craig S. Bartlett, Jr. 0 (11) *
Ralph F. Cox 0 (11) *
Frederick M. Pevow, Jr. 0 (11) *
Joseph A. Wagda 0 (11) *
All Officers and Directors as a 1,729,283 7.42%
Group (11 persons) (4)(5)(6)(7)(8)(9)(10)
- ---------
</TABLE>
* Less than 1%
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(1) Unless otherwise indicated, all shares are held directly with sole voting
and investment power.
(2) 2,957,549 shares of common stock beneficially owned by various Halcyon
limited partnerships managed by Halcyon/Alan B. Slifka Management Company
LLC, over which the manager disclaims beneficial ownership, as reported on
Schedule 13G filed with the SEC on January 6, 2000. An additional 509,260
shares of common stock are owned by a Halcyon limited partnership managed by
an affiliate of Halcyon/Alan B. Slifka Management Company LLC, over which
such affiliate disclaims beneficial ownership.
(3) Owned by one or more open or closed-end investment companies or other
managed accounts which are advised by direct and indirect investment
advisory subsidiaries (the "Adviser Subsidiaries") of Franklin Resources,
Inc. ("FRI"). Such advisory contracts grant to such Adviser Subsidiaries all
investment and/or voting power over the securities owned by such advisory
clients.
The voting and investment powers held by Franklin Mutual Advisers, LLC
("FMA"), formerly Franklin Mutual Advisers, Inc., an indirect wholly owned
investment advisory subsidiary of FRI, are exercised independently from FRI
and from all other investment advisor subsidiaries of FRI (FRI, its
affiliates and investment advisor subsidiaries other than FMA are
collectively referred to herein as "FRI affiliates"). Furthermore, FMA and
FRI internal policies and procedures establish informational barriers that
prevent the flow between FMA and the FRI affiliates of information that
relates to the voting and investment powers over the securities owned by
their respective advisory clients.
Chareles B. Johnson and Rupert H. Johnson, Jr. (the "Principal
Shareholders") each own in excess of 10% of the outstanding Common Stock of
FRI and are the principal shareholders of FRI. FRI and the Principal
Shareholders may be deemed to be, for purposes of Rule 13d-3 under the
Securities and Exchange Act of 1934, the beneficial owner of securities held
by persons and entities advised by FRI subsidiaries. FRI, the Principal
Shareholders and each of the Adviser Subsidiaries disclaim any economic
interest of beneficial ownership in any of the securities covered by this
statement.
FRI, the Principal Shareholders, and each of the Adviser Subsidiaries are of
the view that they are not acting as a "group" for purposes of Section 13(d)
under the 1934 Act and that they are not otherwise required to attribute to
each other the "beneficial ownership" of securities held by any of them or
by any persons or entities advised by FRI subsidiaries.
(4) 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 244,541 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.
(5) Includes 8,900 shares issuable upon exercise of options granted pursuant to
the Abraxas Petroleum Corporation 1984 Non-Qualified Stock Option Plan and
7,250 shares issuable upon exercise of options granted pursuant to the
Amended and Restated Director Stock Option Plan (the "Director Option
Plan").
(6) Includes 56,000 shares owned by Marie Phelps, Mr. Phelps' wife and 7,750
shares issuable upon exercise of options granted pursuant to the Director
Option Plan.
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(7) 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 77,500
shares issuable upon exercise of options granted pursuant to the Abraxas
Petroleum Corporation 1994 Long Term Incentive Plan.
(8) Includes 10,000 shares issuable upon exercise of options granted pursuant to
the Abraxas Petroleum Corporation 1993 Key Contributor Stock Option Plan and
63,995 shares issuable upon exercise of options granted pursuant to the
Abraxas Petroleum Corporation 1994 Long Term Incentive Plan.
(9) Includes 14,500 shares issuable upon exercise of options granted pursuant to
the Abraxas Petroleum Corporation 1994 Long Term Incentive Plan and 1,000
shares in a retirement account.
(10) Includes 80,000 shares issuable upon exercise of options granted pursuant
to the Abraxas Petroleum Corporation 1994 Long Term Incentive Plan.
(11) Does not include 75,000 shares issuable upon exercise of certain options
(none of which will vest within sixty (60) days of the filing of this
registration statement).
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SELLING SECURITY HOLDERS
The following table sets forth certain information concerning each of the
selling security holders. Assuming that the selling security holders offer all
of their securities, the selling security holders will not have any beneficial
ownership of Abraxas' securities. The second lien notes, Abraxas common stock
and contingent value rights are being registered to allow the selling security
holders to offer the second lien notes, Abraxas common stock and contingent
value rights for resale from time to time. See the heading entitled "Plan of
Distribution."
<TABLE>
<CAPTION>
Second Lien Notes
Principal Amount of
Second Lien Notes Principal Amount Principal Amount
Selling Security Holder Owned Prior to Offering Offered Owned After Offering
- ------------------------------ ----------------------- ---------------- --------------------
<S> <C> <C> <C>
Houlihan Lokey Howard & Zukin $1,718,000 $1,718,000 $ 0
Capital
Jefferies & Company, Inc. $3,282,000 $3,282,000 $ 0
</TABLE>
<TABLE>
<CAPTION>
Abraxas Common Stock
Number of Shares Owned Number of Shares Owned
Selling Security Holder Prior to Offering Number of Shares Offered After Offering
- -------------------------- ---------------------- ------------------------ ----------------------
<S> <C> <C> <C>
Houlihan Lokey Howard 163,354 163,354 0
& Zukin Capital
</TABLE>
<TABLE>
<CAPTION>
Contingent Value Rights
Number of CVRs Owned Number of VCR's
Selling Security Holder Prior to Offering Number of CVRs Offered Owned After Offering
- ------------------------- -------------------- ---------------------- --------------------
<S> <C> <C> <C>
Houlihan Lokey Howard 163,354 163,354 0
& Zukin Capital
</TABLE>
Since 1993, Jefferies has acted in various material roles relating to the
Company. Jefferies acted as one of the initial purchasers in the sale of the old
notes, as the initial purchaser of the first lien notes and served as financial
advisor to the Company during the recent exchange offer.
At the request and cost of the Company, Houlihan acted as financial advisor
to an informal committee of holders of the old notes during the exchange offer.
Other than such role, Houlihan has not had any material relationships with the
Company.
The second lien notes, Abraxas common stock and contingent value rights
offered pursuant to this prospectus were issued to Jefferies and Houlihan as
payment of fees and expenses related to the exchange offer. In connection with
such issuance, Jefferies and Houlihan were granted registration rights covering
the second lien notes, Abraxas common stock and contingent value rights pursuant
to a registration rights agreement, a form of which is filed as an exhibit to
the registration statement of which this prospectus is a part. This registration
statement is intended to satisfy such registration rights.
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<PAGE>
PLAN OF DISTRIBUTION
This prospectus covers the resale of the second lien notes, the shares of
Abraxas common stock and the contingent value rights by the selling security
holders. The selling security holders may sell their second lien notes, shares
of Abraxas common stock and contingent value rights under this prospectus:
o through one or more broker-dealers acting as either principal or agent;
o through underwriters;
o directly to investors; or
o any combination of these methods.
The selling security holders will fix a price or prices, and they may change the
price, of the second lien notes, shares of Abraxas common stock and contingent
value rights offered based upon:
o market prices prevailing at the time of sale;
o prices related to those market prices; or
o negotiated prices.
These sales may be effected in one or more of the following transactions (which
may involve crosses and block transactions):
o on any securities exchange or U.S. inter-dealer system of a registered
national securities association on which the common stock may be listed
or quoted at the time of sale;
o in the over-the-counter market;
o in private transactions;
o through the writing of options, whether the options are listed on an
o option exchange or otherwise; or
o through the settlement of short sales.
Broker-dealers, underwriters or agents may receive compensation in the form
of discounts, concessions from the selling security holders or the purchasers.
These discounts, concessions or commissions may be more than those customary for
the transaction involved. If any broker-dealer purchases the notes, shares of
common stock or contingent value rights as principal, it may effect resales of
the shares through other broker-dealers, and other broker-dealers may receive
compensation from the purchasers for whom they act as agents.
To comply with the securities laws of some states, if applicable, the
securities may be sold in these jurisdictions only through registered or
licensed brokers or dealers. In addition, in some states the securities may not
be sold unless they have been registered or qualified for sale or an exemption
from registration or qualification requirements is available and is complied
with.
The selling security holders and any underwriters, broker-dealers or agents
that participate in the sale of the securities may be "underwriters" within the
meaning of the Securities Act. Any discounts, commissions, concessions or profit
they earn on any resale of the shares may be underwriting discounts and
commissions under the Securities Act. Selling security holders who are
"underwriters" within the meaning of the Securities Act will be subject to the
prospectus delivery requirements of the Securities Act.
Any securities covered by this prospectus which qualify for sale under Rule
144 of the Securities Act may be sold under Rule 144 rather than under this
prospectus. A selling security holder may not sell any securities described in
this prospectus and may not transfer, devise or gift these securities by other
means not described in this prospectus.
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To the extent required, the specific securities to be sold, the names of the
selling security holders, the respective purchase prices and public offering
prices, the names of any agent, dealer or underwriter, and any applicable
commissions or discounts with respect to a particular offer will be set forth in
an accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement of which this prospectus is a part.
Under Abraxas' registration rights agreement with the selling security
holders, we have agreed to indemnify the selling security holders and each
underwriter, if any, against certain liabilities, including certain liabilities
under the Securities Act, or will contribute to payments the selling security
holders or underwriters may be required to make in respect of those liabilities.
We have agreed to pay substantially all of the expenses in connection with
the registration, offering and sale of the securities covered by this
prospectus, other than commissions, fees and discounts of underwriters, brokers,
dealers and agents.
We have agreed to keep the registration statement, of which this prospectus
is a part, effective for one year from the time this registration statement
becomes effective, subject to extension for any suspension or blackout periods
during which securities covered by this prospectus can not be sold.
DESCRIPTION OF THE SECOND LIEN NOTES
You can find definitions of certain terms used in this description under the
subheading "Certain Definitions." In this description, the word "Issuers" refer
to Abraxas and Canadian Abraxas and not to any of their subsidiaries.
The Issuers issued the second lien notes under an indenture entered into
among the Issuers, the Subsidiary Guarantors and Firstar Bank, 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" or the "TIA"). The terms of the second lien notes include those
stated in the indenture and those made part of the indenture by reference to the
Trust Indenture Act.
The indenture provides for issuance of up to $196.8 million of second lien
notes. The Issuers issued an aggregate principal amount of $188,778,000 million
of second lien notes in exchange for the old notes in the exchange offer and
$5.0 million in payment of certain fees incurred in connection with the exchange
offer. The following description is a summary of the material provisions of the
second lien notes, the indenture and the documents providing for the security
interests of the holders of the second lien notes. 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 second lien notes. A copy of the form of indenture and the security
documents may be obtained from the Issuers.
Brief Description of the Second Lien Notes and the Guarantees
The Second Lien Notes
The second lien notes:
o are general obligations of the Issuers;
o are secured by a second lien and a second fixed or floating charge on
substantially all of the Oil and Gas Assets of Abraxas and its Wholly
Owned Restricted Subsidiaries and the common stock of Grey Wolf owned by
the Issuers;
o rank equally with all of the Issuers' current and future senior
Indebtedness;
o rank senior to all of the Issuers' current future Subordinated
Indebtedness; and
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o are be unconditionally guaranteed by the Subsidiary Guarantors.
The Guarantees
The second lien notes are jointly and severally guaranteed (the
"Guarantees") by the following subsidiaries of the Issuers:
o Sandia; and
o Wamsutter.
The Guarantees of the second lien notes:
o are general obligations of each Subsidiary Guarantor;
o are senior in right of payment to all existing and future Subordinated
Indebtedness of each Subsidiary Guarantor;
o are on an equal basis with all existing and future Senior Indebtedness of
each Subsidiary Guarantor;
o are secured by a second lien or charge on all of the Oil and Gas Assets
of the Subsidiary Guarantors; and
o are limited for each Subsidiary Guarantor to the maximum amount which
will result in each Guarantee's not being a fraudulent conveyance or
fraudulent transfer.
Each Subsidiary Guarantor that makes a payment or distribution under its
Guarantee will be entitled to a contribution from each other Subsidiary
Guarantor in a prorata amount based on the net assets of each Subsidiary
Guarantor.
Each Subsidiary Guarantor may consolidate with or merge into or sell its
assets to the Issuers 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 the description of the
covenant in "Merger, Consolidation and Sale of Assets" below. In the event all
of the Capital Stock of a Subsidiary Guarantor is sold by the Issuers and/or one
or more of their Restricted Subsidiaries and the sale complies with the
provisions set forth in "Limitation on Asset Sales," such Subsidiary Guarantor's
Guarantee and any related Collateral will be released.
Principal, Maturity and Interest
The indenture provides for the issuance of up to $196.8 million of second
lien notes thereunder. The second lien notes are issued in full registered form
only, without coupons, in denominations of $1,000 and integral multiples of
$1,000. The second lien notes mature on November 1, 2004.
Interest on the second lien notes accrues at the rate of 11.5% per annum and
is payable semi-annually on each November 1 and May 1, commencing on May 1,
2000, to the Persons who are registered holders at the close of business on the
April 15 and October 15 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 11.5% per annum.
Interest on the second lien notes accrues from and including the most recent
date to which interest has been paid on the old notes with interest beginning to
accrue on November 1, 1999. Interest is computed on the basis of a 360-day year
comprised of twelve 30-day months.
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Payment of Taxes
All payments made by Canadian Abraxas or any Subsidiary Guarantor under or
with respect to the second lien notes or its Subsidiary Guarantee will be made
free and clear of any tax, duty, levy, impost, assessment or other Canadian
government or provincial charges. These items are sometimes collectively called
"Taxes" in this "Description of the Second Lien Notes."
If Canadian Abraxas or any Subsidiary Guarantor or any successor, as the
case may be, were required to withhold or deduct any Taxes from any payment made
under or with respect to the second lien notes or any Subsidiary Guarantee,
Canadian Abraxas or such Subsidiary Guarantor, as the case may be, 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. However, no Additional
Amounts will be payable with respect to a payment made to a holder (an "Excluded
Holder") in respect of a beneficial owner:
o with which the Issuers 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
o 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 second lien notes or the
receipt of payments thereunder.
Canadian Abraxas and the Subsidiary Guarantors will also:
o make such withholding or deduction; and
o remit the full amount deducted or withheld to the relevant governmental
authority in accordance with applicable law.
If Canadian Abraxas and the Subsidiary Guarantors pay these Taxes, they will
furnish certified copies of tax receipts evidencing such payment within 30 days
of payment to the holders.
Canadian Abraxas and 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 :
o any Taxes so levied or imposed on and paid by such holder as a result of
payments made under or with respect to the second lien notes or any
Subsidiary Guarantee,
o any liability (including penalties, interest and expenses) arising
therefrom or with respect thereto, and
o any Taxes imposed with respect to any reimbursement under the two clauses
above 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.
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 of the second lien notes, it also includes the payment of Additional Amounts
to the extent that, in such context, Additional Amounts are, were or would be
payable.
The Issuers will also 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 second lien notes or any other document or instrument in
relation thereto, or from the receipt of any payments with respect to the second
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lien notes, excluding such taxes, charges or similar levies imposed by any
jurisdiction outside of Canada, the jurisdiction of incorporation of any
successor of either of the Issuers or any jurisdiction in which a paying agent
is located, and have agreed to indemnify the holders for any such taxes paid by
such holders.
The foregoing obligations will survive any termination, defeasance or
discharge of the indenture and the payment of all amounts owing under or with
respect to the second lien notes and any Subsidiary Guarantee.
Paying Agent and Registrar; Transfer and Exchange
Initially, the Trustee will act as registrar for the second lien notes and
as paying agent. The second lien 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 101 East 5th Street, St. Paul, Minnesota
55101. The Issuers will pay principal (and premium, if any) and interest on the
second lien notes at the office of the paying agent in the Borough of Manhattan
in the City of New York, State of New York. In addition, in the event the second
lien notes do not remain in book-entry form, interest may be paid, at the
Issuers' option, by wire transfer or check mailed to the registered addresses of
the holders as shown on the note register. The Issuers may change the paying
agent and registrar without notice to holders of the second lien notes. The
second lien notes will be treated as a single class of securities under the
indenture.
Redemption
Optional Redemption
The Issuers may redeem the second lien notes, at their option, in whole at
any time or in part from time to time, on and after December 1, 2000, at the
redemption prices expressed as percentages of the principal amount set forth
below. If the Issuers redeem the second lien notes, the Issuers must also pay
interest accrued and unpaid to the applicable redemption date. The redemption
prices during the twelve-month period beginning on December 1 of the years
indicated are set forth below:
Year Percentage
2000.............................. 105.750%
2001.............................. 102.875%
2002 and thereafter............... 100.000%
In addition, prior to December 1, 2000, the Issuers may redeem up to 50% of
the aggregate principal amount of the second lien notes at a redemption price of
111.50% of the principal amount, plus accrued and unpaid interest to the date of
redemption with the net proceeds of one or more Equity Offerings. The Issuers
may not cause a redemption from the proceeds of an Equity Offering unless:
o at least 50% of the aggregate principal amount of the second lien notes
remains outstanding immediately after giving effect to any such
redemption (with second lien notes owned by the Issuers or any of their
Affiliates deemed not to be outstanding); and
o redemption occurs within 60 days after the consummation of any such
Equity Offering.
If the Issuers redeem less than all of the second lien notes, selection of
second lien 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 second lien notes are listed or, if the second lien 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 deems fair and appropriate. The Issuers will not
redeem second lien notes in principal amounts of less than $1,000. In addition,
if a partial redemption is made with the proceeds of an Equity Offering,
selection of second lien 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 to the procedures of The Depository Trust Company (the
"DTC")), unless such method is otherwise prohibited. The Issuers will mail
notice of redemption at least 30 and not more than 60 days before the redemption
date. The notice will describe the amount of second lien notes being redeemed,
if less than the entire principal amount. Interest will cease to accrue on
second lien notes which are redeemed on the redemption date.
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Security
All of the Obligations of the Issuers under the second lien notes and the
indenture are secured by a second priority Lien, but subject to Permitted Liens,
on substantially all of the Oil and Gas Assets of the Issuers and the Subsidiary
Guarantors, and by a second priority Lien, subject to Permitted Liens, on
substantially all of any 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 Capital Stock of Grey Wolf owned by the Issuers,
such Lien being junior to the Liens securing the First Lien Notes. The Oil and
Gas Assets that initially secure such Obligations represent approximately 99% of
the PV-10 value at December 31, 1998.
If the second lien notes become due and payable prior to maturity or are not
paid in full at maturity, 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 right to
foreclose on the Collateral is, however, subject to a 180-day standstill period
in favor of the holders of the First Lien Notes described below. Subject to the
right of the holders of the First Lien Notes, the proceeds received from the
sale of any Collateral that is the subject of a foreclosure or collection suit
will 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 second lien 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.
If an Event of Default has occurred, the Trustee or a holder, as the case
may be, must give the First Lien Notes Representative written notice (a
"Standstill Period Commencement Notice") prior to taking action to enforce its
foreclosure rights with respect to any of the Collateral in connection with such
Event of Default, with such notice stating that an Event of Default has occurred
under the indenture and stating that such notice is being given to commence a
Standstill Period. The Trustee and such holder will not be allowed to take a
foreclosure action with respect to such Event of Default until 180 days have
elapsed since the date such Standstill Period Commencement Notice is given by
the Trustee or such holder to the First Lien Notes Representative (a "Standstill
Period"), unless the First Lien Notes Representative consents to the taking of
such foreclosure action and the First Lien Notes Representative has authority to
give such consent on behalf of the holders of the First Lien Notes pursuant to
the First Lien Indenture. The foregoing provisions of this paragraph shall cease
to be applicable upon the payment in full of all Indebtedness under the First
Lien Notes and the First Lien Indenture. Nothing in this paragraph shall be
construed as limiting any right of the Trustee and/or the holders of the second
lien notes to assert any rights they may have to any proceeds arising from any
foreclosure or other such realization on the Collateral by the First Lien Notes
Representative, by any holder or holders of any of the First Lien Notes or by
any trustee or other person acting for or on behalf of the First Lien Notes
Representative or any holder or holders of any of the First Lien Notes.
There can be no assurance that the Trustee will be able to sell the
Collateral without substantial delays or compromises in addition to the 180-day
standstill or that the proceeds obtained will be sufficient to pay all amounts
owing to holders of the second lien notes. See "Risk Factors -- Adequacy of
Collateral." Third parties that have Permitted Liens (including, without
limitation, the holders of the First Lien Notes) 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 the summary of the covenant "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 second lien notes.
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Change of Control
If a Change of Control occurs, each holder will have the right to require
that the Issuers purchase all or a portion of such holder's second lien 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, to the date of purchase.
The Issuers must mail a notice of any Change of Control to each holder and
the Trustee no later than 30 days after the Change of Control occurs. The notice
will 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 is mailed, other than
as may be required by law (the "Change of Control Payment Date"). A Change of
Control Offer must remain open for a period of 20 Business Days or such longer
period as may be required by law. Holders electing to have a second lien note
purchased pursuant to a Change of Control Offer will be required to surrender
the second lien note, with the form entitled "Option of Holder to Elect
Purchase" on the reverse of the second lien note completed, to the paying agent
for the second lien 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 Issuers will not be required to make a Change of Control Offer 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 Issuers and purchases the
second lien 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
Issuers will have available funds sufficient to pay the Change of Control
purchase price for all the second lien notes that might be delivered by holders
seeking to accept the Change of Control Offer. In addition, the First Lien Notes
Indenture and the 11 1/2% Senior Notes due 2004, Series D indenture have
substantially identical change of control provisions as the indenture, which may
further restrict the ability of the Issuers to purchase the second lien notes.
In the event the Issuers are required to purchase second lien notes pursuant to
a Change of Control Offer, the Issuers expect that they would seek third party
financing to the extent they do not have available funds to meet their purchase
obligations. However, there can be no assurance that the Issuers would be able
to obtain such financing.
Neither the Board of Directors of Abraxas nor the Trustee may waive the
covenant relating to the Issuers' obligation to make a Change of Control Offer.
Restrictions in the indenture described in this Description of the Second Lien
Notes on the ability of the Issuers and their 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 Issuers, whether favored or opposed by the management of the
Issuers. Consummation of any such transaction in certain circumstances may
require repurchase of the second lien notes, and there can be no assurance that
the Issuers 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 Issuers by the management of the Issuers. 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 second lien notes protection in all circumstances from the adverse
aspects of a highly leveraged transaction, reorganization, restructuring, merger
or similar transaction.
The Issuers 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 second lien notes pursuant to a Change of Control Offer. These
rules require that the Issuers keep the offer open for 20 Business Days. They
also require that the Issuers notify holders of second lien notes of changes in
the offer and extend the offer for specified time periods if we amend the offer.
If the provisions of any securities laws or regulations conflict with the
"Change of Control" provisions in the indenture, the Issuers will comply with
the applicable securities laws and regulations and will not be deemed to have
breached their obligations under the "Change of Control" provisions of the
indenture.
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Certain Covenants
The indenture contains, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness
Other than the Permitted Indebtedness, Abraxas may not, and may not cause or
permit any of its Restricted Subsidiaries to, directly or indirectly, create,
incur, assume, guarantee, acquire, become liable, contingently or otherwise,
with respect to, or otherwise become responsible for payment of (collectively,
"incur") any Indebtedness. However, 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 Issuers and the Subsidiary Guarantors or any of
them may incur Indebtedness (including any Acquired Indebtedness), in each case,
if at the time of such event and after giving effect thereto on a pro forma
basis, both:
o Abraxas' Consolidated EBITDA Coverage Ratio would have been at least
equal to 2.5 to 1.0; and
o Abraxas' Adjusted Consolidated Net Tangible Assets are equal to or
greater than 150% of the aggregate consolidated Indebtedness of Abraxas
and its Restricted Subsidiaries.
For purposes of determining any particular amount of Indebtedness under this
covenant, guarantees of Indebtedness otherwise included in the determination of
the amount of Indebtedness 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 Abraxas or any Restricted
Subsidiary or which is secured by a Lien on an asset acquired by Abraxas 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.
The Issuers 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 such 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 second lien 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 such Issuer or such Subsidiary
Guarantor, as the case may be.
Limitation on Restricted Payments
The indenture defines the following as Restricted Payments if done by
Abraxas or any of its Restricted Subsidiaries:
o declare or pay any dividend or make any distribution (other than
dividends or distributions payable solely in Qualified Capital Stock of
Abraxas) on or in respect of shares of Abraxas' Capital Stock to holders
of such Capital Stock;
o purchase, redeem or otherwise acquire or retire for value any Capital
Stock of Abraxas 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 Abraxas or
warrants, rights or options to purchase or acquire shares of Qualified
Capital Stock of Abraxas;
o 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 an Issuer or a Subsidiary Guarantor; or
o make any Investment (other than a Permitted Investment).
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The Issuers may not make a Restricted Payment, if at the time of such
Restricted Payment or immediately after giving effect to the Restricted Payment:
o a Default or an Event of Default shall have occurred and be continuing;
o Abraxas is not able to incur at least $1.00 of additional Indebtedness
(other than Permitted Indebtedness) in compliance with the covenant
described under "Limitation on Incurrence of Additional Indebtedness"
above; or
o the aggregate amount of all 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 Abraxas) 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 Abraxas earned subsequent to the Issue Date and on
or prior to the last date of Abraxas' 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
Abraxas from any Person (other than a Restricted Subsidiary of
Abraxas) from the issuance and sale subsequent to the Issue Date
and on or prior to the Reference Date of Qualified Capital Stock
of Abraxas, plus
(iii) without duplication of any amounts included in
clause(ii) above, 100% of the aggregate net cash proceeds of any
equity contribution received by Abraxas from a holder of Abraxas'
Capital Stock (excluding, in the case of clauses (ii) and (iii),
any net cash proceeds from an Equity Offering to the extent used
to redeem the second lien 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 Abraxas or to any Restricted Subsidiary of
Abraxas from Unrestricted Subsidiaries (but without duplication of
any such amount included in calculating cumulative Consolidated
Net Income of Abraxas), or from redesignations of Unrestricted
Subsidiaries as Restricted Subsidiaries (in each case valued as
provided in the covenant described under "Limitation on
Designation of Unrestricted Subsidiaries" below), not to exceed,
in the case of any Unrestricted Subsidiary, the amount of
Investments previously made by Abraxas 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
Abraxas).
However, the Issuers may take the following actions:
o 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,
o if no Default or Event of Default shall have occurred and be continuing,
the acquisition of any shares of Capital Stock of Abraxas, either:
(A) solely in exchange for shares of Qualified Capital Stock
of Abraxas, or
(B) through the application of net proceeds of a substantially
concurrent sale for cash (other than to a Restricted Subsidiary of
Abraxas) of shares of Qualified Capital Stock of Abraxas,
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o if no Default or Event of Default shall have occurred and be continuing,
the acquisition of any Indebtedness of Abraxas or a Subsidiary Guarantor
that is subordinate or junior in right of payment to the second lien
notes or such Subsidiary Guarantor's Guarantee, as the case may be,
either:
(A) solely in exchange for shares of Qualified Capital Stock
of Abraxas, or
(B) through the application of net proceeds of a
substantially concurrent sale for cash (other than to a Restricted
Subsidiary of Abraxas) of (I) shares of Qualified Capital Stock of
Abraxas or (II) Refinancing Indebtedness; and
o 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, amounts expended for the payment of any dividend or
redemption payment, as described above, and for the acquisition of any shares of
Capital Stock of Abraxas through the application of net proceeds of a
substantially concurrent sale for cash (other than to a Restricted Subsidiary of
Abraxas) of shares of Qualified Capital Stock of Abraxas, as described above,
shall be included in such calculation.
Limitation on Asset Sales
Abraxas may not, and may not cause or permit any of its Restricted
Subsidiaries to, consummate an Asset Sale unless the consideration received is
at least equal to the fair market value of the assets sold or otherwise disposed
of, as determined in good faith by Abraxas' Board of Directors or senior
management of Abraxas, and at least 75% of the consideration received is cash or
Cash Equivalents and is received at the time of such disposition.
Within 180 days after the receipt of any Net Cash Proceeds from an Asset
Sale plus such additional time as may be necessary to complete a net proceeds
offer under the terms of the First Lien Indenture with respect to such Asset
Sale ("Net Cash Proceeds Application Period"), Abraxas or such Restricted
Subsidiary must apply the Net Cash Proceeds of such Asset Sale as follows:
o 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
o with respect to any Non-Collateral Proceeds remaining after application
pursuant to the preceding paragraph and any Net Cash Proceeds received
from an Asset Sale involving Collateral, Abraxas must 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 second
lien 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.
Abraxas will not, however, be required to apply Net Cash Proceeds received
from any Asset Sale to make a Net Proceeds Offer if, and only to the extent that
such Net Cash Proceeds are applied, within the Net Cash Proceeds Application
Period for such Asset Sale:
o to repay or prepay any Indebtedness outstanding under the First Lien
Notes or the First Lien Indenture;
o to repay or prepay any Indebtedness of Abraxas that is secured by a Lien
permitted to be incurred pursuant to the Section "Covenants- Limitation
on Liens";
o to pay interest on the second lien notes in an aggregate amount not to
exceed 5.75% of the aggregate original principal amount of the second
lien notes;
o to an investment or investments in Crude Oil and Natural Gas Related
Assets; or
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o to an investment or investments in properties or assets that replace the
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 Abraxas and its Restricted Subsidiaries ("Replacement
Assets"), with the properties or assets constituting such Crude Oil and
Natural Gas Related Assets or Replacement Assets and any non-cash
consideration received being made subject to the Lien of the indenture
and the security documents to the extent the Net Cash Proceeds used to
purchase such properties or assets arose from the sale of properties or
assets that were subject to such Lien, provided that any such properties
or assets that are Oil and Gas Assets shall be made subject to such Lien
in any event.
In addition, if at the end of the Net Cash Proceeds Application Period for
such Asset Sale, Abraxas or one of its Restricted Subsidiaries has delivered to
the Trustee an officer's certificate:
o otherwise in compliance with the terms of the indenture;
o 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
o setting forth the aggregate cash consideration to be paid in connection
with such purchase from the Available Proceeds Amount;
then Abraxas shall have an additional period of time during which it may defer
making a Net Proceeds Offer with respect to the Available Proceeds Amount the
subject of such purchase and sale, such additional period of time ending on the
earlier of:
o 90 days after the end of the Net Cash Proceeds Application Period, and
o the date such purchase and sale agreement is terminated or cancelled.
If at any time any consideration (other than cash or Cash Equivalents)
received in connection with any Asset Sale is converted into or sold or
otherwise disposed of for cash, then such conversion or disposition shall be
treated like an Asset Sale and the Net Cash Proceeds will be applied as
described above.
Abraxas 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, will
be applied as required pursuant to this paragraph). If the amount of second lien
notes tendered is less than the amount of second lien notes that the Issuers
offered to purchase, Abraxas 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 six preceding paragraphs above, Abraxas and
its Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent:
o the consideration for such Asset Sale constitutes Replacement Assets
and/or Crude Oil and Natural Gas Related Assets; and
o such Asset Sale is for fair market value.
Any consideration not constituting Replacement Assets and Crude Oil and Natural
Gas Related Assets received by Abraxas or any of its Restricted Subsidiaries in
connection with any Asset Sale permitted to be consummated under this paragraph
will be treated as Net Cash Proceeds and, to the extent that the property
transferred or conveyed constitutes an Oil and Gas Asset, the property received
in exchange will constitute an Oil and Gas Asset.
All Collateral Proceeds delivered to the Trustee will constitute Trust
Moneys, and all Collateral Proceeds will be delivered by Abraxas:
o so long as any Indebtedness under the First Lien Notes remains
outstanding, to the First Lien Notes Representative; and
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o otherwise to the Trustee and all Collateral Proceeds delivered to the
Trustee will be deposited in the Collateral Account in accordance with
the indenture. These Collateral Proceeds may be withdrawn from the
Collateral Account for application by Abraxas as set forth 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 Abraxas as an entirety to a Person in a transaction
permitted under the covenant described in "Merger, Consolidation and Sale of
Assets," the successor corporation will be deemed to have sold the consolidated
assets of Abraxas not so transferred and must comply with the provisions of this
covenant as if it were an Asset Sale. In addition, the fair market value of the
consolidated assets of Abraxas deemed to be sold will be deemed to be Net Cash
Proceeds.
The Issuers will be required to mail notice of a Net Proceeds Offer to the
holders and the Trustee not less than 30 days nor more than 60 days before the
payment date for the Net Proceeds Offer, and shall comply with the procedures
set forth in the indenture. Upon receiving notice of the Net Proceeds Offer,
holders may elect to tender their second lien notes in whole or in part in
integral multiples of $1,000 principal amount in exchange for cash. To the
extent holders properly tender second lien notes in an amount exceeding the
Available Proceeds Amount, second lien notes will be repurchased on a pro rata
basis (based on amounts tendered).
The Issuers 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 second lien notes as a result of a Net Proceeds Offer. These rules
require that the Issuers keep the offer open for 20 Business Days. They also
require that the Issuers notify holders of second lien notes of changes in the
offer and extend the offer for specified time periods if the Issuers amend the
offer. If the provisions of any securities laws or regulations conflict with the
"Asset Sale" provisions of the indenture, the Issuers will comply with the
applicable securities laws and regulations and shall not be deemed to have
breached their obligations under the "Asset Sale" provisions of the indenture.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
Abraxas may not, and may 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 (each, a "Payment
Restriction") on the ability of any Restricted Subsidiary to:
o pay dividends or make any other distributions on or in respect of its
Capital Stock;
o make loans or advances, or to pay any Indebtedness or other obligation
owed, to Abraxas or any other Restricted Subsidiary;
o guarantee any Indebtedness or any other obligation of Abraxas or any
Restricted Subsidiary; or
o transfer any of its property or assets to Abraxas or any other Restricted
Subsidiary.
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 old notes, the indenture
governing the First Lien Notes, any security document or any of the security
documents entered into in connection with the indenture governing the old
notes or the indenture governing the First Lien Notes;
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(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
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 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 Abraxas 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 Restricted Subsidiaries may not issue any Preferred Stock (other than to
Abraxas or to a Wholly Owned Restricted Subsidiary) or permit any Person (other
than Abraxas or a Wholly Owned Restricted Subsidiary) to own any Preferred Stock
of any Restricted Subsidiary.
Limitation on Liens
Abraxas may not, and may 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:
o 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 any Liens securing the First Lien
Notes or any other Indebtedness under the First Lien Indenture;
o upon any other properties or assets of Abraxas 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:
(i) Liens existing on the Issue Date to the extent and in the
manner such Liens are in effect on the Issue Date,
(ii) Permitted Liens, and
(iii) any Liens securing the First Lien Notes or any other
Indebtedness under the First Lien Indenture.
Merger, Consolidation and Sale of Assets
Abraxas may 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 Abraxas' assets (determined on a consolidated basis for
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Abraxas and its Restricted Subsidiaries), whether as an entirety or
substantially as an entirety to any Person unless:
o either
(A) Abraxas or such Restricted Subsidiary, as the case may be, shall
be the surviving or continuing corporation or
(B) the Person (if other than Abraxas) formed by such consolidation or
into which Abraxas is merged or the Person which acquires by sale,
assignment, transfer, lease, conveyance or other disposition the
assets of Abraxas 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; 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 payment of the principal of,
premium, if any, and interest on all of the second lien notes and
the performance of every covenant of the second lien notes, the
indenture, and the security documents on the part of Abraxas to be
performed or observed;
o immediately after giving effect to such transaction and the assumption
contemplated 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), Abraxas 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 Abraxas 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 the covenant
described in "Limitation on Incurrence of Additional Indebtedness";
o immediately before and immediately after giving effect to such
transaction and the assumption contemplated 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
o Abraxas 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.
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 assets of one or more Restricted Subsidiaries the
Capital Stock of which constitutes all or substantially all of the assets of
Abraxas, shall be deemed to be the transfer of all or substantially all of the
assets of Abraxas.
Upon any consolidation or merger or any transfer of all or substantially all
of the assets of Abraxas in accordance with the foregoing, in which Abraxas is
not the continuing corporation, the successor Person formed by such
consolidation or into which Abraxas is merged or to which such transfer is made
shall succeed to, and be substituted for, and may exercise every right and power
of, Abraxas under the indenture and the second lien notes and thereafter (except
in the case of a lease), Abraxas will be relieved of all further obligations and
covenants under the indenture and the second lien notes.
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") may
not, and Abraxas may not cause or permit any Subsidiary Guarantor to,
consolidate with or merge with or into any Person other than an Issuer or
another Subsidiary Guarantor that is a Wholly Owned Restricted Subsidiary
unless:
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o the entity formed by or surviving any such consolidation or merger (if
other than the Subsidiary Guarantor) 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);
o such entity assumes by execution of a supplemental indenture all of the
obligations of the Subsidiary Guarantor under its Guarantee;
o immediately after giving effect to such transaction, no Default or Event
of Default shall have occurred and be continuing; and
o immediately after giving effect to such transaction and the use of any
net proceeds therefrom on a pro forma basis, Abraxas could satisfy the
Consolidated Net Worth and incurrence of Additional Indebtedness
provisions set forth above.
Any merger or consolidation of a Subsidiary Guarantor with and into either of
the Issuers (with either of the Issuers being the Surviving Entity) or another
Subsidiary Guarantor that is a Wholly Owned Restricted Subsidiary need only
comply with the officer's certificate and opinion of counsel provisions set
forth above.
Limitations on Transactions with Affiliates
Abraxas may not, and may not permit any of its Restricted Subsidiaries to,
directly or indirectly, engage in 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 any of their respective Affiliates unless,
o such transaction or series of related transactions is on terms that are
fair and reasonable to Abraxas or the applicable Restricted Subsidiary
and are no less favorable to Abraxas or the applicable Restricted
Subsidiary than would have been obtained in a comparable transaction at
such time on an arm's-length basis from a Person that is not an Affiliate
; and
o with respect to a transaction or series of related transactions involving
aggregate payments or other property with a fair market value in excess
of $1,000,000, Abraxas obtains Board approval which is evidenced by a
resolution stating that the Board has determined that such transaction
complies with the foregoing provisions.
In addition, if the transaction or series of related transactions involves an
aggregate fair market value of more than $10,000,000, Abraxas must, prior to the
consummation thereof, obtain a favorable opinion as to the fairness of such
transaction or series of related transactions to Abraxas 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.
The foregoing shall not apply to
o reasonable fees and compensation paid to and indemnity provided on behalf
of, officers, directors, employees or consultants of Abraxas or any
Restricted Subsidiary as determined in good faith by the Board of
Directors or senior management of Abraxas or such Restricted Subsidiary,
as the case may be;
o transactions exclusively between or among Abraxas and any of its
Restricted Subsidiaries or exclusively between or among such Restricted
Subsidiaries if such transactions are not otherwise prohibited by the
indenture; and
o Restricted Payments permitted by the indenture.
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Limitation on Restricted and Unrestricted Subsidiaries
The indenture provides that the Board of Directors of Abraxas 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
o any such redesignation shall be deemed to be an incurrence by Abraxas and
its Restricted Subsidiaries of the Indebtedness (if any) of such
redesignated Subsidiary under the covenant described in "Limitation on
Incurrence of Additional Indebtedness" above;
o 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, Abraxas could not incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) under the covenant
described in "Limitation on Incurrence of Additional Indebtedness" above;
and
o such Subsidiary assumes all of the obligations of a Subsidiary Guarantor
under a Guarantee.
The Board of Directors of Abraxas also may, if no Default or Event of
Default shall have occurred and be continuing or would arise from such a
designation, designate any Restricted Subsidiary none of whose Properties are
subject to any Liens of any security documents to be an Unrestricted Subsidiary
if:
o such designation is at that time permitted under the covenant described
in "Limitation on Restricted Payments" above; and
o immediately after giving effect to such designation, Abraxas could incur
$1.00 of additional Indebtedness (other than Permitted Indebtedness)
pursuant to the covenant described in "Limitation on Incurrence of
Additional Indebtedness" above.
Any such designation by such 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,
o 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 Abraxas' 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;
o 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 Abraxas' 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 Abraxas and its Restricted Subsidiaries in such
Unrestricted Subsidiary with, "net worth" calculated based upon the fair
market value of the assets of such Subsidiary as of any such date of
designation); and
o 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, such Board of Directors may not designate any
Subsidiary of Abraxas to be an Unrestricted Subsidiary if, after such
designation,
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o Abraxas 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
o 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 Abraxas that are not designated by the Board of
Directors as Restricted or Unrestricted Subsidiaries will be deemed to be
Restricted Subsidiaries. All Subsidiaries of an Unrestricted Subsidiary will be
Unrestricted Subsidiaries.
Additional Subsidiary Guarantees
If Abraxas 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
Abraxas 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
o execute and deliver to the Trustee a Guarantee in form reasonably
satisfactory to the Trustee pursuant to which such Restricted Subsidiary
shall unconditionally guarantee all of the Issuers' obligations under the
second lien notes and the indenture on the terms set forth in the
indenture;
o grant to the Trustee a second Lien on substantially all its Oil and Gas
Assets; and
o 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 Abraxas nor any of its Subsidiaries may take or omit to take any
action which 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 Abraxas nor any of its Subsidiaries
may grant to any Person, or suffer any Person (other than Abraxas 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 Abraxas nor any of its Subsidiaries may 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 Indebtedness under the First Lien
Notes or under the First Lien Indenture and the security documents entered into
in connection therewith, and other than pursuant to the indenture and the
security documents.
Limitation on the Sale or Issuance of Capital Stock of Restricted Subsidiaries
Abraxas may not, and may 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:
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o to Abraxas or a Wholly Owned Restricted Subsidiary of Abraxas; or
o if all shares of Capital Stock of such Restricted Subsidiary owned by
Abraxas and its Restricted Subsidiary are sold or otherwise disposed of.
In connection with any sale or disposition of Capital Stock of any
Restricted Subsidiary, Abraxas will be required to comply with the covenant
described under the caption "Limitation on Asset Sales."
Limitation on Conduct of Business
Abraxas 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.
Reports to Holders
Abraxas will deliver to the Trustee within 15 days after the filing of the
same with the SEC, copies of the quarterly and annual reports and of the
information, documents and other reports, if any, which Abraxas is required to
file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act.
Notwithstanding that Abraxas may not be subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act, Abraxas will file with the SEC, 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. Abraxas will also comply with the other provisions of
Section 314(a) of the TIA.
Events of Default
Each of the following is an Event of Default:
o the failure to pay interest (including any Additional Interest) on any
second lien notes when the same becomes due and payable and the default
continues for a period of 30 days;
o the failure to pay the principal on any second lien notes, when such
principal becomes due and payable, at maturity, upon redemption or
otherwise (including the failure to make a payment to purchase second
lien notes tendered pursuant to a Change of Control Offer or a Net
Proceeds Offer);
o a default in the observance or performance of any other covenant or
agreement contained in the indenture which default continues for a period
of 30 days after either of the Issuers or any Subsidiary Guarantor
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 second lien notes (except in the
case of a default with respect to observance or performance of any of the
terms or provisions of the covenants described above under "Change of
Control" or "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);
o 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 Abraxas or of any Restricted Subsidiary (or the payment
of which is guaranteed by Abraxas 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,
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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;
o 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) are rendered against Abraxas 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;
o certain events of bankruptcy; or
o any of the Guarantees or any of the security documents cease to be in
full force and effect or any of the Guarantees or any of the security
documents 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) or any obligor
or any Related Person denies or disaffirms its liability under any
security document to which it is a party.
If any Event of Default (other than the Event of Default relating to certain
events of bankruptcy) occurs and is continuing, the Trustee or the holders of at
least 25% in principal amount of outstanding second lien notes may declare the
principal of, premium, if any, and accrued and unpaid interest on all the second
lien notes to be due and payable by notice in writing to the Issuers 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 relating to certain events of bankruptcy occurs and is
continuing, then all unpaid principal of, and premium, if any, and accrued and
unpaid interest on all of the outstanding second lien notes will be immediately
due and payable without any declaration or other act on the part of the Trustee
or any holder.
After a declaration of acceleration with respect to the second lien notes as
described in the preceding paragraph, the holders of a majority in principal
amount of the second lien notes may rescind and cancel such declaration if:
o the rescission would not conflict with any judgment or decree;
o 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;
o 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;
o the Issuers have paid the Trustee its reasonable compensation and
reimbursed the Trustee for its expenses, disbursements and advances; and
o the Trustee shall have received an officer's certificate and an opinion
of counsel that such Event of Default has been cured or waived in the
event of the cure or waiver of an Event of Default relating to certain
events of bankruptcy.
No such rescission shall affect any subsequent Default or impair any right
consequent thereto.
Prior to the declaration of acceleration of the second lien notes, the
holders of a majority in principal amount of the second lien 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 second
lien notes.
Holders of the second lien notes may not enforce the indenture or the second
lien 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
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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 second lien notes will 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 Issuers are 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.
Possession, Use and Release of Collateral
Unless an Event of Default shall have occurred and be continuing, the
Issuers and the Subsidiary Guarantors will have the right to remain in
possession and retain exclusive control of the Collateral securing the second
lien notes (other than any cash, securities, obligations and Cash Equivalents
constituting part of the Collateral and deposited with the Trustee in the
Collateral Account or with the First Lien Notes Representative 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 Issuers 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 Issuers or the
grantor of the Lien on such property. The Issuers 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 Issuers
deliver to the Trustee the following:
o a notice from Abraxas 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 Abraxas 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 Issuers 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 summarized in the
description of certain covenants under "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;
o an officer's certificate of Abraxas stating that:
(A) such sale, transfer or other disposition complies with the terms
and conditions of the indenture, including the provisions summarized in
the description of certain covenants under " Limitation on Asset Sales,"
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"Limitation on Transactions with Affiliates," "Limitation on Restricted
and Unrestricted Subsidiaries" and "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 the deposit of proceeds into the Collateral
Account or with the First Lien Notes Representative 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,
(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 Abraxas
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 Abraxas in a transaction
which made in compliance with the provisions of the covenants described
under "Merger, Consolidation and Sale of Assets;" and
o 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 described above, so long as no Event of
Default shall have occurred and be continuing, the Issuers may, without
satisfaction of the conditions described 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 Issuers would be permitted to:
o 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;
o 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;
o 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;
o alter, repair, replace, change the location or position of and add to its
structures, machinery, systems, equipment, fixtures and appurtenances;
o demolish, dismantle, tear down or scrap any obsolete Collateral or
abandon any portion thereof; and
o grant farm-outs, leases or sub-leases in respect of real property to the
extent the foregoing does not constitute an Asset Sale.
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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,
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 so long as any
Indebtedness under the First Lien Notes remains outstanding, with the First Lien
Notes Representative and otherwise 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 Issuers, in Cash
Equivalents. The Issuers will not 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 funds deposited with the Trustee may be released to the Issuers by their
delivering to the Trustee an officer's certificate stating:
o no Event of Default has occurred and is continuing as of the date of the
proposed release;
(A) if such Trust Moneys represent Collateral Proceeds in respect of
an Asset Sale, that 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, such funds will be applied to repair
or replace property subject of a casualty or condemnation or reimburse
the Issuers 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 Abraxas and its Restricted Subsidiaries in compliance with the terms
of the indenture; and
o all conditions precedent in the indenture relating to the release in
question have been complied with; and
o 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,
o if the maturity of the second lien notes has been accelerated, and the
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 second lien notes to the extent of such Trust Moneys;
o if the Issuers so elect, 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
o if the Issuers so elect, 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 second lien notes on the maturity or upon
redemption or to the purchase of second lien 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.
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Legal Defeasance and Covenant Defeasance
As long as the Issuers take steps to make sure that holders receive all of
their payment under the second lien notes and are able to transfer the second
lien notes, the Issuers can elect to legally release themselves and any of the
Subsidiary Guarantors for any Obligations on the second lien notes (called
"Legal Defeasance") other than:
o the rights of holders to receive payments in respect of the principal of,
premium, if any, and interest on the second lien notes when such payments
are due;
o the Issuers' obligations with respect to the second lien notes to issue
temporary second lien notes, register second lien notes, replace
mutilated, destroyed, lost or stolen second lien notes and the
maintenance of an office or agency for payments;
o the rights, powers, trust, duties and immunities of the Trustee; and
o the Legal Defeasance provisions of the indenture.
In addition, the Issuers may, at their option and at any time, elect to have
the obligations of the Issuers and the Subsidiary Guarantors, if any, released
with respect to certain covenants that are described in the indenture ("Covenant
Defeasance"). 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 second lien notes. The occurrence of either Legal
Defeasance or Covenant Defeasance would result in a release of all Collateral
from the Lien of the indenture and the security documents.
In order to exercise either Legal Defeasance or Covenant Defeasance,
o the Issuers must irrevocably deposit with the Trustee, in trust, for the
benefit of the holders cash in U.S. dollars and/or non-callable U.S.
government obligations 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 second lien notes on their various due dates:
o in the case of Legal Defeasance, the Issuers must deliver to the Trustee
an opinion of counsel in the United States reasonably acceptable to the
Trustee confirming that:
(A) the Issuers have 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 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;
o in the case of Covenant Defeasance, the Issuers must deliver 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;
o 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;
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o 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 Abraxas or any of its Restricted
Subsidiaries is a party or by which Abraxas or any of its Restricted
Subsidiaries is bound;
o the Issuers must deliver an officer's certificate to the Trustee stating
that the deposit was not made by the Issuers with the intent of
preferring the holders over any other creditors of the Issuers or with
the intent of defeating, hindering, delaying or defrauding any other
creditors of the Issuers or others;
o the Issuers must deliver an officer's certificate and an opinion of
counsel to the Trustee, 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; and
o the Issuers must deliver an opinion of counsel to the Trustee 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. o
Satisfaction and Discharge
The Issuers and the Subsidiary Guarantors will have no further obligations
under the indenture, the security documents and the Guarantees as to all
outstanding second lien notes, other than surviving rights of registration of
transfer or exchange of the second lien notes, when
o either
(A) all the second lien notes have been delivered to the Trustee for
cancellation except lost, stolen or destroyed second lien notes which
have been replaced or paid and second lien notes which the Issuers have
deposited in trust or segregated and held in trust by the Issuers and
thereafter repaid to the Issuers or discharged from such trust, or
(B) all second lien notes have become due and payable and the Issuers
have deposited with the Trustee funds in sufficient to pay and discharge
the entire Indebtedness on the second lien notes on their various due
dates;
o the Issuers have paid all other sums payable under the indenture by the
Issuers; and
o the Issuers have delivered to the Trustee an officer's certificate and an
opinion of counsel stating that the Issuers have complied with all
conditions precedent under the indenture relating to the satisfaction and
discharge of the indenture.
Modification of the Indenture
From time to time, the Issuers, the Subsidiary Guarantors and the Trustee,
without the consent of the holders, may amend the indenture, the second lien
notes, the guarantees or any security document for certain specified purposes,
including curing ambiguities, defects or inconsistencies, to comply with any
requirements of the SEC 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.
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 second lien notes issued under the
indenture, except that, without the consent of each holder affected thereby, no
amendment may:
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o reduce the amount of second lien notes whose holders must consent to an
amendment;
o reduce the rate of or change or have the effect of changing the time for
payment of interest, including defaulted interest, on any second lien
notes;
o reduce the principal of or change or have the effect of changing the
fixed maturity of any second lien notes, or change the date on which any
second lien notes may be subject to redemption or repurchase, or reduce
the redemption or repurchase price therefor;
o make any second lien notes payable in money other than that stated in the
second lien notes;
o 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 second lien 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 second lien notes to waive Defaults or
Events of Default;
o amend, change or modify in any material respect the obligation of the
Issuers 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;
o modify or change any provision of the indenture, any security document or
the related definitions affecting ranking of the second lien notes or any
Guarantee in a manner which adversely affects the holders; or
o 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.
The provisions of the indenture concerning the 180 day standstill period
with respect to foreclosure actions and the provisions of the indenture
concerning the giving of notices of Default or an Event of Default to the First
Lien Notes Representative may not be amended without the consent of the First
Lien Notes Representative.
Governing Law
The indenture, the second lien notes, the Guarantees and the security
documents relating to Collateral located in the U.S. are 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 are governed by Alberta law.
Concerning The Trustee
Firstar Bank, National Association acts as Trustee. Its address is 101 East
5th Street, St. Paul, Minnesota 55101, 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 incorporated by reference into
the indenture will contain certain limitations on the rights of the Trustee,
should it become a creditor of the Issuers or any 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. If the
Trustee acquires any conflicting interest as described in the TIA, it must
eliminate such conflict or resign.
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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.
"Abraxas" means Abraxas Petroleum Corporation, a Nevada corporation.
"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 Abraxas or any of its Restricted
Subsidiaries, or
(2) which becomes Indebtedness of Abraxas or a Restricted Subsidiary in
connection with the acquisition of assets from such Person.
Acquired Indebtedness does not include Indebtedness 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 the sum of:
(A) Discounted future net revenues from proved oil and gas reserves of
Abraxas and its consolidated Restricted Subsidiaries, calculated in
accordance with SEC guidelines but 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 Abraxas' latest annual
consolidated financial statements,
(i) as increased by, as of the date of determination, the estimated
discounted future net revenues from:
(x) estimated proved oil and gas reserves acquired since the
date of such year-end reserve report; and
(y) 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 SEC guidelines (utilizing the prices utilized
in such year-end reserve report); and
(ii) decreased by, as of the date of determination, the estimated
discounted future net revenues from:
(x) estimated proved oil and gas reserves produced or disposed
of since the date of such year-end reserve report; and
(y) 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; and
(iii) in each case calculated in accordance with SEC guidelines
(utilizing the prices utilized in such year-end reserve report).
In the case of each of the determinations made pursuant to clauses (i)
through (iv), such increases and decreases shall be as estimated by Abraxas'
petroleum engineers, except that 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 shall be confirmed by a
nationally recognized firm of independent petroleum engineers, plus
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(B) The capitalized costs that are attributable to oil and gas
properties of Abraxas and its consolidated Restricted Subsidiaries to which
no proved oil and gas reserves are attributable, based on Abraxas' books and
records as of a date no earlier than the date of Abraxas' latest annual or
quarterly financial statements, plus
(C) The Net Working Capital on a date no earlier than the date of
Abraxas' latest consolidated annual or quarterly financial statements, plus
(D) With respect to each other tangible asset of Abraxas or its
consolidated Restricted Subsidiaries specifically including, but not to the
exclusion of any other qualifying tangible assets, Abraxas' or its
consolidated Restricted Subsidiaries' natural 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 Abraxas' 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 Abraxas and its Restricted
Subsidiaries, as of a date no earlier than the date of Abraxas' latest
audited financial statements, minus
The sum of minority interests. To the extent not otherwise taken into
account in determining Adjusted Consolidated Net Tangible Assets, any gas
balancing liabilities of Abraxas and its consolidated Restricted Subsidiaries
reflected in Abraxas' 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
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 Abraxas;
(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" of any specified Person means,
(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."
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"Asset Acquisition" means:
(1) an Investment by Abraxas 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 Abraxas or any Restricted Subsidiary; or
(2) the acquisition by Abraxas 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 Abraxas
or any of its Restricted Subsidiaries (including any Sale and Leaseback
Transaction) to any Person other than Abraxas 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
Abraxas or any Restricted Subsidiary, including any disposition by means of
a merger, consolidation or similar transaction.
For purposes of this definition, the term "Asset Sale" shall not include:
(3) the sale, lease, conveyance, disposition or other transfer of all or
substantially all of the assets of Abraxas in a transaction which is made in
compliance with the provisions of the covenant described in "Merger,
Consolidation and Sale of Assets;"
(4) any Investment in an Unrestricted Subsidiary which is made in
compliance with the provisions of the covenant described in "Limitation on
Restricted Payments" above;
(5) disposals or replacements of obsolete equipment in the ordinary
course of business;
(6) the sale, lease, conveyance, disposition or other transfer by
Abraxas or any Restricted Subsidiary of assets or property to Abraxas or one
or more Wholly Owned Restricted Subsidiaries;
(7) any disposition of Hydrocarbons or other mineral products for value
in the ordinary course of business;
(8) 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;
(9) the contemporaneous trade or exchange by Abraxas 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
Abraxas 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 Abraxas 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
Abraxas 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
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(10) the sale, lease, conveyance, disposition or other transfer by
Abraxas 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 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 that are 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.
"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;
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(5) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in the first clause above
entered into with any bank meeting the qualifications specified in the
fourth clause 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
Abraxas 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 Abraxas of any plan
or proposal for the liquidation or dissolution of Abraxas (whether or not
otherwise in compliance with the provisions of the indenture);
(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 Abraxas; or
(4) the replacement of a majority of the Board of Directors of Abraxas
over a two-year period from the directors who constituted the Board of
Directors of Abraxas 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 Abraxas 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 "Deposit; Use and Release 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.
"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 Abraxas 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),
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(B) Consolidated Interest Expense,
(C) the amount of any Preferred Stock dividends paid by Abraxas 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 Abraxas and its Restricted Subsidiaries in accordance with GAAP.
"Consolidated EBITDA Coverage Ratio" means, with respect to Abraxas, the
ratio of:
(1) Consolidated EBITDA of Abraxas 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 Abraxas for the Four Quarter Period.
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 Abraxas 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 Abraxas 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 Abraxas 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 Abraxas 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.
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"Consolidated Fixed Charges" means, with respect to Abraxas 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 Abraxas 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 Abraxas (other than dividends paid in Qualified
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 Abraxas for any
period, the sum of, without duplication:
(1) the aggregate of the interest expense of Abraxas 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 Abraxas and its Restricted
Subsidiaries during such period, as determined on a consolidated basis in
accordance with GAAP.
"Consolidated Net Income" means, with respect to Abraxas for any period, the
aggregate net income (or loss) of Abraxas 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 Abraxas 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 Abraxas has an interest, other
than a Restricted Subsidiary, except to the extent of cash dividends or
distributions actually paid to Abraxas 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 Abraxas by consolidation or merger or
as a transferee of Abraxas' 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.
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"Consolidated Non-cash Charges" means, with respect to Abraxas, for any
period, the aggregate depreciation, depletion, amortization and other non-cash
expenses of Abraxas and its Restricted Subsidiaries reducing Consolidated Net
Income of Abraxas 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
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 Abraxas 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 Abraxas or any Restricted
Subsidiary of Abraxas which is related to the business of Abraxas 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 Abraxas
or any Restricted Subsidiary of Abraxas 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 second lien
notes.
"Equity Offering" means an offering of Qualified Capital Stock of Abraxas.
"Event of Default" has the meaning set forth under "Events of Default".
"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
Abraxas acting reasonably and in good faith and shall be evidenced by a Board
Resolution of Abraxas delivered to the Trustee; provided, however, that
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(1) if the aggregate non-cash consideration to be received by Abraxas 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.
"First Lien Indenture" means the Indenture dated March 26, 1999 executed by
Abraxas, as issuer, and Norwest Bank Minnesota, National Association, as
trustee, or any successor or replacement agreement, whether by the same or any
other trustee, agent, note holder or group of note holders, lender or group of
lenders, together with the related documents (including, without limitation, any
guarantee agreements and security documents), in each case as such indenture and
documents have been or may be amended (including any amendment and restatement
thereof), supplemented or otherwise modified from time to time, including any
agreements extended the maturity of, refinancing, replacing or otherwise
restructuring all or any portion of the Indebtedness under such agreements.
"First Lien Notes" means the $63,500,000 12-7/8% Senior Notes due 2003 of
Abraxas issued pursuant to the First Lien Indenture as such notes have been or
may be amended (including any amendment and restatement thereof), supplemented
or otherwise modified from time to time, including any agreements extending the
maturity of, refinancing, replacing or otherwise restructuring all or any
portion of the Indebtedness under such notes.
"First Lien Notes Representative" means the trustee under the First Lien
Indenture or any other Person designated to the Trustee in a First Lien Notes
Representative Change Notice.
"First Lien Notes Representative Change Notice" means a written notice of a
change in the identity and/or address of the First Lien Notes Representative
which certifies to the Trustee (a) with respect to such a notice that gives
notice of a new First Lien Notes Representative, that the Persons executing such
notice constitute the holders of at least 51% in aggregate principal amount of
Indebtedness under the First Lien Notes, or (b) with respect to such a notice
that only gives notice of a new address for the First Lien Notes Representative,
that the Person executing such notice is the then current First Lien Notes
Representative, and which sets forth the new identity (by name, and by
jurisdiction of organization as applicable) and/or the new address of the First
Lien Notes Representative.
"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.
"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,
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(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
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 Abraxas. The "amount" or "principal amount"
of Indebtedness at any time of determination as used herein is 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 Abraxas,
and
(2) in the judgment of the Board of Directors of Abraxas, is otherwise
disinterested, independent and qualified to perform the task for which it is
to be engaged.
"Institutional Accredited Investor" means an institution that is an
"accredited investor" as that term is defined in Rule 501 (a) (1), (2), (3) or
(7) under the Securities Act.
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"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
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 Abraxas and its Restricted Subsidiaries on commercially
reasonable terms in accordance with normal trade practices of Abraxas 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 Abraxas 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 Abraxas, Abraxas 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 second lien notes.
"Issuers" means Abraxas Petroleum Corporation, a Nevada corporation, and
Canadian Abraxas Petroleum Limited, an Alberta corporation.
"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
Abraxas and its 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.
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"Mortgage" means a mortgage (or deed of trust) dated as of the Issue Date
granted by Abraxas or any Restricted Subsidiary of Abraxas 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 Abraxas or any of its
Restricted Subsidiaries from such Asset Sale, sale, transfer or other
disposition net of:
(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
Abraxas) to be provided by Abraxas 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 Abraxas 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 second lien 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 First Lien Notes, the old notes or the second lien notes) of
Abraxas or such Restricted Subsidiary which is secured by a Lien on the
property subject of the Asset Sale, sale, transfer or other disposition.
"Net Cash Proceeds Application Period" has the meaning set forth under
"Certain Covenants--Limitation on Asset Sales".
"Net Working Capital" means:
(1) all current assets of Abraxas and its consolidated Subsidiaries,
minus
(2) all current liabilities of Abraxas and its consolidated
Subsidiaries, except current liabilities included in Indebtedness,
in each case as set forth in financial statements of Abraxas 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:
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(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,
(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 Abraxas and/or any of Abraxas' Restricted
Subsidiaries.
"Payment Restriction" has the meaning set forth in the description of the
covenants "Limitation on Dividend and Other Payment Restrictions Affecting
Restricted Subsidiaries."
"Permitted Indebtedness" means, without duplication, each of the following:
(1) Indebtedness under the second lien notes, the indenture, the
Guarantees and the security documents;
(2) Interest Swap Obligations of Abraxas or a Restricted Subsidiary
covering Indebtedness of Abraxas or any of its Restricted Subsidiaries;
provided, however, that such Interest Swap Obligations are entered into to
protect Abraxas 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 Abraxas or to a Wholly
Owned Restricted Subsidiary for so long as such Indebtedness is held by
Abraxas or a Wholly Owned Restricted Subsidiary, in each case subject to no
Lien held by a Person other than Abraxas or a Wholly Owned Restricted
Subsidiary; provided, however, that if as of any date any Person other than
Abraxas 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 Abraxas 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 Abraxas to any Wholly Owned Restricted Subsidiary that is
not a Subsidiary Guarantor is unsecured and subordinated, pursuant to a
written agreement, to Abraxas' Obligations under the indenture and the
second lien 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
Abraxas;
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(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 Abraxas or any of its Restricted Subsidiaries
represented by letters of credit for the account of Abraxas 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 Abraxas outstanding on the Issue
Date;
(9) Capitalized Lease Obligations and Purchase Money Indebtedness of
Abraxas 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 Abraxas 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 Abraxas 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 Abraxas or any of its Restricted
Subsidiaries in an aggregate principal amount at any time outstanding not to
exceed the sum of (i) $5,000,000 plus (ii) 5.0% of Adjusted Consolidated Net
Tangible Assets; and
(15) Indebtedness, including, but not limited to, the first lien notes
and the old notes, outstanding on the Issue Date (to the extent the
Indebtedness thereunder is not taken up by the second lien notes).
"Permitted Industry Investments" means:
(1) capital expenditures, including, without limitation, acquisitions of
Abraxas 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
Abraxas' Properties for other Abraxas Properties of at least equivalent
value as determined in good faith by the Board of Directors of Abraxas; and
(3) Investments of operating funds on behalf of co-owners of Crude Oil
and Natural Gas Properties of Abraxas or the Subsidiaries pursuant to joint
operating agreements.
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"Permitted Investments" means:
(1) Investments by Abraxas 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 Abraxas or a Restricted
Subsidiary that is not subject to any Payment Restriction;
(2) Investments in Abraxas 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 Abraxas' Obligations under
the second lien notes and the indenture;
(3) investments in cash and Cash Equivalents;
(4) Investments made by Abraxas 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 second lien notes and the Guarantees;
(3) Liens arising under the First Lien Notes Indenture or the security
documents entered into in connection therewith;
(4) Liens securing the First Lien Notes and the guarantees thereunder;
(5) 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 Abraxas 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;
(6) 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;
(7) Liens incurred on 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);
(8) 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 Abraxas or any of its
Restricted Subsidiaries;
(9) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any Property which is
not leased Property subject to such Capitalized Lease Obligation;
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(10) 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;
(11) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of Abraxas or
any of its Restricted Subsidiaries, including rights of offset and set-off;
(12) 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;
(13) Liens on pipeline or pipeline facilities, Hydrocarbons or
Properties of Abraxas and its Subsidiaries which arise out of operation of
law;
(14) 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 of Abraxas and its Subsidiaries or otherwise as
are customary in the oil and gas business;
(15) with respect to any Properties of Abraxas 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 Abraxas or
any Subsidiary determines in good faith to be necessary for the economic
development of such Property;
(16) 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);
(17) Liens in favor of collecting or payor banks having a right of
setoff, revocation, refund or chargeback with respect to money or
instruments of Abraxas or any Restricted Subsidiary on deposit with or in
possession of such bank;
(18) Liens securing Non-recourse Indebtedness;
(19) judgment and attachment Liens not giving rise to an Event of
Default;
(20) Liens securing Acquired Indebtedness 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 Abraxas or a Restricted Subsidiary and were not granted in
connection with, or in anticipation of, the incurrence of such Acquired
Indebtedness by Abraxas or a Restricted Subsidiary and (B) such Liens do not
extend to or cover any property or assets of Abraxas 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 Abraxas 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 Abraxas or a Restricted
Subsidiary; and
(21) Liens existing on the Issue Date;
(22) Liens securing Refinancing Indebtedness which is incurred to
Refinance any Indebtedness permitted under the indenture and which has been
secured by a Lien permitted under the indenture and which has been incurred
in accordance with the provisions of the indenture; provided, however, that
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 Property of Abraxas or any of its Restricted Subsidiaries not
securing the Indebtedness so Refinanced; and
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(23) Liens securing Indebtedness of Abraxas or any of its Restricted
Subsidiaries in an aggregate principal amount at any time outstanding not to
exceed the sum of (A) $5,000,000.00 plus (B) 5.0% of Adjusted Consolidated
Net Tangible Assets.
"Permitted Operating Obligations" means Indebtedness of Abraxas 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, Abraxas or any Restricted Subsidiary in the
ordinary course of business (excluding obligations related to the purchase by
Abraxas or any Restricted Subsidiary of Hydrocarbons for which Abraxas 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
Abraxas and/or the Restricted Subsidiaries of Abraxas 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" or "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.
"Qualified Institutional Buyer" shall have the meaning specified in Rule
144A under the Securities Act.
"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.
"Refinancing Indebtedness" means any Refinancing by Abraxas or any
Restricted Subsidiary of Abraxas of Indebtedness incurred in accordance with the
covenant described in "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 Abraxas 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
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Indebtedness being Refinanced is Indebtedness of Abraxas or a Subsidiary
Guarantor, then such Refinancing Indebtedness shall be Indebtedness solely
of Abraxas and/or such Subsidiary Guarantor and (b) if such Indebtedness
being Refinanced is subordinate or junior to the second lien notes or a
Guarantee, then such Refinancing Indebtedness shall be subordinate to the
second lien 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.
"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 in the covenant described
under "Limitation on Asset Sales."
"Restricted Payment" has the meaning set forth in the covenant described
under "Limitation on Restricted Payments."
"Restricted Subsidiary" means any Subsidiary of Abraxas (including, without
limitation, Canadian Abraxas and Sandia) that has not been designated by the
Board of Directors of Abraxas, by a Board Resolution delivered to the Trustee,
as an Unrestricted Subsidiary pursuant to and in compliance with the covenant
described under "Limitation on Restricted and Unrestricted Subsidiaries" above.
Any such designation may be revoked by a Board Resolution of Abraxas 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 Abraxas or a Restricted Subsidiary of any property, whether owned by
Abraxas or any Restricted Subsidiary at the Issue Date or later acquired which
has been or is to be sold or transferred by Abraxas 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.
"Subordinated Indebtedness" means Indebtedness of Abraxas or a Subsidiary
Guarantor that is subordinated or junior in right of payment to the second lien
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 Sandia and Wamsutter and each of Abraxas'
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 in the covenant described in
"Merger, Consolidation and Sale of Assets."
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"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
deposited with the Trustee pursuant to any Change of Control Offer, Net
Proceeds Offer or redemption or defeasance of any second lien notes.
"Unrestricted Subsidiary" means any Subsidiary of Abraxas designated as such
pursuant to and in compliance with the covenant described in "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 Abraxas delivered to the Trustee, subject to the
provisions of such covenant.
"Wamsutter" means Wamsutter Holdings, Inc.
"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 Abraxas or another Wholly Owned Restricted
Subsidiary.
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DESCRIPTION OF CAPITAL STOCK
Common Stock
Abraxas is authorized to issue 50,000,000 shares of common stock, par value
$.01 per share. At January 20, 2000, there were 22,747,118 shares of Abraxas
common stock issued and outstanding. Holders of the common stock are entitled to
cast one vote for each share held of record on all matters submitted to a vote
of stockholders and are not entitled to cumulate votes for the election of
directors. Holders of common stock do not have preemptive rights to subscribe
for additional shares of common stock issued by Abraxas.
Holders of the common stock are entitled to receive dividends as may be
declared by the Board of Directors out of funds legally available therefor.
Under the terms of the first lien notes indenture and the second lien notes
indenture, Abraxas may not pay dividends on shares of the common stock. In the
event of liquidation, holders of the common stock are entitled to share pro rata
in any distribution of Abraxas' assets remaining after payment of liabilities,
subject to the preferences and rights of the holders of any outstanding shares
of Preferred Stock. All of the outstanding shares of the common stock are fully
paid and nonassessable.
References herein to Abraxas' common stock include the common share purchase
rights distributed by Abraxas to its stockholders on November 17, 1994 as long
as they trade with the common stock. See "-- Stockholder Rights Plan".
Preferred Stock
Abraxas' Articles of Incorporation authorize the issuance of up to 1,000,000
shares of Preferred Stock, par value $.01 per share, in one or more series. The
Board of Directors is authorized, without any further action by the
stockholders, to determine the dividend rights, dividend rate, conversion
rights, voting rights, rights and terms of redemption, liquidation preferences,
sinking fund terms and other rights, preferences, privileges and restrictions of
any series of Preferred Stock, the number of shares constituting any such
series, and the designation thereof. The rights of the holders of common stock
will be subject to, and may be adversely affected by, the rights of holders of
any Preferred Stock that may be issued in the future.
Contingent Value Rights
General. The CVRs were issued under a CVR Agreement (the "CVR Agreement")
between Abraxas and American Stock Transfer & Trust Company. The following
description is a summary of the material provisions of the CVRs and the CVR
Agreement. It does not restate the CVR Agreement in its entirety. We urge you to
read the CVR Agreement because it, not this description, defines your rights as
a holder of CVRs. A copy of the CVR Agreement may be obtained from Abraxas. The
definitions of certain capitalized terms used in the following summary are set
forth below under "Certain Definitions."
Issuance of Shares at Maturity Date or Extended Maturity Date. The CVR
Agreement provides that, subject to adjustment as described under "Antidilution"
below, Abraxas will be required to issue to each holder of the CVRs (each such
person, a "CVR Holder") on the Maturity Date (as defined below), unless Abraxas
will, in its sole discretion, extend the Maturity Date to the Extended Maturity
Date (as defined below), then on the Extended Maturity Date, for each CVR held
by such CVR Holder, a number of shares of Abraxas common stock, if any, equal to
(a) the Target Price (as defined below) minus the Current Market Value divided
by (b) the Current Market Value; provided, however, in no event shall more than
62,014,179 shares of Abraxas common stock be issued in exchange for the CVRs, in
the aggregate, at the Maturity Date or more than 104,365,326 shares of Abraxas
common stock be issued in exchange for the CVRs, in the aggregate, at the
Extended Maturity Date, such maximum number of shares being subject to
adjustment as described under "Antidilution" below. Such determination by
Abraxas absent manifest error will be final and binding on Abraxas and the CVR
Holder.
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Abraxas may at its option extend the Maturity Date to the Extended Maturity
Date. Such option will be exercised by (i) publishing notice of an extension in
the Authorized Newspaper (as defined below) or (ii) furnishing notice to the CVR
Holders of such extension, in each case, not less than one business day
preceding the Maturity Date; provided, however, that no defect in any such
notice will affect the validity of the extension of the Maturity Date to the
Extended Maturity Date, and that any notice when published and mailed to a CVR
Holder whether or not actually received by such CVR Holder.
If the number of shares ultimately issuable under the CVRs is greater than
the number of authorized and unissued shares Abraxas has available at that time,
Abraxas will be required either to increase the authorized number of shares of
Abraxas common stock or to effect a reverse stock split in order to increase the
number of authorized and unissued shares of Abraxas common stock to an amount
sufficient to satisfy the number of shares issuable under the CVRs.
Determination that No Shares are Issuable With Respect to the CVRs. If the
Current Market Value of a share of the Abraxas common stock equals or exceeds
$5.68 on the Maturity Date or $5.97 on the Extended Maturity Date (if the
Maturity Date is extended by Abraxas to the Extended Maturity Date), as the case
may be, no shares of Abraxas common stock will be issuable with respect to the
CVRs. In addition, the CVRs will terminate if the average of the Per Share
Market Value (as defined below) equals or exceeds the Target Price for any
period of 30 Trading Days during any 45 consecutive Trading Days.
In the event that Abraxas determines that no shares of Abraxas common stock
are issuable with respect to the CVRs to the CVR Holders, Abraxas will give to
the CVR Holders notice of such determination. Upon making such determination and
absent manifest error, the CVRs will terminate and become null and void and the
CVR Holders will have no further rights with respect thereto. The failure to
give such notice or any defect therein will not affect the validity of such
determination.
Antidilution. In the event Abraxas in any manner subdivides (by stock split,
stock dividend or otherwise) or combines (by reverse stock split or otherwise)
the number of outstanding shares of Abraxas common stock, Abraxas will similarly
subdivide or combine the CVRs and will appropriately adjust the Target Price and
the maximum number of shares issuable on the Maturity Date and on the Extended
Maturity Date. Whenever such an adjustment is made, Abraxas will (i) promptly
prepare a certificate setting forth such adjustment and a brief statement of the
facts accounting for such adjustment, (ii) promptly file with American Stock
Transfer a copy of such certificate and (iii) mail a brief summary thereof to
each CVR Holder. American Stock Transfer will be fully protected in relying on
any such certificate and on any adjustment therein contained. Such adjustment
absent manifest error will be final and binding on Abraxas and the CVR Holders.
Each outstanding CVR Certificate will thenceforth represent that number of
adjusted CVRs necessary to reflect such subdivision or combination and reflect
the adjusted Target Price.
Consolidation, Merger and Sale of Assets. The CVR Agreement provides that
Abraxas may, without the consent of the holders of any of the outstanding CVRs,
consolidate or merge with or into any other entity or convey, transfer or lease
its properties and assets substantially as an entirety to any entity, provided
that (i) the Surviving Person (as defined below) assumes Abraxas' obligations
under the CVRs and the CVR Agreement and (ii) Abraxas delivers to American Stock
Transfer an officer's certificate regarding compliance with the foregoing. For
the purposes hereof, "convey, transfer or lease its properties and assets
substantially as an entirety" shall mean properties and assets contributing in
the aggregate at least 80% of Abraxas' total revenues as reported in Abraxas'
last available periodic financial report (quarterly or annual, as the case may
be) filed with the SEC.
In the event that Abraxas were merged out of existence, liquidated or
subject to some other event resulting in the lack of any market for the Abraxas
common stock (each, a "Transaction"), the holders of the CVRs would be entitled
to receive securities of the Surviving Person or such other consideration that
holders of shares of Abraxas common stock received in such a Transaction based
upon the price per share received by holders of shares of Abraxas common stock.
Prohibition on Short Positions in the Abraxas Common Stock. During the
Valuation Period, holders of CVRs will be prohibited under the terms of the CVR
Agreement from establishing short positions in Abraxas common stock or in
derivatives of Abraxas common stock.
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Certain Definitions.
"Authorized Newspaper" means The Wall Street Journal, or if The Wall Street
Journal shall cease to be published, or, if the publication or general
circulation of The Wall Street Journal shall be suspended for whatever reason,
such other English language newspaper as is selected by the Company with general
circulation in The City of New York, New York.
"Current Market Value" means with respect to the Maturity Date and the
Extended Maturity Date, the average of the highest closing bid prices during
normal trading hours in the over-the-counter market as reported on the OTC
Bulletin Board (or, if shares of Abraxas are traded over-the-counter as reported
on by the NASDAQ Stock Market or the NASDAQ Small Cap Market or listed on a
securities exchange, in such over-the-counter market or on such exchange) of
shares of Abraxas common stock for any 30 Trading Days during any 45 consecutive
Trading Day period that begins and ends in the Valuation Period.
"Extended Maturity Date" means May 21, 2001.
"Maturity Date" means December 21, 2000.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Per Share Market Value" means on any particular date (a) the closing bid
price per share of Abraxas common stock on such date on the principal stock
exchange on which Abraxas common stock has been listed or, if there is no such
price on such date, then the closing bid price on such exchange on the date
nearest preceding such date, or (b) if Abraxas common stock is not listed on any
stock exchange, the average of the high and low sales prices for a share of
Abraxas common stock in the over-the-counter market, as reported by the NASDAQ
Stock Market or the NASDAQ Small Cap Market for such date, or, if there is no
such price on such date, then the average of the high and low sales prices on
the date nearest preceding such date, or (c) if Abraxas common stock is not
quoted on the NASDAQ Stock Market or the NASDAQ Small Cap Market, the average of
the final bid and final asked prices for a share of Abraxas common stock in the
over-the-counter market as reported on the OTC Bulletin Board (or any similar
organization or agency succeeding to its functions of reporting prices), or (d)
if Abraxas common stock is no longer publicly traded, as determined by a
nationally recognized or major regional investment banking firm or firm of
independent certified public accountants of recognized standing (which may be
the firm that regularly examines the financial statements of Abraxas) selected
in good faith by the Board of Directors of Abraxas.
"Surviving Person" means any other Person into which Abraxas shall
consolidate with or merge into or the Person which acquires by conveyance or
transfer or which leases, the properties and assets of Abraxas substantially as
an entirety.
"Target Price" means (i) the price determined by multiplying $5.03 plus
daily interest at an annual rate of 11.5% divided by the number of shares of
Abraxas common stock issued in the exchange offer, (ii) at the Maturity Date,
$5.68 and (iii) at the Extended Maturity Date, $5.97. In each case, upon each
occurrence of an event specified under "Antidilution" above, such amounts, as
they may have been previously adjusted, shall be adjusted as described under
"Antidilution" above.
"Trading Day" means (a) a day on which Abraxas common stock is traded on the
principal stock exchange on which Abraxas common stock has been listed, or (b)
if Abraxas common stock is not listed on any stock exchange, a day on which
Abraxas common stock is traded in the over-the-counter market, as reported by
the NASDAQ Stock Market or the NASDAQ Small Cap Market, or (c) if Abraxas common
stock is not traded on the NASDAQ Stock Market or the NASDAQ Small Cap Market, a
day on which Abraxas common stock is traded in the over-the-counter market as
reported on the OTC Bulletin Board (or any similar organization or agency
succeeding to its functions of reporting prices).
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"Valuation Period" means the period beginning on the date of the closing of
the exchange offer and ending on the Maturity Date or the Extended Maturity
Date, as the case may be.
Warrants
Abraxas has warrants outstanding to purchase an aggregate of 13,500 shares
of Abraxas common stock. Associated Energy Managers, Inc. ("AEM"), has Warrants
to purchase 13,500 shares at an exercise price of $7.00 per share. AEM has
certain registration rights with respect to shares of the Abraxas common stock
issued pursuant to the exercise of such warrants. See " -- Registration Rights."
All outstanding warrants contain provisions that protect AEM against
dilution by adjusting the price at which the warrants are exercisable and the
number of shares of the Abraxas common stock issuable upon exercise thereof upon
the occurrence of certain events, including payment of stock dividends and
distributions, stock splits, recapitalizations, reclassifications, mergers,
consolidations or the issuance or sale of common stock or options, rights or
securities convertible into shares of the common stock at less than the current
market price. A holder of warrants has no rights as a stockholder of Abraxas
until the warrants are exercised. All warrants are currently exercisable,
although none have been exercised as of the date hereof.
Option Plans
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"), Abraxas 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. At January 1, 2000, there were options to
purchase 1,884,557 shares of Abraxas common stock outstanding, of which 685,133
were fully vested at an average exercise price of $2.06 per share. Abraxas
intends to adopt a new stock-based incentive plan providing for the issuance of
incentive stock options, non-qualified stock options and other stock-based
incentive compensation representing up to ten percent of the number of fully
diluted shares outstanding as of the time of adoption of the plan.
Registration Rights
The shares of the Abraxas common stock to be received by AEM upon exercise
of warrants and any shares of the Abraxas common stock owned by Endowment Energy
Partners, L.P. ("EEP") and Endowment Energy Partners II, Limited Partnership
("EEP II") are entitled to certain rights with respect to the registration of
such shares under the Securities Act.
Under the terms of the Registration Rights Agreement with EEP and EEP II, in
the event that Abraxas proposes to register any shares of the Abraxas common
stock or securities convertible into Abraxas common stock under the Securities
Act for its own account, except in certain circumstances, EEP and EEP II are
entitled to unlimited piggyback registrations, subject to the right of the
underwriters of any such offering to limit the number of shares included in such
registration. Abraxas has agreed to pay all expenses in connection with a
piggyback registration except for underwriting discounts and selling commissions
which shall be borne by EEP and/or EEP II with respect to shares of the Abraxas
common stock owned by EEP and EEP II other than the 211,500 shares of Abraxas
common stock acquired by EEP and EEP II through the exercise of the warrants
formerly owned by EEP and EEP II ("Warrant Shares"). EEP and EEP II have the
additional right to require Abraxas to effect one demand registration of all
shares of the Abraxas common stock (other than Warrant Shares) in the aggregate
at any time and Abraxas is required to effect such registration, subject to
certain conditions and limitations. Abraxas is required to bear the expenses of
a demand registration except for underwriting discounts and selling commissions
which shall be borne by EEP and/or EEP II with respect to shares of Abraxas
common stock owned by EEP and EEP II other than Warrant Shares. Abraxas has
agreed to customary indemnities including an agreement to indemnify, subject to
certain limited exceptions, EEP and EEP II in connection with a demand
registration and a piggyback registration.
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Under the terms of its warrants, AEM has the right to unlimited piggyback
registrations. EEP and EEP II have the right to one demand registration in the
aggregate at any time after December 20, 1995 and unlimited piggyback
registrations with respect to Warrant Shares. Abraxas has agreed to pay all
expenses in connection with piggyback registrations by AEM and by EEP and EEP II
with respect to Warrant Shares and to share expenses equally with EEP and EEP II
with respect to Warrant Shares registered in a Demand Registration; provided,
however, all underwriting discounts and selling commissions shall be borne by
EEP, EEP II or AEM, as the case may be.
Under the terms of a Registration Rights Agreement with Halcyon/Alan B.
Slifka Management Company LLC ("Halcyon") and Franklin Resources, Inc.
("Franklin"), in the event that Abraxas proposes to register any shares of its
common stock or debt securities under the Securities Act for its own account,
except in certain circumstances, Halcyon and Franklin are entitled to unlimited
incidental registrations, subject to the right of the underwriters of any such
offering to limit the number of shares included in such registration. Halcyon
and Franklin each have the additional right to require Abraxas to effect one
demand registration of all of the second lien notes, Abraxas common stock and
contingent value rights (and any securities issuable pursuant to the terms
thereof) issued to them pursuant to the exchange offer, subject to certain
conditions and limitations including the right of the underwriters of such an
offering to limit the number of shares included in such registration. In
addition, Abraxas has agreed to pay all expenses in connection with a demand or
incidental registration except for underwriting discounts and selling
commissions which shall be borne by Halcyon and Franklin. Abraxas has agreed to
customary indemnities including an agreement to indemnify, subject to certain
limited exceptions, Halcyon and Franklin in connection with a demand
registration and an incidental registration.
Anti-takeover Effects of Certain Provisions of the Articles of Incorporation and
Bylaws
Abraxas' Articles of Incorporation and Bylaws provide for the Board of
Directors to be divided into three classes of directors serving staggered
three-year terms. As a result, approximately one-third of the Board of Directors
will be elected each year. The Articles of Incorporation and Bylaws provide that
the Board of Directors will consist of not less than three nor more than twelve
members, with the exact number to be determined from time to time by the
affirmative vote of a majority of directors then in office. The Board of
Directors, and not the stockholders, has the authority to determine the number
of directors, and could prevent any stockholder from obtaining majority
representation on Abraxas' Board of Directors by enlarging the Board of
Directors and by filling the new directorships with the stockholder's own
nominees. In addition, directors may be removed by the stockholders only for
cause.
The Articles of Incorporation and Bylaws provide that special meetings of
stockholders of Abraxas may be called only by the Chairman of the Board, the
President or a majority of the members of the Board of Directors. This provision
may make it more difficult for stockholders to take actions opposed by the Board
of Directors.
The Articles of Incorporation and Bylaws provide that any action required to
be taken or which may be taken by holders of Abraxas common stock must be
effected at a duly called annual or special meeting of such holders, and may not
be taken by any written consent of such stockholders. These provisions may have
the effect of delaying consideration of a stockholder proposal until the next
annual meeting unless a special meeting is called by the persons set forth
above. The provisions of the Articles of Incorporation and Bylaws prohibiting
stockholder action by written consent could prevent the holders of a majority of
the voting power of Abraxas from using the written consent procedure to take
stockholder action and taking action by consent without giving all the
stockholders of Abraxas entitled to vote on a proposed action the opportunity to
participate in determining such proposed action.
Stockholder Rights Plan
On November 17, 1994, the Board of Directors of Abraxas adopted a
stockholder rights plan (the "Stockholder Rights Plan"). Under the terms of the
Stockholder Rights Plan, the Board of Directors of Abraxas declared a dividend
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of one common share purchase right ("Stockholder Right") on each share of the
Abraxas common stock outstanding on November 17, 1994. Each Stockholder Right
entitles the holder thereof to buy one share of Abraxas common stock at an
exercise price of $40 per share, subject to adjustment.
The Stockholder Rights are not exercisable until the occurrence of specified
events. Upon the occurrence of such an event (which events are generally those
which would signify the commencement of a hostile bid to acquire Abraxas), the
Stockholder Rights then become exercisable (unless redeemed by the Board of
Directors) for a number of shares of Abraxas common stock having a market value
of four times the exercise price of the Stockholder Right. If the acquiror were
to conclude the acquisition of Abraxas, the Stockholder Rights would then become
exercisable for shares of the controlling/surviving corporation having a value
of four times the exercise price of the Stockholder Rights. If the Stockholder
Rights were exercised at any time, significant dilution would result, thus
making the acquisition prohibitively expensive for the acquiror. In order to
encourage a bidder to negotiate with the Board of Directors, the Stockholder
Rights Plan provides that the Stockholder Rights may be redeemed under
prescribed circumstances by the Board of Directors.
The Stockholder Rights are not intended to prevent a takeover of Abraxas and
will not interfere with any tender offer or business combination approved by the
Board of Directors. The Stockholder Rights Plan is intended to protect the
stockholders in the event of (a) an unsolicited offer to acquire Abraxas,
including offers that do not treat all stockholders equally, (b) the acquisition
in the open market of shares constituting control of Abraxas without offering
fair value to all stockholders and (c) other coercive takeover tactics which
could impair the Board's ability to fully represent the interests of the
stockholders.
Anti-Takeover Statutes
The Nevada General Corporation Law (the "Nevada GCL") contains two
provisions, described below as "Combination Provisions" and the "Control Share
Act," that may make more difficult the accomplishment of unsolicited or hostile
attempts to acquire control of a corporation through certain types of
transactions.
Restrictions on Certain Combinations Between Nevada Resident Corporations and
Interested Stockholders
The Nevada GCL includes certain provisions (the "Combination Provisions")
prohibiting certain "combinations" (generally defined to include certain
mergers, disposition of assets transactions, and share issuance or transfer
transactions) between a resident domestic corporation and an "interested
stockholder" (generally defined to be the beneficial owner of 10% or more of the
voting power of the outstanding shares of the corporation), except those
combinations which are approved by the board of directors before the interested
stockholder first obtained a 10% interest in the corporation's stock. There are
additional exceptions to the prohibition, which apply to combinations if they
occur more than three years after the interested stockholder's date of acquiring
shares. The Combination Provisions apply unless the corporation elects against
their application in its original articles of incorporation or an amendment
thereto, or in its bylaws. Abraxas' Articles of Incorporation and Bylaws do not
currently contain a provision rendering the Combination Provisions inapplicable.
Nevada Control Share Act
Nevada's Control Share Acquisition Act (the "Control Share Act") imposes
procedural hurdles on and curtails greenmail practices of corporate raiders. The
Control Share Act temporarily disenfranchises the voting power of "control
shares" of a person or group ("Acquiring Person") purchasing a "controlling
interest" in an "issuing corporation" (as defined in the Nevada GCL) not opting
out of the Control Share Act. In this regard, the Control Share Act will apply
to an "issuing corporation" unless, before an acquisition is made, the articles
of incorporation or bylaws in effect on the tenth day following the acquisition
of a controlling interest provide that it is inapplicable. Abraxas' Articles of
Incorporation and Bylaws do not currently contain a provision rendering the
Control Share Act inapplicable.
Under the Control Share Act, an "issuing corporation" is a corporation
organized in Nevada which has 200 or more stockholders, at least 100 of whom are
116
<PAGE>
stockholders of record (which for this purpose includes registered and
beneficial owners) and residents of Nevada, and which does business in Nevada
directly or through an affiliated company. The status of Abraxas at the time of
the occurrence of a transaction governed by the Control Share Act (assuming that
Abraxas' Articles of Incorporation or Bylaws have not theretofore been amended
to include an opting out provision) would determine whether the Control Share
Act is applicable.
The Control Share Act requires an Acquiring Person to take certain
procedural steps before he or it can obtain the full voting power of the control
shares. "Control shares" are the shares of a corporation (1) acquired or offered
to be acquired which will enable the Acquiring Person to own a "controlling
interest," and (2) acquired within 90 days immediately preceding that date. A
"controlling interest" is defined as the ownership of shares which would enable
the Acquiring Person to exercise certain graduated amounts (beginning with
one-fifth) of all voting power of the corporation. The Acquiring Person may not
vote any control shares without first obtaining approval from the stockholders
not characterized as "interested stockholders" (as defined below).
To obtain voting Rights in control shares, the Acquiring Person must file a
statement at the principal office of the issuer ("Offeror's Statement") setting
forth certain information about the acquisition or intended acquisition of
stock. The Offeror's Statement may also request a special meeting of
stockholders to determine the voting Rights to be accorded to the Acquiring
Person. A special stockholders' meeting must then be held at the Acquiring
Person's expense within 30 to 50 days after the Offeror's Statement is filed. If
a special meeting is not requested by the Acquiring Person, the matter will be
addressed at the next regular or special meeting of stockholders.
At the special or annual meeting at which the issue of voting rights of
control shares will be addressed, "interested stockholders" may not vote on the
question of granting voting rights to control the corporation or its parent
unless the articles of incorporation of the issuing corporation provide
otherwise. Abraxas' Articles of Incorporation do not currently contain a
provision allowing for such voting power.
If full voting power is granted to the Acquiring Person by the disinterested
stockholders, and the Acquiring Person has acquired control shares with a
majority or more of the voting power, then (unless otherwise provided in the
articles of incorporation or bylaws in effect on the tenth day following the
acquisition of a controlling interest) all stockholders of record, other than
the Acquiring Person, who have not voted in favor of authorizing voting rights
for the control shares, must be sent a notice advising them of the fact and of
their right to receive "fair value" for their shares. Abraxas' Articles of
Incorporation and Bylaws do not provide otherwise. Within 20 days of the mailing
of the notice, any such stockholder may demand to receive from the corporation
the "fair value" for all or part of his shares. "Fair value" is defined in the
Control Share Act as "not less than the highest price per share paid by the
Acquiring Person in an acquisition."
The Control Share Act permits a corporation to redeem the control shares in
the following two instances, if so provided in the articles of incorporation or
bylaws of the corporation in effect on the tenth day following the acquisition
of a controlling interest: (1) if the Acquiring Person fails to deliver the
Offeror's Statement to the corporation within 10 days after the Acquiring
Person's acquisition of the control shares; or (2) an Offeror's Statement is
delivered, but the control shares are not accorded full voting rights by the
stockholders. Abraxas' Articles of Incorporation and Bylaws do not address this
matter.
117
<PAGE>
LEGAL MATTERS
The validity of the second lien notes, the Abraxas common stock and the
contingent value rights offered hereby will be passed upon for Abraxas by Cox &
Smith Incorporated, San Antonio, Texas and the validity of the second lien notes
will be passed upon for Canadian Abraxas by Osler, Hoskin and Harcourt LLP,
Calgary, Alberta, Canada.
EXPERTS
The consolidated financial statements of Abraxas Petroleum Corporation at
December 31, 1998 and 1997, 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
report thereon appearing elsewhere herein, and are 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 prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given on the authority of such firm as experts in
accounting and auditing.
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 those firms as experts with
respect to matters contained in such reserve reports.
WHERE YOU CAN FIND MORE INFORMATION
Abraxas and Canadian Abraxas have filed the registration statement regarding
the second lien notes, the Abraxas common stock and the contingent value rights
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, proxy statements and
other information with the SEC. Our SEC filings are available to the public over
the Internet at the SEC's web site at http://www.sec.gov. You may also read and
copy any document Abraxas files at the SEC's public reference room at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the SEC
located at 7 World Trade Center, Suite 1300, New York, New York 10048 and at 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. You may obtain
information on the operation of the SEC's public reference room in Washington,
D.C. by calling the SEC at 1-800-SEC-0330.
118
<PAGE>
GLOSSARY OF TERMS
Unless otherwise indicated in this prospectus, 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
prospectus.
"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.
"MMBTUpd" means million British Thermal Units per day.
"MMcf" means million cubic feet.
119
<PAGE>
"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.
120
<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-8
New Cache Petroleums Ltd.
Report of Independent Auditors...................................... F-34
Balance Sheet at November 30, 1998.................................. F-25
Statement of Loss and Retained Earnings (Deficiency) for the
year ended November 30, 1998...................................... F-36
Statement of Cash Flows for the year ended November 30, 1998........ F-37
Notes to Financial Statements....................................... F-38
F-1
<PAGE>
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 (deficit),
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 income (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>
Reveune:
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 ... $ .27 $ (1.11) $ (13.26)
Extraordinary item ........................ (.07) - -
------------ ------------ ------------
Net income (loss) per common share ............ $ .20 $ (1.11) $ (13.26)
============ ============ ============
Earnings (loss) per common share - assuming dilution:
Income (loss) before extraordinary item ... $ .23 $ (1.11) $ (13.26)
Extraordinary item ........................ (.06) - -
------------ ------------ ------------
Net income (loss) per common share - assuming
dilution $ .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)
Accumulated
Convertible Other
Preferred Stock Common Stock Treasury Stock Additional Comprehensive
--------------------------------------------------------- Paid-In Accumulated Income
Shares Amount Shares Amount Shares Amount Caprtal Deficit (Loss) Total
-------------------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 45,741 $ - 5,799,762 $ 58 2,571 $ (1) $ 50,914 $ (13,664) $ (244) $ 37,063
1995 .................
Comprehensive income (loss)
Net income ......... - - - - - - - 1,513 - 1,513
Other comprehensive
income:
Change in
unrealized
holding loss on - - - - - - - - 244 244
securities .....
Foreign currency
translation - - - - - - - - (2,406) (2,406)
adjustment .....
----------------------------------------------------------------------------------------------------------
Comprehensive income (loss) - - - - - - - 1,513 (2,162) (649)
Issuance of common
stock for - - 5,050 (2,500) 1 41 - - 42
compensation ....... - - -
Expenses paid related
to private - - - - - - (42) - - (42)
placement offering .
Options exercised .... - - 2,000 - - - 13 - - 13
Treasury stock - - - - 74,640 (405) - - - (405)
purchased ..........
Dividend on preferred - - - - - - - (366) - (366)
stock ..............
----------------------------------------------------------------------------------------------------------
Balance at December 31,
1996 .................. 45,471 - 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 - - - - - - - - (2,496) (2,496)
adjustment .....
----------------------------------------------------------------------------------------------------------
Comprehensive income (loss) - - - - - - - (6,485) (2,496) (8,981)
Issuance of common
stock for - - 7,735 - (21,688) 124 186 - - 310
compensation .......
Conversion of
preferred stock (45,741) - 508,183 5 - - (5) - - -
into common stock ..
Options exercised .... - - 2,000 - - - 11 - - 11
Dividend on preferred - - - - - - - (183) - (183)
stock ..............
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 (6,067) (6,067)
adjustment ..... - - - - - - - - -
---------
Comprehensive income (loss) (90,207)
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 properties . - - 71,063 2 - - 447 - - 449
----------------------------------------------------------------------------------------------------------
Balance at December 31,
1998 ................. - $ - 6,501,441 65 171,015 $ (1,167) $ 51,695 $(103,145) $(10,970) $ (63,522)
==========================================================================================================
See accompanying notes.
F-5
</TABLE>
<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 forcompensation .... 42 310 207
Loss on marketable securities ............... 235 - -
Net loss from debt restructurings ........... 427 - -
Changes in operating assets and liabilies:
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
</TABLE>
See accompanying notes.
F-6
<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>
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>
<TABLE>
<CAPTION>
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):
<S> <C>
Fair value of assets acquired ..................... $ 123,970
Cash paid for the capital stock ................... (85,362)
-------------------
Liabilities assumed ............................... $ 38,608
===================
</TABLE>
See accompanying notes.
F-7
<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.
F-8
<PAGE>
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
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
F-9
<PAGE>
remediation costs can be reasonably estimated. These amounts are the
undiscounted, future estimated costs under existing regulatory requirements and
using existing technology.
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. These securities
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 12.875%, 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.
F-10
<PAGE>
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.
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 Senior 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
F-11
<PAGE>
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 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 operatioins 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-12
<PAGE>
5. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
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 Senior 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 (Notes). In January 1997, the Notes were exchanged for Series B Notes,
which have been registered under the Securities Act of 1933 (Series B Notes).
The form and terms of the Series B Notes are the same as the Notes issued on
November 14, 1996. 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 B 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 B 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 B Notes. The
Series B 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 B 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 B Notes to be redeemed plus accrued interest,
provided, however, that after giving effect to such redemption, at least
$139,750,000 aggregate principal amount of Series B Notes remains outstanding.
The Series B Notes were issued under the terms of an Indenture dated November
14, 1996 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 Indenture, including the Credit Facility
discussed below, provided however, if no event of default is continuing, the
Company may 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
Indenture also contains other covenants affecting the Company's ability to pay
dividends on its common stock, sell assets and incur liens.
F-13
<PAGE>
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 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
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
F-14
<PAGE>
to decline, a further write-down of the Company's oil and gas properties may be
required (see Note 16).
In January 1998, the Company and Canadian Abraxas completed the sale of
$60,000,000 aggregate principal amount of 11.5% Senior Notes due 2004, Series C
(Series C Notes). The Series C Notes are general unsecured obligations of the
Company and Canadian Abraxas and rank pari passu in right to all existing and
future indebtedness of the Company and Canadian Abraxas and on parity with the
Series B Notes and senior in right of payment to all future subordinated
indebtedness of the Company and Canadian Abraxas. The Series C Senior Notes
carry similar redemption provisions to the Series B Notes and are subject to the
terms of the Indenture dated January 27, 1998 which is substantially similar to
the Indenture governing the Series B 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.
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 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.
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
F-15
<PAGE>
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-16
<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
-------------------------------------------------- ------------------------
Weighted-Average Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Options Exercise Price
(000s) (000s) Price(1) (000s)
-------- ----------------------------------------- -------- ---------------
<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>
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.
(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.
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.
F-17
<PAGE>
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.
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)
=========== ===========
F-18
<PAGE>
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.
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
=========== ============ ==============
F-19
<PAGE>
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.
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 judgement 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-20
<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 ........... 1,147,000 (6,668,000) (83,960,000)
stockholders
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-21
<PAGE>
12. Quarterly Results of Operations (Unaudited)
Selected results of operations for each of the fiscal quarters during
the years ended December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
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.
F-22
<PAGE>
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 B Notes ($215,000,000), of
which $84,612,000 was utilized by Canadian Abraxas in connection with the
acquisition 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 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, to Year Ended Year Ended
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
F-23
<PAGE>
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 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:
U.S. Canada Total
----------- ---------- ----------
(In thousands)
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
==========
Business segment information about the Company's 1997 operations in
different geographic areas is as follows:
U.S. Canada Total
----------- ---------- ----------
(In thousands)
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
==========
F-24
<PAGE>
Business segment information about the Company's 1998 operations in
different geographic areas is as follows:
U.S. Canada Total
----------- ---------- ----------
(In thousands)
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
=========
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 write-downs 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
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.
F-25
<PAGE>
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
========= ==========
F-26
<PAGE>
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)
Property acquisition costs:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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>
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 ..........
impairnebt -- -- -- (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>
F-27
<PAGE>
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, 1996, 1997, and 1998. 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.
<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)
Proved developed and undeveloped reserves:
<S> <C> <C> <C> <C>
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)
========= ========= ======= ======== ====== =======
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; 260,200 and 475,400 barrels of liquid hydrocarbon reserves
owned by Grey Wolf of which approximately 57,600; 140,200 and 244,000barrels are
applicable to the minority interest's share of these reserves at December 31,
1996, 1997 and 1998, respectively.
(2) Includes 7,446 and 28,610 MMcf of natural
gas reserves owned by Grey Wolf of which 4,012 and 14,700 MMcf are applicable to
the minority interest's share of these reserves at December 31, 1997 and 1998,
respectively.
F-28
<PAGE>
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.
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.
F-30
<PAGE>
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 Tota 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 86,000 283,872 169,634 114,238
Discount .............. (220,016) (193,221) (26,795) (129,367) (107,259) (22,108) (102,291) (75,389) (26,902)
----------- --------- -------- --------- --------- --------- --------- --------- ----------
Standardized Measure of
discounted future net
cash relating to
proved reserves ..... $ 329,821 $ 272,549 $ 57,272 $ 252,079 $ 188,187 $ 63,892 $ 181,581 $ 94,245 $ 87,336
=========== ========== ========= ========== ========= ========= ========= ========= ==========
</TABLE>
F-31
<PAGE>
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) (37,422)
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 (17,727)
Other .............................. (2,554) (12,389) (9,005)
Accretion of discount .............. 8,716 41,721 26,861
--------------- --------------- ----------------
Standardized Measure, end of year $ 329,821 $ 252,079 $ 181,581
=============== =============== ================
</TABLE>
F-33
<PAGE>
REPORT OF INDEPENDENT AUDIORS
To the Board of Directors and Shareholders
New Cache Petroleums Ldt.
We have audited the balance sheet of New Cache Petroleums Ltd. as of
November 30, 1998 and the related 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-34
<PAGE>
<TABLE>
<CAPTION>
New Cache Petroleums Ltd.
Balance Sheet
As at
November
30, 1998
------------
Assets
<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-35
<PAGE>
<TABLE>
<CAPTION>
New Cache Petroleums Ltd.
Statement of Loss and
retained earnings (Deficiency)
Year ended
November 30,
1998
-------------
<S> <C>
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)
===========
</TABLE>
See accompanying notes
F-36
<PAGE>
<TABLE>
<CAPTION>
New Cache Petroleums Ltd.
Statement of Cash Flows
Year ended
November 30,
1998
------------
<S> <C>
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
===========
</TABLE>
See accompanying notes
F-37
<PAGE>
New Cache Petroleums Ltd.
Notes to 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.
F-38
<PAGE>
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.
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-39
<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 $3.15 to $9.50
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 $1,350,000 and $0.09 respectively. These effects are not
necessarily indicative of those to be expected in future years.
F-40
<PAGE>
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
==========
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.
F-41
<PAGE>
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.
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 $6.50 per common share. As a
result of the acquisition, the Company's share options were cancelled.
F-42
<PAGE>
11. Supplemtal Oil & Gas Disclosure (Unaudited)
The following talbe 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 cost
relating to oil and gas producing activities are as follows:
November 30, 1998
(In Thousands)
------------------
Proved crude oil and natural gas properties .................... $ 118,736
Unproved properties ........................................... 9,546
---------
Total ........................................................ 128,282
Accumulated depreciation, depletion , and impairment ........... (64,727)
---------
Net capitalized costs ........................................ 63,555
=========
Cost incurred in oil and gas property acquisitions, exploration and development
activities are as follows:
November 30, 1998
(In Thousands)
------------------
Property Acquisition cost
Proved ...................................................... $ 2,508
Unproved .................................................... --
-------
$ 2,508
=======
Property development and acquisition cost ..................... $15,130
=======
Results of operations for oil and gas producing activities are as follows:
November 30, 1998
(In Thousands)
-----------------
Revenues ......................................................... $ 17,798
Production costs ................................................. (6,237)
Depreciation, depletion, and amortization ........................ (13,609)
Proved property impairment ....................................... (32,616)
General and administrative ....................................... (2,210)
Income taxes ..................................................... 14,593
--------
Results of operations from oil and gas producing activities
(excluding corporate overhead and interest costs) ............. $(22,281)
========
Depletion rate per barrel of oil equivalent ...................... $ 8.35
========
F-43
<PAGE>
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, 1997, and 1998. 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.
Liquid Natural
Hydrocarbons Gas
------------ ---------
(Barrels) (Mcf)
(In thousands)
-----------------------
Proved developed and undeveloped reserves:
Balance at November30, 1997 ............................ 5,300 63,942
Revisions of previous estimates ................. (1,904) (14,429)
Extensions and discoveries ...................... 229 11,050
Purchase of minerals in place ................... 141 4,863
Production ...................................... (517) (6,671)
Sale of minerals in place ....................... (4) (1,674)
======= =======
Balance at November 30, 1998 ...................... 3,245 57,081
======= =======
Proved developed .................................. 2,994 43,297
======= =======
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 November 30, 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. 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:
November 30, 1998
(In Thousands)
-------------------
Future cash inflows .............................. $ 127,648
Future production and development costs .......... (47,179)
Future income tax expense ........................ (7,045)
---------
Future net cash flows ............................ 73,424
Discount ......................................... (24,964)
---------
Standardized Measure of discounted future net cash
relating to proved reserves .................... $ 48,460
=========
F-44
<PAGE>
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:
November 30, 1998
(In thousands)
---------------------
Standardized Measure, beginning of year................. $ 70,257
Sales and transfers of oil and gas produced, net of
production costs...................................... (11,561)
Net changes in prices and development and production
costs from prior year................................. (22,840)
Extensions, discoveries, and improved recovery, less
related costs......................................... 7,866
Purchases of minerals in place.......................... 1,881
Sales of minerals in place.............................. (1,244)
Revision of previous quantity estimates................. (14,052)
Change in future income tax expense..................... 12,174
Other................................................... (1,047)
Accretion of discount.................................. 7,026
--------------------
Standardized Measure, end of year $ 48,460
====================
F-45
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses (other than underwriting
discounts and commissions) in connection with the offering described in this
Registration Statement, all of which shall be paid by us. All of such amounts
(except the SEC Registration Fee) are estimated.
SEC Registration Fee................................$_______
Printing and Mailing Costs..........................$_______
Legal Fees and Expenses.............................$_______
Accounting Fees and Expenses........................$_______
Miscellaneous.......................................$_______
Item 14. 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.
II-1
<PAGE>
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 15. Recent Sales of Unregistered Securities
Since January 1997, we have issued and sold the following unregistered
securities:
(a) On January 27, 1998, Abraxas and Canadian Abraxas issued and sold
$60,000,000 of their 11.5% Senior Notes Due 2004, Series C. The Series C notes
were offered only to "Qualified Institutional Buyers" (as defined in Rule 144A
under the Securities Act) in reliance on the exemption from the registration
requirements of the Securities Act provided by Rule 144A, and to a limited
number of institutional "Accredited Investors" within the meaning of Rule
501(a)(1), (2), (3) or (7) under the Securities Act. Jefferies & Company, Inc.
acted as the initial purchaser. The consideration and underwriting discounts
were as follows:
Price to Discount to Proceeds to
Investors Initial Purchaser Issuers
------------- ----------------- ------------
Per Note 106.75% 2.00% 104.75%
Total $64,050,000 $1,200,000 $62,850,000
(b) On March 26, 1999, Abraxas issued and sold $63,500,000 of the first lien
notes. The Series C notes were offered only to "Qualified Institutional Buyers"
(as defined in Rule 144A under the Securities Act) in reliance on the exemption
from the registration requirements of the Securities Act provided by Rule 144A,
and to a limited number of institutional "Accredited Investors" within the
meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act. Jefferies &
Company, Inc. acted as the initial purchaser. The consideration and underwriting
discounts were as follows:
Price to Discount to Proceeds to
Investors Initial Purchaser Issuers
------------- ----------------- ------------
Per Note 100.00% 3.00% 97.00%
Total $63,500,000 $1,905,000 $61,595,000
(c) On December 21, 1999, Abraxas and Canadian Abraxas issued $3,282,000 of
second lien notes to Jefferies and $1,718,000 of second lien notes, 163,354
shares of Abraxas common stock and 163,354 contingent value rights to Houlihan
in payment of advisory fees incurred in conjunction with the exchange offer. The
second lien notes, Abraxas Common stock and contingent value rights were issued
in reliance on the exemption from the registration requirements of the
Securities Act provided by Section 4(2) thereof.
(d) On December 21, 1999, Abraxas and Canadian Abraxas completed an exchange
offer whereby they exchanged $188,778,000 of the second lien notes, 16,078,990
shares of Abraxas common stock and 16,078,990 contingent value rights for
$269,699,000 of their outstanding old notes. The exchange offer was made
exclusively to holders of the old notes. The exchange offer was made in reliance
on the exemption from the registration requirements of the Securities Act
provided by Section 3(a)(9) thereof. As such, neither Abraxas or Canadian
Abraxas paid any commission or remuneration to any broker, dealer, salesman or
other person for soliciting tenders of the old notes.
Item 21. Exhibits and Financial Statement Schedules.
3.1 Articles of Incorporation of Abraxas. (Filed as Exhibit 3.1 to Abraxas'
Registration Statement on Form S-4, No. 333-36565 (the "S-4 Registration
Statement")).
II-2
<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. 333-00398 (the "S-3 Registration Statement")).
3.5 Articles of Incorporation of Canadian Abraxas (Filed as Exhibit 3.7 to
Abraxas and Canadian Abraxas' Registration Statement on Form S-4, No. 333-18673,
(the "1996 Exchange Offer Registration Statement")).
3.6 Articles of Incorporation of Sandia (Filed as Exhibit 3.7 to Abraxas and
Canadian Abraxas' Registration Statement on Form S-4, No. 333-79349 (the "1999
Exchange Offer Registration Statement")).
3.7 Articles of Incorporation of Wamsutter (Filed herewith).
3.8 Amended and Restated Bylaws of Abraxas. (Filed as Exhibit 3.5 to the S-3
Registration Statement).
3.9 By-Laws of Canadian Abraxas (Filed as Exhibit 3.8 to the 1996 Exchange Offer
Registration Statement).
3.10 By-Laws of Sandia (Filed as Exhibit 3.10 to the 1999 Exchange Offer
Registration Statement.
3.11 By-Laws of Wamsutter (Filed herewith).
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
Abraxas' 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
Abraxas' 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 Abraxas' Registration Statement on Form 8-A filed on August
20, 1997).
4.5 Contingent Value Rights Agreement dated December 21, 1999, by and between
Abraxas and American Stock Transfer & Trust Company (Filed herewith).
4.6 Indenture dated January 27, 1998 by and among Abraxas, Canadian Abraxas and
IBJ Schroder Bank & Trust Company (filed as Exhibit 4.1 to Abraxas' Current
Report on Form 8-K dated February 5, 1998).
4.7 Third Supplemental Indenture dated December 21, 1999, by and among Abraxas,
Canadian Abraxas and The Bank of New York f/k/a IBJ Schroder Bank & Trust
Company (Filed herewith).
4.8 Indenture dated March 26, 1999 by and among Abraxas, Canadian Abraxas, New
Cache, Sandia and Norwest Bank Minnesota, National Association (Filed as Exhibit
4.6 to Abraxas' Annual Report on Form 10-K dated March 31, 1999).
4.9 Indenture dated December 21, 1999, by and among Abraxas, Canadian Abraxas,
Sandia, New Cache, Wamsutter and Firstar Bank, National Association (Filed as
Exhibit T3C to Abraxas and Canadian Abraxas' Indenture Qualification on Form
T3-A, No. 022-22449).
II-3
<PAGE>
4.10 Form of Old Note (Filed as Exhibit A to Exhibit 4.5)
4.11. Form of First Lien Note (filed as Exhibit A to Exhibit 4.6).
4.12 Form of Second Lien Note (filed as Exhibit A to Exhibit 4.9).
5.1 Opinion of Cox & Smith Incorporated. (Filed herewith).
5.2 Opinion of Osler Hoskin & Harcourt LLP. (Filed herewith).
*10.1 Abraxas Petroleum Corporation 1984 Non-Qualified Stock Option Plan, as
amended and restated. (Filed as Exhibit 10.7 to Abraxas' 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 Abraxas' 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 Abraxas' 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)
II-4
<PAGE>
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).
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 Form of Indemnity Agreement between Abraxas and each of its directors and
officers. (Filed as Exhibit 10.30 to the S-1 Registration Statement).
*10.19 Employment Agreement between Abraxas and Robert L. G. Watson. (To be
filed by amendment).
*10.20 Employment Agreement between Abraxas and Chris E. Williford. (To be filed
by amendment).
*10.21 Employment Agreement between Abraxas and Stephen T. Wendel. (Filed as
Exhibit 10.26 to the S-3 Registration Statement).
*10.22 Employment Agreement between Abraxas and Robert W. Carington, Jr. (To be
filed by amendment).
10.23 Registration Rights Agreement dated as of March 26, 1999 by and among
Abraxas, Canadian Abraxas, New Cache, Sandia and Jefferies & Company, Inc.
(Filed as Exhibit 10.26 to the 1999 Exchange Offer Registration Statement).
10.24 Management Agreement dated November 14, 1996 by and between Canadian
Abraxas and Cascade Oil & Gas Ltd. (Filed as Exhibit 10.36 to the 1996 Exchange
Offer Registration Statement).
10.25 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).
10.26 Registration Rights Agreement dated December 21, 1999, by and among
Abraxas, Jefferies & Company, Inc. and Houlihan Lokey Howard & Zukin Capital.
(Filed herewith).
10.27 Registration Rights Agreement dated December 21, 1999, by and among
Abraxas, Halcyon/Alan B. Slifka Management Company LLC and Franklin Resources,
Inc. (To be filed by amendment).
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 and MacNaughton. (Filed herewith).
23.3 Consent of McDaniel & Associates Consultants, Ltd. (Filed herewith).
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 Osler Hoskin & Harcourt LLP (Included in Exhibit 5.2).
24.1 Power of Attorney of Craig S. Bartlett, Jr.(Filed herewith).
24.2 Power of Attorney of Franklin Burke (Filed herewith).
24.3 Power of Attorney of Ralph F. Cox (Filed herewith).
24.4 Power of Attorney of Frederick M. Pevow, Jr.(Filed herewith).
II-5
<PAGE>
24.5 Power of Attorney of James C. Phelps (Filed herewith).
24.6 Power of Attorney of Joseph A. Wagda (Filed herewith).
27.1 Financial Data Schedule. (Omitted pursuant to Regulation S-K, Item 601(c)).
* Management Compensatory Plan or Agreement.
Item 17. Undertakings
A. The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
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.
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 January 24, 2000.
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, January 24, 2000
- ---------------------------
Robert L.G. Watson President, Chief Executive Office
(Principal Executive Officer) and
Director of the Company
/s/ Chris E. Williford Executive Vice President, January 24, 2000
- ----------------------------
Chris E. Williford Treasurer, and Chief Financial
Officer (Principal
Financial and Accounting Officer)
of the Company
/s/ Robert W. Carington, Jr. Executive Vice President
Robert W. Carington, Jr. of the Company January 24, 2000
* Director of the Company January 24, 2000
- ----------------------------
Craig S. Bartlett, Jr.
* Director of the Company January 24, 2000
- ----------------------------
Franklin Burke
* Director of the Company January 24, 2000
- ----------------------------
Ralph F. Cox
* Director of the Company January 24, 2000
- ----------------------------
Frederick M. Pevow, Jr.
* Director of the Company January 24, 2000
- ----------------------------
James C. Phelps
* Director of the Company January 24, 2000
- ----------------------------
Joseph A. Wagda
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 January 24, 2000.
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, January 24, 2000
- ------------------------- President, and Director of
Robert L.G. Watson Canadian Abraxas
(Principal Executive Officer)
/s/Francis Cheung Vice President of Finance January 24, 2000
- ------------------------- of Canadian Abraxas
Francis Cheung (Principal Accounting Officer)
/s/Donald A. Engle Secretary and Director of January 24, 2000
- ------------------------- Canadian Abraxas
Donald A. Engle
/s/Roger L. Bruton Executive Vice President and January 24, 2000
- ------------------------- Director of Canadian Abraxas
Roger L. Bruton
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 January 24, 2000.
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 January 24, 2000
- ---------------------------- Officer) and Director of
Robert L.G. Watson Sandia
/s/ Chris E. Williford Vice President (Principal January 24, 2000
- ---------------------------- Financial and Accounting
Chris E. Williford Officer) and Director of Sandia
/s/ Robert W. Carington, Jr. Vice President and Director January 24, 2000
- ---------------------------- of Sandia
Robert W. Carington, Jr.
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 January 24, 2000.
WAMSUTTER HOLDINGS, INC.
By: /s/ Robert L. G. Watson
Robert L. G. Watson, President
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 President (Principal Executive January 24, 2000
- --------------------------- Officer) and Director of
Robert L.G. Watson Wamsutter
/s/ Chris E. Williford Vice President (Principal January 24, 2000
- --------------------------- Accounting Officer) and
Chris E. Williford Director of Wamsutter
/s/Robert W. Carington, Jr. Vice President and January 24, 2000
- --------------------------- Director of Wamsutter
Robert W. Carington, Jr.
II-14
<PAGE>
EXHIBIT INDEX
Exhibit Page
Number: Exhibit Number
- -------- ---------------------------------------------------- --------
3.7 Articles of Incorporation of Wamsutter
3.11 By-Laws of Wamsutter
4.5 Contingent Value Rights Agreement
4.7 Third Supplemental Indenture
5.1 Opinion of Cox & Smith Incorporated
5.2 Opinion of Osler Hoskin & Harcourt LLP
10.26 Houlihan/Jefferies Registration Rights Agreement
21.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP
23.2 Consent of DeGoyler and MacNaughton
23.3 Consent of McDaniel & Associates Consultants Ltd.
23.4 Consent of Ernst & Young LLP Chartered Accountants
23.5 Consent of Cox & Smith Incorporated (included
in Exhibit 5.1)
23.6 Consent of Osler Hoskin & Harcourt LLP
(included in exhibit 5.2)
24.1 Power of Attorney of Craig S. Bartlett, Jr.
24.2 Power of Attorney of Franklin Burke
24.3 Power of Attorney of Ralph F. Cox
24.4 Power of Attorney of Frederick M. Pevow, Jr.
24.5 Power of Attorney of James C. Phelps
24.6 Power of Attorney of Joseph A. Wagda
1
<PAGE>
EXHIBIT 3.7
ARTICLES OF INCORPORATION
OF
WAMSUTTER HOLDINGS, INC.
Pursuant to the provisions of the Wyoming Business Corporation Act (the
"WBCA"), the undersigned Incorporator adopts the following Articles of
Incorporation:
ARTICLE I
The name of the corporation is Wamsutter Holdings, Inc.
ARTICLE II
The aggregate number of shares the corporation is authorized to issue
is 1,000 shares of common stock, par value $.01 per share.
ARTICLE III
The street address of the initial registered office of the corporation
is c/o CT Corporation System, 1720 Carey Avenue, Cheyenne, Wyoming 82001 and the
name of the initial registered agent for the corporation at such address is CT
Corporation System.
ARTICLE IV
The initial Board of Directors of the corporation shall consist of
three (3) members, whose names and addresses are as follows:
Name Address
Robert L. G. Watson 500 North Loop 1604 East, Suite 100
San Antonio, Texas 78232
Chris E. Williford 500 North Loop 1604 East, Suite 100
San Antonio, Texas 78232
Robert W. Carington 500 North Loop 1604 East, Suite 100
San Antonio, Texas 78232
ARTICLE V
The name of the Incorporator is Dale Cottam and the address of the
Incorporator is 1720 Carey Avenue, Cheyenne, Wyoming 82001.
2
<PAGE>
ARTICLE VI
The corporation shall indemnify its directors, officers, employees and
agents from and against any and all liabilities, costs and expenses incurred by
them in such capacities to the fullest extent permitted by the WBCA, as
presently in effect and as may be hereafter amended, and shall have the power to
purchase and maintain liability insurance coverage for those persons as, and to
the fullest extent, permitted by the WBCA, as presently in effect and as may be
hereafter amended.
ARTICLE VII
A director of the corporation shall not be personally liable to the
corporation or its shareholders for monetary damages for an act or omission in
the director's capacity as a director, except for liability for (a) the amount
of financial benefit received by a director to which he is not entitled, (b) an
intentional infliction of harm on the corporation or shareholders, (c) a
violation of ss.17-16-833 of the WBCA, or (d) an intentional violation of
criminal law.
If the WBCA or other applicable law hereafter is amended to authorize
further elimination or limitation of the liability of directors, then the
liability of a director of the corporation, in addition to the limitation on the
personal liability provided herein, shall be limited to the fullest extent
permitted by such law. Any repeal or modification of this Article VII by the
shareholders of the corporation shall be prospective only, and shall not
adversely affect any limitation on the personal liability of a director at the
time of such repeal or modification.
EXECUTED this 10th day of November, 1998.
/s/ Dale Cottam
Dale Cottam
3
<PAGE>
EXHIBIT 3.11
BY-LAWS
OF
Wamsutter holdings, inc.
ARTICLE I
OFFICES
Section 1. Principal Office. The principal office of the Company shall
be in San Antonio, Bexar County, Texas.
Section 2. Other Offices. The Company may also have offices at such
other places both within and without the State of Wyoming as the Board of
Directors may from time to time determine or the business of the Company may
require.
ARTICLE II
SHAREHOLDERS
Section 1. Time and Place of Meeting. All meetings of the shareholders
shall be held at such time and at such place within or without the State of
Wyoming as shall be determined by the Board of Directors.
Section 2. Annual Meetings. An annual meeting of the shareholders shall
be held each year on such date and at such time as shall be designated from time
to time by the Board of Directors, and stated in the notice of the meeting, at
which meeting the shareholders shall elect a board of directors and transact
such other business as may properly be brought before the meeting.
Section 3. Special Meetings. Special meetings of the shareholders may
be called at any time by the President or the Board of Directors, and shall be
called by the President or Secretary at the request in writing of the holders of
not less than ten percent (10%) of the shares issued and outstanding and
entitled to vote at the meeting. Such request shall state the purpose or
purposes of the proposed special meeting. The purpose or purposes of any such
special meeting shall be stated in the call and notice thereof. Business
transacted at special meetings of shareholders shall be confined to the purposes
stated in the notice of the special meeting.
Section 4. Notice. Written or printed notice stating the place, day and
hour of any shareholders' meeting, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called, shall be delivered not less
than ten (10) nor more than sixty (60) days before the date of the meeting,
either personally or by mail, by or at the direction of the President,
Secretary, or the officer or person calling the meeting, to each shareholder
entitled to vote at such meeting. If mailed, such notice shall be deemed to be
delivered when deposited in the United States mail, postage prepaid, to the
shareholder at his address as it appears on the share transfer records of the
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Company. Any notice required to be given to a shareholder pursuant to this
Section 4 or any other provision of these By-Laws, the Articles of Incorporation
of the Company or any provision of the Wyoming Business Corporation Act (herein
called the "Act") need not be given to such shareholder if (a) notice of two (2)
consecutive annual meetings of shareholders of the Company, and all notices of
meetings of shareholders of the Company held during the period between such
annual meetings, if any, or (b) all (but in no event less than two (2)) payments
(if sent by first class mail) of distributions or interest on securities of the
Company during any twelve-month period, have been mailed to such shareholder at
his address as shown on the share transfer records of the Company and have been
returned undeliverable, and any action or meeting of shareholders of the Company
taken or held without notice to such shareholder shall have the same force and
effect as if notice had been duly given to such shareholder; provided, however,
that if such shareholder delivers to the Company a written notice setting forth
his or her then current address, the requirement that notice be given to such
shareholder shall be reinstated.
Section 5. Record Date. The Board of Directors may fix in advance a
record date for the purpose of determining shareholders entitled to notice of or
to vote at a meeting of shareholders, such record date to be not less than ten
(10) nor more than sixty (60) days prior to such meeting, or the Board of
Directors may close the stock transfer records for such purpose for a stated
period of not less than ten (10) nor more than sixty (60) days prior to such
meeting. In the absence of any action by the Board of Directors, the date upon
which the notice of the meeting is mailed shall be the record date. In the event
that a special meeting of shareholders is called by shareholders, the record
date for determining shareholders entitled to call such meeting shall be the
date on which the first shareholder calling such special meeting signs the call
or notice of that meeting.
Section 6. List of Shareholders. The officer or agent of the Company
having charge of the share transfer records for shares of the Company shall
make, at least ten (10) days before each meeting of the shareholders, a complete
list of the shareholders entitled to vote at such meeting or any adjournment
thereof, arranged in alphabetical order, with the address of and the number of
voting shares held by each, which list, for a period of ten (10) days prior to
such meeting, shall be kept on file at the registered office or principal place
of business of the Company and shall be subject to inspection by any such
shareholder at any time during usual business hours. Such list shall also be
produced and kept open at the time and place of the meeting and shall be subject
to the inspection of any shareholder during the whole time of the meeting. The
original share transfer records shall be prima facie evidence as to who are the
shareholders entitled to examine such list or transfer records or to vote at any
meetings of shareholders.
Section 7. Quorum. The holders of a majority of the issued and
outstanding shares entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the shareholders for the
transaction of business, except as otherwise provided by the Act. If, however,
such quorum shall not be present or represented at any meeting of the
shareholders, the shareholders entitled to vote, present in person or
represented by proxy, shall have the power to adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present or represented. When any adjourned meeting is reconvened and a
quorum shall be present or represented, any business may be transacted which
might have been transacted at the meeting as originally noticed. Once a quorum
is constituted, the shareholders present or represented by proxy at a meeting
may continue to transact business until adjournment, notwithstanding the
subsequent withdrawal therefrom of such number of shareholders as to leave less
than a quorum.
Section 8. Voting. When a quorum is present at any meeting, the vote of
the holders of a majority of the shares present or represented by proxy at such
meeting and entitled to vote shall be the act of the shareholders, unless the
vote of a different number is required by the Act, the Articles of Incorporation
of the Company or these By-Laws. Each shareholder shall at every meeting of the
shareholders be entitled to one vote in person or by proxy for each share having
voting power held by such shareholder.
Section 9. Proxy. Every proxy must be executed in writing by the
shareholder or by his duly authorized attorney-in-fact, and shall be filed with
the Secretary of the Company prior to or at the time of the meeting. A telegram,
telex, cablegram, or similar transmission by the shareholder, or a photographic,
photostatic, facsimile, or similar reproduction of a writing executed by the
shareholder or by his duly authorized attorney-in-fact, shall be treated as an
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execution in writing for purposes of this Section 9. No proxy shall be valid
after eleven (11) months from the date of its execution unless otherwise
provided therein. Each proxy shall be revocable unless the proxy form
conspicuously states that the proxy is irrevocable and the proxy is coupled with
an interest. Proxies coupled with an interest include the appointment as proxy
of:
(a) a pledgee;
(b) a person who purchased or agreed to purchase, or owns or
holds an option to purchase, the shares covered by such proxy;
(c) a creditor of the Company who extended credit to the Company
under terms requiring appointment of the creditor as proxy;
(d) an employee of the Company whose employment contract requires
appointment of the employee as proxy; and
(e) a party to a voting agreement entered into pursuant to and in
compliance with applicable provisions of the Act.
Section 10. Action by Written Consent. Any action required or permitted
to be taken at any meeting of the shareholders may be taken without a meeting if
a consent in writing, setting forth the action so taken, shall be signed by all
of the shareholders entitled to vote with respect to the subject matter thereof
and such consent shall have the same force and effect as a unanimous vote of
shareholders.
Section 11. Meetings by Conference Telephone. Shareholders may
participate in and hold meetings of shareholders by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in such a
meeting shall constitute presence in person at such meeting, except where a
person participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
ARTICLE III
DIRECTORS
Section 1. Number of Directors. The number of directors of the Company
shall be two (2). The number of directors may be increased or decreased from
time to time by amendment of these By-Laws or by resolution adopted by the
directors, but no decrease shall have the effect of reducing the term of any
incumbent director. Directors shall be elected at the annual meeting of the
shareholders, except as provided in Section 2 of this Article III, and each
director shall hold office until his successor is elected and qualified.
Directors need not be shareholders of the Company or residents of the State of
Wyoming.
Section 2. Vacancies; Removal. Notwithstanding the fact that the
remaining directors may constitute less than a quorum of the Board of Directors
as fixed by Section 8 of this Article, the affirmative vote of a majority of the
remaining directors may fill any vacancy occurring in the Board of Directors
and, during the period between any two successive annual meetings of the
shareholders, may fill a maximum of two (2) vacant directorships resulting from
an increase in the number of directors. A director elected to fill a vacancy
shall be elected for the unexpired term of his predecessor in office. A
directorship to be filled by reason of an increase in the number of directors
may be filled by the Board of Directors for a term of office continuing only
until the next election of one or more directors by the shareholders. Any
directorship to be filled by reason of an increase in the number of directors
may also be filled by election at an annual meeting or at a special meeting of
shareholders called for that purpose. At any annual meeting of shareholders, or
any special meeting called for such purpose, any director may be removed from
office, for or without cause, though his term may not have expired.
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Section 3. General Powers. The business of the Company shall be managed
by its Board of Directors, which may exercise any and all powers of the Company
and do any and all such lawful acts and things as are not by the Act, the
Articles of Incorporation of the Company or by these By-Laws directed or
required to be exercised or done by the shareholders.
Section 4. Place of Meetings. The directors of the Company may hold
their meetings, both regular and special, either within or without the State of
Wyoming.
Section 5. Annual Meetings. The first meeting of each newly elected
Board of Directors shall be held without further notice immediately following
the annual meeting of the shareholders, and at the same place, unless by
unanimous consent of the directors then elected and serving such time or place
shall be changed.
Section 6. Regular Meetings. Regular meetings of the Board of Directors
may be held without notice at such time and place as shall from time to time be
determined by the Board of Directors.
Section 7. Special Meetings. Special meetings of the Board of Directors
may be called by the Chairman, if there be one, the President or any director.
Notice thereof stating the place, date and hour of the meeting shall be given to
each director either by mail not less than forty-eight (48) hours before the
date of the meeting, by telephone, electronic facsimile or telegram on
twenty-four (24) hours notice, or on such shorter notice as the person calling
the meeting may deem necessary or appropriate in the circumstances.
Section 8. Quorum and Voting. At all meetings of the Board of Directors
the presence of at least a majority of the number of directors fixed by, or in
the manner provided in, Section 1 of this Article shall be necessary and
sufficient to constitute a quorum for the transaction of business, and the
affirmative vote of at least a majority of the directors present at any meeting
at which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by the Act, the Articles of Incorporation
of the Company or these By-Laws. If a quorum shall not be present at any meeting
of directors, the directors present thereat may adjourn the meeting from time to
time without notice other than announcement at the meeting, until a quorum shall
be present.
Section 9. Committees. The Board of Directors may, by resolution passed
by a majority of the whole Board, designate committees, each committee to
consist of one or more directors, which committees shall have such power and
authority and shall perform such functions as may be provided in such
resolution. Such committee or committees shall have such name or names as may be
designated by the Board of Directors and shall keep regular minutes of their
proceedings and report the same to the Board of Directors when required.
Section 10. Compensation of Directors. Directors, as such, shall not
receive any stated salary for their services, but, by resolution of the Board of
Directors, a fixed sum and expenses of attendance, if any, may be allowed for
attendance at each regular or special meeting of the Board of Directors;
provided that nothing herein contained shall be construed to preclude any
director or directors from serving the Company in any other capacity and
receiving compensation therefor.
Section 11. Action by Written Consent. Any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee
designated by the Board of Directors may be taken without a meeting if a written
consent, setting forth the action so taken, is signed by all the members of the
Board of Directors or of such committee, and such consent shall have the same
force and effect as a unanimous vote at a meeting.
Section 12. Meetings by Conference Telephone. Members of the Board of
Directors or members of any committee designated by the Board of Directors may
participate in and hold a meeting of such Board or committee by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and participation in
such a meeting shall constitute presence in person at such meeting, except where
a person participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
Section 13. Resignations. Each director shall have the right to resign
at any time upon written notice of such resignation to the President or
Secretary of the Company. Unless otherwise specified in such written notice, the
resignation shall take effect upon the receipt thereof, and acceptance of such
resignation shall not be necessary to make same effective.
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ARTICLE IV
NOTICES
Section 1. Form of Notice. Whenever under the provisions of the Act,
the Articles of Incorporation of the Company or these By-Laws notice is required
to be given to any director or shareholder, and no provision is made as to how
such notice shall be given, notice shall not be construed to mean personal
notice, but any such notice may be given in writing, by mail, postage prepaid,
addressed to such director or shareholder at such address as appears in the
records of the Company, or by telex, telegraph or mailgram. Any notice required
or permitted to be given by mail shall be deemed to be given at the time when
the same is deposited, postage prepaid, in the United States mail as aforesaid.
Section 2. Waiver. Whenever any notice is required to be given to any
director or shareholder of the Company under the provisions of the Act, the
Articles of Incorporation of the Company or these By-Laws, a waiver thereof in
writing signed by the person or persons entitled to such notice, whether signed
before or after the time stated in such notice, shall be deemed equivalent to
the giving of such notice.
ARTICLE V
OFFICERS
Section 1. In General. The officers of the Company shall be elected by
the Board of Directors and shall be a President and a Secretary. The Board of
Directors may also, if it chooses to do so, elect a Chairman of the Board, one
or more Vice Presidents, a Treasurer, one or more Assistant Secretaries, one or
more Assistant Treasurers and such other officers and agents as it shall deem
necessary, all of whom shall also be officers of the Company. Two or more
offices may be held by the same person.
Section 2. Election. The Board of Directors at its first meeting after
each annual meeting of the shareholders shall elect a President and, if it so
chooses, may elect a Chairman of the Board, who shall be a member of the Board
of Directors, but the other officers need not be members of the Board of
Directors. The Board of Directors shall in addition elect at such meeting a
Secretary and, if it so chooses, one or more Vice Presidents, a Treasurer and
may appoint such other officers and agents as it shall deem necessary, and may
determine the salaries of all officers and agents from time to time. The
officers shall hold office until their successors are duly elected and
qualified. Any officer elected or appointed by the Board of Directors may be
removed, for or without cause, at any time by a majority vote of the whole Board
of Directors. Election or appointment of an officer or agent shall not of itself
create contract rights.
Section 3. Chairman. The Chairman of the Board of Directors, if there
be a Chairman, shall preside at all meetings of the shareholders and the Board
of Directors and shall have such other powers as may from time to time be
assigned by the Board of Directors.
Section 4. President. The President shall be the chief executive
officer of the Company, shall preside at all meetings of the shareholders in the
absence or disability of the Chairman of the Board or if a Chairman of the Board
has not been elected, shall have authority and responsibility for the general
and active management of the business of the Company and shall see that all
orders and resolutions of the Board of Directors are carried into effect.
Subject to the prior approval of the Board of Directors, the President shall
execute all contracts, mortgages, conveyances or other legal instruments in the
name of and on behalf of the Company, but this provision shall not prohibit the
delegation of such powers by the Board of Directors to some other officer, agent
or attorney-in-fact of the Company.
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Section 5. Vice Presidents. The Vice President, if there be a Vice
President, or, if there be more than one, the Vice Presidents in the order of
their seniority or in any other order determined by the Board of Directors,
shall, in the absence or disability of the President, perform the duties and
exercise the powers of the President, and shall generally assist the President
and perform such other duties as the Board of Directors shall prescribe.
Section 6. Secretary. The Secretary shall attend all sessions of the
Board of Directors and all meetings of the shareholders and shall record all
votes and the minutes of all such proceedings in a book to be kept for that
purpose, and shall perform like duties for any other committees of the Board
when required. The Secretary shall give, or cause to be given, notice of all
meetings of the shareholders and special meetings of the Board of Directors, and
shall perform such other duties as may be prescribed by the Board of Directors
or President, under whose supervision he or she shall be. The Secretary shall
keep in safe custody the seal of the Company, if any.
Section 7. Assistant Secretaries. Any Assistant Secretary shall, in the
absence or disability of the Secretary, perform the duties and exercise the
powers of the Secretary and shall perform such other duties as may be prescribed
by the Board of Directors or the President.
Section 8. Treasurer. The Treasurer, if there be a Treasurer, shall
have the custody of all corporate funds and securities, shall keep full and
accurate accounts of receipts and disbursements of the Company, and shall
deposit all moneys and other valuable effects in the name of and to the credit
of the Company in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Company as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, shall render to the President and directors, at the regular
meetings of the Board of Directors or whenever they may otherwise require, an
account of all of his or her transactions as Treasurer and of the financial
condition of the Company, and shall perform such other duties as may be
prescribed by the Board of Directors or the President.
Section 9. Assistant Treasurers. Any Assistant Treasurer shall, in the
absence or disability of the Treasurer, perform the duties and exercise the
powers of the Treasurer and shall perform such other duties as may be prescribed
by the Board of Directors or the President.
Section 10. Resignations. Each officer shall have the right to resign
at any time upon written notice of such resignation to the President or the
Board of Directors. Unless otherwise specified in such written notice, the
resignation shall take effect upon the receipt thereof, and acceptance of such
resignation shall not be necessary to make same effective.
ARTICLE VI
CERTIFICATES REPRESENTING SHARES
Section 1. Form of Certificates. The Company shall deliver certificates
representing all shares to which shareholders are entitled. Certificates
representing shares of the Company shall be in such form as shall be determined
by the Board of Directors and shall be numbered consecutively and entered in the
records of the Company as they are issued. Each certificate shall state on the
face thereof the holder's name, the number and class of shares, and the par
value of the shares or a statement that the shares are without par value. Each
certificate shall be signed by the President or a Vice President and the
Secretary or an Assistant Secretary of the Company, and may be sealed with the
seal of the Company or a facsimile thereof if the Company shall then have a
seal. The signatures of the Company's officers on any such certificate or
certificates may be facsimiles. In case any officer or officers who have signed,
or whose facsimile signature or signatures have been used on, such certificate
or certificates shall cease to be such officer or officers of the Company,
whether because of death, resignation or otherwise, before such certificate or
certificates have been delivered by the Company or its agents, such certificate
or certificates may nevertheless be adopted by the Company and be issued and
delivered as though the person or persons who signed the certificate or
certificates or whose facsimile signature or signatures have been used thereon
had not ceased to be such officer or officers of the Company.
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Section 2. Lost Certificates. The Board of Directors may direct that a
new certificate be issued in place of any certificate theretofore issued by the
Company which is alleged to have been lost or destroyed, upon the making of an
affidavit of that fact by the person claiming the certificate to be lost or
destroyed. When authorizing the issue of a new certificate, the Board of
Directors, in its discretion and as a condition precedent to the issuance
thereof, may require the owner of the lost or destroyed certificate, or his
legal representative, to advertise the same in such manner as it shall require
and/or give the Company a bond in such form, in such sum, and with such surety
or sureties as it may direct as indemnity against any claim that may be made
against the Company with respect to the certificate alleged to have been lost or
destroyed.
Section 3. Transfer of Shares. Shares of stock shall be transferable
only on the records of the Company by the holder or holders thereof in person or
by his, her or their duly authorized attorney or attorneys and, upon surrender
to the Company or to the transfer agent of the Company of a certificate
representing shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
Company or the transfer agent of the Company to issue a new certificate to the
person entitled thereto, cancel the old certificate and record the transaction
upon its records.
Section 4. Registered Shareholders. The Company shall be entitled to
recognize the holder or holders of record of any share or shares of stock as the
holder or holders in fact thereof, and, accordingly, shall not be bound to
recognize any equitable or other claim to or interest in such share or shares on
the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by law.
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends and Other Distributions. Dividends and other
distributions made upon or with respect to the outstanding shares of the
Company, subject to the provisions of the Act and of the Articles of
Incorporation of the Company, may be declared by the Board of Directors at any
regular or special meeting. Dividends may be declared and paid in cash, in
property or in shares of the Company, and other distributions may be declared
and paid in cash or property, provided that all such declarations and payments
of dividends and other distributions shall be in strict compliance with all
applicable laws and the Articles of Incorporation of the Company. The Board of
Directors may fix in advance a record date for the purposes of determining
shareholders entitled to receive payment of any dividend or other distribution,
such record date to be not more than sixty (60) days prior to the payment date
of such dividend or other distribution, or the Board of Directors may close the
stock transfer records for such purpose for a period of not more than sixty (60)
days prior to the payment date of such dividend or other distribution. In the
absence of any action by the Board of Directors, the date upon which the Board
of Directors adopts the resolution declaring such dividend or other distribution
shall be the record date. Any dividend or other distribution declared pursuant
to this Section 1 shall be payable to the persons registered as shareholders of
the Company in the Company's stock transfer records as of the record date for
such dividend or other distribution as set pursuant to this Section 1, and the
person in whose name shares are registered in the stock transfer records of the
Company as of such record date shall be deemed to be the owner of the shares so
registered in his name at such time.
Section 2. Fiscal Year. The fiscal year of the Company shall be the
twelve (12) month period ending on December 31 of each ----------- year unless
otherwise determined and fixed by resolution of the Board of Directors.
Section 3. Seal. The Company may by resolution of the Board of
Directors adopt and have a seal, and said seal may be used by causing it or a
facsimile thereof to be impressed or affixed or in any manner reproduced. Any
officer of the Company shall have authority to affix the seal to any document
requiring it.
Section 4. Annual Statement. The Board of Directors shall present to
the shareholders at each annual meeting, and, when called for by vote of the
shareholders, at any special meeting, a full and clear statement of the business
and condition of the Company.
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ARTICLE VIII
INDEMNITY
Section 1. Indemnification. The Company shall indemnify its directors
and officers from and against any and all liabilities, costs and expenses
incurred by them in such capacities to the fullest extent permitted by the Act,
as presently in effect and as may be hereafter amended, and shall have the power
to purchase and maintain liability insurance coverage for those persons or make
and maintain other arrangements on such persons' behalf as, and to the fullest
extent, permitted by the Act, as presently in effect and as may be hereafter
amended.
Section 2. Indemnification Not Exclusive. The rights of indemnification
and reimbursement provided for in Section 1 of this Article VIII shall not be
deemed exclusive of any other rights to which any such director or officer may
be entitled under the Articles of Incorporation, any By-Laws, agreement or vote
of shareholders, or as a matter of law or otherwise.
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ARTICLE IX
BY-LAWS
Section 1. Amendments. These By-Laws may be altered, amended or
repealed and new By-Laws may be adopted by the Board of Directors or the
shareholders at any regular meeting or at any special meeting called for that
purpose.
Section 2. When By-Laws Silent. It is expressly recognized that when
the By-Laws are silent as to the manner of performing any corporate function,
the provisions of the Wyoming Business Corporation Act shall control.
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EXHIBIT 4.5
CONTINGENT VALUE RIGHTS AGREEMENT
BY AND BETWEEN
ABRAXAS PETROLEUM CORPORATION
AND
AMERICAN STOCK TRANSFER & TRUST COMPANY, RIGHTS AGENT
Dated as of December 21, 1999
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TABLE OF CONTENTS
Page
PARTIES............................................................1
RECITALS...........................................................1
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 1.01 Definitions ....................................................1
Section 1.02 Compliance Certificates.........................................7
Section 1.03 Form of Documents Delivered to Rights Agent.....................8
Section 1.04 Acts of Holders.................................................8
Section 1.05 Notices, Etc. to Rights Agent and Company.......................9
Section 1.06 Notices to Holders; Waiver......................................9
Section 1.07 Effect of Headings and Table of Contents.......................10
Section 1.08 Successors and Assigns.........................................10
Section 1.09 Benefits of Agreement..........................................10
Section 1.10 Governing Law..................................................10
Section 1.11 Legal Holidays.................................................10
Section 1.12 Separability Clause............................................11
ARTICLE TWO
CVR FORMS
Section 2.01 Forms Generally................................................11
Section 2.02 Form of CVR Certificate........................................11
ARTICLE THREE
THE CVRS
Section 3.01 Title and Terms................................................12
Section 3.02 Registerable Form..............................................13
Section 3.03 Execution, Authentication, Delivery and Dating and CUSIP
Number................................................13
Section 3.04 Temporary CVRs.................................................14
Section 3.05 Registration, Registration of Transfer and Exchange............15
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Section 3.06 Mutilated, Destroyed, Lost and Stolen CVRs.....................16
Section 3.07 Presentation of CVR Certificate................................16
Section 3.08 Persons Deemed Owners..........................................17
Section 3.09 Cancellation...................................................17
Section 3.10 Fractional CVRs and Fractional Shares..........................17
Section 3.11 CVR Certificate Holder Not Deemed a Stockholder................17
Section 3.12 Restrictive Legends............................................18
Section 3.13 Special Transfer Provisions....................................19
Section 3.14 Book--Entry Provisions for Global CVRs.........................21
Section 3.15 Prohibitions on Short Positions................................22
ARTICLE FOUR
THE RIGHTS AGENT
Section 4.01 Certain Duties and Responsibilities............................22
Section 4.02 Certain Rights of Rights Agent.................................23
Section 4.03 Not Responsible for Recitals or Issuance of CVRs...............24
Section 4.04 May Hold CVRs..................................................24
Section 4.05 Compensation, Reimbursement and Indemnification of the
Rights Agent...........................................24
Section 4.06 Corporate Rights Agent Required; Eligibility...................25
Section 4.07 Change of Rights Agent ........................................25
Section 4.08 Acceptance of Appointment by Successor.........................26
Section 4.09 Merger, Conversion, Consolidation or Succession
to Business............................................26
ARTICLE FIVE
HOLDERS' LISTS AND REPORTS BY RIGHTS AGENT AND COMPANY
Section 5.01 Company to Furnish Rights Agent Names and
Addresses of Holders...................................26
Section 5.02 Preservation of Information; Communications to Holders.........27
Section 5.03 Reports by Company.............................................27
ARTICLE SIX
AMENDMENTS
Section 6.01 Amendments Without Consent of Holders..........................28
Section 6.02 Amendments with Consent of Holders.............................29
Section 6.03 Execution of Amendments........................................29
Section 6.04 Effect of Amendments...........................................29
Section 6.05 Reference in CVRs to Amendments................................30
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ARTICLE SEVEN
COVENANTS
Section 7.01 Issuance to Shares of Common Stock, If Any, to Holders.........30
Section 7.02 Maintenance of Office or Agency ...............................31
Section 7.03 Shares for CVR Payments to Be Reserved.........................31
ARTICLE EIGHT
CONSOLIDATION, MERGER, SALE OR CONVEYANCE
Section 8.01 Company May Consolidate, Etc...................................31
Section 8.02 Successor Substituted..........................................32
Section 8.03 Opinion of Counsel to Rights Agent.............................32
Section 8.04 Counterparts...................................................33
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This CONTINGENT VALUE RIGHTS AGREEMENT, dated as of December 21, 1999,
between ABRAXAS PETROLEUM CORPORATION, a Nevada corporation (hereinafter called
the "Company"), and AMERICAN STOCK TRANSFER & TRUST COMPANY, a New York trust
company (hereinafter called the "Rights Agent").
W I T N E S S E TH:
WHEREAS, the Company has duly authorized the creation of an issue of
contingent value rights (hereinafter called the "CVRs"), of substantially the
tenor and amount hereinafter set forth, and to provide therefor the Company has
duly authorized the execution and delivery of this Agreement;
WHEREAS, pursuant to the Offer to Exchange and Consent Solicitation
dated as of November 18, 1999, as amended or supplemented (the "Offering
Memorandum"), the Company has agreed to issue and deliver, among other
securities, approximately 59.6184 CVRs to each Participating Noteholder (as
defined herein) entitling such Participating Noteholder to a portion of a
contingent distribution of common stock, par value $.01 per share, of the
Company for each $1,000 principal amount of the Old Notes (as defined herein)
exchanged; and
WHEREAS, all things necessary have been done to make the CVRs, when
executed by the Company and authenticated and delivered hereunder, the valid
obligations of the Company and to make this Agreement a valid agreement of the
Company, in accordance with their and its terms.
NOW, THEREFORE, for and in consideration of the premises and the
consummation of the transactions referred to above, it is mutually covenanted
and agreed, for the equal and proportionate benefit of all Holders (as
hereinafter defined) of the CVRs, as follows:
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 1.01 Definitions. For all purposes of this Agreement, except as
otherwise expressly provided or unless the context otherwise requires:
(a)......the terms defined in this Article have the meanings assigned
to them in this Article, and include the plural as well as the singular;
(b)......all accounting terms used herein and not expressly defined
shall have the meanings assigned to such terms in accordance with generally
accepted accounting principles, and the term "generally accepted accounting
principles" means such accounting principles as are generally accepted in the
United States at the time of any computation; and
(c)......the words "herein," "hereof" and "hereunder" and other words
of similar import refer to this Agreement as a whole and not to any particular
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Article, Section or other subdivision.
"Act," when used with respect to any Holder, has the meaning specified
in Section 1.04.
"Affiliate" means a Person that, directly or indirectly, through one or
more intermediaries, controls, is controlled by, or is under common control
with, the first mentioned Person.
"Agent Member" has the meaning specified in Section 3.14(a).
"Agreement" means this instrument as originally executed and as it may
from time to time be supplemented or amended pursuant to the applicable
provisions hereof.
"Authorized Newspaper" means The Wall Street Journal, or if The Wall
Street Journal shall cease to be published, or, if the publication or general
circulation of The Wall Street Journal shall be suspended for whatever reason,
such other English language newspaper as is selected by the Company with general
circulation in The City of New York, New York.
"Board of Directors" means either the board of directors of the Company
or any duly authorized committee of that board.
"Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted by
the Board of Directors and to be in full force and effect on the date of such
certification, and delivered to the Rights Agent.
"Business Day" means any day (other than a Saturday or a Sunday) on
which banking institutions in The City of New York, New York or in the state of
the principal office of the Rights Agent are not authorized or obligated by law
or executive order to close and, if the CVRs are listed on a national securities
exchange, such exchange is open for trading.
"Canadian Abraxas" means Canadian Abraxas Petroleum Limited, an Alberta
corporation.
"Common Stock" means the Common Stock, par value $.01 per share, of the
Company.
"Commission" means the Securities and Exchange Commission, as from time
to time constituted, created under the Exchange Act, or if at any time after the
execution of this instrument such Commission is not existing and performing the
duties now assigned to it under the Exchange Act, then the body performing such
duties at such time.
"Company" means the Person named as the "Company" in the first
paragraph of this Agreement, until a successor Person shall have become such
pursuant to the applicable provisions of this Agreement, and thereafter
"Company" shall mean such successor Person.
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"Company Request" or "Company Order" means a written request or order
signed in the name of the Company by the Chairman of the Board of Directors, the
president, any vice president, the controller, the treasurer or any assistant
treasurer, the secretary or any assistant secretary, and delivered to the Rights
Agent.
"Control" (including the terms "controlled," "controlled by" and "under
common control with") means the possession, directly or indirectly or as trustee
or executor, of the power to direct or cause the direction of the management or
policies of a Person, whether through the ownership of stock or as trustee or
executor, by contract or otherwise.
"Corporate Trust Office" means the office of the Rights Agent at which
at any particular time its corporate trust business shall be principally
administered, which office at the date of execution of this Agreement is located
at 40 Wall Street - 46th Floor, New York, New York 10005, Attention: Investor
Relations Department.
"Current Market Value" per share means, with respect to the Maturity
Date and the Extended Maturity Date, the average of the highest closing bid
prices during normal trading hours in the over-the-counter market as reported on
the OTC Bulletin Board (or, if the Common Stock is traded over-the-counter as
reported on by the NASDAQ Stock Market or the NASDAQ Small Cap Market or listed
on a securities exchange, in such over-the-counter market or on such exchange)
of shares of the Common Stock for any 30 Trading Days during any 45 consecutive
Trading Day period that both begins and ends in the Valuation Period.
"CVR Certificates" and, unless the context otherwise requires, "CVRs"
mean the certificates, substantially in the form of Exhibit A attached hereto,
evidencing the CVRs.
"Depository" means The Depository Trust Company, its nominees and
successors.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Offer" means the Company's and Canadian Abraxas' offer to
exchange 11 1/2% Senior Secured Notes due 2004, Series A, and Common Stock and
CVRs for all of the Old Notes, and Consent Solicitation set to expire at 12:01
a.m., New York City Time, on December 17, 1999, unless extended.
"Extended Maturity Date" means May 21, 2001.
"Global CVRs" has the meaning specified in Section 2.02.
"Holder" means a Person in whose name a CVR is registered in the
Security Register.
"Institutional Accredited Investor" means an institution that is an
"accredited investor" as that term is defined in Rule 501(a)(1), (2), (3) or (7)
under the Securities Act.
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"Issue Date" means the date of original issuance of the CVRs.
"Maturity Date" means the first anniversary of the date of this
Agreement.
"NASDAQ Small Cap Market" means the National Association of Securities
Dealers Automated Quotation System Small Cap Market.
"NASDAQ Stock Market" means the National Association of Securities
Dealers Automated Quotation System National Market System.
"Non-U.S. Person" means a Person who is not a U.S. person, as defined
in Regulation S.
"Officer's Certificate" means a certificate signed by the Chairman of
the Board of Directors, the president, any vice president, the controller, the
treasurer or any assistant treasurer, the secretary or any assistant secretary
of the Company in his or her capacity as such an officer, and delivered to the
Rights Agent.
"Old Notes" means the 11.5% Senior Notes due 2004, Series D, of the
Company and Canadian Abraxas.
"Opinion of Counsel" means a written opinion of counsel, who may be
General Counsel for the Company (if any), and who shall be reasonably acceptable
to the Rights Agent.
"OTC Bulletin Board" means the quotation service maintained by the
National Association of Securities Dealers for equity securities not listed or
traded on the NASDAQ Stock Market or NASDAQ Small Cap Market or a national
securities exchange.
"Outstanding," or "outstanding" when used with respect to CVRs means,
as of the date of determination, all CVRs theretofore authenticated and
delivered under this Agreement, except:
(a)......CVRs theretofore cancelled by the Rights Agent or delivered to
the Rights Agent for cancellation;
(b)......From and after the earlier of the Maturity Date or, in the
event the Company shall extend the Maturity Date, the Extended Maturity Date,
CVRs, or portions thereof, for whose exercise shares of the Common Stock of the
Company in the necessary amount have been theretofore deposited with the Rights
Agent or any Paying Agent (other than the Company) in trust or set aside and
segregated in trust by the Company (if the Company shall act as its own Paying
Agent) for the Holders of such CVRs; and
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(c)......CVRs in exchange for or in lieu of which other CVRs have been
authenticated and delivered pursuant to this Agreement, other than any such CVRs
in respect of which there shall have been presented to the Rights Agent proof
satisfactory to it that such CVRs are held by a bona fide purchaser in whose
hands the CVRs are valid obligations of the Company; provided, however, that in
determining whether the Holders of the requisite outstanding CVRs have given any
request, demand, direction, consent or waiver hereunder, CVRs owned by the
Company or any other obligor upon the CVRs or any Affiliate of the Company or
such other obligor shall be disregarded and deemed not to be outstanding, except
that, in determining whether the Rights Agent shall be protected in relying upon
any such request, demand, direction, consent or waiver, only CVRs which the
Rights Agent knows to be so owned shall be so disregarded.
"Participating Noteholder" means each holder of the Old Notes who
participates in the Exchange Offer.
"Paying Agent" means any Person authorized by the Company to deliver
certificates representing shares of Common Stock previously deposited with such
Person pursuant to Section 3.01 on exercise of any CVRs.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, limited liability company, estate,
unincorporated organization or government or any agency or political subdivision
thereof.
"Per Share Market Value" means on any particular date (a) the closing
bid price per share of the Common Stock on such date on the principal stock
exchange on which the Common Stock is then listed or, if there is no such price
on such date, then the closing bid price on such exchange on the date nearest
preceding such date, or (b) if the Common Stock is not listed on any stock
exchange, the average of the high and low sales prices for a share of Common
Stock in the over-the-counter market, as reported by the NASDAQ Stock Market or
the NASDAQ Small Cap Market for such date, or, if there is no such price on such
date, then the average of the high and low sales prices on the date nearest
preceding such date, or (c) if the Common Stock is not quoted on the NASDAQ
Stock Market or the NASDAQ Small Cap Market, the average of the final bid and
final asked prices for a share of Common Stock in the over-the-counter market as
reported on the OTC Bulletin Board (or any similar organization or agency
succeeding to its functions of reporting prices), or (d) if the Common Stock is
no longer publicly traded, as determined by a nationally recognized or major
regional investment banking firm or firm of independent certified public
accountants of recognized standing (which may be the firm that regularly
examines the financial statements of the Company) selected in good faith by the
Board of Directors of the Company.
"Physical CVRs" has the meaning specified in Section 2.02.
"Responsible Officer," when used with respect to the Rights Agent,
means any officer assigned to the Corporate Trust Office and also means, with
respect to any particular corporate trust matter, any other officer of the
Rights Agent to whom such matter is referred because of his knowledge of and
familiarity with the particular subject.
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"Restricted Security" has the meaning assigned to such term in Rule
144(a)(3) under the Securities Act; provided, however, that the Rights Agent
shall be entitled to request and conclusively rely on an Opinion of Counsel with
respect to whether any CVR constitutes a Restricted Security.
"Rights Agent" means the Person named as the "Rights Agent" in the
first paragraph of this Agreement, until a successor Rights Agent shall have
become such pursuant to the applicable provisions of this Agreement, and
thereafter "Rights Agent," shall mean such successor Rights Agent.
"Securities Act" means the Securities Act of 1933, as amended.
"Security Register" and "Security Registrar" have the respective
meanings specified in Section 3.05.
"Surviving Person" has the meaning set forth in Section 8.01.
"Target Price" means (a) prior to the Maturity Date and from and after
the Maturity Date and prior to the Extended Maturity Date, the price (rounded
upwards or downwards to the nearest cent) determined by multiplying $5.03 times
the sum of (i) 1.00 plus (ii) the product of (A) the quotient of (1) the number
of days from and after November 2, 1999, to but excluding the date of
determination and (2) 366 times (B) 0.115, (b) at the Maturity Date, $5.68 , and
(c) at the Extended Maturity Date, $5.97. In each case, upon each occurrence of
an event specified in Section 3.01(f), such amounts, as they may have been
previously adjusted, shall be adjusted pursuant to Section 3.01(f). "Trading
Day" means (a) a day on which the Common Stock is traded on the principal stock
exchange on which the Common Stock is then listed, or (b) if the Common Stock is
not listed on any stock exchange, a day on which the Common Stock is traded in
the over-the-counter market, as reported by the NASDAQ Stock Market or NASDAQ
Small Cap Market, or (c) if the Common Stock is not traded on the NASDAQ Stock
Market or the NASDAQ Small Cap Market, a day on which the Common Stock is traded
in the over-the-counter market as reported on the OTC Bulletin Board.
"Transaction" means (i) a merger, consolidation or other business
combination involving the Company in which the Company is not the surviving
Person (other than such a transaction in which the Company survives only as a
wholly-owned subsidiary of another Person) or (ii) a sale, transfer, lease or
other disposition, of the properties and assets of the Company substantially as
an entirety; provided, however, that a "Transaction" shall not mean, or occur
upon, a merger of the Company and any wholly-owned subsidiary of the Company.
"Transaction Price" means the price per share of Common Stock payable
to holders of the Common Stock in a Transaction.
"Transaction Record Date" shall have the meaning set forth in Section
8.01(c).
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"Valuation Period" means the period beginning on the date of the
closing of the Exchange Offer and ending on the Maturity Date or the Extended
Maturity Date, as the case may be.
"Vice President," when used with respect to the Company or the Rights
Agent, means any vice president, whether or not designated by a number or a word
or words added before or after the title of "vice president."
Section 1.02 Compliance Certificates.
(a)......Upon any application or request by the Company to the Rights
Agent to take any action under any provision of this Agreement, the Company
shall furnish to the Rights Agent an Officer's Certificate stating that all
conditions precedent, if any, provided for in this Agreement (including any
covenants, compliance with which constitutes a condition precedent) relating to
the proposed action have been complied with, except that, in the case of any
such application or request as to which the furnishing of such documents is
specifically required by any provision of this Agreement relating to such
particular application, no additional certificate or opinion need be furnished.
(b)......Every certificate with respect to compliance with a condition
or covenant provided for in this Agreement shall include:
(1) a statement that each individual signing
such certificate has read such covenant or condition and the definitions herein
relating thereto;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of each such individual,
he has made such examination or investigation as is necessary to enable him to
express an informed opinion as to whether or not such covenant or condition has
been complied with; and
(4) a statement as to whether, in the opinion of each such
individual, such condition or covenant has been complied with.
Section 1.03 Form of Documents Delivered to Rights Agent.
(a)......In any case where several matters are required to be certified
by, or covered by an opinion of, any specified Person, it is not necessary that
all such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
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(b)......Any Opinion of Counsel may be based upon an Officer's
Certificate unless such counsel knows, or in the exercise of reasonable care
should know, that the Officer's Certificate or representations with respect to
the matters upon which his opinion is based are erroneous.
(c)......Any certificate or statement of an officer of the Company may
be based upon a certificate or representation by an officer or officers of the
Company, unless such officer knows, or in the exercise of reasonable care should
know, that the certificate or representations with respect to such matters are
erroneous.
(d)......Any certificate or statement of an officer of the Company may
be based, insofar as it relates to accounting matters, upon a certificate or
opinion of or representations by an accountant or firm of accountants in the
employ of the Company, unless such officer knows that the certificate or opinion
or representations with respect to the accounting matters upon which his
certificate or statement may be based as aforesaid are erroneous, or in the
exercise of reasonable care should know that the same are erroneous. Any
certificate or opinion of any independent firm of public accountants filed with
the Rights Agent shall contain a statement that such firm is independent,
(e)......Where any Person is required to make, give or execute two or
more applications, requests, consents, certificates, statements, opinions or
other instruments under this Agreement, they may, but need not, be consolidated
and form one instrument.
Section 1.04 Acts of Holders.
(a)......Any request, demand, authorization, direction, notice,
consent, waiver or other action provided by this Agreement to be given or taken
by Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by agent duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Rights Agent and, where it is hereby expressly required, to the Company.
Such instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Holders signing
such instrument or instruments. Proof of execution of any such instrument or of
a writing appointing any such agent shall be sufficient for any purpose of this
Agreement and (subject to Section 4.01) conclusive in favor of the Rights Agent
and the Company, if made in the manner provided in this Section.
(b)......The fact and date of the execution by any Person of any such
instrument or writing may be proved in any reasonable manner which the Rights
Agent deems sufficient.
(c)......The ownership of CVRs shall be proved by the Security
Register.
(d)......At any time prior to (but not after) the evidencing to the
Rights Agent, as provided in this Section 1.04, of the taking of any action by
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the Holders of the CVRs specified in this Agreement in connection with such
action, any Holder of a CVR the serial number of which is shown by the evidence
to be included among the serial numbers of the CVRs the Holders of which have
consented to such action may, by filing written notice at the Corporate Trust
Office and upon proof of holding as provided in this Section 1.04, revoke such
action so far as concerns such CVR. Any request, demand, authorization,
direction, notice, consent, waiver or other action by the Holder of any CVR
shall bind every future Holder of the same CVR or the Holder of every CVR issued
upon the registration of transfer thereof or in exchange therefor or in lieu
thereof, in respect of anything done, suffered or omitted to be done by the
Rights Agent, any Paying Agent or the Company in reliance thereon, whether or
not notation of such action is made upon such CVR.
Section 1.05 Notices, Etc. to Rights Agent and Company.
Any request, demand, authorization, direction, notice, consent, waiver
or other Act of Holders or other document provided or permitted by this
Agreement to be made upon, given or furnished to, or filed with:
(a)......the Rights Agent by any Holder or by the Company shall be
sufficient for every purpose hereunder if made, given, furnished or filed, in
writing, to or with the Rights Agent at its Corporate Trust Office, Attention:
Investor Relations Department; or
(b)......the Company by the Rights Agent or by any Holder shall be
sufficient for every purpose hereunder if in writing and mailed, first-class
postage prepaid, to the Company addressed to it at 500 N. Loop 1604 East, Suite
100, San Antonio, Texas 78232, Attention: Chief Financial Officer, or at any
other address previously furnished in writing to the Rights Agent by the
Company.
Section 1.06 Notice to Holders; Waiver.
Where this Agreement provides for notice to Holders of any event, such
notice shall be sufficiently given (unless otherwise herein expressly provided)
if in writing and mailed, first-class postage prepaid, to each Holder affected
by such event, at his address as it appears in the Security Register, not later
than the latest date, and not earlier than the earliest date, prescribed for the
giving of such notice. In any case where notice to Holders is given by mail,
neither the failure to mail such notice, nor any defect in any notice so mailed,
to any particular Holder shall affect the sufficiency of such notice with
respect to other Holders. Where this Agreement provides for notice in any manner
such notice may be waived in writing by the Person entitled to receive such
notice, either before or after the event, and such waiver shall be the
equivalent of such notice. Waivers of notice by Holders shall be filed with the
Rights Agent, but such filing shall not be a condition precedent to the validity
of any action taken in reliance upon such waiver.
In case by reason of the suspension of regular mail service or by
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reason of any other cause, it shall be impracticable to mail notice of any event
as required by any provision of this Agreement, then any method of giving such
notice as shall be satisfactory to the Rights Agent shall be deemed to be a
sufficient giving of such notice.
Section 1.07 Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of Contents are
for convenience only and shall not affect the construction hereof.
Section 1.08 Successors and Assigns.
All covenants and agreements in this Agreement by the Company shall
bind its successors and assigns, whether so expressed or not.
Section 1.09 Benefits of Agreement.
Nothing in this Agreement or in the CVRs, express or implied, shall
give to any Person (other than the parties hereto and their successors
hereunder, any Paying Agent and the Holders) any benefit or any legal or
equitable right, remedy or claim under this Agreement or under any covenant or
provision herein contained, all such covenants and provisions being for the sole
benefit of the parties hereto and their successors and of the Holders.
Section 1.10 Governing Law.
This Agreement and the CVRs shall be governed by and construed in
accordance with the laws of the State of New York.
Section 1.11 Legal Holidays.
In the event that the Maturity Date or the Extended Maturity Date, as
the case may be, shall not be a Business Day, then (notwithstanding any
provision of this Agreement or the CVRs to the contrary) payment on the CVRs
need not be made on such date, but may be made on the next succeeding Business
Day with the same force and effect as if made on the Maturity Date or the
Extended Maturity Date, as the case may be.
Section 1.12 Separability Clause.
In case any provision in this Agreement or in the CVRs shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
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ARTICLE TWO
CVR FORMS
Section 2.01 Forms Generally.
The CVRs and the Rights Agent's certificate of authentication shall be
in substantially the forms set forth in this Article, with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by this Agreement and may have such letters, numbers or other marks of
identification and such legends or endorsements placed thereon as may be
required to comply with the rules of any securities exchange or as may be
required by law or any rule or regulation pursuant thereto, all as may be
determined by officers executing such CVRs, as evidenced by their execution of
the CVRs.
The definitive CVRs shall be printed, lithographed or engraved on steel
engraved borders or produced by any combination of these methods or may be
produced in any other manner permitted by the rules of any securities exchange
on which the CVRs may be listed, all as determined by the officers executing
such CVRs, as evidenced by their execution of such CVRs.
Section 2.02 Form of CVR Certificate. CVRs issued pursuant to the
Exchange Offer shall be issued in the form of one or more permanent global CVRs
in registered form, substantially in the form set forth in Exhibit A (the
"Global CVRs"), deposited with the Rights Agent, as custodian for the
Depository, duly executed by the Company and authenticated by the Rights Agent
as hereinafter provided. CVR certificates issued in exchange for interests in a
Global CVR Certificate pursuant to Section 3.12 may be issued in the form of
permanent certificated CVRs in registered form in substantially the form set
forth in Exhibit A (the "Physical CVRs"). CVRs originally issued other than in
reliance upon Section 3(a)(9) of the Securities Act shall be issued in the form
of one or more Physical CVRs, each duly executed by the Company and
authenticated by the Rights Agent as hereinafter provided and bearing the legend
prescribed by the initial paragraph of Section 3.12.
ARTICLE THREE
THE CVRs
Section 3.01 Title and Terms.
(a)......The aggregate number of CVRs which may be authenticated and
delivered under this Agreement is limited to 16,498,796, except for CVRs
authenticated and delivered upon registration of transfer of, or in exchange
for, or in lieu of, other CVRs pursuant to Sections 3.04, 3.05, 3.06 or 6.05.
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(b)......The CVRs shall be known and designated as the "Contingent
Value Rights" of the Company.
(c)......Subject to adjustment pursuant to Section 3.01(f), the Company
shall issue to each Holder of a CVR Certificate at the Maturity Date, unless the
Company shall, in its sole discretion, extend the Maturity Date to the Extended
Maturity Date, then at the Extended Maturity Date for each CVR held by such
Holder, upon presentment by such Holder of such Holder's CVR Certificate, with
the form of Election to Exercise thereon duly executed, the number of shares of
Common Stock of the Company, if any, equal to (i) the Target Price minus the
Current Market Value per share divided by (ii) the Current Market Value per
share; provided, however, in no event shall greater than (i) 3.8728 shares of
Common Stock be issuable pursuant to each CVR on the Maturity Date or (ii)
6.5067 shares of Common Stock be issuable pursuant to each CVR on the Extended
Maturity Date.
Notwithstanding anything to the contrary set forth herein, the CVRs
shall terminate and no shares of Common Stock will be issuable pursuant thereto
(i) if the Current Market Value per share of the Common Stock equals or exceeds
$5.68 on the Maturity Date or $5.97 on the Extended Maturity Date, if the
Maturity Date is extended by the Company to the Extended Maturity Date, as the
case may be, or (ii) if the average of the Per Share Market Value prices for any
period of 30 Trading Days during any 45 consecutive Trading Days during the
Valuation Period equals or exceeds the Target Price on the 45th day of such 45
consecutive Trading Day period. In the event that the Company determines that
shares of Common Stock are not issuable to the Holders on maturity of the CVRs
on the Maturity Date or the Extended Maturity Date, as the case may be, the
Company shall give to the Holders and the Rights Agent notice of such
determination. Upon making such determination, absent manifest error, the CVRs
shall terminate and become null and void and the Holder thereof shall have no
further rights with respect thereto. The failure to give such notice or any
defect therein shall not affect the validity of such determination.
All determinations by the Company in connection with this Section
3.01(c), absent manifest error, shall be final and binding on the Company and
the Holders.
(d)......The Company may at its option extend the Maturity Date to the
Extended Maturity Date. Such option shall be exercised by (i) publishing notice
of such extension in the Authorized Newspaper and furnishing notice, in the form
set forth on Exhibit B hereto, to the Rights Agent, or (ii) furnishing notice,
in the form set forth on Exhibit B hereto, to the Rights Agent and each Holder
of such extension, in each case, not less than one Business Day prior to the
Maturity Date; provided, however, that no defect in any such notice shall affect
the validity of the extension of the Maturity Date to the Extended Maturity
Date, and that any notice when published and mailed to the Rights Agent and a
Holder in the aforesaid manner shall be conclusively deemed to have been
received by such Holder whether or not actually received by such Holder.
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(e)......Notwithstanding any provision of this Agreement or the CVR
Certificates to the contrary, no interest shall accrue on any amounts payable on
the CVRs to any Holder.
(f)......In the event the Company shall in any manner subdivide (by
stock split, stock dividend or otherwise) or combine (by reverse stock split or
otherwise) the number of outstanding shares of Common Stock, the Company shall
similarly subdivide or combine the CVRs and shall appropriately adjust the
Target Price and the numbers of shares of Common Stock referred to in clauses
(i) and (ii) of Sections 3.01(c) and 8.01(c). Whenever an adjustment is made as
provided in this Section 3.01(f), the Company shall, (i) promptly prepare a
certificate setting forth such adjustment and a brief statement of the facts
accounting for such adjustment, (ii) promptly file with the Rights Agent a copy
of such certificate and (iii) mail a brief summary thereof to each Holder. The
Rights Agent shall be fully protected in relying on any such certificate and on
any adjustment therein contained. Such adjustment absent manifest error shall be
final and binding on the Company and the Holders. Each outstanding CVR
Certificate shall thenceforth represent that number of adjusted CVRs necessary
to reflect such subdivision or combination, and reflect the adjusted Target
Price.
Section 3.02 Registrable Form.
The CVRs shall be issuable only in registered form.
Section 3.03 Execution, Authentication, Delivery, Dating and CUSIP
Number.
(a)......The CVRs shall be executed on behalf of the Company by its
Chairman of the Board of Directors or its president or any vice president or its
treasurer, under its corporate seal which may, but need not, be attested. The
signature of any of these officers on the CVRs may be manual or facsimile.
(b)......CVRs bearing the manual or facsimile signatures of individuals
who were at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such CVRs or did not hold
such offices at the date of such CVRs.
(c)......At any time and from time to time after the execution and
delivery of this Agreement, the Company may deliver CVRs executed by the Company
to the Rights Agent for authentication, together with a Company Order for the
authentication and delivery of such CVRs; and the Rights Agent in accordance
with such Company Order shall authenticate and deliver such CVRs as provided in
this Agreement and not otherwise. Each such Company Order shall specify the
amount of CVRs to be authenticated and whether the CVRs are to be issued as
Physical CVRs or Global CVRs or such other information as the Rights Agent may
reasonably request.
(d)......Each CVR shall be dated the date of its authentication.
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(e)......No CVR shall be entitled to any benefit under this Agreement
or be valid or obligatory for any purpose unless there appears on such CVR a
certificate of authentication substantially in the form provided for herein duly
executed by the Rights Agent by manual signature of an authorized officer, and
such certificate upon any CVR shall be conclusive evidence, and the only
evidence, that such CVR has been duly authenticated and delivered hereunder and
that the Holder is entitled to the benefits of this Agreement.
(f)......The Company in issuing the CVRs may use one or more "CUSIP"
numbers, and, if so, the Rights Agent shall use the appropriate CUSIP number as
a convenience to Holders; provided, however, that no representation is hereby
deemed to be made by the Rights Agent as to the correctness or accuracy of a
CUSIP number contained in any notice to Holders or in the CVRs, and that
reliance may be placed only on the other identification numbers contained on the
CVRs. The Company shall promptly notify the Rights Agent in writing of any
change in a CUSIP number.
Section 3.04 Temporary CVRs.
(a)......Pending the preparation of definitive CVRs, the Company may
execute, and upon Company order the Rights Agent shall authenticate and deliver,
temporary CVRs which are printed, lithographed, typewritten, mimeographed or
otherwise produced, substantially of the tenor of the definitive CVRs in lieu of
which they are issued and with such appropriate insertions, omissions,
substitutions and other variations as the officers executing such CVRs may
determine with the concurrence of the Rights Agent. Temporary CVRs may contain
such reference to any provisions of this Agreement as may be appropriate. Every
temporary CVR shall be executed by the Company and be authenticated by the
Rights Agent upon the same conditions and in substantially the same manner, and
with like effect, as the definitive CVRs.
(b)......If temporary CVRs are issued, the Company will cause
definitive CVRs to be prepared without unreasonable delay. After the preparation
of definitive CVRs, the temporary CVRs shall be exchangeable for definitive CVRs
upon surrender of the temporary CVRs at the office or agency of the Company
designated for such purpose pursuant to Section 7.02, without charge to the
Holder. Upon surrender for cancellation of any one or more temporary CVRs the
Company shall execute and the Rights Agent shall authenticate and deliver in
exchange therefor a like amount of definitive CVRs. Until so exchanged, the
temporary CVRs shall in all respects be entitled to the same benefits under this
Agreement as definitive CVRs.
Section 3.05 Registration, Registration of Transfer and Exchange.
(a)......The Company shall cause to be kept at the Corporate Trust
Office of the Rights Agent a register (the register maintained in such office
and in any other office or agency designated pursuant to Section 7.02 being
herein sometimes referred to as the "Security Register") in which, subject to
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such reasonable regulations as it may prescribe, the Company shall provide for
the registration of CVRs and of transfers of CVRs. The Rights Agent is hereby
initially appointed "Security Registrar" for the purpose of registering CVRs and
transfers of CVRs as herein provided.
(b)......Upon surrender for registration of transfer of any CVR at the
office or agency of the Company designated pursuant to Section 7.02, the Company
shall execute, and the Rights Agent shall authenticate and deliver, in the name
of the designated transferee or transferees, one or more new CVR Certificates
representing the same aggregate number of CVRs represented by the CVR
Certificate so surrendered that are to be transferred and the Company shall
execute and the Rights Agent shall authenticate and deliver, in the name of the
transferor, one or more new CVR Certificates represented by such CVR Certificate
that are not to be transferred.
(c)......At the option of the Holder, CVR Certificates may be exchanged
for other CVR Certificates that represent in the aggregate the same number of
CVRs as the CVR Certificates surrendered at such office or agency. Whenever any
CVR Certificates are so surrendered for exchange, the Company shall execute, and
the Rights Agent shall authenticate and deliver, the CVR Certificates which the
Holder making the exchange is entitled to receive.
(d)......All CVRs issued upon any registration of transfer or exchange
of CVRs shall be the valid obligations of the Company, evidencing the same
right, and entitled to the same benefits under this Agreement, as the CVRs
surrendered upon such registration of transfer or exchange.
(e)......Every CVR presented or surrendered for registration of
transfer or for exchange shall (if so required by the Company or the Security
Registrar) be duly endorsed, or be accompanied by a written instrument of
transfer in form satisfactory to the Company and the Security Registrar, duly
executed by the Holder thereof or his attorney duly authorized in writing.
(f)......No service charge shall be made for any registration of
transfer or exchange of CVRs, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any registration of transfer or exchange of CVRs, other than
exchanges pursuant to Section 3.04 or not involving any transfer.
(g)......Any holder of a beneficial interest in a Global CVR shall, by
acceptance of such Global CVR, agree that transfers of beneficial interests in
such Global CVR may be effected only through a book--entry system maintained by
the Holder of such Global CVR (or its agent), and that ownership of a beneficial
interest in the CVR shall be required to be reflected in a book--entry system.
Section 3.06 Mutilated, Destroyed, Lost and Stolen CVRs.
(a)......If (i) any mutilated CVR is surrendered to the Rights Agent or
(ii) the Company and the Rights Agent receive evidence to their satisfaction of
the destruction, loss or theft of any CVR, and there is delivered to the Company
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and the Rights Agent such security or indemnity as may be required by them to
save each of them harmless, then, in the absence of notice to the Company or the
Rights Agent that such CVR has been acquired by a bona fide purchaser, the
Company shall execute and upon its written request the Rights Agent shall
authenticate and deliver, in exchange for any such mutilated CVR or in lieu of
any such destroyed, lost or stolen CVR, a new CVR Certificate of like tenor and
amount of CVRs, bearing a number not contemporaneously outstanding.
(b)......In case any such mutilated, destroyed, lost or stolen CVR has
become or is to become due and payable within 15 days, the Company in its
discretion may, instead of issuing a new CVR Certificate, make payment in
respect of such CVR in accordance with Section 3.07 on the Maturity Date or the
Extended Maturity Date, as the case may be.
(c)......Upon the issuance of any new CVRs under this Section 3.06, the
Company may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Rights Agent) connected
therewith.
(d)......Every new CVR issued pursuant to this Section 3.06 in lieu of
any destroyed, lost or stolen CVR shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen CVR shall be at any time enforceable by anyone, and shall be entitled to
all benefits of this Agreement equally and proportionately with any and all
other CVRs duly issued hereunder.
(e)......The provisions of this Section 3.06 are exclusive and shall
preclude (to the extent lawful) all other rights and remedies with respect to
the replacement or payment of mutilated, destroyed, lost or stolen CVRs.
Section 3.07 Presentation of CVR Certificate. Payment of any amounts on
the CVRs shall be made only upon presentation thereof by the Holder thereof,
with the form of Election to Exercise thereon duly executed by such Holder, at
the office or agency of the Company maintained for that purpose in New York, New
York, or the Corporate Trust Office and at any other office or agency maintained
by the Company for such purpose. Subject to the provisions of Sections 3.10 and
8.01(c), such payment shall be made in one or more certificates representing the
number of shares of Common Stock of the Company to which the Holder is entitled.
Such certificates shall be(i) registered in the name of the Holder and (ii)
legended as provided in the initial paragraph of Section 3.12 if and only if
payment is being made in relation to any CVRs originally issued to Houlihan
Lokey Howard & Zukin Capital.
Section 3.08 Persons Deemed Owners. Prior to the time of due
presentment for registration of transfer, the Company, the Rights Agent and any
agent of the Company or the Rights Agent may treat the Person in whose name any
CVR is registered as the owner of such CVR for the purpose of receiving payment
on such CVR and for all other purposes whatsoever, whether or not such CVR be
overdue, and neither the Company, the Rights Agent nor any agent of the Company
or the Rights Agent shall be affected by notice to the contrary.
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Section 3.09 Cancellation. All CVRs surrendered for payment,
registration of transfer or exchange shall, if surrendered to any Person other
than the Rights Agent, be delivered to the Rights Agent and shall be promptly
cancelled by it. The Company may at any time deliver to the Rights Agent for
cancellation any CVRs previously authenticated and delivered hereunder which the
Company may have acquired in any manner whatsoever, and all CVRs so delivered
shall be promptly cancelled by the Rights Agent. No CVRs shall be authenticated
in lieu of or in exchange for any CVRs cancelled as provided in this Section
3.09, except as expressly permitted by this Agreement. All cancelled CVRs held
by the Rights Agent shall be disposed of as directed by a Company Order.
Section 3.10 Fractional CVRs and Fractional Shares. (a) The Company
shall not be required to issue fractions of shares of Common Stock upon exercise
of the CVRs or to distribute certificates which evidence fractional shares of
Common Stock; provided that the foregoing shall not preclude any holder of CVR
Certificates from aggregating such CVR Certificates in any exercise thereof and
receiving any whole number of shares of Common Stock, in which case the
foregoing shall apply only to any fraction of a share resulting from such
aggregation. In lieu of any such fractional shares of Common Stock, the Company
shall pay to the Holders of CVR Certificates at the time such CVRs are exercised
as herein provided an amount in cash equal to the same fraction of the Per Share
Market Value of one share of Common Stock.
(b)......The Holder of a CVR by the acceptance of the CVR expressly
waives his right to receive any fractional shares upon exercise of a CVR except
as permitted by this Section 3.10.
(c)......Nothing contained in subsection (a) shall impair any right of
any Holder to receive any CVR for a fraction of a share of Common Stock pursuant
to the provisions of this Agreement or any CVR Certificate.
Section 3.11 CVR Certificate Holder Not Deemed a Stockholder. No
Holder, as such, of any CVR Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the shares of capital stock
which may at any time be issuable on the exercise of the CVRs represented
thereby, nor shall anything contained herein or in any CVR Certificate be
construed to confer upon the Holder of any CVR Certificate, as such, any of the
rights of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to stockholders at any meeting thereof,
or to give or withhold consent to any corporate action, or to receive notice of
meetings or other actions affecting stockholders, or to receive dividends or
subscription rights, or otherwise, until the CVR or CVRs evidenced by such CVR
Certificate shall have been exercised in accordance with the provisions hereof.
Section 3.12 Restrictive Legends.
Each Global CVR and Physical CVR that constitutes a Restricted Security
shall bear the following legend (the "Private Placement Legend") on the face
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thereof, and the assignment form that is part of such CVR shall include the
additional provisions set forth in Exhibit C, until after the second anniversary
of the later of the Issue Date and the last date on which the Company or any
Affiliate of the Company was the owner of such CVR (or any predecessor security)
(or such shorter period of time as permitted by Rule 144(k) under the Securities
Act or any successor provision thereunder), unless otherwise agreed by the
Company and the Holder thereof:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR
SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S.
PERSONS EXCEPT AS SET FORTH BELOW. BY ITS ACQUISITION HEREOF, THE HOLDER (1)
REPRESENTS THAT (A) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN
RULE 501(a) UNDER THE SECURITIES ACT), (AN "INSTITUTIONAL ACCREDITED INVESTOR")
OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN OFFSHORE
TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (2) AGREES
THAT IT WILL NOT WITHIN TWO YEARS AFTER THE ORIGINAL ISSUANCE OF THIS SECURITY
RESELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE COMPANY OR ANY
SUBSIDIARY THEREOF, (B) INSIDE THE UNITED STATES TO AN INSTITUTIONAL ACCREDITED
INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES (OR HAS FURNISHED ON ITS BEHALF
BY A U.S. BROKER-DEALER) TO THE RIGHTS AGENT A SIGNED LETTER CONTAINING CERTAIN
REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THIS
SECURITY (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM THE RIGHTS AGENT FOR
THIS SECURITY), (C) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN
COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT (PROVIDED THAT ANY SUCH SALE
OR TRANSFER IN CANADA OR TO OR FOR THE BENEFIT OF A CANADIAN RESIDENT MUST BE
EFFECTED PURSUANT TO AN EXEMPTION FROM THE PROSPECTUS AND REGISTRATION
REQUIREMENTS UNDER APPLICABLE CANADIAN SECURITIES LAWS), (D) PURSUANT TO THE
EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF
AVAILABLE), OR (E) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS
SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN
CONNECTION WITH ANY TRANSFER OF THIS SECURITY WITHIN TWO YEARS AFTER THE
ORIGINAL ISSUANCE OF THIS SECURITY, IF THE PROPOSED TRANSFEREE IS AN
INSTITUTIONAL ACCREDITED INVESTOR, THE HOLDER MUST, PRIOR TO SUCH TRANSFER,
FURNISH TO THE RIGHTS AGENT AND THE COMPANY SUCH CERTIFICATIONS, LEGAL OPINIONS
OR OTHER INFORMATION AS EITHER OF THEM MAY REASONABLY REQUIRE TO CONFIRM THAT
SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION
NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. AS USED
HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE
THE MEANING GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT.
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Each Global CVR shall also bear the following legend on the face
thereof:
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR SECURITIES IN
DEFINITIVE FORM, THIS SECURITY MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE
DEPOSITORY TO A NOMINEE OF THE DEPOSITORY, OR BY ANY SUCH NOMINEE OF THE
DEPOSITORY, OR BY THE DEPOSITORY OR NOMINEE OF SUCH SUCCESSOR DEPOSITORY OR ANY
SUCH NOMINEE TO A SUCCESSOR DEPOSITORY OR A NOMINEE OF SUCH SUCCESSOR
DEPOSITORY. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO AN ISSUER OR
ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE
TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN
WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR
SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL
BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN
SECTION 3.13 OF THE CVR AGREEMENT.
Section 3.13. Special Transfer Provisions.
(a)......Transfers to Institutional Accredited Investors and Non-U.S.
Persons. The following provisions shall apply with respect to the registration
of any proposed transfer of a CVR constituting a Restricted Security to any
Institutional Accredited Investor or to any Non-U.S. Person:
(i) the Security Registrar shall register the transfer of any
CVR constituting a Restricted Security, whether or not such CVR bears the
Private Placement Legend, if (1) in the case of a transfer to an Accredited
Investor (excluding Non-U.S. Persons), the proposed transferee has delivered to
the Security Registrar a certificate substantially in the form of Exhibit D
hereto or (2) in the case of a transfer to a Non-U.S. Person, the proposed
transferor has delivered to the Security Registrar a certificate substantially
in the form of Exhibit E hereto; and
(ii) if the proposed transferor is an Agent Member holding a
beneficial interest in a Global CVR, upon receipt by the Security Registrar of
(x) the certificate, if any, required by paragraph (i) above and (y) written
instructions given in accordance with the Depository's and the Security
Registrar's procedures,
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whereupon (a) the Security Registrar shall reflect on its books and
records the date and (if the transfer does not involve a transfer of outstanding
Physical CVRs) a decrease in the principal amount of such Global CVR in an
amount equal to the number of CVRs in the Global CVR to be transferred, and (b)
the Company shall execute and the Rights Agent shall authenticate and deliver
one or more Physical CVRs of like tenor and amount.
(b)......Private Placement Legend. Upon the transfer, exchange or
replacement of CVRs not bearing the Private Placement Legend, the Security
Registrar shall deliver CVRs that do not bear the Private Placement Legend. Upon
the transfer, exchange or replacement of CVRs bearing the Private Placement
Legend, the Security Registrar shall deliver only CVRs that bear the Private
Placement Legend unless there is delivered to the Security Registrar an Opinion
of Counsel reasonably satisfactory to the Company and the Rights Agent to the
effect that neither such legend nor the related restrictions on transfer are
required in order to maintain compliance with the provisions of the Securities
Act.
(c)......General. By its acceptance of any CVR bearing the Private
Placement Legend, each Holder of such a CVR acknowledges the restrictions on
transfer of such CVR set forth in this Agreement and in the Private Placement
Legend and agrees that it will transfer such CVR only as provided in this
Agreement.
The Security Registrar shall retain copies of all letters, notices and
other written communications received pursuant to this Section 3.13 or Section
3.14. The Company shall have the right to inspect and make copies of all such
letters, notices or other written communications at any reasonable time during
the Security Registrar's normal business hours upon the giving of reasonable
written notice to the Security Registrar.
(d)......Transfers of CVRs Held by Affiliates. Any certificate (i)
evidencing a CVR that has been transferred to an Affiliate of the Company within
two years after the Issue Date, as evidenced by a notation on the Assignment
Form for such transfer or in the representation letter delivered in respect
thereof or (ii) evidencing a CVR that has been acquired from an Affiliate (other
than by an Affiliate) in a transaction or a chain of transactions not involving
any public offering, shall, until three years after the last date on which
either of the Company or any Affiliate of the Company was an owner of such CVR,
in each case, bear a legend in substantially the form set forth in Section 3.12
hereof, unless otherwise agreed by the Company (with written notice thereof to
the Rights Agent).
Section 3.14 Book-Entry Provisions for Global CVRs.
(a)......The Global CVRs initially shall (i) be registered in the name
of the Depository or the nominee of such Depository, (ii) be delivered to the
Rights Agent as custodian for such Depository and (iii) bear legends as set
forth in the second paragraph of Section 3.12.
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Members of, or participants in, the Depository ("Agent Members") shall
have no rights under this Agreement with respect to any Global CVR held on their
behalf by the Depository, or the Rights Agent as its custodian, or under the
Global CVRs, and the Depository may be treated by the Company, the Rights Agent
and any Agent of the Company or the Rights Agent as the absolute owner of such
Global CVR for all purposes whatsoever. Notwithstanding the foregoing, nothing
herein shall prevent the Company, the Rights Agent or any Agent of the Company
or the Rights Agent from giving effect to any written certification, proxy or
other authorization furnished by the Depository or impair, as between the
Depository and its Agent Members, the operation of customary practices governing
the exercise of the rights of a Holder of any CVR.
(b)......Transfers of a Global CVR shall be limited to transfers in
whole, but not in part, to the Depository, its successors or their respective
nominees. Interests of beneficial owners in a Global CVR may be transferred or
exchanged for Physical CVRs in accordance with the rules and procedures of the
Depository. In addition, Physical CVRs shall be transferred to all beneficial
owners in exchange for their beneficial interests in a Global CVR if the
Depository notifies the Company that it is unwilling or unable to continue as
Depository for the Global CVRs and a successor depositary is not appointed by
the Company within 90 days of such notice.
(c)......In connection with any transfer or exchange of a portion of
the beneficial interest in a Global CVR to beneficial owners pursuant to
paragraph (b), the Registrar shall (if one or more Physical CVRs are to be
issued) reflect on its books and records the date and a decrease in the
principal amount of such Global CVR in an amount equal to the principal amount
of the beneficial interest in the Global CVR to be transferred, and the Company
shall execute and the Rights Agent shall authenticate and deliver, one or more
Physical CVRs of like tenor and amount.
(d)......In connection with the transfer of an entire Global CVR to
beneficial owners pursuant to paragraph (b), such Global CVR shall be deemed to
be surrendered to the Rights Agent for cancellation, and the Company shall
execute and the Rights Agent shall authenticate and deliver, to each beneficial
owner identified by the Depository in exchange for its beneficial interest in
the Global CVR, an equal aggregate principal amount of Physical CVRs of
authorized denominations.
(e)......The Holder of a Global CVR may grant proxies and otherwise
authorize any Person, including Agent Members and Persons that may hold
interests through Agent Members, to take any action which a Holder is entitled
to take under this Agreement.
Section 3.15 Prohibition on Short Positions.
During the Valuation Period, no Holder (or owner of a beneficial
interest in a CVR) may establish a short position in the Common Stock or in
derivatives of the Common Stock.
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ARTICLE FOUR
THE RIGHTS AGENT
Section 4.01 Certain Duties and Responsibilities.
(a)......With respect to the Holders of CVRs issued hereunder, the
Rights Agent undertakes to perform such duties and only such duties as are
specifically set forth in this Agreement.
(b)......In the absence of bad faith on its part, the Rights Agent may
conclusively rely, as to the truth of the statements and the correctness of the
opinions expressed therein, upon certificates or opinions furnished to the
Rights Agent and conforming to the requirements of this Agreement; but in the
case of any such certificates or opinions which by any provision hereof are
specifically required to be furnished to the Rights Agent, the Rights Agent
shall be under a duty to examine the same to determine whether or not they
conform to the requirements of this Agreement.
(c)......The Rights Agent shall be liable hereunder only for its own
gross negligence, bad faith or willful misconduct.
(d)......The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from any
person reasonably believed by the Rights Agent to be the Chairman of the Board,
the President or any Vice President or the Secretary or any Assistant Secretary
or the Treasurer or any Assistant Treasurer of the Company, and to apply to such
officers for advice or instructions in connection with its duties, and it shall
not be liable for any action taken, suffered or omitted to be taken by it in
good faith in accordance with instructions of any such officer. Any application
by the Rights Agent for written instructions from the Company may, at the option
of the Rights Agent, set forth in writing any action proposed to be taken or
omitted by the Rights Agent under this Agreement and the date on or after which
such action shall be taken or such omission shall be effective. The Rights Agent
shall not be liable for any action taken by, or omission of, the Rights Agent in
accordance with a proposal included in any such application on or after the date
specified in such application (which date shall not be less than five Business
Days after the date any officer of the Company actually receives such
application, unless any such officer shall have consented in writing to an
earlier date) unless, prior to taking any such action (or the effective date in
the case of an omission), the Rights Agent shall have received written
instructions in response to such application specifying the action to be taken
or omitted.
Section 4.02 Certain Rights of Rights Agent.
The Rights Agent undertakes to perform such duties and only such duties
as are specifically set forth in this Agreement, and no implied covenants or
obligations shall be read into this Agreement against the Rights Agent.
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(a)......The Rights Agent may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond, debenture,
note, other evidence of indebtedness or other paper or document believed by it
to be genuine and to have been signed or presented by the proper party or
parties.
(b)......Any request or direction of the Company mentioned herein shall
be sufficiently evidenced by a Company Request or Company Order and any
resolution of the Board of Directors may be sufficiently evidenced by a Board
Resolution.
(c)......Whenever in the administration of this Agreement the Rights
Agent shall deem it desirable that a matter be proved or established prior to
taking, suffering or omitting any action hereunder, the Rights Agent (unless
other evidence be herein specifically prescribed) may, in the absence of bad
faith on its part, rely upon an Officer's Certificate.
(d)......The Rights Agent may consult with counsel and the written
advice of such counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or omitted
by it hereunder in good faith and in reliance thereon.
(e)......The Rights Agent shall be under no obligation to exercise any
of the rights or powers vested in it by this Agreement at the request or
direction of any of the Holders pursuant to this Agreement, unless such Holders
shall have offered to the Rights Agent reasonable security or indemnity against
the costs, expenses and liabilities which might be incurred by it in compliance
with such request or direction.
(f)......The Rights Agent shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, consent, order, approval,
appraisal, bond, debenture, note, coupon, security, or other paper or document
unless requested in writing to do so by the Holders of not less than a majority
in aggregate number of the CVRs then outstanding; provided that, if the payment
within a reasonable time to the Rights Agent of the costs, expenses or
liabilities likely to be incurred by it in the making of such investigation is,
in the opinion of the Rights Agent, not reasonably assured to the Rights Agent
by the security afforded to it by the terms of this Agreement, the Rights Agent
may require reasonable indemnity against such expenses or liabilities as a
condition to proceeding; the reasonable expenses of every such investigation
shall be paid by the Company or, if paid by the Rights Agent or any predecessor
Rights Agent, shall be repaid by the Company upon demand.
(g)......The Rights Agent may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or through
agents or attorneys and the Rights Agent shall not be responsible for any
misconduct or negligence on the part of any agent or attorney appointed with due
care by it hereunder.
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(h)......The permissive rights of the Rights Agent to do things
enumerated in this Agreement shall not be construed as a duty.
(i)......The Rights Agent shall not be required to give any note or
surety in respect of the execution of the said trusts and powers or otherwise in
respect of the premises. (j)......No provision of this Rights Agreement shall
require the Rights Agent to expend or risk its own funds or otherwise incur any
financial liability in the performance of any of its duties hereunder, or in the
exercise of any of its rights or powers, if it shall have reasonable grounds for
believing that repayment of such funds or adequate indemnity against such risk
or liability is not reasonably assured to it.
Section 4.03 Not Responsible for Recitals or Issuance of CVRs. The
recitals contained herein and in the CVRs, except the Rights Agent's
certificates of authentication, shall be taken as the statements of the Company,
and the Rights Agent assumes no responsibility for their correctness. The Rights
Agent makes no representations as to the validity or sufficiency of this
Agreement or of the CVRs. The Rights Agent shall not be accountable for the use
or application by the Company of CVRs or the proceeds thereof.
Section 4.04 May Hold CVRs. The Rights Agent, any Paying Agent,
Security Registrar or any other agent of the Company, in its individual or any
other capacity, may become the owner or pledgee of CVRs, and may otherwise deal
with the Company with the same rights it would have if it were not Rights Agent,
Paying Agent, Security Registrar or such other agent.
Section 4.05 Compensation, Reimbursement and Indemnification of the
Rights Agent. The Company agrees
(a)......to pay to the Rights Agent from time to time reasonable
compensation for all services rendered by it hereunder;
(b)......except as otherwise expressly provided herein, to reimburse
the Rights Agent upon its request for all reasonable expenses, disbursements and
advances incurred or made by the Rights Agent in accordance with any provision
of this Agreement (including the reasonable compensation and the expenses and
disbursements of its agents and counsel), except any such expense, disbursement
or advance as may be attributable to its gross negligence, willful misconduct or
bad faith; and
(c)......to indemnify the Rights Agent for, and to hold it harmless
against, any loss, liability or expense incurred without gross negligence or bad
faith on its part, arising out of or in connection with the acceptance or
administration of this agency, including the costs and expenses of defending
itself against any claim or liability in connection with the exercise or
performance of any of its powers or duties hereunder, including the enforcement
of this Section 4.05.
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Section 4.06 Corporate Rights Agent Required; Eligibility. The Company
shall insure that there shall at all times be a Rights Agent hereunder which
shall be a corporation organized and doing business under the laws of the United
States of America or of any State, authorized under such laws to exercise
corporate trust powers, and subject to supervision or examination by Federal or
State authority. If at any time the Rights Agent shall cease to be eligible in
accordance with the provisions of this Section 4.06, it shall resign immediately
in the manner and with the effect hereinafter specified in this Article.
Section 4.07 Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon 30 days notice in writing mailed to the Company and to each transfer agent
of the Common Stock by registered or certified mail, and, to the Holders of the
CVR Certificates by first-class mail. The Company may remove the Rights Agent or
any successor Rights Agent upon 30 days' notice in writing, mailed to the Rights
Agent or successor Rights Agent, as the case may be, and to each transfer agent
of the Common Stock by registered or certified mail and to the Holders of the
CVR Certificates by first-class mail. If the Rights Agent shall resign or be
removed or shall otherwise become incapable of acting, the Company shall appoint
a successor to the Rights Agent. If the Company shall fail to make such
appointment within a period of 30 days after giving notice of such removal or
after it has been notified in writing of such resignation or incapacity by the
resigning or incapacitated Rights Agent or by the Holder of a CVR Certificate
(who shall, with such notice, submit his CVR Certificate for inspection by the
Company), then the Holder of any CVR Certificate may apply to any court of
competent jurisdiction for the appointment of a new Rights Agent. Any successor
Rights Agent, whether appointed by the Company or by such a court, shall meet
the eligibility requirements of Section 4.06. Failure to give any notice
provided for in this Section 4.07, or any defect therein, shall not affect the
legality or validity of the resignation or removal of the Rights Agent or the
appointment of the successor Rights Agent, as the case may be.
Section 4.08 Acceptance of Appointment by Successor.
(a)......Every successor Rights Agent appointed hereunder shall
execute, acknowledge and deliver to the Company and to the retiring Rights Agent
an instrument accepting such appointment, and thereupon the resignation or
removal of the retiring Rights Agent shall become effective and such successor
Rights Agent, without any further act, deed or conveyance, shall become vested
with all the rights, powers, trusts and duties of the retiring Rights Agent;
but, on request of the Company or the successor Rights Agent, such retiring
Rights Agent shall, upon payment of its charges, execute and deliver an
instrument transferring to such successor Rights Agent all the rights, powers
and trusts of the retiring Rights Agent, and shall duly assign, transfer and
deliver to such successor Rights Agent all property and money held by such
retiring Rights Agent hereunder. Upon request of any such successor Rights
Agent, the Company shall execute any and all instruments for more fully and
certainly vesting in and confirming to such successor Rights Agent all such
rights, powers and trusts.
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(b)......No successor Rights Agent shall accept its appointment unless
at the time of such acceptance such successor Rights Agent shall be qualified
and eligible under this Article.
Section 4.09 Merger, Conversion, Consolidation or Succession to
Business. Any corporation into which the Rights Agent may be merged or converted
or with which it may be consolidated, or any corporation resulting from any
merger, conversion or consolidation to which the Rights Agent shall be a party,
or any corporation succeeding to all or substantially all of the corporate trust
business of the Rights Agent, shall be the successor of the Rights Agent
hereunder, provided such corporation shall be otherwise qualified and eligible
under this Article, without the execution or filing of any paper or any further
act on the part of any of the parties hereto. In case any CVRs shall have been
authenticated, but not delivered, by the Rights Agent then in office, any
successor by merger, conversion or consolidation to such authenticating Rights
Agent may adopt such authentication and deliver the CVRs so authenticated with
the same effect as if such successor Rights Agent had itself authenticated such
CVRs; and such certificate shall have the full force which it is anywhere in the
CVRs or in this Agreement provided that the certificate of the Rights Agent
shall have; provided that the right to adopt the certificate of authentication
of any predecessor Rights Agent shall apply only to its successor or successors
by merger, conversion or consolidation.
ARTICLE FIVE
HOLDERS' LISTS AND REPORTS BY RIGHTS AGENT AND COMPANY
Section 5.01 Company to Furnish Rights Agent Names and Addresses of
Holders.
The Company will furnish or cause to be furnished to the Rights Agent
(a) semiannually, beginning with the consummation of the Exchange Offer, a list,
in such form as the Rights Agent may reasonably require, of the names and
addresses of the Holders as of the date hereof and (b) at such times as the
Rights Agent may request in writing, within 30 days after receipt by the Company
of any such request, a list, in such form as the Rights Agent may reasonably
require, of the names and the addresses of the Holders as of a date not more
than 15 days prior to the time such list is furnished; provided, however, that,
if and so long as the Rights Agent shall be the Security Registrar, no such list
need be furnished.
Section 5.02 Preservation of Information; Communications to Holders.
(a)......If the list is provided pursuant to Section 5.01(a), the
Rights Agent shall preserve, in as current a form as is reasonably practicable,
the names and addresses of Holders contained in the most recent list furnished
to the Rights Agent as provided in Section 5.01 and the names and addresses of
Holders received by the Rights Agent in its capacity as Security Registrar. The
Rights Agent may destroy any list furnished to it as provided in Section 5.01
upon receipt of a new list so furnished.
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(b)......If three or more Holders (hereinafter referred to as
"applicants") apply in writing to the Rights Agent, and furnish to the Rights
Agent reasonable proof that each such applicant has owned a CVR for a period of
at least six months preceding the date of such application, and such application
states that the applicants desire to communicate with other Holders with respect
to their rights under this Agreement or under the CVRs and is accompanied by a
copy of the form of proxy or other communication which such applicants propose
to transmit, then the Rights Agent shall, within five Business Days after the
receipt of such application, afford such applicants access to the information
preserved at the time by the Rights Agent in accordance with Section 5.02(a).
(c)......Every Holder of CVRs, by receiving and holding the same,
agrees with the Company and the Rights Agent that neither the Company nor the
Rights Agent shall be held accountable by reason of the disclosure of any such
information as to the names and addresses of the Holders in accordance with
Subsection (b), regardless of the source from which such information was
derived, and that the Rights Agent shall not be held accountable by reason of
mailing any material pursuant to a request made under Subsection (b).
Section 5.03 Reports by Company. The Company shall:
(a)......file with the Rights Agent, within 15 days after the Company
is required to file the same with the Commission, copies of the annual reports
and of the information, documents and other reports (or copies of such portions
of any of the foregoing as the Commission may from time to time by rules and
regulations prescribe) which the Company may be required to file with the
Commission pursuant to Section 13 or Section 15(d) of the Exchange Act; or, if
the Company is not required to file information, documents or reports pursuant
to either of said Sections, then it shall file with the Rights Agent and the
Commission, in accordance with rules and regulations prescribed from time to
time by the Commission, such of the supplementary and periodic information,
documents and reports which may be required pursuant to Section 13 of the
Exchange Act in respect of a security listed and registered on a national
securities exchange as may be prescribed from time to time in such rules and
regulations; and
(b)......file with the Rights Agent and the Commission, in accordance
with rules and regulations prescribed from time to time by the Commission, such
additional information, documents and reports with respect to compliance by the
Company with the conditions and covenants of this Agreement as may be required
from time to time by such rules and regulations.
(c)......The Rights Agent shall transmit by mail to all Holders, as
their names and addresses appear in the Security Register, within 30 days after
the filing thereof with the Rights Agent, such summaries of any information,
documents and reports required to be filed by the Company pursuant to
Subsections (a) and (b) of this Section 5.03 as may be required by rules and
regulations prescribed from time to time by the Commission.
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ARTICLE SIX
AMENDMENTS
Section 6.01 Amendments Without Consent of Holders. Without the consent
of any Holders, the Company, when authorized by a Board Resolution, and the
Rights Agent, at any time and from time to time, may enter into one or more
amendments hereto, in form satisfactory to the Rights Agent, for any of the
following purposes:
(a)......to convey, transfer, assign, mortgage or pledge to the Rights
Agent as security for the CVRs any property or assets; or
(b)......to evidence the succession of another Person to the Company,
and the assumption by any such successor of the covenants of the Company herein
and in the CVRs; or
(c)......to add to the covenants of the Company such further covenants,
restrictions, conditions or provisions as its Board of Directors and the Rights
Agent shall consider to be for the protection of the Holders of CVRs; or
(d)......to cure any ambiguity, to correct or supplement any provision
herein which may be defective or inconsistent with any other provision herein,
or to make any other provisions with respect to matters or questions arising
under this Agreement; provided that in each case, such provisions shall not
adversely affect the interests of the Holders.
Section 6.02 Amendments with Consent of Holders.
(a)......With the consent of the Holders of not less than a majority of
the outstanding CVRs, by Act of said Holders delivered to the Company and the
Rights Agent, the Company, when authorized by a Board Resolution, and the Rights
Agent may enter into one or more amendments hereto for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
this Agreement or of modifying in any manner the rights of the Holders under
this Agreement; provided, however, that no such amendment shall, without the
consent of the Holder of each outstanding CVR affected thereby:
(1) modify the definition of Maturity Date, Extended Maturity
Date, Per Share Market Value, Current Market Value, Valuation Period or Target
Price or modify Section 3.01(f) or otherwise extend the maturity of the CVRs or,
except as provided in Section 3.01(f), reduce the number of shares of Common
Stock (or the amount of any other consideration) payable in respect of the CVRs;
(2) reduce the amount of the outstanding CVRs, the consent of
whose Holders is required for any such amendment; or
(3) modify any of the provisions of this Section 6.02, except
to increase any such percentage or to provide that certain other provisions of
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this Agreement cannot be modified or waived without the consent of the Holder of
each CVR affected thereby.
(b)......It shall not be necessary for any Act of Holders under this
Section 6.02 to approve the particular form of any proposed amendment, but it
shall be sufficient if such Act shall approve the substance thereof.
(c)......Promptly after the execution by the Company and the Rights
Agent of any amendment pursuant to the provisions of this Section 6.02, the
Company shall mail a notice thereof by first class mail to the Holders of CVRs
at their addresses as they shall appear on the Security Register, setting forth
in general terms the substance of such amendment. Any failure of the Company to
mail such notice, or any defect therein, shall not, however, in any way impair
or affect the validity of any such amendment.
Section 6.03 Execution of Amendments. In executing any amendment
permitted by this Article, the Rights Agent shall be entitled to receive, and
(subject to Section 4.01) shall be fully protected in relying upon, an Opinion
of Counsel stating that the execution of such amendment is authorized or
permitted by this Agreement. The Rights Agent may, but shall not be obligated
to, enter into any such amendment which affects the Rights Agent's own rights,
duties or immunities under this Agreement or otherwise.
Section 6.04 Effect of Amendments. Upon the execution of any amendment
under this Article, this Agreement shall be modified in accordance therewith,
and such amendment shall form a part of this Agreement for all purposes; and
every Holder of CVRs theretofore or thereafter authenticated and delivered
hereunder shall be bound thereby.
Section 6.05 Reference in CVRs to Amendments. CVRs authenticated and
delivered after the execution of any amendment pursuant to this Article may, and
shall if required by the Rights Agent, bear a notation in form approved by the
Rights Agent as to any matter provided for in such amendment. If the Company
shall so determine, new CVRs so modified as to conform, in the opinion of the
Rights Agent and the Board of Directors, to any such amendment may be prepared
and executed by the Company and authenticated and delivered by the Rights Agent
in exchange for outstanding CVRs.
ARTICLE SEVEN
COVENANTS
Section 7.01 Issuance of Shares of Common Stock, if Any, to Holders.
The Company will duly and punctually issue the number of shares of Common Stock,
if any, in the manner provided for in Section 3.01 on the CVRs in accordance
with the terms of the CVRs and this Agreement. In the event that the Company
determines that shares of Common Stock are not issuable to the Holders on
maturity of the CVRs on the Maturity Date or the Extended Maturity Date, as the
case may be, the Company shall give to the Holders and the Rights Agent notice
of such determination. Upon making such determination, absent manifest error,
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the CVRs shall terminate and become null and void and the Holder thereof shall
have no further rights with respect thereto. The failure to give such notice or
any defect therein shall not affect the validity of such determination.
Section 7.02 Maintenance of Office or Agency.
(a)......As long as any of the CVRs remain outstanding, the Company
will maintain in New York, New York, an office or agency where CVRs may be
presented or surrendered for payment. The Company also will maintain in New
York, New York, an office or agency (i) where CVRs may be surrendered for
registration of transfer or exchange and (ii) where notices and demands to or
upon the Company in respect of the CVRs and this Agreement may be served. The
Company hereby initially designates the Corporate Trust Office as the office or
agency of the Company where CVRs may be presented for payment or surrendered for
registration of transfer or exchange and where such notices or demands may be
served, in each case, unless the Company shall designate and maintain some other
office or agency for one or more of such purposes. The Company will give prompt
written notice to the Rights Agent of any change in the location of any such
office or agency. If at any time the Company shall fail to maintain any such
required office or agency or shall fail to furnish the Rights Agent with the
address thereof, such presentations, surrenders, notices and demands may be made
or served at the Corporate Trust Office of the Rights Agent, and the Company
hereby appoints the Rights Agent as its agent to receive all such presentations,
surrenders, notices and demands.
(b)......The Company may from time to time designate one or more other
offices or agencies (in or outside of New York, New York) where the CVRs may be
presented or surrendered for any or all such purposes, and may from time to time
rescind such designation; provided, however, that no such designation or
rescission shall in any manner relieve the Company of its obligations as set
forth in Subsection (a). The Company will give prompt written notice to the
Rights Agent of any such designation or rescission and any change in the
location of any such office or agency.
Section 7.03 Shares for CVR Payments to Be Reserved. The Company shall,
on or before the Maturity Date or the Extended Maturity Date, as the case may
be, reserve for the benefit of the Persons entitled thereto a number of shares
of Common Stock to be issued to the Holders of the CVRs as herein provided, and
will promptly notify the Rights Agent of its action or failure so to act. In the
event that the number of shares of Common Stock which are authorized by the
Company's articles of incorporation but not outstanding or reserved for issuance
other than upon maturity of the CVRs is not sufficient to permit the exercise in
full of the CVRs, the Company shall take all actions necessary to either
increase the number of shares of Common Stock which are authorized by the
Company's articles of incorporation or effect a reverse stock split.
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ARTICLE EIGHT
CONSOLIDATION, MERGER, SALE OR CONVEYANCE
Section 8.01 Company May Consolidate, Etc.
The Company shall not consolidate or merge with or into any other
Person or sell, transfer, lease or otherwise dispose of its properties and
assets substantially as an entirety to any other Person, unless:
(1) in case the Company shall consolidate or merge with or
into any other Person or sell, transfer, lease or otherwise dispose of its
properties and assets substantially as an entirety to any other Person, the
Person formed by such consolidation or into which the Company is merged or the
Person which acquires by conveyance or transfer, or which leases, the properties
and assets of the Company substantially as an entirety or the Person which
acquires all of the Common Stock as a result of a merger (the "Surviving
Person") shall be a corporation, partnership or trust organized and existing
under the laws of the United States of America, any state thereof or the
District of Columbia and shall expressly assume the obligations of the Company
on the CVRs and the performance of every covenant of this Agreement on the part
of the Company to be performed or observed; and
(2) the Company has delivered to the Rights Agent an Officer's
Certificate, stating that such consolidation, merger, sale, transfer, lease or
other disposition complies with this Article and that all conditions precedent
herein provided for relating to such transaction have been complied with.
(b)......Solely for purposes of this Section 8.01 and the definition of
"Transaction" in Section 1.01, "sell, transfer, lease or otherwise dispose of
its properties and assets substantially as an entirety" shall mean properties
and assets contributing in the aggregate at least 80% of the Company's total
revenues as reported in the Company's last available periodic financial report
(quarterly or annual, as the case may be) filed with the Commission.
(c)......Upon consummation of a Transaction, the Holders of the CVRs
shall be entitled to receive, upon presentation of their CVR Certificates in
accordance with Section 3.07, shares of the capital stock or other securities of
the Surviving Person or such other consideration that holders of shares of the
Common Stock received in such a Transaction as if the Holders of the CVRs were
holders of the Common Stock on the record date used to determine the holders of
shares of the Common Stock entitled to receive the consideration paid in the
Transaction (the "Transaction Record Date"). In the event of a Transaction, the
Holders of the CVRs shall be deemed to have received a number of shares of
Common Stock per CVR equal to the Target Price minus the greater of the Current
Market Value and the Transaction Price per share divided by the greater of the
Current Market Value and the Transaction Price per share; provided, however, in
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no event shall the Holders of the CVRs be deemed to have received greater than
(i) 3.8728 shares of Common Stock if the Transaction Record Date occurs prior to
the Maturity Date or (ii) 6.5067 shares of Common Stock if the Transaction
Record Date occurs after the Maturity Date and prior to the Extended Maturity
Date. For purposes of this Section 8.01(c) only, the Current Market Value,
together with the Target Price and the Transaction Price, shall be determined by
the Company as of the Transaction Record Date, and each such determination,
absent manifest error, shall be conclusive and binding upon the Holders.
Section 8.02 Successor Substituted. Upon any consolidation of or merger
by the Company with or into any other Person, or any sale, transfer, lease or
other disposition of the properties and assets substantially as an entirety to
any other Person in accordance with Section 8.01, the Surviving Person shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under this Agreement with the same effect as if the Surviving Person
had been named as the Company herein, and thereafter, except in the case of a
lease, the predecessor Person shall be relieved of all obligations and covenants
under this Agreement and the CVRs.
Section 8.03 Opinion of Counsel to Rights Agent.
The Rights Agent, subject to the provisions of Sections 4.01 and 4.02,
may receive an Opinion of Counsel, prepared in accordance with Sections 1.03 and
1.04, as conclusive evidence that any such consolidation, merger, sale,
transfer, lease or other disposition, and any such assumption, comply with the
applicable provisions of this Agreement.
8.04 Counterparts.
This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original and all of which together shall constitute one
and the same document.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, and their respective corporate seals to be hereunto affixed and
attested, all as of the day and year first above written.
ABRAXAS PETROLEUM CORPORATION
By:/s/ Robert L.G. Watson
--------------------------------
Robert L. G. Watson,
Chairman of the Board,
Chief Executive Officer and
President
ATTEST:
/s/ Stephen T. Wendel
- -----------------------------------
Stephen T. Wendel, Secretary
AMERICAN STOCK TRANSFER & TRUST COMPANY
By:/s/ Barry Rosenthal
---------------------------
Title:Vice President
-------------------------
ATTEST:
______________________________
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EXHIBIT A
ABRAXAS PETROLEUM CORPORATION
CUSIP NO. _______
No. __________ Certificate for ________ Contingent Value Rights
This certifies that or registered assigns (the "Holder"), is the
registered holder of the number of Contingent Value Rights ("CVRs") set forth
above. Each CVR entitles the Holder, subject to the provisions contained herein
and in the Agreement referred to below, to the issuance from Abraxas Petroleum
Corporation, a Nevada corporation (the "Company"), of a number of shares of
Common Stock, par value $.01 per share ("Common Stock"), of the Company
determined pursuant to the provisions set forth and as more fully described in
the Agreement. Such payment shall be made on the Maturity Date or the Extended
Maturity Date, if the Maturity Date shall be extended by the Company in its sole
discretion.
Issuance of any shares of Common Stock pursuant to this CVR Certificate
shall be made only upon presentation of this CVR Certificate by the Holder
hereof with the form of Election to Exercise duly executed by such Holder, at
the office or agency of the Company maintained for that purpose. Such issuance
shall be made in New York, New York, or at any other office or agency maintained
by the Company for such purpose by delivering a number of shares of Common Stock
of the Company equal to the product of (i) a fraction, the numerator of which is
the Target Price minus the Current Market Value per share and the denominator of
which is the Current Market Value per share times (ii) the number of CVRs
represented by this CVR Certificate; provided, however, in no event shall
greater than (i) 3.8728 shares of Common Stock be issuable pursuant to each CVR
represented by this CVR Certificate on the Maturity Date or (ii) 6.5067 shares
of Common Stock be issuable pursuant to each CVR represented by this CVR
Certificate on the Extended Maturity Date and any fractional share shall be
settled in cash as provided in the Agreement. All determinations by the Company
in connection with Section 3.01 of the Agreement, absent manifest error, shall
be final and binding on the Company and the Holders. The Rights Agent has been
appointed as Paying Agent in New York, New York.
Notwithstanding anything to the contrary set forth herein or in the
Agreement, the CVRs shall terminate and no shares of Common Stock will be
issuable pursuant thereto (i) if the Current Market Value per share of the
Common Stock equals or exceeds $5.68 on the Maturity Date or $5.97 on the
Extended Maturity Date, if the Maturity Date is extended by the Company to the
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Extended Maturity Date, as the case may be, or (ii) if the average of the Per
Share Market Value prices for any period of 30 Trading Days during any 45
consecutive Trading Days during the Valuation Period equals or exceeds the
Target Price on the 45th day of such 45 consecutive Trading Day period.
Unless the certificate of authentication hereon has been duly executed
by the Rights Agent by manual signature, this CVR Certificate shall not be
entitled to any benefit under the Agreement, or be valid or obligatory for any
purpose.
This CVR Certificate is issued under and in accordance with the
Contingent Value Rights Agreement, dated as of December 21, 1999 (the
"Agreement"), between the Company and American Stock Transfer & Trust Company
(the "Rights Agent", which term includes any successor Rights Agent under the
Agreement), and is subject to the terms and provisions contained in the
Agreement, to all of which terms and provisions the Holder of this CVR
Certificate consents by acceptance hereof. The Agreement is hereby incorporated
herein by reference and made a part hereof. Reference is hereby made to the
Agreement for a full statement of the respective rights, limitations of rights,
duties, obligations and immunities thereunder of the Company, the Rights Agent
and the holders of the CVRs. Copies of the Agreement can be obtained by
contacting the Rights Agent. Capitalized terms used in this CVR Certificate and
not otherwise defined herein shall have the meaning set forth in the Agreement.
The Company may at its option extend the Maturity Date to the Extended
Maturity Date. Such option shall be exercised by (i) publishing notice of such
extension in the Authorized Newspaper or (ii) furnishing notice to the Holder
hereof and the Rights Agent of such extension, in each case, not less than one
Business Day preceding the Maturity Date; provided, however, that no defect in
any such notice shall affect the validity of the extension of the Maturity Date
to the Extended Maturity Date, and that any notice when published to the Holder
hereof in the aforesaid manner shall be conclusively deemed to have been
received by the Holder hereof whether or not actually received by the Holder.
In the event that the Company determines that shares of Common Stock
are not issuable to the Holders of the CVRs on the Maturity Date or the Extended
Maturity Date, as the case may be, the Company shall give to the Holders and the
Rights Agent notice of such determination. Upon making such determination,
absent manifest error, the CVR Certificates shall terminate and become null and
void and the Holder hereof shall have no further rights with respect hereto. The
failure to give such notice or any defect therein shall not affect the validity
of such determination.
Notwithstanding any provision of the Agreement or of this CVR
Certificate to the contrary, no interest shall accrue on any amounts payable on
the CVRs to the Holders.
No Holder of this CVR Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the shares of capital stock
which may at any time be issuable on the exercise hereof, nor shall anything
contained in the Agreement or herein be construed to confer upon the Holder
hereof, as such, any of the rights of a stockholder of the Company or any right
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to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or, to receive notice of meetings or other actions affecting
stockholders, or to receive dividends or subscription rights, or otherwise,
until the CVR or CVRs evidenced by this CVR Certificate shall have been
exercised as provided in the Agreement.
The Agreement permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the holders of CVRs under the Agreement at any time by
the Company and the Rights Agent with the consent of the holders of a majority
of the CVRs at the time outstanding.
As provided in the Agreement and subject to certain limitations therein
set forth, the transfer of the CVRs represented by this CVR Certificate is
registerable on the Security Register of the Company, upon surrender of this CVR
Certificate for registration of transfer at the office or agency of the Company
maintained for such purpose in New York, New York, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Security Registrar duly executed by, the Holder hereof or his
attorney duly authorized in writing, and thereupon one or more new CVR
Certificates, for the same amount of CVRs, will be issued to the designated
transferee or transferees. As provided in the Agreement and subject to certain
limitations therein set forth, this CVR Certificate is exchangeable for one or
more CVR Certificates representing the same number of CVRs as represented by
this CVR Certificate as requested by the Holder surrendering the same.
The Company has initially designated the office of the Rights Agent, 40
Wall Street - 46th Floor, New York, New York 10005 as the office for
registration of transfer or exchange of this CVR Certificate.
No service charge will be made for any registration of transfer or
exchange of CVRs, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
Prior to the time of due presentment of this CVR Certificate for
registration of transfer, the Company, the Rights Agent and any agent of the
Company or the Rights Agent may treat the Person in whose name this CVR
Certificate is registered as the owner hereof for all purposes, and neither the
Company, the Rights Agent nor any agent shall be affected by notice to the
contrary.
All capitalized terms used in this CVR Certificate without definition
shall have the meanings assigned to them in the Agreement.
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Company has caused CUSIP numbers to be
used on the CVRs as a convenience to the Holders of the CVRs. No representation
is made as to the accuracy of such numbers on the CVRs and reliance may be
placed only on the other identification numbers hereon.
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IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.
Dated:...______________, _____.
ABRAXAS PETROLEUM CORPORATION
By:_________________________
ATTEST:
____________________________ [SEAL]
____________________________
Authorized Signature
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CERTIFICATE OF AUTHENTICATION
This is one of the CVR Certificates referred to in the within-mentioned
Agreement.
AMERICAN STOCK TRANSFER & TRUST COMPANY, Rights Agent
By______________________________
Authorized officer
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Form of Assignment
(To be executed if the registered holder desires to transfer the CVR
Certificate.)
FOR VALUE RECEIVED___________________________________________________________
hereby sells, assigns and transfers unto_____________________________________
(Please print name and address of transferee)
this CVR Certificate, together with all right, title and interest therein, and
does hereby irrevocably constitute and appoint___________________ Attorney, to
transfer the within CVR Certificate on the books of the within-named Company,
with full power of substitution.
Dated:_____________________________
________________________________
Signature
Signature Guaranteed:
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Form of Election to Exercise
(To be executed if the registered holder desires to exercise CVRs
represented by the CVR Certificate.)
To: ABRAXAS PETROLEUM CORPORATION
The undersigned hereby irrevocably elects to exercise all of the CVRs
represented by this CVR Certificate to purchase shares of Common Stock issuable
upon the exercise of the CVR (or such other securities of the Company or of any
other Person or other consideration which may be issuable upon the exercise of
the CVR) and requests that certificates for such securities be issued in the
name of and delivered to the undersigned at:
_______________________________________________________________________________
(Please print name and address)
Dated: _______________.
____________________________
Signature
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EXHIBIT B
ABRAXAS PETROLEUM CORPORATION
CONTINGENT VALUE RIGHTS
[Date]
NOTICE OF EXTENSION OF MATURITY
DATE TO ________________________________
NOTICE IS HEREBY GIVEN THAT, pursuant to Section 3.01 of the Contingent
Value Rights Agreement, dated as of December 21, 1999 (the "Agreement"), between
Abraxas Petroleum Corporation (the "Company") and American Stock Transfer &
Trust Company, the Company has extended the Maturity Date on the Contingent
Value Rights to May ___, 2001. All terms used in this Notice which are defined
in the Agreement shall have the meanings assigned to them in the Agreement.
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EXHIBIT C
Form of Additional Provisions In Assignment Form
For Restricted Securities
In connection with any transfer of this CVR occurring prior to the date
of the declaration by the Commission of the effectiveness of a registration
statement under the Securities Act of 1933, as amended (the "Securities Act")
covering resales of this CVR (which effectiveness shall not have been suspended
or terminated at the date of the transfer), the undersigned confirms that it has
not utilized any general solicitation or general advertising in connection with
the transfer:
[Check One]
(1)____ to the Company or a Subsidiary thereof; or
(2)____ to an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) under the Securities Act of 1933, as
amended) that has furnished to the Rights Agent a signed letter
containing certain representations and agreements (the form of
which letter can be obtained from the Rights Agent); or
(3)____ outside the United States to a "foreign person" in compliance
with Rule 904 of Regulation S under the Securities Act of 1933,
as amended; or
(4)____ pursuant to the exemption from registration provided by Rule 144
under the Securities Act of 1933, as amended; or
(5)____ pursuant to an effective registration statement under the
Securities Act of 1933, as amended; or
(6)____ pursuant to another available exemption from the registration
requirements of the Securities Act of 1933, as amended.
and unless the box below is checked, the undersigned confirms that such CVR is
not being transferred to an "affiliate" of the Company as defined in Rule 144
under the Securities Act of 1933, as amended (an "Affiliate"):
__ The transferee is an Affiliate of the Company.
Unless one of the items is checked, the Rights Agent will refuse to register any
of the CVRs evidenced by this certificate in the name of any Person other than
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the registered Holder thereof; provided, however, that if item (2), (3), (4) or
(6) is checked, the Company or the Rights Agent may require, prior to
registering any such transfer of the CVRs, in its sole discretion, such written
legal opinions, certifications (including an investment letter in the case of
box (2) or (3)) and other information as the Rights Agent or the Company has
reasonably requested to confirm that such transfer is being made pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act of 1933, as amended.
If none of the foregoing items are checked, the Rights Agent or Security
Registrar shall not be obligated to register this CVR in the name of any Person
other than the Holder hereof unless and until the conditions to any such
transfer of registration set forth herein and in Sections 3.05 and 3.13 of the
Agreement shall have been satisfied.
Dated:__________________ Signed:____________________________________________
(Sign exactly as name
appears on the other side
of this CVR)
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EXHIBIT D
Form of Certificate To Be
Delivered in Connection with
Transfers to Non-QIB Accredited Investors
[ ], [ ]
[ ]
[ ]
[ ]
Ladies and Gentlemen:
In connection with our proposed purchase of Contingent Value Rights
("CVRs") of Abraxas Petroleum Corporation ("Abraxas"), we confirm that:
1. We understand that any subsequent transfer of the CVRs is
subject to certain restrictions and conditions set forth in the
Contingent Value Rights Agreement (the "Agreement") and the undersigned
agrees to be bound by, and not to resell, pledge or otherwise transfer
the CVRs except in compliance with, such restrictions and conditions
and the Securities Act of 1933, as amended (the "Securities Act"), and
all applicable State securities laws.
2. We understand that the offer and sale of the CVRs to us or
our predecessors have not been registered under the Securities Act, and
that the CVRs may not be offered or sold within the United States or
to, or for the account or benefit of, U.S. Persons except as permitted
in the following sentence. We agree, on our own behalf and on behalf of
any accounts for which we are acting as hereinafter stated, that if we
should sell any CVRs, we will do so only (i) to Abraxas or any
subsidiary thereof, (ii) inside the United States in accordance with
Rule 144A under the Securities Act to a "qualified institutional buyer"
(as defined in Rule 144A promulgated under the Securities Act) that,
prior to such transfer, furnishes (or has furnished on its behalf by a
U.S. broker-dealer) to the Rights Agent (as defined in the Agreement")
a signed letter containing certain representations and agreements
relating to the restrictions on transfer of the CVRs (the form of which
letter can be obtained from Abraxas), (iii) outside the United States
in accordance with Rule 904 of Regulation S promulgated under the
Securities Act (provided that any such sale or transfer in Canada or to
or for the benefit of a Canadian resident must be effected pursuant to
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an exemption from the prospectus and registration requirements under
applicable Canadian securities laws), (iv) pursuant to the exemption
from registration provided by Rule 144 under the Securities Act (if
available), or (v) pursuant to an effective registration statement
under the Securities Act, and we further agree to provide to any Person
purchasing any of the CVRs from us a notice advising such purchaser
that resales of the Notes are restricted as stated herein.
3. We understand that, on any proposed resale of any CVRs, we
will be required to furnish to the Rights Agent and Abraxas such
certification, legal opinions and other information as the Rights Agent
or Abraxas may reasonably require to confirm that the proposed sale
complies with the foregoing restrictions. We further understand that
the CVRs purchased by us will bear a legend to the foregoing effect.
4. We are an institutional "accredited investor" (as defined in
Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities
Act) and have such knowledge and experience in financial and business
matters as to be capable of evaluating the merits and risks of our
investment in the CVRs, and we and any accounts for which we are acting
are each able to bear the economic risk of our or its investment, as
the case may be.
5. We are acquiring the CVRs purchased by us for our account or
for one or more accounts (each of which is an institutional "accredited
investor") as to each of which we exercise sole investment discretion.
You,Abraxas, the Rights Agent and others are entitled to rely upon this letter
and are irrevocably authorized to produce this letter or a copy hereof to
any interested party in any administrative or legal proceeding or official
inquiry with respect to the matters covered hereby.
Very truly yours,
[Name of Transferee]
By:______________________________
Name:__________________________
Title:_________________________
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EXHIBIT E
Form of Certificate To Be Delivered
in Connection with Transfers
Pursuant to Regulation S
[ ], [ ]
[ ]
[ ]
[ ]
[ ]
Re: Abraxas Petroleum Corporation ("Abraxas")
Contingent Value Rights (the "CVRs")
Ladies and Gentlemen:
In connection with our proposed sale of [ ] CVRs, we confirm that such
sale has been effected pursuant to and in accordance with Regulation S under the
U.S. Securities Act of 1933, as amended (the "Securities Act"), and,
accordingly, we represent that:
(1) the offer of the CVRs was not made to a Person in the United
States;
(2) either (a) at the time the buy offer was originated, the
transferee was outside the United States or we and any Person acting on
our behalf reasonably believed that the transferee was outside the
United States, or (b) the transaction was executed in, on or through
the facilities of a designated off-shore securities market and neither
we nor any Person acting on our behalf knows that the transaction has
been pre-arranged with a buyer in the United States;
(3) no directed selling efforts have been made in the United
States in contravention of the requirements of Rule 903(b) or Rule
904(b) of Regulation S, as applicable;
(4) the transaction is not part of a plan or scheme to evade the
registration requirements of the Securities Act; and
(5) we have advised the transferee of the transfer restrictions
applicable to the CVRs.
You, Abraxas and counsel for Abraxas are entitled to rely upon
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this letter and are irrevocably authorized to produce this letter or a copy
hereof to any interested party in any administrative or legal proceedings or
official inquiry with respect to the matters covered hereby. Terms used in this
certificate have the meanings set forth in Regulation S.
Very truly yours,
[Name of Transferor]
By:_____________________________
Authorized Signature
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EXHIBIT 4.7
THIRD SUPPLEMENTAL INDENTURE
This THIRD SUPPLEMENTAL INDENTURE dated as of the 21st day of December,
1999 (this "Supplemental Indenture") among Abraxas Petroleum Corporation, a
Nevada corporation (the "Company"), Canadian Abraxas Petroleum Limited, an
Alberta corporation and wholly-owned subsidiary of the company ("Canadian
Abraxas" and, together with the Company, the "Issuers"), and the Bank of New
York f/k/a IBJ Schroder Bank & Trust Company, a New York corporation, as Trustee
(the "Trustee").
W I T N E S S E T H:
WHEREAS, there has heretofore been executed and delivered to the
Trustee an Indenture dated as of January 27, 1998, among the Issuers and the
Trustee (as the same has been amended or supplemented from time to time by one
or more indentures supplemental thereto entered into pursuant to the applicable
provisions thereof, the "Indenture"), providing for the issuance of the Issuers'
11 1/2% Senior Notes due 2004 (the "Securities").
WHEREAS, there are now outstanding under the Indenture Securities in
the aggregate principal amount of $274,000,000;
WHEREAS, the Issuers have offered to exchange new notes, common stock
of the Company and contingent value rights of the Company for all of the
Securities (the "Exchange Offer") and has solicited the consent (the
"Solicitations") to certain amendments (the "Amendments") to the Indenture
pursuant to the Issuers' Offer to Exchange and Consent Solicitation dated
November 18, 1999;
WHEREAS, Section 9.02 of the Indenture provides that the Issuers and
the Trustee may amend the Indenture with the written consent of the Holders of
at least a majority in principal amount of the Securities then outstanding;
WHEREAS, the Issuers desire to amend certain provisions of the
Indenture, as set forth in Article II hereof;
WHEREAS, the holders of at least a majority in aggregate principal
amount of the Securities outstanding have consented to the amendments effected
by this Supplemental Indenture; and
WHEREAS, all matters necessary to make this Supplemental Indenture a
valid agreement, in accordance with its terms, have been done.
NOW THEREFORE, for and in consideration of the premises and the mutual
covenants and agreements hereinafter set forth, the parties hereto agree as
follows:
ARTICLE I
EFFECTIVENESS AND OPERATIVE DATE
SECTION 1.1 Effectiveness. This Supplemental Indenture shall become
effective as of the date hereof.
ARTICLE II
AMENDMENTS TO INDENTURE
Section 2.1. Amendments to Indenture.
(a) The Indenture is hereby amended by deleting therefrom the following
provisions in their entirety and any references to those provisions: Sections
4.04, 4.05, 4.08, 4.10, 4.11, 4.12, 4.13, 4.14, 4.17, 4.18, 5.1(b)(i),
5.1(b)(ii), 5.1(c), 5.1(d), 6.01(d), and 6.01(e).
(b) Section 4.06 of the Indenture is hereby amended in its entirety to
read as follows:
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"(a) The Issuers shall deliver to the Trustee, within 105 days
after the end of their respective fiscal years, an Officers' Certificate of each
of the Issuers (provided, however, that one of the signatories to each such
Officers' Certificate shall be the respective Issuer's principal executive
officer, principal financial officer or principal accounting officer), as to
such Officers' knowledge, without independent investigation, of such Issuer's
compliance with all conditions and covenants under this Indenture (without
regard to any period of grace or requirement of notice provided hereunder) and
in the event any Default of the Issuers exists, such Officers shall specify the
nature of such Default. Each such Officers' Certificate shall also notify the
Trustee should such Issuer elect to change the manner in which it fixes its
fiscal year end."
(c) Any definitions used exclusively in the deleted provisions of the
Indenture set forth in paragraph (a) of this Section 2.1 are hereby deleted in
their entirety from the Indenture.
ARTICLE III
MISCELLANEOUS
Section 3.1 Instruments to Be Read Together. This Supplemental
Indenture is an indenture supplemental to and in implementation of the
Indenture, and said Indenture and this Supplemental Indenture shall henceforth
be read together:
Section 3.2 Confirmation. The Indenture as amended and supplemented by
this Supplemental Indenture is in all respect confirmed and preserved.
Section 3.3 Terms Defined. Capitalized terms used in this Supplemental
Indenture and not otherwise defined herein shall have the respective meanings
set forth in the Indenture.
Section 3.4 Headings. The headings of the Articles and Sections of this
Supplemental Indenture have been inserted for convenience of reference only, and
are not to be considered a part hereof and shall in no way modify or restrict
any of the terms and provisions hereof.
Section 3.5 Governing Laws. The laws of the State of New York shall
govern this Supplemental Indenture.
Section 3.6 Counterparts. This Supplemental Indenture may be executed
in any number of counterparts, each of which so executed shall be deemed to be
an original, but all such counterparts shall together constitute but one and the
same instrument.
Section 3.7 Compliance with the Trust Indenture Act. This Supplemental
Indenture shall be interpreted to comply in every respect with the Trust
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Indenture Act of 1939, as amended (the "TIA"). If any provision of this
Supplemental Indenture limits, qualifies, or conflicts with the duties imposed
by the TIA, the imposed duties shall control.
Section 3.8 Acceptance by Trustee. The Trustee accepts the amendments
to the Indenture effected by this Supplemental Indenture and agrees to execute
the trusts created by the Indenture as hereby amended, but upon the terms and
conditions set forth in the Indenture.
Section 3.9 Responsibility of Trustee. The recitals contained herein
shall be taken as the statement of the Company, and the Trustee assumes no
responsibility for their correctness. The Trustee makes no representations as to
the validity or sufficiency of this Supplemental Indenture, except that the
Trustee is duly authorized to execute and deliver this Supplemental Indenture.
IN WITNESS WHEREOF, the parties hereto have caused this Third
Supplemental Indenture to be duly executed, all as of the date first written
above.
ABRAXAS PETROLEUM CORPORATION
By: /s/ Chris E. Williford
CANADIAN ABRAXAS PETROLEUM LIMITED
By: /s/ Chris E. Williford
THE BANK OF NEW YORK
By: /s/ Terence Rawlins
Name: Terence Rawlins
Title: Assistant Vice President
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EXHIBIT 5.1
January 24, 2000
Abraxas Petroleum Corporation
Sandia Oil & Gas Corporation
Wamsutter Holdings, Inc.
500 North Loop 1604 East
Suite 100
San Antonio, Texas 78232
Re: Registration Statement on Form S-1 filed
by Abraxas Petroleum Corporation
Dear Sirs:
We have acted as counsel to Abraxas Petroleum Corporation, a Nevada
corporation ("Abraxas"), Sandia Oil & Gas Corporation, a Texas corporation
("Sandia") and Wamsutter Holdings, Inc., a Wyoming corporation ("Wamsutter"), in
connection with the registration under the Securities Act of 1933, as amended,
of an aggregate of $5,000,000 principal amount of Abraxas' and Canadian Abraxas
Petroleum Limited's 11-1/2% Senior Secured Notes Due 2004, Series A (the
"Notes"), 1,226,249 shares of common stock of Abraxas (the "Common Stock"),
163,354 contingent value rights of Abraxas (the "CVRs") and the guarantee to be
endorsed on the Notes by Sandia (the "Sandia Guarantee") and Wamsutter (the
"Wamsutter Guarantee").
We have examined and are familiar with originals or copies, the
authenticity of which have been established to our satisfaction, of all such
documents, corporate records, certificates of officers of Abraxas, Sandia and
Wamsutter and public officials, and other instruments as we have deemed
necessary to express the opinion hereinafter set forth. In expressing our
opinion as to the valid issuance of the Notes, Common Stock, CVRs, Sandia
Guarantee and Wamsutter Guarantee, we express no opinion as to compliance with
federal and state securities laws.
Based upon the foregoing, it is our opinion that:
(1) the Notes to be sold as described in the Registration Statement
have been duly and validly authorized for such sale and, when so sold and
delivered, will be validly issued, fully paid and nonassessable;
(2) the Notes, when sold and delivered, will be binding obligations of
Abraxas except to the extent that the enforceability of the Notes may be limited
by bankruptcy, insolvency, moratorium, reorganization, fraudulent conveyance or
other laws or decisions relating to or affecting the enforcement of creditors'
rights generally and by general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law);
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(3) the Common Stock to be sold as described in the Registration
Statement has been duly and validly authorized for such sale and, when so sold
and delivered, will be validly issued, fully paid and nonassessable;
(4) the CVRs to be sold as described in the Registration Statement have
been duly and validly authorized for such sale and, when so sold and delivered,
will be validly issued, fully paid and nonassessable;
(5) the Sandia Guarantee will be validly issued, fully paid and
nonassessable;
(6) the Sandia Guarantee will be a binding obligation of Sandia except
to the extent that the enforceability of the Sandia Guarantee may be limited by
bankruptcy, insolvency, moratorium, reorganization, fraudulent conveyance or
other laws or decisions relating to or affecting the enforcement of creditors'
rights generally and by general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law.
(7) the Wamsutter Guarantee will be validly issued, fully paid and
nonassessable; and
(8) the Wamsutter Guarantee will be a binding obligation of Wamsutter
except to the extent that the enforceability of the Wamsutter Guarantee may be
limited by bankruptcy, insolvency, moratorium, reorganization, fraudulent
conveyance or other laws or decisions relating to or affecting the enforcement
of creditors' rights generally and by general principles of equity (regardless
of whether such enforceability is considered in a proceeding in equity or at
law.
The opinion expressed herein is limited to the laws of the State of
Texas, the corporation laws of the State of Nevada, and the federal laws of the
United States.
We hereby consent to the use of our name in the Registration Statement
as counsel who has expressed an opinion upon certain legal matters in connection
with the issue and sale of the Notes, Common Stock, CVRs, Sandia Guarantee and
Wamsutter Guarantee (including specifically the reference contained under the
caption "Legal Matters") and to the use of this opinion as an exhibit to the
Registration Statement.
Yours very truly,
COX & SMITH INCORPORATED
By: /s/Steven R. Jacobs
Steven R. Jacobs,
For the Firm
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EXHIBIT 5.2
Mark R. Smith
Direct Dial: (403) 260-7055
[email protected]
January 20, 2000
Canadian Abraxas Petroleum Limited
300 - 5th Avenue, 12th Floor
Calgary, Alberta
Dear Sirs
Re: Registration Statement on Form S-1 filed by Canadian Abraxas Petroleum
Limited
We have acted as counsel to Canadian Abraxas Petroleum Limited, an Alberta
corporation ("Canadian Abraxas") in connection with the registration under the
Securities Act of 1933, as amended, pursuant to the Registration Statement on
Form S-1 (the "Registration Statement"), of an aggregate of $5,000,000 principal
amount of Abraxas Petroleum Corporation's and Canadian Abraxas' 11 1/2% Senior
Secured Notes Due 2004 (the "Notes").
We have examined and are familiar with originals or copies, the authenticity of
which have been established to our satisfaction, of all such documents,
corporate records, certificates of officers of Canadian Abraxas and of public
officials, and other instruments as we have deemed necessary to express the
opinions hereinafter set forth. In expressing our opinion as to the valid
issuance of the Notes, we express no opinion as to compliance with provincial or
foreign securities laws.
Based on the foregoing, it is our opinion that:
1. the Notes to be issued and sold as described in the Registration Statement
have been duly and validly authorized for such issue and sale and, when so
issued, sold and delivered, will be validly issued, fully paid and
non-assessable; and
2. the Notes to be issued, sold and delivered, will be binding obligations of
Canadian Abraxas.
Our opinion is subject to the following qualifications:
1. the enforceability of the Notes is subject to or may be limited by
applicable bankruptcy, insolvency, reorganization, arrangement, moratorium
or other similar laws relating to or affecting the rights of creditors
generally;
2. the enforceability of the Notes is subject to general principles of equity,
including the fact that equitable remedies, such as specific performance
and injunctions, may only be awarded in the discretion of the court;
3. an Alberta court will only render a judgment in lawful currency of Canada;
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4. each of the Notes are stated to be governed by and construed in accordance
with the laws of the State of New York. With respect to any opinions
relating to enforceability of the Notes, at your request, we have assumed
that the laws of the State of New York are not different from those of the
Province of Alberta and the laws of Canada applicable therein, as they
apply to the opinions expressed herein.
The opinions expressed herein are limited to the laws of the Province of Alberta
and the federal laws of Canada applicable therein.
This opinion is intended solely for the use of the persons to whom it is
addressed in connection with the transactions provided for in the Agreements and
may not be relied upon by any other person or for any other purpose, nor quoted
from or referred to in any other document, without our prior written consent.
We hereby consent to the use of our name in the Registration Statement as
counsel who has expressed an opinion upon certain legal matters in connection
with the issue and sale of the Notes and Guarantee (including specifically the
references contained under the captions "Enforceability of Civil Liabilities
Against Foreign Persons" and "Legal Matters") and to the use of this opinion as
an exhibit to the Registration Statement
Yours very truly,
/s/ OSLER, HOSKIN & HARCOURT, LLP
MRS:slc
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EXHIBIT 10.26
ABRAXAS PETROLEUM CORPORATION
REGISTRATION RIGHTS AGREEMENT
December 21, 1999
Jefferies & Company, Inc.
Two Houston Center
909 Fannin Street, Suite 3100
Houston, TX 77010
Houlihan Lokey Howard & Zukin Capital
685 3rd Avenue, 15th Floor
New York, NY 10017
Gentlemen:
Abraxas Petroleum Corporation, a Nevada corporation ("Abraxas"), and
Canadian Abraxas Petroleum Limited, an Alberta corporation and wholly-owned
subsidiary of the Company ("Canadian Abraxas" and, together with Abraxas, the
"Issuers"), have agreed to issue and sell (i) to Jefferies & Company, Inc.
("Jefferies") $3,282,000 principal amount of the Issuers' 11 1/2% Senior Secured
Notes due 2004 , Series A (the "New Notes"), and (ii) to Houlihan Lokey Howard &
Zukin Capital ("Houlihan Lokey" and, together with Jefferies, the "Holders")
$1,718,000 principal amount of New Notes, 163,354 shares of Abraxas' common
stock, par value $.01 per share ("Common Stock"), and 163,354 contingent value
rights ("CVRs") each of which may result in the distribution of up to
approximately 6.3889 shares of Common Stock (the "CVR Shares") for each CVR
held. In connection therewith, the Issuers agree with the Holders for their
benefit as follows:
1. Definitions. As used in this Agreement, the following capitalized
defined terms shall have the following meanings:
"Act" means the Securities Act of 1933, as amended, and the rules and
regulations of the Commission promulgated thereunder.
"Affiliate" of any specified person means any other person which,
directly or indirectly, is in control of, is controlled by, or is under common
control with, such specified person. For purposes of this definition, control of
a person means the power, direct or indirect, to direct or cause the direction
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of the management and policies of such person whether by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Closing Date" means December 21, 1999.
"Commission" means the Securities and Exchange Commission.
"Engagement Letters" means the Engagement Letter between Abraxas and
Jefferies dated May 17, 1999, as amended on November 18, 1999, and the
Engagement Letter between Abraxas and Houlihan Lokey dated August 1, 1999, as
amended on November 18, 1999.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations of the Commission promulgated thereunder.
"Liquidated Damages" shall have the meaning set forth in Section 7(a)
hereof.
"Managing Underwriters" means the investment banker or investment
bankers and manager or managers that shall administer an underwritten offering.
"NASD" means the National Association of Securities Dealers, Inc.
"Prospectus" means the prospectus included in any Registration
Statement (including, without limitation, a Prospectus that discloses
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A under the Act), as amended or
supplemented by any prospectus supplement, with respect to the terms of the
offering of any portion of the Registrable Securities, covered by such
Registration Statement, and all amendments and supplements to the Prospectus,
including post-effective amendments.
"Registrable Securities" means (a) the New Notes, CVRs and shares of
Common Stock issued to the Holders as described in the introductory paragraph to
this Agreement, (b) any shares of Common Stock that are issued pursuant to the
CVRs issued to Houlihan Lokey as described in the introductory paragraph to this
Agreement and (c) any shares of Common Stock issued in respect of or in exchange
for any of the shares of Common Stock issued as described in parts (a)-(c) of
this sentence, whether by result of a reclassification, recapitalization,
merger, stock split or stock dividend paid thereon or otherwise;
"Registration Statement" means a "shelf" registration statement of the
Issuers pursuant to the provisions of Section 2 hereof which covers some or all
of the Registrable Securities on an appropriate form under Rule 415 under the
Act, or any similar rule that may be adopted by the Commission, amendments and
supplements to such registration statement, including post-effective amendments,
in each case including the Prospectus contained therein, all exhibits thereto
and all material incorporated by reference therein.
"Shelf Registration" means a registration effected pursuant to Section
2 hereof.
"Underwriter" means any underwriter of Registrable Securities in
connection with an underwritten offering thereof under a Registration Statement.
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"Underwritten Registration" or "Underwritten Offering" means a
registration in which Registrable Securities are sold to any Underwriter for
reoffering to the public pursuant to a Registration Statement.
2. Shelf Registration.
(a) The Issuers shall as promptly as practicable after the Closing Date
and no later than January 24, 2000 file with the Commission and thereafter shall
use their reasonable best efforts to cause to be declared effective under the
Act a Registration Statement relating to the offer and sale of the Registrable
Securities by the Holders from time to time in accordance with the methods of
distribution elected by such Holders and set forth in such Registration
Statement, including an Underwritten Offering.
(b) The Issuers shall use their reasonable best efforts to keep the
Registration Statement continuously effective in order to permit the Prospectus
forming part thereof to be usable by Holders for a period of one year from the
date the Registration Statement is declared effective by the Commission or such
shorter period that will terminate when all of the Registrable Securities
covered by the Registration Statement have been sold pursuant to the
Registration Statement (in any such case, such period being called the
"Registration Period").
(c) Each Holder of Registrable Securities agrees by its acquisition of
such Registrable Securities that, upon actual receipt of any notice from the
Issuers of the happening of any event of the kind described in Section 3(c)(2)
hereof, such Holder will forthwith discontinue disposition of such Registrable
Securities covered by such Registration Statement or Prospectus, as the case may
be, until such Holder's receipt of the copies of the supplemented or amended
Prospectus contemplated by Section 3(i) hereof, or until it is advised in
writing (the "Advice") by the Issuers that the use of the applicable Prospectus
may be resumed, and has received copies of any amendments or supplements
thereto. In the event that the Issuers shall give any such notice, the period
during which the Registration Statement and the Prospectus are required to
remain continuously effective shall be extended by the number of days during
such period from and including the date of the giving of such notice to and
including the date when each seller of Registrable Securities covered by such
Registration Statement shall have received (x) the copies of the supplemented or
amended Prospectus contemplated by Section 3(i) hereof or (y) the Advice.
(d) No Holder of Registrable Securities may include any Registrable
Securities in any Registration Statement pursuant to this Agreement unless and
until such Holder furnishes to the Issuers in writing, within 15 days after
receipt of a request therefor, such information as the Issuers may reasonably
request for use in connection with any Registration Statement or Prospectus or
preliminary prospectus included therein. Each Holder of Registrable Securities
as to which any Registration Statement is being effected agrees to furnish
promptly to the Issuers all information required to be disclosed in order to
make information previously furnished to the Issuers by such Holder not
materially misleading.
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3. Registration Procedures.
(a) The Issuers shall furnish to the Holders, prior to the filing
thereof with the Commission, a copy of any Registration Statement, and each
amendment thereof and each amendment or supplement, if any, to the Prospectus
included therein.
(b) The Issuers will ensure that (i) any Registration Statement and any
amendment thereto and any Prospectus forming part thereof and any amendment or
supplement thereto comply in all material respects with the Act and the rules
and regulations thereunder, (ii) any Registration Statement or any amendment
thereto does not, when it becomes effective, contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and (iii) any Prospectus
forming part of any Registration Statement, and any amendment or supplement to
such Prospectus, do not include an untrue statement of a material fact or omit
to state a material fact necessary in order to make the statements, in the light
of the circumstances under which they were made, not misleading.
(c) (1) The Issuers shall advise the Holders and, if requested by the
Holders, confirm such advice in writing:
(i) when a Registration Statement or any amendment thereto has
been filed with the Commission and when the Registration Statement or any
post-effective amendment thereto has become effective; and
(ii) of any request by the Commission for amendments or
supplements to the Registration Statement or the Prospectus included therein or
for additional information.
(2) The Issuers shall advise the Holders and, if requested by the
Holders, confirm such advice in writing:
(i) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the initiation of
any proceedings for that purpose;
(ii) of the receipt by the Issuers of any notification with
respect to the suspension of the qualification of the Registrable Securities
included therein for sale in any jurisdiction or the initiation of any
proceeding for such purpose;
(iii) of the happening of any event that requires the making
of any changes in the Registration Statement or the Prospectus so that, as of
such date, the statements therein are not misleading and do not omit to state a
material fact required to be stated therein or necessary to make the statements
therein (in the case of the Prospectus, in light of the circumstances under
which they were made) not misleading (which advice shall be accompanied by an
instruction to suspend the use of the Prospectus until the requisite changes
have been made); and
(iv) of either of the Issuers' determination that a
post-effective amendment to the Registration Statement would be appropriate.
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(d) The Issuers will use their reasonable best efforts to obtain the
withdrawal of any order suspending the effectiveness of any Registration
Statement at the earliest possible time.
(e) The Issuers will furnish to each Holder of Registrable Securities
and any Underwriter included within the coverage of any Registration Statement,
without charge, at least one copy of such Registration Statement and any
post-effective amendment thereto, including financial statements and schedules,
and, if the Holder or an Underwriter so requests in writing, all exhibits
(including those incorporated by reference).
(f) The Issuers will, during the Registration Period, deliver to each
Holder of Registrable Securities included within the coverage of any
Registration Statement, without charge, as many copies of the Prospectus
(including each preliminary Prospectus) included in such Registration Statement
and any amendment or supplement thereto as such Holder may reasonably request;
and the Issuers consent to the use of the Prospectus or any amendment or
supplement thereto by each of the selling Holders of Registrable Securities and
any Underwriter in connection with the offering and sale of the Registrable
Securities covered by the Prospectus or any amendment or supplement thereto.
(g) Prior to any offering of Registrable Securities pursuant to any
Registration Statement, the Issuers will register or qualify or cooperate with
the Holders of Registrable Securities included therein and their respective
counsel in connection with the registration or qualification (or exemption from
such registration or qualification) of such Registrable Securities for offer and
sale under the securities or blue sky laws of such jurisdictions as any such
Holders or any Underwriter reasonably requests in writing and do any and all
other acts or things necessary or advisable to enable the offer and sale in such
jurisdictions of the Registrable Securities covered by such Registration
Statement; provided, however, that the Issuers will not be required to qualify
generally to do business in any jurisdiction where it is not then so qualified
or to take any action which would subject it to general service of process or to
taxation in any such jurisdiction where it is not then so subject.
(h) The Issuers will cooperate with the Holders of Registrable
Securities to facilitate the timely preparation and delivery of certificates
representing Registrable Securities to be sold pursuant to any Registration
Statement free of any restrictive legends and in such denominations and
registered in such names as either the Holders or any Underwriter may request
prior to sales of Registrable Securities pursuant to such Registration
Statement.
(i) Subject to the last sentence of this Section 3(i), upon the
occurrence of any event contemplated by paragraphs (c)(2)(iii) or (c)(2)(iv)
above, the Issuers will promptly prepare a post-effective amendment to any
Registration Statement or an amendment or supplement to the related Prospectus
or file any other required document so that the Prospectus will not include an
untrue statement of a material fact or omit to state any material fact necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading. Notwithstanding the foregoing, the Issuers shall
not be required to amend or supplement a Registration Statement, any related
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Prospectus or any document incorporated therein by reference in the event that,
and for a period (a "Black Out Period") not to exceed, for so long as this
Agreement is in effect, an aggregate of 90 days if either (A) any action by the
Issuers pursuant to this Section 3(i) would violate applicable law or (B) (x) an
event occurs and is continuing as a result of which a Registration Statement,
any related Prospectus or any document incorporated therein by reference as then
amended or supplemented would, in the Issuers' good faith judgment, contain an
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, and (y) (1) the Issuers determine in good
faith that the disclosure of such event at such time would have a material
adverse effect on the business, operations or prospects of the Issuers or (2)
the disclosure otherwise relates to a material business transaction which has
not yet been publicly disclosed in any relevant jurisdiction.
(j) The Issuers shall, if reasonably requested, promptly incorporate in
a Prospectus supplement or post-effective amendment to a Registration Statement,
such information as the Managing Underwriters and the Holders reasonably agree
should be included therein and shall make all required filings of such
Prospectus supplement or post-effective amendment as soon as notified of the
matters to be incorporated in such Prospectus supplement or post-effective
amendment.
(k) The Issuers shall enter into such agreements (including
underwriting agreements) and take all other appropriate actions in order to
expedite or facilitate the registration or the disposition of the Registrable
Securities, and in connection therewith, if an underwriting agreement is entered
into, (i) make such representations, warranties to, and covenants with, the
Underwriters, with respect to the businesses of the Issuers and their
subsidiaries and the Registration Statement, the Prospectus and documents
incorporated by reference therein, in each case, as are customarily made by
issuers to underwriters in underwritten offerings of securities similar to the
Registrable Securities to be sold in such Underwritten Offering, (ii) furnish to
the Underwriters opinions of counsel to the Issuers and updates thereof in form
and substance reasonably satisfactory to the Managing Underwriters, covering the
matters customarily covered in opinions delivered in underwritten offerings of
securities similar to the Registrable Securities to be sold in such Underwritten
Offering, (iii) furnish to the Underwriters "cold comfort" letters and updates
thereof in form and substance reasonably satisfactory to the Managing
Underwriters from the independent public accountants of each of the Issuers
(and, if necessary, any other independent public accountants of any subsidiary
of either of the Issuers or of any business acquired by either of the Issuers
for which financial statements and financial data are, or are required to be,
including in the Registration Statement), such letters to be in customary form
and covering matters of the type customarily covered in "cold comfort" letters
in connection with underwritten offerings of securities similar to the
Registrable Securities to be sold in such Underwritten Offering, and (iv) cause
the same to contain indemnification provisions and procedures no less favorable
than those set forth in Section 5 of this Agreement (or such other provisions
and procedures acceptable to the Holders and the Managing Underwriters, if any,
with respect to all parties to be indemnified pursuant to Section 5 of this
Agreement from Holders of Registrable Securities to the Issuers). The above
shall be done at each closing under such underwriting agreement, or as and to
the extent required thereunder.
(l) The Issuers shall (i) make reasonably available for inspection by a
representative or representatives of the Holders of Registrable Securities to be
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registered thereunder, any Underwriter participating in any disposition pursuant
to such Registration Statement, and any attorney, accountant or other agent
retained by the Holders or any such Underwriter, during reasonable business
hours all relevant financial and other records, pertinent corporate documents
and properties of the Issuers and their subsidiaries and (ii) cause the Issuers'
officers, directors and employees to supply all relevant information reasonably
requested by any such representatives or any such Underwriter, attorney,
accountant or agent in connection with any such Registration Statement as is
customary for similar due diligence examinations; provided, however, that any
information that is designated in writing by the Issuers, in good faith, as
confidential at the time of delivery of such information shall be kept
confidential by any such representatives or any such Underwriter, attorney,
accountant or agent, unless such disclosure is made in connection with a court
proceeding or required by law, or such information becomes available to the
public generally or through a third party without an accompanying obligation of
confidentiality.
(m) The Issuers shall comply with all applicable rules and regulations
of the Commission and make generally available to the securityholders of Abraxas
earnings statements satisfying the provisions of Section 11(a) of the Act and
Rule 158 thereunder (or any similar rule promulgated under the Act) no later
than 45 days after the end of any 12-month period (or 90 days after the end of
any 12-month period if such period is a fiscal year) (A) commencing at the end
of any fiscal quarter in which Registrable Securities are sold to Underwriters
in a firm commitment or best efforts Underwritten Offering and (B) if not sold
to Underwriters in such an offering, then commencing on the first day of the
first fiscal quarter of Abraxas after the effective date of a Registration
Statement, which statements shall cover such 12-month periods.
(n) The Issuers shall cooperate with each seller of Registrable
Securities covered by any Registration Statement and each Underwriter, if any,
participating in the disposition of such Registrable Securities and their
respective counsel in connection with any filings required to be made with the
NASD.
4. Registration Expenses, The Issuers will bear all expenses incurred
in connection with the performance of its obligations under Sections 2 and 3
hereof, including, without limitation, fees and expenses of one (1) counsel to
the Holders, fees and expenses of compliance with blue sky laws as provided in
Section 3(g) and any NASD filing fees required to be made in connection with an
Underwritten Offering of Registrable Securities, but excluding any underwriting
discount or commission and any broker-dealer sales commission that the Holders
may incur in disposing of their Registrable Securities.
5. Indemnification and Contribution, (a) In connection with any
Registration Statement, the Issuers agree, jointly and severally, to indemnify
and hold harmless each Holder of Registrable Securities covered thereby, the
directors, officers, employees and agents of each such Holder and each person
who controls any such Holder within the meaning of either the Act or the
Exchange Act against any and all losses, claims, damages or liabilities, joint
or several, to which they or any of them may become subject under the Act, the
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Exchange Act or other Federal or state statutory law or regulation, at common
law or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement as originally filed or in any amendment thereof, or in any preliminary
Prospectus or the Prospectus, or in any amendment thereof or supplement thereto,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, and the Issuers agree, jointly and severally,
to reimburse each such indemnified party for any legal or other expenses
reasonably incurred by it in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that the Issuers
will not be liable in any case (i) to the extent that any such loss, claim,
damage or liability arises out of or is based upon any such untrue statement or
alleged untrue statement or omission or alleged omission made therein in
reliance upon and in conformity with written information furnished to the
Issuers by or on behalf of any such Holder specifically for inclusion therein
and (ii) to the extent that any such loss, claim, damage or liability is caused
by any untrue statement or alleged untrue statement or omission or alleged
omission made in the preliminary Prospectus which is corrected in the Prospectus
and a copy of the Prospectus was not sent or given to the person asserting any
such loss, claim, damage or liability who purchased Registrable Securities sold
by the Holders at or before the written confirmation of the sale to such person.
The Issuers also agree, jointly and severally, to indemnify or
contribute to Losses (as defined in Section 5(d) below) of, as provided in
Section 5(d), any Underwriters of Registrable Securities registered under a
Registration Statement, their officers and directors and each person who
controls such Underwriters on substantially the same basis as that of the
indemnification of the Holders provided in this Section 5(a) and shall, if
requested by any Holder, enter into an underwriting agreement reflecting such
agreement, as provided in Section 3(k) hereof.
(b) Each Holder of Registrable Securities covered by a Registration
Statement severally agrees to indemnify and hold harmless (i) the Issuers, (ii)
each of their directors, (iii) each of their officers who signs such
Registration Statement and (iv) each person who controls the Issuers within the
meaning of either the Act or the Exchange Act to the same extent as the
foregoing indemnity from the Issuers to each such Holder, but only with
reference to written information relating to such Holder furnished to the
Issuers by or on behalf of such Holder specifically for inclusion in the
documents referred to in the foregoing indemnity. This indemnity agreement will
be in addition to any liability which any such Holder may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section 5
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 5, notify the indemnifying party in writing of the commencement thereof;
but the failure so to notify the indemnifying party (i) will not relieve it from
liability under paragraph (a) or (b) above unless and to the extent it did not
otherwise learn of such action and such failure results in the forfeiture by the
indemnifying party of substantial rights and defenses and (ii) will not, in any
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event, relieve the indemnifying party from any obligations to any indemnified
party other than the indemnification obligation provided in paragraph (a) or (b)
above. The indemnifying party shall be entitled to appoint counsel of the
indemnifying party's choice at the indemnifying party's expense to represent the
indemnified party in any action for which indemnification is sought (in which
case the indemnifying party shall not thereafter be responsible for the fees and
expenses of any separate counsel retained by the indemnified party or parties
except as set forth below); provided, however, that such counsel shall be
satisfactory to the indemnified party. Notwithstanding the indemnifying party's
election to appoint counsel to represent the indemnified party in an action, the
indemnified party shall have the right to employ separate counsel (including
local counsel), and the indemnifying party shall bear the reasonable fees, costs
and expenses of such separate counsel (and local counsel) if (i) the use of
counsel chosen by the indemnifying party to represent the indemnified party
would present such counsel with a conflict of interest, (ii) the actual or
potential defendants in, or targets of, any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be legal defenses available to it
and/or other indemnified parties which are different from or additional to those
available to the indemnifying party, (iii) the indemnifying party shall not have
employed counsel satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of the institution of
such action or (iv) the indemnifying party shall authorize the indemnified party
to employ separate counsel at the expense of the indemnifying party. An
indemnifying party will not, without the prior written consent of the
indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding. The indemnifying party
shall not be liable for any settlement of any proceeding effected without its
written consent, which consent shall not be unreasonably withheld.
(d) In the event that the indemnity provided in paragraph (a) or (b) of
this Section 5 is unavailable to or insufficient to hold harmless an indemnified
party for any reason, then each applicable indemnifying party, in lieu of
indemnifying such indemnified party, shall have a joint and several obligation
to contribute to the aggregate losses, claims, damages and liabilities
(including legal or other expenses reasonably incurred in connection with
investigating or defending same) (collectively "Losses") to which such
indemnified party may be subject in such proportion as is appropriate to reflect
the relative benefits received by such indemnifying party, on the one hand, and
such indemnified party, on the other hand, from the Registration Statement which
resulted in such Losses. If the allocation provided by the immediately preceding
sentence is unavailable for any reason, the indemnifying party and the
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indemnified party shall contribute in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of such
indemnifying party, on the one hand, and such indemnified party, on the other
hand, in connection with the statements or omissions which resulted in such
Losses as well as any other relevant equitable considerations. Notwithstanding
the provisions of this paragraph (d), no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 5, each person who controls a
Holder within the meaning of either the Act or the Exchange Act and each
director, officer, employee and agent of such Holder shall have the same rights
to contribution as such Holder, and each person who controls the Issuers within
the meaning of either the Act or the Exchange Act, each officer of the Issuers
who shall have signed the Registration Statement and each director of the
Issuers shall have the same rights to contribution as the Issuers, subject in
each case to the applicable terms and conditions of this paragraph (d).
(e) The provisions of this Section 5 will remain in full force and
effect, regardless of any investigation made by or on behalf of any Holder or
the Issuers or any of the officers, directors or controlling persons referred to
in Section 5 hereof, and will survive the sale by a Holder of Registrable
Securities covered by a Registration Statement.
6. Put Provisions.
(a) If the Commission shall not declare the Registration Statement to
be effective under the Act within 180 days of the Closing Date, or if the
Registration Statement, having been declared effective by the Commission under
the Act shall not be available to the Holders for sale of the Restricted
Securities for any period in excess of an aggregate of 90 days, then in either
such event, upon the written request (each a "Put Notice") given to the Issuers
by any Holder of Registrable Securities at any time after the occurrence of such
event but no later than the first anniversary of the Closing Date, the Issuers
or either of them or any of their respective subsidiaries shall repurchase (the
"Put") (subject to the provisions of Section 6(b) below), on the date set forth
in the Put Notice, from such Holder such portion of the New Notes and the Common
Stock held by such holder as shall have been designated in the applicable Put
Notice. The purchase price for the New Notes and Common Stock to be repurchased
(the "Put Price") shall be equal to 100% of the face amount of each of the New
Notes, plus accrued and unpaid interest thereon to the date of repurchase and
$5.03 for each share of the Common Stock, subject to adjustment, in the case of
the Common Stock purchase price, as may be necessary to avoid dilution or
enlargement of rights in the event of an intervening stock split, stock
dividend, combination or subdivision of the Common Stock. The Company shall have
no obligation to repurchase the CVRs or the CVR Shares.
(b) The Issuers shall not be obligated to repurchase any New Notes or
shares of the Common Stock pursuant to section 6(a) to the extent that either of
the following conditions (a "Disabling Condition") would exist: (i) if, in the
case of a repurchase of Common Stock, such repurchase would be unlawful under
the corporation laws of the State of Nevada or the province of Alberta, Canada
and no steps can reasonably be taken by the Issuers (including, without
limitation, a revaluation of assets, a reduction in the stated capital of the
Issuers, causing the respective subsidiaries of the Issuers to pay dividends to
the Issuers or other similar restructuring actions) that would permit such
repurchase within sixty (60) days after the date of the Put Notice; or (ii) if
such repurchase would create a default or event of default under the indenture
governing the New Notes or the indenture governing Abraxas' 12 7/8% Senior
Secured Notes due 2003. In the event that the Issuers have used all required
efforts and any Disabling Condition remains with respect to any repurchase
requested pursuant to subsection (a) above, the Issuers shall promptly give each
affected Holder written notice thereof which details the Issuers' efforts to
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remove such Disabling Condition. In any case in which the Issuers are released
from their obligation to repurchase any New Notes or Common Stock or a
combination thereof under this Section 6(b) because of the existence of a
Disabling Condition, the Issuers shall promptly notify each Holder who
previously delivered a Put Notice to which a Disabling Condition applied of any
subsequent abatement of such Disabling Condition and proceed with the repurchase
of the New Notes and Common Stock or a combination thereof subject to the
applicable Put Notice at a Put Price equal to the Put Price at the time of the
applicable Put Notice, plus interest on the outstanding balance of such amount
at 11.5% per annum from time to time in effect from the date on which payment of
the Put Price would otherwise have been required pursuant to Section 6(a) to the
date of the actual completion of such repurchase, irrespective of whether or not
the date of the actual completion of such repurchase is later than the first
anniversary of the Closing Date.
7. Liquidated Damages
(a) The Issuers and the Holders agree that the Holders will suffer
damages if the Issuers fail to fulfill their obligations under Sections 2 and 6
hereof and that it would not be feasible to ascertain the extent of such damages
with precision. Accordingly, the Issuers agree, jointly and severally, to pay,
as liquidated damages, $2,500 per day to each of the Holders ("Liquidated
Damages") if (i) the Registration Statement is not declared effective by the SEC
on or prior to 180 days of the Closing Date and (ii) the Issuers fail to
repurchase the New Notes or shares of Common Stock when obligated to do so under
Section 6(a), whether as the result of a Disabling Condition or otherwise;
provided, however, that upon either (i) the effectiveness of the Registration
Statement or (ii) the fulfillment by the Issuers of their repurchase obligations
under Section 6(a) above, Liquidated Damages shall cease to accrue.
(b) The Issuers shall notify the Holders within one business day after
each and every date on which an event occurs in respect of which Liquidated
Damages are required to be paid. . All accrued Liquidated Damages shall be paid
to the Holders by the Issuers by wire transfer of immediately available funds or
by federal funds check on each date on which interest on the New Notes is to be
paid commencing with the first such date occurring after any such Liquidated
Damages commence to accrue.
8. Miscellaneous.
(a) Amendments and Waivers, The provisions of this Agreement, including
the provisions of this sentence, may not be amended, qualified, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the Issuers have obtained the written consent of the
Holders.
(b) Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, first-class mail,
telecopier, or air courier guaranteeing overnight delivery:
(1) if to a Holder, at the most current address given by such holder to the
Issuers in accordance with the provisions of this Section 8(c), which address
initially is, with respect to each Holder, the address of such Holder indicated
on page 1 hereof; and
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(2) if to the Issuers:
c/o Abraxas Petroleum Corporation
500 North Loop 1604 East, Suite 100
San Antonio, TX 78232
All such notices and communications shall be deemed to have been duly
given when received.
The Holders or the Issuers by notice to the other may designate
additional or different addresses for subsequent notices or communications.
(c) Successors and Assigns, This Agreement shall inure to the benefit
of and be binding upon the successors and assigns of each of the parties,
including, without the need for an express assignment or any consent by the
Issuers thereto, subsequent Holders of Registrable Securities. The Issuers
hereby agree to extend the benefits of this Agreement to any subsequent record
holder of Registrable Securities and any such holder may specifically enforce
the provisions of this Agreement as if an original party hereto.
(d) Counterparts. This agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(e) Readings. The headings in this agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(f) Governing Law. This agreement shall be governed by and construed in
accordance with the internal laws of the State of Texas applicable to agreements
made and to be performed in said State.
(g) Severability. In the event that any one of more of the provisions
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect and of
the remaining provisions hereof shall not be in any way impaired or affected
thereby, it being intended that all of the rights and privileges of the parties
shall be enforceable to the fullest extent permitted by law.
(h) No Inconsistent Agreements. Except for that certain Registration
Rights Agreement dated as of December 21, 1999 (the "Affiliate Registration
Rights Agreement") by and among Abraxas and the Persons Listed on the signature
page thereto, the Issuers shall not enter, after the date of this Agreement,
into any agreement with respect to any of their securities that is inconsistent
with the rights granted to the Holders in this Agreement or otherwise conflicts
with the provisions hereof. Except for the Affiliate Registration Rights
Agreement, the Issuers have not entered and will not enter into any agreement
with respect to any of their securities that will grant to any person piggy-back
rights with respect to a Registration Statement.
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Please confirm that the foregoing correctly sets forth the agreement
between the Issuers and you.
Very truly yours,
ABRAXAS PETROLEUM CORPORATION
By: /s/ Robert L.G. Watson
___________________________________________
Robert L. G. Watson, Chairman of the Board,
Chief Executive Officer and President
CANADIAN ABRAXAS PETROLEUM LIMITED
By: /s/ Robert L.G. Watson
______________________________________________
Robert L.G. Watson, Chairman of the Board
JEFFERIES & COMPANY, INC.
By: /s/ Daniel O. Conwill, IV
______________________________________________
HOULIHAN LOKEY HOWARD & ZUKIN CAPITAL
By: /s/ David R. Hilty
______________________________________________
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EXHIBIT 21.1
Subsidiaries of Abraxas
Name of Subsidiary State or Other Jurisdiction
of Incorporation
___________________________________ ___________________________
Canadian Abraxas Petroleum Limited Alberta, Canada
Wamsutter Holdings, Inc. Wyoming
Sandia Oil & Gas Corporation Texas
Western Associated Energy Corp. Texas
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EXHIBIT 23.1
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 17, 1999, (except for Note 2, as to which the date
is March 27, 1999), in the Registration Statement(Form S-1) and the related
Prospectus of Abraxas Petroleum dated January 24, 2000.
/s/ Ernst & Young LLP
San Antonio, Texas
January 21, 2000
85
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EXHIBIT 23.2
January 13, 2000
Abraxas Petroleum Corporation
500 North Loop 1604 East, Suite 100
San Antonio, Texas 78232
Gentlemen:
We hereby consent to the incorporation in your Registration Statement on
Form S-1 of the references to DeGolyer and MacNaughton in the "Reserves
Information" section on page 36, in the "Management" section on page 48, and in
the "Experts" section on page 109, and to the use by reference of information
contained in our "Appraisal Report as of December 31, 1998 on Certain Interests
owned by Abraxas Petroleum Corporation" provided, however, that since the crude
oil, condensate, natural gas liquids, and natural gas reserves estimates set
forth in this Report have been combined with reserves estimates of other
petroleum consultants, we are necessarily unable to verify the accuracy of the
reserves values contained in the aforementioned Registration Statement.
Very truly yours,
/s/ DeGOLYER and MacNAUGHTON
86
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EXHIBIT 23.3
January 19, 2000
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We consent to the reference to our firm under the caption "Business - Reserves
Information" and "Experts" in the Registration Statement on Form S-1 (the
"Registration Statement") of Abraxas Petroleum Corporation.
Sincerely,
MCDANIEL & ASSOCIATES CONSULTANTS, LTD.
/s/ P.A. Welch
P.A. Welch, P. Eng.
Senior Vice President
Calgary, Alberta
Dated: January 19, 2000
87
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EXHIBIT 23.4
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to the
use or our report dated March 12, 1999 in the Registration Statement (Form S-1)
and related Prospectus of Abraxas Petroleum Corporation dated January 24, 2000.
Calgary, Canada
January 21, 2000 /s/ Ernst & Young LLP
88
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EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Robert L. G. Watson and Chris Williford, and each
of them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign the Registration Statement on Form S-1 of
Abraxas Petroleum Corporation and any or all amendments (including
post-effective amendments) thereto and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Dated: January 24, 2000.
/s/ Craig S. Bartlett
Craig S. Bartlett
89
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EXHIBIT 24.2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Robert L. G. Watson and Chris Williford, and each
of them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign the Registration Statement on Form S-1 of
Abraxas Petroleum Corporation and any or all amendments (including
post-effective amendments) thereto and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Dated: January 24, 2000.
/s/ Franklin A. Burke
Franklin A. Burke
90
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EXHIBIT 24.3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Robert L. G. Watson and Chris Williford, and each
of them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign the Registration Statement on Form S-1 of
Abraxas Petroleum Corporation and any or all amendments (including
post-effective amendments) thereto and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Dated: January 24, 2000.
/s/ Ralph F. Cox
Ralph F. Cox
91
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EXHIBIT 24.4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Robert L. G. Watson and Chris Williford, and each
of them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign the Registration Statement on Form S-1 of
Abraxas Petroleum Corporation and any or all amendments (including
post-effective amendments) thereto and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Dated: January 24, 2000.
/s/ Frederick M. Pevow, Jr.
Frederick M. Pevow, Jr.
92
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EXHIBIT 24.5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Robert L. G. Watson and Chris Williford, and each
of them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign the Registration Statement on Form S-1 of
Abraxas Petroleum Corporation and any or all amendments (including
post-effective amendments) thereto and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Dated: January 24, 2000.
/s/ James C. Phelps
James C. Phelps
93
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EXHIBIT 24.6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Robert L. G. Watson and Chris Williford, and each
of them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign the Registration Statement on Form S-1 of
Abraxas Petroleum Corporation and any or all amendments (including
post-effective amendments) thereto and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Dated: January 24, 2000.
/s/ Joseph A. Wagda
Joseph A. Wagda
94
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