As filed with the Securities and Exchange Commission on December 7, 2000.
Registration No. 333-95281
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 3 TO
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 (I.R.S. Employer
incorporation or organization) Industrial Classification Identification
Code Number) 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
(210) 554-5500
--------------------------------------------------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective.
<PAGE>
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]
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. [ ]
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 holder identified in this prospectus is offering
$1,718,000 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
holder.
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 two of our wholly-owned subsidiaries, 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 November 24,2000, the closing "bid" price of Abraxas
common stock was $3.44 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.
December 7, 2000
1
<PAGE>
TABLE OF CONTENTS
Page
Summary.............................................................. 4
Forward-Looking Information.......................................... 7
Risk Factors......................................................... 7
Use of Proceeds...................................................... 16
Capitalization....................................................... 17
Price Range of Our Common Stock...................................... 18
Dividend Policy...................................................... 18
Unaudited Pro Forma Financial Information............................ 19
Selected Historical Financial Data................................... 24
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 26
Business............................................................. 38
Management........................................................... 53
Executive Compensation .............................................. 55
Certain Transactions................................................. 58
Principal Stockholders............................................... 58
Selling Security Holders............................................. 62
Plan of Distribution................................................. 63
Description of the Second Lien Notes................................. 64
Description of Capital Stock......................................... 106
Legal Matters........................................................ 112
Experts.............................................................. 113
Where You Can Find More Information ................................. 113
Glossary of Terms.................................................... 113
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.
----------------------
CERTAIN DEFINITIONS AND OTHER INFORMATION
As used in this prospectus, 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 "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 Abraxas' and Canadian
Abraxas' 11 1/2% Senior Secured Notes due 2004, Series A, the term "first
lien notes" refers to 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.
2
<PAGE>
As used in this prospectus, "Bcf" means 1,000,000,000 cubic feet of natural
gas, "Bcfe" means 1,000,000,000 cubic feet of natural gas equivalent, "MBbls"
means 1,000 barrels of crude oil, condensate and natural gas liquids, "Mcf"
means 1,000 cubic feet of natural gas, "Mcfe" means 1,000 cubic feet of
natural gas equivalent using a ratio of 1 barrel = 6,000 cubic feet of
natural gas, "MMcf" means 1,000,000 cubic feet of natural gas and "Mmcfe"
means 1,000,000 cubic feet of natural gas equivalent. There is a Glossary of
Terms that sets out the definitions of other industry specific technical
terms used in this prospectus on page 112.
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 exchange of the second
lien notes, Abraxas common stock and the contingent value rights and the sale
by Abraxas and by a limited partnership of which a subsidiary of Abraxas is
the general partner of certain properties located in Wyoming to Samson
Resources Company had occurred at the times indicated. You should read the
discussion under the heading "Business" for more information regarding the
sale of the first lien notes, the exchange offer and the Samson transaction.
3
<PAGE>
SUMMARY
The following summary highlights certain information about this
offering that is important to you. However, it does not contain all the
information regarding this offering. As such, we encourage you to read this
prospectus in its entirety.
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.
Our principal means of growth is through the acquisition and subsequent
exploitation and development of producing crude oil and natural gas properties
and related assets.
Our principal United States offices are located at 500 North Loop 1604
East, Suite 100, San Antonio, Texas 78232 and the telephone number is (210)
490-4788. Our principal Canadian offices are located at 300 5th Avenue SW,
#1200, Calgary, Alberta, Canada T2P 3C4 and the telephone number is (403)
262-1949.
Summary of the Offering
One of our security holders is offering to sell up to $1,718,000
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 115,666 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.
InterestRateandPaymentDates.. Annual rate - 11 1/2%.
Payment frequency -- every six months on May 1 and
November 1.
First payment -- May 1, 2000.
Guarantees................... Each guarantor is Abraxas' wholly-owned
subsidiary. 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 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."
4
<PAGE>
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 currently authorized to issue a total of 200,000,000 shares
of common stock, par value $.01 per share, and 1,000,000 shares of preferred
stock, par value $.01 per share. As of November 15, 2000, there were 22,593,939
shares of Abraxas common stock outstanding and no shares of preferred stock
outstanding.
The Contingent Value Rights
Abraxas has issued contingent value rights or CVRs the terms of which
provide that the holders thereof could receive up to a total of 104,365,326
shares of Abraxas common stock. Subsequent to the issuance of the CVRs, Abraxas'
common stock traded at a price per share of $3.73 or higher for 30 days during
the 45-day trading period beginning on August 16, 2000 and ending on October 19,
2000. As a result, under the terms of the CVRs, the maximum number of shares
which holders of the CVRs could be entitled to receive has been reduced to
approximately 8,500,000 shares of Abraxas common stock at December 21, 2000 and
9,700,000 shares at May 21, 2001. In addition, in the event Abraxas common stock
trades at a price per share higher than $3.73 for 30 days during any future
45-day trading period, the number of shares issuable under the CVRs would
decrease correspondingly to a number below 8,500,000 or 9,700,000, as the case
may be.
On December 21, 2000, or at the election of Abraxas, on May 21, 2001,
Abraxas may be required to issue 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.
5
<PAGE>
Summary Historical and Pro Forma Financial Information
The following table presents our summary historical consolidated
financial data as of and for the three years ended December 31, 1999, and as of
and for the nine months ended September 30, 1999 and 2000 and our pro forma
financial data as of and for the year ended December 31, 1999, and the nine
months ended September 30, 2000, which have been derived from our 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," our Consolidated Financial
Statements and the notes thereto and the unaudited Pro Forma Financial
Information and the notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Year Ended December 31, 1999 Nine Months Ended September 30,
------------------------------------------------------------------------------
Pro Pro
Forma Forma
1997 1998 1999 1999 (1) 1999 2000 2000 (2)
-------- --------- ----------- ---------- ---------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Total operating revenue (3)............. $ 70,931 $60,084 $66,770 $ 66,770 $ 49,704 $ 49,381 $ 49,381
Operating expense (4)................... 16,429 18,612 18,562 18,562 14,438 14,095 14,095
Depreciation, depletion and
amortization expense................... 30,581 31,226 34,811 34,811 25,801 26,212 26,212
Proved property impairment.............. 4,600 61,224 19,100 19,100 -- -- --
General and administrative expense...... 4,171 5,522 5,269 5,866 4,187 4,762 4,875
Interest expense, net of interest income 24,300 30,043 36,149 29,463 27,929 22,889 22,889
Amortization of deferred financing fee.. 1,260 1,571 1,915 2,286 1,073 1,523 1,523
Income (loss) before extraordinary
items.................................. (6,485) (83,960) (36,680) (30,962) (19,954) 8,937 8,824
Preferred stock dividends............... 183 -- -- -- -- -- --
Net income (loss) applicable to common
stock.................................. $ (6,668) $(83,960) $(36,680) $(30,962) $ (19,954) $ 10,290 $ 10,177
Net income (loss) per common share:
Basic.............................. $ (1.11) $ (13.26) $ (5.41) $ (1.35) $ (3.15) $ 0.46 $ 0.45
Diluted............................ $ (1.11) $ (13.26) $ (5.41) $ (1.35) $ (3.15) $ 0.31 $ 0.31
Other Data:
Capital expenditures (including
acquisitions)........................ $ 87,764 $ 57,861 $ 128,708 $ 128,708 $ 115,250 $ 44,271 $ 44,271
Ratio of earnings to fixed charges (5) -- -- -- -- -- -- --
</TABLE>
September 30, 2000
------------------------
(dollars in thousands)
(unaudited)
Consolidated Balance Sheet Data:
Total assets......................... $ 334,079
Total debt (6) ...................... $ 264,586
Stockholders' equity (deficit) (7) .. $ (4,007)
----------
(1) Reflects the sale of the first lien notes, the exchange offer
and the reversal of an overhead reimbursement received from
Abraxas Wamsutter, L.P. associated with the Samson transaction
as if they occurred on January 1, 2000.
(2) Reflects the reversal of an overhead reimbursement received
from Abraxas Wamsutter, L.P. associated with the Samson
transaction as if it occurred on January 1, 2000.
(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. Our earnings were inadequate to
cover fixed charges in 1997, 1998, 1999, September 30,1999,
September 30, 2000, and Pro Forma September 30, 2000, by $10.0
million, $88.1 million, $49.0 million, $23.7 million, $21.1
million and $21.2 million, respectively.
(6) Consists of long-term debt and capital lease obligations.
(7) Consists of 22,593,939 issued and outstanding shares of
Abraxas common stock.
6
<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 holder.
Risks Related to the Offering
We can not assure you that an active market will develop for the second lien
notes or the 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.
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.
We have not paid dividends on the 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.
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
7
<PAGE>
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,
including the net proceeds from the Samson transaction, cash flow from
operations and proceeds from production payments with a unit of Southern Energy,
Inc. 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 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.
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
8
<PAGE>
(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
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
9
<PAGE>
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.
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.
Risks Related to Our Business
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 1999 was substantially reduced. In 1999 and the
first nine months of 2000, our sale of the first lien notes, the production
payments from Southern and the sale of 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 three
principal sources of liquidity during the next 12 months: (i) cash on hand
including the net proceeds from the Samson transaction; (ii) cash generated by
operations; and (iii) the production payments with Southern. You should read the
discussions under the heading "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 our assets.
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
first 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
10
<PAGE>
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.
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 were $264.6 million and $(4.0) million,
respectively, as of June 30, 2000. 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.
11
<PAGE>
Our ability to replace production with new reserves is highly dependent on
acquisitions or successful development and exploration activities.
The rate of production from crude oil and natural gas properties
declines as reserves are depleted. Our proved reserves will decline as reserves
are produced unless we acquire additional properties containing proved reserves,
conduct successful exploration and development activities or, through
engineering studies, identify additional behind-pipe zones or secondary recovery
reserves. Our future crude oil and natural gas production is therefore highly
dependent upon our level of success in acquiring or finding additional reserves.
We cannot assure you that our exploration and development activities will result
in increases in reserves. Our operations may be curtailed, delayed or cancelled
if we lack necessary capital and by other factors, such as title problems,
weather, compliance with governmental regulations, mechanical problems or
shortages or delays in the delivery of equipment.
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 until recently 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 1999, 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 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 crude 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
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
1999, we recorded a writedown of $19.1 million ($11.9 million after tax) as a
result of a downward adjustment to our proved reserves in Canada. We cannot
assure you that we will not experience additional ceiling limitation writedowns
in the future.
12
<PAGE>
Estimates of our 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. 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, 1999. The average sales prices as of such date used
for purposes of such estimates were $24.88 per Bbl of crude oil, $14.79 per Bbl
of NGLs and $2.11 per Mcf of natural gas. This compares with $9.95 per Bbl of
crude oil, $8.97 per Bbl of NGLs and $1.90 per Mcf of natural gas as of December
31, 1998. It is also assumed that we will make future capital expenditures of
approximately $31.7 million in the aggregate, which are necessary to develop and
realize the value of proved undeveloped reserves on our properties. Any
significant variance in actual results from these assumptions could also
materially affect the estimated quantity and value of reserves set forth herein.
We have experienced recurring net losses.
The following table shows the losses we had in 1994, 1995, 1997, 1998
and 1999:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
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) $(36.7)
</TABLE>
13
<PAGE>
You should read the discussions under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our 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.
Our 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.
We depend on our 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.
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 headings
"Description of Capital Stock -- Anti-takeover Effects of Certain Provisions of
the Articles of Incorporation and Bylaws," "-- Stockholder Rights Plan," and "--
Anti-Takeover Statutes" for more information regarding these anti-takeover
provisions.
Risks Related to Our Industry
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
- 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.
14
<PAGE>
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
ours. 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, 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
15
<PAGE>
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.
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 holder pursuant to this prospectus.
16
<PAGE>
CAPITALIZATION
The following table sets forth our total consolidated capitalization at
September 30, 2000, on a historical basis. This table should be read in
conjunction with our Consolidated Financial Statements and the notes thereto and
the other financial information included elsewhere in this prospectus.
September 30, 2000
(unaudited)
---------------------
(dollars in thousands)
Total debt, including current maturities:
Credit Facility due to a Canadian bank (1) ......... $ 7,948
12 7/8% Senior Secured Notes due 2003............... 63,500
111/2% Senior Secured Notes due 2004, Series A (2).. 190,178
111/2% Senior Notes due 2004, Series D.............. 801
Other long-term obligations................... 2,159
---------
Total debt............................................. 264,586
Stockholders' equity:
Common stock........................................ 227
Treasury stock, 165,883 shares...................... (964)
Additional paid-in capital.......................... 127,570
Foreign currency translation........................ (1,305)
Accumulated deficit................................. (129,535)
---------
Total stockholders' equity.................... (4,007)
-------
Total capitalization.......................... $260,579
=========
----------
(1) Indebtedness of Grey Wolf, which is non-recourse to us.
(2) Includes $5.0 million of second lien notes issued to Houlihan and Jefferies
& Company, Inc. as payment for their fees and expenses.
17
<PAGE>
PRICE RANGE OF ABRAXAS COMMON STOCK
Abraxas common stock began trading on the American Stock Exchange on
August 18, 2000, under the symbol "ABP." 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.
During the period beginning June 16, 1999, and ending on August 17, 2000,
Abraxas Common Stock traded on the OTC Bulletin Board under the symbol "AXAS."
As of November 15, 2000, Abraxas had 22,593,939 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), on the OTC Bulletin Board for the remainder of 1999 and
through August 17, 2000, and the high and low sales price on the American Stock
Exchange from August 18, 2000 through November 24, 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................................ $2.81 $1.06
Second Quarter............................... 2.38 1.34
Third Quarter (OTC through August 17, 2000).. 2.75 1.38
Third Quarter (AMEX through
September 30, 2000).......................... 4.00 2.75
Fourth Quarter (through
November 24, 2000)........................... 3.94 3.00
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.
18
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information is derived from
our historical financial statements set forth elsewhere in this prospectus and
is adjusted to reflect the following:
Our Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
December 31, 1999, has been prepared assuming the sale of non-core properties
held by Abraxas Wamsutter L.P., a limited partnership of which a subsidiary of
Abraxas is the general partner, as well as other contiguous assets owned by
Abraxas, to Samson Resources Company as if the transaction were consummated on
December 31, 1999. Our Unaudited Pro Forma Consolidated Statement of Operations
for the year ended December 31, 1999, has been prepared assuming the issuance of
the first lien notes, the exchange offer and the reversal of an overhead
reimbursement received from Abraxas Wamsutter, L.P. associated with the Samson
transaction were consummated on January 1, 1999. Our Unaudited Pro Forma
Consolidated Statement of Operations for the nine months ended September 30,
2000 has been prepared assuming the reversal of an overhead reimbursement
received from Abraxas Wamsutter, L.P. associated with the Samson transaction was
consummated on January 1, 2000.
The unaudited pro forma financial information should be read in
conjunction with the notes thereto and our Consolidated Financial Statements and
the notes thereto.
Our unaudited pro forma financial information is not indicative of our
financial position or results of operations which would actually have occurred
if the sale of the first lien notes, the exchange offer and the Samson
transaction 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.
19
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2000
Abraxas
Petroleum Samson
Corporation adjustments Pro Forma
----------- ----------- ----------
(dollars in thousands except
per share data)
Revenue:
<S> <C> <C> <C>
Oil and gas production revenues .......... $ 46,472 $ -- $ 46,472
Gas processing revenues .................. 2,074 -- 2,074
Rig revenues ............................. 384 -- 384
Other revenues ........................... 451 -- 451
-------- -------- --------
Total revenue ..................... 49,381 -- 49,381
Operating costs and expenses:
Lease operating and production taxes ..... 13,507 -- 13,507
Depreciation, depletion and amortization . 26,212 -- 26,212
Rig operations ........................... 588 -- 588
General and administrative expense ....... 4,762 113(5) 4,875
-------- -------- --------
Total operating expenses .......... 45,069 113 45,182
-------- -------- --------
Operating income (loss) .................... 4,312 (113) 4,199
Other (income) expense:
Interest income .......................... (482) -- (482)
Amortization of deferred financing fee ... 1,523 -- 1,523
Interest expense ......................... 23,371 -- 23,371
Gain on sale of equity investment ......... (33,983) -- (33,983)
-------- -------- --------
Other ..................................... 1,030 -- 1,030
-------- -------- --------
Total other (income) expenses ..... (8,541) -- (8,541)
-------- -------- --------
Income before tax and extraordinary item ... 12,853 (113) 12,740
Income tax (expense) benefit:
Current .................................. 71 -- 71
Deferred ................................. 3,248 -- 3,248
Minority interest income (loss) ............ 597 -- 597
-------- -------- --------
Net income before extraordinary item ....... 8,937 -- 8,824
-------- -------- --------
Extraordinary item:
Debt extinguishment ...................... 1,353 -- 1,353
-------- -------- --------
Net income ................................. 10,290 (113) 10,177
======== ======== ========
Earnings per common share:
Net income before extraordinary item ..... $ 0.40 $ -- $ 0.39
Extraordinary item ....................... 0.06 -- 0.06
-------- -------- --------
Net income per common share .............. $ 0.46 $ -- $ 0.45
======== ======== ========
Earnings per common share assuming dilution:
Net income before extraordinary item ..... $ 0.27 $ -- $ 0.27
Extraordinary item ....................... 0.04 -- 0.04
-------- -------- --------
Net income per common share .............. $ 0.31 $ -- $ 0.31
======== ======== ========
</TABLE>
See notes to unaudited pro forma financial information
20
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1999
Abraxas
Petroleum Offering Exchange offer Samson
Corporation adjustments adjustments adjustments Pro Forma
---------------- ----------------- ----------------- ---------------- --------------
(dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Revenue:
Oil and gas production revenues.......... $ 59,025 $ -- $ -- $ -- $ 59,025
Gas processing revenues.................. 4,244 -- -- -- 4,244
Rig revenues............................. 444 -- -- -- 444
Other revenues........................... 3,057 -- -- -- 3,057
---------------- ----------------- ----------------- ---------------- --------------
Total revenue..................... 66,770 -- -- -- 66,770
Operating costs and expenses:
Lease operating and production taxes..... 17,938 -- -- -- 17,938
Depreciation, depletion and amortization. 34,811 -- -- -- 34,811
Proved property impairment............... 19,100 -- -- -- 19,100
Rig operations........................... 624 -- -- -- 624
General and administrative expense....... 5,269 -- -- 597 (5) 5,866
---------------- ----------------- ----------------- ---------------- --------------
Total operating expenses.......... 77,742 -- -- 597 78,339
---------------- ----------------- ----------------- ---------------- --------------
Operating income (loss).................... (10,972) -- -- (597) (11,569)
Other (income) expense:
Interest income.......................... (666) -- -- -- (666)
Amortization of deferred financing fee... 1,915 170 (1) 201 (3) -- 2,286
Interest expense......................... 36,815 2,044 (2) (8,730) (4) -- 30,129
---------------- ----------------- ----------------- ---------------- --------------
Total other (income) expenses..... 38,064 2,214 (8,529) -- 31,749
---------------- ----------------- ----------------- ---------------- --------------
Income (loss) before tax................... (49,036) (2,214) 8,529 (597) (43,318)
Income tax (expense) benefit:
Current.................................. (491) -- -- -- (491)
Deferred................................. 13,116 -- -- -- 13,116
Minority interest income (loss)............ 269 -- -- -- 269
---------------- ----------------- ----------------- ---------------- --------------
Net (loss) applicable to common stockholders $ (36,680) $ (2,214) $ 8,529 $ (597) $ (30,962)
================ ================= ================= ================ ==============
Net (loss) per share....................... $ (5.41) -- -- -- $ (1.35)
================ ================= ================= ================ ==============
See notes to unaudited pro forma financial information
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
As of December 31, 1999
Abraxas
Petroleum Pro-forma
Corporation adjustments Pro Forma
------------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C>
Assets:
Cash............................................. $ 3,799 $ 31,232 (1) $ 35,031
Accounts receivable.............................. 14,352 -- 14,352
Other............................................ 878 -- 878
-------------- ------------------ --------------
Total current assets...................... 19,029 31,232 50,261
Property and equipment............................. 514,353 -- 514,353
Less accumulated DD&A.............................. 219,687 -- 219,687
-------------- ------------------ --------------
Net property and equipment....................... 294,666 -- 294,666
Deferred financing fees............................ 7,711 -- 7,711
3,250 (1)
Other assets....................................... 878 (499)(2) 3,629
============== ================== ==============
Total assets.............................. $ 322,284 $ 33,983 $ 356,267
============== ================== ==============
Liabilities and stockholders' equity (deficit):
Total current liabilities.......................... $ 26,334 $ -- $ 26,334
Long-term debt..................................... 273,421 -- 273,421
Deferred income taxes.............................. 16,935 -- 16,935
Minority interest.................................. 10,496 -- 10,496
Future site restoration............................ 4,603 -- 4,603
Stockholders' equity (deficit):
Common stock..................................... 227 -- 227
Additional paid-in capital....................... 127,562 -- 127,562
Accumulated deficit.............................. (139,825) 33,983 (3) (105,842)
Treasury stock................................... (1,071) -- (1,071)
Accumulated other comprehensive income........... 3,602 -- 3,602
-------------- ------------------ --------------
Total stockholders' equity (deficit)...... (9,505) 33,983 24,478
============== ================== ==============
Total liabilities and stockholders' equity
(deficit)................................. $ 322,284 $ 33,983 $ 356,267
============== ================== ==============
</TABLE>
See notes to unaudited pro forma financial information.
22
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
Note 1. The Unaudited Pro Forma Statement of Operations for the year ended
December 31, 1999, reflects the offering of the first lien notes, the exchange
offer and the reversal of an overhead reimbursement received from Abraxas
Wamsutter, L.P. associated with the Samson transaction as if all were
consummated on January 1, 1999 and the Unaudited Pro Forma Statement of
Operations for the nini months ended September 30, 2000, reflects the reversal
of an overhead reimbursement received from Abraxas Wamsutter, L.P. associated
with the Samson transaction as if the transaction were consummated on January 1,
2000:
(1) Record additional amortization of deferred financing fees related to fees
paid in connection with the offering of $63.5 million of the first lien
notes.
(2) Record additional interest expense on the first lien notes.
(3) Record additional amortization of deferred financing fees related to fees
paid in connection with the exchange offer.
(4) Record reduction of interest related to reduced debt as result of exchange
offer.
(5) Reversal of overhead reimbursement received from partnership.
Note 2. The Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
December 31, 1999, reflects the Samson transaction as if it were consummated on
December 31, 1999:
(1) Proceeds from sale of Wamsutter assets.
(2) Cost basis of assets sold.
(3) Gain on sale.
23
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following historical selected consolidated financial data are
derived from, and qualified by reference to, our Consolidated Financial
Statements and the notes thereto. The statement of operations data for the nine
months ended September 30, 2000, is not necessarily indicative of results of a
full year. The consolidated financial data for each of the nine months ended
September 30, 1999 and 2000, are derived from our 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
our Consolidated Financial Statements 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,
---------------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
---------- ------- --------- -------- --------- -------- -------
(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...... $13,660 $25,749 $ 65,826 $ 54,263 $ 59,025 $43,884 $46,472
Gas processing revenues.............. -- 600 3,568 3,159 4,244 2,733 2,074
Other revenue........................ 157 304 1,537 2,662 3,501 3,087 835
------- ------- -------- -------- -------- -------- --------
Total operating revenue...... 13,817 26,653 70,931 60,084 66,770 49,704 49,381
------- ------- -------- -------- -------- -------- --------
Operating costs and expenses:
Lease operating and production taxes... 4,333 6,120 16,133 18,091 17,938 13,986 13,507
Depreciation, depletion and
amortization expense.............. 5,434 9,605 30,581 31,226 34,811 25,801 26,212
General and administrative expense... 1,042 1,933 4,171 5,522 5,269 4,187 4,762
Other................................ 125 169 296 521 624 452 588
Proved property impairment........... -- -- 4,600 61,224 19,100 -- --
------- ------- -------- -------- --------- ------- -------
Total operating expenses..... 10,934 17,827 55,781 116,584 77,742 44,426 45,069
------- ------- -------- -------- --------- ------- -------
Operating income (loss)................ 2,883 8,826 15,150 (56,500) (10,972) 5,278 4,312
Net interest expense................... 3,877 5,987 24,300 30,043 36,149 27,929 22,889
Amortization of deferred financing
fees(1)............................ 214 280 1,260 1,571 1,915 1,073 1,523
Gain on sale of equity investment (33,983)
Other (income) expense................. -- 443 (34) 4 269 -- 1,030
------- ------- -------- -------- ----------- ------- --------
Income (loss) from continuing
operations before taxes and
extraordinary items................. (1,208) 2,116 (10,376) (88,118) (49,305) (23,724) 12,853
Income tax (expense) benefit........... -- (176) 3,891 4,158 12,625 3,942 (3,319)
Minority interest in income (loss) of
consolidated foreign subsidiary.... -- -- -- -- -- (172) (597)
------- ------- -------- -------- -------- --------- -------
Income (loss) before extraordinary
items............................... (1,208) 1,940 (6,485) (83,960) (36,680) (19,954) 8,937
Extraordinary items(2)................. -- (427) -- -- -- -- 1,353
------- ------- -------- -------- -------- --------- -------
Net income (loss)...................... (1,208) 1,513 (6,485) (83,960) (36,680) (19,954) 10,290
Preferred dividends.................... (366) (366) (183) -- -- -- --
------- ------- -------- -------- -------- --------- -------
Net income (loss) applicable to
common stockholders................ $ (1,574) $ 1,147 $ (6,668) $(83,960) $(36,680) $ (19,954) $ 10,290
======== ======= ======== ======== ======== ========= =======
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
---------------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
---------- ------- --------- -------- --------- -------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings per share:
Income (loss) before extraordinary
item............................... $ (0.34) $ 0.23 $ (1.11) $(13.26) $ (5.41) $ (3.15) $ 0.40
Extraordinary items................. -- (.06) -- -- -- -- .06
------- -------- -------- -------- --------- --------- -------
Net income (loss) per common share.... $ (0.34) $ 0.17 $ (1.11) $(13.26) $ (5.41) $ (3.15) $ 0.46
======== ======== ======== ========= ========= ========= =======
Net Income (loss) per common share
assuming dilution:
Income (loss) before
extraordinary item................. $ (0.34) $ 0.23 $ (1.11) $(13.26) $ (5.41) $ (3.15) $ 0.27
Extraordinary item................. -- (0.06) -- -- -- -- 0.04
------- -------- -------- -------- --------- --------- -------
Net income (loss) per common share.... $ (0.34) $ 0.17 $ (1.11) $(13.26) $ (5.41) $ (3.15) $ 0.31
======== ======== ======== ========= ========= ========= =======
Weighted average shares
outstanding assuming dilution.. 4,635 6,794 6,025 6,331 6,784 6,342 32,642
======== ======== ======== ========= ========= ========= =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, At September 30
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ----
(dollars in thousands)
Consolidated Balance Sheet Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets...................... $85,067 $304,842 $338,528 $ 291,498 $322,284 347,325 334,079
Long-term debt(3)................. 41,557 215,000 248,617 299,698 273,421 340,243 264,586
Stockholders' equity (deficit).... 37,062 35,656 26,813 (63,522) (9,505) (73,325) (4,007)
Other Data:
Capital expenditures (including
acquisitions).................. 12,330 173,155 87,764 57,861 128,708 115,250 44,271
Ratio (deficiency) of earnings to
fixed charges(4) -- 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) Consists of gain (loss) incurred in connection with extinguishment of debt.
(3) Excludes current maturities of long-term debt and capital lease obligations.
Includes the premium on the old notes and capital lease obligations.
(4) 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. Our
earnings were inadequate to cover fixed charges in 1995, 1997, 1998, 1999,
the nine months ended September 30, 1999 and 2000 by $1.2 million, $10.0
million, $88.1 million, $49.0 million, $23.7 million and $21.1 million,
respectively.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of our financial condition, results of
operations, liquidity and capital resources. This discussion should be read in
conjunction with our Consolidated Financial Statements and the notes thereto
included elsewhere in this prospectus.
General
We have incurred net losses for a number of years. Our 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 we produce. Natural gas and crude oil prices
weakened somewhat during 1997 and continued to decrease during 1998. Crude oil
and natural gas prices increased somewhat in 1999 and have continued to increase
during the first nine months of 2000.
We incurred losses in 1997, 1998 and 1999, and there can be no
assurance that operating income and net earnings will be achieved in future
periods. Because our proved reserves will decline as crude oil, natural gas and
natural gas liquids are produced, unless we are successful in acquiring
properties containing proved reserves or conduct successful exploration and
development activities, our reserves and production will decrease. Our ability
to acquire or find additional reserves in the near future will be dependent, in
part, upon the amount of available funds for acquisition, exploration and
development projects. If crude oil and natural gas prices remain at depressed
levels, or if our production levels decrease, our revenues, cash flow from
operations and financial condition will be materially adversely affected.
Results of Operations
The factors which most significantly affect our 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.
Selected Operating Data. The following table sets forth certain of our
operating data for the periods presented:
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(dollars in thousands, except per unit data)
Operating revenue:
<S> <C> <C> <C> <C> <C>
Crude oil sales....................... $ 17,453 $ 9,948 $ 11,330 $ 8,506 $ 7,681
NGLs sales............................ 10,668 5,905 5,043 3,366 5,236
Natural gas sales..................... 37,705 38,410 42,652 32,012 33,555
Gas processing revenue................ 3,568 3,159 4,244 2,733 2,074
Other................................. 1,537 2,662 3,501 3,087 835
-------- --------- ----------- ----------- ----------
Total operating revenue....... $ 70,931 $ 60,084 $ 66,770 $ 49,704 $ 49,381
======== ========= =========== ========== ==========
Operating income(loss).................. $ 15,150 $ (56,500) $ (10,972) $ 5,278 $ 4,312
Crude oil production(MBbls)............. 936.7 728.6 777.9 609 474
NGLs production(MBbls).................. 992.3 867.4 376.5 282 243
Natural gas production(MMcf)............ 21,050.0 24,929.9 25,697.9 20,155 15,312
Average crude oil sales prices(per Bbl). $ 18.63 $ 13.65 $ 14.57 $ 13.98 $ 16.20
Average NGLs sales price(per Bbl)....... $ 10.75 $ 6.81 $ 13.40 $ 11.96 $ 21.50
Average natural gas sales price(per Mcf) $ 1.79 $ 1.54 $ 1.66 $ 1.59 $ 2.19
</TABLE>
26
<PAGE>
Comparison of Nine Months Ended September 30, 2000 to Nine Months Ended
September 30, 1999
Operating Revenue. During the nine months ended September 30, 2000,
operating revenue from crude oil, natural gas and natural gas liquid sales
increased from $43.9 million in the nine months ended September 30, 1999 to
$46.5 million for the same period in 2000. The increase in revenue was primarily
attributable to higher prices realized during the nine months ended September
30, 2000 as compared to the same period of 1999. After deducting losses from
hedging activities of $14.7 million, increased prices contributed $12.7 million
in additional revenue. Reduced production volumes had a $10.1 million negative
impact on revenue.
The average sales price, net of hedging activities, for the nine months ended
September 30, 2000 were:
o $16.20 per Bbl of crude oil,
o $21.50 per Bbl of natural gas liquid, and
o $ 2.19 per Mcf of natural gas
The average sales price, net of hedging activities, for the nine months ended
September 30, 1999 were:
o $13.98 per Bbl of crude oil,
o $11.96 per Bbl of natural gas liquid, and
o $ 1.59 per Mcf of natural gas
Crude oil production decreased from 608.6 MBbls for the first nine months
of 1999 to 474.3 MBbls for the same period of 2000. The decline in crude oil
production is due to natural field depletion, a de-emphasis on crude oil
drilling during 1999 and the disposition of non core properties in 2000,
primarily in our Canadian operations. Natural gas production decreased to 15,312
MMcf for the first nine months of 2000 from 20,155 MMcf for the same period of
1999. The decline in natural gas production is due primarily to the sale of non
core properties during 2000 and natural field depletion. During 1999 and the
first nine months of 2000 a significant portion of our drilling activity has
been in the Edwards Trend in south Texas. Natural gas production volumes in this
area increased by 952.1 MMcf from 2,123.0 MMcf for the nine months ended
September 30, 1999 to 3,075.0 MMcf for the same period of 2000. Production in
our other areas declined due to decreased drilling activity and the fields'
natural decline. Natural gas liquids volumes declined from 281.5 MBbls for the
nine months ended September 30, 1999 to 243.5 MBbls for the same period of 2000.
The decline in natural gas liquids is primarily due to a decline in natural gas
volumes in the areas that we process liquids.
Lease Operating Expenses. LOE and natural gas processing expenses were
$13.5 million for the nine months ended September 30, 2000 compared to $14.0
million for the same period in 1999. The Company's LOE on a per MCFE basis for
the nine months ended September 30, 2000 was $0.69 compared to $0.55 for the
same period of 1999. The increase on a per MCFE basis was due to a general
increase in the cost of services from 1999 to 2000 and higher production taxes
as a result of higher commodity prices in 2000 as compared to 1999.
G&A Expenses. G&A expenses increased from $4.2 million for the nine months
ended September 30, 1999 to $4.8 million for the same period of 2000. The
increase was primarily to the loss of overhead reimbursement of approximately
$300,000 received from Abraxas Wamsutter, which sold it's properties in March
2000, and increased insurance cost. G&A expense on a per MCFE basis increased
from $0.17 for the nine months ended September 30, 1999 to $0.24 for the same
period of 2000.
Depreciation, Depletion and Amortization Expenses. DD&A expense increased
to $26.2 million for the nine months ended September 30, 2000, from $25.8
million for the same period of 1999. The Company's DD&A on a per MCFE basis for
the nine months ended September 30, 2000 was $1.34 per MCFE compared to $1.01 in
1999. The decrease in total DD&A was due to decreased production during the
first nine months of 2000 and a reduction of the full cost pool relating to the
write down of Canadian reserves in 1999. The per MCFE increase is due to higher
finding cost in the later part of 1999 and the first nine months of 2000.
27
<PAGE>
Interest Expense. Interest decreased to $23.4 million for the nine months
ended September 30, 2000 from $28.4 million for the nine months ended September
30, 1999. This decrease resulted from reduced debt levels during the first nine
months of 2000 compared to the same period of 1999. The reduced debt level is
the result of the exchange of approximately $269.7 million principal amount of
our 11.5% Senior Notes due 2004, Series D (the "Old Notes") for approximately
$188.8 million principal amount of our 11.5% Senior Secured Notes due 2004,
Series A (the "Second Lien Notes"), shares of our common stock and contingent
value rights. The interest savings related to this exchange was partially offset
by interest on our 12.875% Senior Secured Notes due 2003 (the "First Lien
Notes") which were issued on March 27, 1999. Long-term debt declined from $346.2
million at September 30, 1999 to $264.6 million at September 30, 2000
Other Expense. Other expense was $1.0 million of the nine months ended
September 30, 2000. Included in this amount is $147,000 of non-cash expense in
connection with the issuance of warrants in August, 2000 to a third party
financial advisor, approximately $400,000 in non-recurring costs incurred in our
Canadian operations in connection with the acquisition of New Cache Petroleums,
Ltd. in 1999 and approximately $436,000 in connection with the settlement of a
lawsuit in April 2000.
General. Our 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 we produce The
prices of natural gas and, crude oil and natural gas liquids we receive
increased during the first nine months of 2000. The average natural gas price we
realized increased by 27% to $2.19 per MCF during the first nine months of 2000,
including the impact of a loss from hedging activities of $8.4 million, compared
with $1.59 per MCF during the same period of 1999. Crude oil prices increased
from $13.98 per BBL during the nine months of 1999, to $16.20 for the nine
months ended September 30, 2000, including the impact of a loss from hedging
activities of $5.7 million. Natural gas liquids prices increased to $21.50 per
BBL for the nine months ended September 30, 2000 compared to $11.96 per BBL in
the same period of 1999. In addition, our proved reserves will decline as crude
oil, natural gas and natural gas liquids are produced unless we are 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 our production levels
decrease, our revenues, cash flow from operations and profitability will be
materially adversely affected.
Comparison of Year Ended December 31, 1999 to Year Ended December 31, 1998
Operating Revenue. During the year ended December 31, 1999, operating
revenue from crude oil, natural gas and natural gas liquids sales, and natural
gas processing revenues increased by $4.7 million from $54.3 million in 1998 to
$59.0 million in 1999. This increase was primarily attributable to an increase
in commodity prices. Increased prices contributed $8.1 million in additional
revenue, which was offset by $3.4 million due to a decrease in production
volumes.
Natural gas liquids volumes declined from 867.4 MBbls in 1998 to 376.5 in
1999. The decline in natural gas liquids was primarily a result of the sale of
oil and gas producing properties in Wyoming in late 1998. The Wyoming properties
contributed 440.6 MBbls of natural gas liquids in 1998. Also contributing to the
decline in natural gas liquids volumes was the closing of two gas processing
plants in South Texas, one in late 1998 and one in January 1999 and our decision
to stop processing gas in early 1999 due to depressed prices. We resumed
processing natural gas in April 1999 as prices improved and third party
facilities became available. Crude oil sales volumes increased by 6.8% from
728.6 MBbls in 1998 to 777.9 MBbls during 1999. Natural gas sales volumes
increased by 13.8% from 24.9 Bcf in 1998 to 25.7 Bcf in 1999. The increase in
crude oil and natural gas sales volumes was attributable to increased production
attributable to our ongoing development program on existing and acquired
properties. Average sales prices in 1999 were:
o $14.57 per Bbl of crude oil,
o $13.40 per Bbl of natural gas liquids, and
o $1.66 per Mcf of natural gas.
28
<PAGE>
Average sales prices in 1998 were:
o $13.65 per Bbl of crude oil,
o $6.81 per Bbl of natural gas liquids, and
o $1.54 per Mcf of natural gas.
We also had gas processing revenue of $4.2 million in 1999 as compared to $3.1
million in 1998.
Lease Operating Expense. Lease operating expense ("LOE") and natural gas
processing costs decreased by $0.2 million from $18.1 million for the year ended
December 31, 1998, to $17.9 million for the same period of 1999. LOE on a per
Mcfe basis for 1999 was $0.55 per Mcfe as compared to $0.52 per Mcfe in 1998.
The increase in the per Mcfe LOE is due to the sale of low cost gas wells in
Wyoming which were replaced with higher cost oil wells acquired in Canada with
the acquisition of New Cache Petroleums, Ltd. in January 1999. The decrease was
due primarily to the greater number of wells we owned for the year ended
December 31, 1999, compared to the year ended December 31, 1998. LOE on a per
Mcfe basis for 1999 was $0.55 per Mcfe as compared to $0.52 per Mcfe in 1998.
G&A Expense. G&A expense decreased from $5.5 million for the year ended
December 31, 1998, to $5.3 million for the year ended December 31, 1999. This is
primarily a result of cost control measures implemented in the climate of
depressed prices. Our G&A expense on a per Mcfe basis was unchanged at $0.16 per
Mcfe in 1999 and 1998.
DD&A Expense. Depreciation, depletion and amortization ("DD&A") expense
increased by $3.6 million from $31.2 million for the year ended December 31,
1998, to $34.8 million for the year ended December 31, 1999. Our DD&A expense on
a per Mcfe basis for 1999 was $1.07 per Mcfe as compared to $0.90 per Mcfe in
1998. The increase in DD&A is the result of higher finding and acquisition cost
in 1998 and 1999, primarily related to Canadian operations.
Interest Expense. Interest expense increased by $6.2 million from $30.8
million to $37.0 million for the year ended December 31, 1999, compared to 1998.
This increase was attributable to our increased borrowings during 1999. In March
1999, we issued $63.5 million in principal amount of the first lien notes. In
December 1999, we consummated the exchange offer whereby $188.8 million in
second lien notes, 16,078,990 shares of our common stock, and 16,078,990 CVRs
were exchanged for $269.7 million of the old notes. Long-term debt decreased
from $299.8 million at December 31, 1998, to $275.7 million at December 31,
1999.
Ceiling Limitation Writedown. We record the carrying value of our crude oil
and natural gas properties using the full cost method of accounting for oil and
gas properties. Under this method, we capitalize the cost to acquire, explore
for and develop oil and gas properties. Under the full cost accounting rules,
the net capitalized cost of crude oil and natural gas properties less related
deferred taxes, are limited by country, to the lower of the unamortized cost or
the cost ceiling, defined as the sum of the present value of estimated
unescalated future net revenues from proved reserves, discounted at 10%, plus
the cost of properties not being amortized, if any, plus the lower of cost or
estimated fair value of unproved properties included in the costs being
amortized, if any, less related income taxes. If the net capitalized cost of
crude oil and natural gas properties exceeds the ceiling limit, we are 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 our
stockholders' equity.
The risk that we will be required to writedown the carrying value of our
oil and gas assets increases when oil and gas prices are depressed or volatile.
In addition, writedowns may occur if we have substantial downward revisions in
our estimated proved reserves or if purchasers or governmental action cause an
abrogation of, or if we voluntarily cancel, long-term contracts for our natural
gas. For the year ended December 31, 1999, we recorded a writedown of $19.2
million, $11.9 million after tax, related to our Canadian properties. We cannot
assure you that we will not experience additional writedowns in the future.
Should commodity prices decline, a further writedown of the carrying value of
our crude oil and natural gas properties may be required. See Note 17 of Notes
to Consolidated Financial Statements.
29
<PAGE>
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 our 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. This decrease was due primarily to our 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 we 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:
o $13.65 per Bbl of crude oil,
o $6.81 per Bbl of natural gas liquids, and
o $1.54 per Mcf of natural gas.
Average sales prices in 1997 were:
o $18.63 per Bbl of crude oil,
o $10.75 per Bbl of natural gas liquids, and
o $1.79 per Mcf of natural gas.
We 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 we owned for the year ended December 31, 1998, compared to the year ended
December 31, 1997. Our 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 our hiring of additional staff. The sale of the Wyoming Properties did
not have a material effect on G&A expense. Our 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. Our 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
our increased borrowings during 1998. In January 1998, Abraxas and Canadian
Abraxas issued $60.0 million in principal amount of 11.5% Senior Notes due 2004,
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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, we also made additional borrowings under our 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, we
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. We record the carrying value of our crude oil
and natural gas properties using the full cost method of accounting for oil and
gas properties. Under this method, we capitalize the cost to acquire, explore
for and develop oil and gas properties. Under the full cost accounting rules,
the net capitalized cost of crude oil and natural gas properties less related
deferred taxes, are limited by country, to the lower of the unamortized cost or
the cost ceiling, defined as the sum of the present value of estimated
unescalated future net revenues from proved reserves, discounted at 10%, plus
the cost of properties not being amortized, if any, plus the lower of cost or
estimated fair value of unproved properties included in the costs being
amortized, if any, less related income taxes. If the net capitalized cost of
crude oil and natural gas properties exceeds the ceiling limit, we are 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 our
stockholders' equity.
The risk that we will be required to writedown the carrying value of our
crude oil and natural gas assets increases when crude oil and natural gas prices
are depressed or volatile. In addition, writedowns may occur if we have
substantial downward revisions in our estimated proved reserves or if purchasers
or governmental action cause an abrogation of, or if we voluntarily cancel,
long-term contracts for our natural gas. For the year ended December 31, 1998,
we recorded a writedown of $61.2 million related to our United States
properties. No assurance can be given that we will not experience additional
writedowns in the future. Should commodity prices continue to decline, a further
writedown of the carrying value of our crude oil and natural gas properties may
be required. See Note 17 of Notes to Consolidated Financial Statements.
Liquidity and Capital Resources
General. Capital expenditures in 1997, 1998 and 1999 and for the nine
months ended September 30, 2000 were $87.8 million, $57.9 million, $128.7
million and $44.3 million, respectively. The table below sets forth the
components of these capital expenditures on a historical basis for the three
years ended December 31, 1997, 1998 and 1999, and for the nine months ended
September 30, 1999 and 2000.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
---------------------------------------- ----------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(dollars in thousands)
Expenditure category:
<S> <C> <C> <C> <C> <C>
Property acquisitions (1) $24,210 $2,729 $ 89,743 $92,586 $ 301
Development 61,414 51,821 37,344 21,006 42,829
Facilities and other 2,140 3,311 1,621 1,658 1,141
------- ------ --------- ------- ------
Total $87,764 $57,861 $ 128,708 $115,250 $44,271
======= ======= ========= ======== =======
</TABLE>
----------
(1)Acquisition cost includes 7,585,000 common shares and 4,000,000 special
warrants of Grey Wolf valued at approximately $3.7 million in 1997 and 71,063
shares of Abraxas common stock valued at approximately $449,000 in 1998
related to the acquisition of certain crude oil and natural gas properties.
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During 1999, expenditures were primarily for the acquisition of New
Cache Petroleums, Ltd. During 1997 and 1998, expenditures were primarily for the
development of existing properties. These expenditures were funded through
internally generated cash flow, the issuance of the Series C Notes and the first
lien notes and borrowings under our credit facility.
At September 30, 2000, we had current assets of $21.8 million and
current liabilities of $31.5 million resulting in a working capital deficit of
$9.7 million. This compares to a working capital deficit of $7.3 million at
December 31, 1999, and a working capital deficit of $1.8 million at September
30, 1999. The material components of our current liabilities at September 30,
2000, include trade accounts payable and revenues due third parties of $19.6
million and accrued interest of $10.0 million.
Our current budget for capital expenditures for the last three months
of 2000 other than acquisition expenditures is approximately $10.0 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 we currently have no agreements,
arrangements or undertakings regarding any material acquisitions. We have no
material long-term capital commitments and are consequently able to adjust the
level of our expenditures as circumstances dictate. Additionally, the level of
capital expenditures will vary during future periods depending on market
conditions and other related economic factors.
Operating activities during the nine months ended September 30, 2000,
provided $8.8 million cash compared to providing $9.3 million in the same period
in 1999. Net income plus non-cash expense items during 2000 and net changes in
operating assets and liabilities accounted for most of these funds. Investing
activities required $1.3 million net during the first nine months of 2000,
$300,000 of which was utilized for the acquisition of crude oil and natural gas
properties, $43.3 million of which was utilized for the development of crude oil
and natural gas properties and $1.1 million of which was utilized for facilities
and other . The sale of assets by Abraxas Wamsutter, L.P., a limited partnership
of which one of our subsidiaries is the general partner, and certain contiguous
assets we owned provided $34.5 million with $43.1 million being utilized for the
acquisition and development of crude oil and natural gas properties and $1.1
million of which was used for facilities and other. This compares to $100.4
million required during the same period of 1999, $92.6 million of which was used
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.
Financing activities used $7.4 million for the first nine months of 2000
compared to providing $43.9 million for the same period of 1999. Financing
activities in 1999 include the proceeds of the $63.5 million from the issuance
of the first lien notes in March 1999 and borrowings under a credit facility of
$19.5 million, which were offset by the repayment of a credit facility in the
amount of $35.2 million.
Operating activities for the year ended December 31, 1999, provided us
$3.9 million of cash. Investing activities used $111.2 million during 1999,
$17.5 million was provided from the sale of oil and gas producing properties and
$128.7 million was used primarily for the acquisition and development of
producing properties. Financing provided $49.1 million during 1999.
Operating activities for the year ended December 31, 1998, provided
$4.8 million of cash to us. Investing activities provided $2.0 million in 1998,
$59.4 million was provided from the sale of oil and gas producing properties,
primarily the Wyoming Properties, and $57.4 million was used primarily for the
acquisition and development of producing properties. Financing provided $52.5
million during 1998.
Operating activities for the year ended December 31, 1997, provided
$36.6 million of cash. Investing activities required $74.5 million primarily for
the acquisition and development of producing properties. Financing activities
provided $33.3 million during 1997.
We are heavily dependent on crude oil and natural gas prices which have
historically been volatile. Although we have hedged a portion of our natural gas
production and substantially all of our crude oil production and intend to
continue this practice, future crude oil and natural gas price declines would
have a material adverse effect on our overall results, and therefore, our
liquidity. Furthermore, low crude oil and natural gas prices could affect our
ability to raise capital on terms favorable to us.
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<PAGE>
Current Liquidity Needs. Since January 1999, we have sought to improve
our liquidity in order to allow us to meet our debt service requirements and to
maintain and increase existing production.
Our sale in March 1999 of our first lien notes allowed us to refinance
our bank debt, meet our near-term debt service requirements and make limited
crude oil and natural gas capital expenditures.
In October 1999, we 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, May and September
2000, we sold additional production payments for $2.0 million, $900,000 and $1.5
million, respectively, relating to additional natural gas wells in the Edwards
Trend to Southern. We have the ability to sell up to $50 million to Southern for
drilling opportunities in the Edwards Trend.
In December 1999, Abraxas and our wholly-owned Canadian subsidiary,
Canadian Abraxas Petroleum Limited, completed an exchange offer whereby we
exchanged the second lien notes, common stock, and contingent value rights for
approximately 98.43% of our outstanding old notes. The exchange offer reduced
our long term debt by $76.6 million.
In March 2000, we sold our interest in certain crude oil and natural
gas properties that we owned and operated in Wyoming to Samson Resources
Company. Simultaneously, a limited partnership of which one of our subsidiaries
was the general partner sold its interest in crude oil and natural gas
properties in the same area to Samson. Our net proceeds from these transactions
were approximately $34.0 million.
We are continuing to rationalize our significant non-core Canadian
assets to allow us to continue to grow while reducing our debt. As of September
30, 2000, we have received proceeds from sale of non-core Canadian assets of
approximately $6.0 million. As of September 30, 2000 there were agreements to
sell other non-core Canadian assets for approximately $2.5 million. All such
sales are expected to close by the end of the year. We may sell other non-core
assets or seek partners to fund a portion of the exploration costs of
undeveloped acreage and are considering other potential strategic alternatives.
In September 2000, we entered into a farm-out agreement with EOG
Resources, Inc. to develop our Montoya prospect in West Texas. EOG paid Abraxas
$2.5 million and will earn 75% of Abraxas' working interest in the Montoya
formation covering approximately 11,000 net acres in Ward and Reeves Counties.
EOG will operate and pay 100% of the costs of up to five horizontal wells in the
Montoya formation. We retained a carried 25% working interest in four of the
wells and will have an override and a 30% working interest after payout of the
fifth well. The two companies entered into an area of mutual interest covering
the Montoya formation in this area. The wells will offset several wells drilled
by ExxonMobil and BP Amoco that have tested at rates of 8 to 17 MMcfpd per well.
In addition, EOG has acquired 709,400 shares of Abraxas common stock in the open
market. All of such shares were acquired for investment purposes only and EOG
has no current intent to buy additional shares.
We will have three principal sources of liquidity going forward: (i)
cash on hand, including the proceeds from the Samson transaction, (ii) cash flow
from operations, and (iii) the production payments with Southern. We also intend
to sell certain non-core properties, although the terms of the first lien notes
indenture, the second lien notes indenture and the old notes indenture
substantially limit our use of proceeds from such sales. 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.
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.
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<PAGE>
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%
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 to 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
34
<PAGE>
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.
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:
(1) applicable law;
(2) the first lien notes indenture;
(3) customary non-assignment provisions of any contract or any lease
governing leasehold interest of such subsidiaries;
(4) any instrument governing indebtedness assumed by us 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;
(5) 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;
(6) 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;
(7) 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
(8) an agreement governing indebtedness incurred to refinance the
indebtedness issued, assumed or incurred pursuant to an agreement referred to in
clause (1), (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 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
(1), (4) or (5) and do not extend to or cover any new or additional property or
assets and, with respect to newly created liens:
o such liens are expressly junior to the liens securing the first lien
notes,
o 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
o 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.
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<PAGE>
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. Our results of operations are significantly
affected by fluctuations in commodity prices and we seek to reduce our exposure
to price volatility by hedging our production through swaps, options and other
commodity derivative instruments.
We have entered into a hedge agreement with Barrett Resources
Corporation ("Barrett") for the period November 1999 through October 2000. This
agreement is for 1,000 Bbls per day with us 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.
As of September 30, 2000, we had 22.5 MMBtupd hedged through October
31, 2000, of which 2.5 MMBtupd is hedged at an average NYMEX price
(approximately $4.36 per MMBtu as of September 30, 2000) less $0.83 and 20.0
MMBtupd with a ceiling of $2.39 and a floor of $2.07 based on an AECO index.
Both of these hedges are with Barrett Resources. We realized a loss of $14.1
million on hedging activities during the first nine months of 2000, which is
accounted for in crude oil and natural gas revenue.
Net Operating Loss Carryforwards. At December 31, 1999, we had, subject
to the limitations discussed below, $94.6 million of net operating loss
carryforwards for U.S. tax purposes, of which approximately $7.3 million may be
utilized before they expire, absent the application of Section 382(h) which
allows built-in-gains to offset carry forwards otherwise limited by Section 382
of the Internal Revenue Code of 1986, as amended. These loss carryforwards will
expire from 2002 through 2018 if not utilized. At December 31, 1999, we had
approximately $10.3 million of net operating loss carryforwards for Canadian tax
purposes which expire in varying amounts in 2001-2005. 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 our
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, we have established
a valuation allowance of $32.8 million and $36.1 million for deferred tax assets
at December 31, 1999 and 1998, respectively.
Quantitative and Qualitative Disclosures about Market Risk; Commodity Price Risk
Commodity Price and Market Risk
Our exposure to market risks rest primarily with the volatile nature of
crude oil, natural gas and natural gas liquids prices. We manage crude oil and
natural gas prices through the periodic use of commodity price hedging
agreements. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources". Assuming the production
levels we attained during the year ended December 31, 1999, a 10% decline in
crude oil, natural gas and natural gas liquids prices would have reduced our
operating revenue, cash flow and net income (loss) by approximately $6.0 million
for the year ended December 31, 1999.
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<PAGE>
In order to manage our exposure to price risks in the marketing of our
crude oil and natural gas, from time to time we have 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, we
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 our futures position and sell our production to a
customer. Such contracts may expose us to the risk of financial loss in certain
circumstances, including instances where production is less than expected, our
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 our ability 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."
Interest rate risk
At September 30, 2000, substantially all of our long-term debt is at
fixed interest rates and not subject to fluctuations in market rates.
Foreign currency
Our Canadian operations are measured in the local currency of Canada.
As a result , our 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 year ended
December 31, 1999. It is estimated that a 5% change in the value of the U.S.
dollar to the Canadian dollar would have changed our net income by approximately
$1.3 million. We do 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.
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, our 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 the
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 the telephone number is (403) 262-1949.
Recent Developments
In March 2000, we sold our interest in certain crude oil and natural
gas properties that we owned and operated in Wyoming to Samson Resources
Company. Simultaneously, a limited partnership of which one of our subsidiaries
is the general partner sold its interests in crude oil and natural gas
properties in the same area to Samson Resources Company. Our net proceeds from
these transactions were approximately $34.0 million.
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
37
<PAGE>
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, we 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, July and September
2000, we sold additional production payments for $2.0 million, $900,000 and $1.5
million, respectively, relating to additional natural gas wells in the Edwards
Trend to Southern. We have the ability to sell up to $50.0 million to Southern
for drilling opportunities in the Edwards Trend.
We are continuing to rationalize our significant non-core Canadian
assets to allow us to continue to grow while reducing our debt. As of September
30, 2000, we have received proceeds from sale of non-core Canadian assets of
approximately $6.0 million. As of September 30, 2000 there were agreements to
sell other non-core Canadian assets for approximately $2.5 million. All such
sales are expected to close by the end of the year. We may sell other non-core
assets or seek partners to fund a portion of the exploration costs of
undeveloped acreage and are considering other potential strategic alternatives.
In September 2000, we entered into a farm-out agreement with EOG
Resources, Inc. to develop our Montoya prospect in West Texas. EOG paid Abraxas
$2.5 million and will earn 75% of Abraxas' working interest in the Montoya
formation covering approximately 11,000 net acres in Ward and Reeves Counties.
EOG will operate and pay 100% of the costs of up to five horizontal wells in the
Montoya formation. We retained a carried 25% working interest in four of the
wells and will have an override and a 30% working interest after payout of the
fifth well. The two companies entered into an area of mutual interest covering
the Montoya formation in this area. The wells will offset several wells drilled
by ExxonMobil and BP Amoco that have tested at rates of 8 to 17 MMcfpd per well.
In addition, EOG has acquired 709,400 shares of Abraxas common stock in the open
market. All of such shares were acquired for investment purposes only and EOG
has no current intent to buy additional shares.
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, 1999, located in those two regions. We operate approximately 85% of our
wells in Texas.
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 87% working interest in 88 wells. These properties had
average daily production of 671 net Bbls of crude oil and NGLs and 15,773 net
Mcf of natural gas per day for the year ended December 31, 1999. During 1999, we
drilled a total of 7 new wells (7 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 our 23 wells.
These properties had average daily production of 879 net Bbls of crude oil and
NGLs and 6,080 net Mcf of natural gas per day for the year ended December 31,
1999. During 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.
38
<PAGE>
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, 1999, Canadian Abraxas and Grey Wolf had
estimated net proved reserves of 104,458 Mmcfe (80% natural gas) with a PV-10 of
$121.5 million, 93.5% of which was attributable to proved developed reserves. We
recorded a writedown of our Canadian reserves under the ceiling test rules of
$19.1 million ($11.4 million after tax) as a result of a downward adjustment to
our estimated proved reserves in Canada. This adjustment primarily affected the
properties we acquired in January 1999 from New Cache. For the year ended
December 31, 1999, the properties produced an average of approximately 1,563 net
Bbls of crude oil and NGLs per day and 47,966 net Mcf of natural gas per day
from 105.5 net wells. The natural gas processing plants had aggregate capacity
of approximately 313gross MMcf of natural gas per day (121 net MMcf). During
1999, we drilled a total of 20 new wells (14.5 net) in Canada with a 60% (56.4%
net) success rate.
Grey Wolf manages the operations of Canadian Abraxas under 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
non-producing and producing crude oil and natural gas leases, including reserves
of crude oil and natural gas in place. The following table indicates our
interest in developed and undeveloped acreage as of December 31, 1999:
<TABLE>
<CAPTION>
Developed and Undeveloped Acreage
As of December 31, 1999
Developed Acreage Undeveloped Acreage
--------------------------------- -----------------------------------
Gross Acres Net Acres Gross Acres Net Acres
--------------- --------------- --------------- ------------------
<S> <C> <C> <C> <C>
Canada 217,654 123,788 1,064,768 681,487
Texas 37,525 26,941 13,031 11,149
N. Dakota 920 432 - -
Oklahoma 1,941 1,214 - -
Kansas - - 3,855 2,874
Wyoming 9,138 7,553 57,540 49,470
Alabama 40 - - -
=============== =============== =============== ==================
Total 267,218 159,928 1,139,194 744,980
=============== =============== =============== ==================
</TABLE>
Productive Wells
The following table sets forth our total gross and net productive
wells, expressed separately for crude oil and natural gas, as of December 31,
1999:
<TABLE>
<CAPTION>
Productive Wells
As of December 31, 1999
State/Country Crude Oil Natural Gas
--------------------- -------------------------------- ----------------------------------
Gross Net Gross Net
--------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
Canada 128.0 43.8 225.0 92.1
Texas 233.0 180.3 90.0 68.8
N. Dakota 1.0 0.5 - -
39
<PAGE>
Oklahoma - - 4.0 2.6
Wyoming - - 12.0 1.8
Alabama 1.0 - - -
=============== ============== =============== ================
Total 363.0 224.6 331.0 165.3
=============== ============== =============== ================
</TABLE>
Reserves Information
The crude oil and natural gas reserves of Abraxas have been estimated
as of January 1, 2000, January 1, 1999, and January 1, 1998, by DeGolyer and
MacNaughton, of Dallas, Texas. The reserves of Canadian Abraxas and Grey Wolf as
of January 1, 2000, January 1, 1999, and January 1, 1998, have been estimated by
McDaniel & Associates Consultants Ltd. of Calgary, Alberta. Crude oil and
natural gas reserves, and the estimates of the present value of future net
revenues therefrom, were determined based on then current prices and costs.
Reserve calculations involve the estimate of future net recoverable reserves of
crude oil and natural gas and the timing and amount of future net revenues 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 our crude oil, natural gas liquids and natural gas reserves as of January 1,
2000, January 1, 1999, and January 1, 1998:
<TABLE>
<CAPTION>
Estimated Proved Reserves
----------------------------------------------------------
Proved Proved Total
Developed Undeveloped Proved
-------------- ---------------- ------------------
<S> <C> <C> <C>
As of January 1, 1998(1)
Crude oil (MBbls).................... 7,075 1,873 8,948
NGLs (MBbls)......................... 7,178 1,651 8,829
Natural gas (MMcf) .................. 186,490 34,824 221,314
As of January 1, 1999(1) (2) (3)
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
As of January 1, 2000(1) (2) (3)(4)
Crude oil (MBbls) ................... 5,513 1,606 7,119
NGLs (MBbls) ........................ 4,961 562 5,523
Natural gas (MMcf) .................. 154,221 35,894 190,115
</TABLE>
------------------
(1) Includes 128,900, 31,900 and 33,000 barrels of crude oil reserves owned
by Grey Wolf of which 69,500, 16,400 and 16,900 barrels are applicable
to the minority interests share of these reserves as of January 1,
1998, 1999 and 2000, respectively.
(2) Includes 443,500, 443,500 and 236,000 barrels of natural gas liquids
reserves owned by Grey Wolf of which 70,889, 227,600 and 121,098
barrels are applicable to the minority interests share of these
reserves as of January 1, 1998, 1999 and 2000, respectively.
(3) Includes 7,446, 28,610 and 21,710 Mmcf of natural gas reserves owned by
Grey Wolf of which 4,020, 14,700 and 11,140 Mmcf are applicable to the
minority interests share of these reserves as of January 1, 1998, 1999
and 2000, respectively.
(4) Includes 343,941Bbls of crude oil reserves; 2,448.6 Mbbls of natural
gas liguids reserves and 25,810 Mmcf of natural gas reserves,
attributable to the Wyoming properties which were sold in March 2000.
These reserves were estimated internally.
The process of estimating crude oil and natural gas reserves is complex
40
<PAGE>
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 this annual statement 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. 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 report 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, 1999. The average sales prices as of such date used for
purposes of such estimates were $24.88 per Bbl of crude oil, $14.79 per Bbl of
NGLs and $2.11 per Mcf of natural gas. It is also assumed that we will make
future capital expenditures of approximately $31.7 million in the aggregate,
which are necessary to develop and realize the value of proved undeveloped
reserves on our properties. Any significant variance in actual results from
these assumptions could also materially affect the estimated quantity and value
of reserves set forth herein.
We file reports of our 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.
41
<PAGE>
Crude Oil, NGLs and Natural Gas Production and Sales Prices
The following table presents our net crude oil, net NGLs and our net
natural gas production, 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, 1997, 1998 and 1999:
1997 1998 1999
------------ ------------ ------------
Production:(1)
Crude oil (MBbls)........ 936.7 728.6 777.9
NGLs (MBbls)............. 992.3 867.4 376.4
Natural gas (MMcf)....... 21,050.0 24,929.9 25,697.9
Mmcfe(2)................. 32,624.0 34,505.9 32,623
Average Sales Price:(3)
Crude oil (per Bbl)...... $ 18.63 $ 13.65 $ 14.57
NGLs (per Bbl)........... 10.75 6.81 13.40
Natural gas (per Mcf).... 1.79 1.54 1.66
Per Mcfe................. 2.02 1.57 1.81
LOE (per Mcfe)............. $ 0.46 $ 0.49 $ 0.55
---------
(1) Includes the following amounts with respect to Grey Wolf: 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; and 13.5 MBbls of crude oil, 40.6
MBbls of NGLs, 4,694 MMcf of natural gas and 5,018 Mmcfe in 1999.
(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.
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, 1997, 1998 and 1999.
<TABLE>
<CAPTION>
1997 1998 1999
--------------- ---------------- --------------
Gross Net Gross Net Gross Net
----- ---- ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Exploratory
Productive
Crude oil........... -- -- 1.0 1.0 2.0 2.0
Natural gas......... 10.1 7.9 7.0 5.6 8.0 5.3
Dry holes............. 2.0 1.8 9.0 7.3 11.0 6.2
----- ----- ----- ----- ------ ------
Total........... 12.0 9.7 17.0 13.9 21.0 13.5
===== ===== ===== ===== ===== ======
Development
Productive
Crude oil........... 25.0 22.3 3.0 2.4 8.0 1.6
Natural gas......... 20.0 14.9 30.0 23.9 20.0 13.1
Service............... -- -- 1.0 1.0 -- --
Dry holes............. 3.0 2.0 3.0 2.2 9.0 4.5
----- ----- ----- -----
Total........... 48.0 39.2 37.0 29.5 37.0 19.2
===== ===== ===== ===== ====== ======
</TABLE>
Markets and Customers
The revenue generated by our operations is highly dependent upon the
prices of, and demand for crude oil and natural gas. Historically, the markets
42
<PAGE>
for crude oil and natural gas have been volatile and are likely to continue to
be volatile in the future. The prices we received for our crude oil and natural
gas production and the level of such production are subject to wide fluctuations
and depend on numerous factors beyond our 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 our proved reserves and our revenue,
profitability and cash flow from operations.
In order to manage our exposure to price risks in the marketing of our
crude oil and natural gas, from time to time we have 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, we
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 our futures position and sell our production to a
customer. Such contracts may expose us to the risk of financial loss in certain
circumstances, including instances where production is less than expected, our
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 our ability 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 our 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, 1999, three purchasers accounted for
approximately 58% of our crude oil and natural gas sales and approximately 56%
of our gas processing revenues. We believe that there are numerous other
companies available to purchase our crude oil and natural gas and that the loss
of any or all of these purchasers would not materially affect our ability to
sell crude oil and natural gas.
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
ours. 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.
43
<PAGE>
Regulatory Matters
Our 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 our
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.
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
44
<PAGE>
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 us; 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. We do not believe that Order 636 and the related
restructuring proceedings affect us any differently than other natural gas
producers and marketers with which we compete.
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:
(1) 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),
(2) the completion of rule-making involving the regulation of pipelines
with marketing affiliates under Order No. 497,
(3) various FERC orders adopting rules proposed by the Gas Industry
Standards Board which are designed to further standardize pipeline
transportation tariffs and business practices,
(4) a notice of proposed rulemaking that, among other things, proposes
(a) to eliminate the cost-based price cap currently imposed on natural gas
transactions of less than one year in duration, (b) to establish mandatory
"transparent" capacity auctions of short-term capacity on a daily basis, and (c)
to permit interstate pipelines to negotiate terms and conditions of service with
individual customers,
(5) a notice of inquiry which continues the FERC's review of its
regulatory policies with respect to the pricing of long-term pipeline
transportation services by presenting a range of questions to the industry
dealing with current cost-based pricing of new and existing capacity and
alternative rate mechanism options, including the desirability of pricing
interstate pipeline capacity utilizing market-based rates, incentive rates, or
indexed rates, and
(6) 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 us, 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
our business. However, we do not believe that these FERC initiatives will affect
us any differently than other natural gas procedures and marketers with which we
compete.
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." We ship certain of our 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 our gas on third party gathering
facilities, our 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
45
<PAGE>
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. We do not believe that these rules affect us
any differently than other crude oil producers and marketers with which we
compete.
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. We cannot predict when or if any
such proposals might become effective or their effect, if any, on our
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 we own 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. Our 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 we can produce from our wells, and to
limit the number of wells or the location at which we can drill.
State and provincial regulation of gathering facilities generally
includes various safety, environmental, and in some circumstances,
non-discriminatory take requirements, but does not generally entail rate
regulation. In the United States, natural gas gathering has received greater
regulatory scrutiny at both the state and federal levels in the wake of the
interstate pipeline restructuring under Order 636. For example, on August 19,
1997, the Texas Railroad Commission enacted a Natural Gas Transportation
Standards and Code of Conduct to provide regulatory support for the State's more
active review of rates, services and practices associated with the gathering and
transportation of gas by an entity that provides such services to others for a
fee, in order to prohibit such entities from unduly discriminating in favor of
their affiliates.
In the event we conduct 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. We cannot predict what, if any, effect any new rule
will have on our 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
46
<PAGE>
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 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.
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<PAGE>
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
Our 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 our operations. Environmental permits required for our
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. Our management believes that we are in
substantial compliance with current environmental laws and regulations, and that
we 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 us as
well as the oil and gas industry in general, and thus we are unable to predict
the ultimate cost and effects of future changes in environmental laws and
regulations.
In the United States, the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), also known as "Superfund," and
comparable state statutes impose strict, joint, and several liability on certain
classes of persons who are considered to have contributed to the release of a
"hazardous substance" into the environment. These persons include the owner or
operator of a disposal site or sites where a release occurred and companies that
generated, disposed or arranged for the disposal of the hazardous substances
released at the site. Under CERCLA such persons or companies may be
retroactively liable for the costs of cleaning up the hazardous substances that
have been released into the environment and for damages to natural resources,
and it is common for neighboring land owners and other third parties to file
claims for personal injury, property damage, and recovery of response costs
allegedly caused by the hazardous substances released into the environment. The
Resource Conservation and Recovery Act ("RCRA") and comparable state statutes
govern the disposal of "solid waste" and "hazardous waste" and authorize
imposition of substantial civil and criminal penalties for failing to prevent
surface and subsurface pollution, as well as to control the generation,
transportation, treatment, storage and disposal of hazardous waste generated by
oil and gas operations. Although CERCLA currently contains a "petroleum
exclusion" from the definition of "hazardous substance," state laws affecting
our 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.
We currently own or lease, and have 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 we 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 we owned or leased 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
our control. These properties and the wastes disposed thereon may be subject to
CERCLA, RCRA, and analogous state laws. Our operations are also impacted by
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regulations governing the disposal of naturally occurring radioactive materials
("NORM"). We must comply with the Clean Air Act and comparable state statutes
which prohibit the emissions of air contaminants, although a majority of our
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 us, 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.
Our 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 us include the
Canadian Environmental Assessment Act which ensures that the environmental
effects of projects receive careful consideration prior to licenses or permits
being issued, to ensure that projects that are to be carried out in Canada or on
federal lands do not cause significant adverse environmental effects outside the
jurisdictions in which they are carried out, and to ensure that there is an
opportunity for public participation in the environmental assessment process;
the Canadian Environmental Protection Act ("CEPA") which is the most
comprehensive federal environmental statute in Canada, and which controls toxic
substances (broadly defined), includes standards relating to the discharge of
air, soil and water pollutants, provides for broad enforcement powers and
remedies and imposes significant penalties for violations; the National Energy
Board Act which can impose certain environmental protection conditions on
approvals issued under the Act; the Fisheries Act which prohibits the depositing
of a deleterious substance of any type in water frequented by fish or in any
place under any condition where such deleterious substance may enter any such
water and provides for significant penalties; the Navigable Waters Protection
Act which requires any work which is built in, on, over, under, through or
across any navigable water to be approved by the Minister of Transportation, and
which attracts severe penalties and remedies for non-compliance, including
removal of the work.
In Alberta, environmental compliance has been governed by the Alberta
Environmental Protection and Enhancement Act ("AEPEA") since September 1, 1993.
In addition to consolidating a variety of environmental statutes, the AEPEA also
imposes certain new environmental responsibilities on oil and natural gas
operators in Alberta. The AEPEA sets out environmental standards and compliance
for releases, clean-up and reporting. The Act provides for a broad range of
liabilities, enforcement actions and penalties.
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.
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We are 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 our financial position or
results of operations. Moreover, we maintain insurance against costs of clean-up
operations, but we are 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.
We have a Corporate Environmental Policy and a detailed Environmental
Management System in place to ensure continued compliance with environmental,
health and safety laws and regulations. We believe that we have obtained and are
in compliance with all material environmental permits, authorizations and
approvals.
Title to Properties
As is customary in the crude oil and natural gas industry, we make only
a cursory review of title to undeveloped crude oil and natural gas leases at the
time we acquire them. However, before drilling commences, we require 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, we, rather than the seller of the
undeveloped property, are typically obligated to cure any title defect at our
expense. If we 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, we
could suffer a loss of our entire investment in the property. We believe that we
have good title to our crude oil and natural gas properties, some of which are
subject to immaterial encumbrances, easements and restrictions. The crude oil
and natural gas properties we own are also typically subject to royalty and
other similar non-cost bearing interests customary in the industry. We do not
believe that any of these encumbrances or burdens will materially affect our
ownership or use of our properties.
Employees
As of November 15, 2000, we had 48 full-time employees, including 3
executive officers, 3 non-executive officers, 2 petroleum engineers, 1
geologist, 7 managers, 10 secretarial and clerical personnel and 22 field
personnel. Additionally, we retain contract pumpers on a month-to-month basis.
We retain independent geological and engineering consultants from time to time
on a limited basis and expect to continue to do so in the future.
As of November 15, 2000, Grey Wolf had 42 full-time employees,
including 2 executive officers, 2 non-executive officers, 4 petroleum engineers,
3 geologists, 1 geophysicist, 16 technical and clerical personnel and 14 field
personnel.
Office Facilities
Our executive and administrative offices are located at 500 North Loop
1604 East, Suite 100, San Antonio, Texas 78232. We also have 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
We own 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. We
also own 23 vehicles which are used in the field by employees.
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Litigation
General. From time to time, we are involved in litigation relating to
claims arising out of our operations in the normal course of business. We are
not currently engaged in any legal proceedings that are expected, individually
or in the aggregate, to have a material adverse effect on us.
Hornburg Litigation. In May 1995, certain plaintiffs filed a lawsuit
against us alleging negligence and gross negligence, tortious interference with
contract, conversion and waste. In March 1998, a jury found against us and on
May 22, 1998 final judgment in the amount of $1.3 million was entered. We filed
an appeal and in March 2000, the Court of Appeals reduced the plaintiff's award
to $362,495 plus post-judgment interest of $68,915. We fully and finally
resolved the litigation on April 25, 2000, through a payment of $435,780 in the
aggregate to the plaintiffs.
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 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.
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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>
Robert L. G. Watson....... 50 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........ 49 Executive Vice President, Chief Financial Officer, --
and Treasurer of Abraxas; Vice President and
Assistant Secretary of Canadian Abraxas
Robert W. Carington, Jr... 39 Executive Vice President of Abraxas --
Craig S. Bartlett, Jr..... 67 Director of Abraxas II
Franklin A. Burke......... 66 Director of Abraxas I
Ralph F. Cox ............. 68 Director of Abraxas II
Frederick M. Pevow, Jr.... 37 Director of Abraxas II
James C. Phelps........... 78 Director of Abraxas III
Joseph A. Wagda........... 57 Director of Abraxas II
</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
MacNaughton, 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, 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.
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,
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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 had a
varied twenty-five year career involving the financial and legal aspects of
private and corporate business transactions. Currently a practicing attorney and
president of Altamont Capital Management, Inc., Mr. Wagda's business emphasizes
special situation consulting and investing, including involvement in distressed
investments and venture capital opportunities. Previously, Mr. Wagda was a
senior managing director and cofounder of the Price Waterhouse corporate finance
practice. He also served with the finance staff of Chevron Corporation and in
the general counsel's office at Ford Motor Company. Mr. Wagda received an
undergraduate degree from Fordham College, a Masters of Business Administration,
with distinction, from the Johnson Graduate School of Management, Cornell
University, and a JD, with honors, from Rutgers University.
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.
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EXECUTIVE COMPENSATION
Compensation Summary
The following table sets forth a summary of compensation for the fiscal
years ended December 31, 1997, 1998 and 1999 paid by Abraxas to Robert L.G.
Watson, Abraxas' Chairman of the Board, President and Chief Executive Officer,
Chris E. Williford, Abraxas' Executive Vice President, Chief Financial Officer
and Treasurer, Robert W. Carington, Jr., Abraxas' Executive Vice President,
Stephen T. Wendel, Abraxas' Vice President-Land and Marketing, and to Lee T.
Billingsley, Abraxas' Vice President-Exploration for the fiscal year ended
December 31, 1999. Abraxas did not have any executive officers other than
Messrs. Watson, Williford, and Wendel whose total annual salary and bonus
exceeded $100,000 for the year ended December 31, 1997, Messrs. Watson,
Williford, Carington and Wendel for the year ended December 31, 1998, and
Messrs. Watson, Williford, Carington, and Wendel and Dr. Billingsley for the
year ended December 31, 1999.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Compensation
------------------
Annual Compensation Awards
------------------------------------------------- ------------------
Options
Name and Principal /SARs
Position Year Salary ($) Bonus ($) (#)
------------------------------ -------- -------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Robert L. G. Watson, 1997 $211,154 $39,373 (1) 100,000
Chairman of the Board and 1998 $253,367 -- 140,000
President 1999 $259,615 $43,750 0
Chris E. Williford, 1997 $148,269 $26,250 (1) 40,000
Executive Vice President, 1998 $155,770 -- 35,000
Chief Financial Officer 1999 $155,769 $26,250 0
and Treasurer
Robert W. Carington, Jr., 1998 $103,846 -- 320,000
Executive Vice President 1999 $207,629 $35,000 0
Lee T. Billingsley 1998 $ 31,154 -- 0
Vice President - Exploration 1999 $124,615 $22,500 30,000
Stephen T. Wendel, 1997 $106,731 $13,750 (1) 25,000
Vice President - Land and 1998 $114,231 -- 20,000
Marketing 1999 $114,231 $13,750 15,000
------------------------------ -------- -------------------- ------------------- ------------------
</TABLE>
(1) One-half paid in cash and one-half in stock awards.
Grants of Stock Options and Stock Appreciation Rights During the Fiscal Year
Ended December 31, 1999
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 its
54
<PAGE>
employees and officers (including its directors 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 Compensation Committee did not grant any stock options to Messrs. Watson,
Williford or Carington during 1999. The table below contains certain information
concerning stock options granted to Dr. Billingsley and Mr. Wendel during 1999:
<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL YEAR
--------------------------------------------------------------------------------------------------------------
% of Total Potential Realizable Value
Options Exercise Price at Assumed Annual Rates of
Options Granted to Per Share Stock Price Appreciation
Name Granted Employees (Price at Expiration Date for Option Term
Grant)
=============== ============ ============== ================ ================= ============= ==============
5% 10%
<S> <C> <C> <C> <C> <C> <C>
Lee T. 30,000(1) 20.69 $1.41 11/18/09 $26,700 $67,500
Billingsley
Stephen T. 15,000(1) 16.34 $1.41 11/18/09 $13,350 $33,750
Wendel
--------------
</TABLE>
(1) One-fourth of the options become exercisable on each of the first four
anniversaries of the date of grant.
Aggregated Option Exercises and Values for the Fiscal Year Ended December 31,
1999
The table below contains certain information concerning exercises of
stock options during the fiscal year ended December 31, 1999, by Messrs. Watson,
Williford, Carington and Wendel and Dr. Billingsley and the fiscal year end
value of unexercised options held by Messrs. Watson, Williford, Carington and
Wendel and Dr. Billingsley.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Fiscal 1999
and Fiscal Year End Option Values
Value of
Number of Unexercised
Unexercised Options in-the-Money
on December 31,1998 Options on
(#) December 31,
Exercisable/ 1998 ($)
Shares Acquired By Unexercisable Exercisable/
Name Exercise (#) Value Realized ($) Unexercisable
---- ------------ -------------- -------------------- -------------
<S> <C> <C> <C> <C> <C>
Robert L. G. Watson 0 0 275,000/165,000 0 / 0
Chris E. Williford 0 0 102,500/52,500 0 / 0
Robert W. Carington, Jr. 0 0 80,000/240,000 0 / 0
Lee T. Billingsley 0 0 63,995/44,665 0 / 0
Stephen T. Wendel 0 0 14,500/73,500 0 / 0
----------------
</TABLE>
55
<PAGE>
Long Term Incentive Plan Awards During the Fiscal Year Ended December 31, 1999
We did not make any awards to any of Messrs. Watson, Williford,
Carington or Wendel or Dr. Billingsley under a long term incentive plan during
the fiscal year ended December 31, 1999.
Employment Agreements
We have 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 we give 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 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 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 us or (b) his annual base salary for the remainder of the term of
each of his respective employment agreements.
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
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 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 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.
Under such circumstances, 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 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 times his annual base salary; and
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<PAGE>
(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 two 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 us 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 us 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 our employees from time to time at Wind River's
cost. We paid Wind River a total of $336,482 for use of the plane during 1999.
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 under a management agreement between
Canadian Abraxas and Grey Wolf. Under the management agreement, Canadian Abraxas
reimburses Grey Wolf for reasonable costs or expenses attributable to Canadian
Abraxas and for administrative expenses based upon the percentage that Canadian
Abraxas' gross revenue bears to the total gross revenue of Canadian Abraxas and
Grey Wolf. In 1999, Canadian Abraxas paid CDN $2,267,770 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 us to be the beneficial owner of more than five percent of the
57
<PAGE>
outstanding shares of our Common Stock, each director, each of the named
executive officers and all of our directors and officers as a group, owned
beneficially as of May 15, 2000, the number and percentage of outstanding shares
of our Common Stock indicated in the following table:
<TABLE>
<CAPTION>
Name and Address of
Beneficial Owner Number of Shares (1) Percentage
<S> <C> <C> <C>
Halcyon/Alan B. Slifka Management Company LLC 2,957,549 (2) 13.09%
477 Madison Avenue, 8th Floor
New York, NY 10022
Franklin Resources, Inc. 3,081,079 (3) 13.64%
777 Mariners Island Blvd., 6th Floor
San Mateo, CA 94404
Robert L. G. Watson 622,874(4) 2.72%
Franklin A. Burke 606,103(5) 2.68%
James C. Phelps 187,961(6) *
Chris E. Williford 140,503(7) *
Stephen T. Wendel 79,799(8) *
Lee T. Billingsley 79,275(9) *
Robert W. Carington, Jr. 196,518(10) *
Craig S. Bartlett, Jr. 4,000(11) *
Ralph F. Cox 100,000(11) *
Frederick M. Pevow, Jr. 0 (11) *
Joseph A. Wagda 0 (11) *
William A. Wallace 10,750(12)
All Officers and Directors as a 2,027,783 8.70%
Group (11 persons) (4)(5)(6)(7)(8)(9)(10)
(11)(12)
</TABLE>
---------
* Less than 1%
(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.
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<PAGE>
(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.
Charles 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 30,459 shares issuable upon exercise of options granted pursuant
to Abraxas Petroleum Corporation 1993 Key Contributor Stock Option Plan and
279,541 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
10,250 shares issuable upon exercise of options granted pursuant to the
Amended and Restated Director Stock Option Plan (the "Director Option
Plan").
(6) Includes 150,000 shares owned by Marie Phelps, Mr. Phelps' wife and 1,250
shares issuable upon exercise of options granted pursuant to the Director
Option Plan.
(7) Includes 20,000 shares issuable upon exercise of options granted pursuant
to the Abraxas Petroleum Corporation 1993 Key Contributor Stock Option Plan
and 97,500 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 62,910 shares issuable upon exercise of options granted pursuant to the
Abraxas Petroleum Corporation 1994 Long Term Incentive Plan.
(9) Includes 27,000 shares issuable upon exercise of options granted pursuant
to the Abraxas Petroleum Corporation 1994 Long Term Incentive Plan and
5,000 shares in a retirement account.
(10) Includes 155,000 shares issuable upon exercise of options granted pursuant
to the Abraxas Petroleum Corporation 1994 Long Term Incentive Plan.
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<PAGE>
(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).
(12) Includes 10,750 shares issuable upon exercise of options granted pursuant
to the Abraxas Petroleum Corporation 1994 Long Term Incentive Plan.
60
<PAGE>
SELLING SECURITY HOLDER
The following table sets forth certain information concerning the selling
security holder. Assuming that the selling security holder offers all of its
securities, the selling security holder 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
holder 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
</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 CVRs
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>
At our request and cost, 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 us.
The second lien notes, Abraxas common stock and contingent value rights
offered pursuant to this prospectus were issued to Houlihan as payment of fees
and expenses related to the exchange offer. In connection with such issuance,
Houlihan was 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
holder and its donees, pledges, transferees or other successors n interes. The
selling security holder may sell its 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 holder will fix a price or prices, and it 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 or concessions from the selling security holder 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 holder 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. A selling security holder 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. The 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.
To the extent required, the specific securities to be sold, the names of
the selling security holder, the respective purchase prices and public offering
62
<PAGE>
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
holder, we have agreed to indemnify the selling security holder and each
underwriter, if any, against certain liabilities, including certain liabilities
under the Securities Act, or will contribute to payments the selling security
holder 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"
refers 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 indenture is governed by certain provisions
contained in the Trust Indenture Act of 1939, as amended. 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 approximately $188.8
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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<PAGE>
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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<PAGE>
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
lien notes, excluding such taxes, charges or similar levies imposed by any
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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), 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 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 the notice is given
by the Trustee or the holder to the First Lien Notes Representative, unless the
First Lien Notes Representative consents to the taking of the foreclosure
action. The First Lien Notes Representative has the 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 will cease to be
applicable upon the payment in full of all Indebtedness under the First Lien
Notes and the First Lien Indenture.
We cannot assure you 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. You should read the discussion under the
heading "Risk Factors --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" for a further discussion regarding the adequacy of the collateral
securing the second lien notes. 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. You should read the
discussion under the heading "Risk Factors" For more information regarding these
bankruptcy law limitations.
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.
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.
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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.
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,
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"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).
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
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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,
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
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(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
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
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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;
(3) customary non-assignment provisions of any contract or any lease
governing a leasehold interest of any Restricted Subsidiary;
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(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 Abraxas and its Restricted Subsidiaries), whether as an
entirety or substantially as an entirety to any Person unless:
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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.
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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:
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;
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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.
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
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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,
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.
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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:
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:
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(A) is caused by a failure to pay principal of or premium,
if any, or interest on such Indebtedness after any applicable grace
period provided in such Indebtedness (a "payment default"), or
(B) results in the acceleration of such Indebtedness prior
to its express maturity and, in each case, the principal amount of
any such Indebtedness, together with the principal amount of any
other such Indebtedness under which there has been a payment
default or the maturity of which has been so accelerated,
aggregates at least $5,000,000;
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.
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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
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
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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," "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;
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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.
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.
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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:
o reduce the amount of second lien notes whose holders must consent to an
amendment;
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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.
"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 consolidateswith us, or
(2) which becomes our Indebtedness in connection with the acquisition of
assets from such Person.
Acquired Indebtedness does not include Indebtedness 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:
(1) Discounted future net revenues from our proved oil and gas reserves,
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
our latest annual consolidated financial statements.
Discounted future net revenues will be increased under clauses (a) and
(b) below and decreased under clauses (c) and (d) below, as of the date of
determination, by the estimated discounted future net revenues, calculated
in accordance with SEC guidelines but before any state of federal income
taxes and utilizing the prices utilized in our year-end reserve report,
from:
(a) estimated proved oil and gas reserves acquired since the date
of our year-end reserve report;
(b) estimated oil and gas reserves attributable to upward
revisions of estimates of proved oil and gas reserves since the date
of our year-end reserve report due to exploration, development or
exploitation activities,
(c) estimated proved oil and gas reserves produced or disposed of
since the date of our year-end reserve report; and
(d) estimated oil and gas reserves attributable to downward
revisions of estimates of proved oil and gas reserves since the date
of our year-end reserve report due to changes in geological
conditions or other factors which would, in accordance with standard
industry practice, cause such revisions.
In the case of each of the determinations made under clauses (a) through
(d), all increases and decreases will be as estimated by our petroleum
engineers, except that in the event that there is a Material Change as a result
of acquisitions, dispositions or revisions, then the discounted future net
revenues utilized for purposes of this clause will be confirmed by a nationally
recognized firm of independent petroleum engineers.
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(2) The capitalized costs that are attributable to our oil and gas
properties to which no proved oil and gas reserves are attributable, based
on our books and records as of a date no earlier than the date of our
latest annual or quarterly financial statements.
(3) The Net Working Capital on a date no earlier than the date of our
latest consolidated annual or quarterly financial statements.
(4)The greater of
(a) the net book value of our other tangible assets on a date no
earlier than the date of our latest consolidated annual or quarterly
financial statements, or
(b) the appraised value, as estimated by independent appraisers, of
our other tangible assets as of a date no earlier than the date of our
latest audited financial statements.
Minus the sum of
(1) Minority interests; and
(2) Any of our gas balancing liabilities as reflected in our latest
audited financial statements.
In calculating "Adjusted Consolidated Net Tangible Assets" we will also
give effect, on a pro forma basis, to:
o Any Investment in another person that becomes our Restricted
Subsidiary and which is not prohibited by the indenture, to and including
the date of the transaction for which we would need to calculate Adjusted
Consolidated Net Tangible Assets .
o The acquisition, to and including the date of the transaction, of any
business or assets, including, Permitted Industry Investments.
o Any sales or other dispositions of assets permitted by the indenture
except for sales of Hydrocarbons or other mineral products in the ordinary
course of business), occurring on or after the date of the transaction.
"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.
"Asset Acquisition" means:
(1) an Investment by us in any other Person in which such Person becomes
our Restricted Subsidiary, or merges with us; or
(2) the acquisition by us 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.
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"Asset Sale" means any 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 us to any Person other than us of:
(1) any Capital Stock of any Restricted Subsidiary; or
(2) any of our other property or assets and any interests therein,
including any disposition by a merger, consolidation or similar
transaction.
For purposes of this definition, the term "Asset Sale" does 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 us 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 us 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
Abraxas' Board of Directors determines to be of approximately equal value,
including any cash or Cash Equivalents necessary in order to achieve an
exchange of equivalent value; provided that:
o such cash and Cash Equivalents are subject to the covenant described
in "Limitation on Asset Sales";
o to the extent not prohibited by the terms of any Acquired
Indebtedness associated with the property received, that the
property received by us 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
o to the extent the property traded or exchanged by uscontains 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
(10) the sale, lease, conveyance, disposition or other transfer by us of
assets or property in the ordinary course of business if the total fair
market value of all the assets and property sold, leased, conveyed,
disposed or transferred since the Issue Date under this exception does not
exceed $1,000,000 in any one year.
"Available Proceeds Amount" means:
(1) 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.
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(2)For the purpose of determining whether we must make a Net Proceeds Offer
and for determining the amount of such offer an amount equal to the amount set
forth under clause (1) above minus the total amount of all of those Asset Sale
proceeds previously spent in compliance with the terms of the section described
under "Deposit; Use and Release of Trust Moneys."
"Capitalized Lease Obligation" means the discounted present value of the
rental obligations under a lease or similar agreement that is required to be
classified and accounted for as a capital lease under GAAP.
"Capital Stock" means:
(1) with respect to a corporation, any and all shares, interests,
participations or other equivalents of corporate stock, including each
class of Common Stock and Preferred Stock 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 one of its
agencies and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition;
(2) marketable direct obligations issued by any state of the United
States of America or any of its political subdivisions or public
instrumentalities maturing within one year from the date of acquisition
and, at the time of acquisition, having one of the two highest ratings
obtainable from either S&P or Moody's;
(3) commercial paper maturing no more than one year from its date of
creation 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 issued by any domestic bank having
capital and surplus of at least $250,000,000;
(5) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (1) above entered
into with any bank meeting the qualifications specified in clause (4)
above; and
(6) money market mutual or similar funds having assets in excess of
$100,000,000.
"Change of Control" means the occurrence of any of the following:
(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;
(2) the adoption of any plan or proposal for the liquidation or
dissolution of Abraxas;
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(3) any Person or group becomes 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 was not approved by a vote of at least a majority of the Board
of Directors of Abraxas then still in office who either were members at the
beginning of such period or whose election as a member was previously so
approved.
"Collateral" means, collectively, all of the property and assets (including
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 Proceeds" means any Net Cash Proceeds received from an Asset
Sale of Collateral.
"Consolidated EBITDA" means, for any period, the sum (without duplication),
on a consolidated basis and determined in accordance with GAAP, of:
(1) Consolidated Net Income, and
(2) to the extent Consolidated Net Income has been reduced thereby,
(a) all income taxes paid or accrued by us in accordance with GAAP
for such period except for income taxes attributable to extraordinary,
unusual or nonrecurring gains or losses or taxes attributable to sales or
dispositions outside the ordinary course of business,
(b) Consolidated Interest Expense,
(c) the amount of any Preferred Stock dividends paid by us, and
(d) Consolidated Non-cash Charges, less any non-cash items increasing
Consolidated Net Income for such periods.
"Consolidated EBITDA Coverage Ratio" means the ratio of:
(1) Consolidated EBITDA during the four full fiscal quarters for which
financial information 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 for the Four Quarter Period.
For purposes of this definition, "Consolidated EBITDA" and "Consolidated
Fixed Charges" will be calculated after giving effect, without duplication, on a
pro forma basis for the calculation periodto:
(1) the incurrence or repayment of
(a) Indebtedness giving rise to the need to make such calculation, and
(b) other Indebtedness 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, occurred on the first day of
the Four Quarter Period, and
(2) any Asset Sales or Asset Acquisitions 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 occurred on the first day of the Four Quarter
Period. If we guarantee Indebtedness of a third Person, the preceding
sentence will give effect to the incurrence of such guaranteed Indebtedness
as if we had directly incurred or otherwise assumed such guaranteed
Indebtedness.
In addition, in calculating "Consolidated Fixed Charges" for purposes of
determining the denominator (but not the numerator) of the 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 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;
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(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, will be deemed to
accrue at the rate per annum resulting after giving effect to the operation
of such agreements.
"Consolidated Fixed Charges" means the sum, without duplication, of:
(1) Consolidated Interest Expense including any premium or penalty paid
in connection with redeeming or retiring Indebtedness prior to the stated
maturity and
(2) the product of
(a) the amount of all dividend payments on any series of our
Preferred Stock (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" for a period means the sum, without
duplication, of:
(1) our total interest expense for such period determined on a
consolidated basis in accordance with GAAP, including
(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;
plus
(2) the interest component of Capitalized Lease Obligations paid,
accrued and/or scheduled to be paid or accrued by us during such period, as
determined on a consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to us for any period, our
aggregate net income (or loss) for such period on a consolidated basis,
determined in accordance with GAAP. The following will, however, be excluded
from such calculation:
(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 us,
(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 us 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
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(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
(1) the consolidated stockholders' equity of such Person, determined on
a consolidated basis in accordance with GAAP, less (without duplication)
(2) amounts attributable to Disqualified Capital Stock of such Person.
"Consolidated Non-cash Charges" means, for any period, our total
depreciation, depletion, amortization and other non-cash expenses reducing our
Consolidated Net Income for such period, determined on a consolidated basis in
accordance with GAAP, but 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.
"Crude Oil and Natural Gas Business" means
(1) the acquisition, exploration, development, operation and disposition
of interests in oil, gas and other hydrocarbon properties located in North
America, and
(2) the gathering, marketing, treating, processing, storage, selling and
transporting of any production from such interests or properties of Abraxas
or those of others.
"Crude Oil and Natural Gas Hedge Agreements" means any oil and gas
agreements and other agreements or arrangements entered into by a 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 in those Properties, 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 us which is related to our
business 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 us
against fluctuations in currency values.
"Default" means an event or condition that is, or with the lapse of time or
the giving of notice or both would be, an Event of Default.
"Disqualified Capital Stock" means 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 Abraxas' Qualified Capital Stock.
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"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; provided, however, that
(1) if the aggregate non-cash consideration to be received by us 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 written notice of a
change in the identity and/or address of the First Lien Notes Representative.
"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.
"Indebtedness" means with respect to any Person, without duplication:
(1) all Obligations for borrowed money,
(2) all Obligations evidenced by bonds, debentures, notes or other
similar instruments,
(3) all Capitalized Lease Obligations,
(4) all Obligations for 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
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(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 of this definition:
(1) 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 it 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 the Disqualified Capital Stock, the
fair market value shall be determined reasonably and in good faith by the
Board of Directors of Abraxas.
(2) The "amount" or "principal amount" of Indebtedness at any time will
be:
(a) for any Indebtedness issued at a price that is less than its
principal amount at maturity the face amount of the liability,
(b) for any Capitalized Lease Obligation, the amount determined
in accordance with its definition above,
(c) for any Interest Swap Obligations included in the definition
of Permitted Indebtedness, zero,
(d) for all other unconditional obligations, the amount
determined in accordance with GAAP, and
(e) for all other contingent obligations, 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.
"Interest Swap Obligation" means obligations under interest rate swaps,
caps, floors, collars and similar agreements, whereby, directly or indirectly, a
Person is entitled to receive payments calculated by applying either a floating
or a fixed rate of interest on a stated notional amount in exchange for payments
made by another Person calculated by applying a fixed or a floating rate of
interest on the same notional amount.
"Investment" by a Person means any direct or indirect:
(1) loan, advance or other extension of credit (including a guarantee)
or capital contribution,
(2) purchase or acquisition of any Capital Stock, bonds, notes,
debentures or other securities or evidences of Indebtedness issued by
another Person ,
(3) guarantee or assumption of the Indebtedness of another Person (other
than the guarantee or assumption of Indebtedness of the Person or a
Restricted Subsidiary of the Person which 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" excludes extensions of trade
credit by us on commercially reasonable terms in accordance with our normal
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trade practices. The amount of any Investment will not be adjusted for increases
or decreases in value, or write-ups, write-downs or write-offs with respect to
that Investment. If we sell or otherwise dispose 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, we will 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.
"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 our proved oil and gas reserves
(before any state or federal income tax); provided, however, that the following
will be excluded from the calculation of Material Change:
(1) any acquisitions during the quarter of oil and gas reserves that
have been estimated by independent petroleum engineers and on which a
report or reports exist,
(2) any disposition of properties existing at the beginning of such
quarter that have been disposed of as provided in "Limitation on Asset
Sales," and
(3) any reserves added during the quarter attributable to the drilling
or recompletion of wells not included in previous reserve estimates, but
which will be included in future quarters.
"Mortgage" means a mortgage or deed of trust dated as of the Issue Date
granted by us 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 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 us from any 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,
(3) appropriate amounts (determined by the Chief Financial Officer of
Abraxas) to be provided by us, 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 us, as the case may be, after such Asset Sale, sale, transfer
or other disposition, including 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) which
is secured by a Lien on the property subject of the Asset Sale, sale,
transfer or other disposition.
"Net Working Capital" means:
(1) all of our current assets, minus
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(2) all of our current liabilities, except current liabilities included
in Indebtedness,
in each case as set forth in our financial statements prepared in
accordance with GAAP.
"Non-Recourse Indebtedness" with respect to any Person means Indebtedness
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" only because such Indebtedness could become recourse
upon:
(a) fraud or misrepresentation by the Person in connection with such
Indebtedness,
(b) such Person failing to pay taxes or other charges that result in the
creation of liens on any portion of the specific property securing such
Indebtedness or failing to maintain any insurance on such property required
under the instruments securing such Indebtedness,
(c) the conversion of any of the collateral for such Indebtedness,
(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 any principal, premium, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Oil and Gas Assets" means our Crude Oil and Natural Gas Properties and
natural gas processing facilities.
"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) Our obligations under Interest Swap Obligations covering our
Indebtedness if these Interest Swap Obligations are entered into to protect
us 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 is not greater than 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
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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;
(5) Indebtedness arising from a bank or other financial institution
inadvertently honoring a check, draft or similar instrument (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) Our Indebtedness represented by letters of credit for our account,
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) Our Capitalized Lease Obligations outstanding on the Issue Date;
(9) Our Capitalized Lease Obligations and Purchase Money Indebtedness
not exceeding $5,000,000 at any one time;
(10) Permitted Operating Obligations;
(11) Obligations arising in connection with our Crude Oil and Natural
Gas Hedge Agreements;
(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 our Indebtedness 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 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 outstanding on the Issue Date except to the extent the
Indebtedness thereunder was taken up by the second lien notes.
"Permitted Industry Investments" means:
(1) capital expenditures, including acquisitions of Abraxas Properties
and interests therein;
(2) (a) 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 with such
agreements, interests or arrangements, in each case made or entered into in
the ordinary course of the oil and gas business,
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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 our Crude
Oil and Natural Gas Properties pursuant to joint operating agreements.
"Permitted Investments" means:
(1) Investments by us 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:
(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 with the First Lien Notes Indentures;
(4) Liens securing the First Lien Notes and the guarantees thereunder;
(5) Liens for taxes, assessments or governmental charges or claims that
are either
(a) not delinquent or
(b) contested in good faith by appropriate proceedings and as to which
we, have set aside on our 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:
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(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 our business;
(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;
(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 our obligations arising
from statutory, regulatory, contractual, or warranty requirements,
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 our pipeline or pipeline facilities, Hydrocarbons or
Properties 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 our Properties or otherwise as are
customary in the oil and gas business;
(15) with respect to any of our Properties, 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 we determine 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 our money or
instruments 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;
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(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 our incurrence of such Acquired Indebtedness and were not
granted in connection with, or in anticipation of, the incurrence of such
Acquired Indebtedness by us, and
(b) such Liens do not extend to or cover any of our property or
assets other than the property or assets that secured the Acquired
Indebtedness prior to the time such Indebtedness became our Acquired
Indebtedness and are no more favorable to the lienholders than those
securing the Acquired Indebtedness prior to the incurrence of such Acquired
Indebtedness by us.
(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
(a) 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
(b) do not extend to or cover any of our Property not securing
the Indebtedness so Refinanced;
and
(23) Liens securing our Indebtedness 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 our Indebtedness 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, us in
the ordinary course of business (excluding obligations related to the purchase
by us of Hydrocarbons for which we have 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 the Security Agreements (Pledge) pursuant to which
the Capital Stock of Grey Wolf owned by us 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.
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"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"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.
"Refinancing Indebtedness" means any Refinancing by us 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 total 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 us 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
(i) if such 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
(ii) 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).
"Restricted Subsidiary" means any Subsidiary of Abraxas (including, without
limitation, Canadian Abraxas and Sandia) that is not an Unrestricted Subsidiary.
"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 us of any property, whether owned by us at the Issue Date or later
acquired which has been or is to be sold or transferred by us 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.
"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, under a written agreement to that effect.
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"Subsidiary" 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 a 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 a 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.
"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.
"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 currently authorized to issue 200,000,000 shares of common
stock, par value $.01 per share. At November 15, 2000, there were 22,593,939
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 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 on December
21, 2000, unless Abraxas will, in its sole discretion, extend the Maturity Date
to May 21, 2001, 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 minus the Current Market Value divided by (b) the Current Market
value. The CVR Agreement provides that 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. However, subsequent to the issuance of the CVRs,
Abraxas' common stock traded at a price per share of $3.73 or higher for 30
Trading Days during the 45 consecutive Trading Days beginning on August 16,2000
and ending on October 19, 2000. As a result, under the formula discussed above,
the maximum number of shares which holders of the CVRs could be entitled to
receive has been reduced to 8,500,000 shares of common stock at December 21,
2000 and 9,700,000 shares of common stock at May 21, 2001, such maximum number
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of shares being subject to adjustment as described under "Antidilution" below.
In addition, in the event Abraxas' common stock trades at a price per share
higher than $3.73 for 30 Trading Days during any future 45 consecutive Trading
Days, the number of shares of Abraxas common stock issuable under the CVRs would
decrease correspondingly to a number below 8,500,000 or 9,700,000, as the case
may be. The determination by Abraxas of the number of shares of common stock
issuable under the CVRs, absent manifest error, will be final and binding on
Abraxas and the CVR Holders.
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 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 shall be conclusively deemed to have been
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
and the proposal to increase the number of authorized shares is not approved at
the upcoming annual meeting of stockholders, Abraxas will be required 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. The agreement governing the CVRs does not
contemplate any alternative in lieu of issuing additional shares of common stock
for satisfying the requirements of 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, 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 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:
o promptly prepare a certificate setting forth such adjustment and a brief
statement of the facts accounting for such adjustment,
o promptly file with American Stock Transfer a copy of such certificate,
and
o 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 assumes Abraxas' obligations under the CVRs and
the CVR Agreement and (ii) Abraxas delivers to American Stock Transfer an
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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, 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 or, if the Current
Market Value is higher, then based upon the Current Market Value.
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.
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 we select 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
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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:
(a) 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,
(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 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).
"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 763,500
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 and
Basis Street Company has warrants to purchase 750,000 shares at an exercise
price of $3.50 per share. AEM and Basil have 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 and Basil
Street 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 or consolidations. AEM also has antidilution
protection for the issuance or sale of common stock or options, rights or
securities convertible into sha1es 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.
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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"), we grant to our
employees and officers (including our directors 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 November 15, 2000, there were options to
purchase 3,972,124 shares of Abraxas common stock outstanding, of which 828,177
were fully vested at an average exercise price of $2.06 per share. In 2000
Abraxas adopted 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
Under the terms of its warrants, AEM and Basil Street have the right to
unlimited piggyback registrations. Abraxas has agreed to pay all expenses in
connection with piggyback registrations by AEM and Basail Street; provided,
however, all underwriting discounts and selling commissions shall be borne by
AEM and Basil Street.
Under the terms of a Registration Rights Agreement with Halcyon/Alan B.
Slifka Management Company LLC and Franklin Resources, Inc., 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
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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
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.
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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
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.
111
<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, 1999 and 1998, and for each of the three years in the period
ended December 31, 1999, 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 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.
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.
"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.
112
<PAGE>
"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.
"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 we have an interest.
"LOE" means lease operating expenses and production taxes.
"MMBTU" means million British Thermal Units.
"MMBTUpd" means million British Thermal Units per day.
"MMcfpd" means million cubic feet per day.
"Net" natural gas and crude oil wells or "net" acres are determined by
multiplying "gross" wells or acres by the our working interest in such wells or
acres.
"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.
113
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Abraxas Petroleum Corporation and Subsidiaries
Report of Independent Auditors ......................................F-2
Consolidated Balance Sheets at December 31, 1998 and 1999 ...........F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999 .................................F-5
Consolidated Statements of Stockholders' Equity (Deficit) for
the years ended December 31, 1997, 1998 and 1998 .................F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999 .................................F-8
Notes to Consolidated Financial Statements ..........................F-10
Unaudited Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999.............................................F-35
Unaudited Consolidated Statement of Operations for the three
and nine months ended September 30, 2000 and 1999.................F-37
Unaudited Consolidated Statement of Stockholders Equity
(deficit) at September 30, 2000 and December 31, 1999.............F-38
Unaudited Consolidated Statement of Cash Flows for the
nine months ended September 30, 2000 and 1999.....................F-39
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, 1998 and 1999, 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,
1999. 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 auditing standards generally
accepted in the United States. 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, 1998 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
ERNST & YOUNG LLP
San Antonio,Texas
March 17, 2000, except for Notes
2 and 18 as to which the date is
March 31, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
---------------------
1998 1999
---------- ---------
(In thousands)
<S> <C> <C>
Current assets:
Cash ....................................................... $ 61,390 $ 3,799
Accounts receivable, less allowance for doubtful
accounts:
Joint owners ........................................... 3,337 5,140
Oil and gas production sales ........................... 6,098 7,955
Other .................................................. 1,070 1,257
-------- --------
10,505 14,352
Equipment inventory ........................................ 504 447
Other current assets ....................................... 844 431
-------- --------
Total current assets ..................................... 73,243 19,029
Property and equipment ........................................ 374,316 514,353
Less accumulated depreciation, depletion, and amortization .... 165,867 219,687
-------- --------
Net property and equipment based on the full cost
method of accounting for oil and gas properties
of which $10,675 and $17,057 at December 31, 1998
and 1999, respectively, were excluded from amortization .. 208,449 294,666
Deferred financing fees, net of accumulated amortization
of $2,911 and $4,826 at December 31, 1998 and 1999,
respectively ............................................... 8,059 7,711
Other assets .................................................. 1,747 878
-------- --------
Total assets ............................................... $291,498 $322,284
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
December 31
--------------------
1998 1999
---------- ---------
(In thousands)
<S> <C> <C>
Current liabilities:
Accounts payable ........................................... $ 10,499 $ 8,445
Oil and gas production payable ............................. 5,846 10,608
Accrued interest ........................................... 5,522 6,358
Income taxes payable ....................................... 160 134
Other accrued expenses ..................................... 527 789
--------- --------
Total current liabilities ................................ 22,554 26,334
Long-term debt ............................................. 299,698 273,421
Deferred income taxes ......................................... 19,820 16,935
Minority interest in foreign subsidiary ....................... 9,672 10,496
Future site restoration ....................................... 3,276 4,603
Commitments and contingencies
Stockholders' equity (Deficit):
Common stock, par value $.01 per share - authorized
50,000,000 shares; issued 6,501,441 and 22,747,099
shares at December 31, 1998 and 1999, respectively ........ 65 227
Additional paid-in capital .................................. 51,695 127,562
Accumulated deficit ......................................... (103,145) (139,825)
Treasury stock, at cost, 171,015 and 152,083 shares
at December 31, 1998 and 1999, respectively ............... (1,167) (1,071)
Accumulated other comprehensive income (loss) ............... (10,970) 3,602
--------- --------
Total stockholders' equity (deficit) ........................... (63,522) (9,505)
--------- --------
Total liabilities and stockholders' equity (deficit) .......... $ 291,498 $322,284
========= ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31
----------------------------------------
1997 1998 1999
----------------------------------------
(In thousands except per share data)
<S> <C> <C> <C>
Revenues:
Oil and gas production revenues ...................... $ 65,826 $ 54,263 $ 59,025
Gas processing revenues .............................. 3,568 3,159 4,244
Rig revenues ......................................... 334 469 444
Other ................................................ 1,203 2,193 3,057
--------- --------- ---------
70,931 60,084 66,770
Operating costs and expenses:
Lease operating and production taxes ................. 16,133 18,091 17,938
Depreciation, depletion, and amortization ............ 30,581 31,226 34,811
Rig operations ....................................... 296 521 624
Proved property impairment ........................... 4,600 61,224 19,100
General and administrative ........................... 4,171 5,522 5,269
--------- --------- ---------
55,781 116,584 77,742
--------- --------- ---------
Operating income (loss) ................................. 15,150 (56,500) (10,972)
Other (income) expense:
Interest income ...................................... (320) (805) (666)
Amortization of deferred financing fee ............... 1,260 1,571 1,915
Interest expense ..................................... 24,620 30,848 36,815
Other ................................................ (369) -- --
--------- --------- ---------
25,191 31,614 38,064
--------- --------- ---------
Income (loss) before taxes .............................. (10,041) (88,114) (49,036)
Income tax expense (benefit):
Current .............................................. 244 231 491
Deferred ............................................. (4,135) (4,389) (13,116)
Minority interest in income of consolidated foreign
subsidiary ........................................... 335 4 269
--------- --------- ---------
Income (loss) ........................................... (6,485) (83,960) (36,680)
Less dividend requirement on cumulative preferred stock . (183) -- --
Net income (loss) applicable to common stock ............ $ (6,668) $ (83,960) $ (36,680)
--------- --------- ---------
Earnings (loss) per common share:
Net income (loss) per common share ................... $ (1.11) $ (13.26) $ (5.41)
========= ========= =========
Earnings (loss) per common share - assuming dilution:
Net income (loss) per common share - assuming dilution $ (1.11) $ (13.26) $ (5.41)
========= ========= =========
</TABLE>
See accompanying notes.
F-5
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands except share amounts)
Convertible
Preferred Stock Common Stock Treasury Stock
----------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,1996 .. 45,741 $ -- 5,806,812 $ 58 74,711 $(405)
Comprehensive income (loss)
Net loss .................. -- -- -- -- -- --
Other comprehensive
income:
Foreign currency
translation
adjustment ......... -- -- -- -- -- --
Comprehensive income (loss) -- -- -- -- -- --
Issuance of common stock
for compensation ........ -- -- 7,735 -- (21,688) 124
Conversion of preferred
stock for common stock .. (45,741) -- 508,183 5 -- --
Options exercised ......... -- -- 2,000 -- -- --
Dividend on preferred ..... -- -- -- -- -- --
stock
Warrants exercised ........ -- -- 97,810 -- -- --
-------- -------- ---------- ------ -------- -------
Balance at December 31,1997 .. -- $ -- 6,422,540 $ 63 53,023 $ (281)
Comprehensive income (loss)
Net loss ................ -- -- -- -- -- --
Other comprehensive
income:
Foreign currency
translation
adjustment .......... -- -- -- -- -- --
Comprehensive income (loss)
Issuance of common stock
for compensation ........ -- -- 4,838 -- (18,263) 94
Purchase of treasury
stock ................... -- -- -- -- 136,255 (980)
stock
Options exercised ......... -- -- 3,000 -- -- --
Issuance of common stock
for acquisition of oil
and gas properties ...... -- -- 71,063 2 -- --
-------- -------- ---------- ------ -------- -------
Balance at December 31, 1998 . -- $ -- 6,501,441 $ 65 171,015 $(1,167)
======== ======== ========== ====== ======== =======
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Additional Other
Paid-In Accumulated Comprehensive
Capital Deficit Income (Loss) Total
--------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Balance at December 31,1996 .. $ 50,926 $ (12,517) $ (2,406) $35,656
Comprehensive income (loss)
Net loss .................. -- (6,485) -- (6,485)
Other comprehensive
income:
Foreign currency
translation
adjustment ......... -- -- (2,496) (2,496)
----------- -------------- -----------
Comprehensive income (loss) -- (6,485) (2,496) (8,981)
Issuance of common stock
for compensation ........ 186 -- -- 310
Conversion of preferred
stock for common stock .. (5) -- -- --
Options exercised ......... 11 -- -- 11
Dividend on preferred ..... -- (183) -- (183)
stock
Warrants exercised ........ -- -- -- --
--------- ----------- -------------- -----------
Balance at December 31,1997 .. $ 51,118 $ (19,185) $ (4,902) $26,813
Comprehensive income (loss)
Net loss ................ -- (83,960) -- (83,960)
Other comprehensive
income:
Foreign currency
translation
adjustment .......... -- -- (6,068) (6,068)
----------- -------------- -----------
(83,960) (6,068) (90,028)
Comprehensive income (loss)
(loss)
Issuance of common stock
for compensation ........ 114 -- -- 208
Purchase of treasury
stock ................... -- -- -- (980)
stock
Options exercised ......... 16 -- -- 16
Issuance of common stock
for acquisition of oil
and gas properties ...... 447 -- -- 449
--------- ----------- -------------- -----------
Balance at December 31, 1998 . $ 51,695 $(103,145) $(10,970) $(63,522)
========= =========== ============== ===========
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)(continued)
(In thousands except share amounts)
Convertible
Preferred Stock Common Stock Treasury Stock
------------------------------------------------ ---------------------
Shares Amount Shares Amount Shares Amount
------------------------------------------------ ---------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998. -- $ -- 6,501,441 $ 65 171,015 $ (1,167)
Comprehensive income (loss)
Net loss .............. -- -- -- -- -- --
Other comprehensive
income:
Foreign currency
translation ....... -- -- -- -- -- --
adjustment
Comprehensive income ....
(loss)
Issuance of common stock
for compensation ...... -- -- 3,314 -- (18,932) 96
Purchase of treasury .... -- -- -- -- -- --
stock
Issuance of common stock
in connection with .... -- --
exchange offer ........ -- -- 16,242,344 162 -- --
-------- ---------- ------------ ----- -------- ---------
Balance at December 31, 1999 -- $ -- 22,747,099 $227 152,083 $ (1,071)
======== ========== ============ ===== ======== =========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Additional Other
Paid-In Accumulated Comprehensive
Capital Deficit Income (Loss) Total
--------- ----------- -------------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1998. $ 51,695 $ (103,145) $ (10,970) $(63,522)
Comprehensive income (loss)
Net loss ............... -- (36,680) -- (36,680)
Other comprehensive
income:
Foreign currency
translation
adjustment. ........ -- -- 14,572 14,572
----------- -------------- ---------
Comprehensive income (loss).. (36,680) 14,572 (22,108)
Issuance of common stock
for compensation ....... (43) -- -- 53
Purchase of treasury
stock .................. -- -- -- --
Issuance of common stock
in connection with
exchange offer ......... 75,910 -- -- 76,072
---------- ----------- -------------- ---------
Balance at December 31, 1999. $127,562 $ (139,825) $ 3,602 $ (9,505)
========== =========== ============== =========
</TABLE>
See accompanying notes.
F-7
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
------------------------------------
1997 1998 1999
----------- --------- ----------
(In thousands)
<S> <C> <C> <C>
Operating Activities
Net income (loss) ........................ $ (6,485) $(83,960) $ (36,680)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Minority interest in income of
foreign subsidiary ................ 335 4 269
Depreciation, depletion, and
amortization ...................... 30,581 31,226 34,811
Proved property impairment .......... 4,600 61,224 19,100
Deferred income tax benefit ......... (4,135) (4,389) (13,116)
Amortization of deferred financing
fees .............................. 1,260 1,571 1,915
Amortization of premium on long term
debt .............................. -- -- (579)
Issuance of common stock for
compensation ...................... 310 207 53
Changes in operating assets and
liabilities:
Accounts receivable ............. (444) 4,739 (2,698)
Equipment inventory ............. 76 (137) 57
Other assets .................... (325) (468) 396
Accounts payable and accrued
expenses ...................... 10,402 (5,770) (2,000)
Oil and gas production payable .. 466 598 2,354
--------- -------- ---------
Net cash provided by operating activities 36,641 4,845 3,882
Investing Activities
Capital expenditures, including purchases
and development of properties ......... (84,111) (57,412) (128,708)
Proceeds from sale of oil and gas
properties and equipment inventory .... 9,606 59,389 17,494
--------- -------- ---------
Net cash (used) provided by investing
activities ............................ (74,505) 1,977 (111,214)
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
Abraxas Petroleum Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Year Ended December 31
------------------------------------
1997 1998 1999
----------- --------- ----------
(In thousands)
<S> <C> <C> <C>
Financing Activities
Preferred stock dividends ................ $ (183) $ -- $ --
Issuance of common stock, net of expenses 11 3,926 --
Purchase of treasury stock, net .......... -- (979) --
Proceeds from long-term borrowings ....... 33,620 83,691 88,457
Payments on long-term borrowings ......... -- (32,433) (35,747)
Deferred financing fees .................. (123) (1,688) (3,586)
--------- -------- ---------
Net cash provided by financing activities. 33,325 52,517 49,124
--------- -------- ---------
Increase (decrease) in cash .............. (4,539) 59,339 (58,208)
Effect of exchange rate changes on cash . (1,005) (825) 617
--------- ------- --------
Increase (decrease) in cash .............. (5,544) 58,514 (57,591)
Cash at beginning of year ................ 8,380 2,876 61,390
--------- ------- --------
Cash at end of year ...................... $ 2,836 $ 61,390 $ 3,799
========= ======= ========
Supplemental Disclosures
Supplemental disclosures of cash flow
information:
Interest paid ....................... $ 24,170 $ 30,362 $ 35,979
========= ======= ========
Supplemental schedule of noncash investing and
financing activities: In December 1999 the
Company completed the exchange of $269,699,000
of it's 11.5% Old Notes for $188,778,000 of
new Second Lien Notes, issuance of 16,078,990
shares of common stock and contingent value
rights. An additional $5,000,000 on the Second
Lien Notes were issued for payment of fees and
expenses.
Decrease in long-term debt $ 75,921
========
Increase in shareholder's equity $ 75,921
========
</TABLE>
See accompanying notes.
F-9
<PAGE>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1998, and 1999
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
prices 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-10
<PAGE>
Unevaluated properties not currently being amortized included in oil
and gas properties were approximately $10,675,000 and $17,057,000 at December
31, 1998 and 1999, 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, 1999 will be substantially evaluated in six to
thirty-six months and it will begin to amortize these costs at such time.
Other Property and Equipment
Other property and equipment are recorded on the basis of cost.
Depreciation of gas gathering and processing facilities and other property and
equipment is provided over the estimated useful lives using the straight-line
method. Major renewals and betterments are recorded as additions to the property
and equipment accounts. Repairs that do not improve or extend the useful lives
of assets are expensed.
Hedging
The Company periodically enters into contracts to hedge the risk of
future crude oil and natural gas price fluctuations. Such contracts may either
fix or support crude oil and natural gas prices or limit the impact of price
fluctuations with respect to the Company's sales of crude oil and natural gas.
Gains and losses on such hedging activities are recognized in oil and gas
production revenues when hedged production is sold.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("Statement 123") encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock.
Foreign Currency Translation
The functional currency for the Company's Canadian operations is the
Canadian dollar. The Company translates the functional currency into U.S.
dollars based on the current exchange rate at the end of the period for the
balance sheet and a weighted average rate for the period on the statement of
operations. Translation adjustments are reflected as Accumulated Other
Comprehensive Income (Loss) in Stockholders' Equity (Deficit).
Fair Value of Financial Instruments
The Company includes fair value information in the notes to
consolidated financial statements when the fair value of its financial
instruments is materially different from the book value. The Company assumes the
book value of those financial instruments that are classified as current
approximates fair value because of the short maturity of these instruments. For
noncurrent financial instruments, the Company uses quoted market prices or, to
the extent that there are no available quoted market prices, market prices for
similar instruments.
Restoration, Removal and Environmental Liabilities
The estimated costs of restoration and removal of major processing
facilities are accrued on a straight-line basis over the life of the property.
The estimated future costs for known environmental remediation requirements are
accrued when it is probable that a liability has been incurred and the amount of
remediation costs can be reasonably estimated. These amounts are the
undiscounted, future estimated costs under existing regulatory requirements and
using existing technology.
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.
F-11
<PAGE>
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.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which is
required to be adopted in years beginning after June 15, 1999. In June 1999,
SFAS No. 137 was issued, which delays the required adoption of SFAS No. 133 by
one year. The statement permits early adoption as of the beginning of any fiscal
quarter after its issuance. The Statement will require the Company to recognize
all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the derivative is a
hedge, changes in the fair value of derivatives will either be offset against
the change in fair value of the hedged assets, liabilities, of firm commitments
through earnings or recognized in other comprehensive income until the hedge
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. The Company has not
yet determined the effect of SFAS No. 133 will be on the earnings and financial
position of the Company.
2. Liquidity
The Company's operating results have been adversely affected by low
crude oil and natural gas prices in 1998 and early 1999. In addition, the
Company has significant semi annual interest payments due on its long term debt.
As a result of these conditions, the Company has issued $63.5 million
of debt securities ("First Lien 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. The Senior Notes will mature in 2003. Proceeds from
the Senior Notes were used to pay-off the Company's 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.
In October 1999 the Company entered into a non-recourse Dollar
Denominated Production Payment agreement (the "Production Payment") with a third
party. The Production Payment has an aggregate total availability of up to $50
million, subject to third party approval. The Production Payment relates to a
portion of the production from several natural gas wells in the Edwards Trend,
in south Texas. As of December 31, 1999, the Company had received $4.0 million
under this agreement. The outstanding balance as of December 31, 1999 is $3.5
million.
In December 1999, Abraxas and Canadian Abraxas completed an exchange
offer whereby they exchanged $189 million in 11.5% Second Lien Notes (the
"Second Lien Notes"), Abraxas common stock, and contingent value rights for
approximately $270 million of the 11.5% Senior Notes (the "Senior Notes"). The
Second Lien Notes are senior obligations of Abraxas and Canadian Abraxas and are
jointly and severally guaranteed by Sandia Oil and Gas Corporation ("Sandia")
and Wamsutter Holdings, Inc. ("Wamsutter"), 100% owned subsidiaries of Abraxas.
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 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 and
annual interest payments by approximately $8.8 million.
In March 2000, the Company sold it's interests in certain crude oil and
natural gas properties in Wyoming. Simultaneously, a limited partnership, in
which the Company had an economic interest, sold its crude oil and natural gas
properties in the same area. The Company realized $34 million in net proceeds
from the sale, which will enable the Company to meet its interest obligations
throughout 2000.
F-12
<PAGE>
The Company has implemented a number of measures to conserve its cash
resources, including postponement of certain 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.
With 2000 interest obligations funded from proceeds of the above
described sale of the Company's partnership interest and certain Wyoming crude
oil and natural gas properties, the Company will have sufficient operating cash
flows to enable the Company to continue operating in the ordinary course of
business.
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 92% interest in the Pacalta Properties from Canadian Abraxas.
The acquisition was accounted for as a purchase, and the purchase price
was allocated to the crude oil and natural gas properties based on the fair
values of the properties acquired. The transaction was financed through an
advance from the Company with funds which were obtained through borrowings under
the Company's Credit Facility.
Wyoming Properties Divestiture
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.
New Cache Petroleums LTD Acquisition
In January 1999, the Canadian Abraxas completed the acquisition of New
Cache Petroleums, LTD, ("New Cache"), for approximately $78 million in cash and
the assumption of approximately $10 million in debt. The debt was paid off with
a portion of the proceeds from the sale of $63.5 million 12.875% Senior Secured
Notes in March 1999.
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. Results of operations for New Cache
Properties have been included in the consolidated financial statements since
January 1999.
The condensed pro forma financial information presented below
summarizes on an unaudited pro forma basis, approximate results of the Company's
consolidated results of operations for the year ended December 31, 1998,
assuming the acquisition of New Cache Petroleums LTD had occurred on January 1,
1998.
December 31, 1998
(In thousands except
per share data)
-----------------------
Revenue ................................. $ 77,882
=======================
Net income (loss) ....................... $ (107,607)
=======================
Income (loss) per common share .......... $ (17.00)
=======================
F-13
<PAGE>
4. Property and Equipment
The major components of property and equipment, at cost, are as
follows:
Estimated
Useful Life 1998 1999
-----------------------------------
Years (In thousands)
Land, buildings, and improvements .... 15 $ 309 $ 310
Crude oil and natural gas properties . - 335,207 468,081
Natural gas processing plants ........ 18 36,583 42,863
Equipment and other .................. 7 2,217 3,099
-------- ---------
$374,316 $ 14,353
======== =========
5. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31
1998 1999
--------- --------
(In thousands)
<S> <C> <C>
11.5% Senior Notes due 2004 ("Old Notes") (see below) ............. $274,000 $ 4,321
12.875% Senior Secured Notes due 2003 ("First Lien Notes") (see
below) ....................................................... -- 63,500
11.5% Second Lien Notes due 2004 ("Second Lien Notes") (see below) -- 193,769
Unamortized premium on Old Notes .................................. 3,471 --
Credit facility due to Bankers Trust Company, ING
Capital and Union Bank of California (see below) ............. 15,700 --
Credit facility payable to a Canadian bank (due 2001),
providing for borrowings to approximately $11,630,000 at
the bank's prime rate plus .125%, 6.20% at December 31,
1999, secured by the assets of Grey Wolf ..................... 6,515 8,360
Other ............................................................. 12 3,471
-------- --------
299,698 273,421
Less current maturities ........................................... -- --
-------- --------
$299,698 $273,421
======== ========
</TABLE>
Long-Term Indebtedness
On November 14, 1996, the Company consummated the offering of $215.0
million of it's 11.5% Senior Notes due 2004, Series A, which were exchanged for
the Series B Notes in February 1997. On January 27, 1998, the Company completed
the sale of $60.0 million of the Series C Notes. The Series B Notes and the
Series C Notes were subsequently combined into $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 Company, 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:
F-14
<PAGE>
Year Percentage
2000................................................. 105.750%
2001................................................. 102.875%
2002 and thereafter.................................. 100.000%
The Old Notes are joint and several obligations of the Company and rank
pari passu in right of payment to all existing and future unsubordinated
indebtedness of the Company. The Old Notes rank senior in right of payment to
all future subordinated indebtedness of the Company. 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 Oil and Gas
Corporation ("Sandia"), a wholly owned subsidiary of Abraxas. 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 Company 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 Company 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 First 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.
F-15
<PAGE>
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 in certain situations as described in the First Lien Notes
indenture.
Second Lien Notes. In December 1999, Abraxas and Canadian Abraxas
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 in payment of fees and expenses. Interest on the
Second Lien Notes is payable semi-annually in arrears on May 1 and November 1,
commencing May 1, 2000. The Second Lien Notes are redeemable, in whole or in
part, at the option of Abraxas and Canadian Abraxas on or after December 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
December 1 of the years set forth below:
Year Percentage
----- ----------
2000............................................ 105.750%
2001............................................ 102.875%
2002 and thereafter............................. 100.000%
Prior to December 1, 2000, Abraxas and Canadian Abraxas may use all or
a portion of the net cash proceeds of one or more equity offerings to redeem up
to 50% of the aggregate original principal amount of the Second Lien Notes at a
redemption price equal to 111.50% of the principal amount of the Second Lien
Notes be redeemed, plus accrued and unpaid interest.
The Second Lien Notes are senior indebtedness of Abraxas and Canadian
Abraxas and are secured by a second lien on substantially all of the crude oil
and natural gas properties of Abraxas and Canadian Abraxas and the shares of
Grey Wolf owned by Abraxas and Canadian Abraxas. The Second Lien Notes are
unconditionally guaranteed on a senior basis, jointly and severally, by Sandia
and Wamsutter. The guarantees are secured by substantially all of the crude oil
and natural gas properties of the guarantors. The Second Lien Notes 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 guarantees is
insufficient to pay both the Second Lien Notes and the First Lien Notes.
Upon a change of control, each holder of the Second Lien Notes will
have the right to require Abraxas and Canadian Abraxas to repurchase such
holder's Second 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 and Canadian Abraxas will be obligated to offer to repurchase
the Second 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 Second Lien Notes indenture contains certain covenants that limit
the ability of Abraxas and Canadian Abraxas and certain of their subsidiaries,
including the guarantors of the Second 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 or
Canadian Abraxas.
The Second Lien Notes indenture provides, among other things, that
Abraxas and Canadian 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, Canadian
Abraxas or any other Restricted Subsidiary, guarantee any indebtedness of
Abraxas, Canadian Abraxas or any other Restricted Subsidiary or transfer any of
its assets to Abraxas, Canadian Abraxas or any other Restricted Subsidiary
except in certain situations as described in the Second Lien Notes indenture.
The fair value of the Old Notes, First Lien Notes and Second Lien Notes
was approximately $244.4 million as of December 31, 1999. The Company has
approximately $1,230,000 of standby letters of credit and a $30,000 performance
bond open at December 31, 1999. Approximately $30,000 of cash is restricted and
in escrow related to certain of the letters of credit and bond.
F-16
<PAGE>
Contingent Value Rights ("CVRs")
As part of the exchange offer consummated by the Company in December
1999, Abraxas issued contingent value rights or CVRs, which may entitle the
holders of the notes to receive up to a total of 105,408,978 of Abraxas common
stock. On December 20, 2000, or at the election of Abraxas, on May 21, 2001,
Abraxas may be required to issue additional shares 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 exceeds certain prices for a period of 30 trading days
during any 45 day consecutive trading day period prior to the expiration date.
The target price on a 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 $5.64. If
the Company elects to extend the target date to May 21, 2001 the target price
will be $5.97. If the number of shares ultimately issuable under CVRs is greater
than the number of authorized and unissued shares available at the time, the
Company will be required to increase the number of shares of Abraxas common
stock 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.
Capitalized Interest
During 1997 1998 and 1999 the Company capitalized $966,000, $414,000 and
$193,000 of interest expense, respectively.
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
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, 136,255 shares with an aggregate purchase price of $980,000
were purchased. During the years ended December 31, 1997 and 1999 the Company
did not purchase any shares of its common stock for 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 2.1
million shares of the Company's common stock. All options granted have ten year
terms and vest and become fully exercisable over three to four years of
continued service at 25% to 33% on each anniversary date. At December 31, 1999
approximately 258,000 options remain available for grant.
F-17
<PAGE>
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 1997, 1998, and 1999, 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 .529, .667
and .928, 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:
<TABLE>
<CAPTION>
1997 1998 1999
----------------------------------------------
(In thousands except per share data)
<S> <C> <C> <C>
Pro forma net income (loss) .......................... $ (7,325) $ (85,619) $ (37,240)
Pro forma net income (loss) per common share ......... $ (1.25) $ (13.52) $ (5.49)
Pro forma net income (loss) per common share -
assuming dilution .................................. $ (1.25) $ (13.52) $ (5.49)
</TABLE>
A summary of the Company's stock option activity, and related
information for the years ended December 31, follows:
<TABLE>
<CAPTION>
1997 1998 1999
----------------------------- ----------------------------- -----------------------------
Weighted-Average Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price(1) Options Exercise Price(2)
(000s) (000s) (000s)
---------- ------------------ ---------- ------------------ --------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of
year ................... 551 $ 6.63 834 $ 8.27 1,572 $ 7.33
Granted ................... 285 11.26 792 7.37 534 1.19
Exercised ................. (2) 5.50 (3) 5.33 - -
Forfeited/Expired ......... - - (51) 7.39 (216) 2.06
---------- ---------- ---------
Outstanding-end of year ... 834 $ 8.27 1,572 $ 7.33 1,890 $ 1.82
========== ========== =========
Exercisable at end of year 222 $ 6.66 501 $ 6.71 685 $ 2.06
========== ========== =========
Weighted-average fair
value of options
granted during the year $ 8.00 $ 5.15 $ 1.07
</TABLE>
Exercise prices for options outstanding as of December 31, 1999 ranged
from $0.97 to $2.06 The weighted-average remaining contractual life of those
options is approximately 8.5 years.
(1) 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.
(2) In March 1999, the Company amended the exercise price to $2.06 per share
on all options with an existing exercise price greater than $2.06. Certain of
these options are not exercisable until the Company's stock price is $4.12 per
share for ten days out of a thirty day period.
F-18
<PAGE>
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 1997, 1998, and
1999, the Company made direct awards of common stock of 14,748 shares, 18,263
shares and 18,932 shares, respectively, at weighted average fair values of
$10.75, $5.13 and $5.09 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 1997, 1998, and 1999, the Company made direct awards of common stock
of 7,735 shares, 4,838 shares and 3,314 shares, respectively, at weighted
average fair values of $9.87, $14.75 and $4.38 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. 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. In March 1999 each of the seven eligible
directors were granted an option to purchase 2,000 common shares at $2.06, in
November 1999 five of the eligible directors were granted options to purchase
15,000 common shares at $1.41. In December 1999 a new board was appointed in
connection with the Company's exchange offer, each of the four new eligible
directors were granted options for 75,000 common shares at $0.97.
Stock Warrants
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, 1999 the Company has approximately 62,572,000 shares
reserved for future issuance for conversion of its stock options, warrants,
Contingent Value 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
----------------------
1998 1999
----------------------
(In thousands)
Deferred tax liabilities:
U.S. full cost pool ..................... $ -- $ --
Canadian full cost pool ................. 19,753 20,368
State taxes ............................. 67 67
Other ................................... 14 --
-------- --------
Total deferred tax liabilities ............ 19,834 20,435
Deferred tax assets:
U.S. full cost pool ..................... 15,803 6,252
Depletion ............................... 1,075 1,075
Net operating losses .................... 15,841 32,155
Other ................................... 117 152
-------- --------
Total deferred tax assets ................. 32,836 39,634
Valuation allowance for deferred tax assets (32,822) (36,134)
-------- --------
Net deferred tax assets ................... 14 3,500
-------- --------
Net deferred tax liabilities .............. $ 19,820 $ 16,935
======== ========
F-19
<PAGE>
Significant components of the provision (benefit) for income taxes are
as follows:
1997 1998 1999
------------ ----------- ---------
Current:
Federal ................... $ - $ - $ -
State ..................... - - -
Foreign ................... 244 231 491
------------ ----------- ---------
$ 244 $ 231 $ 491
============ =========== =========
Deferred:
Federal ................... $ - $ - $ -
State ..................... - - -
Foreign ................... (4,135) (4,389) (13,116)
------------ ----------- ----------
$(4,135) $(4,389) $ (13,116)
============ =========== ==========
At December 31, 1999, the Company had, subject to the limitation
discussed below, $94,573,000 of net operating loss carryforwards for U.S. tax
purposes, of which it is estimated a maximum of $7,260,000 may be utilized
before it expires, absent the application of Section 382(h) which allows
built-in gains to offset carryforwards otherwise limited by Section 382 of the
Internal Revenue Code of 1986, as amended, (Section 382). These loss
carryforwards will expire from 2002 through 2018 if not utilized. At December
31, 1999, the Company had approximately $10,262,000 of net operating loss
carryforwards for Canadian tax purposes of which $274,000 will expire in 2000,
$3,542,000 will expire in 2001, $151,000 will expire in 2002 and $6,295,000 will
expire in 2003-2005.
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 the U.S. net operating loss carryforwards generated prior to December 31,
19991 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 the
acquired corporation 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 as described above and in the following paragraph.
An ownership change under Section 382 occurred in December 1999,
following the issuance of additional shares, as described in Note 5. It is
expected that the annual use of U.S. net operating loss carryforwards subject to
this Section 382 limitation will be limited to approximately $363,000, subject
to the lower limitations described above. Future changes in ownership may
further limit the use of the Company's carryforwards.
The annual Section 382 limitation may be increased during any year,
within 5 years of a change in ownership, in which built-in gains that existed on
the date of the change in ownership are recognized.
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 $32,822,000 and $36,134,000 for deferred tax assets at
December 31, 1998 and 1999, respectively.
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense is:
F-20
<PAGE>
December 31
---------------------------------
1997 1998 1999
--------- --------- ----------
(In thousands)
Tax (expense) benefit at U.S. ....
statutory rates (34%) .......... $ 3,414 $ 29,958 $ 16,672
(Increase) decrease in deferred
tax asset valuation allowance .. (259) (26,907) (3,312)
Higher effective rate of foreign
operations ..................... (244) (231) (491)
Percentage depletion ............. 499 146 --
Other ............................ 481 1,192 (244)
------- -------- --------
$ 3,891 $ 4,158 $ 12,625
======= ======== ========
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., in 1997 Grey Wolf merged with
Cascade and the name was changed to Grey Wolf Exploration, Inc. ("Grey Wolf").
At December 31, 1999, the Company owns approximately 49% 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 80,000 shares of Grey Wolf capital stock at an exercise price of CDN$2.00 per
share, and certain of the Company's directors own options to purchase in the
aggregate up to 100,000 shares of Grey Wolf capital stock at an exercise price
of CDN$2.00 per share. Grey Wolf currently has approximately 12,700,000 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, 1997, 1998, and 1999, the Company
incurred rent expense of approximately $228,000, $292,000 and $396,000,
respectively. Future minimum rental payments are as follows at December 31,
1999:
2000 ................................................... $ 393,900
2001 ................................................... 368,000
2002 ................................................... 242,000
2003 ................................................... 228,000
2004 ................................................... 228,000
Thereafter ............................................. 398,000
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 and on May
22, 1998, final judgment in the amount of $1.3 million was entered. The Company
filed an appeal and in March 2000, the Court of Appeals reduced the plaintiff's
award to $362,495 plus post-judgment interest of $68,915. The Company is
currently reviewing whether to further appeal this decision. The Company has not
established a reserve for this matter at December 31, 1999.
F-21
<PAGE>
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, 1999, 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.
11. Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
1997 1998 1999
----------------- ----------------- ------------------
<S> <C> <C> <C>
Numerator:
Net income (loss)................................ $ (6,485,000) $ (83,960,000) $ (36,680,000)
Preferred stock dividends........................ 183,000 - -
----------------- ----------------- ------------------
Numerator for basic earnings per share - income
(loss) available to common stockholders........ (6,668,000) (83,960,000) (36,680,000)
Effect of dilutive securities:
Preferred stock dividends...................... - - -
----------------- ----------------- ------------------
Numerator for diluted earnings per share - income
available to common stockholders after assumed
conversions.................................... (6,668,000) (83,960,000) (36,680,000)
Denominator:
Denominator for basic earnings per share -
weighted-average shares........................ 6,025,294 6,331,292 6,783,633
Effect of dilutive securities:
Stock options and warrants..................... - - -
Convertible preferred stock.................... - - -
Assumed issuance under the CVR Agreement....... - - -
----------------- ----------------- ------------------
- - -
----------------- ----------------- ------------------
Dilutive potential common shares Denominator for
diluted earnings per share adjusted
weighted-average shares and assumed
conversions..................................... 6,025,294 6,331,292 6,783,633
================= ================= ==================
Basic earnings (loss) per share................... $ (1.11) $ (13.26) $ (5.41)
================= ================= ==================
Diluted earnings (loss) per share................. $ (1.11) $ (13.26) $ (5.41)
================= ================= ==================
</TABLE>
For the year ended December 31, 1999 none of the shares issuable in
connection with stock options, warrants or the Contingent Value rights agreement
are included in diluted shares. 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.
F-22
<PAGE>
12. Quarterly Results of Operations (Unaudited)
Selected results of operations for each of the fiscal quarters during
the years ended December 31, 1998 and 1999 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, 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)
Year Ended December 31, 1999
Net revenue .................... $ 15,970 $ 16,776 $ 16,958 $ 17,066
Operating income (loss) ........ 604 1,692 2,982 (16,250)
Net income (loss) .............. (6,294) (6,741) (6,919) (16,726)
Earnings (loss) per common
share ........................ $ (0.99) $ (1.06) $ (1.09) $ (2.06)
Earnings (loss) per common
share - assuming dilution .... $ (0.99) $ (1.06) $ (1.09) $ (2.06)
</TABLE>
During the fourth quarter of 1998, the Company recorded a write-down of
its United States proved crude oil and natural gas properties of approximately
$61,224,000 under the ceiling limitation. During the fourth quarter of 1999, the
Company recorded a write-down of its Canadian proved crude oil and natural gas
properties of approximately $19,100,000 ($11,900,000 after tax) under the
ceiling limitation.
13. Benefit Plans
The Company has a defined contribution plan (401(k)) covering all
eligible employees of the Company. During 1997 and 1998 the Company contributed
7,440 and 10,329 shares, respectively, of its common stock held in the treasury
to the Plan and recorded the fair value of $41,850 and $76,847 respectively, as
compensation expense. The Company did not contribute to the plan in 1999. The
employee contribution limitations are determined by formulas which limit the
upper one-third of the plan members from contributing amounts that would cause
the plan to be top-heavy. The employee contribution is limited to the lesser of
20% of the employee's annual compensation or $10,000.
14. Summary Financial Information of Canadian Abraxas Petroleum Ltd.
The following is summary financial information of Canadian Abraxas, a
wholly owned subsidiary of the Company. Canadian Abraxas is jointly and
severally liable for the entire balance of the Series B Notes ($215,000,000), of
which $84,612,000 was utilized by Canadian Abraxas in connection with the 1996
acquisition of Canadian Gas Gathering Systems ("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,
1998 1999
----------------- ---------------
(In thousands)
<S> <C> <C>
BALANCE SHEET
Assets
Total current assets ............................. $ 6,144 $ 11,777
Oil and gas and processing properties ............ 91,115 164,420
Other assets ..................................... 3,854 2,777
--------------- --------------
$ 101,113 $ 178,974
=============== ==============
</TABLE>
F-23
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Liabilities and Stockholder's Equity
Total current liabilities ......................... $ 3,030 $ 3,158
11.5% Senior Notes due 2004 ....................... 74,682 52,629
Notes payable to Abraxas Petroleum
Corporation ..................................... 20,355 38,580
Other liabilities ................................. 22,519 23,642
Stockholder's equity (deficit) .................... (19,473) 60,965
----------------- ---------------
$ 101,113 $ 178,974
================= ===============
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1998 December 31, 1999
------------------------ ---------------------- ----------------------
(In Thousands)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS
Revenues ...................................... $ 19,264 $ 18,624 $ 33,362
Operating costs and expenses .................. (16,617) (18,026) (31,171)
Proved property impairment .................... (4,600) -- (19,100)
Interest expense .............................. (9,952) (10,356) (10,093)
Other income .................................. 202 191 347
Income tax (expense) benefit .................. 3,815 4,158 9,677
------------------------ ---------------------- ----------------------
Net income (loss) ........................... $ (7,888) $ (5,409) $ (16,978)
======================== ====================== ======================
</TABLE>
15. Business Segments
The Company conducts its operations through two geographic segments,
the United States and Canada, and is engaged in the acquisition, development and
production of crude oil and natural gas and the processing of natural gas in
each country. The Company's significant operations are located in the Texas Gulf
Coast, the Permian Basin of western Texas and Canada. Identifiable assets are
those assets used in the operations of the segment. Corporate assets consist
primarily of deferred financing fees and other property and equipment. The
Company's revenues are derived primarily from the sale of crude oil, condensate,
natural gas liquids and natural gas to marketers and refiners and from
processing fees from the custom processing of natural gas. As a general policy,
collateral is not required for receivables; however, the credit of the Company's
customers is regularly assessed. The Company is not aware of any significant
credit risk relating to its customers and has not experienced significant credit
losses associated with such receivables.
In 1999 three customers accounted for approximately 58% of oil and
natural gas production and approximately 56% of gas processing revenues. five
customers accounted for approximately 79% of United States revenue and three
customers accounted for approximately 77% of revenue in Canada. In 1998 four
customers accounted for approximately 58% of oil and natural gas production
revenues and gas processing revenues. In 1997 three customers accounted for
approximately 40% of oil and natural gas production revenues and gas processing
revenues.
Business segment information about the Company's 1997 operations in different
geographic areas is as follows:
<TABLE>
<CAPTION>
U.S. Canada Total
------------------ ------------------ -------------------
(In thousands)
<S> <C> <C> <C>
Revenues ................................... $ 50,172 $ 20,759 $ 70,931
================== ================== ===================
Operating profit ........................... $ 19,938 $ (2,125) $ 17,813
================== ==================
General corporate .......................... (2,663)
Net interest expense and amortization of
deferred financing fees ................. (25,191)
===================
Income before income taxes .............. $ (10,041)
===================
Identifiable assets at December 31, 1997 ... $ 198,277 $ 130,969 $ 329,246
================== ==================
Corporate assets ........................... 9,282
-------------------
Total assets ............................ $ 338,528
===================
</TABLE>
F-24
<PAGE>
Business segment information about the Company's 1998 operations in different
geographic areas is as follows:
<TABLE>
<CAPTION>
U.S. Canada Total
------------------ ------------------ -------------------
(In thousands)
<S> <C> <C> <C>
Revenues ................................... $ 36,267 $ 23,817 $ 60,084
================== ================== ===================
Operating profit (loss)..................... $ (53,016) $ 877 $ (52,139)
================== ==================
General corporate .......................... (4,361)
Net interest expense and amortization of
deferred financing fees ................. (31,614)
===================
Loss before income taxes ................ $ (88,114)
===================
Identifiable assets at December 31, 1998 ... $ 153,030 $ 129,301 $ 282,331
================== ==================
Corporate assets ........................... 9,167
-------------------
Total assets ............................ $ 291,498
===================
</TABLE>
Business segment information about the Company's 1999 operations in different
geographic areas is as follows:
<TABLE>
<CAPTION>
U.S. Canada Total
------------------ ------------------ -------------------
(In thousands)
<S> <C> <C> <C>
Revenues ................................... $ 24,586 $ 42,184 $ 66,770
================== ================== ===================
Operating profit (loss)..................... $ 7,765 $ (15,444) $ (7,679)
================== ==================
General corporate .......................... (3,293)
Net interest expense and amortization of
deferred financing fees ................. (38,064)
===================
Loss before income taxes ................ $ (49,036)
===================
Identifiable assets at December 31, 1999 ... $ 107,336 $ 206,474 $ 313,810
================== ================== ===================
Corporate assets ........................... 8,474
-------------------
Total assets ............................ $ 322,284
===================
</TABLE>
16. Commodity Swap Agreements
The Company enters into commodity swap agreements (Hedge Agreements) to
reduce its exposure to price risk in the spot market for crude oil and natural
gas. Pursuant to the Hedge Agreements, either the Company or the counterparty
thereto is required to make payment to the other at the end of each month.
In November 1996, the Company assumed swap arrangements extending
through October 2001 with a counterparty involving various quantities and fixed
prices. These swap arrangements provided that the Company 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 us 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. These swap arrangements
terminated in January 1999 and the Company 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 through March 31, 1999. Under the terms of the agreement the
F-25
<PAGE>
Company was paid when the average monthly price for crude oil on the NYMEX was
below the floor price, and the Company paid the counterparty when the average
monthly price exceeded the ceiling price. For the year ended December 31, 1999
the Company realized a loss of $1.8 million on this agreement, which is
accounted for in crude oil and natural gas revenue. The Company has also entered
into a costless collar hedge agreement with Barrett Resources Corporation
("Barrett") for the period November 1999 through October 2000. This agreement
consist of a swap for 1,000 Bbls per day with the Company being paid $20.30 and
paying NYMEX calendar month average, and 1,000 barrels per day with a floor
price of $18.00 per Bbl 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.
As of December 31, 1999, the Company has 22.5 MMBtupd hedged through
October 31, 2000, 2.5 MMBtupd is hedged at an average NYMEX price less $0.83
(approximately $1.75 per MMBtu as of February 2000) and 20.0 MMBtupd with a
ceiling of $2.39 and a floor of $2.07 based on an AECO index. Both of these
hedges are with Barrett Resoucres. In connection with the 20.0 MMBtupd Barrett
hedge, the Company realized a loss of $2.5 million for the year ended December
31, 1999, which is accounted for in crude oil and natural gas revenue.
The fair market value of these hedge agreements is approximately $(6.5)
million as of December 31, 1999.
17. Proved Property Impairment
In 1997, 1998 and 1999 the Company recorded a write-down of its proved
crude oil and natural gas properties of approximately $4,600,000; $61,224,000
and $19,100,000 under the ceiling limitation prescribed for companies following
the full cost method of accounting for its oil and gas properties. The
write-down in 1997 and 1999 were 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. The write downs in 1997 and 1998 were due primarily to a
decrease in spot market prices for the Company's crude oil and natural gas. The
write-down in 1999 was due to a downward revision of the Company's proved
reserves in Canada. 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. Depending on future prices, further impairment
of the Company's crude oil and natural gas properties may be required.
18. Subsequent Event
In March 2000, the Company sold it's interest in certain crude oil and
natural gas properties in Wyoming. Simultaneously, a limited partnership of
which one of our subsidiaries was the general partner sold its interest in crude
oil and natural gas properties in the same area. Our net proceeds from these
transactions were approximately $34.0 million subject to post closing
adjustments.
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
----------------------
1998 1999
--------- ---------
(In thousands)
Proved crude oil and natural gas properties $ 324,532 $ 451,024
Unproved properties ....................... 10,675 17,057
--------- ---------
Total ................................... 335,207 468,081
Accumulated depreciation, depletion, and
amortization, and impairment ............ (161,593) (215,144)
--------- ---------
Net capitalized costs ................. $ 173,614 $ 252,937
========= =========
F-26
<PAGE>
Cost incurred in oil and gas property acquisitions, exploration and
development activities are as follows:
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------------------------------------------------------------
1997 1998 1999
--------------------------- --------------------------- ---------------------------
Total U.S. Canada Total U.S. Canada Total U.S. Canada
------- ------- ------- ------- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Property acquisition costs:
Proved .................. $13,800 $ -- $13,800 $ 2,729 $ 1,319 $ 1,410 $89,743 $ -- $89,743
Unproved ................ 8,958 -- 8,958 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
$22,758 $ -- $22,758 $ 2,729 $ 1,319 $ 1,410 $89,743 $ -- $89,743
======= ======= ======= ======= ======= ======= ======= ======= =======
Property development and
exploration costs ....... $61,414 $53,363 $ 8,051 $51,821 $35,421 $16,400 $37,344 $18,901 $18,443
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
F-27
<PAGE>
<TABLE>
<CAPTION>
The results of operations for oil and gas producing activities are as
follows:
Years Ended December 31
-------------------------------------------------------------------------------------------------
1997 1998 1999
------------------------------ ------------------------------- -------------------------------
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 ...................... $ 65,826 $ 49,031 $ 16,795 $ 54,263 $ 33,705 $ 20,558 $ 59,025 $ 21,331 $ 37,694
Production costs .............. (14,881) (10,749) (4,132) (16,841) (10,299) (6,542) (17,938) (6,627) (11,311)
Depreciation, depletion,
and amortization ............ (27,803) (18,992) (8,811) (30,832) (17,239) (13,593) (34,452) (9,571) (24,881)
Proved property impairment .... (4,600) -- (4,600) (61,223) (61,223) -- (19,100) -- (19,100)
General and administrative .... (1,042) (721) (321) (1,381) (992) (389) (1,317) (733) (584)
Income taxes .................. 427 -- 427 (14) -- (14) 7,455 -- 7,455
-------- -------- -------- -------- -------- -------- -------- -------- --------
Results of operations from oil
and gas producing activities
(excluding corporate overhead
and interest costs) ......... $ 17,927 $ 18,569 $ (642) $(56,028) $(56,048) $ 20 $ (6,327) $ 4,400 $(10,727)
======== ======== ======== ======== ======== ======== ======== ======== ========
Depletion rate per barrel
of oil equivalent .......... $ 5.62 $ 5.05 $ 6.98 $ 5.36 $ 5.26 $ 5.49 $ 6.34 $ 4.91 $ 7.13
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
F-28
<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, 1998, and 1999. 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)
<S> <C> <C> <C> <C> <C> <C>
Proved developed and undeveloped reserves:
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)
Revisions of previous estimates ...... 2,626 (54,782) 3,946 (19,887) (1,320) (34,895)
Extensions and discoveries ........... 354 30,305 196 24,686 158 5,619
Purchase of minerals in place ........ 3,246 58,354 -- -- 3,246 58,354
Production ........................... (1,154) (25,698) (584) (8,190) (570) (17,508)
Sale of minerals in place ............ (125) (15,542) (95) (621) (30) (14,921)
------- -------- ------- -------- ------ -------
Balance at December 31, 1999 ........... 12,642 190,115 9,214 106,227 3,428(1) 83,888(2)
======= ======== ======= ======== ====== =======
</TABLE>
(1) Includes 260,200; 475,400 and 269,000 barrels of liquid hydrocarbon reserves
owned by Grey Wolf of which approximately 140,200; 244,000 and 138,000 barrels
are applicable to the minority interest's share of these reserves at December
31, 1997, 1998 and 1999, respectively.
(2) Includes 7,446, 28,610 and 21,710 MMcf of natural gas reserves owned by Grey
Wolf of which 4,012, 14,700 and 11,140 MMcf are applicable to the minority
interest's share of these reserves at December 31, 1997,1998 and 1999,
respectively.
F-29
<PAGE>
<TABLE>
<CAPTION>
Estimated Quantities of Proved Oil and Gas Reserves (continued)
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 reserves:
<S> <C> <C> <C> <C> <C> <C>
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
======= ======== ======= ======== ====== =======
December 31, 1999 ....................... 10,473 154,221 7,265 78,909 3,208 75,312
======= ======== ======= ======== ====== =======
</TABLE>
F-30
<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, 1999, 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-31
<PAGE>
<TABLE>
<CAPTION>
Set forth below is the Standardized Measure relating to proved oil and
gas reserves for:
Years Ended December 31
--------------------------------------------------------------------------------------------------------
1997 1998 1999
---------------------------------- -------------------------------- ---------------------------------
Total U.S Canada Total U.S. Canada Total U.S. Canada
--------- ---------- ---------- --------- --------- --------- ---------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Future cash inflows ....... $ 714,048 $ 530,627 $ 183,421 $ 474,263 $ 268,821 $ 205,442 $ 664,032 $ 396,234 $ 267,798
Future production and
development costs ....... (249,604) (186,445) (63,159) (169,736) (99,187) (70,549) (201,513) (116,706) (84,807)
Future income tax expense . (82,998) (48,736) (34,262) (20,655) -- (20,655) (6,319) -- (6,319)
---------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------
Future net cash flows ..... 381,446 295,446 86,000 283,872 169,634 114,238 456,200 279,528 176,672
Discount .................. (129,367) (107,259) (22,108) (102,291) (75,389) (26,902) (205,415) (143,911) (61,504)
---------- ---------- ---------- ---------- ---------- --------- ---------- ---------- --------
Standardized Measure of
discounted future net
cash relating to proved .
reserves................. $ 252,079 $ 188,187 $ 63,892 $ 181,581 $ 94,245 $ 87,336 $ 250,785 $ 135,617 $ 115,168
========== ========== ========== ========== ========== ========= ========== ========== =========
</TABLE>
F-32
<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:
F-33
<PAGE>
Year Ended December 31
----------------------------------
1997 1998 1999
--------- ----------- ----------
(In thousands)
Standardized Measure, beginning
of year ............................. $ 329,821 $ 252,079 $ 181,581
Sales and transfers of oil and gas
produced, net of production costs ... (50,945) (37,422) (41,086)
Net changes in prices and development
and production costs from prior year (190,174) (26,858) 63,539
Extensions, discoveries, and improved
recovery, less related costs ........ 49,471 36,187 29,346
Purchases of minerals in place ........ 27,586 28,079 90,510
Sales of minerals in place ............ (5,720) (58,099) (18,562)
Revision of previous quantity estimates (8,150) (12,514) (46,659)
Change in future income tax expense ... 70,858 (17,727) (6,319)
Other ................................. (12,389) (9,005) (19,723)
Accretion of discount ................. 41,721 26,861 18,158
--------- --------- ---------
Standardized Measure, end of year ... $ 252,079 $ 181,581 $ 250,785
========= ========= =========
F-34
<PAGE>
<TABLE>
<CAPTION>
Abraxas Petroleum Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
September 30, December 31,
2000 1999
(unaudited)
--------------------------------------
(In thousands)
<S> <C> <C>
Current assets:
Cash ................................................... $ 3,633 $ 3,799
Accounts receivable, less allowance for doubtful
accounts............................................ 16,245 14,352
Equipment inventory .................................... 1,461 447
Other current assets ................................... 479 431
------------------ -------------------
Total current assets ................................. 21,818 19,029
Property and equipment..................................... 544,688 514,353
Less accumulated depreciation, depletion, and amortization
244,255 219,687
------------------ -------------------
Net property and equipment based on the full cost
method of accounting for oil and gas properties of
which $17,057 was excluded from amortization ......... 300,433 294,666
Deferred financing fees, net of accumulated amortization
of $4,826 and $6,349 at December 31, 1999 and September
30, 2000, respectively ................................. 6,729 7,711
Other assets .............................................. 5,099 878
------------------ -------------------
Total assets ........................................... $ 334,079 $ 322,284
================== ===================
</TABLE>
See accompanying notes to consolidated financial statements
F-36
<PAGE>
<TABLE>
<CAPTION>
Abraxas Petroleum Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
September 30, December 31,
2000 1999
(Unaudited)
--------------------------------------
(In thousands)
<S> <C> <C>
Current liabilities:
Accounts payable .......................................... $ 19,561 $ 19,053
Accrued interest .......................................... 10,025 6,358
Other accrued expenses .................................... 1,879 923
------------------ -----------------
Total current liabilities ............................... 31,465 26,334
Long-term debt................................................ 264,586 273,421
Deferred income taxes ........................................ 24,420 16,935
Minority interest in foreign subsidiary ...................... 11,434 10,496
Future site restoration ..................................... 4,691 4,603
Other ........................................................ 1,490 -
Commitments and contingencies
Stockholders' equity (Deficit):
Common stock, par value $.01 per share - authorized
200,000,000 shares; issued 22,759,852 and 22,747,099
shares at September 30, 2000 and December 31, 1999
respectively............................................. 227 227
Additional paid-in capital ................................ 127,570 127,562
Accumulated deficit ....................................... (129,535) (139,825)
Treasury stock, at cost, 165,883 and 152,083 shares at
September 30, 2000 and December 31, 1999, respectively... (964) (1,071)
Accumulated other comprehensive loss....................... (1,305) 3,602
------------------ -------------------
Total stockholders' equity (deficit)......................... (4,007) (9,505)
------------------ -------------------
Total liabilities and stockholders' equity (deficit).... $ 334,079 $ 322,284
================== ===================
See accompanying notes to consolidated financial statements
</TABLE>
F-37
<PAGE>
<TABLE>
<CAPTION>
Abraxas Petroleum Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------- ------------------------------------
2000 1999 2000 1999
-------------------- ------------------ ----------------- -----------------
(In thousands except per share data)
<S> <C> <C> <C> <C>
Revenue:
Oil and gas production revenues ................... $ 15,345 $ 15,842 $ 46,472 $ 43,884
Gas processing revenues ........................... 672 818 2,074 2,733
Rig revenues ...................................... 134 129 384 328
Other ............................................ 226 169 451 2,759
-------------------- ------------------ ----------------- -----------------
16,377 16,958 49,381 49,704
Operating costs and expenses:
Lease operating and production taxes .............. 4,577 4,581 13,507 13,986
Depreciation, depletion, and amortization ......... 8,746 7,834 26,212 25,801
Rig operations .................................... 204 156 588 452
General and administrative ........................ 1,680 1,405 4,762 4,187
-------------------- ------------------ ----------------- -----------------
15,207 13,976 45,069 44,426
-------------------- ------------------ ----------------- -----------------
Operating income ..................................... 1,170 2,982 4,312 5,278
Other (income) expense:
Interest income ................................... (155) (226) (482) (493)
Amortization of deferred financing fee ............ 508 382 1,523 1,073
Interest expense .................................. 7,706 10,016 23,371 28,422
Gain of sale of equity investment.................. - - (33,983) -
Other ............................................. 147 - 1,030 -
-------------------- ------------------ ----------------- -----------------
8,206 10,172 (8,541) 29,002
Income (loss) from operations before taxes and
extraordinary item ................................ (7,036) (7,190) 12,853 (23,724)
Income tax expense (benefit):
Current ........................................... (112) 92 71 305
Deferred .......................................... 4,147 (510) 3,248 (4,247)
Minority interest in income of consolidated foreign
subsidiary ........................................ 382 147 597 172
-------------------- ------------------ ----------------- -----------------
Net income (loss) before extraordinary item ....... (11,453) (6,919) 8,937 (19,954)
$
Extraordinary item:
Debt extinguishment - net of tax ............. - - 1,353 -
-------------------- ------------------ ----------------- -----------------
Net Income (loss) ................................. $ (11,453) $ (6,919) $ 10,290 $ (19,954)
==================== ================== ================= =================
Earnings (loss) per common share:
Net Income (loss) before extraordinary item... $ (0.51) $ (1.09) $ 0.40 $ (3.15)
Extraordinary item ........................... - - 0.06 -
-------------------- ------------------ ----------------- -----------------
Net income (loss) per common share ................ $ (0.51) $ (1.09) $ 0.46 $ (3.15)
==================== ================== ================= =================
Earnings (loss) per common share assuming dilution:
Net Income (loss) before extraordinary item... $ (0.51) $ (1.09) $ 0.27 $ (3.15)
Extraordinary item ........................... - - 0.04 -
-------------------- ------------------ ----------------- -----------------
Net income (loss) per common share ................ $ (0.51) $ (1.09) $ 0.31 $ (3.15)
==================== ================== ================= =================
See accompanying notes to consolidated financial statements
</TABLE>
F-38
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands except share amounts)
Accumulated
Common Stock Treasury Stock Additional Other
-------------------- ------------------- Paid-In Accumulated Comprehensive
Shares Amount Shares Amount Capital Deficit Income (Loss) Total
-------------------- ------------------- ----------- ------------ ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999.............. 22,747,099 $ 227 152,083 $ (1,071) $ 127,562 $(139,825) $ 3,602 (9,505)
Comprehensive income (loss):
Net income .......................... - - - - - 10,290 - 10,290
Other comprehensive income:
Foreign currency translation
adjustment....................... - - - - - - (4,907) (4,907)
--------- -------- -------
Comprehensive income (loss) ........... - - - - - 10,290 (4,907) 5,383
Purchase of treasury stock ............ - - 38,800 (78) - - - (78)
Issuance of stock warrants ............ 147 147
Issuance of common stock for
compensation ........................ 12,753 - (25,000) 185 (139) - - 46
----------- ------ -------- -------- ---------- --------- --------- -------
Balance at September 30, 2000 (unaudited). 22,759,852 $ 227 165,883 $ (964) $127,570 $ (129,535) $(1,305) $ (4,007)
=========== ====== ======== ======== ========== ========= ========= =======
See accompanying notes to consolidated financial statements
</TABLE>
F-39
<PAGE>
<TABLE>
<CAPTION>
Abraxas Petroleum Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
-----------------------
2000 1999
---------- ----------
(In Thousands)
<S> <C> <C>
Operating Activities
Net income (loss) .................................... $ 10,290 $ (19,954)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Minority interest in income of foreign subsidiary 597 172
Gain on sale of equity investment ............... (33,983) --
Extraordinary gain on extinguishment of debt .... (1,353) --
Depreciation, depletion, and amortization ....... 26,212 25,801
Amortization of deferred financing fees ......... 1,523 1,073
Amortization of premium on Senior Notes ......... -- (434)
Deferred income taxes ........................... 3,248 (4,247)
Issuance of common stock for compensation ....... 46 52
Issuance of warrants for compensation ........... 147 --
Changes in operating assets and liabilities:
Accounts receivable ......................... (2,408) (1,556)
Equipment inventory and other ............... (741) 502
Accounts payable and accrued expenses ....... 5,205 7,969
--------- ---------
Net cash provided by operating activities ............ 8,783 9,378
Investing Activities
Capital expenditures, including purchases and
development of properties .......................... (44,271) (115,250)
Proceeds from sale of oil and gas properties
and equipment inventory ............................ 8,451 14,844
Proceeds from sale of equity investment .............. 34,482 --
--------- ----------
Net cash used by investing activities ................ (1,338) (100,406)
Financing Activities
Issuance of common stock, net of expenses ............ 2 --
Purchase of treasury stock, net ...................... (79) (12)
Proceeds from long-term borrowings ................... 2,900 83,000
Payments on long-term borrowings ..................... (9,644) (36,298)
Deferred financing fees .............................. (582) (2,834)
--------- ----------
Net cash provided (used) by financing activities ..... (7,403) 43,856
Effect of exchange rate changes on cash .............. (208) 203
--------- ----------
Increase (decrease) in cash .......................... (166) (46,969)
Cash at beginning of period .......................... 3,799 61,390
--------- ----------
Cash at end of period ................................ $ 3,633 $ 14,421
========= ==========
Supplemental Disclosures
Supplemental disclosures of cash flow information:
Interest paid ................................... $ 19,704 $ 20,788
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
F-40
<PAGE>
Abraxas Petroleum Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2000
Note 1. Basis of Presentation
The accounting policies followed by Abraxas Petroleum Corporation and
its subsidiaries (the "Company"or "Abraxas") are set forth in the notes to the
Company's audited financial statements in the Annual Report on Form 10-K filed
for the year ended December 31, 1999 which is incorporated herein by reference.
Such policies have been continued without change. Also, refer to the notes to
those financial statements for additional details of the Company's financial
condition, results of operations, and cash flows. All the material items
included in those notes have not changed except as a result of normal
transactions in the interim, or as disclosed within this report. The
consolidated financial statements have not been audited by independent
accountants, but in the opinion of management, reflect all adjustments necessary
for a fair presentation of the financial position and results of operations. Any
and all adjustments are of a normal and recurring nature.
The consolidated financial statements include the accounts of the
Company, its wholly-owned foreign subsidiary Canadian Abraxas Petroleum Limited
("Canadian Abraxas") and its 49% owned foreign subsidiary Grey Wolf Exploration
Inc. ("Grey Wolf"). Minority interest represents the minority shareholders'
proportionate share of the equity and income of Grey Wolf.
Canadian Abraxas' and Grey Wolf's assets and liabilities are translated
to U.S. dollars at period-end exchange rates. Income and expense items are
translated at average rates of exchange prevailing during the period.
Translation adjustments are accumulated as a separate component of shareholders'
equity.
Certain balances for 1999 and year to date 2000 have been reclassified
for comparative purposes.
Note 2. Sale of equity investment
On March 31, 2000, we sold our interest in certain crude oil and
natural gas properties in Wyoming. In addition, we sold our equity investment in
Abraxas Wamsutter, L.P., a limited partnership of which one of our subsidiaries
was the general partner, which owned an interest in crude oil and natural gas
properties in the same area. Our investment Abraxas Wamsutter, L.P. was
accounted for by the equity method since inception in 1998. Prior to the sale of
the partnership in March 2000, our equity investee share of oil and gas property
cost, results of operations and amortization were not material to our
consolidated operations. As a result of the sale, we received approximately $34
million, which represented a proportional interest in the partnership's proved
properties. Our equity investee interest in such properties as of December 31,
1999, the effective date of the sale, were 2.8 MBbls of crude oil and natural
gas liquids and 25.8 MMcf of natural gas. These equity investment reserves were
not included in consolidated DD&A computations during 1999 or 2000. Our share of
the equity investee standardized measure of discounted future net cash flows at
December 31, 1999 was $12.3 million. The following table illustrates the impact
of our interest in the equity method investment as of December 31, 1999.
F-41
<PAGE>
<TABLE>
<CAPTION>
Total United States Canada
-------------------------------- -------------------------------- --------------------------------
Liquid Natural Liquid Natural Liquid Natural
Hydrocarbons Gas Hydrocarbons Gas Hydrocarbons Gas
------------------- ------------ ------------------- ------------ ------------------- ------------
(Barrels) (Mcf) (Barrels) (Mcf) (Barrels) (Mcf)
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Proved developed and
undeveloped reserves
Balance December 31,1999 .. 9,849 164,305 6,421 80,417 3,428 83,888
Equity investee ........ 2,793 25,810 2,793 25,810 - -
------------------- ------------ ------------------- ------------ ------------------- ------------
Consolidated .............. 12,642 190,115 9,214 106,227 3,428 83,888
=================== ============ =================== ============ =================== ============
</TABLE>
<TABLE>
<CAPTION>
Total U.S. Canada
--------------- -------------- -------------
(In thousands)
<S> <C> <C> <C>
Standardized Measure of
discounted net cash flow
related to proved reserves
at December 31, 1999 ...... $ 238,451 $ 123,283 $ 115,168
Equity investee ............. 12,334 12,334 -
---------------- ------------- --------------
Consolidated ................ $ 250,785 $ 135,617 $ 115,168
=============== ============== ==============
</TABLE>
Note 3. Extraordinary Item and Unusual Item
In June 2000, we retired $7.1 million of our 11.5% Senior Notes, due
2004 at a discount of $1.7 million before tax. The transaction was consummated
at the current market value of the notes.
During the second quarter of 2000, we incurred approximately $400,000
in non-recurring costs in our Canadian operations, relating to the acquisition
of New Cache Petroleums, L.T.D. in early 1999. These costs are included in other
expenses in the accompanying financial statements.
Note 4. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30 December 31
2000 1999
------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
11.5% Senior Notes due 2004, Series D ("Old Notes") (see below).... $ 801 $ 4,321
12.875% Senior Secured Notes due 2003 ("First Lien Notes") (see
below) ....................................................... 63,500 63,500
11.5% Senior Secured Notes due 2004, Series A ("Second Lien Notes")
(see below) .................................................. 190,178 193,769
Credit facility payable to a Canadian bank (due 2001),
providing for borrowings to approximately $15,870,000 at
the bank's prime rate plus .125%, 7.50% at June 30, 2000,
secured by the assets of Grey Wolf ........................... 7,948 8,360
Other ............................................................. 2,159 3,471
-------- --------
264,586 273,421
Less current maturities ........................................... -- --
-------- --------
$264,586 $273,421
======== ========
</TABLE>
In June 2000, we retired $7.1 million of our 11.5% Senior Notes, ($3.5
million of the Old Notes and $3.6 million of the Second Lien Notes). These notes
were retired at current market value resulting in an extraordinary gain of $1.7
million before income taxes.
Old Notes. On November 14, 1996, Abraxas and Canadian Abraxas
consummated the offering of $215.0 million of their 11.5% Senior Notes due 2004,
F-42
<PAGE>
Series A, which were exchanged for Series B Notes in February 1997. On January
27, 1998, Abraxas and Canadian Abraxas completed the sale of $60.0 million of
their 11.5% senior notes due 2004, Series C. 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 Abraxas and Canadian Abraxas,
on or after November 1, 2000, at the redemption prices set forth below, plus
accrued and unpaid interest to the date of redemption, if redeemed during the
12-month period commencing on November 1 of the years set forth below:
Year Percentage
------ ----------
2000...................................... 105.750%
2001...................................... 102.875%
2002 and thereafter....................... 100.000%
The Old Notes are joint and several obligations of Abraxas and Canadian
Abraxas and rank pari passu in right of payment to all existing and future
unsubordinated indebtedness of Abraxas and Canadian Abraxas. The Old Notes rank
senior in right of payment to all future subordinated indebtedness of Abraxas
and Canadian Abraxas. 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 a wholly-owned Abraxas subsidiary, Sandia Oil &
Gas Corporation ("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 securing these obligations.
Upon a change of control, each holder of the Old Notes will have the
right to require Abraxas and Canadian Abraxas 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, Abraxas and Canadian Abraxas 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 First 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 one of our wholly-owned subsidiaries, Wamsutter Holdings,
Inc. 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.
F-43
<PAGE>
The indenture governing the First Lien Notes (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 "First Lien 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.
The First Lien Notes Indenture provides, among other things, that
Abraxas may not, and may not cause or permit the First Lien 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
First Lien Restricted Subsidiary, guarantee any indebtedness of Abraxas or any
other First Lien Restricted Subsidiary or transfer any of its assets to Abraxas
or any other First Lien Restricted Subsidiary except for such encumbrances or
restrictions existing under or by reason of:
(1) applicable law;
(2) the First Lien Notes Indenture;
(3) customary non-assignment provisions of any contract or any lease
governing leasehold interest of such subsidiaries;
(4) any instrument governing indebtedness assumed by us in an
acquisition, which encumbrance or restriction is not applicable to such First
Lien Restricted Subsidiary or the properties or assets of such subsidiary other
than the entity or the properties or assets of the entity so acquired;
(5) 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;
(6) 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 First Lien 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;
(7) 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
(8) an agreement governing 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 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
(2), (4) or (5) 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, Abraxas and Canadian Abraxas
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 in payment of fees and expenses. Interest on the
Second Lien Notes is payable semi-annually in arrears on May 1 and November 1,
commencing May 1, 2000. The Second Lien Notes are redeemable, in whole or in
part, at the option of Abraxas and Canadian Abraxas on or after December 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
December 1 of the years set forth below:
F-44
<PAGE>
Year Percentage
2000................................... 105.750%
2001................................... 102.875%
2002 and thereafter.................... 100.000%
Prior to December 1, 2000, Abraxas and Canadian Abraxas may use all or
a portion of the net cash proceeds of one or more equity offerings to redeem up
to 50% of the aggregate original principal amount of the Second Lien Notes at a
redemption price equal to 111.50% of the principal amount of the Second Lien
Notes be redeemed, plus accrued and unpaid interest.
The Second Lien Notes are senior indebtedness of Abraxas and Canadian
Abraxas and are secured by a second lien on substantially all of the crude oil
and natural gas properties of Abraxas and Canadian Abraxas and the shares of
Grey Wolf owned by Abraxas and Canadian Abraxas. The Second Lien Notes are
unconditionally guaranteed on a senior basis, jointly and severally, by Sandia
and Wamsutter. The guarantees are secured by substantially all of the crude oil
and natural gas properties of the guarantors. The Second Lien Notes 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 guarantees is
insufficient to pay both the Second Lien Notes and the First Lien Notes.
Upon a change of control, each holder of the Second Lien Notes will
have the right to require Abraxas and Canadian Abraxas to repurchase such
holder's Second 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 and Canadian Abraxas will be obligated to offer to repurchase
the Second 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 indenture governing the Second Lien Notes (the "Second Lien Notes
Indenture") contains certain covenants that limit the ability of Abraxas and
Canadian Abraxas and certain of their subsidiaries, including the guarantors of
the Second Lien Notes (the "Second Lien 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 or Canadian Abraxas.
The Second Lien Notes Indenture provides, among other things, that
Abraxas and Canadian Abraxas may not, and may not cause or permit the Second
Lien 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, Canadian Abraxas or any other Second Lien Restricted Subsidiary,
guarantee any indebtedness of Abraxas, Canadian Abraxas or any other Second Lien
Restricted Subsidiary or transfer any of its assets to Abraxas, Canadian Abraxas
or any other Second Lien Restricted Subsidiary except for such encumbrances or
restrictions existing under or by reason of:
(1) applicable law;
(2) the Old Notes Indenture, the First Lien Notes Indenture, or the
Second Lien Notes Indenture;
(3) customary non-assignment provisions of any contract or any lease
governing leasehold interest of such subsidiaries;
(4) any instrument governing indebtedness assumed by us in an
acquisition, which encumbrance or restriction is not applicable to such Second
Lien Restricted Subsidiary or the properties or assets of such subsidiary other
than the entity or the properties or assets of the entity so acquired;
(5) agreements existing on the Issue Date (as defined in the Second
Lien Notes Indenture) to the extent and in the manner such agreements were in
effect on the Issue Date;
(6) customary restrictions with respect to subsidiaries of Abraxas and
Canadian Abraxas pursuant to an agreement that has been entered into for the
F-45
<PAGE>
sale or disposition of capital stock or assets of such Second Lien Restricted
Subsidiary to be consummated in accordance with the terms of the Second Lien
Notes solely in respect of the assets or capital stock to be sold or disposed
of;
(7) any instrument governing certain liens permitted by the Second 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
(8) an agreement governing 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 of the Second 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
(2), (4) or (5).
Contingent Value Rights ("CVRs")
As part of the exchange offer, Abraxas issued the CVRs the terms of
which provide that the holders thereof could receive up to a total of
104,365,326 shares of Abraxas common stock. Subsequent to the issuance of the
CVRs, Abraxas' common stock traded at an average price per share of $3.73 or
higher for 30 days during the 45-day trading period beginning on August 16,
2000, and ending on October 19, 2000. As a result, under the terms of the CVRs,
the maximum number of shares which holders of the CVRs could be entitled to
receive has been reduced to 8.5 million shares of Abraxas common stock. In
addition, in the event Abraxas common stock trades at an average price per share
higher than $3.73 for 30 days during any future 45-day trading period, the
number of shares issuable under the CVRs would decrease correspondingly to a
number below 8.5 million.
On December 21, 2000, or at the election of Abraxas, on May 21, 2001,
Abraxas may be required to issue 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.
F-46
<PAGE>
Note 5. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
------------- -------------- ------------ -----------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) from continuing operations $ (11,453) $ (6,919) $ 8,937 $ (19,954)
-------------- -------------- ------------ -----------
Numerator for basic and diluted earnings per share
- income (loss) from continuing operations (11,453) (6,919) 8,937 (19,954)
Extraordinary item - - 1,353 -
------------- -------------- ------------ -----------
Numerator for basic earnings per share - income
(loss) applicable to common stock (11,453) (6,919) 10,290 (19,954)
Denominator:
Denominator for basic earnings per share -
Weighted-average shares 22,628,599 6,352,672 22,641,993 6,342,437
Effect of dilutive securities:
Stock options, warrants and CVR's - - 9,979,975 -
------------- -------------- ------------ -----------
Dilutive potential common shares Denominator
for diluted earnings per share -
Adjusted weighted-average shares and assumed
Conversions 22,628,599 6,352,672 32,621,968 6,342,437
Basic earnings (loss) per share:
Income (loss) from continuing operations $ (0.51) $ (1.09) $ 0.40 $ (3.15)
Extraordinary item - - 0.06 -
------------- -------------- ------------ -----------
$ (0.51) $ (1.09) $ 0.46 $ (3.15)
============= ============== ============ ===========
Diluted earnings (loss) per share:
Income (loss) from continuing operations $ (0.51) $ (1.09) $ 0.27 $ (3.15)
Extraordinary item - - 0.04 -
------------- -------------- ------------ -----------
$ (0.51) $ (1.09) $ 0.31 $ (3.15)
============= ============== ============ ===========
</TABLE>
For the three months ended September 30, 2000 and 1999, and for the
nine months ended September 30, 1999, none of the shares issuable in connection
with stock options, warrants or CVR's are included in diluted shares. Inclusion
of these shares would be antidilutive due to losses incurred in the periods.
F-47
<PAGE>
Note 6. Summary Financial Information of Canadian Abraxas Petroleum Ltd.
The following is summary financial information of Canadian Abraxas, a
wholly owned subsidiary of Abraxas at September 30, 2000. Canadian Abraxas is
jointly and severally liable with Abraxas for the entire balance of Abraxas' and
Canadian Abraxas' 11.5% Senior Notes due 2004.
BALANCE SHEET
---------------------------------------------------------------------------
Assets Liabilities and Shareholders Equity
------------------------------------ -------------------------------------
(In Thousands)
Total current assets $ 8,734 Total current liabilities $ 4,635
Oil and gas properties 148,294 11.5% Notes due 2004 52,629
Other assets 7,099 Note payable to Abraxas 27,085
Other liabilities 28,502
Equity 51,276
---------- ---------
$ 164,127 $ 164,127
========== =========
F-48
<PAGE>
Note 7. Business Segments
Business segment information about the Company's third quarter
operations in different geographic areas is as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, 2000
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
(In thousands)
<S> <C> <C> <C>
Revenues ............................... $ 4,750 $ 11,627 $ 16,377
================== ================= ===================
Operating profit (loss)................. $ (516) $ 2,944 $ 2,428
================== =================
General corporate ...................... (1,258)
Interest expense and amortization of
deferred financing fees ............. (8,206)
-------------------
Income (loss) before income taxes ... $ (7,036)
===================
Three Months Ended September 30, 1999
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
(In thousands)
Revenues ............................... $ 5,920 $ 11,038 $ 16,958
================== ================= ===================
Operating profit (loss)................. $ 1,720 $ 1,993 $ 3,713
================== =================
General corporate ...................... (731)
Interest expense and amortization of
deferred financing fees ............. (10,172)
-------------------
Income (loss) before income taxes ... $ (7,190)
===================
Nine Months Ended September 30, 2000
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
(In thousands)
Revenues ............................... $ 16,033 $ 33,348 $ 49,381
================== ================= ===================
Operating profit (loss)................. $ 1,208 $ 6,171 $ 7,379
================== =================
General corporate....................... (3,067)
Interest expense and amortization of
deferred financing fees ............. (24,412)
Other ............................. 32,953
-------------------
Income before income taxes and
extraordinary item ................ $ 12,853
===================
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
(In thousands)
<S> <C> <C> <C>
Revenues ............................... $ 18,677 $ 31,027 $ 49,704
================== ================= ===================
Operating profit (loss)................. $ 5,946 $ 1,556 $ 7,502
================== =================
General corporate ...................... (2,224)
Interest expense and amortization of
deferred financing fees ............. (29,002)
-------------------
Income before income taxes .......... $ (23,724)
===================
F-49
<PAGE>
September 30, 2000
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
(In thousands)
Identifiable assets at September 30,
2000................................. $ 128,844 $ 199,200 $ 328,044
================== =================
Corporate assets ....................... 6,035
-------------------
Total assets ........................ $ 334,079
===================
December, 31, 1999
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
(In thousands)
Identifiable assets at December 31,
1999 ................................ $ 107,336 $ 206,474 $ 313,810
================== =================
Corporate assets ....................... 8,474
-------------------
Total assets ........................ $ 322,284
===================
</TABLE>
Note 8. Contingencies
In May 1995, certain plaintiffs filed a lawsuit against us alleging
negligence and gross negligence, tortuous interference with contract, conversion
and waste. In March 1998, a jury found against us, and on May 22, 1998, final
judgement in the amount of approximately $1.3 million was entered. We filed an
appeal and in March 2000, the Court of Appeals reduced the plaintiff's award to
$362,495 plus post judgement interest of $68,915. We settled the suit on April
26, 2000, for $435,781 which was charged to earnings in the accompanying
financial statement.
Additionally, from time to time, we are involved in litigation relating
to claims arising out of our operations in the normal course of business. At
September 30, 2000, we were not engaged in any legal proceedings that are
expected, individually or in the aggregate, to have a material adverse effect on
us.
See note 4 regarding potential issuance of additional common stock
related to CVR's
Note 9. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" (as amended
by SFAS No. 138), which is required to be adopted in years beginning after June
15, 1999. In June 1999, SFAS No. 138 was issued, which delays the required
adoption of SFAS No. 133 by one year. The statement permits early adoption as of
the beginning of any fiscal quarter after its issuance. The Statement will
require the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities, of firm commitments through earnings or recognized in other
comprehensive income until the hedge item is recognized in earnings. Based on a
preliminary review, had the Company implemented SFAS No. 133 as of September 30,
2000, an estimated $24.0 million liability would have been recorded. The offset
at the future date of implementation would be reflected as a cumulative effect
adjustment to income and other comprehensive income in stockholder's equity. The
Company will adopt this statement on January 1, 2001.
F-50
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
-------
The following table sets forth the expenses (other than underwriting
discounts and commissions) in connection with the offering described in
this Registration Statement, all of which shall be paid by us. All of such
amounts (except the SEC Registration Fee) are estimated.
SEC Registration Fee...............................$ 1,760
Printing and Mailing Costs.........................$ 1,000
Legal Fees and Expenses............................$ 30,000
Accounting Fees and Expenses.......................$ 15,000
Miscellaneous......................................$ 2,500
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
Abraxas 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.
ABCA corporations are permitted to obtain such insurance also, except 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:
<TABLE>
<CAPTION>
Price to Investors Discount to Initial Purchaser Proceeds to Issuers
<S> <C> <C> <C>
Per Note 106.75% 2.00% 104.75%
Total $64,050,000 $1,200,000 $62,850,000
</TABLE>
(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:
<TABLE>
<CAPTION>
Price to Investors Discount to Initial Purchaser Proceeds to Issuers
<S> <C> <C> <C>
Per Note 100.00% 3.00% 97.00%
Total $63,500,000 $1,905,000 $61,595,000
</TABLE>
(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.
(e) On August 1, 2000, Abraxas issued a warrant to purchase 750,000 shares
at an exercise price of $3.50 per share. The warrant was issued pursuant to
Section 4(2) of the Securities Act of 1933, as amended. 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")).
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 Abraxas' Registration Statement
on Form S-3, No. 333-00398 (the "S-3 Registration Statement")).
II-2
<PAGE>
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.
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.
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.
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.
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).
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.
II-3
<PAGE>
+5.2 Opinion of Osler Hoskin & Harcourt LLP.
*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 Abraxas' 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 Abraxas' 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 Abraxas' 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 Abraxas' and
Canadian Abraxas' 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 Abraxas' 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 Abraxas' Annual Report on Form 10-K filed March
31, 1995).
10.13 Common Stock Purchase Warrant dated as of December 18, 1991 between
Abraxas and EEP. (Filed as Exhibit 12.3 to the Abraxas' Current Report on
Form 8-K filed January 9, 1992).
10.14 Common Stock Purchase Warrant dated as of August 1, 1993 between
Abraxas and EEP. (Filed as Exhibit 10.35 to the S-1 Registration
Statement).
10.15 Common Stock Purchase Warrant dated August 11, 1993 between Abraxas
and EEP II. (Filed as Exhibit 10.36 to the S-1 Registration Statement).
10.16 Common Stock Purchase Warrant dated August 11, 1993 between Abraxas
and Associated Energy Managers, Inc. (Filed as Exhibit 10.37 to the S-1
Registration Statement).
II-4
<PAGE>
10.17 Letter dated September 2, 1994 from Abraxas to EEP and EEP II. (Filed
as Exhibit 10.13 to the Abraxas' 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.
+*10.20 Employment Agreement between Abraxas and Chris E. Williford.
*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.
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 Abraxas' 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.
+10.27 Registration Rights Agreement dated December 21, 1999, by and among
Abraxas, Halcyon/Alan B. Slifka Management Company LLC and Franklin
Resources, Inc.
+21.1 Subsidiaries of Abraxas.
23.1 Consent of Ernest & Young LLP. (Filed herewith).
+23.2 Consent of DeGolyer and MacNaughton.
+23.3 Consent of McDaniel & Associates Consultants, Ltd.
+23.5 Consent of Cox & Smith Incorporated.
+23.6 Consent of Osler Hoskin & Harcourt LLP.
+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.
27.1 Financial Data Schedule. (Omitted pursuant to Regulation S-K, Item
601(c)).
II-5
<PAGE>
+ Previously filed.
* 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 December 7, 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, September 29, 2000
---------------------------
Robert L.G. Watson President, Chief Executive Officer
(Principal Executive Officer) and
Director of Abraxas
/s/ Chris E. Williford Executive Vice President, December 7, 2000
----------------------------
Chris E. Williford Treasurer, and Chief Financial
Officer (Principal
Financial and Accounting Officer)
of Abraxas
/s/ Robert W. Carington, Jr.Executive Vice President
Robert W. Carington, Jr. of Abraxas December 7, 2000
* Director of Abraxas
----------------------------
Craig S. Bartlett, Jr.
* Director of Abraxas December 7, 2000
----------------------------
Franklin Burke
* Director of Abraxas December 7, 2000
----------------------------
Ralph F. Cox
* Director of Abraxas December 7, 2000
----------------------------
Frederick M. Pevow, Jr.
* Director of Abraxas December 7, 2000
----------------------------
James C. Phelps
* Director of Abraxas December 7, 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 December 7, 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, December 7, 2000
---------------------------
Robert L.G. Watson President, and Director of
Canadian Abraxas
(Principal Executive Officer)
/s/Jim Wilson Vice President of Finance December 7, 2000
---------------------------
Jim Wilson of Canadian Abraxas
(Principal Accounting Officer)
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 December 7, 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
Robert L.G. Watson Officer) and Director of December 7, 2000
Sandia
/s/ Chris E. Williford Vice President (Principal December 7, 2000
Chris E. Williford Financial and Accounting
Officer) and Director of Sandia
/s/ Robert W. Carington, Jr. Vice President and Director
Robert W. Carington, Jr. of Sandia December 7, 2000
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 December 7, 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 December 7, 2000
Robert L.G. Watson Officer) and Director of
Wamsutter
/s/ Chris E. Williford Vice President (Principal December 7, 2000
Chris E. Williford Accounting Officer) and
Director of Wamsutter
/s/Robert W. Carington, Jr. Vice President and December 7, 2000
Robert W. Carington, Jr. Director of Wamsutter
II-14
<PAGE>
EXHIBIT INDEX
Exhibit Number: Exhibit Page Number
23.1 Consent of Ernst & Young LLP
1
<PAGE>
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, 2000, (except for Notes 2 and 18, as to
which the date is March 31, 2000), in Post-Effective Amendment No. 3 to the
Registration Statement (Form S-1, No. 333-95281) and the related Prospectus of
Abraxas Petroleum Corporation.
/s/ Ernst & Young LLP
San Antonio, Texas
December 4, 2000
2
<PAGE>
