10147977.01
As filed with the Securities and Exchange Commission on December 23, 1996
Registration No.333-_________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
ABRAXAS PETROLEUM CORPORATION
CANADIAN ABRAXAS PETROLEUM LIMITED
(Exact name of registrant as specified in the charter)
Nevada 1331 74-2584033
Canada 1331 N/A
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation IndustrialClassification Identification
Organization) Code Number) Number)
Robert L. G. Watson
500 North Loop 1604 East 500 North Loop 1604 East
Suite 100 Suite 100
San Antonio, Texas 78232 San Antonio, Texas 78232
(210) 490-4788 (210) 490-4788
(Address, including zip code, and (Address, including zip code, and
telephone number, including area code, telephone number, including area
of registrants principal executive code, of agent for services)
offices)
Copies to:
Cox & Smith Incorporated
112 E. Pecan Street, Suite 1800
San Antonio, Texas 78205
(210) 554-5500
Attention: Steven R. Jacobs
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
<TABLE>
<CAPTION>
Calculation of Registration Fee
- ------------------------------------------------------------------------------------------------
Title of each Proposed maximum Proposed maximum
class of Amount to be offering price aggregate Amount of
securities to be registered per unit offering price registration fee
registered
- -------------------- ------------------ ------------------ ------------------ ------------------
<C> <C> <C> <C> <C>
11.5% Senior Notes $215,000,000 100% $215,000,000 $65,151.52
Due 2004, Series B
Guarantees -- -- -- --
</TABLE>
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.
<PAGE>
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
SHOWING LOCATION IN PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS OF PART I OF FORM S-4
REGISTRATION STATEMENT ITEM OF FORM S-4 CAPTION OR LOCATION
1. Forepart of Registration Statement and Outside Front Cover
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages Inside Front; Outside Back
of Prospectus Cover Page; Available
Information; Enforceability
of Civil Liabilities Against
Foreign Persons
3. Rick Factors, Ratio of Earnings to Fixed Summary; Risk Factors; Pro
Charges and Other Information Forma Financial Data;
Selected Consolidated
Financial Data; Pro Forma
Financial Information
4. Terms of the Transaction Outside Front Cover Page;
Summary; The Exchange Offer;
Description of the Notes;
Description of Capital Stock;
Certain United States and
Canadian Income Tax
Considerations
5. Pro Forma Financial Information Pro Forma Financial
Information
6. Material Contacts with the Company
Being Acquired Inapplicable
7. Additional Information Required for
Reoffering by Persons and Parties
Deemed to Be Underwriters Inapplicable
8. Interests of Named Experts and Counsel Legal Matters; Experts
9. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities Inapplicable
10. Information with Respect to S-3 Registrants Inapplicable
11. Incorporation of Certain Information by
Reference Inapplicable
12. Information with Respect to S-2 or S-3
Registrants Inapplicable
13. Incorporation of Certain Information
by Reference Inapplicable
14. Information with Respect to Registrants
Other than S-3 or S-2 Registrants Business; Consolidated
Financial Statements
Selected Consolidated
Financial Data; Pro Forma
Financial Information;
Management's Discussion and
Analysis of Financial
Condition and Results of
Operation
15. Information with Respect to S-3 Companies Inapplicable
16. Information with Respect to S-2 or S-3
Companies Inapplicable
17. Information with Respect to Companies Other
than S-2 or S-3 Companies Inapplicable
18. Information if Proxies, Consents or
Authorizations are to be Solicited Inapplicable
19. Information if Proxies, Consents or
Authorizations are not to be Solicited
or in an Exchange Offer Management; Executive
Compensation; Securities
Holdings of Principal
Stockholders, Directors and
Officers; Transactions with
Related Parties
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 23, 1996
PROSPECTUS
ABRAXAS PETROLEUM CORPORATION
CANADIAN ABRAXAS PETROLEUM LIMITED
OFFER TO EXCHANGE 11.5% SENIOR NOTES DUE 2004, SERIES B
FOR ANY AND ALL OUTSTANDING 11.5% SENIOR
NOTES DUE 2004, SERIES A
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME, ON ________________, 199__, UNLESS EXTENDED.
Abraxas Petroleum Corporation, a Nevada corporation ("Abraxas"), and
Canadian Abraxas Petroleum Limited, a Canada corporation ("Canadian Abraxas"
and, together with Abraxas, the "Issuers"), hereby offer (the "Exchange Offer"),
upon the terms and conditions set forth in this Prospectus (the "Prospectus")
and the accompanying Letter of Transmittal (the "Letter of Transmittal"), to
exchange $1,000 principal amount of their 11.5% Senior Notes due 2004, Series B
(the "Exchange Notes"), which have been registered under the Securities Act of
1933, as amended (the "Securities Act"), pursuant to a Registration Statement of
which this Prospectus is a part, for each $1,000 principal amount of their
outstanding 11.5% Senior Notes due 2004, Series A (the "Series A Notes"), of
which $215,000,000 principal amount is outstanding. The form and terms of the
Exchange Notes are the same as the form and terms of the Series A Notes (which
they replace) except that (i) the Exchange Notes will bear a Series B
designation, (ii) the Exchange Notes will have been registered under the
Securities Act and, therefore, will not bear legends restricting their transfer
and will not be subject to certain provisions relating to an increase in the
interest rate which were applicable to the Series A Notes in certain
circumstances relating to the timing of the Exchange Offer and (iii) holders of
the Exchange Notes will not be entitled to certain rights of holders of the
Series A Notes under the Registration Rights Agreement (as defined herein),
which rights will terminate upon consummation of the Exchange Offer. The
Exchange Notes will evidence the same debt as the Series A Notes (which they
replace) and will be issued under and be entitled to the benefits of the
Indenture dated November 14, 1996 (the "Indenture") among the Issuers and IBJ
Schroder Bank & Trust Company governing the Series A Notes and the Exchange B
Notes. As used herein, the term "Notes" refers to both the Series A Notes and
the Exchange Notes. See "The Exchange Offer" and "Description of the Notes."
Interest on the Exchange Notes will be payable semi-annually in arrears
on May 1 and November 1 of each year, commencing on May 1, 1997, at the rate of
11.5% per annum. Interest will accrue from the date of issuance of the Series A
Notes (November 14, 1996). The Exchange Notes will be redeemable, in whole or in
part, at the option of the Issuers, on or after November 1, 2000, at the
redemption prices set forth herein, plus accrued and unpaid interest to the date
of redemption. In addition, at any time on or prior to November 1, 1999, the
Issuers may, at their option, redeem up to 35% of the aggregate principal amount
of the Notes originally issued with the net cash proceeds of one or more Equity
Offerings (as defined herein), at a redemption price equal to 111.5% of the
aggregate principal amount of the Exchange Notes to be redeemed, plus accrued
and unpaid interest to the date of redemption; provided, however, that, after
giving effect to any such redemption, at least $139.75 million aggregate
principal amount of Notes remains outstanding.
The Exchange Notes will be general unsecured obligations of the Issuers
and will rank pari passu in right of payment to all existing and future
unsubordinated indebtedness of the Issuers. The Exchange Notes will rank senior
in right of payment to all future subordinated indebtedness of the Issuers. The
Exchange Notes will, however, be effectively subordinated to secured
indebtedness of the Issuers to the extent of the value of the assets securing
such indebtedness. See "Description of the Notes."
The Exchange Notes will be unconditionally guaranteed, jointly and
severally, by certain of the Issuers' future subsidiaries (the "Subsidiary
Guarantors"). The Guarantees (as defined herein) will be general unsecured
obligations of the Subsidiary Guarantors and will rank pari passu in right of
payment to all unsubordinated indebtedness of the Subsidiary Guarantors and
senior in right of payment to all subordinated indebtedness of the Subsidiary
Guarantors. The Guarantees will be effectively subordinated to secured
indebtedness of the Subsidiary Guarantors to the extent of the value of the
assets securing such indebtedness. See "Description of the Notes." Upon
consummation of the Offering, the Issuers and the Subsidiary Guarantors will
have no secured indebtedness outstanding.
Abraxas has entered into a credit facility (the "New Credit Facility")
with Bankers Trust Company ("BTCo") and ING (U.S.) Capital Corporation ("ING
Capital") which is secured by certain assets of Abraxas and guaranteed by
Canadian Abraxas. The New Credit Facility has an initial availability of $20.0
million. As of December 20, 1996, there were no borrowings under the New Credit
Facility outstanding.
Upon a Change of Control (as defined herein), each holder of the Notes
will have the right to require the Issuers to repurchase all or a portion of
such holder's 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 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. See "Description of the Notes."
The Issuers will accept for exchange any and all Series A Notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on
__________, 199_, unless extended by the Issuers in their sole discretion (the
"Expiration Date"). Tenders of the Series A Notes may be withdrawn at any time
prior to 5:00 p.m. on the Expiration Date. The Exchange Offer is subject to
certain customary conditions. The Series A Notes were sold by the Issuers on
November 14, 1996 to the Initial Purchasers (as defined herein) and were
thereupon sold by the Initial Purchasers in reliance upon Rule 144A under the
Securities Act, to a limited number of qualified institutional buyers that
agreed to comply with certain transfer restrictions and other conditions.
Accordingly, the Series A Notes may not be offered, resold or otherwise
transferred in the United States unless registered under the Securities Act or
unless an applicable exemption from the registration requirements of the
Securities Act is available. The Exchange Notes are being offered hereunder in
order to satisfy the obligations of the Issuers under the Registration Rights
Agreement entered into by the Issuers and the Initial Purchasers in connection
with the offering of the Series A Notes. See "The Exchange Offer."
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Issuers believe that the Exchange Notes issued pursuant to the
Exchange Offer may be offered for resale, resold and otherwise transferred by
any holder thereof (other than any such holder that is an "affiliate" of either
of the Issuers within the meaning of Rule 405 under the Securities Act or a
broker-dealer who purchased the Series A Notes directly from the Issuers for
resale pursuant to Rule 144A or another exemption from the Securities Act)
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such Exchange Notes are acquired in the
ordinary course of such holder's business and such holder has no arrangement or
understanding with any person to participate in the distribution of such
Exchange Notes. See "Purpose of the Exchange Offer" and " Resale of the Exchange
Notes." Each broker-dealer that receives the Exchange Notes for its own account
pursuant to the Exchange Offer (a "Participating Broker-Dealer") must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a participating Broker-Dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a Participating Broker-Dealer in connection with resales of the Exchange
Notes received in exchange for the Series A Notes where such Series A Notes were
acquired by such Participating Broker-Dealer as a result of market-making
activities or other trading activities. The Issuers agreed that they will make
this Prospectus available to any Participating Broker-Dealer for use in
connection with any such resale during the period required by the Securities
Act. See "Plan of Distribution."
There has not previously been any public market for the Series A Notes
or the Exchange Notes. The Issuers do not intend to list the Exchange Notes on
any securities exchange or to seek approval for quotation through any automated
quotation system. There can be no assurance that an active market for the
Exchange Notes will develop. See "Risk Factors -- Lack of Public Market."
Moreover, to the extent that the Series A Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered and tendered but unaccepted
Series A Notes could be adversely affected.
The Exchange Notes will be available initially only in book-entry form.
The Issuers expect that the Exchange Notes issued pursuant to the Exchange Offer
will be issued in the form of a Global Certificate (as defined herein), which
will be deposited with, or on behalf of, The Depository Trust Company (the
"Depositary" or "DTC") and registered in its name or in the name of Cede & Co.,
its nominee. Beneficial interests in the Global Certificate representing the
Exchange Notes will be shown on, and transfers thereof to qualified
institutional buyers will be affected through, records maintained by the
Depositary and its participants. After the initial issuance of the Global
Certificate, the Exchange Notes in certified form will be issued in exchange for
the Global Certificate only on the terms set forth in the Indenture. See
"Book-Entry; Delivery and Form."
Holders of the Series A Notes not tendered and accepted in the Exchange
Offer will continue to hold such Series A Notes and will be entitled to all of
the rights and benefits and will be subject to the limitations applicable
thereto under the Indenture and with respect to transfer under the Securities
Act. The Issuers will not receive any proceeds from the Exchange Offer. Pursuant
to the Registration Rights Agreement, the Issuers will pay all the expenses
incurred by them incident to the Exchange Offer. See "The Exchange Offer."
SEE "RISK FACTORS" ON P. 16 FOR A DESCRIPTION OF CERTAIN RISKS TO BE
CONSIDERED BY HOLDERS WHO TENDER THEIR SERIES A NOTES IN THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Prospectus is ______________, 199_.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
This Prospectus includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical facts included in this
Prospectus, including, without limitation, those regarding the Issuers'
financial position, business strategy, budgets, reserve estimates, development
and exploitation opportunities and projects, behind-pipe zones, classification
of reserves, projected costs, potential reserves and plans and objectives of
management for future operations, are forward-looking statements. Although the
Issuers believe that the expectations reflected in such forward-looking
statements are reasonable, they can give no assurance that such expectations
will prove to have been correct. Important factors that could cause actual
results to differ materially from the Issuers' expectations ("Cautionary
Statements") are disclosed under "Risk Factors" and elsewhere in this Prospectus
including, without limitation, in conjunction with the forward-looking
statements included in this Prospectus. All subsequent written and oral
forward-looking statements attributable to either of the Issuers, or persons
acting on behalf of either of them, are expressly qualified in their entirety by
the Cautionary Statements.
CURRENCY TRANSLATION
Certain information contained in this Prospectus relating to CGGS (as
defined herein) and Cascade (as defined herein) has been translated from
Canadian dollars into U.S. dollars. The statements of operations and other
similar information relating to CGGS have been translated into U.S. dollars at
the average exchange rates of $0.7321 and $0.7273 to one Canadian dollar for the
nine months ended September 30, 1996 and the fiscal year ended October 31, 1995,
respectively. The balance sheet of Canadian Abraxas as of September 30, 1996 has
been translated at the period-end exchange rate of $0.7458 to one Canadian
dollar. In addition, the financial statements of Canadian Abraxas have been
converted from Canadian generally accepted accounting principles to United
States generally accepted accounting principles.
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER THIS CHAPTER WITH THE STATE OF NEW HAMPSHIRE NOR
THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN
THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT
ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER
ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A
SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY
WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO,
ANY PERSON, SECURITY, OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE
MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER, OR CLIENT ANY REPRESENTATION
INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
NOTICE TO FLORIDA RESIDENTS
PURSUANT TO SECTION 517.011(1)(a)(5) OF THE FLORIDA SECURITIES ACT, YOU
HAVE THE RIGHT TO RESCIND YOUR SUBSCRIPTION (UNLESS YOU ARE AN INSTITUTIONAL
INVESTOR DESCRIBED IN SECTION 517.061(7) OF THE FLORIDA SECURITIES ACT) BY
GIVING NOTICE OF SUCH RESCISSION BY TELEPHONE, TELEGRAPH OR LETTER, WITHIN THREE
DAYS AFTER YOU FIRST TENDER CONSIDERATION, TO THE INITIAL PURCHASERS. IF NOTICE
IS NOT RECEIVED BY SUCH TIME, THE FOREGOING RIGHT OF RESCISSION SHALL BE NULL
AND VOID.
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. As used in this Prospectus, the term "Abraxas"
refers to Abraxas Petroleum Corporation, the term "Canadian Abraxas" refers to
Canadian Abraxas Petroleum Limited and the term "Company" refers to Abraxas and
all of its subsidiaries, including Canadian Abraxas, for the relevant time
periods. The term "CGGS" refers to CGGS Canadian Gas Gathering Systems Inc.
after giving effect to the sale by CGGS of the Nevis Gas Processing Plant and
related assets (the "Nevis Plant") to a third party. References herein to
"Fiscal 1995" with respect to CGGS shall mean CGGS' fiscal year ended October
31, 1995 and references to the nine months ended September 30, 1996 with respect
to CGGS means the nine months ended October 31, 1996.. Except as otherwise
noted, the reserve data for the Company reported in this Prospectus are based on
reserve estimates of the Company's independent petroleum engineers and the
reserve data for CGGS reported in this Prospectus are based on reserve estimates
of CGGS' independent petroleum engineers. Except as otherwise indicated herein,
each reference herein to "on a pro forma basis" shall mean that the results for
the stated period or other information have been adjusted to reflect the
consummation of the Transactions (as defined herein). See "Glossary of Terms"
for definitions of certain terms used in this Prospectus.
THE COMPANY
The Company is an independent energy company engaged primarily in the
acquisition, exploration, development and production of crude oil and natural
gas. Since January 1, 1991, the Company's principal means of growth has been
through the acquisition and subsequent development and exploitation of producing
properties and related assets. The Company utilizes a disciplined acquisition
strategy, focusing its efforts on producing properties and related assets
possessing the following characteristics: a concentration of operations;
significant, quantifiable development potential; historically low operating
expenses; and the potential to reduce G&A expenses per BOE. The Company seeks to
complement its acquisition and development activities by selectively
participating in exploration projects with experienced industry partners. After
giving effect to the Recent Acquisitions, the Company's principal areas of
operation are Texas, western Canada and southwestern Wyoming. The Company owns
interests in 225,290 gross acres (126,845 net acres) and 507 gross wells (325.8
net wells), 352 of which are operated by the Company, and varying interests in
13 natural gas processing plants or compression facilities. On a pro forma
basis, at June 30, 1996, the Company would have had total proved reserves of
45,647 MBOE (64.9% natural gas), of which 81.7% would have been proved
developed. On a pro forma basis, for the nine months ended September 30, 1996,
the Company's EBITDA would have been $28.4 million.
The Company's acquisition, development, exploitation and exploration
activities have substantially increased the Company's proved reserve base,
average daily production and natural gas processing plant throughput while
decreasing its total operating and G&A expenses per BOE. After consummation of
the Recent Acquisitions, the Company has completed 16 acquisitions of producing
properties totaling 46,009 MBOE of proved reserves at an average net acquisition
cost of $3.83 per BOE since January 1, 1991. From January 1, 1991, on an
historical basis, to June 30, 1996, on a pro forma basis, the Company's total
proved reserves would have increased from 889 MBOE to 45,647 MBOE and aggregate
PV-10 would have increased from $11.9 million to $218.3 million. From January 1,
1991, on an historical basis, to the nine months ended September 30, 1996, on a
pro forma basis, average net daily production would have increased from 0.141
MBOE per day to _14.1 MBOE per day. On a pro forma basis, the Company would have
had net natural gas processing capacity of 128.1 MMcf per day as of September
30, 1996. In addition, on a pro forma basis, for the nine months ended September
30, 1996, average net daily natural gas processing plant throughput would have
been 87.4 MMcf per day, of which 27.3 MMcf would have been processed for third
parties, and net operating revenue from processing natural gas of third parties
at the Canadian Abraxas Plants (as defined herein) would have been $1.9 million.
From the year ended December 31, 1991, on an historical basis, to the nine
months ended September 30, 1996, on a pro forma basis, the Company's direct
operating expenses per BOE would have decreased from $6.30 per BOE to $2.81 per
BOE and G&A expenses per BOE would have decreased from $5.39 per BOE to $0.66
per BOE. As a result of the Company's successful acquisition strategy and its
ability to decrease its direct operating and G&A expenses per BOE, the Company's
EBITDA (excluding interest income) has increased from $6.66 per BOE, for the
year ended December 31, 1991, to, on a pro forma basis, $7.24 per BOE, for the
nine months ended September 30, 1996.
The Company was founded in 1977 by Robert L.G. Watson, the Company's
Chairman of the Board, President and Chief Executive Officer. Canadian Abraxas
was formed by the Company in 1996 to acquire CGGS. The Company's principal
offices are located at 500 North Loop 1604 East, Suite 100, San Antonio, Texas
78232 and its telephone number is (210) 490-4788. Canadian Abraxas' principal
offices are located at 630 - 6th Avenue, S.W., Suite 303, Calgary, Alberta and
its telephone number is (403) 262-1949.
BUSINESS STRATEGY
The Company's primary business objectives are to: increase its
recoverable reserves, production and cash flow from operations through strategic
acquisitions; exploit and develop its producing properties; maintain low cost
operations; and pursue a focused exploration strategy. The Company seeks to
achieve its business objectives through the use of the following strategies:
Disciplined Acquisition Strategy. The Company utilizes a disciplined
acquisition strategy, focusing its acquisition efforts on producing properties
and related assets possessing the following characteristics: a concentration of
operations; significant, quantifiable development potential; historically low
operating expenses; and the potential to reduce G&A expenses per BOE. The
success of the Company's acquisition strategy is illustrated by the following
table:
<TABLE>
<CAPTION>
Property Purchase Purchase Cumulative Cumulative June 30, 1996
Date Price(1) CapEx(2) Cash Flow(3) PV-10 IRR(4)
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Delaware Properties(5) 7/1/94 $ 25.0 $ 6.8 $ 6.0 $ 37.6 19.3%
Sinton Properties (6) 1/1/93 19.6 13.4 12.1(7) 43.0 21.4%
Sharon Ridge/Westbrook 9/1/92 4.4 0.4 2.0 5.2 13.1%
Spraberry 7/1/94 3.2 3.0 0.9 7.1 18.5%
Happy 8/12/92 2.2 0.1 2.6(7) 2.0 31.0%
</TABLE>
(1) Purchase price is net of accrual of net revenue from the effective date of
acquisition to purchase date.
(2) Consists of capital expenditures on a cumulative basis from date of purchase
through June 30, 1996 (undiscounted).
(3)Consists of operating revenue less LOE on a cumulative basis from date of
purchase through June 30, 1996 (undiscounted).
(4) Internal rate of return "IRR" was calculated assuming that the purchase
price for each property was paid on the purchase date and that the cumulative
capital expenditures and cumulative cash flow occurred in equal monthly amounts
over the time periods presented.
(5) Consist of the Company's interests in Cherry Canyon and the Delaware Area
(each as defined herein).
(6)Consist of the Company's interests in Portilla, East White Point and Stedman
Island (each as defined herein). Does not include the 50% overriding royalty
interest in Portilla, East White Point and Stedman Island previously owned by
the Pension Fund (as defined herein).
7) Does not include results of operations of the Partnership (as defined herein)
from March 21, 1996 to June 30, 1996 or proceeds from the Acco Sale (as defined
herein).
In connection with the acquisition of the Sinton Properties, the Company
also acquired interests in two natural gas processing plants, one of which was
subsequently sold in the Acco Sale. See "-- Recent Acquisitions -- Portilla and
Happy." Since being acquired by the Company, the average net daily natural gas
processing throughput of these plants has increased by an average of 7.3% per
year, revenue has increased by an average of 24.5% per year and operating
expenses as a percentage of revenue have decreased by an average of 13.7% per
year.
Exploitation Of Existing Properties. The Company allocates a
significant amount of its non-acquisition capital budget to the exploitation of
its producing properties. As of June 30, 1996, on a pro forma basis,
approximately 18.3% (8,373 MBOE) of the Company's total proved reserves would
have been classified as proved undeveloped. Management believes that the
proximity of these undeveloped reserves to existing production makes development
of these properties less risky and more cost-effective than other drilling
opportunities available to the Company. The Company has identified 272 potential
exploitation opportunities on the Company's existing properties including those
acquired in the Recent Acquisitions. The Company drilled 29 wells during the
first nine months of 1996 (including seven in western Canada) at a total cost of
$7.9 million with a success rate of 93%. In addition, the Company has drilled or
plans to drill a total of 37 wells and has performed 42 workovers or
recompletions during 1996 at an estimated cost of $2.8 million and plans to
drill 64 wells and perform 35 workovers or recompletions during 1997 at an
estimated cost of $22.2 million.
Low Cost Operations. The Company seeks to maintain low operating and
G&A expenses per BOE by operating a majority of its producing properties and
related assets and by using contract personnel to assist with the development or
evaluation of producing properties and related assets. As a result of this
strategy, the Company's EBITDA Margin has consistently improved since 1991, even
in years with depressed commodity prices. From the year ended December 31, 1991
to, on a pro forma basis, the nine months ended September 30, 1996, the
Company's direct operating and G&A expenses per BOE have decreased by 55.4% and
87.8%, respectively, resulting in an improvement in EBITDA Margin as illustrated
below:
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
-------------------------------------------------------------------------
Pro Pro Forma
Forma
(per BOE) (1) 1991 1992 1993 1994 1995 1995 1996 1996
-------- -------- -------- ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total operating
revenue (2) $18.35 $16.03 $15.98 $13.08 $12.15 $ 8.61 $14.08 $10.71
Direct operating
expenses (3) 6.30 6.23 6.39 4.41 3.92 2.50 4.21 2.81
G&A 5.39 4.59 1.09 0.93 0.92 0.49 1.54 0.66
-------- -------- -------- ----------------------------------------------
EBITDA (4) $ 6.66 $ 5.21 $8.50 $ 7.74 $ 7.31 $ 5.62 $ 8.33 $ 7.24
EBITDA Margin 36.3% 32.5% 53.2% 59.2% 60.2% 65.3% 59.2% 67.6%
- --------------------
</TABLE>
(1) Amounts are calculated on the basis of dollars per BOE of production.
Production data does not include third-party natural gas processing volumes. (2)
Consists of crude oil and natural gas production sales, revenue from rig
operations and processing of natural gas of third parties as well as other
miscellaneous revenue. Both historical and pro forma total operating revenue for
the nine months ended September 30, 1996 are presented net of a loss from
hedging activities incurred during such period. (3) Consists of lease operating
expenses, production taxes, abandoned projects, rig operating expenses and
processing expenses. (4) Does not include interest income.
Focused Exploration Activity. The Company allocates a portion of its
capital budget to the drilling of exploratory wells which have high reserve
potential. The Company believes that by devoting a relatively small amount of
capital to high impact, high risk projects while reserving the majority of its
available capital for development projects, it can reduce its risk profile while
still benefiting from the potential for significant reserve additions. See
"Business -- Primary Operating Areas -- Exploration Opportunities."
RECENT ACQUISITIONS
The Company has recently acquired CGGS, the Wyoming Properties, Portilla
and Happy, East White Point and Stedman Island for an aggregate purchase price
of approximately $176.2 million (the "Recent Acquisitions"). The Company
believes that each of the Recent Acquisitions is consistent with the Company's
acquisition strategy.
CGGS
In November 1996, Canadian Abraxas acquired 100% of the outstanding
capital stock of CGGS, after the consummation of the sale of the Nevis Plant,
for CDN$126.4 million, or approximately U.S.$94.8 million, including
approximately $8.3 million for CGGS' working capital.
As a result, Canadian Abraxas owns producing properties in western
Canada consisting primarily of natural gas reserves (the "Canadian Abraxas
Properties") and interests ranging from 10% to 100% in 197 miles of natural gas
gathering systems and 11 natural gas processing plants or compression facilities
(the "Canadian Abraxas Plants"), four of which are operated by Canadian Abraxas.
The Canadian Abraxas Properties consist of 154,968 gross acres (86,327 net
acres) and 120 gross wells (68.8 net wells), 48 of which operated by Canadian
Abraxas. As of September 1, 1996, the Canadian Abraxas Properties had total
proved reserves of 10,821 MBOE (91.8% natural gas) with an aggregate PV-10 of
$46.4 million, 82.4% of which was attributable to proved developed reserves. The
Canadian Abraxas Plants had aggregate net natural gas processing capacity of
98.5 MMcf per day at September 1, 1996. For the nine months ended September 30,
1996, the Canadian Abraxas Plants processed an average of 182.8 gross MMcf (65.7
net MMcf) of natural gas per day, of which 19.6% (39.7% net) was custom
processed for third parties. For the nine months ended September 30, 1996, the
Canadian Abraxas Properties and the Canadian Abraxas Plants would have
contributed $10.3 million of EBITDA to the Company on a pro forma basis.
The Company believes that the Canadian Abraxas Properties have
significant, quantifiable development potential which can be realized through
exploitation and development. The Company believes that processing volumes at
the Canadian Abraxas Plants can be increased due to unutilized gross natural gas
processing throughput capacity at the plants of approximately 69.5 MMcf (32.4
net MMcf) of natural gas per day. The Company intends to utilize this excess
capacity by seeking to process additional natural gas volumes from third parties
and from increased production from the Canadian Abraxas Properties. In addition,
the Company believes that expected increases in the demand for natural gas from,
Alberta, Canada will help to reduce the existence of basis differentials in the
pricing of natural gas produced in this area. The Company believes that its
ownership of the Canadian Abraxas Properties and the Canadian Abraxas Plants
will afford it a competitive advantage relative to other area operators due to
the Company's preferential access to the natural gas processing capacity at
these facilities.
Immediately after the acquisition of CGGS, the Company amalgamated CGGS
with Canadian Abraxas, and Canadian Abraxas, being the name of the surviving
entity, used the net proceeds from the sale of the Nevis Plant to retire the
outstanding debentures of CGGS. In addition, Canadian Abraxas intends to sell a
10% working interest in the Canadian Abraxas Properties and the Canadian Abraxas
Plants to Cascade, in connection with the Company's plan to integrate the
operations of the Canadian Abraxas Properties and the Canadian Abraxas Plants
into the existing operations of Cascade Oil & Gas Ltd., one of the Company's
Canadian subsidiaries ("Cascade"). The Company has identified potential cost
savings through anticipated decreases in the G&A expenses of CGGS, which would
have amounted to approximately $380,000 for the nine months ended September 30,
1996, on a pro forma basis. See the unaudited Pro Forma Financial Information
and the notes thereto included elsewhere in this Prospectus.
THE WYOMING PROPERTIES
On September 30, 1996, the Company acquired producing properties with
total proved reserves of 9,935 MBOE (68.5% natural gas) as of June 30, 1996, in
the Wamsutter area of southwestern Wyoming (the "Wyoming Properties") for $47.5
million in cash, before adjustment for accrual of net revenue and interest from
April 1, 1996 to September 30, 1996. The Wyoming Properties consist of 19,587
gross acres (14,091 net acres) and 25 gross wells (20.4 net wells), 22 of which
are operated by the Company. In addition, the Company acquired various
overriding royalty interests in four wells. As of June 30, 1996, the aggregate
PV-10 of the Wyoming Properties was $30.3 million (based, in part, on an assumed
natural gas price of $1.07 per Mcf), 97.3% of which was attributable to proved
developed reserves. For the nine months ended September 30, 1996, the Wyoming
Properties would have contributed $5.4 million of EBITDA to the Company on a pro
forma basis. As of September 30, 1996, the Company had recorded the preliminary
net purchase price of $45.9 million to its crude oil and natural gas properties.
Management believes that the Wyoming Properties have significant
development potential which will enable the Company to increase its cash flow
from operations and reserve base without significant capital expenditures. The
Company intends to exploit this development potential through the more efficient
use of compression and gathering facilities, low cost recompletions of various
behind-pipe zones and drilling of infill development wells on closer spacing.
The Company has drilled two wells on the Wyoming Properties since September 30,
1996. Additionally, the Company has identified potential exploitation and
development opportunities which it believes may have up to 15,400 MBOE of
additional reserves. The Wyoming Properties are geographically concentrated,
thereby enabling the Company to operate the properties without incurring
additional G&A expenses. In addition, the Company believes that expected
improvements in the transportation infrastructure and an increase in the demand
for natural gas from southwestern Wyoming will help to reduce the existence of
basis differentials in the pricing of natural gas produced in the area.
PORTILLA AND HAPPY
In November 1996, the Company acquired a 75% partnership interest (the
"Partnership Interest") in Portilla-1996, L.P. (the "Partnership") for $27.6
million, including the repayment of certain indebtedness before adjustment for
the accrual of net revenue to the closing date. The Company previously owned the
remaining 25% interest in the Partnership. The Partnership owned a 100% working
interest in the Portilla Field, located in the Texas Gulf Coast region (the
"Portilla Field"), a 100% interest in a natural gas processing plant located at
the Portilla Field (the "Portilla Plant" and, together with the Portilla Field,
"Portilla") and a 12% working interest in the Happy Field, located in the
Permian Basin of west Texas ("Happy"). Portilla and Happy consist of 1,405 gross
acres (1,115 net acres) and 78 gross wells (52 net wells), 61 of which are
operated by the Company. As of June 30, 1996, Portilla and Happy had total
proved reserves of 4,314 MBOE (18.4% natural gas) with an aggregate PV-10 of
$30.2 million, 99.8% of which was attributable to proved developed reserves. The
Portilla Plant had natural gas processing capacity of approximately 20.0 MMcf
per day at September 30, 1996. During the nine months ended September 30, 1996,
the Portilla Plant processed an average of 18.2 MMcf of natural gas per day. For
the nine months ended September 30, 1996, Portilla and Happy would have
contributed an additional $3.8 million of EBITDA to the Company on a pro forma
basis.
The Company previously owned a 50% interest in Portilla and a 12%
working interest in Happy. In March 1996, the Company sold its interests in
Portilla and Happy to Acco, LLC ("Acco") for net consideration of $15.6 million
(the "Acco Sale"). Acco subsequently obtained the release of a 50% overriding
royalty interest in Portilla previously owned by the Commingled Pension Trust
Fund (Pension II), the trustee of which is Morgan Guaranty Trust Company of New
York (the "Pension Fund"), and Acco then contributed its interests in Portilla
and Happy to the Partnership in return for the Partnership Interest. The Company
continued to operate Portilla subsequent to the Acco Sale. See "Business -
Recent Acquisitions -- Portilla and Happy."
EAST WHITE POINT AND STEDMAN ISLAND
In November 1996, the Company obtained the release of the 50% overriding
royalty interests in the East White Point Field, San Patricio Country, Texas
("East White Point") and the Stedman Island Field, Nueces County, Texas
("Stedman Island") from the Pension Fund for $9.3 million, before adjustment for
accrual of net revenue from August 1, 1996 to November 27, 1996. The Pension
Fund's interest in East White Point and Stedman Island consisted of 3,723 gross
acres (1,256 net acres) and 25 gross wells (6.5 net wells), 15 of which are
operated by the Company. As of June 30, 1996, East White Point and Stedman
Island had total proved reserves of 5,304 MBOE (62.5% natural gas) with an
aggregate PV-10 of $29.4 million, 71.7% of which was attributable to proved
developed reserves. The East White Point natural gas processing plant, a modern
cyrogenic plant with capacity of approximately 25.0 MMcf of natural gas per day,
extracted approximately 679 Bbls of NGLs per day for the nine months ended
September 30, 1996.
THE TRANSACTIONS
The initial offering of the Notes, the execution of the New Credit
Facility, the repayment of the indebtedness under the Company's $85.0 million
revolving credit and term loan facility with BTCo. and ING Capital (the "Bridge
Facility") and the consummation of the Recent Acquisitions are collectively
referred to herein as the "Transactions."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating an investment in the Notes.
PURPOSE OF THE EXCHANGE OFFER
The Exchange Offer provides holders of the Series A Notes with the
Exchange Notes which will generally be freely transferable by the holders
thereof without registration or any prospectus delivery requirement under the
Securities Act. The Issuers' purpose in engaging in the Exchange Offer is to
provide holders of the Series A Notes with freely transferable securities and to
comply with the provisions of the Registration Rights Agreement which require,
subject to certain conditions, that the Exchange Offer be made. See "Purpose of
the Exchange Offer".
<PAGE>
THE EXCHANGE OFFER
Exchange Ratio Each Series A Note is exchangeable for a like
principal amount of Exchange Notes.
Expiration Date 5:00 p.m., New York City time, on
__________, 199_ unless extended, in which
case the term "Expiration Date" means the
latest date and time to which the Exchange
Offer shall have been extended.
Principal Amount of Notes Subject to the terms and conditions of the
Exchange Offer, any and all Series A Notes
will be accepted if duly tendered and not
withdrawn prior to acceptance thereof. The
Exchange Offer is not conditioned upon any
minimum principal amount of the Series A
Notes being tendered. The Indenture limits
the aggregate amount of the Notes, including
the Series A Notes and the Exchange Notes,
which may be outstanding to $215.0 million
principal amount, all of which is currently
in the form of the Series A Notes.
Trading and Market Price The Series A Notes are currently eligible for
quotation through the National Association of
Securities Dealers, Inc.'s PORTAL system.
Prior to the date hereof, there has been only
a private institutional trading market for
the Series A Notes. It is anticipated that a
similar trading market will exist for the
Exchange Notes following the Exchange Offer.
BT Securities Corporation, Jefferies &
Company, Inc. and ING Baring (U.S.)
Securities Corporation (the "Initial
Purchasers") have advised the Issuers that
they intend to act as market makers for the
Exchange Notes; however, they are not
obligated to do so and may discontinue market
making activities with respect to the
Exchange Notes at any time. See "Risk Factors
-- Lack of Public Market."
Conditions of the Exchange The Issuers' obligation to consummate
Offer the Exchange Offer is subject to certain
conditions. See "The Exchange Offer --
Conditions." Tenders of the Series A Notes
may be withdrawn at any time prior to the
Expiration Date. See "The Exchange Offer --
Withdrawal Rights."
How to Tender Tendering holders of the Series A Notes must
either (i) complete and sign a Letter of
Transmittal, have their signatures guaranteed
if required, forward the Letter of
Transmittal and any other required documents
to the Exchange Agent at the address set
forth under the caption "Exchange Agent", and
either deliver the Series A Notes to the
Exchange Agent or tender such Series A Notes
pursuant to the procedures for book-entry
transfer or (ii) request a broker, dealer,
bank, trust company or other nominee to
effect the transaction for them. Beneficial
owners of the Series A Notes registered in
the name of a broker, dealer, bank, trust
company or other nominee must contact such
institution to tender their Series A Notes.
The Series A Notes may be physically
delivered, but physical delivery is not
required if a confirmation of a book-entry
transfer of such Series A Notes to the
Exchange Agent's account at DTC is delivered
in a timely fashion. Certain provisions have
also been made for holders whose Series A
Notes are not readily available or who cannot
comply with the procedure for book-entry
transfer on a timely basis. Questions
regarding how to tender and requests for
information should be directed to the
Exchange Agent. See "The Exchange Offer --
How to Tender."
Acceptance of Tenders Subject to the terms and conditions of the
Exchange Offer, including the reservation of
certain rights by the Issuers, the Series A
Notes validly tendered prior to the
Expiration Date will be accepted promptly
after such Expiration Date. Subject to such
terms and conditions, the Exchange Notes to
be issued in exchange for validly tendered
Series A Notes will be mailed by the Exchange
Agent promptly after acceptance of the
tendered Series A Notes or credited to the
holder's account in accordance with
appropriate book-entry procedures. Although
the Issuers do not currently intend to do so,
if they modify the terms of the Exchange
Offer prior to the Expiration Date, such
modified terms will be available to all
holders of the Series A Notes, whether or not
their Series A Notes have been tendered prior
to such modification. Any material
modification will be disclosed in accordance
with the applicable rules of the Commission
and, if required, the Exchange Offer will be
extended to permit holders of the Series A
Notes adequate time to consider such
modification. See "The Exchange Offer --
Acceptance of Tenders."
Exchange Agent IBJ Schroder Bank & Trust Company
Securities Offered $215,000,000 aggregate principal
amount of 11.5% Senior Notes due 2004.
Issuers Abraxas Petroleum Corporation and Canadian
Abraxas Petroleum Limited, as joint and
several obligors.
Maturity Date November 1, 2004.
Interest Payment Dates Interest on the Notes will accrue from the
Issue Date and will be payable semi-annually
on each May 1 and November 1, commencing May
1, 1997.
Ranking The Notes will be general unsecured
obligations of the Issuers and will rank pari
passu to all existing and future
unsubordinated indebtedness of the Issuers
and senior to all future subordinated
indebtedness of the Issuers. The Notes will
be effectively subordinated in right of
payment to all existing and future secured
indebtedness of the Issuers.
Optional Redemption The Notes will be redeemable, in whole or in
part, at the option of the Issuers on or
after November 1, 2000, at the redemption
prices set forth herein, plus accrued and
unpaid interest to the date of redemption. In
addition, at any time on or prior to November
1, 1999, the Issuers may, at their option,
redeem up to 35% of the aggregate principal
amount of the Notes with the net cash
proceeds of one or more Equity Offerings at a
redemption price equal to 111.5% of the
aggregate principal amount of the Notes to be
redeemed, plus accrued and unpaid interest to
the date of redemption; provided, however,
that, after giving effect to any such
redemption, at least $139.75 million
aggregate principal amount of the Notes
remains outstanding.
Change of Control Upon a Change of Control, each holder will
have the right to require the Issuers to
repurchase such holder's 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 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.
Guarantees The Notes will be guaranteed (the
"Guarantees") on a senior basis by each of
the Subsidiary Guarantors. The Guarantees
will be general unsecured obligations of the
Subsidiary Guarantors and will rank pari
passu to all unsubordinated indebtedness of
the Subsidiary Guarantors. The Guarantees
will be effectively subordinated in right of
payment to secured indebtedness of the
Subsidiary Guarantors.
Certain Covenants The Indenture governing the Notes (the
"Indenture") will contain certain covenants
that limit the ability of the Issuers and
their Restricted Subsidiaries (as defined
herein) 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, impose restrictions on the ability of
a Restricted Subsidiary to pay dividends or
make certain payments to the Issuers and
their Restricted Subsidiaries, 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 either of the Issuers.
For additional information regarding the Exchange Notes, see
"Description of the Notes."
<PAGE>
EXCHANGE OFFER; REGISTRATION RIGHTS; ADDITIONAL INTEREST
In the Registration Rights Agreement, the Issuers agreed (i) to file
within 45 days after the Issue Date, and to cause to become effective within 120
days after the Issue Date, a registration statement with respect to the Exchange
Offer, and (ii) upon the Exchange Offer Registration Statement's being declared
effective, to offer the Exchange Notes in exchange for surrender of the Series A
Notes. If the Issuers do not comply with their registration obligations in a
timely manner, they will be required to pay additional interest (in addition to
the scheduled payment of interest) during the first 90 day period of such
default in an amount equal to 0.50% per annum at the end of such 90 day period.
The amount of the additional interest will increase by an additional 0.50% per
annum for each subsequent 90 day period until such obligations are complied
with, up to a maximum amount of additional interest of 2.00% per annum. In the
event that applicable interpretations of the staff of the Commission do not
permit the Issuers to effect the Exchange Offer, or if for any other reason the
Exchange Offer is not consummated within 150 days of the Issue Date, or if
certain holders of the Series A Notes are not permitted to receive the benefit
of the Exchange Offer, the Issuers will use their best efforts to cause to
become effective a shelf registration statement with respect to the resale of
the Series A Notes and to keep such shelf registration statement effective until
the earlier of three years after its effective date and such time as all of the
Series A Notes have been sold thereunder.
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following table presents summary historical consolidated financial
data of the Company for the five years ended December 31, 1995, and as of and
for the nine months ended September 30, 1995 and 1996, which have been derived
from the Company's consolidated financial statements and unaudited historical
and pro forma financial data. The pro forma data give effect to the consummation
of the Transactions. The unaudited Pro Forma Condensed Balance Sheet reflects
such adjustments as if the Transactions had occurred at September 30, 1996, and
the unaudited Pro Forma Statements of Operations for the year ended December 31,
1995 and for the nine months ended September 30, 1996 reflect such adjustments
as if the Transactions had occurred on January 1, 1995 and January 1, 1996,
respectively. The historical consolidated financial data of the Company as of
and for the nine months ended September 30, 1995 and 1996 have been derived from
the Company's interim consolidated financial statements which, in the opinion of
management of the Company, have been prepared on the same basis as the audited
consolidated financial statements and include all adjustments (consisting of
only normal recurring adjustments) necessary for a fair presentation of the
financial data for such periods. The information in this table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Selected Consolidated Financial Data," the
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>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------------------------- -----------------------
Pro Pro
Forma Forma
1991 1992 1993 1994 1995 1995 (1) 1995 1996 1996
(dollars in thousands, except ratios)
Consolidated Statement of
Operations Data:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total operating revenue (2) $1,150 $ 2,691 $ 7,494 $11,349 $13,817 $ 45,696 $9,929 $11,909 $42,251
Operating expense (3) 322 1,075 2,964 3,826 4,458 13,283 3,278 3,408 10,855
DD&A expense 361 957 2,373 3,790 5,434 21,092 3,541 4,145 17,664
G&A expense 338 770 510 810 1,042 2,592 769 1,250 2,545
Interest expense 132 906 2,531 2,359 3,911 24,276 2,915 2,142 18,151
Amortization of deferred -- -- 649 400 214 1,025 120 192 769
financing fee
Income (loss) from continuing (15) (1,072) (1,580) 113 (1,208) (15,917) (685) 122 (8,034)
operations before
extraordinary items
Preferred stock dividends (249) (249) (186) (183) (366) (366) (274) (274) (274)
Net income (loss) applicable to $ (264) $(4,204) $ (2,619) $(2,577)$(1,574) $(16,283) $ (959) $ (520) $(8,308)
common stock
Other Data:
EBITDA (4) $ 168 $ 760 $ 4,049 $ 6,728 $ 8,351 $ 29,893 $5,892 $ 6,894 $28,403
Capital expenditures $2,940 $ 7,866 $ 26,234 $ 40,906 $12,256 $ 22,842 $9,223 $58,040 $66,036
Ratio of EBITDA to fixed
charges (5) (6) -- -- 1.49x 2.65x 1.95x 1.21x 2.16x 2.85x $ 1.53x
Ratio (deficiency) of earnings to
fixed charges(7)(8) -- -- -- -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
September 30,1996
Consolidated Statement of Operations Data:
(dollars in thousands)
<S> <C> <C>
Cash and cash equivalents $ 9,993 $ 11,486
Total assets 130,440 291,824
Total debt (9) 85,123 215,124
Shareholders' equity (10) 36,421 36,197
ACNTA (11) 293,761
Ratio of ACNTA to total debt (11) 1.37
- --------------
<FN>
(1) The results of operations of CGGS for 1995 included herein reflect CGGS'
results of operations for its fiscal year ended October 31, 1995.
(2) Consists of crude oil and natural gas production sales, revenue from rig
operations and processing facilities and other miscellaneous revenue.
(3) Consists of lease operating and production taxes, rig operating expenses
and processing expenses.
(4) EBITDA is defined as income (loss) from
continuing operations before income taxes, interest expense, DD&A,
amortization of deferred financing fee and other non-cash charges. The
Company believes that the presentation of EBITDA facilitates an investor's
understanding of a company's ability to service and/or incur indebtedness.
EBITDA should not be considered by an investor as an alternative to net
income as an indicator of the Company's operating performance or to cash
flows as a measure of liquidity.
(5) Fixed charges consist of interest expense and dividends on preferred stock.
(6) The Company's EBITDA was inadequate to cover fixed charges in 1991 and 1992
by $213,000 and $395,000, respectively.
(7) Earnings consist of income (loss) from continuing operations before income
taxes plus fixed charges. Fixed charges consist of interest expense and
dividends on preferred stock.
(8) The Company's earnings were inadequate to cover fixed charges in 1991,
1992, 1993, 1994 and 1995 by $264,000, $1,321,000, $1,579,000, $70,000 and
$1,574,000, respectively, for pro forma 1995 by $16,866,000 for the nine
months ended September 30, 1995 and 1996 by $958,000 and $152,000,
respectively, and for the pro forma nine months ended September 30, 1996 by
$8,748,000.
(9) Consists of long-term debt, including capital lease obligations.
(10) Consists of 5,804,812 shares of the Company's Common Stock, par value $.01
per share, of which 70,711 are treasury shares, and 45,741 shares of the
Company's Series 1995-B Preferred Stock, par value $.01 per share ("Series
1995-B Preferred"). Each share of Series 1995-B Preferred Stock has a
liquidation preference of $100, is entitled to cumulative annual dividends
of $8.00 per share payable quarterly and is convertible into 11.11 shares
of Common Stock.
(11) Adjusted Consolidated Net Tangible Assets ("ACNTA"). Pro Forma ACNTA
includes: $218,292,000 of PV-10, $12,104,000 of working capital,
$32,660,000 of book value for the processing plants, $28,628,000 of book
value for unproved properties, $3,372,000 of book value for other
properties and equipment, $858,000 of book value for other tangible assets
less $2,153,000 of book value for minority interest.
</FN>
</TABLE>
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA RESERVE AND OPERATING DATA
The following table sets forth summary information with respect to the
Company's estimated proved crude oil, NGLs and natural gas reserves and certain
summary information with respect to the Company's operations for the periods
indicated. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," the Company's Consolidated Financial Statements and the
notes thereto and the unaudited Pro Forma Financial Information and the notes
thereto included elsewhere in this Prospectus. The pro forma reserve data at
December 31, 1995 and June 30, 1996 give effect to the Transactions as if they
had occurred on December 31, 1995 and June 30, 1996, respectively, and the pro
forma operations data for the year ended December 31, 1995 and the nine months
ended September 30, 1996 give effect to the Transactions as if they had occurred
on January 1, 1995 and January 1, 1996, respectively.
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------
Historical Pro Historical Pro forma
Forma
------------------------------ ------------------
1993 1994 1995 1995(1) 1995 1996 1996(2)
------- ------- ------- ------- ------ ------- --------
Estimated Proved Reserves
(period-end):
- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Crude oil and NGLs (MBbls) . 4,086 9,156 8,267 16,547 n/a(3) 6,513 16,039
Natural gas (MMcf) ......... 16,591 67,579 54,569 191,593 n/a(3) 52,566 177,651
Crude oil equivalents (MBOE) 6,851 20,420 17,362 48,479 n/a(3) 15,274 45,647
% Proved developed ... 87.7% 67.9% 76.8% 80.8% n/a(3) 76.9% 81.7%
Estimated future net
revenuebefore income
taxes (in thousands) ...... $ 64,257 $ 153,476 $ 164,058 $ 402,445(4) n/a(3) $157,153 $ 414,497(4)
PV-10 (in thousands) ....... 41,095 78,868 89,992 $ 223,790(4) n/a(3) 81,925 218,292(4)
%Proved developed ...... 89.9% 76.7% 78.4% 90.2% n/a(3) 79.7% 85.3%
Reserve Life (years): (5) .. 14.6 23.5 15.3 9.2 n/a(3) 13.8(6) 8.7 (6)
Reserve Replacement Rate:(7) 1,017% 1,664% (116%) 640% n/a(3) 207% 1,075%
Nine Months Ended September 30,
--------------------------------
Historical Pro forma
------------------------------
1995 1996 1996(1)
------ ------- --------
Average Net Daily Production:
Crude oil and NGLs (Bbls) 835 1,285 1,493 3,668 1,423 1,358 4,071
Natural gas (Mcf) 2,700 6,556 9,733 65,275 9,654 9,582 60,340
Average Sales Price:
Crude oil (per Bbl) $ 15.54 $ 15.47 $ 17.16 $ 17.18 $ 17.24 $ 19.94 $ 20.04
NGLs (per Bbl) 14.75 10.54 10.83 7.82 10.94 12.73 10.89
Natural gas (per Mcf) 2.60 1.85 1.47 1.01 1.41 1.95 1.30
Natural Gas Processing
Plants:
Net plant capacity (MMcfpd)
(period-end) 25 25 25 123 25 25 128
Percentage utilization 52.6% 58.3% 62.4% 60.7% 62.1% 64.1% 68.2%
Percentage of throughput
attributable to
third-party processing 7.9% 5.3% 9.3% 35.3% 9.1% 11.0% 31.2%
- ----------------
<FN>
(1) The results of operations of CGGS for 1995 included herein reflect CGGS'
results of operations for its fiscal year ended October 31, 1995. The
results of operations of CGGS for the nine months ended September 30, 1996
included herin reflects CGGS results of operations for the nine months
ended October 31, 1996.
(2) Includes reserve information for the Company, the Wyoming Properties,
Portilla and Happy and East White Point and Stedman Island at June 30, 1996
and the Canadian Abraxas Properties at September 1, 1996. Does not include
reserves of Cascade.
(3) Not available. Reserve information for 1995 was prepared by the Company's
independent petroleum engineers as of January 1, 1996 only.
(4) Does not include the present value of future net cash flow from processing
natural gas of third parties at the Canadian Abraxas Plants.
(5) Except as otherwise noted, Reserve Life is calculated as proved reserves
divided by annual production, both on a BOE basis.
(6) Based on reserve data as of June 30, 1996 (and September 1, 1996 with
respect to the CGGS reserve data included in the pro forma calculation), and
production for the six months ended June 30, 1996, annualized to derive
estimated annual production.
(7) Reserve replacement rate is calculated as reserve additions in the period
divided by production for the period, both on a BOE basis.
</FN>
</TABLE>
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following factors in
addition to the other information in this Prospectus before making an investment
in the Notes offered hereby.
HIGH DEGREE OF LEVERAGE
As adjusted for the consummation of the Transactions, the Company's
total debt and stockholders' equity would have been approximately $215.1 million
and $36.2 million, respectively, as of September 30, 1996. See "Capitalization."
In addition, the Company has entered into the New Credit Facility, under which
the Company's borrowing capacity is an initial maximum of up to $20.0 million.
For the year ended December 31, 1995 and the nine months ended September 30,
1996, on a pro forma basis, the Company's ratio of EBITDA to fixed charges would
have been 1.21x and 1.53x, respectively, and its ratio of earnings to fixed
charges would have been inadequate to cover fixed charges by $16.9 million and
$8.7 million, respectively. The Company intends to incur additional indebtedness
in the future in connection with acquiring, developing and exploiting producing
properties, although the Company's ability to incur additional indebtedness may
be limited by the terms of the Indenture and the New Credit Facility. See
"Description of the Notes," "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" and the
unaudited Pro Forma Financial Information and the notes thereto included
elsewhere in this Prospectus
The Company's level of indebtedness will have several important effects
on its future operations including (i) a substantial portion of the Company's
cash flow from operations will be dedicated to the payment of interest on its
indebtedness and will not be available for other purposes; (ii) covenants
contained in the Company's debt obligations will require the Company to meet
certain financial tests and other restrictions which will limit its ability to
borrow additional funds or to dispose of assets and may affect the Company's
flexibility in planning for, and reacting to, changes in its business, including
possibly limiting acquisition activities; and (iii) the Company's 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 may be limited. See "Description of
the Notes -- Certain Covenants -- Limitation on Incurrence of Additional
Indebtedness" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."
The Company's ability to meet its debt service obligations and to reduce
its total indebtedness will be dependent upon the Company's future performance,
which will be subject to general economic conditions and to financial, business
and other factors affecting the operations of the Company, many of which are
beyond its control. Based upon the current level of operations and the
historical production of the producing properties and related assets currently
owned by the Company, the Company believes that its cash flow from operations as
well as borrowing capabilities will be adequate to meet its anticipated
requirements for working capital, capital expenditures, interest payments,
scheduled principal payments and general corporate or other purposes for the
foreseeable future. See the unaudited Pro Forma Financial Information and the
notes thereto included elsewhere in this Prospectus, the Company's 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 -Liquidity and Capital Resources." No assurance can be given,
however, that the Company's business will continue to generate cash flow from
operations at or above current levels or that the historical production of the
producing properties and related assets currently owned by the Company can be
sustained in the future. If the Company is unable to generate cash flow from
operations in the future to service its debt, it may be required to refinance
all or a portion of its existing debt or to obtain additional financing. There
can be no assurance that such refinancing would be possible or that any
additional financing could be obtained. In addition, the Notes are subject to
certain limitations on redemption. See "Description of the Notes -- Redemption"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
<PAGE>
RANKING OF INDEBTEDNESS
The Notes will be general unsecured obligations of the Issuers and will
rank pari passu in right of payment to all existing and future unsubordinated
indebtedness of the Issuers and senior in right of payment to all future
subordinated indebtedness of the Issuers. In addition, the Notes will be
unconditionally guaranteed, jointly and severally, by each of the Subsidiary
Guarantors. The Guarantees will be general unsecured obligations of the
Subsidiary Guarantors and will rank pari passu in right of payment to all
existing and future unsubordinated indebtedness of the Subsidiary Guarantors and
senior in right of payment to all present and future subordinated indebtedness
of the Subsidiary Guarantors. However, the Notes will be effectively
subordinated to secured indebtedness of the Issuers and the Subsidiary
Guarantors to the extent of the value of the assets securing such indebtedness.
As of September 30, 1996, on a pro forma basis, the Issuers and the Subsidiary
Guarantors would have had $215.1 million of indebtedness outstanding, none of
which would have been secured, and $20.0 million of availability under the New
Credit Facility, which borrowings will be secured. See "Capitalization,"
"Description of the Notes" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Issuers must offer to
purchase all of the Notes then outstanding at a purchase price equal to 101% of
the principal amount thereof, plus accrued interest to the date of purchase (a
"Change of Control Offer"). See "Description of the Notes --Change of Control."
Prior to commencing such an offer to purchase, the Issuers may be
required to (i) repay in full all indebtedness of the Issuers that would
prohibit the repurchase of the Notes, including that under the New Credit
Facility, or (ii) obtain any requisite consent to permit the repurchase. See "
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." If the Issuers were unable to
repay all of such indebtedness or were unable to obtain the necessary consents,
then the Issuers would be unable to offer to repurchase the Notes and such
failure would constitute an Event of Default under the Indenture. There can be
no assurance that the Issuers will have sufficient funds available at the time
of any Change of Control to repurchase the Notes.
The events that require a Change of Control Offer under the Indenture
may also constitute events of default under the New Credit Facility. Such events
may permit the lenders under such debt instruments to accelerate the payment of
the debt and, if the debt is not paid, to commence litigation which could
ultimately result in a sale of substantially all of the assets of the Company to
satisfy the debt, thereby limiting the Company's ability to raise cash to
repurchase the Notes and reducing the practical benefit of the offer to purchase
provisions to the holders of the Notes.
NET LOSSES
The Company has experienced recurring losses. For the years ended
December 31, 1992, 1993, 1994 and 1995, and the nine months ended September 30,
1996, the Company recorded net losses of $4.0 million, $2.4 million, $2.4
million, $1.2 million and $0.2 million, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements and the notes thereto included
elsewhere in this Prospectus.
INDUSTRY CONDITIONS; IMPACT ON COMPANY'S PROFITABILITY
The Company's revenue, profitability and future rate of growth are
substantially dependent upon prevailing prices for crude oil and natural gas.
Crude oil and natural gas prices can be extremely volatile and in recent years
have been depressed by excess total domestic and imported supplies. Prices are
also affected by actions of state and local agencies, the United States and
foreign governments and international cartels. While prices for crude oil and
natural gas increased during the fourth quarter of 1995 and remained at these
levels during the first half of 1996, there can be no assurance that these
levels for crude oil and natural gas prices can be sustained. These external
factors and the volatile nature of the energy markets make it difficult to
estimate future prices of crude oil and natural gas. Any substantial or extended
decline in the prices of crude oil and natural gas would have a material adverse
effect on the Company's financial condition and results of operations, including
reduced cash flow and borrowing capacity. All of these factors are beyond the
control of the Company. Sales of crude oil and natural gas are seasonal in
nature, leading to substantial differences in cash flow at various times
throughout the year. Federal and state regulation of crude oil and natural gas
production and transportation, general economic conditions, changes in supply
and changes in demand all could adversely affect the Company's ability to
produce and market its crude oil and natural gas. If market factors were to
change dramatically, the financial impact on the Company could be substantial.
The availability of markets and the volatility of product prices are beyond the
control of the Company and thus represent a significant risk.
In addition, declines in crude oil and natural gas prices might, under
certain circumstances, require a write-down of the book value of the Company's
crude oil and natural gas properties. If such declines were severe enough, they
could result in the occurrence of an event of default under the Notes or the New
Credit Facility that could require the sale of some of the Company's producing
properties under unfavorable market conditions or require the Company to seek
additional equity capital. In addition, the Indenture and the New Credit
Facility contain certain restrictions on certain sales of assets by the Company.
See "Description of the Notes" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
In order to manage its exposure to price risks in the marketing of its
crude oil and natural gas, the Company from time to time has entered into fixed
price delivery contracts, financial swaps and crude oil and natural gas futures
contracts as hedging devices. To ensure a fixed price for future production, the
Company may sell a futures contract and thereafter either (i) make physical
delivery of crude oil or natural gas to comply with such contract or (ii) buy a
matching futures contract to unwind its futures position and sell its production
to a customer. Such contracts may expose the Company to the risk of financial
loss in certain circumstances, including instances where production is less than
expected, the Company's customers fail to purchase or deliver the contracted
quantities of crude oil or natural gas, or a sudden, unexpected event materially
impacts crude oil or natural gas prices. Such contracts may also restrict the
ability of the Company to benefit from unexpected increases in crude oil and
natural gas prices.
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Indenture and the New Credit Facility will restrict, among other
things, the Company's ability to incur additional indebtedness, incur liens, pay
dividends or make certain other restricted payments, consummate certain asset
sales, enter into certain transactions with affiliates, 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 the Company. In addition,
the New Credit Facility will contain additional and more restrictive covenants.
The Indenture and the New Credit Facility also will require the Company to
maintain specified financial ratios and satisfy certain financial tests. The
Company's ability to meet such financial ratios and tests may be affected by
events beyond its control, and there can be no assurance that the Company will
meet such ratios and tests. See "Description of the Notes -- Certain Covenants"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." A breach of any of these
covenants could result in a default under the Indenture and/or the New Credit
Facility. Upon the occurrence of an event of default under the New Credit
Facility, the lenders thereunder could elect to declare all amounts outstanding
under the New Credit Facility, together with accrued interest, to be immediately
due and payable. If the Company were unable to repay those amounts, such lenders
could proceed against the collateral granted to them to secure that
indebtedness. If the lenders under the New Credit Facility accelerate the
payment of such indebtedness, there can be no assurance that the assets of the
Company would be sufficient to repay in full such indebtedness and the other
indebtedness of the Company, including the Notes. Substantially all of the
Company's U.S. assets, including, without limitation, working capital and
interests in producing properties and related assets owned by the Company, and
the proceeds thereof will be pledged as security under the New Credit Facility.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
SUBSTANTIAL CAPITAL REQUIREMENTS
The Company makes, and will continue to make, substantial capital
expenditures for the acquisition, exploitation, development, exploration and
production of crude oil and natural gas reserves. Historically, the Company has
financed these expenditures primarily with cash flow from operations, bank
borrowings and the offering of its equity securities. The Company believes that
it will have sufficient capital to finance planned capital expenditures. If
revenue or the Company's borrowing base under the New Credit Facility decrease
as a result of lower crude oil and natural gas prices, operating difficulties or
declines in reserves, the Company may have limited ability to finance planned
capital expenditures in the future. There can be no assurance that additional
debt or equity financing or cash generated by operations will be available to
meet these requirements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
INTEGRATION OF OPERATIONS; FOREIGN OPERATIONS
The Company's future operations and earnings will be largely dependent
upon the Company's ability to integrate the operations of Canadian Abraxas and
the Wyoming Properties into the current operations of the Company. The
operations of Canadian Abraxas and the Wyoming Properties vary in geography from
that of the Company's current operations, and with respect to Canadian Abraxas,
to some extent, in scope and type, from the Company's current operations. There
can be no assurance that the Company will be able to successfully integrate such
operations with those of the Company, and a failure to do so would have a
material adverse effect on the Company's financial position, results of
operations and cash flows. Additionally, although the Company does not currently
have any specific acquisition plans other than the Recent Acquisitions, the need
to focus management's attention on integration of the new operations, as well as
other factors, may limit the Company's ability to successfully pursue
acquisitions or other opportunities related to its business for the foreseeable
future. Also, successful integration of operations will be subject to numerous
contingencies, some of which are beyond management's control. These
contingencies include general and regional economic conditions, prices for crude
oil and natural gas, competition and changes in regulation. Even if the Company
were successful in integrating the new operations, the acquisition of CGGS in
particular will significantly increase the Company's dependence on international
operations, specifically those in Canada, and therefore the Company will be
subject to various additional political, economic and other uncertainties. Among
other risks, the Company's operations will be subject to the risks of
restrictions on transfers of funds, export duties and quotas, domestic and
international customs and tariffs, and changing taxation policies, foreign
exchange restrictions, political conditions and governmental regulations. In
addition, the Company will receive a substantial portion of its revenue in
Canadian dollars. As a result, fluctuations in the exchange rates of the
Canadian dollar with respect to the U.S. dollar could have an adverse effect on
the Company's financial position, results of operations and cash flows. The
Company may from time to time engage in hedging programs intended to reduce the
Company's exposure to currency fluctuations.
FUTURE AVAILABILITY OF NATURAL GAS SUPPLY
To obtain volumes of committed natural gas reserves to supply the
Canadian Abraxas Plants, Canadian Abraxas will contract to process natural gas
with various producers. Future natural gas supplies available for processing at
the Canadian Abraxas Plants will be affected by a number of factors that are not
within the Company's control, including the depletion rate of natural gas
reserves currently connected to the Canadian Abraxas Plants and the extent of
exploration for, production and development of, and demand for natural gas in
the areas in which Canadian Abraxas will operate. Long-term contracts will not
protect Canadian Abraxas from shut-ins or supply curtailments by natural gas
suppliers. Although CGGS was historically successful in contracting for new
natural gas supplies and in renewing natural gas supply contracts as they
expired, there is no assurance that Canadian Abraxas will be able to do so on a
similar basis in the future.
OPERATING HAZARDS; UNINSURED RISKS
The nature of the crude oil and natural gas business involves certain
operating hazards such as crude oil and natural gas blowouts, explosions,
encountering formations with abnormal pressures, cratering and crude oil spills
and fires, any of which could result in damage to or destruction of crude oil
and natural gas wells, destruction of producing facilities, damage to life or
property, suspension of operations, environmental damage and possible liability
to the Company. In accordance with customary industry practices, the Company
maintains insurance against some, but not all, of such risks and some, but not
all, of such losses. The occurrence of such an event not fully covered by
insurance could have a material adverse effect on the financial condition and
results of operations of the Company.
<PAGE>
COMPETITION
The Company encounters strong competition from major oil companies and
independent operators in acquiring properties and leases for the exploration
for, and production of, crude oil and natural gas. Competition is particularly
intense with respect to the acquisition of desirable undeveloped crude oil and
natural gas 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. Many of
the Company's competitors have financial resources, staff and facilities
substantially greater than those of the Company. In addition, the producing,
processing and marketing of crude oil and natural gas is affected by a number of
factors which are beyond the control of the Company, the effect of which cannot
be accurately predicted.
The principal raw materials and resources necessary for the exploration
and production of crude oil and natural gas are leasehold prospects under which
crude oil and natural gas reserves may be discovered, drilling rigs and related
equipment to explore for such reserves and knowledgeable personnel to conduct
all phases of crude oil and natural gas operations. The Company must compete for
such raw materials and resources with both major crude oil and natural gas
companies and independent operators. Although the Company believes its current
operating and financial resources are adequate to preclude any significant
disruption of its operations in the immediate future, the continued availability
of such materials and resources to the Company cannot be assured.
The Company will face significant competition for obtaining additional
natural gas supplies for gathering and processing operations, for marketing
NGLs, residue gas, helium, condensate and sulfur, and for transporting natural
gas and liquids. The Company's principal competitors will include major
integrated oil companies and their marketing affiliates and national and local
gas gatherers, brokers, marketers and distributors of varying sizes, financial
resources and experience. Certain competitors, such as major crude oil and
natural gas companies, have capital resources and control supplies of natural
gas substantially greater than the Company. Smaller local distributors may enjoy
a marketing advantage in their immediate service areas.
The Company will compete against other companies in its natural gas
processing business both for supplies of natural gas and for customers to which
it will sell its products. Competition for natural gas supplies is based
primarily on location of natural gas gathering facilities and natural gas
gathering plants, operating efficiency and reliability and ability to obtain a
satisfactory price for products recovered. Competition for customers is based
primarily on price and delivery capabilities.
RELIANCE ON ESTIMATES OF PROVED RESERVES AND FUTURE NET REVENUE
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and the timing of
development expenditures, including many factors beyond the control of the
Company. The reserve data included in this Prospectus represent only estimates.
In addition, the estimates of future net revenue from proved reserves and the
present value thereof are based upon certain assumptions about future production
levels, prices, and costs that may not prove to be correct over time. In
particular, estimates of crude oil and natural gas reserves, future net revenue
from proved reserves and the PV-10 thereof for the 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 June 30, 1996, with respect to Abraxas' existing properties, and for
the month of July 1996 with respect to the Canadian Abraxas Properties. The
average sales prices as of such dates used for purposes of such estimates were
$19.86 per Bbl of crude oil, $14.09 per Bbl of NGLs and $1.27 per Mcf of natural
gas with respect to the Canadian Abraxas Properties, $21.70 per Bbl of crude
oil, $9.25 per Bbl of NGLs and $1.07 per Mcf of natural gas with respect to the
Wyoming Properties, $19.98 per Bbl of crude oil, $14.50 per Bbl of NGLs and
$2.65 per Mcf of natural gas with respect to Portilla and Happy and $20.64 per
Bbl of crude oil, $12.38 per Bbl of NGLs and $2.29 per Mcf of natural gas with
respect to the Company's other properties in the aggregate. Also assumed is the
Company's making future capital expenditures of approximately $19.7 million in
the aggregate, including $3.4 million on the Wyoming Properties, $1.7 million on
the Canadian Abraxas Properties and $2.2 million on Portilla and Happy,
necessary to develop and realize the value of proved undeveloped reserves on
these properties. Any significant variance in these assumptions could materially
affect the estimated quantity and value of reserves set forth herein. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business -- Reserves
Information."
CERTAIN BUSINESS RISKS
The Company intends to continue acquiring producing crude oil and
natural gas properties or companies that own such properties. Although the
Company performs a review of the acquired properties that it believes is
consistent with industry practices, such reviews are inherently incomplete. It
generally is not feasible to review in depth every individual property involved
in each acquisition. Ordinarily, the Company will focus its review efforts on
the higher-valued properties and will sample the remainder. However, even an
in-depth review of all properties and records may not necessarily reveal
existing or potential problems nor will it permit the Company to become
sufficiently familiar with the properties to assess fully their deficiencies and
capabilities. Inspections may not always be performed on every well, and
environmental problems, such as ground water contamination, are not necessarily
observable even when an inspection is undertaken. Furthermore, the Company must
rely on information, including financial, operating and geological information,
provided by the seller of the properties without being able to verify fully all
such information and without the benefit of knowing the history of operations of
all such properties.
In addition, a high degree of risk of loss of invested capital exists in
almost all exploration and development activities which the Company undertakes.
No assurance can be given that crude oil or natural gas will be discovered to
replace reserves currently being developed, produced and sold, or that if crude
oil or natural gas reserves are found, they will be of a sufficient quantity to
enable the Company to recover the substantial sums of money incurred in their
acquisition, discovery and development. Drilling activities are subject to
numerous risks, including the risk that no commercially productive crude oil or
natural gas reservoirs will be encountered. The cost of drilling, completing and
operating wells is often uncertain. The Company's operations may be curtailed,
delayed or cancelled as a result of numerous factors including title problems,
weather conditions, compliance with governmental requirements and shortages or
delays in the delivery of equipment. The availability of a ready market for the
Company's natural gas production depends on a number of factors, including,
without limitation, the demand for and supply of natural gas, the proximity of
natural gas reserves to pipelines, the capacity of such pipelines and government
regulations.
DEPLETION OF RESERVES
The rate of production from crude oil and natural gas properties
declines as reserves are depleted. Except to the extent the Company acquires
additional properties containing proved reserves, conducts successful
exploration and development activities or, through engineering studies,
identifies additional behind-pipe zones or secondary recovery reserves, the
proved reserves of the Company will decline as reserves are produced. Future
crude oil and natural gas production is therefore highly dependent upon the
Company's level of success in acquiring or finding additional reserves. See
"--Certain Business Risks."
The Company's 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. There can be no assurance, however, that such
divestitures will continue or that the Company will be able to acquire such
properties at acceptable prices or develop additional reserves in the future. In
addition, under the terms of the Indenture and the New Credit Facility, the
Company's ability to obtain additional financing in the future for acquisitions
and capital expenditures may be limited.
GOVERNMENT REGULATION
The Company's business is subject to certain federal, state, provincial
and local laws and regulations relating to the exploration for and development,
production and marketing of crude oil and natural gas, as well as environmental
and safety matters. Such laws and regulations have generally become more
stringent in recent years, often imposing greater liability on a larger number
of potentially responsible parties. Because the requirements imposed by such
laws and regulations are frequently changed, the Company is unable to predict
the ultimate cost of compliance with such requirements. There is no assurance
that laws and regulations enacted in the future will not adversely affect the
Company's financial condition and results of operations. See "Business --
Regulatory Matters."
FRAUDULENT CONVEYANCE
Various fraudulent conveyance laws enacted for the protection of
creditors may apply to the Subsidiary Guarantors' issuance of the Guarantees. To
the extent that a court were to find that (x) a Guarantee was incurred by a
Subsidiary Guarantor with actual intent to hinder, delay or defraud any present
or future creditor or (y) such Subsidiary Guarantor did not receive fair
consideration or reasonably equivalent value for issuing its Guarantee and such
Subsidiary Guarantor (i) was insolvent, (ii) was rendered insolvent by reason of
the issuance of such Guarantee, (iii) was engaged or about to engage in a
business or transaction for which the remaining assets of such Subsidiary
Guarantor constituted unreasonably small capital to carry on its business or
(iv) intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they matured, the court could avoid or subordinate
such Guarantee in favor of the Subsidiary Guarantor's creditors. Among other
things, a legal challenge of a Guarantee on fraudulent conveyance grounds may
focus on the benefits, if any, realized by the Subsidiary Guarantor as a result
of the issuance by the Company of the Notes. To the extent any Guarantees were
avoided as a fraudulent conveyance or held unenforceable for any other reason,
the claims of holders of the Notes in respect of such Subsidiary Guarantor would
be adversely affected and such holders would, to such extent, be creditors
solely of the Company and any Subsidiary Guarantor whose Guarantee was not
avoided or held unenforceable. To the extent the claims of the holders of the
Notes against the issuer of an invalid Guarantee were subordinated, they would
be subject to the prior payment of all liabilities of such Subsidiary Guarantor.
There can be no assurance that, after providing for all prior claims, there
would be sufficient assets to satisfy the claims of the holders of the Notes
relating to any voided portion of any of the Guarantees.
The measure of insolvency for purposes of the foregoing considerations
will vary depending upon the law applied in any such proceeding. Under one
measure, the Subsidiary Guarantors may be considered insolvent if the sum of
their debts, including contingent liabilities, were greater than the fair
marketable value of all of their assets at a fair valuation or if the present
fair marketable value of their assets were less than the amount that would be
required to pay their probable liability on their existing debts, including
contingent liabilities, as they become absolute and mature.
Based upon financial and other information, the Company believes that
the Notes and the Guarantees are being incurred for proper purposes and in good
faith and that the Company and each Subsidiary Guarantor is solvent and will
continue to be solvent after issuing the Notes or its Guarantee, as the case may
be, will have sufficient capital for carrying on its business after such
issuance and will be able to pay its debts as they mature. There can be no
assurance, however, that a court passing on such standards would agree with the
Company.
DEPENDENCE ON KEY PERSONNEl
The Company depends to a large extent on Robert L. G. Watson, its
Chairman of the Board, President and Chief Executive Officer, for its management
and business and financial contacts. See "Management." The unavailability of Mr.
Watson would have a materially adverse effect on the Company's business. The
Company's success is also dependent upon its ability to employ and retain
skilled technical personnel. While the Company has not to date experienced
difficulties in employing or retaining such personnel, its failure to do so in
the future could adversely affect its business.
LIMITATIONS ON THE AVAILABILITY OF THE COMPANY'S NET OPERATING LOSS
CARRYFORWARDS
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 ("Section 382") of the Internal Revenue Code of 1986, as amended
(the "Code"), occurred in December 1991. Accordingly, it is expected that the
use of net operating loss carryforwards generated prior to December 31, 1991 of
$6.9 million will be limited to approximately $235,000 per year. During 1992,
the Company acquired 100% of the outstanding capital stock of an unrelated
corporation. The use of net operating loss carryforwards of $3.6 million of the
unrelated corporation are limited to approximately $115,000 per year. As a
result of the issuance of additional shares of Common Stock for acquisitions and
to raise capital, an additional ownership change occurred in October 1993.
Accordingly, it is expected that the use of the $13.4 million of net operating
loss carryforwards generated through October 1993 will be limited to
approximately $1.0 million per year, subject to the limitations described above,
and $7.2 million in the aggregate. Future changes in ownership may further limit
the use of the Company's carryforwards. In addition to the Section 382
limitations, uncertainties exist as to the future utilization of the
carryforwards under the criteria set forth in Financial Accounting Standards
Board ("FASB") Statement No. 109, "Accounting for Income Taxes." The Company
established a valuation allowance of $5.5 million and $5.7 million for deferred
tax assets at December 31, 1994 and 1995, respectively.
LACK OF PUBLIC MARKET
There is no existing trading market for the Notes. Although the Initial
Purchasers have advised the Issuers that they currently intend to make a market
in the Notes and, if issued, the Exchange Notes, they are not obligated to do so
and they may discontinue such market-making at any time without notice. In
addition, such market-making activity may be limited during the Exchange Offer
and the pendency of the Shelf Registration Statement (as defined herein), if
any. Although the Notes will be eligible for trading in the PORTAL Market, there
can be no assurance as to the development of any market or the liquidity of any
market that may develop for the Notes or the Exchange Notes. The Issuers do not
intend to apply for listing or quotation of the Notes on any securities exchange
or stock market.
PURPOSE OF THE EXCHANGE OFFER
In connection with the initial sale of the Series A Notes, the Issuers
agreed, subject to certain conditions, to use their best efforts to conduct the
Exchange Offer pursuant to the terms of the Registration Rights Agreement by and
among the Issuers and the Initial Purchasers (the "Registration Rights
Agreement"). The Registration Rights Agreement, pursuant to which the Issuers
agreed, with respect to the Series A Notes and subject to the Issuers'
determination that the Exchange Offer is permitted under applicable law and
Commission policy, to (i) cause to be filed with the Commission, no later than
45 days after the Issue Date, a registration statement under the Securities Act
relating to the Exchange Notes and the Exchange Offer, (ii) use their best
efforts (a) to cause such registration statement to be declared effective by the
Commission in no event later than 120 days after the Issue Date, (b) upon the
effectiveness of such registration statement, to commence the Exchange Offer,
and (c) to cause the Exchange Offer to remain open for a period of not less than
30 days. The Issuers' purpose in making the Exchange Offer is to comply with
such agreement and to avoid the increase in interest rate on the Series A Notes
which would occur if the Exchange Offer were not duly and timely consummated.
The Exchange Offer should provide holders of the Series A Notes with the ability
to effect, for federal income tax purposes, a tax-free exchange of such Series A
Notes, which are subject to trading limitations, for Exchange Notes that will
not be subject to such restrictions.
The Exchange Offer provides holders of the Series A Notes with the
Exchange Notes that will generally be freely transferable by holders thereof
(other than any holder who is an "affiliate" or "promoter" of the Issuers within
the meaning of Rule 405 under the Securities Act), who may offer for resale,
resell or otherwise transfer such Exchange Notes without complying with the
registration and prospectus delivery provisions of the Securities Act, provided
that such Exchange Notes are acquired in the ordinary course of each such
holder's business and such holders have no arrangement or understanding with any
person to participate in a distribution of the Exchange Notes. Each holder who
participates in the Exchange Offer will be required to represent that any
Exchange Notes received by it will be acquired in the ordinary course of its
business, that at the time of consummation of the Exchange Offer such holder
will have no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes in violation of the provisions of the
Securities Act, and that such holder is not an affiliate of the Issuers within
the meaning of the Securities Act.
<PAGE>
RESALE OF THE EXCHANGE NOTES
With respect to resales of the Exchange Notes, based on interpretations
by the staff of the Commission set forth in no-action letters issued to third
parties, the Issuers believe that a holder or other person who receives Exchange
Notes, whether or not such person is the holder (other than a person that is an
"affiliate" of the Issuers within the meaning of Rule 405 under the Securities
Act) who receives Exchange Notes in exchange for Series A Notes in the ordinary
course of business and who is not participating, does not intend to participate,
and has no arrangement or understanding with any person to participate, in the
distribution of the Exchange Notes, will be allowed to resell the Exchange Notes
to the public without further registration under the Securities Act and without
delivering to the purchasers of the Exchange Notes a prospectus that satisfies
the requirements of Section 10 of the Securities Act. However, if any holder
acquires Exchange Notes in the Exchange Offer for the purpose of distributing or
participating in a distribution of the Exchange Notes, such holder cannot rely
on the position of the staff of the Commission enunciated in such no-action
letters or any similar interpretive letters, and must comply with the
registration and prospectus delivery requirements of the Securities Act (with
such prospectus containing the selling securityholder information required by
Item 507 of Regulation S-K under the Securities Act) in connection with any
resale transaction, unless an exemption from registration is otherwise
available. Further, each Participating Broker-Dealer that receives Exchange
Notes for its own account in exchange for Series A Notes, where such Series A
Notes were acquired by such Participating Broker-Dealer as a result of
market-making activities or other trading activities, may be a statutory
underwriter and must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act (which may be this Prospectus, as it may be
amended or supplemented from time to time) in connection with any resale of such
Exchange Notes.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent to
the Issuers in the Letter of Transmittal that (i) the Exchange Notes are to be
acquired by the holder or the person receiving such Exchange Notes, whether or
not such person is the holder, in the ordinary course of business, (ii) the
holder or any such other person (other than a broker-dealer referred to in the
next sentence) is not engaging and does not intend to engage, in the
distribution of the Exchange Notes, (iii) the holder or any such other person
has no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iv) neither the holder nor any such other
person is an "affiliate" of the Issuers within the meaning of Rule 405 under the
Securities Act, and (v) the holder or any such other person acknowledges that if
such holder or other person participates in the Exchange Offer for the purpose
of distributing the Exchange Notes it must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale of the Exchange Notes and cannot rely on those no-action letters. As
indicated above, each Participating Broker-Dealer that receives an Exchange Note
for its own account in exchange for the Series A Notes must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
For a description of the procedures for such resales by Participating
Broker-Dealers, see "Plan of Distribution."
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives Exchange Notes for its
own account pursuant to the Exchange Offer must acknowledge that it will deliver
a prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a Participating Broker-Dealer in connection with resales of Exchange Notes
received in exchange for the Series A Notes where such Series A Notes were
acquired as a result of market-making activities or other trading activities.
The Issuers have agreed that they will make this Prospectus, as amended or
supplemented, available to any Participating Broker-Dealer for use in connection
with any such resale during the period required by the Securities Act.
The Issuers will not receive any proceeds from any sales of the Exchange
Notes by Participating Broker-Dealers. The Exchange Notes received by
Participating Broker-Dealers for their own account pursuant to the Exchange
Offer may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the Exchange Notes or a combination of such methods of resale, at
market prices prevailing at the time of resale, at prices related to such
prevailing market prices or negotiated prices. Any such resale may be made
directly to the purchaser or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
Participating Broker-Dealer and/or the purchasers of any such Exchange Notes.
Any Participating Broker-Dealer that resells the Exchange Notes that were
received by it for its own account pursuant to the Exchange Offer and any broker
or dealer that participates in a distribution of such Exchange Notes may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any such resale of Exchange Notes and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation under
the Securities Act. The Letter of Transmittal states that by acknowledging that
it will deliver and by delivering a prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. The Issuers have agreed to pay all expenses incident to the
Exchange Offer other than commissions or concessions of any brokers or dealers
and will indemnify an Eligible Holder (including any broker-dealer) against
certain liabilities, including liabilities under the Securities Act.
The Issuers will promptly send additional copies of this Prospectus and
any amendment or supplement to this Prospectus to any Participating
Broker-Dealer that requests such documents in the Letter of Transmittal.
THE EXCHANGE OFFER
TERMS OF THE OFFER
The Issuers hereby offer, upon the terms and conditions set forth herein
and in the related Letter of Transmittal, to exchange the Exchange Notes for a
like principal amount of the outstanding Series A Notes. An aggregate of $215.0
million principal amount of Series A Notes are outstanding. The Exchange Offer
is not conditioned upon any minimum amount of the Series A Notes being tendered.
The Exchange Offer will expire at 5:00 p.m., New York City time, on
___________, 199_, unless extended. The term "Expiration Date" means 5:00 p.m.,
New York City time, on __________ , 199_, unless the Issuers, in their sole
discretion, notify the Exchange Agent that the period of the Exchange Offer has
been extended, in which case the term "Expiration Date" means the latest time
and date on which the Exchange Offer as so extended will expire. See "--
Expiration and Extension."
Holders of the Series A Notes who wish to exchange the Series A Notes
for the Exchange Notes and who validly tender the Series A Notes to the Exchange
Agent or validly tender the Series A Notes by complying with the book-entry
transfer procedures described below and, in each case, who furnish the Letter of
Transmittal and any other required documents to the Exchange Agent, will either
have the Exchange Notes mailed to them by the Exchange Agent or have the
Exchange Notes credited to their account in accordance with the book-entry
transfer procedures described below, promptly after such tender is accepted by
the Issuers. Subject to the terms and conditions of the Exchange Offer, the
Series A Notes which have been validly tendered prior to the Expiration Date
will be accepted on or promptly after the Expiration Date. Subject to the
applicable rules of the Commission, the Issuers, however, reserve the right,
prior to the first acceptance of tendered Series A Notes, to delay acceptance of
tendered Series A Notes, or to terminate the Exchange Offer, subject to the
provisions of Rule 14e-1(c) under the Exchange Act, which requires that a tender
offeror pay the consideration offered or return the tendered securities promptly
after the termination or withdrawal of a tender offer.
In addition, the Issuers reserve the right to waive any condition or
otherwise amend the Exchange Offer in any respect consistent with the Indenture
and the Registration Rights Agreement prior to the acceptance of tendered Series
A Notes. If any amendment by the Issuers of the Exchange Offer or waiver by the
Issuers of any condition thereto constitutes a material change in the
information previously disclosed to the holders of Series A Notes, the Issuers
will, in accordance with the applicable rules of the Commission, disseminate
promptly disclosure of such change in a manner reasonably calculated to inform
such holders of such change. If it is necessary to permit an adequate
dissemination of information regarding such material change, the Issuers will
extend the Exchange Offer to permit an adequate time for holders of the Series A
Notes to consider the additional information.
<PAGE>
CERTAIN EFFECTS OF THE EXCHANGE OFFER
Because the Exchange Offer is for any and all Series A Notes, the number
of Series A Notes tendered and exchanged in the Exchange Offer will reduce the
principal amount of Series A Notes outstanding. As a result, the liquidity of
any remaining Series A Notes may be substantially reduced. The Series A Notes
are currently eligible for sale pursuant to Rule 144A through the PORTAL System
of the National Association of Securities Dealers, Inc. Because the Issuers
anticipate that most holders of Series A Notes will elect to exchange such
Series A Notes for the Exchange Notes due to the absence of restrictions on the
resale of the Exchange Notes under the Securities Act, the Issuers anticipate
that the liquidity of the market for any Series A Notes remaining after the
consummation of the Exchange Offer may be substantially limited.
EXPIRATION AND EXTENSION
The Exchange Offer will expire at 5:00 p.m., New York City time, on
__________ , 199_, unless extended by the Issuers. The Exchange Offer may be
extended by oral or written notice from the Issuers to the Exchange Agent at any
time or from time to time, on or prior to the date then fixed for the expiration
of the Exchange Offer. Public announcement of any extension of the Exchange
Offer will be timely made by the Company, but, unless otherwise required by law
or regulation, the Company will not have any obligation to communicate such
public announcement other than by making a release to the Dow Jones News
Service.
The Issuers reserve the right, in their sole discretion, (i) to delay
accepting any Series A Notes, (ii) to extend the Exchange Offer or (iii) if any
conditions set forth below under "--Conditions" shall not have been satisfied,
to terminate the Exchange Offer by giving oral or written notice of such delay,
extension or termination to the Exchange Agent. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by oral or written notice thereof to the registered holders. If the Exchange
Offer is amended in a manner determined by the Issuers to constitute a material
change, the Issuers will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the registered holders of the
Private Notes, and the Issuers will extend the Exchange Offer for a period of
five to ten business days, depending upon the significance of the amendment and
the manner of disclosure to the registered holders, if the Exchange Offer would
otherwise expire during such five to ten business day period.
CONDITIONS
The Exchange Offer is subject to the following conditions: (i) the
Exchange Offer does not violate applicable law or any applicable interpretation
of the staff of the Commission, (ii) no action or proceeding is instituted or
threatened in any court or by any governmental agency which might materially
impair the ability of the Issuers to proceed with the Exchange Offer and no
material adverse development has occurred in any existing action or proceeding
with respect to the Issuers and (iii) all governmental approvals have been
obtained, which approvals the Issuers deem necessary for the consummation of the
Exchange Offer.
REGISTRATION RIGHTS
On November 14, 1996, the Issuers entered into the Registration Rights
Agreement with the Initial Purchasers pursuant to which the Issuers have, for
the benefit of the holders of the Notes, at the Issuers' cost, agreed to (i)
file the registration statement of which this Prospectus forms a part (the
"Exchange Offer Registration Statement"), under the Securities Act with respect
to the Exchange Offer which constitutes the Issuers' offer to exchange the
Series A Notes for the Exchange Notes, which will have terms identical in all
material respects to the Series A Notes (except that the Exchange Notes will not
contain terms with respect to transfer restrictions and will not contain certain
provisions relating to an increase in the interest rate which were applicable to
the Series A Notes in certain circumstances relating to the timing of the
Exchange Offer), and (ii) cause the Exchange Offer Registration Statement to be
declared effective under the Securities Act within 120 days after the Issue
Date. The Issuers will keep the Exchange Offer open for not less than 30
calendar days (or longer if required by applicable law) after the date notice of
the Exchange Offer is mailed to the holders of the Series A Notes.
In the event that (i) any changes in law or the applicable
interpretations of the staff of the Commission do not permit the Issuers to
effect the Exchange Offer, (ii) the Exchange Offer is not consummated within 150
days of the Issue Date, (iii) in certain circumstances, certain holders of
unregistered Exchange Notes so request within 120 days after the consummation of
the Exchange Offer or (iv) in the case of any holder that participates in the
Exchange Offer, such holder does not receive Exchange Notes on the date of the
exchange that may be sold without restriction under state and federal securities
laws (other than due solely to the status of such holder as an affiliate of the
Issuers within the meaning of the Securities Act) and so notifies the Issuers
within 60 days after such holder first becomes aware of such restriction and
provides the Issuers with a reasonable basis for its conclusion, in the case of
each of clauses (i)-(iv) of this sentence, then the Issuers will promptly
deliver to the holders and the Trustee written notice thereof and, at their
cost, (a) as promptly as practicable, file a shelf registration statement
covering resales of the Notes (the "Shelf Registration Statement"), (b) use
their best efforts to cause the Shelf Registration Statement to be declared
effective under the Securities Act and (c) use their best efforts to keep the
Shelf Registration Statement effective until three years after their effective
date, or such shorter period ending when (i) all Notes covered by the Shelf
Registration Statement have been sold in the manner set forth and as
contemplated therein or (ii) a subsequent Shelf Registration Statement covering
all unregistered Notes has been declared effective under the Securities Act. The
Issuers will, in the event of the filing of a Shelf Registration Statement,
provide to each holder of the Notes copies of the prospectus which is a part of
the Shelf Registration Statement, notify each such holder when the Shelf
Registration Statement for the Notes has become effective and take certain other
actions as are required to permit unrestricted resales of the Notes. A holder of
Notes that sells such Notes pursuant to the Shelf Registration Statement
generally will be required to be named as a selling securityholder in the
related prospectus and to deliver a prospectus to purchasers, will be subject to
certain of the civil liability provisions under the Securities Act in connection
with such sales and will be bound by the provisions of the Registration Rights
Agreement which are applicable to such a holder (including certain
indemnification obligations). In addition, each holder of the Notes will be
required to deliver information to be used in connection with the Shelf
Registration Statement and to provide comments on the Shelf Registration
Statement within the time periods set forth in the Registration Rights Agreement
in order to have its Notes included in the Shelf Registration Statement and to
benefit from the provisions regarding liquidated damages set forth therein.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is available without charge by writing to the Company
at 500 North Loop 1604 East, Suite 100, San Antonio, Texas 78232, Attention:
Secretary.
HOW TO TENDER
A holder of the Series A Notes may tender the Series A Notes by (a)
properly completing and signing the Letter of Transmittal or a facsimile thereof
(all references in this Prospectus to the Letter of Transmittal shall be deemed
to include a facsimile thereof) and delivering the same, together with the
Series A Notes being tendered (or a confirmation of an appropriate book-entry
transfer) to the Exchange Agent on or prior to the Expiration Date or (b)
requesting a broker, dealer, bank, trust company or other nominee to effect the
transaction for such holder prior to the Expiration Date.
If Exchange Notes are to be delivered to an address other than that of
the registered holder appearing on the note register (the "Note Register")
maintained by the registrar of the Notes, the signature on the Letter of
Transmittal must be guaranteed by a commercial bank or trust company having an
office or correspondent in the United States, or by a member firm of a national
securities exchange or the National Association of Securities Dealers, Inc. (any
of the foregoing is hereinafter referred to as an "Eligible Institution").
Exchange Notes will not be issued in the name of a person other than that of the
registered holder of the Series A Notes appearing on the Note Register.
The Exchange Agent will establish an account with respect to the Series
A Notes at DTC within two business days after the date of this Prospectus, and
any financial institution which is a participant in DTC may make book-entry
delivery of the Series A Notes by causing DTC to transfer such Series A Notes
into the Exchange Agent's account in accordance with DTC's procedure for such
transfer. Although delivery of the Series A Notes may be effected through
book-entry transfer into the Exchange Agent's account at DTC, the Letter of
Transmittal, with any required signature guarantees and any other required
documents, must in any case be transmitted to and received by the Exchange Agent
on or prior to the Expiration Date at one of its addresses set forth below under
"Exchange Agent", or in compliance with the guaranteed delivery procedure
described below. DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO
THE EXCHANGE AGENT. All references in this Prospectus to deposit or delivery of
Series A Notes shall be deemed to include DTC's book-entry delivery method.
Notwithstanding the foregoing, any financial institution that is a
participant in the Depository's Book-Entry Transfer Facility system may make
book-entry delivery of the Existing Notes by causing the Depositary to transfer
such Existing Notes into the Exchange Agent's account in accordance with the
Depository's Automated Tender Offer Program ("ATOP") procedures for such
book-entry transfers. However, the exchange for the Existing Notes so tendered
will only be made after timely confirmation (a "Book-Entry Confirmation") of
such Book-Entry Transfer of Existing Notes into the Exchange Agent's account,
and timely receipt by the Exchange Agent of an Agent's Message (as such term is
defined in the next sentence) and any other documents required by the Letter of
Transmittal. The term "Agent's Message" means a message, transmitted by the
Book-Entry Transfer Facility and received by the Exchange Agent and forming a
part of a Book-Entry Confirmation, which states that the Book-Entry Transfer
Facility has received an express acknowledgment from a participant tendering the
Series A Notes that is the subject of such Book-Entry Confirmation that such
participant has received and agrees to be bound by the terms of the Letter of
Transmittal, and that the Issuers may enforce such agreement against such
participant.
THE METHOD OF DELIVERY OF THE SERIES A NOTES AND ALL OTHER DOCUMENTS,
INCLUDING DELIVERY THROUGH DTC, IS AT THE ELECTION AND RISK OF THE HOLDER. IF
SENT BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, RETURN RECEIPT REQUESTED,
BE USED, AND PROPER INSURANCE BE OBTAINED.
If a holder desires to tender Series A Notes pursuant to the Exchange
Offer and such holder's Series A Notes are not immediately available or time
will not permit all of the above documents to reach the Exchange Agent prior to
the Expiration Date, or such holder cannot complete the procedure of book-entry
transfer on a timely basis, such tender may be effected if the following
conditions are satisfied:
(a) such tenders are made by or through an Eligible Institution;
(b) a properly completed and duly executed Notice of Guaranteed
Delivery, in substantially the form provided by the Issuers, is received by the
Exchange Agent as provided below on or prior to the Expiration Date; and
(c) the Series A Notes, in proper form for transfer (or confirmation of
book-entry transfer of such Series A Notes into the Exchange Agent's account at
DTC as described above), together with a properly completed and duly executed
Letter of Transmittal and all other documents required by the Letter of
Transmittal, are received by the Exchange Agent within three New York Stock
Exchange, Inc. trading days after the date of execution of such Notice of
Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand or
transmitted by facsimile transmission or mailed to the Exchange Agent and must
include a guarantee by an Eligible Institution in the form set forth in such
Notice of Guaranteed Delivery.
A tender will be deemed to have been received as of the date when the
tendering holder's duly signed Letter of Transmittal accompanied by Series A
Notes (or a timely confirmation received of a book-entry transfer of Series A
Notes into the Exchange Agent's account at DTC) or a Notice of Guaranteed
Delivery from an Eligible Institution is received by the Exchange Agent.
Issuances of Exchange Notes in exchange for Series A Notes tendered pursuant to
a Notice of Guaranteed Delivery by an Eligible Institution will be made only
against delivery of the Letter of Transmittal (and any other required documents)
and the tendered Series A Notes (or a timely confirmation received of a
book-entry transfer of Series A Notes into the Exchange Agent's account at DTC)
with the Exchange Agent.
Partial tenders of Series A Notes may be made only if (i) the principal
amount tendered is equal to $1,000 or an integral multiple thereof; and (ii) the
remaining untendered portion of such Series A Note is in a principal amount of
$250,000, or any integral multiple of $1,000 in excess of such amount. Holders
tendering less than the entire principal amount of any Series A Note they hold
in accordance with the foregoing restrictions must appropriately indicate such
fact on the Letter of Transmittal accompanying the tendered Series A Note.
With respect to tenders of Series A Notes, the Issuers reserve full
discretion to determine whether the documentation is complete and generally to
determine all questions as to tenders, including the date of receipt of a
tender, the propriety of execution of any document, and other questions as to
the validity, form, eligibility or acceptability of any tender. The Issuers
reserve the right to reject any tender not in proper form or otherwise not valid
or the acceptance of exchange of which may, in the opinion of the Issuers'
counsel, be unlawful or to waive any irregularities or conditions, and the
Issuers' interpretation of the terms and conditions of the Exchange Offer
(including the instructions on the Letter of Transmittal) will be final. The
Issuers shall not be obligated to give notice of any defects or irregularities
in tenders and shall not incur any liability for failure to give any such
notice. The Exchange Agent may, but shall not be obligated to, give notice of
any irregularities or defects in tenders, and shall not incur any liability for
any failure to give any such notice. The Series A Notes shall not be deemed to
have been duly or validly tendered unless and until all defects and
irregularities have been cured or waived. All improperly tendered Series A
Notes, as well as Series A Notes in excess of the principal amount tendered for
exchange, will be returned (unless irregularities and defects are timely cured
or waived), without cost to the tendering holder (or, in the case of Series A
Notes delivered by book-entry transfer within DTC, will be credited to the
account maintained within DTC by the participant in DTC which delivered such
shares), promptly after the Expiration Date.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, certain terms
and conditions which are summarized below and are part of the Exchange Offer.
Each holder who participates in the Exchange Offer will be required to
represent that any Exchange Notes received by it will be acquired in the
ordinary course of its business, that at the time of consummation of the
Exchange Offer such holder will have no arrangement or understanding with any
person to participate in the distribution of the Exchange Notes in violation of
the provision of the Securities Act, and that such holder is not an affiliate
within the meaning of the Securities Act.
The Series A Notes tendered in exchange for the Exchange Notes (or a
timely confirmation of a book-entry transfer of such Series A Notes into the
Exchange Agent's account at DTC) must be received by the Exchange Agent, with
the Letter of Transmittal and any other required documents, by 5:00 p.m., New
York City time, on or prior to ___________, 199_, unless extended, or within the
time periods set forth above in "-- How to Tender" pursuant to a Notice of
Guaranteed Delivery from an Eligible Institution. The party tendering the Series
A Notes for exchange (the "Holder") will sell, assign and transfer the Series A
Notes to the Exchange Agent, as agent of the Issuers, and irrevocably constitute
and appoint the Exchange Agent as the Holder's agent and attorney-in-fact to
cause the Series A Notes to be transferred and exchanged. The Holder will
warrant that it has full power and authority to tender, exchange, sell, assign
and transfer the Series A Notes and to acquire the Exchange Notes issuable upon
the exchange of such tendered Series A Notes, the Exchange Agent, as agent of
the Issuers, will acquire good and unencumbered title to the tendered Series A
Notes, free and clear of all liens, restrictions, charges and encumbrances, and
that the Series A Notes tendered for exchange are not subject to any adverse
claims when accepted by the Exchange Agent, as agent of the Issuers. The Holder
will also covenant and agree that it will, upon request, execute and deliver any
additional documents deemed by the Issuers or the Exchange Agent to be necessary
or desirable to complete the exchange, sale, assignment and transfer of the
Series A Notes. All authority conferred or agreed to be conferred in the Letter
of Transmittal by the Holder will survive the death or incapacity of the Holder
and any obligation of the Holder shall be binding upon the heirs, personal
representatives, successors and assigns of such Holder.
Signature(s) on the Letter of Transmittal will be required to be
guaranteed as set forth above in "-- How to Tender." All questions as to the
validity, form, eligibility (including time of receipt) and acceptability of any
tender will be determined by the Issuers, in their sole discretion, and such
determination will be final and binding. Unless waived by the Issuers,
irregularities and defects must be cured by the Expiration Date. The Issuers
will pay all security transfer taxes, if any, applicable to the transfer and
exchange of the Series A Notes tendered.
WITHDRAWAL RIGHTS
All tenders of the Series A Notes may be withdrawn at any time prior to
acceptance thereof on the Expiration Date. To be effective, a notice of
withdrawal must be timely received by the Exchange Agent at the address set
forth below under "-- Exchange Agent." Any notice of withdrawal must specify the
person named in the Letter of Transmittal as having tendered the Series A Notes
to be withdrawn. If the Series A Notes have been physically delivered to the
Exchange Agent, the tendering holder must also submit the serial number shown on
the particular Series A Notes to be withdrawn. If the Series A Notes have been
delivered pursuant to the book-entry procedures set forth above under "--How to
Tender," any notice of withdrawal must specify the name and number of the
participant's account at DTC to be credited with the withdrawn Series A Notes.
The Exchange Agent will return the properly withdrawn Series A Notes as soon as
practicable following receipt of notice of withdrawal. All questions as to the
validity, including time of receipt, of notices of withdrawals will be
determined by the Issuers, and such determinations will be final and binding on
all parties.
ACCEPTANCE OF TENDERS
Subject to the terms and conditions of the Exchange Offer, including the
reservation of certain rights by the Issuers, the Series A Notes tendered
(either physically or through book-entry delivery as described in "-- How to
Tender") with a properly executed Letter of Transmittal and all other required
documentation, and not withdrawn, will be accepted promptly after the Expiration
Date. Subject to such terms and conditions, Exchange Notes to be issued in
exchange for properly tendered Series A Notes will either be mailed by the
Exchange Agent or credited to the holder's account in accordance with the
appropriate book-entry procedures promptly after the acceptance of the properly
tendered Series A Notes. Acceptance of Series A Notes will be effected by the
delivery of a notice to that effect by the Issuers to the Exchange Agent.
Subject to the applicable rules of the Commission, the Issuers, however, reserve
the right, prior to the acceptance of tendered Series A Notes, to delay
acceptance of tendered Series A Notes upon the occurrence of any of the
conditions set forth above under the caption "-- Conditions." The Issuers
confirms that their reservation of the right to delay acceptance of tendered
Series A Notes is subject to the provisions of Rule 14e-1(c) under the 1934 Act
which requires that a tender offeror pay the consideration offered or return the
tendered securities promptly after the termination or withdrawal of a tender
offer.
Although the Issuers do not currently intend to do so, if they modify
the terms of the Exchange Offer, such modified terms will be available to all
holders of Series A Notes, whether or not their Series A Notes have been
tendered prior to such modification. Any material modification will be disclosed
in accordance with the applicable rules of the Commission and, if required, the
Exchange Offer will be extended to permit holders of Series A Notes adequate
time to consider such modification.
The tender of Series A Notes pursuant to any one of the procedures set
forth in "-- How to Tender" will constitute an agreement between the tendering
holder and the Issuers upon the terms and subject to the conditions of the
Exchange Offer.
<PAGE>
EXCHANGE AGENT
IBJ Schroder Bank & Trust Company has been appointed as Exchange Agent
for the Exchange Offer. Letters of Transmittal must be addressed to the Exchange
Agent as follows:
IBJ Schroder Bank & Trust Company
One State Street
Eleventh Floor
New York, New York 10004
Attention: Corporate Trust Trustee
Administration
Delivery to other than the above address will not constitute valid
delivery.
SOLICITATION OF TENDERS; EXPENSES
Except as described above under "Exchange Agent," the Issuers have not
retained any agent in connection with the Exchange Offer and will not make any
payments to brokers, dealers or other persons for soliciting or recommending
acceptances of the Exchange Offer. The Issuers will, however, reimburse the
Exchange Agent for its reasonable out-of-pocket expenses in connection
therewith. The Issuers will also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding copies of this Prospectus and related documents to the beneficial
owners of the Series A Notes and in handling or forwarding tenders for their
customers.
<PAGE>
USE OF PROCEEDS
The Issuers will not receive any proceeds as a result of the Exchange
Offer.
The net proceeds to the Issuers from the Offering were approximately
$206.8 million after deducting discounts and estimated offering expenses payable
by the Issuers. The Issuers utilized the net proceeds, primarily to (i)
consummate the Recent Acquisitions, (ii) repay all indebtedness outstanding
under the Company's credit facility with BTCo and ING Capital and (iii) pay
certain expenses incurred in connection with the Transactions. The following
table illustrates the sources and uses of proceeds:
Sources of Funds Uses of Funds
- ----------------------------- ----------------------------------------------
(dollars in thousands)
Notes $215,000 Purchase of CGGS (2) $ 94,771
Purchase of Portilla and Happy(3) 26,848
Purchase of East White Point and
Stedman Island 8,771
Repay Bridge Facility 85,000
Fees and Expenses 8,200
Working Capital (8,590)
---------- ---------
Total Sources (1) $215,000 Total Uses $215,000
---------- ---------
- --------
(1)Does not include the borrowing base of $40.0 million under the New Credit
Facility, $20.0 million of which will initially be available upon
consummation of the Offering.
(2) $126.4 million converted at an approximate exchange rate of U.S.$0.7499 to
one Canadian dollar.
(3) Includes $20.6 million paid to Christiania Bank og Kreditkasse
("Christiania") and $7.0 million paid to Acco and the holders of certain
notes (the "Partnership Notes") and options to purchase certain overriding
royalty interests issued by the Partnership, net of estimate for the
accrual of net crude oil and natural gas revenues to the closing date.
<PAGE>
CAPITALIZATION
The following table sets forth the total consolidated capitalization of
the Issuers at September 30, 1996, on an historical basis and on a pro forma
basis. This table should be read in conjunction with the Consolidated Financial
Statements of the Issuers and the notes thereto, the unaudited Pro Forma
Financial Information and the notes thereto and the other financial information
included elsewhere in this Prospectus.
September 30, 1996
----------------------------
Pro Forma
Actual As Adjusted
----------- ------------
(dollars in thousands)
Cash and cash equivalents $ 9,993 $ 11,486
=========== ============
Total debt, including current maturities:
Bridge Facility (1) 85,000 --
Other long-term obligation 124 124
New Credit Facility -- --
11 1/2% Senior Notes due 2004 -- 215,000
----------- ------------
Total debt 85,124 215,124
----------- ------------
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000
shares authorized; 45,741 shares of Series
1995-B Preferred Stock issued and
4,574,100) 0 0
Common stock, $.01 par value; 50,000,000
shares authorized; 5,804,812 shares issued 58 58
Treasury stock, 70,711 shares (374) (374)
Additional paid-in capital 50,920 50,920
Retained deficit (14,184) (14,407)
----------- ------------
Total stockholders' equity 36,420 36,197
----------- ------------
Total capitalization $ 121,544 $ 251,321
=========== ============
- -------------
(1) All amounts outstanding under the Bridge Facility were repaid with a portion
of the proceeds of the initial offering of the Series A Notes.
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial data are derived from the
historical financial statements of the Company set forth elsewhere in this
Prospectus and are adjusted to reflect the consummation of the Transactions.
The Unaudited Pro Forma Condensed Balance Sheet of the Company as of
September 30, 1996 has been prepared assuming the Transactions were consummated
on September 30, 1996, and the Unaudited Pro Forma Statements of Operations of
the Company for the year ended December 31, 1995 and the nine months ended
September 30, 1996 have been prepared assuming the Transactions were consummated
on January 1, 1995 and January 1, 1996, respectively. The historical revenues
and expenses of CGGS, the Wyoming Properties, Portilla and Happy and East White
Point and Stedman Island represent amounts recorded by or with respect to such
businesses or properties for the periods indicated.
The historical financial statements of CGGS were prepared in Canadian
dollars in accordance with Canadian generally accepted accounting principles.
This information has been adjusted to present the historical financial
statements in accordance with United States generally accepted accounting
principles. The statements of operations have been translated into U.S. dollars
at the average exchange rates of $0.7321 and $0.7273 to one Canadian dollar for
the nine months ended October 31, 1996 and the fiscal year ended October 31,
1995, respectively. The monetary amounts on the unaudited balance sheet as of
October 31, 1996 have been translated at the period-end exchange rate of $0.7458
to one Canadian dollar. Non-monetary amounts have been translated at a
historical November 1, 1994 rate with changes in the amounts since that date
translated at the average rate over the twenty-month period.
The Company previously owned a 50% working interest in Portilla and a
12% working interest in Happy. In March 1996, the Company sold its interests in
Portilla and Happy to Acco for net consideration of $15.6 million. Acco
separately obtained the release of the 50% overriding royalty interest in
Portilla previously owned by the Pension Fund and subsequently contributed its
interests in Portilla and Happy to the Partnership. The pro forma adjustments
assume that the Issuers acquired the Pension Fund's interest in Portilla at the
beginning of the periods indicated and that the Issuers owned Portilla and Happy
during the period from March 21, 1996 to September 30, 1996.
The Unaudited Pro Forma Condensed Balance Sheet reflects the preliminary
allocations of the purchase prices for the Recent Acquisitions to the assets and
liabilities of the Company. The final allocation of the purchase prices, and the
resulting effect on DD&A expense in the accompanying unaudited Pro Forma
Statements of Operations, will differ from the preliminary estimates because the
final allocation will be based on the actual closing date purchase prices and
the estimated fair values of the assets and liabilities.
The unaudited pro forma financial data should be read in conjunction
with the notes thereto, the Consolidated Financial Statements of the Company and
the notes thereto and the historical financial information and the notes thereto
relating to CGGS, the Wyoming Properties and Portilla and Happy included
elsewhere in this Prospectus.
The unaudited pro forma financial data are not indicative of the
financial position or results of operations of the Company which would actually
have occurred if the Transactions 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.
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS For
the Year Ended December 31, 1995
Historical Acquisitions
----------- -------------------------------------------------
East White Adjustment Acquisition
Abraxas Point and to Reflect and
Petroleum Wyoming Stedman Sale of Offering Pro Forma
Corporation CGGS Properties Portilla(1) Island (2) Nevis (a) Adjustments
----------- -------- ----------- ---------- ------------ ---------- ----------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue:
Oil and gas ................ $ 13,660 $ 13,849 $ 7,542 $ 3,676 $ 2,062 $ -- $ -- $ 40,789
production sales
Processing .............. -- 24,072 -- -- -- (20,012) -- 4,060
Rig revenue ............. 108 -- -- -- -- -- -- 108
Other ................... 49 690 -- -- -- -- -- 739
-------- -------- --------- --------- ------- -------- -------- ----------
Total operating ............ 13,817 38,611 7,542 3,676 2,062 (20,012) -- 45,696
revenue
Operating costs and
expenses:
LOE ..................... 4,333 4,137 2,142 835 475 -- -- 11,922
Processing .............. -- 10,737 -- -- -- (9,501) -- 1,236
DD&A .................... 5,434 10,003 -- -- -- (3,672) 9,327 (b) 21,092
Rig operations .......... 125 -- -- -- -- -- -- 125
G&A ..................... 1,042 3,257 -- -- -- (1,173) (534)(c) 2,592
-------- -------- --------- --------- ------- -------- -------- ----------
Total operating expenses.... 10,934 28,134 2,142 835 475 (14,346) 8,793 36,967
-------- -------- --------- --------- ------- -------- -------- ----------
Operating Income ........... 2,883 10,477 5,400 2,841 1,587 (5,666) (8,793) 8,729
Other (income) expense:
Interest income ......... (34) (82) -- -- -- -- (116)
Amortization of deferred
financing fee ........... 214 106 -- -- -- 705 (d) 1,025
Interest expense ........ 3,911 11,822 -- -- -- (5,782) 14,325 (e) 24,276
Unrealized
foreign exchange gain ... -- (795) -- -- -- 795 (f) --
Realized foreign
exchange loss .. ........ -- 44 -- -- -- -- -- 44
-------- -------- --------- --------- ------- -------- -------- ----------
Income (loss) before tax.... (1,208) (618) 5,400 2,841 1,587 116 (24,618) (16,500)
tax
Income tax (benefit):
Current ................. -- 224 -- -- -- (128) -- 96
Deferred ................ -- -- -- -- -- -- (679)(g) (679)
-------- -------- --------- --------- ------- -------- -------- ----------
Net income (loss) .......... $ (1,208) $ (842) $ 5,400 $ 2,841 $ 1,587 $ 244 $(23,939) $(15,917)
Less dividend requirement on
cumulative preferred stock.. (366) -- -- -- -- -- -- (366)
-------- -------- --------- --------- ------- -------- -------- ----------
Net income (loss)
available to common
stockholders ............... $ (1,574) $ (842) $ 5,400 $ 2,841 $ 1,587 $ 244 $(23,939) $ (16,283)
======== ======== ========= ========= ======= ======== ======== ==========
Earnings (loss) per
share: ..................... $ (0.34) $ (3.51)
======== ======== ========= ========= ======= ======== ======== ==========
Other data:
EBITDA $ 8,351 $ 20,518 $ 5,400 $ 2,841 $ 1,587 $ (9,338) $ 534 $ 29,893
======== ======== ========= ========= ======= ======== ======== ===========
- -----------
(1) The data for Portilla reflects that portion of Portilla previously owned by
the Pension Fund.
(2) The data for East White Point and Stedman Island reflects that portion of
East White Point and Stedman Island previously owned by the Pension Fund.
Seee notes to unaudited pro forma financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1996
Historical Acquisitions
----------- -----------------------------------------------
East White Adjustment Acquisition
Abraxas Point and to Reflect and
Petroleum Wyoming Portilla Stedman Sale of Offering
Corporation CGGS Properties and Happy(h) Island Nevis (a) Adjustments Pro Forma
----------- -------- ----------- ----------- ---------- ----------- ----------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue:
Oil and gas
production sales ..... $ 11,786 $ 12,246 $ 7,280 $ 5,232 $ 2,359 $ -- $ -- $ 38,903
Processing ........... -- 20,279 -- -- -- (17,214) -- 3,065
Rig revenue .......... 106 -- -- -- -- -- -- 106
Other ................ 17 160 -- -- -- -- -- 177
----------- -------- ----------- ----------- ---------- ----------- ----------- ----------
Total operating revenue... 11,909 32,685 7,280 5,232 2,359 (17,214) -- 42,251
----------- -------- ----------- ----------- ---------- ----------- ----------- ----------
Operating costs and
expenses:
LOE .................. 3,296 2,920 1,844 1,086 404 -- -- 9,550
Processing ........... -- 11,289 -- -- -- (10,097) -- 1,192
DD&A ................. 4,145 7,722 -- -- -- (3,098) 8,895 (b) 17,664
Rig operations ....... 113 -- -- -- -- -- -- 113
G&A .................. 1,250 2,156 -- -- -- (481) (380)(c) 2,545
Hedging loss ......... 511 -- 370 -- -- -- -- 881
----------- -------- ----------- ----------- ---------- ----------- ----------- ----------
Total operating expenses... 9,315 24,087 1,844 1,456 404 (13,676) 8,515 31,945
----------- -------- ----------- ----------- ---------- ----------- ----------- ----------
Operating income ......... 2,594 8,598 5,436 3,776 1,955 (3,538) (8,515) 10,306
Other (income)
expense:
Interest income ...... (156) (226) -- -- -- -- -- (382)
Amortization of
deferred financing
fee .................. 192 80 -- -- -- -- 497 (d) 769
Interest expense ..... 2,142 8,870 -- -- -- (4,255) 11,394 (e) 18,151
Minority interest .... 58 -- -- -- -- -- -- 58
Unrealized foreign
exchange gain ........ -- (2,070) -- 2,070 (f) --
gain
Realized foreign ..... -- -- --
exchange gain ........ -- (51) (51)
Loss on Securities ... 235 -- -- -- -- -- -- 235
----------- -------- ----------- ----------- ---------- ----------- ----------- ----------
Income (loss) before tax .. 123 1,995 5,436 3,776 1,955 717 (22,476) (8,474)
Income Tax (benefit):
Current .............. -- 190 -- -- -- (89) -- 101
Deferred ............. -- -- -- -- -- -- (541)(g) (541)
----------- -------- ----------- ----------- ---------- ----------- ----------- ----------
Net income (loss) excluding
extraordinary items ...... 123 1,805 5,436 3,776 1,955 806 (21,935) (8,034)
Less dividend
requirement on
cummulative preferred
stock .................... (274) -- -- -- -- -- -- (274)
----------- -------- ----------- ----------- ---------- ----------- ----------- ----------
Net income (loss)
available to
common stockholders ...... $ (151) $ 1,071 $ 5,436 $ 3,776 $ 1,955 $ 806 $(21,201) $ (8,308)
=========== ======== ========== =========== ========== =========== =========== ===========
Earnings (loss) per
share $ (0.03) $ (1.54)
=========== ======== ========== =========== ========== =========== =========== ===========
Other data:
EBITDA $ 6,895 $ 16,597 $ 5,436 $ 3,776 $ 1,955 $ (6,636) $ 380 $ 28,403
=========== ======== ========== =========== ========== =========== =========== ===========
- -------------
</TABLE>
See notes to unaudited pro forma financial statements.
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
As of September 30, 1996
Historical Acquisitions Acquisition
Adjustments
Including
Adjustments Portilla and East
Abraxas to Reflect White Point
Petroleum Sale and Stedman Offering
Corporation CGGS of Nevis (a) Island Adjustments Pro Forma
------------- ---------- ---------- --------------- ------------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash $ 9,993 $ 7,495 $ 87,000 $ (84,412)(b) $ (8,590)(f) $ 11,486
Accounts Receivable 3,965 10,099 (5,769) -- -- 8,295
Other 280 -- -- -- -- 280
---------- ---------- ---------- --------------- ---------- -----------
Total current
assets 14,238 17,594 81,231 (84,412) (8,590) 20,061
Property and
equipment:
Oil and gas 111,104 12,769 -- 49,336 (b) --
properties
29,022 (d) --
8,771 (e) -- 211,002
Processing -- 78,860 (50,790) 18,190 (b) -- 46,260
facilities
Other property
and equipment 872 -- 3,600 (b) -- 4,472
Investment and
advances to
partnership 2,397 (2,397)(d) -- --
Deferred financing 971 992 -- 223 (d) 8,200 (f)
fees
992 (b) (223)(b) 9,171
Other assets 858 -- -- 858
---------- ------------ ---------- -------------- ---------- -----------
Total assets $ 130,440 $ 110,215 $ 30,441 $ 21,341 $ (613) $ 291,824
========== ============ ========== ============== ========== ===========
Liabilities and
stockholders'
equity:
Total current
liabilities $ 6,556 $ 5,586 $ (2,050) $ (2,135)(b) $ -- $ 7,957
Long-term debt:
Financing
agreement 85,000 -- -- -- (85,000)(f) --
CGGS debentures -- 84,412 -- (84,412)(b) -- --
Acquisition debt:
CGGS -- -- -- 94,771 (b) (94,771)(f) --
shareholders
Portilla -- -- -- 26,848 (d) (26,848)(f) --
East White -- -- -- 8,771 (e) (8,771)(f) --
Point/Stedman
Notes -- -- -- 215,000 (f) 215,000
Other liabilities 124 3,834 (1,664) -- -- 2,294
Deferred income 187 -- -- 28,036 (b) -- 28,223
taxes
Minority interest 2,153 -- -- -- -- 2,153
Shareholders'
equity:
Preferred stock -- -- --
Common stock 58 25,296 -- (25,296)(c) -- 58
Additional 50,920 -- -- -- -- 50,920
paid-in capital
Retained earnings
(deficit) (14,184) (8,672) 34,155 (25,483)(c) (223) (g) (14,407)
Cumulative
foreign exchange
adjsutment -- (241) 241 (c) -- --
Treasury stock (374) -- -- -- -- (374)
---------- ----------- ----------- -------------- ---------- -----------
Total stockholders'
equity 36,420 16,383 34,155 $ (50,538) $ (223) 36,197
========== =========== =========== ============== ========== ===========
Total liabilities
and stockholders'
equity $ 130,440 $ 110,215 $ 30,441 $ 21,341 $ (613) $ 291,824
========== =========== ========== ============== ========== ===========
- -------------
See notes to unaudited pro forma financial statements.
</TABLE>
<PAGE>
121
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Note 1. The pro forma unaudited Statements of Operations for the periods ended
December 31, 1995 and September 30, 1996 reflect the Transactions as if
consummated on January 1, 1995 and January 1, 1996, respectively:
a. To adjust for the sale of the Nevis Plant prior to the Issuers'
acquisition of CGGS.
The reduction in G&A expense represents the contractual management and
administrative fee paid to the operator related to the results of the Nevis
Plant, net of overhead recoveries charged to third parties for processing of
natural gas.
The reduction in interest expense relates to the repayment of a portion of
the debentures issued by CGGS in connection with its acquisition of the Nevis
Plant.
b. To adjust DD&A expense for the year ended December 31, 1995 to reflect the
acquisition of CGGS, the Wyoming Properties, the 50% overriding royalty interest
in Portilla previously owned by the Pension Fund and the 50% overriding royalty
interest in East White Point and Stedman Island for the twelve months ended
December 31, 1995 and to adjust DD&A expense for the nine months ended September
30, 1996 to reflect the acquisitions of CGGS, the Wyoming Properties, the
reacquisition of Portilla and Happy for the period March 21, 1996 to September
30, 1996, the acquisition of the 50% overriding royalty interest in Portilla
previously owned by the Pension Fund for the nine months ended September 30,
1996 and the 50% overriding royalty interest in East White Point and Stedman
Island for the nine months ended September 30, 1996. DD&A expense of crude oil
and natural gas properties is computed using the units of production method.
Depreciation of natural gas processing facilities is computed using the straight
line method over the estimated useful life of 18 years.
c. To adjust G&A expense of CGGS to reflect the following:
Fiscal Nine Months Ended
1995 September 30, 1996
-------- -------------------
(dollars in thousands)
Reversal of management and administrative
fees paid to third party $(1,649) $ (1,340)
Additional expenses relating to salaries
and benefits, office rent, and other G&A
expenses 1,115 960
------- ---------
$ (534) $ (380)
------- ---------
d. To adjust the amortization of the deferred financing fee for the First Union
Credit Facility and the repayment of the CGGS debentures and the fees and
expenses related to the issuance of the Notes.
e. To adjust interest expense using a rate of 11.5% for the issuance of the
Notes and to reflect the repayment of the Bridge Facility and the retirement of
the CGGS debentures.
f. To adjust the foreign exchange gain realized by CGGS with respect to certain
U.S. dollar-denominated
debentures.
g. To reflect the deferred tax benefit.
Year Ended Nine Months Ended
December 31, 1995 September 30, 1996
-------------------- -------------------
(dollars in thousands)
Deferred tax benefit $679 $541
===== =====
<PAGE>
h. The following reflects the results of operations of the 50% overriding
royalty interest in Portilla previously owned by the Pension Fund for the nine
months ended September 30, 1996 and the results from Portilla and Happy
previously owned by the Issuers for the period March 21, 1996 to September 30,
1996:
<TABLE>
<CAPTION>
Certain
Overriding
Royalty
Interests in
the Portilla
Field Acquired
by Abraxas Portilla and Happy
Petroleum previously owned
Corporation by the Company
for the Nine for the period Portilla
Months Ended March 21, 1996 to and
September 30, 1996 September 30, 1996 Happy
------------------ ------------------ ----------
(dollars in thousands)
<S> <C> <C> <C>
Oil and gas production sales $ 2,822 $ 2,410 $ 5,232
LOE 622 464 1,086
Hedging loss -- 370 370
----------------- ---------------- ---------
$ 2,200 $ 1,576 $ 3,776
================= ================ =========
</TABLE>
Note 2. The pro forma unaudited Condensed Balance Sheet as of September 30,
1996, reflects the Transactions as if they had occurred as of September 30, 1996
as follows (the acquisition of the Wyoming Properties closed on September 30,
1996, and is reflected in the historical balance sheet of the Company at
September 30, 1996 the acquisitions of CGGS and Portilla and Happy were
consummated on November 14, 1996 and the acquisition of East White Point and
Stedman Island was consummated on November 27, 1996):
a. Canadian Abraxas purchased all of the outstanding shares of capital stock of
CGGS and immediately thereafter merged CGGS with and into Canadian Abraxas.
Prior to the Canadian Abraxas' acquisition of CGGS, the Nevis Plant was sold to
a third party and Canadian Abraxas, as the surviving entity of the CGGS
acquisition, used the net proceeds from the sale of the Nevis Plant to retire
the outstanding debentures of CGGS. The CGGS balance sheet included in the
accompanying Unaudited Pro Forma Condensed Balance Sheet dated as of September
30, 1996 represents the historical unaudited balance sheet of CGGS as of October
31, 1996, converted into United States generally accepted accounting principles
and into U.S. dollars. The balances included in the "Adjustments to Reflect Sale
of Nevis" column on the accompanying Unaudited Pro Forma Condensed Balance Sheet
represent the sale of the Nevis Plant and related accounts receivable and
payable at a sales price of approximately CDN$116.1 million, net of estimated
selling costs and related closing adjustments, or approximately U.S.$87.0
million, and the removal of the historical net book value of the Nevis Plant and
the working capital and other liabilities associated with the operations of the
Nevis Plant as of October 31, 1996. Retained earnings represent the approximate
gain from the sale of the Nevis Plant.
b. The acquisition of CGGS was accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16 "Business Combinations." The purchase
price was allocated to the crude oil and natural gas properties, the natural gas
processing plants and other assets based upon estimated fair values. A deferred
income tax liability has been established representing the tax effect of the
difference in the fair value of the assets acquired and their historical tax
basis and has been allocated as additional basis of the crude oil and natural
gas properties, the natural gas processing plants and other assets.
(dollars in
thousands)
The total purchase price has been allocated as follows:
Purchase price for the outstanding
capital stock of CGGS $94,771
Book value of net assets acquired 49,546
-----------
Increase in basis $45,225
===========
Allocation of increase in basis:
Increase in crude oil and natural gas properties $49,336
Increase in natural gas processing facilities 18,190
Increase in other property and equipment 3,600
Deferred Financing fee (992)
Change in accounts payable 3,127
Change in deferred tax liabilities (28,036)
-----------
$45,225
===========
Retirement of CGGS debentures:
Cash $(84,412)
CGGS debentures 84,412
c. To reflect the elimination of CGGS equity balance:
Common stock $25,296
Retained earnings 25,483
Cumulative foreign exchange adjustment (241)
d. To reflect the purchase of Portilla and Happy:
Purchase price of Portilla and Happy $27,600
Estimated adjustments to purchase price for
accrual of net crude oil and natural gas
revenues to November 14, 1996 (752)
-----------
Net amount due to seller 26,848
Elimination of the Issuers' equity investment
in and advances to the Partnership 2,397
Deferred financing fee related to debt repaid (223)
-----------
Net purchase price allocated to oil
and gas properties $29,022
===========
In connection with the Acco Sale, Acco entered into a commodity price
hedge with Christiania which was assumed by the Company and BTCo and ING Capital
in connection with the consummation of the Transactions. Under the terms of this
commodity price hedge, the Company is required to receive or make payment to
BTCo and ING Capital based on a differential between a fixed and variable price
for crude oil and natural gas through the last business day of November 2001 on
volumes ranging from 8,160 barrels of crude oil to 20,000 barrels of crude oil
per month and 14,850 MMBTU of natural gas to 87,406 MMBTU of natural gas per
month. Under this agreement, the Company receives fixed prices ranging from
$17.20 per barrel of crude oil to $18.55 per barrel of crude oil and $1.793 per
MMBTU of natural gas to $1.925 per MMBTU of natural gas and makes payments based
on the price for west Texas intermediate light sweet crude oil on the NYMEX for
crude oil and the Inside FERC, Tennessee Gas Pipeline Co: Texas (Zone 0) price
for natural gas. Currently there is a net unrealized loss of approximately $1.8
million under the commodity price hedge.
e. To reflect the purchase of East White Point and Stedman Island
Purchase price of East White Point
and Stedman Island $9,271
Estimated adjustment to purchase price
for accrual of net crude oil and natural
gas revenues due to the Company from August
1996 to November 1996 (500)
-----------
Net purchase price allocated to oil
and gas properties. $8,771
===========
f. To reflect the issuance of Notes and application
of the proceeds therefrom:
Issuance of Notes $215,000
Expense for issuance of Notes (8,200)
Repayment of the Bridge Facility (85,000)
Payment of amount due to CGGS (94,771)
Payment of amounts due to seller of Portilla and Happy (26,848)
Payment of amounts due to seller of East White Point
and Stedman Island (8,771)
-----------
Decrease in existing cash $8,590
===========
g. To reflect the write-off of deferred financing fees
upon retirement of certain related debt $ (223)
===========
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following historical selected consolidated financial data are
derived from, and qualified by reference to, the Company's' Consolidated
Financial Statements and the notes thereto. The statement of operations data for
the nine months ended September 30, 1996 is not necessarily indicative of
results for a full year. The consolidated financial data for each of the nine
month periods ended September 30, 1995 and 1996 are derived from the unaudited
financial statements and, in the opinion of management, include all adjustments
that are of a normal and recurring nature and necessary for a fair presentation.
The historical consolidated financial data should be read in conjunction with
the Consolidated Financial Statements of the Company and the notes thereto
included elsewhere in this Prospectus and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
-------------------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- ------- --------- -------- ----------
Consolidated Statements of (dollars in thousands except per share data)
Operations
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenue:
Oil and gas production sales . $ 933 $ 2,666 $ 7,275 $ 11,114 $ 13,660 $ 9,795 $ 11,786
Other revenue 217 25 219 235 157 134 123
-------- -------- -------- -------- -------- -------- --------
Total operating revenue ...... 1,150 2,691 7,494 11,349 13,817 9,929 11,909
-------- -------- -------- -------- -------- -------- --------
Operating costs and expenses:
Lease operating and production
taxes ...................... 322 1,075 2,896 3,693 4,333 3,183 3,296
Depreciation, depletion and
amortization ............... 361 957 2,373 3,790 5,434 3,541 4,145
General and administrative
expenses ................... 338 770 510 810 1,042 768 1,250
Other ........................ 73 (29) 103 133 125 95 624
-------- -------- -------- -------- -------- -------- --------
Total operating expenses ..... 1,094 2,773 5,882 8,426 10,934 7,587 9,315
-------- -------- -------- -------- -------- -------- --------
Operating income (loss) ...... 56 (82) 1,612 2,923 2,883 2,342 2,594
Net interest expense ......... 121 892 2,492 2,343 3,877 2,907 1,986
Amortization of deferred
financing fees (1) ......... -- -- 649 400 214 120 192
Other (income) expense ....... (50) 98 (136) 67 -- -- 293
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before tax and
extraordinary items ...... (15) (1,072) (1,393) 113 (1,208) (685) 123
Deferred income tax expense .. -- -- (187) -- -- -- --
Loss from discontinued
operations (2) ............. -- (2,883) (280) (1,335) -- -- --
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary items ........ (15) (3,955) (1,860) (1,222) (1,208) (685) 123
Extraordinary items .......... -- -- (573) (1,172)(3) -- -- (369)
Net income (loss) ............ (15) (3,955) (2,433) (2,394) (1,208) (685) (246)
Preferred dividends
requirement ................ (249) (249) (186) (183) (366) (274) (274)
-------- -------- -------- -------- -------- -------- --------
Net income (loss) applicable
to common stockholders ... $ (264) $ (4,204) $ (2,619) $ (2,577) $ (1,574) $ (959) $ (520)
======== ======== ======== ======== ======== ========= ========
Earnings per share:
Income (loss) from continuing
operations ................. $ (0.28) $ (1.23) $ (0.91) $ (0.02) $ (0.34) $ (0.21) $ (0.03)
Discontinued operations -- (2.69) (0.14) (0.31) -- -- --
Extraordinary items .......... -- -- (0.29) (0.27) -- -- (0.06)
-------- --------- -------- --------- --------- -------- --------
Net income (loss) per common
share ..................... $(0.28) $ (3.92) $ (1.34) $ (0.60) $ (0.34) $ (0.21) $ (0.09)
======== ========= ======== ========= ========= ======== ========
Weighted average shares
outstanding................ 947 1,074 1,947 4,310 4,635 4,456 5,804
======== ========= ======== ========= ========= ======== ========
Other Data:
EBITDA ........................ $168 $760 $4,049 $6,728 $8,351 $5,892 $6,894
Capital expenditures .......... $2,940 $7,866 $26,234 $40,906 $12,256 $9,223 $58,040
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At December 31, At September 30,
------------------------------------------------------------- -----------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- --------- ---------- -------- ---------- ---------
(dollars in thousands)
Consolidated Balance Sheet Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital (deficit) (4) $(1,323) $ (7,184) $ (1,368) $ (1,605) $ 2,633 $ (2,465) $ 7,682
Total assets 13,078 18,017 43,396 75,361 85,067 80,578 130,440
Long-term debt (5) 7,080 6,602 12,484 41,235 41,557 43,974 85,000
Stockholders' equity 3,869 2,233 25,143 28,502 37,063 27,546 36,421
- -----------
</TABLE>
(1) Consists of financing fees incurred in connection with the acquisition of
crude oil and natural gas producing properties.
(2) Discontinued operations consist primarily of coal operations which were
terminated in January 1995. The Company anticipates no additional costs
associated with coal operations in the future. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Results of
Operations."
(3) Consists of loss incurred in connection with extinguishment of debt.
(4) Includes current maturities of long-term debt and capital lease obligations
(5) Excludes current maturities of long-term debt and capital lease
obligations.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the Company's' financial condition,
results of operations, liquidity and capital resources. This discussion should
be read in conjunction with the Consolidated Financial Statements of the Issuers
and the notes thereto included elsewhere in this Prospectus.
RESULTS OF OPERATIONS
The Company's revenue, 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 NGLs produced by the Company. In
addition, the Company's proved reserves will decline as crude oil, NGLs and
natural gas are produced unless the Company is successful in acquiring producing
properties or conducts successful exploration and development activities.
Selected Operating Data. The following table sets forth certain
operating data of the Issuers for the periods presented:
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
-------------------------------- -----------------
(dollars in thousands, except per unit data)
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Operating Revenue:
Crude oil sales ...................... $ 4,210 $ 5,501 $ 6,889 $ 4,887 $ 5,306
NGLs sales ........................... 500 1,193 1,553 1,165 1,350
Natural gas sales .................... 2,565 4,420 5,218 3,743 5,130
Other ............................... 219 235 157 134 123
------- ------- ------- ------- -------
Total operating revenue ................... $ 7,494 $11,349 $13,817 $ 9,929 $11,909
======= ======= ======= ======= =======
Operating income .......................... $ 1,612 $ 2,923 $ 2,883 $ 2,342 $ 2,595
Crude oil production (MBbls) .............. 270.9 355.7 401.4 283.5 266.0
NGLs production (MBbls) ................... 33.9 113.2 143.4 106.5 106.1
Natural gas production (MMcf) ............. 985.4 2,392.9 3,552.7 2,645.1 2,625.4
Average crude oil sales prices (per Bbl) .. $ 15.54 $ 15.47 $ 17.16 $ 17.24 $ 19.94
Average NGLs sales price (per Bbl) ........ $ 14.75 $ 10.54 $ 10.83 $ 10.94 $ 12.73
Average natural gas sales price (per Mcf).. $ 2.60 $ 1.85 $ 1.47 $ 1.41 $ 1.95
</TABLE>
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1996 TO NINE MONTHS ENDED
SEPTEMBER 30, 1995
OPERATING REVENUE. Operating revenue from crude oil, NGLs and natural
gas sales increased by 20.3%, from $9.8 million to $11.8 million, from the nine
months ended September 30, 1995 to the nine months ended September 30, 1996,
primarily due to an increase in crude oil, NGLs and natural gas sales prices and
increased production volumes from the Company's properties other than Portilla
and Happy in 1996 as compared to 1995 which somewhat offset the loss in
production volumes from the sale of Portilla and Happy. Operating revenue from
Portilla and Happy decreased from $3.3 million to $1.2 million from the nine
months ended September 30, 1995 to the nine months ended September 30, 1996. The
Company's average sales prices for its crude oil, NGLs and natural gas were
$17.24 per Bbl, $10.94 per Bbl and $1.41 per Mcf, respectively, for the first
nine months of 1995 as compared to $19.94 per Bbl, $12.73 per Bbl and $1.95 per
Mcf, respectively, for the first nine months of 1996. Crude oil and NGLs sales
volumes decreased by 4.6%, from 390.0 MBbls to 372.1 MBbls, from the nine months
ended September 30, 1995 to the nine months ended September 30, 1996 and natural
gas sales volumes decreased by 0.7%, from 2,645.1 MMcf to 2,625.4 MMcf, from the
nine months ended September 30, 1995 to the nine months ended September 30, 1996
as a result of the sale of Portilla and Happy. Portilla and Happy contributed
161.8 MBbls of crude oil and NGLs (41.5% of Company total) and 376.0 MMcf of
natural gas (14.2% of Company total) during the first nine months of 1995 as
compared to 54.2 MBbls of crude oil and NGLs (14.6% of Company total) and 117.5
MMcf of natural gas (4.5% of Company total) for the first nine months of 1996.
LEASE OPERATING EXPENSES. LOE increased by 3.6%, from $3.2 million to
$3.3 million, from the first nine months of 1995 to the first nine months of
1996, primarily due to the increased percentage of the Company's production base
attributable to west Texas crude oil production than that from Texas Gulf Coast
properties, which generally have lower LOE than the west Texas properties. Of
the LOE incurred during the first nine months of 1995, $445,000, or 14.0% of the
Company's total LOE, was attributable to Portilla and Happy, as compared to
$233,000, or 7.1% of the Company's total LOE, during the first nine months of
1996. The Company's LOE on a per BOE basis for the first nine months of 1995 was
$3.83 per BOE as compared to $4.07 per BOE for the first nine months of 1996.
G&A EXPENSES. G&A expenses increased by 62.7%, from $769,000 to $1.2
million, from the first nine months of 1995 to the first nine months of 1996,
primarily as a result of hiring additional staff to manage the Issuers' assets,
including the establishment of a Canadian administrative office. The Company's
G&A expenses on a per BOE basis for the first nine months of 1995 were $0.93 per
BOE as compared to $1.54 per BOE for the first nine months of 1996.
DD&A EXPENSES. DD&A increased by 17.1%, from $3.5 million to $4.2
million, from the first nine months of 1995 to the first nine months of 1996
primarily due to the increase in sales volumes of crude oil and natural gas. The
Company's DD&A expenses on a per BOE basis for the first nine months of 1995
were $4.27 per BOE as compared to $5.27 per BOE for the first nine months of
1996.
INTEREST EXPENSE AND PREFERRED DIVIDENDS. Interest expense and preferred
dividends decreased 24.2%, from $3.2 million to $2.4 million, from the first
nine months of 1995 to the first nine months of 1996. The decrease was
attributable to the sale of Portilla and Happy, part of the proceeds of which
were used to reduce the indebtedness outstanding under the First Union Credit
Facility by $12.0 million to $29.5 million.
COMPARISON OF YEAR ENDED DECEMBER 31, 1994 TO YEAR ENDED DECEMBER 31, 1995
OPERATING REVENUE. Operating revenue from crude oil, NGLs and natural
gas sales increased by 22.9%, from $11.1 million to $13.7 million, from the year
ended December 31, 1994 to the year ended December 31, 1995. This increase was
primarily attributable to an increase in crude oil and NGLs sales volumes of
16.2%, from 468.9 MBbls to 544.8 MBbls, and an increase in natural gas sales
volumes of 48.5%, from 2,392.9 MMcf to 3,552.7 MMcf. The increase in sales
volumes were primarily attributable to the acquisition of 80% of the overriding
royalty interest previously granted to a lender (the "ORRI") and the acquisition
of certain properties located in west Texas (the "West Texas Properties") by the
Company in June 1994 and July 1994, respectively. The Company's average sales
prices for its crude oil, NGLs and natural gas were $15.47 per Bbl, $10.54 per
Bbl and $1.85 per Mcf, respectively, for the year ended December 31, 1994 as
compared to $17.16 per Bbl, $10.83 per Bbl and $1.47 per Mcf, respectively, for
the year ended December 31, 1995. A general weakening of natural gas prices at
the wellhead during the first nine months of 1995 resulted in a lower average
natural gas sales price received by the Company during the year ended December
31, 1995 as compared to the year ended December 31, 1994. This decrease was
partially offset by an increase in average crude oil prices received by the
Company during the year ended December 31, 1995 as compared to the year ended
December 31, 1994.
LEASE OPERATING EXPENSES. LOE increased by 17.3%, from $3.7 million to
$4.3 million, from the year ended December 31, 1994 to the year ended December
31, 1995, primarily due to the Company's owning a greater number of wells during
the year ended December 31, 1995 than it did during the year ended December 31,
1994. The Company's LOE on a per BOE basis for the year ended December 31, 1994
was $4.26 per BOE as compared to $3.81 per BOE for the year ended December 31,
1995.
G&A EXPENSES. G&A expenses increased by 28.6%, from $810,000 to $1.0
million, from the year ended December 31, 1994 to the year ended December 31,
1995 as a result of hiring additional staff to manage and develop the West Texas
Properties. The Company's G&A expenses on a per BOE basis for the year ended
December 31, 1994 were $0.93 per BOE as compared to $0.92 per BOE for the year
ended December 31, 1995.
DD&A EXPENSES. DD&A increased by 43.4%, from $3.8 million to $5.4
million, from the year ended December 31, 1994 to the year ended December 31,
1995 primarily as a result of the increase in sales volumes of crude oil and
natural gas. The Company's DD&A expenses on a per BOE basis for the year ended
December 31, 1994 were $4.37 per BOE as compared to $4.78 per BOE for the year
ended December 31, 1995.
INTEREST EXPENSE AND PREFERRED DIVIDENDS. Interest expense and preferred
dividends increased 68.3%, from $2.5 million to $4.3 million from the year ended
December 31, 1994 to the year ended December 31, 1995, primarily as a result of
the Company's borrowing $28.0 million under the First Union Credit Facility to
acquire the West Texas Properties in July 1994.
COMPARISON OF YEAR ENDED DECEMBER 31, 1993 TO YEAR ENDED DECEMBER 31, 1994
OPERATING REVENUE. Operating revenue from crude oil, NGLs and natural
gas sales increased by 52.8%, from $7.3 million to $11.1 million, from the year
ended December 31, 1993 to the year ended December 31, 1994. This increase was
primarily attributable to an increase in crude oil and NGLs sales volumes of
53.8%, from 304.8 MBbls to 468.9 MBbls, and an increase in natural gas sales
volumes of 142.8%, from 985.4 MMcf to 2,392.9 MMcf. The increase in sales
volumes was primarily attributable to the acquisition of the ORRI and the West
Texas Properties by the Company in June 1994 and July 1994, respectively, the
further development of the Sinton Properties, which were acquired in April 1993,
and the Company's ongoing development drilling program. The Company's average
sales prices for its crude oil, NGLs and natural gas were $15.54 per Bbl, $14.75
per Bbl and $2.60 per Mcf, respectively, for the year ended December 31, 1993 as
compared to $15.47 per Bbl, $10.54 per Bbl and $1.85 per Mcf, respectively, for
the year ended December 31, 1994. A general weakening of natural gas prices at
the wellhead during the year ended December 31, 1994 resulted in a lower average
natural gas sales price received by the Company as compared to the average
natural gas sales price received by the Issuers during the year ended December
31, 1993.
LEASE OPERATING EXPENSES. LOE increased by 27.5%, from $2.9 million to
$3.7 million, from the year ended December 31, 1993 to the year ended December
31, 1994, primarily due to the Company's owning a greater number of wells during
the year ended December 31, 1994 than it did during the year ended December 31,
1993. The Company's LOE on a per BOE basis for the year ended December 31, 1993
was $6.17 per BOE as compared to $4.26 per BOE for the year ended December 31,
1994.
G&A EXPENSES. G&A expenses increased by 59.0%, from $510,000 to
$810,000, from the year ended December 31, 1993 to the year ended December 31,
1994 as a result of an increase in staff. The Company's G&A expenses on a per
BOE basis for the year ended December 31, 1993 were $1.09 per BOE as compared to
$0.93 per BOE for the year ended December 31, 1994.
DD&A EXPENSES. DD&A increased by 59.7%, from $2.4 million to $3.8
million, from the year ended December 31, 1993 to the year ended December 31,
1994 primarily as a result of the increase in sales volumes of crude oil and
natural gas. The Company's DD&A expenses on a per BOE basis for the year ended
December 31, 1993 were $5.06 per BOE as compared to $4.37 per BOE for the year
ended December 31, 1994.
INTEREST EXPENSE AND PREFERRED DIVIDENDS. Interest expense and preferred
dividends decreased by 6.4%, from $2.7 million to $2.5 million, from the year
ended December 31, 1993 to the year ended December 31, 1994, primarily as a
result of the Company's restructuring its long-term debt in June 1994.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures for the years ended December 31, 1993, 1994 and
1995 were $26.2 million, $40.9 million and $12.3 million, respectively. For the
nine months ended September 30, 1995, capital expenditures were $9.2 million
compared to $58.0 million during the same period in 1996. The table below sets
forth the components of these capital expenditures on a historical basis for the
three years ended December 31, 1993, 1994 and 1995 and the nine months ended
September 30, 1995 and 1996.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31 September 30,
-------------------------------- -----------------------
(dollars in thousands)
1993 1994 1995 1995 1996
<S> <C> <C> <C> <C> <C> <C>
Expenditure category:
Property acquisitions (1) $20,480 $33,597 $ 719 $ 199 $47,655 (1)
Development 5,167 7,151 11,398 8,935 10,016
Coal property development 46 -- -- -- --
Facilities and other 541 158 139 89 369
Total $26,234 $40,906 $12,256 $ 9,223 $58,040
- ------------
<FN>
(1) Acquisition costs include approximately 78,000 shares of Common Stock valued
at $533,000 for the year ended December 31, 1993, and 45,741 shares of Preferred
Stock valued at $4.6 million in 1994 and $1.1 million of oil and gas properties
acquired from Cascade in the nine months ended September 30, 1996.
</FN>
</TABLE>
Acquisitions of crude oil and natural gas producing properties beginning
in 1993 and continuing through the nine months ended September 30, 1996 account
for the majority of the capital expenditures made by the Issuers since January
1, 1993. These expenditures were funded through internally generated cash flow,
borrowings from the Issuers' lenders and the issuance of shares of the Company's
Common and Preferred Stock.
After consummation of the Offering and application of the net proceeds
therefrom, the Company increased its total outstanding debt to approximately
$215.1 million from $85.0 million at September 30, 1996. In addition, on
November 14, 1996, the Company entered into the New Credit Facility concurrently
with the consummation of the Offering. The New Credit Facility provides for a
revolving line of credit with an initial availability of $20.0 million, subject
to certain customary conditions including a borrowing base condition.
Commitments available under the New Credit Facility are subject to
Borrowing Base redeterminations to be performed semi-annually and, at the option
of each of the Company and the Lenders, one additional time per year. Any
outstanding principal balance in excess of the Borrowing Base will be due and
payable in three equal monthly payments after a Borrowing Base redetermination.
The Borrowing Base will be determined in the Agent's sole discretion, subject to
the approval of the Lenders, based on the value of the Company's reserves as set
forth in the reserve report of the Company's independent petroleum engineers,
with consideration given to other assets and liabilities.
The New Credit Facility has an initial revolving term of two years and a
reducing period of three years from the end of the initial two-year period. The
commitment under the New Credit Facility will be reduced during such reducing
period by eleven equal quarterly reductions. Quarterly reductions will equal
8.2% per quarter with the remainder due at the end of the three-year reducing
period.
The applicable interest rate charged on the outstanding balance of the
New Credit Facility is based on a facility usage grid. If the borrowings under
the New Credit Facility represent an amount less than or equal to 33.3% of the
available Borrowing Base, then the applicable interest rate charged on the
outstanding balance will be either (a) an adjusted rate of the London Inter-Bank
Offered Rate ("LIBOR") plus 1.25% or (b) the prime rate of the Agent (which is
based on the Agent's published prime rate) plus 0.50%. If the borrowings under
the New Credit Facility represent an amount greater than or equal to 33.3% but
less than 66.7% of the available Borrowing Base, then the applicable interest
rate on the outstanding principal will be either (a) LIBOR plus 1.75% or (b) the
prime rate of the Agent plus 0.50%. If the borrowings under the New Credit
Facility represent an amount greater than or equal to 66.7% of the available
Borrowing Base, then the applicable interest rate on the outstanding principal
will be either (a) LIBOR plus 2.00% or (b) the prime rate of the Agent plus
0.50%. LIBOR elections can be made for periods of one, three or six months.
The New Credit Facility contains a number of covenants that, among other
things, restrict the ability of the Company to (i) incur certain indebtedness or
guarantee obligations, (ii) prepay other indebtedness including the Notes, (iii)
make investments, loans or advances, (iv) create certain liens, (v) make certain
payments, dividends and distributions, (vi) merge with or sell assets to another
person or liquidate, (vii) sell or discount receivables, (viii) engage in
certain intercompany transactions and transactions with affiliates, (ix) change
its business, (x) experience a change of control and (xi) make amendments to its
charter, by-laws and other debt instruments. In addition, under the New Credit
Facility, the Company is required to comply with specified financial ratios and
tests, including minimum debt service coverage ratios, maximum funded debt to
EBITDA tests, minimum net worth tests and minimum working capital tests.
The New Credit Facility contains customary events of default, including
nonpayment of principal, interest or fees, violation of covenants, inaccuracy of
representations or warranties in any material respect, cross default and cross
acceleration to certain other indebtedness, bankruptcy, material judgments and
liabilities and change of control.
At September 30, 1996, the Company had current assets of $14.2 million
and current liabilities of $6.6 million, resulting in working capital of $7.6
million. This compares to working capital of $2.6 million at December 31, 1995
and a deficiency of $2.5 million at September 30, 1995. The material components
of the Company's current liabilities at September 30, 1996 include trade
accounts payable of $4.7 million and revenue due third parties of $1.4 million.
The Company's current budget for capital expenditures, other than
acquisition expenditures, for the last quarter of 1996 is $6.5 million. Such
expenditures will be made primarily for the development of existing properties.
Additional capital expenditures may be made for acquisitions of producing
properties as such opportunities arise. The Company does not have an acquisition
budget since the timing and size of acquisitions are difficult to forecast. The
Company has no material long-term capital commitments and is consequently able
to adjust the level of its expenditures as circumstances dictate. Additionally,
the level of capital expenditures will vary during future periods depending on
market conditions and other related economic factors.
In August 1995, the Company entered into a rate swap agreement with
First Union relating to $25.0 million of principal amount outstanding under the
First Union Credit Facility. This agreement was assumed by BTCo and ING Capital
in connection with the consummation of the Bridge Facility and remains in
effect. Under the agreement, the Company pays a fixed rate of 6.15% while the
lenders under the New Credit Facility will pay a floating rate equal to the
USD-LIBOR-BBA rate for one month maturities, quoted on the eighteenth day of
each month, to the Company. Settlements are due monthly. The agreement
terminates in August 1997 and may be extended for an additional year by the
Lenders.
In connection with the Acco Sale, Acco entered into a commodity price
hedge with Christiania which was assumed by the Company and BTCo and ING Capital
in connection with the consummation of the Transactions. Under the terms of this
commodity price hedge, the Company is required to receive or make payment to
BTCo and ING Capital based on a differential between a fixed and variable price
for crude oil and natural gas through the last business day of November 2001 on
volumes ranging from 8,160 barrels of crude oil to 20,000 barrels of crude oil
per month and 14,850 MMBTU of natural gas to 87,406 MMBTU of natural gas per
month. Under this agreement, the Company receives fixed prices ranging from
$17.20 per barrel of crude oil to $18.55 per barrel of crude oil and $1.793 per
MMBTU of natural gas to $1.925 per MMBTU of natural gas and will make payments
based on the price for west Texas intermediate light sweet crude oil on the
NYMEX for crude oil and the Inside FERC, Tennessee Gas Pipeline Co: Texas (Zone
0) price for natural gas.
Operating activities during the nine months ended September 30, 1996
provided $4.8 million of cash to the Company compared to $1.4 million in the
same period in 1995. Net income plus non-cash expense items during 1996 and net
changes in operating assets and liabilities accounted for most of these funds.
Investing activities required $41.1 million during the first nine months of 1996
primarily from the acquisition of the Wyoming Properties. This compares to cash
requirements of $6.5 million during the same period of 1995 primarily for the
development of crude oil and natural gas properties. Financing activities
provided $41.9 million for the first nine months of 1996 compared to providing
$5.3 million for the same period of 1995.
For the year ended December 31, 1995, operating activities provided $4.4
million of cash. Investing activities required $10.0 million primarily for the
development of existing properties. Total cash provided from financing
activities for 1995 was $9.8 million as the result of the sale of 1,330,000
shares of Common Stock and contingent value rights during November 1995 which
resulted in net proceeds of $10.1 million.
During 1994, operating activities provided $4.3 million of cash.
Investing activities during 1994 utilized $35.9 million of cash primarily for
the acquisition of the ORRI and the West Texas Properties for $29.0 million and
the development of producing properties of $7.2 million. The Company borrowed
$40.9 million during 1994, repaid $12.7 million of long-term debt, sold Common
Stock for proceeds of $1.5 million and paid financing fees and dividends on
preferred stock resulting in a net contribution of $29.2 million from financing
activities.
For the year ended December 31, 1993, operating activities produced
$665,000 of cash. Investment activities during 1993 utilized $25.2 million of
cash primarily for the acquisition of the Sinton Properties in the amount of
$19.9 million and the development of existing producing properties at a cost of
$5.2 million being offset by the sale of equipment inventory and various crude
oil and natural gas properties for $768,000. The Company borrowed $20.6 million
during 1993 and repaid $17.2 million of long-term debt and sold 2,250,000 shares
of Common Stock for net proceeds of $23.1 million resulting in a net
contribution of $26.4 million from financing activities.
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 net operating loss carry forwards generated prior to December 31, 1991 of
$6.9 million will be limited to approximately $235,000 per year. During 1992,
the Company acquired 100% of the capital stock of an unrelated corporation. The
use of net operating loss carry forwards of $3.6 million of the unrelated
corporation are limited to approximately $115,000 per year. As a result of the
issuance of additional shares of Common Stock for acquisitions and to raise
capital, an additional ownership change occurred in October 1993. Accordingly,
it is expected that the use of the $13.4 million of net operating loss carry
forwards generated through October 1993 will be limited to approximately $1.0
million per year, subject to the limitations described above, and $7.2 million
in the aggregate. Future changes in ownership may further limit the use of the
Company's net operating loss carry forwards. In addition to Section 382
limitations, uncertainties exist as to the future utilization of the operating
loss carry forwards under the criteria set forth under FASB Statement No. 109.
Therefore, the Company has established a valuation allowance of $5.7 million and
$5.5 million for deferred tax assets at December 31, 1995 and 1994,
respectively.
Based upon the current level of operations, the Company believes that
the proceeds from the initial offering of the Series A Notes, cash flow from
operations and the New Credit Facility will be adequate to meet its anticipated
requirements for working capital, capital expenditures and scheduled interest
payments for the foreseeable future. A depressed price for natural gas or crude
oil would have a material adverse effect on the Company's cash flow from
operations and anticipated levels of working capital, and could force the
Issuers to revise its planned capital expenditures.
<PAGE>
NEW ACCOUNTING STANDARDS
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation." SFAS 123, effective for fiscal years beginning after December 31,
1995, defines a fair value-based method of accounting and establishes financial
accounting and reporting standards for stock-based employee compensation plans.
Under the fair value-based method, compensation cost is measured at the grant
date based upon the value of the award and is recognized over the service
period. SFAS 123 allows for the election to continue to measure stock-based
compensation cost using the intrinsic value method of Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"). The
election of this option requires a pro forma disclosure of net income and
earnings per share as if the fair value-based method of accounting, as defined
by SFAS 123, had been applied. Currently, the Company expects to continue to
follow APB 25 and will adopt the required disclosures for financial statements
beginning in 1996.
<PAGE>
BUSINESS
GENERAL
The Company is an independent energy company engaged primarily in the
acquisition, exploration, development and production of crude oil and natural
gas. Since January 1, 1991, the Company's principal means of growth has been
through the acquisition and subsequent development and exploitation of producing
properties and related assets. The Company utilizes a disciplined acquisition
strategy, focusing its efforts on producing properties and related assets
possessing the following characteristics: a concentration of operations;
significant, quantifiable development potential; historically low operating
expenses; and the potential to reduce G&A expenses per BOE. The Company seeks to
complement its acquisition and development activities by selectively
participating in exploration projects with experienced industry partners. After
giving effect to the Recent Acquisitions, the Company's principal areas of
operation are Texas, western Canada and southwestern Wyoming. The Company owns
interests in 225,290 gross acres (126,845 net acres) and 507 gross wells (325.8
net wells), 352 of which are operated by the Company, and varying interests in
13 natural gas processing plants or compression facilities. On a pro forma
basis, at June 30, 1996, the Company would have had total proved reserves of
45,647 MBOE (64.9% natural gas), of which 81.7% would have been proved
developed. On a pro forma basis, for the nine months ended September 30, 1996,
the Company's EBITDA would have been $28.4 million.
The Company's acquisition, development, exploitation and exploration
activities have substantially increased the Company's proved reserve base,
average daily production and natural gas processing plant throughput while
decreasing its total operating and G&A expenses per BOE. After consummation of
the Recent Acquisitions, the Company has completed 16 acquisitions of producing
properties totaling 46,009 MBOE of proved reserves at an average net acquisition
cost of $3.83 per BOE since January 1, 1991. From January 1, 1991, on an
historical basis, to June 30, 1996, on a pro forma basis, the Company's total
proved reserves would have increased from 889 MBOE to 45,647 MBOE and aggregate
PV-10 would have increased from $11.9 million to $218.3 million. From January 1,
1991, on an historical basis, to the nine months ended September 30, 1996, on a
pro forma basis, average net daily production would have increased from 0.141
MBOE per day to 14.1 MBOE per day. On a pro forma basis, the Company would have
had net natural gas processing capacity of 128.1 MMcf per day as of September
30, 1996. In addition, on a pro forma basis, for the nine months ended September
30, 1996, average net daily natural gas processing plant throughput would have
been 87.4 MMcf per day, of which 27.3 MMcf would have been processed for third
parties, and net operating revenue from processing natural gas of third parties
at the Canadian Abraxas Plants would have been $1.9 million. From the year ended
December 31, 1991, on an historical basis, to the nine months ended September
30, 1996, on a pro forma basis, the Company's direct operating expenses per BOE
would have decreased from $6.30 per BOE to $2.81 per BOE and G&A expenses per
BOE would have decreased from $5.39 per BOE to $0.66 per BOE. As a result of the
Company's successful acquisition strategy and its ability to decrease its direct
operating and G&A expenses per BOE, the Company's EBITDA (excluding interest
income) has increased from $6.66 per BOE, for the year ended December 31, 1991,
to, on a pro forma basis, $7.24 per BOE, for the nine months ended September 30,
1996.
The Company was founded in 1977 by Robert L.G. Watson, the Company's
Chairman of the Board, President and Chief Executive Officer. Canadian Abraxas
was formed by the Company in 1996 to acquire CGGS. The Company's principal
offices are located at 500 North Loop 1604 East, Suite 100, San Antonio, Texas
78232 and its telephone number is (210) 490-4788. Canadian Abraxas' principal
offices are located at 630 - 6th Avenue, S.W., Suite 303, Calgary, Alberta and
its telephone number is (403) 262-1949. At June 30, 1996, pro forma for the
Recent Acquisitions, the Company would have had total proved reserves of 45,647
MBOE (64.9% natural gas) with an aggregate PV-10 of $218.3 million, 71.7% of
which would have been attributable to proved developed reserves. In addition,
the Company owns varying interests in 13 natural gas processing plants or
compression facilities and 197 miles of natural gas gathering systems.
<PAGE>
BUSINESS STRATEGY
The Company's primary business objectives are to: increase its
recoverable reserves, production and cash flow from operations through strategic
acquisitions; exploit and develop its producing properties; maintain low cost
operations; and pursue a focused exploration strategy. The Company seeks to
achieve its business objectives through the use of the following strategies:
Disciplined Acquisition Strategy. The Company utilizes a disciplined
acquisition strategy, focusing its acquisition efforts on producing properties
and related assets possessing the following characteristics: a concentration of
operations; significant, quantifiable development potential; historically low
operating expenses; and the potential to reduce G&A expenses per BOE. The
success of the Company's acquisition strategy is illustrated by the following
table:
<TABLE>
<CAPTION>
June 30,
Property Purchase Purchase Cumulative Cumulative 1996
Date Price(1) CapEx (2) Cash Flow(3) PV-10 IRR (4)
- --------------------- --------- --------- ---------- ------------ -------- ---------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Delaware Properties (5) 7/1/94 $ 25.0 $ 6.8 $ 6.0 $ 37.6 19.3%
Sinton Properties (6) 1/1/93 19.6 13.4 12.1(7) 43.0 21.4%
Sharon Ridge/Westbrook 9/1/92 4.4 0.4 2.0 5.2 13.1%
Spraberry 7/1/94 3.2 3.0 0.9 7.1 18.5%
Happy 8/12/92 2.2 0.1 2.6(7) 2.0 31.0%
- ----------------
<FN>
(1) Purchase price is net of accrual of net revenue from the effective date of
acquisition to purchase date.
(2) Consists of capital expenditures on a cumulative basis from date of purchase
through June 30, 1996 (undiscounted).
(3) Consists of operating revenue less LOE on a cumulative basis from date of
purchase through June 30, 1996 (undiscounted).
(4) IRR was calculated assuming that the purchase price for each property was
paid on the purchase date and that the cumulative capital expenditures and
cumulative cash flow occurred in equal monthly amounts over the time periods
presented.
(5) Consist of the Company's interests in Cherry Canyon and the Delaware Area
(each as defined herein).
(6) Consist of the Company's interests in Portilla, East White Point and Stedman
Island (each as defined herein). Does not include the 50% overriding royalty
interest in Portilla, East White Point and Stedman Island previously owned by
the Pension Fund (as defined herein).
(7) Does not include results of operations of the Partnership (as defined
herein) from March 21, 1996 to June 30, 1996 or proceeds from the Acco Sale (as
defined herein).
</FN>
</TABLE>
In connection with the acquisition of the Sinton Properties, the Company also
acquired interests in two natural gas processing plants, one of which was
subsequently sold in the Acco Sale. See "--Recent Acquisitions -- Portilla and
Happy." Since being acquired by the Company, the average net daily natural gas
processing throughput of these plants has increased by an average of 7.3% per
year, revenue has increased by an average of 24.5% per year and operating
expenses as a percentage of revenue have decreased by an average of 13.7% per
year.
EXPLOITATION OF EXISTING PROPERTIES. The Company allocates a
significant amount of its non-acquisition capital budget to the exploitation of
its producing properties. As of June 30, 1996, on a pro forma basis,
approximately 18.3% (8,373 MBOE) of the Company's total proved reserves would
have been classified as proved undeveloped. Management believes that the
proximity of these undeveloped reserves to existing production makes development
of these properties less risky and more cost-effective than other drilling
opportunities available to the Company. The Company has identified 272 potential
exploitation opportunities on the Company's existing properties including those
acquired in the Recent Acquisitions. The Company drilled 29 wells during the
first nine months of 1996 (including seven in western Canada) at a total cost of
$7.9 million with a success rate of 93% . In addition, the Company has drilled
or plans to drill a total of 37 wells and has performed 42 workovers or
recompletions during 1996 at an estimated cost of $2.8 million and plans to
drill 64 wells and perform 35 workovers or recompletions during 1997 at an
estimated cost of $22.2 million.
LOW COST OPERATIONS. The Company seeks to maintain low operating and
G&A expenses per BOE by operating a majority of its producing properties and
related assets and by using contract personnel to assist with the development or
evaluation of producing properties and related assets. As a result of this
strategy, the Company's EBITDA Margin has consistently improved since 1991, even
in years with depressed commodity prices. From the year ended December 31, 1991
to, on a pro forma basis, the nine months ended September 30, 1996, the
Company's direct operating and G&A expenses per BOE have decreased by 55.4% and
87.8%, respectively, resulting in an improvement in EBITDA Margin as illustrated
below:
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
-------------------------------------------------- -------------------
Pro Pro
Forma Forma
(per BOE) (1) 1991 1992 1993 1994 1995 1995 1996 1996
-------- ------- ------- ------ ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total operating
revenue (2) $ 18.35 $ 16.03 $ 15.98 $13.08 $ 12.15 $ 8.61 $ 14.08 $ 10.71
Direct operating
expenses (3) 6.30 6.23 6.39 4.41 3.92 2.50 4.21 2.81
G&A 5.39 4.59 1.09 0.93 0.92 0.49 1.54 0.66
-------- ------- -------- ------ -------- ------- --------- ---------
EBITDA (4) $ 6.66 $ 5.21 $ 8.50 $ 7.74 $ 7.31 $ 5.62 $ 8.33 $ 7.24
EBITDA Margin 36.3% 32.5% 53.2% 59.2% 60.2% 65.3% 59.2% 67.6%
</TABLE>
- --------------------
(1) Amounts are calculated on the basis of dollars per BOE of production.
Production data does not include third-party natural gas processing volumes.
(2) Consists of crude oil and natural gas production sales, revenue from rig
operations and processing of natural gas of third parties as well as other
miscellaneous revenue. Both historical and pro forma total operating revenue
for the nine months ended September 30, 1996 are presented net of a loss
from hedging activities incurred during such period.
(3) Consists of lease operating expenses, production taxes, abandoned projects,
rig operating expenses and processing expenses.
(4) Does not include interest income.
FOCUSED EXPLORATION ACTIVITY. The Company allocates a portion of its
capital budget to the drilling of exploratory wells which have high reserve
potential. The Company believes that by devoting a relatively small amount of
capital to high impact, high risk projects while reserving the majority of its
available capital for development projects, it can reduce its risk profile while
still benefiting from the potential for significant reserve additions. See
"Business -- Primary Operating Areas --Exploration Opportunities."
RECENT ACQUISITIONS
The Company has recently acquired CGGS, the Wyoming Properties, Portilla
and Happy, East White Point and Stedman Island for an aggregate purchase price
of approximately $176.2 million (the "Recent Acquisitions"). The Company
believes that each of the Recent Acquisitions is consistent with the Company's
acquisition strategy.
CGGS
In November 1996, Canadian Abraxas acquired 100% of the outstanding
capital stock of CGGS, after the consummation of the sale of the Nevis Plant,
for CDN$126.4 million, or approximately U.S.$94.8 million, including
approximately $8.3 million for CGGS' working capital.
Canadian Abraxas owns producing properties in western Canada consisting
primarily of natural gas reserves and interests ranging from 10% to 100% in 197
miles of natural gas gathering systems and 11 natural gas processing plants or
compression facilities, four of which are operated by Canadian Abraxas. The
Canadian Abraxas Properties consist of 154,968 gross acres (86,327 net acres)
and 120 gross wells (68.8 net wells), 48 of which are operated by Canadian
Abraxas. As of September 1, 1996, the Canadian Abraxas Properties had total
proved reserves of 10,821 MBOE (91.8% natural gas) with an aggregate PV-10 of
$46.4 million, 82.4% of which was attributable to proved developed reserves. The
Canadian Abraxas Plants had aggregate net natural gas processing capacity of
98.5 MMcf per day at September 1, 1996. For the nine months ended September 30,
1996, the Canadian Abraxas Plants processed an average of 182.8 gross MMcf (65.7
net MMcf) of natural gas per day, of which 19.6% (39.7% net) was custom
processed for third parties. For the nine months ended September 30, 1996, the
Canadian Abraxas Properties and the Canadian Abraxas Plants would have
contributed $10.3 million of EBITDA to the Company on a pro forma basis.
The Company believes that the Canadian Abraxas Properties have
significant, quantifiable development potential which can be realized through
exploitation and development. The Company believes that processing volumes at
the Canadian Abraxas Plants can be increased due to unutilized gross natural gas
processing throughput capacity at the plants of approximately 69.5 MMcf (32.4
net MMcf) of natural gas per day. The Company intends to utilize this excess
capacity by seeking to process additional natural gas volumes from third parties
and from increased production from the Canadian Abraxas Properties. In addition,
the Company believes that expected increasesin the demand for natural gas from,
Alberta, Canada will help to reduce the existence of basis differentials in the
pricing of natural gas produced in this area. The Company believes that its
ownership of the Canadian Abraxas Properties and the Canadian Abraxas Plants
will afford it a competitive advantage relative to other area operators due to
the Company's preferential access to the natural gas processing capacity at
these facilities.
Immediately after the acquisition of CGGS, the Company amalgamated CGGS
with Canadian Abraxas, and Canadian Abraxas, being the name of the surviving
entity, used the net proceeds from the sale of the Nevis Plant to retire the
outstanding debentures of CGGS. In addition, Canadian Abraxas intends to sell a
10% working interest in the Canadian Abraxas Properties and the Canadian Abraxas
Plants to Cascade, in connection with the Company's plan to integrate the
operations of the Canadian Abraxas Properties and the Canadian Abraxas Plants
into the existing operations of Cascade. The Company has identified potential
cost savings through anticipated decreases in the G&A expenses of CGGS, which
would have amounted to approximately $380,000 for the nine months ended
September 30, 1996, on a pro forma basis. See the unaudited Pro Forma Financial
Information and the notes thereto included elsewhere in this Prospectus.
THE WYOMING PROPERTIES
On September 30, 1996, the Company acquired the Wyoming Properties which
had total proved reserves of 9,935 MBOE (68.5% natural gas) as of June 30, 1996,
for $47.5 million in cash, before adjustment for accrual of net revenue and
interest from April 1, 1996 to September 30, 1996. The Wyoming Properties
consist of 19,587 gross acres (14,091 net acres) and 25 gross wells (20.4 net
wells), 22 of which are operated by the Company. In addition, the Company
acquired various overriding royalty interests in four wells. As of June 30,
1996, the aggregate PV-10 of the Wyoming Properties was $30.3 million (based, in
part, on an assumed natural gas price of $1.07 per Mcf), 97.3% of which was
attributable to proved developed reserves. For the nine months ended September
30, 1996, the Wyoming Properties would have contributed $5.4 million of EBITDA
to the Company on a pro forma basis. As of September 30, 1996, the Company has
recorded the preliminary net purchase price of $45.9 million to its crude oil
and natural gas properties.
Management believes that the Wyoming Properties have significant
development potential which will enable the Company to increase its cash flow
from operations and reserve base without significant capital expenditures. The
Company intends to exploit this development potential through the more efficient
use of compression and gathering facilities, low cost recompletions of various
behind-pipe zones and drilling of infill development wells on closer spacing.
The Company has drilled two wells on the Wyoming Properties since September 30,
1996. Additionally, the Company has identified potential exploitation and
development opportunities which it believes may have up to 15,400 MBOE of
additional reserves. The Wyoming Properties are geographically concentrated,
thereby enabling the Company to operate the properties without incurring
additional G&A expenses. In addition, the Company believes that expected
improvements in the transportation infrastructure and an increase in the demand
for natural gas from southwestern Wyoming will help to reduce the existence of
basis differentials in the pricing of natural gas produced in the area.
PORTILLA AND HAPPY
In November 1996, the Company acquired Acco's partnership interest in
the Partnership for $27.6 million, including the repayment of certain
indebtedness before adjustment for the accrual of net revenue to the closing
date. The Company previously owned the remaining 25% interest in the
Partnership. The Partnership owned a 100% working interest in the Portilla
Field, a 100% interest in the Portilla Plant and a 12% working interest in Happy
Field. Portilla and Happy consist of 1,405 gross acres (1,115 net acres) and 78
gross wells (52 net wells), 61 of which are operated by the Company. As of June
30, 1996, Portilla and Happy had total proved reserves of 4,314 MBOE (18.4%
natural gas) with an aggregate PV-10 of $30.2 million, 99.8% of which was
attributable to proved developed reserves. The Portilla Plant had natural gas
processing capacity of approximately 20.0 MMcf per day at September 30, 1996.
During the nine months ended September 30, 1996, the Portilla Plant processed an
average of 17.2 MMcf of natural gas per day. For the nine months ended September
30, 1996, Portilla and Happy would have contributed an additional $3.8 million
of EBITDA to the Company on a pro forma basis.
The Company previously owned a 50% interest in Portilla and a 12%
working interest in Happy. In March 1996, the Company sold its interests in
Portilla and Happy to Acco for net consideration of $15.6 million. Acco
subsequently obtained the release of a 50% overriding royalty interest in
Portilla previously owned by the Pension Fund and Acco then contributed its
interests in Portilla and Happy to the Partnership in return for the Partnership
Interest. The Company continued to operate Portilla subsequent to the Acco Sale.
See "Recent Acquisitions -- Portilla and Happy."
EAST WHITE POINT AND STEDMAN ISLAND
In November 1996, the Company obtained the release of the 50% overriding
royalty interests in East White Point and Stedman Island from the Pension Fund
for $9.3 million before adjustment for accrual of net revenue from August 1996
to November 27, 1996. The Pension Fund's interest in East White Point and
Stedman Island consisted of 3,723 gross acres (1,256 net acres) and 25 gross
wells (6.5 net wells), 15 of which are operated by the Company. As of June 30,
1996, East White Point and Stedman Island had total proved reserves of 5,304
MBOE (62.3% natural gas) with an aggregate PV-10 of $29.4 million, 71.7% of
which was attributable to proved developed reserves. The East White Point
natural gas processing plant, a modern cyrogenic plant with capacity of
approximately 25.0 MMcf of natural gas per day, extracted approximately 679 Bbls
of NGLs per day for the nine months ended September 30, 1996.
PRIMARY OPERATING AREAS
TEXAS
ABRAXAS CHERRY CANYON FIELD, WARD COUNTY, TEXAS. In connection with the
acquisition of the West Texas Properties in July 1994, the Company acquired an
interest in approximately 7,360 gross acres (4,500 net acres) in this field and
currently operates 20 of the wells in its acreage. The Company drilled its first
shallow pool exploratory test well in this field in March 1995. Since that time,
this field has become the principal focus of the Company's development activity.
To date, 24 wells have been drilled and completed in one or more sands,
including the Bell Canyon, Cherry Canyon and Brushy Canyon Sands. Four other
sands have been production tested with additional sands remaining behind pipe to
be tested in the future. The Company is currently attempting to delineate this
field by drilling wells in several different areas. The Company has not yet
drilled any dry holes in this field. Two wells have been drilled by Chevron USA,
Inc. and Southwest Royalties, Inc. offsetting the Company's acreage. Both of
these wells are currently being completed and, if successful, could prove
additional locations on the Company's acreage. At June 30, 1996, this field had
estimated net proved reserves of 3,647 MBOE (50.4% natural gas) with a PV-10 of
$20.3 million, 73.0% of which was attributable to proved developed reserves. For
the nine months ended September 30, 1996, this field produced an average of
approximately 256 net Bbls of crude oil and NGLs and approximately 1,417 net Mcf
of natural gas per day from 11.1 net wells.
DELAWARE AREA (HOWE, ROC, BLOCK 16, TAURUS, GOMEZ AND NINE MILE DRAW
FIELDS), WARD, REEVES, AND PECOS COUNTIES, TEXAS. In connection with the
acquisition of the West Texas Properties in July 1994, the Company acquired
working interests ranging from 18% to 100% in 35 wells, 29 of which are operated
by the Company. These fields produce from Devonian, Wolfcamp, Ellenburger and
Cherry Canyon formations at depths ranging from 6,500 feet to 17,600 feet. At
June 30, 1996, these fields had estimated total net proved reserves of 3,644
MBOE (83.4% natural gas) with a PV-10 of $17.3 million, 100% of which was
attributable to proved developed reserves. For the nine months ended September
30, 1996, these fields produced an average of approximately 127 net Bbls of
crude oil and NGLs and 4,253 net Mcf of natural gas per day from 21.1 net wells.
PORTILLA FIELD, SAN PATRICIO COUNTY, TEXAS. The Company originally
acquired a 50% working interest in Portilla in April 1993. In March 1996, the
Company sold its interest in Portilla to Acco, which subsequently contributed it
to the Partnership. In September 1996, the Company entered into an agreement to
reacquire Portilla, including the 50% interest previously owned by the Pension
Fund. See "-- Recent Acquisitions -- Portilla and Happy." This field was
discovered in the 1950's by Superior Oil Company and produces from numerous
Miocene, Frio and Vicksburg age sands at depths ranging from 4,000 feet to 9,000
feet. At June 30, 1996, this field had estimated net proved reserves of 4,134
MBOE (19.2% natural gas) with a PV-10 of $28.2 million, 99.8% of which was
attributable to proved developed reserves. For the nine months ended September
30, 1996, the field produced an average of approximately 872 net Bbls of crude
oil and NGLs and approximately 1.957 net Mcf of natural gas per day from 51.0
net wells. The Company owns a 100% interest in the Portilla Plant which had
aggregate capacity of approximately 20.0 MMcf of natural gas per day at
September 30, 1996. During the nine months ended September 30, 1996, the
Portilla Plant processed an average of approximately 17.2 MMcf of natural gas
per day and extracted an average of approximately 271 Bbls of NGLs per day. The
Company is currently the operator of the Portilla Plant and all of the wells in
the Portilla Field.
EAST WHITE POINT FIELD, SAN PATRICIO COUNTY, TEXAS. The Company
originally acquired an approximate 30% working interest in this field in April
1993. The field produces crude oil and natural gas from numerous sands in the
Lower Frio formation at depths ranging from 9,000 feet to 13,000 feet. At June
30, 1996, this field had estimated net proved reserves of 8,191 MBOE (61.0%
natural gas) with a PV-10 of $45.9 million, 74.2% of which was attributable to
proved developed reserves. The Company operates 11 wells in this field, and
Marathon Oil Company ("Marathon") operates 10 additional wells in which the
Company has an interest. For the nine months ended September 30, 1996, this
field produced an average of approximately 461 Net Bbls of crude oil and NGLs
and 3,544 net Mcf of natural gas per day from 5.7 net wells. The Company also
owns an approximate 38.4% interest in and operates a natural gas processing
plant in this field. The East White Point natural gas processing plant, a modern
cyrogenic plant with capacity of approximately 25 MMcf of natural gas per day,
processed an average of approximately 11.6 MMcf of natural gas per day and
extracted approximately 679 Bbls of NGLs per day for the nine months ended
September 30, 1996.
STEDMAN ISLAND FIELD, NUECES COUNTY, TEXAs. The Company originally
acquired a 25% working interest in this field in April 1993 and an additional
25% in October 1995. This field produces crude oil and natural gas from Frio
sands at depths ranging from 8,500 feet to 10,000 feet. At June 30, 1996, this
field had estimated net proved reserves of 2,305 MBOE (67.6% natural gas) with a
PV-10 of $12.3 million, 62.6% of which was attributable to proved developed
reserves. For the nine months ended September 30, 1996, this field produced an
average of approximately 42 net Bbls of crude oil and NGLs and 913 net Mcf of
natural gas per day from 2.5 net wells. In July 1996, the Company placed a
successful recompletion well on production which produced an average of
approximately 20 net Bbls of crude oil and 800 net Mcf of natural gas per day
during the balance of the month of July and during August and 13 net Bbls of
crude oil and 665 net Mcf of natural gas per day during September 1996. The
Company believes that additional productive zones remain behind pipe. Two
additional workovers have been identified and are expected to be completed
during the first quarter of 1997. The Company has also identified a potentially
significant exploratory location using recently acquired and re-processed
seismic data in a horizon below current production in the field. The seismic
data indicates the presence of an untested fault block in the deeper Frio sands
and the Company plans to drill a test well during the fourth quarter 1996.
SPRABERRY TREND FIELD, MIDLAND, MARTIN AND REAGAN COUNTIES, TEXAS. Since
January 1, 1991, the Company has acquired interests in or drilled eight new
wells in this field. This field produces at depths ranging from 8,000 feet to
9,100 feet in multiple sands. The Company owns interests in 30 wells in this
field, 15 of which are operated by the Company. Following the successful
completion of two wells during the second quarter of 1996, eight additional
proved undeveloped locations were identified by the Company's independent
petroleum engineers. At June 30, 1996, this field had estimated net proved
reserves of 1,335 MBOE (27.0% natural gas) with a PV-10 of $7.1 million, 78.5%
of which was attributable to proved developed reserves. For the nine months
ended September 30, 1996, the field produced an average of approximately 150 net
Bbls of crude oil and NGLs and approximately 351 net Mcf natural gas per day
from 17.4 net wells.
SHARON RIDGE AND WESTBROOK FIELDS, SCURRY AND MITCHELL COUNTIES, TEXAS.
The Company drilled its first wells in the Westbrook Field in 1978 and operated
approximately 40 wells prior to 1992. These two fields produce crude oil from
Permian age carbonates at depths ranging from 1,700 feet to 3,500 feet. In 1992,
the Company acquired working interests ranging from 57.5% to 100% and became the
operator of 124 wells in the Sharon Ridge Field, which is adjacent to the
Westbrook Field. At June 30, 1996, these fields had estimated total net proved
reserves of 991 MBOE (5.1% natural gas) with a PV-10 of $5.2 million, 75.1% of
which was attributable to proved developed reserves. For the nine months ended
September 30, 1996, these fields produced an average of approximately 200 net
Bbls of crude oil and NGLs per day from 89.0 net wells. The Company is currently
investigating production enhancement efforts in this field, which could include
waterflooding and development drilling.
SOUTHWESTERN WYOMING
The Company acquired the Wyoming Properties in September 1996. See " --
Recent Activities." The Wyoming Properties produce natural gas from numerous
sands at depths ranging from 8,500 feet to 12,000 feet. At June 30, 1996, the
Wyoming Properties had estimated total net proved reserves of 9,935 MBOE (68.5%
natural gas) with a PV-10 of $30.3 million (based, in part, on an assumed
natural gas price of $1.07 per Mcf), 97.3% of which was attributable to proved
developed reserves. For the nine months ended September 30, 1996, the Wyoming
Properties produced an average of approximately 997 net Bbls of crude oil and
NGLs and 12,477 net Mcf of natural gas per day from 22.0 net wells.
WESTERN CANADA
PRODUCING PROPERTIES. In January 1996, the Company invested $3.0 million
in Grey Wolf Exploration Ltd. ("Grey Wolf"), a privately held Canadian
corporation, which, in turn, invested these proceeds in newly-issued shares of
Cascade, an Alberta-based corporation whose common shares are traded on The
Alberta Stock Exchange under the symbol "COL." The Company owns 78% of the
outstanding capital stock of Grey Wolf and, through Grey Wolf, the Company owns
approximately 52% of the outstanding capital stock of Cascade. Cascade owns 30.0
gross (4.3 net to Cascade) producing crude oil and natural gas wells and 12,000
net acres of undeveloped leases in southwestern Saskatchewan. These wells
produce crude oil from multiple sands at depths ranging from 4,200 feet to 4,600
feet. A report prepared by Cascade's independent petroleum engineers showed
estimated net proved reserves of 141 MBbls of crude oil with a PV-10 of CDN$1.4
million, or approximately U.S.$0.9 million, at January 1, 1996. None of these
reserves or values are included in the report of the Company's independent
petroleum engineers. See " -- Reserves Information." Cascade has drilled one dry
exploratory well and Grey Wolf has drilled six successful development wells
during 1996. As of December 17, 1996, the market value of the shares of Cascade
held by Grey Wolf was CDN$20.5 million, or approximately U.S.$15.0 million,
based on the closing price per share of Cascade stock on The Alberta Stock
Exchange on such date.
In November 1996, Canadian Abraxas acquired CGGS. As of September 1,
1996, the Canadian Abraxas Properties had estimated total net proved reserves of
10,821 MBOE (91.7% natural gas) with a PV-10 of $46.4 million, 82.4% of which
was attributable to proved developed reserves. For the nine months ended
September 30, 1996, the Canadian Abraxas Properties produced an average of
approximately 600 net Bbls of crude oil and NGLs and 35.5net Mcf of natural gas
per day from 68.8 net wells. See "-- Recent Acquisitions."
The following table sets forth a summary of certain information, by
field, of the Canadian Abraxas Properties:
Average Daily
Production for Nine
Months Ended September
30, 1996
------------------------
Reserves at Crude Oil
September & NGLs Natural Gas
Name of Field Working Net Wells 1, 1996 (MBbls) (MMcf)
Interest (MBOE)
Quirk Creek (1) 5.0 1,785.3 0.2 3.6
Sundre (2) 9.4 1,794.5 0.3 5.7
Hoole 50% 3.2 1,477.0 -- 7.7
Bellis 100% 10.1 961.7 -- 2.7
Chinchaga 60% 2.4 859.7 -- 3.3
Pouce Coupe 100% 3.0 758.7 -- 3.4
Valhalla 100% 6.0 147.7 0.1 3.1
Other (3) (4) 29.7 3,036.3 -- 6.0
------------- ------------ ------------ -------------
Total 68.8 10,820.9 0.6 35.5 (5)
- ------------
(1) CGGS owns a 21% working interest in 12 wells and a 48% working interest
in four wells.
(2) CGGS owns working interests ranging from 11% to 70% in 16 wells.
(3) Consists of the Big Bend, Knopcik, Eaglesham, Giroux Lake and Minor
Properties.
(4) CGGS owns working interests ranging from 8% to 100% in 58 wells.
(5) Does not reflect burden from royalties payable to the Crown.
NATURAL GAS PROCESSING. Canadian Abraxas natural gas processing business
includes natural gas gathering and processing operations. Natural gas gathering
operations involve locating and contracting for natural gas supplies produced
from crude oil and natural gas fields and the operation and maintenance of a
gathering system of pipelines that connect such natural gas supply sources to
natural gas processing plants. Natural gas processing involves subjecting
natural gas to high pressure and low temperature treatments that cause the
natural gas to separate into various products, including a mixture of NGLs
(commonly referred to as raw product), residual natural gas and by-products such
as helium, condensate and sulfur. The combined value of the residual natural
gas, raw product and by-products is generally higher than that of unprocessed
natural gas. Certain of Canadian Abraxas' processing plants are equipped to
fractionate the raw product into its component products of ethane, propane,
butanes and natural gasoline for sale to local markets.
The Company believes that the Canadian Abraxas Plants will provide
substantial revenue-enhancing opportunities to the Company. Several of the
plants are located in areas with little or no competition from other natural gas
processing plants. The Company intends to utilize the plants' excess capacity by
seeking to process additional natural gas volumes from third parties and from
increased production from the Canadian Abraxas Properties. The Company believes
that its ownership of the Canadian Abraxas Properties and the Canadian Abraxas
Plants will afford it a competitive advantage relative to other area operators
due to the Company's preferential access to the natural gas processing capacity
at these facilities.
For the nine months ended September 30, 1996, the Canadian Abraxas
Plants processed an average of 182.8 MMcf of natural gas per day (65.7 MMcf per
day net to CGGS), of which 19.2% (39.2% net) was custom processed for third
parties. The following table sets forth certain information with respect to the
Canadian Abraxas Plants for the nine months ended September 30, 1996.
CGGS
Maximum Gross Third
Plant Average Party
Working Capacity Throughput Processing
Plant Location Interest (MMcfpd) Utilization (MMcfpd) (MMcfpd)
- -------------------- -------- --------- ----------- ---------- ----------
Quirk Creek 21% 80 67% 53.6 10.4
Knopcik (1) 10% 56 100% 56.0 0.4
Hoole 50% 32 59% 18.9 0.5
Valhalla 100% 30 67% 20.0 18.3
Sundre 23% 20 68% 13.5 --
Bellis 100% 10 76% 7.6 4.8
Big Bend 77% 8 49% 3.9 1.1
Pouce Coupe 100% 8 54% 4.3 0.4
Eaglesham 25% 5 100% 5.0 --
--------- --------- --------- ---------
Total 249 73 182.8 35.9
- ------------
(1) Consists of three plants.
EXPLORATION OPPORTUNITIES
The Company allocates a portion of its capital budget to the drilling of
exploratory wells which have high reserve potential. The Company believes that
by devoting a relatively small amount of capital to high impact, high risk
projects while reserving the majority of its available capital for development
projects, it can reduce its risk profile while still benefiting from the
potential for significant reserve additions. Some of the Company's current
exploration opportunities include the following:
YOAKUM PROSPECT, DEWITT COUNTY, TEXAS. The Company owns a 100% interest
in approximately 952 acres and intends to drill a 15,000 foot step-out well to
the Yoakum (Edwards) Field. The test will attempt to extend existing production
in the Edwards Field onto the Company's acreage. Offsetting wells have produced
as much as 5,000 Mcf of natural gas per day. This well is expected to be drilled
in the fourth quarter of 1996.
ROCHE RANCH, REFUGIO COUNTY, TEXAS. The Company owns a 100% interest in
approximately 416 acres and intends to drill a 7,500 foot Frio test well during
the fourth quarter of 1996. This prospect is located approximately five miles
north of Portilla.
SHANGHAI FIELD, WHARTON COUNTY, TEXAS. The Company owns a 20.0% working
interest in the Shanghai Prospect. Following two inconclusive wells drilled in
1994, the Company participated in an expansive 3-D seismic shoot. The seismic
data was recently processed and interpreted. During the third quarter of 1996,
the Company intends to drill a third well in the field on a directional basis to
test four potential Yegua Sands.
JEAN PROSPECT, YOUNG COUNTY, TEXAS. As many as five additional locations
delineated by 3D seismic remain to be drilled on the 1,800 acre Jean 3D seismic
project in the Mississippi and Caddo Formations at approximately 4,500 feet. The
Company owns a 25.0% working interest and 18.8% net revenue interest in this
project.
DEVELOPMENTAL AND EXPLORATORY ACREAGE
The following table indicates the Company's interest in developed and
undeveloped acreage as of September 30, 1996, on a pro forma basis:
Developed and Undeveloped Acreage
Pro Forma As of September 30, 1996
Developed Acreage Undeveloped Acreage
---------------------------- ---------------------------
Gross Acres Net Acres Gross Acres Net Acres
------------- ------------ ------------- ------------
Canada 65,150 39,489 89,818 46,838
Texas 40,032 ` 21,458 7,159 3,795
N. Dakota 1,864 1,021 -- --
Montana 320 10 -- --
Kansas 640 120 -- --
Wyoming 4,560 3,654 15,027 10,437
720 23 -- --
------------- ------------ ------------- ------------
Total 113,286 65,775 112,004 61,070
PRODUCTIVE WELLS
The following table sets forth the total gross and net productive wells
of the Company, expressed separately for crude oil and natural gas, as of
September 30, 1996, on a pro forma basis:
Productive Wells
Pro Forma as of September 30, 1996
Crude Oil Natural Gas
-------------------------- --------------------------
Gross Net Gross Net
------------ ------------- ------------ ------------
Canada 16.0 13.5 104.0 55.3
Texas 248.0 171.3 100.0 62.3
N. Dakota 4.0 1.7 -- --
Montana 1.0 0.1 -- --
New Mexico -- -- 1.0 0.1
Wyoming 1.0 0.1 24.0 20.3
Alabama 2.0 0.1 1.0 0.1
Utah 1.0 0.1 -- --
Kansas 4.0 0.8 -- --
============ ============= ============ ============
Total 277.0 187.7 230.0 138.1
============ ============= ============ ============
Substantially all of the Company's U.S. crude oil and natural gas
properties on a pro forma basis will be pledged to secure the Company's
indebtedness under the New Credit Facility. See "Management's Discussion of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
<PAGE>
RESERVES INFORMATION
The crude oil and natural gas reserves of the Company have been
estimated as of January 1, 1995, and January 1, 1996, and June 30, 1996, and the
crude oil and natural gas reserves of the Wyoming Properties and Portilla and
Happy have been estimated as of June 30, 1996, by DeGolyer & MacNaughton,
Dallas, Texas. The crude oil and natural gas reserves of CGGS have been
estimated as of September 1, 1996, by Sproule Associates Limited, Calgary,
Alberta, Canada. Crude oil and natural gas reserves, and the estimates of the
present value of future net revenue therefrom, were determined based on then
current prices and costs. Reserve calculations involved the estimate of future
net recoverable reserves of crude oil and natural gas and the timing and amount
of future net revenue to be received therefrom. Such estimates are not precise
and are based on assumptions regarding a variety of factors, many of which are
variable and uncertain.
The following table sets forth certain information regarding estimates
of the Company's crude oil, NGLs and natural gas reserves as of January 1, 1995,
January 1, 1996 and June 30, 1996, on a historical basis and on a pro forma
basis:
Estimated Proved Reserves
------------------------------------------
Proved Proved Total
Developed Undeveloped Proved
----------- ------------ --------
As of January 1, 1995
Crude oil (MBbls) 3,617 3,033 6,649
NGLs (MBbls) 2,089 418 2,507
Natural gas (MMcf) 48,973 18,606 67,579
As of January 1, 1996 (1)
Crude oil (MBbls) 3,992 1,516 5,508
NGLs (MBbls) 2,007 752 2,759
Natural gas (MMcf) 44,026 10,543 54,569
As of June 30, 1996 (1)
Crude oil (MBbls) 2,906 1,083 3,989
NGLs (MBbls) 1,859 665 2,524
Natural gas (MMcf) 41,903 10,663 52,566
Pro Forma (as of June 30, 1996)
(1)(2)
Crude oil (MBbls) 6,895 1,380 8,275
NGLs (MBbls) 6,242 1,522 7,764
Natural gas (MMcf) 144,803 32,848 177,651
- ------------
(1) Does not include reserves of Cascade and Grey Wolf.
(2) Includes reserves of CGGS at September 1, 1996.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and the timing of
development expenditures, including many factors beyond the control of the
Company. The reserve data included in this Prospectus represent only estimates.
In addition, the estimates of future net revenue from proved reserves of the
Company and the present value thereof are based upon certain assumptions about
future production levels, prices, and costs that may not prove to be correct
over time. In particular, estimates of crude oil and natural gas reserves,
future net revenue from proved reserves and the PV-10 thereof for the Company's
crude oil and natural gas properties included in this Prospectus are based on
the assumption that future oil and gas prices remain the same as crude oil and
natural gas prices at June 30, 1996, with respect to the Company's existing
properties and for Portilla and Happy, and for the month of July 1996 with
respect to the Canadian Abraxas Properties. The average sales prices as of such
dates used for purposes of such estimates were $19.86 per Bbl of crude oil,
$14.09 per Bbl of NGLs and $1.27 per Mcf of natural gas with respect to the
Canadian Abraxas Properties, $21.70 per Bbl of crude oil, $9.25 per Bbl of NGLs
and $1.07 per Mcf of natural gas with respect to the Wyoming Properties, $19.98
per Bbl of crude oil, $14.50 per Bbl of NGLs and $2.65 per Mcf of natural gas
with respect to Portilla and Happy and $20.64 per Bbl of crude oil, $12.38 per
Bbl of NGLs and $2.29 per Mcf of natural gas with respect to the Company's other
properties in the aggregate. Also assumed is the Company's making future capital
expenditures of approximately $19.7 million in the aggregate, including $3.4
million on the Wyoming Properties, $1.7 million on the Canadian Abraxas
Properties and $2.2 million on Portilla and Happy, necessary to develop and
realize the value of its undeveloped reserves. Any significant variance in these
assumptions could materially affect the estimated quantity and value of reserves
set forth herein. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
In general, the volume of production from crude oil and natural gas
properties declines as reserves are depleted. Except to the extent the Company
acquires properties containing proved reserves or conducts successful
exploration and development activities, or both, the proved reserves of the
Company will decline as reserves are produced. The Company's future crude oil
and natural gas production is therefore highly dependent upon its level of
success in acquiring or finding additional reserves.
The Company files reports of its estimated crude oil and natural gas
reserves with the Department of Energy and the Bureau of the Census. The
reserves reported to these agencies are required to be reported on a gross
operated basis and therefore are not comparable to the reserve data reported
herein.
CRUDE OIL, NGLS AND NATURAL GAS PRODUCTION AND SALES PRICES
The following table presents the net crude oil, net NGLs and net natural
gas production for the Company, the average sales price per Bbl of crude oil and
NGLs and per Mcf of natural gas produced and the average LOE per BOE of
production sold, for each of the three years ended December 31, 1995, the nine
months ended September 30, 1996, and on a pro forma basis, for the year ended
December 31, 1995, and the nine months ended September 30, 1996:
<TABLE>
<CAPTION>
Pro Forma
Pro Forma September 30, September 30,
1993 1994 1995 1995 1996 1996
--------- --------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Production
Crude oil (MBbls) 270.9 355.7 401.4 666.7 266.0 544.6
NGLs (MBbls) 33.9 113.2 143.4 672.0 106.1 561.0
Natural gas (MMcf) 985.4 2,392.9 3,552.7 23,825.5 2,625.4 16,533.2
Average sales price
Crude oil (per Bbl) $ 15.54 $ 15.47 $ 17.16 $ 17.18 $ 19.94 $ 20.04
NGLs (per Bbl) $ 14.75 $ 10.54 $ 10.83 $ 7.82 $ 12.73 $ 10.89
Natural gas (per Mcf) $ 2.60 $ 1.85 $ 1.47 $ 1.01 $ 1.95 $ 1.30
LOE (per BOE) (1) $ 6.17 $ 4.26 $ 3.81 $ 2.25 $ 4.05 $ 2.36
</TABLE>
- ----------
(1) Crude oil and natural gas were combined by converting natural gas to BOE on
the basis of 6 Mcf natural gas -- 1 Bbl of crude oil.
<PAGE>
DRILLING ACTIVITIES
The following table sets forth the Company's gross and net working
interests in exploratory, development, and service wells drilled during the year
ended December 31, 1995, and the nine months ended September 30, 1996:
1995 1996 (thru
September 30)
--------------------------------------
Gross Net Gross Net
--------------------------------------
Exploratory -- -- -- --
Productive
Crude oil 2.0 1.0 1.0 0.3
Natural gas -- -- 1.0 0.3
Dry holes 1.0 1.0 1.0 1.0
--------------------------------------
Total 3.0 2.0 3.0 1.6
======================================
Development
Productive
Crude oil 12.0 9.1 19.0 11.8
Natural gas 1.0 0.3 5.0 0.5
Service -- -- 2.0 --
Dry holes 1.0 0.6 -- 0.8
--------------------------------------
Total 14.0 10.0 26.0 13.1
======================================
MARKETS AND CUSTOMERS
The revenue generated by the Company's operations are highly dependent
upon the prices of, and demand for crude oil and natural gas. Historically, the
markets for crude oil and natural gas have been volatile and are likely to
continue to be volatile in the future. The prices received by the Company for
its crude oil and natural gas production and the level of such production are
subject to wide fluctuations and depend on numerous factors beyond the Company's
control including seasonality, the condition of the United States economy
(particularly the manufacturing sector), foreign imports, political conditions
in other oil-producing and natural gas-producing countries, the actions of the
Organization of Petroleum Exporting Countries and domestic regulation,
legislation and policies. Decreases in the prices of crude oil and natural gas
have had, and could have in the future, an adverse effect on the carrying value
of the Company's proved reserves and the Company's revenue, profitability and
cash flow from operations.
In order to manage its exposure to price risks in the marketing of its
crude oil and natural gas, the Company from time to time has entered into fixed
price delivery contracts, financial swaps and crude oil and natural gas futures
contracts as hedging devices. To ensure a fixed price for future production, the
Company may sell a futures contract and thereafter either (i) make physical
delivery of crude oil or natural gas to comply with such contract or (ii) buy a
matching futures contract to unwind its futures position and sell its production
to a customer. Such contracts may expose the Company to the risk of financial
loss in certain circumstances, including instances where production is less than
expected, the Company's customers fail to purchase or deliver the contracted
quantities of crude oil or natural gas, or a sudden, unexpected event materially
impacts crude oil or natural gas prices. Such contracts may also restrict the
ability of the Company to benefit from unexpected increases in crude oil and
natural gas prices.
In connection with the Acco Sale, Acco entered into a commodity price
hedge with Christiania which was assumed by the Company and BTCo and ING Capital
in connection with the consummation of the Transactions. Under the terms of this
commodity price hedge, the Company is required to receive or make payment to
BTCo and ING Capital based on a differential between a fixed and variable price
for crude oil and natural gas through the last business day of November 2001 on
volumes ranging from 8,160 barrels of crude oil to 20,000 barrels of crude oil
per month and 14,850 MMBTU of natural gas to 87,406 MMBTU of natural gas per
month. Under this agreement, the Company receives fixed prices ranging from
$17.20 per barrel of crude oil to $18.55 per barrel of crude oil and $1.793 per
MMBTU of natural gas to $1.925 per MMBTU of natural gas and makes payments based
on the price for west Texas intermediate light sweet crude oil on the NYMEX for
crude oil and the Inside FERC, Tennessee Gas Pipeline Co: Texas (Zone 0) price
for natural gas.
Substantially all of the Company's crude oil and natural gas is sold at
current market prices under short term contracts, as is customary in the
industry. During the year ended December 31, 1995, five purchasers accounted for
approximately 64% of the Company's crude oil and natural gas sales. The Company
believes that there are numerous other companies available to purchase the
Company's crude oil and natural gas and that the loss of any or all of these
purchasers would not materially affect the Company's ability to sell crude oil
and natural gas.
In Fiscal 1995, CGGS sold its NGLs and natural gas to a combination of
aggregators, short-term and longer-term Canadian and United States customers.
Pricing terms in these contracts included a mixture of fixed and floating
prices. CGGS received an average of $0.94 per Mcf for its natural gas production
in Fiscal 1995. For the nine months ended October 31, 1996, CGGS received an
average of $1.24 per Mcf of natural gas as a result of utilizing certain hedging
arrangements. During Fiscal 1995, 14 purchasers accounted for 100% of CGGS'
crude oil, NGLs and natural gas sales, and during the nine months ended October
31, 1996, eight purchasers accounted for 100% of CGGS' crude oil, NGLs and
natural gas sales.
The Company believes that expected improvements in the transportation
infrastructure in, and increased demand for natural gas from, southwest Wyoming
and Alberta, Canada will help to reduce the existence of basis differentials in
the pricing of natural gas produced in these areas. With basis differentials at
relatively high historical levels, the Company believes that the Canadian
Abraxas Properties and the Wyoming Properties have the potential for increasing
revenue and asset value as these differentials decrease without any increase in
LOE and G&A expenses.
COMPETITION
The Company encounters strong competition from major oil companies and
independent operators in acquiring properties and leases for the exploration
for, and production of, crude oil and natural gas. Competition is particularly
intense with respect to the acquisition of desirable undeveloped crude oil and
natural gas leases. The principal competitive factors in the acquisition of such
undeveloped crude oil and natural gas leases include the staff and data
necessary to identify, investigate and purchase such leases, and the financial
resources necessary to acquire and develop such leases. Many of the Company's
competitors have financial resources, staff and facilities substantially greater
than those of the Company. In addition, the producing, processing and marketing
of crude oil and natural gas is affected by a number of factors which are beyond
the control of the Company, the effect of which cannot be accurately predicted.
The principal raw materials and resources necessary for the exploration
and production of crude oil and natural gas are leasehold prospects under which
crude oil and natural gas reserves may be discovered, drilling rigs and related
equipment to explore for such reserves and knowledgeable personnel to conduct
all phases of crude oil and natural gas operations. The Company must compete for
such raw materials and resources with both major crude oil companies and
independent operators. Although the Company believes its current operating and
financial resources are adequate to preclude any significant disruption of its
operations in the immediate future, the continued availability of such materials
and resources to the Company cannot be assured.
The Company will face significant competition for obtaining additional
natural gas supplies for gathering and processing operations, for marketing
NGLs, residue gas, helium, condensate and sulfur, and for transporting natural
gas and liquids. The Company's principal competitors will include major
integrated oil companies and their marketing affiliates and national and local
gas gatherers, brokers, marketers and distributors of varying sizes, financial
resources and experience. Certain competitors, such as major crude oil and
natural gas companies, have capital resources and control supplies of natural
gas substantially greater than the Company. Smaller local distributors may enjoy
a marketing advantage in their immediate service areas. The Company will compete
against other companies in its natural gas processing business both for supplies
of natural gas and for customers to which it will sell its products. Competition
for natural gas supplies is based primarily on location of natural gas gathering
facilities and natural gas gathering plants, operating efficiency and
reliability and ability to obtain a satisfactory price for products recovered.
Competition for customers is based primarily on price and delivery capabilities.
<PAGE>
REGULATORY MATTERS
The Company's operations are affected from time to time in varying
degrees by political developments and federal, state, provincial and local laws
and regulations. In particular, oil and gas production operations and economics
are, or in the past have been, affected by price controls, taxes, conservation,
safety, environmental, and other laws relating to the petroleum industry, by
changes in such laws and by constantly changing administrative regulations.
PRICE REGULATIONS
In the recent past, maximum selling prices for certain categories of
crude oil, natural gas, condensate and NGLs were subject to federal regulation.
In 1981, all federal price controls over sales of crude oil, condensate and NGLs
were lifted. Effective January 1, 1993, the Natural Gas Wellhead Decontrol Act
(the "Decontrol Act") deregulated natural gas prices for all "first sales" of
natural gas, which includes all sales by the Company of its own production. As a
result, all sales of the Company's domestically produced crude oil, natural gas,
condensate and NGLs may be sold at market prices, unless otherwise committed by
contract.
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. As is the case with crude
oil, 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 government of Alberta also regulates the volume of natural gas that
may be removed from Alberta 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.
NATURAL GAS REGULATION
Historically, interstate pipeline companies generally acted as wholesale
merchants by purchasing natural gas from producers and reselling the gas to
local distribution companies and large end users. Commencing in late 1985, the
Federal Energy Regulatory Commission (the "FERC") issued a series of orders that
have had a major impact on interstate natural gas pipeline operations, services,
and rates, and thus have significantly altered the marketing and price of
natural gas. The FERC's key rule making action, order No. 636 ("Order 636"),
issued in April 1992, required each interstate pipeline to, among other things,
"unbundle" its traditional bundled sales services and create and make available
on an open and nondiscriminatory basis numerous constituent services (such as
gathering services, storage services, firm and interruptible transportation
services, and standby sales and gas balancing services), and to adopt a new
ratemaking methodology to determine appropriate rates for those services. To the
extent the pipeline company or its sales affiliate makes natural gas sales as a
merchant, it does so pursuant to private contracts in direct competition with
all of the sellers, such as the Company; however, pipeline companies and their
affiliates were not required to remain "merchants" of natural gas, and most of
the interstate pipeline companies have become "transporters only." In subsequent
orders, the FERC largely affirmed the major features of Order 636 and denied a
stay of the implementation of the new rules pending judicial review. 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. However, even through the implementation of Order 636 on individual
interstate pipelines is essentially complete, many of the individual pipeline
restructuring proceedings, as well as Order 636 itself and the regulations
promulgated thereunder, are subject to pending appellate review and could
possibly be changed as a result of future court orders. The Company cannot
predict whether the FERC's orders will be affirmed on appeal or what the effects
will be on its business.
In recent years the FERC also has pursued a number of other important
policy initiatives which could significantly affect the marketing of natural
gas. Some of the more notable of these regulatory initiatives include (i) a
series of orders in individual pipeline proceedings articulating a policy of
generally approving the voluntary divestiture of interstate pipeline owned
gathering facilities by interstate pipelines to their affiliates (the so-called
"spin down" of previously regulated gathering facilities to the pipeline's
nonregulated affiliates), (ii) the completion of rule-making involving the
regulation of pipelines with marketing affiliates under Order No. 497, (iii) the
FERC's ongoing efforts to promulgate standards for pipeline electronic bulletin
boards and electronic data exchange, (iv) a generic inquiry into the pricing of
interstate pipeline capacity, (v) efforts to refine the FERC's regulations
controlling operation of the secondary market for released pipeline capacity,
and (vi) a policy statement regarding market based rates and other
non-cost-based rates for interstate pipeline transmission and storage capacity.
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 as a result of the
monopolization of those facilities by their new, unregulated owners. The FERC
has attempted to address some of these concerns in its orders authorizing such
"spin downs," but it remains to be seen what effect these activities will have
on access to markets and the cost to do business. As to all of these recent FERC
initiatives, the ongoing, or, in some instances, preliminary evolving nature of
these regulatory initiatives makes it impossible at this time to predict their
ultimate impact on the Company's business.
Recent orders of the FERC have been more liberal in their reliance upon
traditional tests for determining what facilities are "gathering" and therefore
exempt from federal regulatory control. In many instances, what was once
classified as "transmission" may now be classified as "gathering." The Company
transports certain of its natural gas through gathering facilities owned by
others, including interstate pipelines, under existing long term contractual
arrangements. With respect to item (i) in the preceding paragraph, on May 27,
1994, the FERC issued orders in the context of the "spin off" or "spin down" of
interstate pipeline owned gathering facilities. A "spin off" is a FERC-approved
sale of such facilities to a non-affiliate. A "spin down" is the transfer by the
interstate pipeline of its gathering facilities to an affiliate. A number of
spin offs and spindowns have been approved by the FERC and implemented. The FERC
held that it retains jurisdiction over gathering provided by interstate
pipelines, but that it generally does not have jurisdiction over pipeline
gathering affiliates, except in the event of affiliate abuse (such as actions by
the affiliate undermining open and nondiscriminatory access to the interstate
pipeline). These orders require nondiscriminatory access for all sources of
supply and prohibit the tying of pipeline transportation service to any service
provided by the pipeline's gathering affiliate. On November 30, 1994, the FERC
issued a series of rehearing orders largely affirming the May 27, 1994 orders.
The FERC now requires interstate pipelines to not only seek authority under
Section 7(b) of the Natural Gas Act of 1938 (the "NGA") to abandon certificated
facilities, but also to seek authority under Section 4 of the NGA to terminate
service from both certificated and uncertificated facilities. On December 31,
1994, an appeal was filed with the U.S. Court of Appeals for the D.C. Circuit to
overturn three of the FERC's November 30, 1994, orders. The Company cannot
predict what the ultimate effect of the FERC's orders pertaining to gathering
will have on its production and marketing, or whether the Appellate Court will
affirm the FERC's orders on these matters.
STATE AND OTHER REGULATION
All of the jurisdictions in which the Company owns producing crude oil
and natural gas properties have statutory provisions regulating the exploration
for and production of crude oil and natural gas, including provisions requiring
permits for the drilling of wells and maintaining bonding requirements in order
to drill or operate wells and provisions relating to the location of wells, the
method of drilling and casing wells, the surface use and restoration of
properties upon which wells are drilled and the plugging and abandoning of
wells. The Company's operations are also subject to various conservation laws
and regulations. These include the regulation of the size of drilling and
spacing units or proration units and the density of wells which may be drilled
and the unitization or pooling of crude oil and natural gas properties. In this
regard, some states allow the forced pooling or integration of tracts to
facilitate exploration while other states rely on voluntary pooling of lands and
leases. In addition, state conservation laws establish maximum rates of
production from crude oil and natural gas wells, generally prohibit the venting
or flaring of natural gas and impose certain requirements regarding the
ratability of production. Some states, such as Texas and Oklahoma, have, in
recent years, reviewed and substantially revised methods previously used to make
monthly determinations of allowable rates of production from fields and
individual wells. The effect of these regulations is to limit the amounts of
crude oil and natural gas the Company can produce from its wells, and to limit
the number of wells or the location at which the Company can drill.
State regulation of gathering facilities generally includes various
safety, environmental, and in some circumstances, non-discriminatory take
requirements, but does not generally entail rate regulation. 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, Oklahoma recently enacted a prohibition against discriminatory
gathering rates and certain Texas regulatory officials have expressed interest
in evaluating similar rules.
ROYALTY MATTERS
UNITED STATES
By a letter dated May 3, 1993, directed to thousands of producers
holding interests in federal leases, the United States Department of the
Interior (the "DOI") announced its interpretation of existing federal leases to
require the payment of royalties on past natural gas contract settlements which
were entered into in the 1980s and 1990s to resolve, among other things,
take-or-pay and minimum take claims by producers against pipelines and other
buyers. The DOI's letter sets forth various theories of liability, all founded
on the DOI's interpretation of the term "gross proceeds" as used in federal
leases and pertinent federal regulations. In an effort to ascertain the amount
of such potential royalties, the DOI sent a letter to producers on June 18,
1993, requiring producers to provide all data on all natural gas contract
settlements, regardless of whether natural gas produced from federal leases were
involved in the settlement. The Company received a copy of this information
demand letter. In response to the DOI's action, in July 1993, various industry
associations and others filed suit in the United States District Court for the
Northern District of West Virginia seeking an injunction to prevent the
collection of royalties on natural gas contract settlement amounts under the
DOI's theories. The lawsuit, styled "Independent Petroleum Association v.
Babbitt," was transferred to the United States District Court in Washington,
D.C. On June 4, 1995, the Court issued a ruling in this case holding that
royalties are payable to the United States on natural gas contract settlement
proceeds in accordance with the Minerals Management Service's May 3, 1993,
letter to producers. This ruling was appealed and is now pending in the D.C.
Circuit Court of Appeals. The DOI's claim in a bankruptcy proceeding against a
producer based upon an interstate pipeline's earlier buy-out of the producer's
natural gas sale contract was rejected by the Federal Bankruptcy Court in
Lexington, Kentucky, in a proceeding styled "Century Offshore Management Corp."
While the facts of the Court's decision do not involve all of the DOI's
theories, the Court found on those at issue that the DOI's theories were without
legal merit, and the Court's reasoning suggests that the DOI's other claims are
similarly deficient. This decision was upheld in the District Court and is now
on appeal in the Sixth Circuit Court of Appeals. Because both the "Independent
Petroleum Association v. Babbitt" and "Century Offshore Management Corp."
decisions have been appealed, and because of the complex nature of the
calculations necessary to determine potential additional royalty liability under
the DOI's theories, it is impossible to predict what, if any, additional or
different royalty obligation the DOI may assert or ultimately be entitled to
recover with respect to any of the Company's prior natural gas contract
settlements.
CANADA
In addition to Canadian federal regulation, each province has
legislation and regulations that govern land tenure, royalties, production
rates, environmental protection and other matters. The royalty regime is a
significant factor in the profitability of crude oil and natural gas production.
Royalties payable on production from lands other than Crown lands are determined
by negotiations between the mineral owner and the lessee. Crown royalties are
determined by governmental regulation and are generally calculated as a
percentage of the value of the gross production, and the rate of royalties
payable generally depends in part on prescribed preference prices, well
productivity, geographical location, field discovery date and the type and
quality of the petroleum product produced.
From time to time the governments of Canada, Alberta and Saskatchewan
have established incentive programs which have included royalty rate reductions,
royalty holidays and tax credits for the purpose of encouraging crude oil and
natural gas exploration or enhanced planning projects.
Regulations made pursuant to the Mines and Minerals Act (Alberta)
provide various incentives for exploring and developing crude oil reserves in
Alberta. Crude oil produced from qualifying development wells that were spudded
on or after November 1, 1991, and prior to August 1, 1993 (or spudded in August
but licensed prior thereto) are eligible for a 12-month royalty exemption up to
a maximum of CDN$400,000. Exploration wells spudded on or after November 1, 1991
and prior to April 1, 1992, or if drilled in northern Alberta or the Foothills
area of Alberta prior to April 1, 1993, are entitled to a 24-month exemption to
a maximum of CDN$1.0 million. A 24-month royalty reduction (up to December 31,
1996) is available for crude oil produced from qualifying horizontal extensions
commenced prior to January 1, 1995. Crude oil produced from horizontal
extensions commenced at least five years after the well was originally spudded
may also qualify for a royalty reduction. Wells drilled prior to September 1,
1990, and reactivated between November 1, 1991 and October 1, 1992, having had
no production between September 1, 1990 and November 1, 1991, are entitled to a
five year royalty exemption to a maximum of 4,000 cubic metres. An 8,000 cubic
metres exemption is available to production from a well that has not produced
for a 12-month period, if resuming production in October, November or December
of 1992 or January of 1993, or for a 24-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 $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.
Crude oil and natural gas royalty holidays and reductions for specific
wells reduce the amount of Crown royalties paid to the provincial governments.
The ARTC program provides a rebate on Crown royalties paid in respect of
eligible producing properties.
The Government of Saskatchewan revised its fiscal regime for the oil and
gas industry effective January 1, 1994. Some royalties on wells existing as of
that date will remain unchanged and therefore subject to various periods of
royalty/tax reduction. While a number of incentives were eliminated or reduced
(such as incentives for vertical infill wells and lower cost horizontal wells),
new incentive programs were initiated to encourage greater exploration and
development activity in the province. The new fiscal regime 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 metres
of oil in the case of deep exploratory wells). The maximum royalty applicable to
the first 12,000 cubic metres 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 metres 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 five 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 metres of natural gas produced
will be subject to an incentive maximum royalty rate of 5%.
ENVIRONMENTAL MATTERS
The Company's operations are subject to numerous federal, state, and
local laws and regulations controlling the discharge of materials into the
environment or otherwise relating to the protection of the environment,
including the Comprehensive Environment Response, Compensation, and Liability
Act ("CERCLA"), also known as the "Federal Superfund Law." Such laws and
regulations, among other things, impose absolute liability upon the lessee under
a lease for the cost of clean up of pollution resulting from a lessee's
operations, subject the lessee to liability for pollution damages, may require
suspension or cessation of operations in affected areas, and impose restrictions
on the injection of liquids into subsurface aquifers that may contaminate
groundwater. The Company maintains insurance against costs of clean-up
operations, but it's not fully insured against all such risks. A serious
incident of pollution may, as it has in the past, also result in the DOI
requiring lessees under federal leases to suspend or cease operation in the
affected area. In addition, the recent trend toward stricter standards in
environmental legislation and regulation may continue. For instance, legislation
has been proposed in Congress from time to time that would reclassify certain
crude oil and natural gas production wastes as "hazardous wastes" which would
make the reclassified exploration and production wastes subject to much more
stringent handling, disposal, and clean up requirements. If such legislation
were to be enacted, it could have a significant impact on the Company's
operating costs, as well as the crude oil and natural gas industry in general.
State initiatives to further regulate the disposal of crude oil and natural gas
wastes are also pending in certain states, and these various matters could have
a similar impact on the Company.
The Company's Canadian operations are also subject to environmental
regulation pursuant to local, provincial and federal legislation. Canadian
environmental legislation provides for restrictions and prohibitions on releases
or emissions of various substances produced in association with certain crude
oil and natural gas industry operations and 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. Environmental legislation in Alberta has undergone a major revision and
has been consolidated in the Environmental and Enhancement Act . Under the new
Act, environmental standards and compliance for releases, clean-up and reporting
are stricter. Also, the range of enforcement actions available and the severity
of penalties have been significantly increased. These changes will have
incremental effect on the cost of conducting operations in Alberta.
The Company is not currently involved in any administrative or judicial
proceedings arising under domestic or foreign federal, state, or local
environmental protection laws and regulations which would have a material
adverse effect on the Company's financial position or results of operations.
<PAGE>
TITLE TO PROPERTIES
As is customary in the crude oil and natural gas industry, the Company
makes only a cursory review of title to undeveloped crude oil and natural gas
leases at the time they are acquired by the Company. However, before drilling
commences, the Company requires a thorough title search to be conducted, and any
material defects in title are remedied prior to the time actual drilling of a
well on the lease begins. To the extent title opinions or other investigations
reflect title defects, the Company, rather than the seller of the undeveloped
property, is typically obligated to cure any title defect at its expense. If the
Company were unable to remedy or cure any title defect of a nature such that it
would not be prudent to commence drilling operations on the property, the
Company could suffer a loss of its entire investment in the property. The
Company believes that it has good title to its crude oil and natural gas
properties, some of which are subject to immaterial encumbrances, easements and
restrictions. The crude oil and natural gas properties owned by the Company are
also typically subject to royalty and other similar non-cost bearing interests
customary in the industry. The Company does not believe that any of these
encumbrances or burdens will materially affect the Company's ownership or use of
its properties.
EMPLOYEES
As of December 20, 1996, Abraxas had 43 full-time employees, including
two executive officers, two non-executive officers, five petroleum engineers,
one landman, one geologist, eleven secretarial and clerical personnel and 21
field personnel. Additionally, Abraxas retains contract pumpers on a
month-to-month basis. The Company retains independent geologic and engineering
consultants from time to time on a limited basis and expects to continue to do
so in the future.
OFFICE FACILITIES
The Company's executive and administrative offices are located at 500
North Loop 1604 East, Suite 100, San Antonio, Texas 78232. The Company owns a
16% limited partnership interest in the partnership which owns this office
building. The Company also has an office in Midland, Texas. These offices,
consisting of approximately 12,650 square feet in San Antonio and 960 square
feet in Midland, are leased until March 2005 at an aggregate rate of $14,194 per
month.
OTHER PROPERTIES
The Company owns 10 acres of land, an office building, workshop,
warehouse and house in Sinton, Texas, 160 acres of land in Coke County, Texas
and a 50% interest in approximately 2.0 acres of land in Bexar County, Texas.
All three properties are used for the storage of tubulars and production
equipment. The Company also owns 19 vehicles which are used in the field by
employees.
LITIGATION
From time to time, the Company is involved in litigation relating to
claims arising out of its operations in the normal course of business. The
Company is not currently engaged in any legal proceedings that are expected,
individually or in the aggregate, to have a material adverse effect on the
Company.
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages, years of service and positions of
the executive officers and directors of Abraxas , as well as certain executive
officers of Cascade and Canadian Abraxas. The term of the Class I directors of
Abraxas expires in 1999, the Class II directors expires in 1997 and the Class
III directors in 1998.
Name Age Office Class
Robert L. G. Watson 46 Chairman of the Board, President and
Chief Executive Officer of Abraxas;
Chairman of the Board and director
of Cascade; Chairman of the Board,
President and director of Canadian
Abraxas III
Chris E. Williford 45 Executive Vice President, Chief
Financial Officer, Treasurer and
director of Abraxas; Vice President
and Assistant Secretary of Canadian
Abraxas III
Robert Patterson 39 Vice President/Operations of Abraxas --
Stephen T. Wendel 47 Vice President/Land and Marketing of
Abraxas --
Franklin A. Burke 62 Director of Abraxas I
Harold D. Carter 57 Director of Abraxas I
Robert D. Gershen 42 Director of Abraxas I
Richard M. Kleberg, III 54 Director of Abraxas II
James C. Phelps 74 Director of Abraxas III
Paul A. Powell, Jr. 51 Director of Abraxas II
Richard M. Riggs 76 Director of Abraxas II
Roger L. Bruton 64 Executive Vice President and
director of Cascade; Executive Vice
President and director of Canadian
Abraxas --
Donald A. Engle 53 President and director of Cascade;
Secretary and director of Canadian
Abraxas --
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, Chief Executive Officer and
director of Grey Wolf and Chairman of the Board and a director of Cascade. In
November 1996, Mr. Watson was elected Chairman of the Board, President and as a
director of Canadian Abraxas. Prior to joining Abraxas, Mr. Watson was employed
in various petroleum engineering positions with Tesoro Petroleum Corporation, a
crude oil and natural gas exploration and production company, from 1972 through
1977, and DeGolyer & McNaughton, an independent petroleum engineering firm, from
1970 to 1972. Mr. Watson received a Bachelor of Science degree in Mechanical
Engineering from Southern Methodist University in 1972 and a Master of Business
Administration degree from the University of Texas at San Antonio in 1974.
CHRIS E. WILLIFORD was elected Vice President, Treasurer and Chief
Financial Officer of Abraxas in January 1993, and as Executive Vice President
and a director of Abraxas in May 1993. In November 1996, Mr. Williford was
elected Vice President, Assistant Secretary and as a director of Canadian
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 PATTERSON has served as Vice President/Operations of Abraxas
since December 1995. From 1986 to 1995, Mr. Patterson was employed by Parker and
Parsley Petroleum USA most recently as a Gulf Coast Division Manager. Prior to
that, Mr. Patterson was District Manager for HCW Exploration from 1983 to 1986
and Drilling Engineer with Hilliard Oil and Gas from 1980 to 1983. Prior to
that, he was a Drilling Engineer with Texas Pacific Oil Company from 1979 to
1980. Mr. Patterson is a registered Professional Engineer in the state of Texas
and graduated with a Bachelor of Science degree in petroleum engineering from
the University of Texas in 1979.
STEPHEN T. WENDEL has served as Vice President/Land and Marketing of
Abraxas since 1990 and Corporate Secretary of Abraxas since 1994. From 1982 to
1990, Mr. Wendel served Abraxas as Manager of Joint Interests and Natural Gas
Contracts. Prior to joining Abraxas, Mr. Wendel was employed in accounting,
auditing and marketing positions with Tenneco Oil Company and Tesoro Petroleum
Corporation, both crude oil and natural gas exploration and production
companies. Mr. Wendel received a Bachelor of Business Administration degree in
Accounting from Texas Lutheran University in 1971.
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.
HAROLD D. CARTER, a director of Abraxas since May 1996, has served as a
member of the management committee of Brigham Oil & Gas, L.P., a
three-dimensional seismic exploration company, since May 1992. Mr. Carter has
also served as a consultant to Associated Energy Managers, Inc., an investment
manager specializing in structuring and managing private investments in the
energy industry, since October 1994. From 1991 to 1992, Mr. Carter was a
consultant to various companies and investors involved in the crude oil and
natural gas industry. Prior to 1991, Mr. Carter was employed by Pacific
Enterprises Oil Company, where he was an Executive Vice President until
September 1990 and a consultant from September 1990 until December 1990. From
1986 to 1989, Mr. Carter served as President and Chief Operating Officer of
Sabine Corporation.
ROBERT D. GERSHEN, a director of Abraxas since May 1995, has served as
President of Associated Energy Managers, Inc., an investment manager
specializing in structuring and managing private investments in the energy
industry, since July 1989. Mr. Gershen has served as an investment advisor to
Endowment Energy Partners, L.P. and Endowment Energy Partners II, Limited
Partnership, limited partnerships formed to make loans to companies in the crude
oil and natural gas business, since October 1989 and January 1993, respectively.
RICHARD M. KLEBERG, III, a director of Abraxas since December 1983, has
held the position of managing partner of SFD Enterprises, Ltd., a private
investment partnership, since 1980. Mr. Kleberg has served on the boards of
directors of Cullen Frost Bankers, Inc., a bank holding company, since 1992;
1776 Restaurants, Inc., a restaurant concern, since 1983; The Frost National
Bank of San Antonio, a national banking association, since 1984; and Kleberg &
Co. Bankers, Inc., a bank holding company, since 1980. Mr. Kleberg holds a
Bachelor of Science degree in Political Science from Trinity University.
JAMES C. PHELPS, a director of Abraxas since December 1983, has been a
consultant to crude oil and natural gas exploration and production companies
such as Panhandle Producing Company and Tesoro Petroleum Corporation since April
1981. Mr. Phelps has served as a director of Grey Wolf since April 1995 and of
Cascade 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 Cascade. 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.
PAUL A. POWELL, JR., a director of Abraxas since 1987, is currently
Trustee of the Paul A. Powell Trust and has served as Vice President and
Director of Mechanical Development Co., Inc., a tool and die and production
machine company, since 1984. He also serves as trustee of sixteen investment
trusts. Mr. Powell is a director and officer of Frameco, Inc., a tool and die
and production machine company, Somerset Investments, Ltd., an investment
company, and Powell Lake Properties, a real estate investment and management
company. He attended Emory and Henry College and graduated from National
Business College with a degree in Accounting.
RICHARD M. RIGGS, a director of Abraxas since 1985, is a self-employed
geological consultant. He served as Vice President of Petro Consultants Energy
Corporation, a crude oil and natural gas exploration and production company,
from June 1978 to December 1984. Mr. Riggs has served as a director of Cascade
since May 1996. He has previously been employed by Tesoro Petroleum Corporation,
a crude oil and natural gas exploration and production company, as Exploration
Vice President for North America, and prior to that time was Manager of Domestic
Exploration for Ashland Oil, Inc., a crude oil and natural gas exploration and
production company. Mr. Riggs graduated with a Bachelors degree in Geology from
Dartmouth College and a Masters degree in Geology from Columbia University.
ROGER L. BRUTON is currently Executive Vice President and a director of
Cascade. From January 1996 to October 1996, he served as President of Cascade.
In November 1996, Mr. Bruton was elected Vice President of Canadian Abraxas and
in December 1996 was elected as a director of Canadian Abraxas. Prior to joining
Cascade, Mr. Bruton served as a geologist with Panhandle Eastern Pipeline
Company from 1958 to 1963. From 1976 to 1977 he served as Regional Exploration
Manager for Anadarko Production Company. He also served as Exploration Manager
for the western United States and Canada for General Crude Oil Company from 1977
to 1979. From 1984 to 1990, Mr. Bruton served as President of Western Oil
Corporation and Plains Petroleum Corporation, both of which are subsidiaries of
KN Energy. Mr. Bruton was Regional General Manager of Anadarko Petroleum of
Canada Ltd. from 1972 to 1976. Mr. Bruton received a Bachelors of Science degree
in Geology and a Masters of Science degree in Geology from Kansas State
University.
DONALD A. ENGLE, is currently President and a director of Cascade. From
January 1996 to October 1996, he served as Vice President of Cascade. In
November 1996, Mr. Engle was elected Secretary and as a director of Canadian
Abraxas. From 1985 to 1995, he was President of Sapphire Resources, Ltd. Prior
to that, Mr. Engle served as President of Neomar Resources Limited from 1980 to
1985 and as General Manager of Anadarko Petroleum of Canada Limited from 1976 to
1979. Mr. Engle received a Bachelor of Commerce degree from the University of
Saskatchewan.
<PAGE>
EXECUTIVE COMPENSATION
COMPENSATION SUMMARY
The following table sets forth a summary of compensation for the fiscal
years ended December 31, 1993, 1994 and 1995 paid by the Company to Robert L.G.
Watson, the Chairman of the Board, President and Chief Executive Officer of the
Company and Chris E. Williford, the Executive Vice President, Chief Financial
Officer and Treasurer of the Company. The Company did not have any executive
officers other than Messrs. Watson and Williford whose total annual salary and
bonus exceeded $100,000 for the years ended December 31, 1993, 1994 and 1995.
Long-Term
Compensation
Awards-Number
of Shares
Annual Underlying
Name and Principal Position Year Salary ($) Options/SARs
------------------------------ ----- --------------- -------------
Robert L. G. Watson 1993 123,977(1)(2) 800,000 (3)
Chairman of the Board, 1994 157,450(1)(4) --
President and Chief Executive 1995 108,281(1)(5) 60,000 (6)
Officer (2)
Chris E. Williford 1993 78,374 20,000 (6)
Executive Vice President, Chief 1994 101,028 --
Financial Officer and Treasurer 1995 115,795(7) 20,000 (6)
- -----------
(1) Mr. Watson received repayments of loans to Abraxas of $54,826
during 1993, $287,940 during 1994 and $354,677 during 1995. See
"Certain Relationships and Related Transactions."
(2) Includes $50,000 of stock awards and $73,977 of salary.
(3) On May 4, 1993, Mr. Watson, who at the time was Chairman of the
Board of Castle Minerals, Inc. ("CMI"), approximately 86% of the
common stock of which was owned indirectly by the Company at that
time, was awarded options to purchase 800,000 shares of CMI Common
Stock for $0.13 per share. On April 19, 1994, the Company sold its
interests in CMI and all of the options previously granted to Mr.
Watson were terminated.
(4) Includes $53,750 of stock awards and $103,700 of salary
(5) Includes $1,093 of stock awards and $107,188 of salary.
(6) Represents the number of options to purchase Common Stock which
were exercisable as of the end of the respective years.
(7) Includes $8,607 of stock awards and $107,188 of salary.
STOCK 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"), the Company grants to
employees and officers of the Company (including directors of the Company who
are also employees) incentive stock options and non-qualified stock options. The
ISO Plan, the 1993 Plan and the LTIP are administered by the Compensation
Committee of the Board of Directors which, based upon the recommendation of the
Chief Executive Officer, determines the number of shares subject to each option.
In addition to the ability to grant either incentive stock options and
non-qualified stock options under the LTIP, the Compensation Committee may grant
or award (a) stock appreciation rights in conjunction with stock options or
independently, (b) restricted stock or (c) other stock-based awards to executive
and other key employees of the Company.
<PAGE>
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements (the "Employment
Agreements") with each of Mr. Watson and Mr. Williford, pursuant to which each
of Messrs. Watson and Williford will receive compensation as determined from
time to time by the Board in its sole discretion. The Employment Agreements
terminate on December 31, 1996 except that the term of the Employment Agreements
may be automatically extended for an additional year if by December 1 of the
prior year neither the Company nor Mr. Watson or Mr. Williford, as the case may
be, has given notice that it 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. Watson's and Mr. Williford's employment is at will and
may be terminated by the Company for any reason without notice or cause. If a
change in control occurs during the term of the Employment Agreement or any
extension thereof, the expiration date of Mr. Watson's Employment Agreement is
automatically extended to a date no earlier than four years following the
effective date of such change in control and the expiration date of Mr.
Williford'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. Watson's or Mr. Williford's employment is
terminated other than for Cause (as defined in each of the Employment
Agreements) or Disability (as defined in each of the Employment Agreements), by
reason of Mr. Watson's or Mr. Williford's death or retirement or by either Mr.
Watson or Mr. Williford, as the case may be, other than for Good Reason (as
defined in each of the Employment Agreements), then Mr. Watson will be entitled
to receive a lump sum payment equal to four times his annual base salary and Mr.
Williford will be entitled to receive a lump sum payment equal to three times
his annual base salary. If any such lump sum payment would individually or
together with any other amounts paid or payable constitute an "excess parachute
payment" within the meaning of Section 280G ("Section 280G") of the Code, and
applicable regulations thereunder, the amounts to be paid will be increased so
that Mr. Watson or Mr. Williford, 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.
COMPENSATION OF DIRECTORS
NON-QUALIFIED STOCK OPTION PLAN
Messrs. Burke, Kleberg, Phelps, Powell and Riggs have previously been
granted options to purchase 8,900 shares of Common Stock under the Company's
1984 Non-Qualified Stock Option Plan (the "Non-Qualified Plan"). There are
currently outstanding options to purchase 8,900 shares of Common Stock under the
Non-Qualified Plan at an exercise price of $6.75 per share.
RESTRICTED SHARE PLAN FOR DIRECTORS
Pursuant to the Abraxas Petroleum Corporation Restricted Share Plan for
Directors (the "Director Plan"), each director of the Company, other than
Messrs. Watson and Williford, is entitled to receive a grant of shares of Common
Stock for attendance at regular and special meetings of the Board of Directors.
Each eligible director of the Company was issued 400 shares of Common Stock
during 1994 as an initial grant under the Director Plan and thereafter receives
a number of shares of Common Stock equal to the product of 1,000 times the
Capitalization Factor (as defined in the Director Plan) divided by the Average
Stock Price (as defined in the Director Plan) as of the date of a meeting of the
Board. For 1995, each of the directors, received the number of shares of Common
Stock set forth opposite his name under the Director Plan:
Number of
Name Shares
- ------------------------- --------------
Franklin M. Burke 365
Robert D. Gershen 365
Richard M. Kleberg 659
James C. Phelps 659
Paul A. Powell 365
Richard M. Riggs 659
DIRECTOR STOCK OPTION PLAN
Pursuant to the Abraxas Petroleum Corporation Director Stock Option
Plan, each non-employee member of the Board of Directors of the Company on June
1, 1996 was granted an option to purchase 8,000 shares of Common Stock at a
price of $6.75 per share. Each person who becomes a director after that date
will also be granted an option to purchase 8,000 shares of Common Stock at the
then prevailing price of the Common Stock as quoted on the Nasdaq National
Market.
OTHER COMPENSATION
The directors of the Company received no other compensation for services
as directors, except for reimbursement of travel expenses to attend Board
meetings.
<PAGE>
SECURITIES HOLDINGS OF PRINCIPAL STOCKHOLDERS,
DIRECTORS AND OFFICERS
Based upon information received from the persons concerned, each person
known to the Company to be the beneficial owner of more than five percent of the
outstanding shares of Common Stock and Preferred Stock of Abraxas , each
director and officer and all directors and officers of Abraxas as a group, owned
beneficially as of December 20, 1996 the number and percentage of outstanding
shares of Common Stock and Preferred Stock of Abraxas indicated in the following
table:
<TABLE>
<CAPTION>
Beneficial Ownership
-----------------------------------------------------------------------
Number of Shares (1) Percentage
-------------------------- ----------------------------------------
Name and Address of
Beneficial Owner Common Stock Preferred Common Preferred Voting Stock
(2) Stock Stock (2) Stock (2)(3)
- ----------------------- ------------- ------------ --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Robert L. G. Watson 262,564 (4) 4.51 4.15
Endowment Advisors,
Inc. 864,790 (5) 45,741(5) 6.14 100 13.70
450 Post Road East
Westport, CT 06881
Wellington Management
Company 572,300 (6) 9.86 9.07
75 State Street
19th Floor
Boston, MA 02109
Ralph Wanger 516,000 (7) 8.89 8.17
227 West Monroe
Street
Suite 3000
Chicago, IL 60606
First Union National
Bank of North
Carolina 424,000 (8) 6.81 6.29
230 South Tryon
Charlotte, NC 28202
Kayne, Anderson
Management, Inc. 375,000 (9) 6.46 5.94
1800 Avenue of
the Stars
Suite 1425
Los Angeles, CA
90067
Metropolitan Life
Insurance Company 375,000 (10) 6.46 5.94
One Madison Avenue
New York, NY
10010
Franklin A. Burke 90,362 (11) 1.1 *
Paul A. Powell, Jr. 36,484 (12) * *
James C. Phelps 32,109 (13) * *
Richard M. Kleberg, III 30,756 (14) * *
Robert D. Gershen 22,994 (15) * *
Chris E. Williford 15,997 (16) * *
Richard M. Riggs 12,315 (17) * *
Harold D. Carter 5,000 * *
All Officers and 507,611 (4)(11) 8.75 8.04
Directors as a (12)(13)
Group (9 persons) (14)(15)
(16)(17)
* Less than 1%
<FN>
(1) Unless otherwise indicated, all shares are held directly with sole voting
and investment power.
(2) Does not include an aggregate of 1,995,000 shares of Common Stock which may
be issued in exchange for the Company's Contingent Value Rights.
<PAGE>
(3) Includes Common Stock and Preferred Stock. The holder of each share of
Preferred Stock has 11.11 votes on all matters voted on by the holders of Common
Stock.
(4) Includes 20,316 shares owned by Wind River Resources Corporation, a
corporation owned by Mr. Watson, as to which Mr. Watson has sole voting and
investment power and 15,000 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 34,288 shares of Series 1995-B Preferred Stock convertible into
380,940 shares of Common Stock and 262,645 shares of Common Stock owned by
Endowment Energy Partners, L.P. ("EEP") and 11,453 shares of Series 1995-B
Preferred Stock convertible into 127,243 shares of Common Stock and 93,962
shares of Common Stock owned by Endowment Energy Partners II, Limited
Partnership ("EEP II"). EEP and EEP II are limited partnerships whose investors
are educational institutions and which were formed to make loans to companies in
the crude oil and natural gas business. The general partner of both EEP and EEP
II is Fairfield Partners, Inc. (Del.) ("Fairfield") which is a wholly-owned
subsidiary of Endowment Advisers, Inc. ("EAI"), a Delaware nonstock corporation
controlled by its trustees and management. Voting and investment power over the
shares held by EEP and EEP II is exercised by the Board of Trustees of EAI, and
by Susan J. Carter, the Senior Vice President and Chief Operating Officer of
both EAI and Fairfield. The trustees of EAI are principally individuals who are
financial officers of educational institutions that have invested in investment
partnerships sponsored by EAI, including EEP and EEP II.
(6) Wellington Management Company is an investment manager which has the power
to make investment decisions for unrelated clients.
(7) Includes 156,000 shares owned by Wanger Asset Management, L.P. ("WAM") and
360,000 shares owned by the Acorn Investment Trust, Series Designated Acorn Fund
(the "Trust"). Wanger Asset Management, Ltd. ("WAM Ltd.") is the general partner
of WAM and Ralph Wanger is the general partner of WAM Ltd. WAM serves as
investment advisor to the Trust. Certain limited partners and employees of WAM
are officers and trustees of the Trust. The Trust has delegated to WAM shared
voting and investment power over the shares owned by the Trust. Does not include
shares owned by clients of WAM over which WAM does not have or share voting or
investment power.
(8) Includes warrants to purchase 424,000 shares of Common Stock at an exercise
price of $9.79 per
share.
(9) Kayne, Anderson Management, Inc. is an investment manager which has the
power to make investment decisions for unrelated clients.
(10) State Street Research & Management, Inc. ("State Street") is an investment
manager which has the power to make investment decisions for the account
specified above. State Street disclaims beneficial ownership of all of the
shares of Common Stock listed above.
(11) Includes 8,900 shares issuable upon exercise of options granted pursuant to
the Abraxas Petroleum Corporation 1984 Non-Qualified Stock Option Plan.
(12) Includes 4,228 shares owned by Mechanical Development Co., Inc., all of the
outstanding capital stock of which is owned by members of Mr. Powell's family,
13,998 shares owned by the Paul A. Powell Trust of which Mr. Powell is a trustee
and his family members are the primary beneficiaries, 51 shares owned by the
Paul A. Powell Individual Trust of which Mr. Powell is a trustee, 4,989 shares
owned by West Point Associates of which Mr. Powell is a general partner and 63
shares owned by NAD Properties of which Mr. Powell is a general partner. Mr.
Powell shares voting and investment power as to all of such shares.
(13) Includes 8,000 shares owned by Marie Phelps, Mr. Phelps' wife.
(14) Includes 16,688 shares owned by SFD Enterprises, Ltd., a private investment
partnership. Mr. Kleberg shares voting and investment power as to the shares
owned by SFD Enterprises.
(15) Includes warrants to purchase 13,500 shares of Common Stock at a price of
$7.00 per share owned by Associated Energy Managers, Inc., the principal
shareholder and Chief Executive Officer of which is Mr.
Gershen.
(16) Includes 3,126 shares issuable upon exercise of options granted pursuant to
the Abraxas Petroleum Corporation 1984 Incentive Stock Option Plan, 6,874 shares
issuable upon exercise of options granted pursuant to the Abraxas Petroleum
Corporation 1993 Key Contributor Stock Option Plan and 5,000 shares issuable
upon exercise of options granted pursuant to the Abraxas Petroleum Corporation
1994 Long Term Incentive Plan.
(17) Includes 700 shares owned by the Riggs Family Trust of which Mr. Riggs is
one of the trustees and 1,000 shares owned jointly by Mr. Riggs and his wife.
</FN>
</TABLE>
<PAGE>
DESCRIPTION OF THE NOTES
The Series A Notes were and the Exchange Notes will be issued under an
indenture (the "Indenture") dated as of November 14, 1996 by and among the
Issuers, the Subsidiary Guarantors and IBJ Schroder Bank & Trust Company, as
Trustee (the "Trustee"). The following summary of certain provisions of the
Indenture does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, the Trust Indenture Act of 1939, as amended (the
"TIA"), and to all of the provisions of the Indenture, including the definitions
of certain terms therein and those terms made a part of the Indenture by
reference to the TIA as in effect on the date of the Indenture. A copy of the
form of Indenture may be obtained from the Issuers or the Initial Purchasers.
The definitions of certain capitalized terms used in the following summary are
set forth below under "-- Certain Definitions."
The Series A Notes were and the Exchange Notes will be general unsecured
obligations of the Issuers and will rank pari passu in right of payment to all
existing and future unsubordinated obligations of the Issuers. The Series A
Notes rank and the Exchange Notes will rank senior in right of payment to all
future subordinated indebtedness of the Issuers. The Series A Notes are, and the
Exchange Notes will be, however, effectively subordinated in right of payment to
all existing and future secured indebtedness of the Issuers to the extent of the
value of the assets securing such indebtedness. The Guarantees will be general
unsecured obligations of the Subsidiary Guarantors and rank pari passu in right
of payment to all existing and future unsubordinated indebtedness of the
Subsidiary Guarantors and senior in right of payment to all existing and future
subordinated indebtedness of the Subsidiary Guarantors. The Guarantees will be
effectively subordinated to secured indebtedness of the Subsidiary Guarantors to
the extent of the value of the assets securing such indebtedness.
The Series A Notes were and the Exchange Notes will be issued in fully
registered form only, without coupons, in denominations of $1,000 and integral
multiples thereof. The Trustee currently acts as paying agent and registrar for
the Notes. The Notes may be presented for registration of transfer and exchange
at the offices of the registrar, which initially will be the Trustee's corporate
trust office. The Issuers may change any paying agent and registrar without
notice to holders of the Notes (the "Holders"). The Issuers will pay principal
(and premium, if any) on the Notes at the Trustee's corporate office in New
York, New York. At the Issuers' option, interest may be paid at the Trustee's
corporate trust office or by check mailed to the registered addresses of the
Holders. Any Series A Notes that remain outstanding after the completion of the
Exchange Offer, together with the Exchange Notes issued in connection with the
Exchange Offer, will be treated as a single class of securities under the
Indenture. See "Exchange Offer and Registration Rights."
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $215,000,000 and
will mature on November 1, 2004. Interest on the Notes will accrue at the rate
of 11.5% per annum and will be payable semi-annually in cash on each May 1 and
November 1, commencing on May 1, 1997, to the Persons who are registered Holders
at the close of business on the April 15 and October 15, respectively,
immediately preceding the applicable interest payment date. Interest on the
Notes will accrue from and including the most recent date to which interest has
been paid or, if no interest has been paid, from and including the date of
issuance.
The Notes will not be entitled to the benefit of any mandatory sinking
fund.
REDEMPTION
OPTIONAL REDEMPTION.
The Notes will be redeemable, at the Issuers' option, in whole at any
time or in part from time to time, on and after November 1, 2000, upon not less
than 30 nor more than 60 days' notice, at the following redemption prices
(expressed as percentages of the principal amount thereof) if redeemed during
the twelve-month period commencing on November 1 of the years set forth below,
plus, in each case, accrued and unpaid interest, if any, thereon to the date of
redemption:
Year Percentage
2000 105.750%
2001 102.875%
2002 and thereafter 100.000%
OPTIONAL REDEMPTION UPON EQUITY OFFERINGS.
At any time, or from time to time, on or prior to November 1, 1999, the
Issuers may, at their option, use all or a portion of the net cash proceeds of
one or more Equity Offerings (as defined below) to redeem up to 35% of the
aggregate principal amount of the Notes originally issued at a redemption price
equal to 111.5% of the aggregate principal amount of the Notes to be redeemed,
plus accrued and unpaid interest, if any, thereon to the date of redemption;
provided, however, that at least $139.75 million aggregate principal amount of
Notes remains outstanding immediately after giving effect to any such redemption
(it being expressly agreed that for purposes of determining whether this
condition is satisfied, Notes owned by either Issuer or any of their Affiliates
shall be deemed not to be outstanding). In order to effect the foregoing
redemption with the proceeds of any Equity Offering, the Issuers shall make such
redemption not more than 60 days after the consummation of any such Equity
Offering.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes are to be redeemed at any
time, selection of such Notes, or portions thereof, for redemption will be made
by the Trustee in compliance with the requirements of the principal national
securities exchange, if any, on which the Notes are listed or, if the Notes are
not then listed on a national securities exchange, on a pro rata basis, by lot
or by such other method as the Trustee shall deem fair and appropriate;
provided, however, that no Notes of a principal amount of $1,000 or less shall
be redeemed in part; and provided, further, that if a partial redemption is made
with the proceeds of an Equity Offering, selection of the Notes or portions
thereof for redemption shall be made by the Trustee only on a pro rata basis or
on as nearly a pro rata basis as is practicable (subject to the procedures of
DTC), unless such method is otherwise prohibited. Notice of redemption shall be
mailed by first-class mail at least 30 but not more than 60 days before the
redemption date to each Holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in a principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the applicable redemption date,
interest will cease to accrue on Notes or portions thereof called for redemption
as long as the Issuers have deposited with the paying agent for the Notes funds
in satisfaction of the applicable redemption price pursuant to the Indenture.
GUARANTEES
Each Subsidiary Guarantor will unconditionally guarantee, on a senior
basis, jointly and severally, to each Holder and the Trustee, the full and
prompt performance of the Issuers' obligations under the Indenture and the
Notes, including the payment of principal of and interest on the Notes. The
obligations of each Subsidiary Guarantor will be limited to the maximum amount
which, after giving effect to all other contingent and fixed liabilities of such
Subsidiary Guarantor and after giving effect to any collections from or payments
made by or on behalf of any other Subsidiary Guarantor in respect of the
obligations of such other Subsidiary Guarantor under its Guarantee or pursuant
to its contribution obligations under the Indenture, will result in the
obligations of such Subsidiary Guarantor under its Guarantee not constituting a
fraudulent conveyance or fraudulent transfer under Federal or state law. Each
Subsidiary Guarantor that makes a payment or distribution under its Guarantee
shall be entitled to a contribution from each other Subsidiary Guarantor in an
amount pro rata, based on the net assets of each Subsidiary Guarantor,
determined in accordance with GAAP.
Each Subsidiary Guarantor may consolidate with or merge into or sell its
assets to the Company or another Subsidiary Guarantor that is a Wholly Owned
Restricted Subsidiary without limitation, or with or to other Persons upon the
terms and conditions set forth in the Indenture. See "-- Certain Covenants --
Merger, Consolidation and Sale of Assets." In the event all of the Capital Stock
of a Subsidiary Guarantor is sold by the Company and/or one or more of its
Restricted Subsidiaries and the sale complies with the provisions set forth in
"-- Certain Covenants -- Limitation on Asset Sales," such Subsidiary Guarantor's
Guarantee will be released.
CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of Control,
each Holder will have the right to require that the Issuers purchase all or a
portion of such Holder's Notes pursuant to the offer described below (the
"Change of Control Offer"), at a purchase price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest, if any, thereon to the date of
purchase.
Within 30 days following the date upon which the Change of Control
occurred, the Issuers must send, by first class mail, a notice to each Holder,
with a copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be no earlier than 30 days nor later than 45 days from the date such
notice is mailed, other than as may be required by law (the "Change of Control
Payment Date"). A Change of Control Offer shall remain open for a period of 20
Business Days or such longer period as may be required by law. Holders electing
to have a Note purchased pursuant to a Change of Control Offer will be required
to surrender the Note, with the form entitled "Option of Holder to Elect
Purchase" on the reverse of the Note completed, to the paying agent for the
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 shall not be required to make a Change of Control Offer upon
a Change of Control if a third party makes the Change of Control Offer at the
Change of Control Purchase Price, at the same times and otherwise in compliance
with the requirements applicable to a Change of Control Offer made by the
Issuers and purchases all 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 Notes that might be delivered by Holders seeking to
accept the Change of Control Offer. In the event the Issuers are required to
purchase outstanding 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 the Company nor the Trustee may waive
the covenant relating to the Issuers' obligation to make a Change of Control
Offer. Restrictions in the Indenture described herein on the ability of the
Company and its Restricted Subsidiaries to incur additional Indebtedness, to
grant liens on their property, to make Restricted Payments and to make Asset
Sales may also make more difficult or discourage a takeover of the Company,
whether favored or opposed by the management of the Company. See "Certain
Antitakeover Provisions." Consummation of any such transaction in certain
circumstances may require repurchase of the Notes, and there can be no assurance
that the Company 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 Company by the management of the
Company. 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 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 Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Issuers shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
<PAGE>
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS. Other than
Permitted Indebtedness, the Company will not, and will not cause or permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume, guarantee, acquire, become liable, contingently or otherwise, with
respect to, or otherwise become responsible for payment of (collectively,
"incur") any Indebtedness; provided, however, that if no Default or Event of
Default shall have occurred and be continuing at the time of or as a consequence
of the incurrence of any such Indebtedness, the Company and the Restricted
Subsidiaries or any of them may incur Indebtedness (including, without
limitation, Acquired Indebtedness), in each case, if on the date of the
incurrence of such Indebtedness, after giving pro forma effect to the incurrence
thereof and the receipt and application of the proceeds therefrom, (i) both (a)
the Company's Consolidated EBITDA Coverage Ratio would have been greater than
2.25 to 1.0 if such proposed incurrence is on or prior to November 1, 1997 and
at least equal to 2.5 to 1.0 if such proposed incurrence is thereafter and (b)
the Company's Adjusted Consolidated Net Tangible Assets are equal to or greater
than 150% of the aggregate consolidated Indebtedness of the Company and its
Restricted Subsidiaries or (ii) the Company's Adjusted Consolidated Net Tangible
Assets are equal to or greater than 200% of the aggregate consolidated
Indebtedness of the Company 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 such amount shall not also be included.
Indebtedness of a Person existing at the time such Person becomes a
Restricted Subsidiary (whether by merger, consolidation, acquisition of Capital
Stock or otherwise) or is merged with or into the Company or any Restricted
Subsidiary or which is secured by a Lien on an asset acquired by the Company or
a Restricted Subsidiary (whether or not such Indebtedness is assumed by the
acquiring Person) shall be deemed incurred at the time the Person becomes a
Restricted Subsidiary or at the time of the asset acquisition, as the case may
be.
The Company will not, and will not permit any Subsidiary Guarantor to
incur any Indebtedness which by its terms (or by the terms of any agreement
governing such Indebtedness) is subordinated in right of payment to any other
Indebtedness of the Company 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 Notes
or the Guarantee of such Subsidiary Guarantor, as the case may be, pursuant to
subordination provisions that are substantively identical to the subordination
provisions of such Indebtedness (or such agreement) that are most favorable to
the holders of any other Indebtedness of the Company or such Subsidiary
Guarantor, as the case may be.
LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and will not
cause or permit any of its Restricted Subsidiaries to, directly or indirectly,
(a) declare or pay any dividend or make any distribution (other than dividends
or distributions payable solely in Qualified Capital Stock of the Company) on or
in respect of shares of the Company's Capital Stock to holders of such Capital
Stock, (b) purchase, redeem or otherwise acquire or retire for value any Capital
Stock of the Company or any warrants, rights or options to purchase or acquire
shares of any class of such Capital Stock other than through the exchange
therefor solely of Qualified Capital Stock of the Company or warrants, rights or
options to purchase or acquire shares of Qualified Capital Stock of the Company,
(c) 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 Indebtedness of the
Company or a Subsidiary Guarantor that is subordinate or junior in right of
payment to the Notes or such Subsidiary Guarantor's Guarantee, as the case may
be, or (d) make any Investment (other than a Permitted Investment) (each of the
foregoing actions set forth in clauses (a), (b), (c) and (d) being referred to
as a "Restricted Payment"), if at the time of such Restricted Payment or
immediately after giving effect thereto, (i) a Default or an Event of Default
shall have occurred and be continuing or (ii) the Company is not able to incur
at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in
compliance with "-- Limitation on Incurrence of Additional Indebtedness" above;
provided, however, that notwithstanding the provisions of clause (i)(a) of "--
Limitation on Incurrence of Additional Indebtedness" above, for purposes of
determining whether the Company could incur such additional Indebtedness
pursuant to this clause (ii), the Consolidated EBITDA Coverage Ratio which shall
be required shall be at least 2.5 to 1.0, or (iii) the aggregate amount of
Restricted Payments (including such proposed Restricted Payment) made subsequent
to the Issue Date (the amount expended for such purposes, if other than in cash,
being the fair market value of such property as determined reasonably and in
good faith by the Board of Directors of the Company) shall exceed the sum of:
(A) 50% of the cumulative Consolidated Net Income (or if cumulative Consolidated
Net Income shall be a loss, minus 100% of such loss) of the Company earned
subsequent to the Issue Date and on or prior to the last date of the Company's
fiscal quarter immediately preceding such Restricted Payment (the "Reference
Date") (treating such period as a single accounting period); plus (B) 100% of
the aggregate net cash proceeds received by the Company from any Person (other
than a Restricted Subsidiary of the Company) from the issuance and sale
subsequent to the Issue Date and on or prior to the Reference Date of Qualified
Capital Stock of the Company; plus (C) without duplication of any amounts
included in clause (iii)(B) above, 100% of the aggregate net cash proceeds of
any equity contribution received by the Company from a holder of the Company's
Capital Stock (excluding, in the case of clauses (iii)(B) and (C), any net cash
proceeds from an Equity Offering to the extent used to redeem the Notes); plus
(D) an amount equal to the net reduction in Investments in Unrestricted
Subsidiaries resulting from dividends, interest payments, repayments of loans or
advances, or other transfers of cash, in each case to the Company or to any
Restricted Subsidiary of the Company from Unrestricted Subsidiaries (but without
duplication of any such amount included in calculating cumulative Consolidated
Net Income of the Company), or from redesignations of Unrestricted Subsidiaries
as Restricted Subsidiaries (in each case valued as provided in "-- Limitation on
Designation of Unrestricted Subsidiaries" below), not to exceed, in the case of
any Unrestricted Subsidiary, the amount of Investments previously made by the
Company or any Restricted Subsidiary in such Unrestricted Subsidiary and which
was treated as a Restricted Payment under the Indenture; plus (E) without
duplication of the immediately preceding subclause (D), an amount equal to the
lesser of the cost or net cash proceeds received upon the sale or other
disposition of any Investment made after the Issue Date which had been treated
as a Restricted Payment (but without duplication of any such amount included in
calculating cumulative Consolidated Net Income of the Company); plus (F)
$5,000,000.
Notwithstanding the foregoing, the provisions set forth in the
immediately preceding paragraph shall not prohibit: (1) the payment of any
dividend or redemption payment within 60 days after the date of declaration of
such dividend or the applicable redemption if the dividend or redemption
payment, as the case may be, would have been permitted on the date of
declaration; (2) if no Default or Event of Default shall have occurred and be
continuing, the acquisition of any shares of Capital Stock of the Company,
either (A) solely in exchange for shares of Qualified Capital Stock of the
Company or (B) through the application of net proceeds of a substantially
concurrent sale for cash (other than to a Restricted Subsidiary of the Company)
of shares of Qualified Capital Stock of the Company; (3) if no Default or Event
of Default shall have occurred and be continuing, the acquisition of any
Indebtedness of the Company or Subsidiary Guarantor that is subordinate or
junior in right of payment to the Notes or such Subsidiary Guarantor's
Guarantee, as the case may be, either (A) solely in exchange for shares of
Qualified Capital Stock of the Company, or (B) through the application of net
proceeds of a substantially concurrent sale for cash (other than to a Restricted
Subsidiary of the Company) of (I) shares of Qualified Capital Stock of the
Company or (II) Refinancing Indebtedness; (4) if no Default or Event of Default
shall have occurred and be continuing, the payment of dividends in respect of
the Company's Series 1995-B Preferred Stock in an amount not to exceed $400,000
in any one year, (5) the initial designation of Grey Wolf, Cascade and Western
Associated Energy Corporation as Unrestricted Subsidiaries under the Indenture
and (6) the payment of such portion of the CGGS purchase price, if any, as shall
have been placed in an escrow account to the former shareholders of CGGS. In
determining the aggregate amount of Restricted Payments made subsequent to the
Issue Date in accordance with clause (iii) of the immediately preceding
paragraph, amounts expended pursuant to clauses (1), (2)(B) and (5) shall be
included in such calculation.
LIMITATION ON ASSET SALES. The Company will not, and will not cause or
permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless
(a) the Company or the applicable Restricted Subsidiary, as the case may be,
receives consideration at the time of such Asset Sale at least equal to the fair
market value of the assets sold or otherwise disposed of (as determined in good
faith by the Company's Board of Directors or senior management of the Company);
(b) (i) at least 70% of the consideration received by the Company or such
Restricted Subsidiary, as the case may be, from such Asset Sale shall be in the
form of cash or Cash Equivalents and is received at the time of such disposition
and (ii) at least 15% of such consideration received if in a form other than
cash or Cash Equivalents is converted into or exchanged for cash or Cash
Equivalents within 120 days of such disposition; and (c) upon the consummation
of an Asset Sale, the Company shall apply, or cause such Restricted Subsidiary
to apply, the Net Cash Proceeds relating to such Asset Sale within 365 days of
receipt thereof either (i) to repay or prepay Indebtedness outstanding under the
New Credit Facility, including, without limitation, a permanent reduction in the
related commitment, (ii) to repay or prepay any Indebtedness of the Company that
is secured by a Lien permitted to be incurred pursuant to "-- Limitation on
Liens" below, (iii) to make an investment 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 business of the Company and its
Restricted Subsidiaries as existing on the Issue Date or in businesses
reasonably related thereto ("Replacement Assets"), (iv) to an investment in
Crude Oil and Natural Gas Related Assets or (v) a combination of prepayment and
investment permitted by the foregoing clauses (c)(i) through (c)(iv). On the
366th day after an Asset Sale or such earlier date, if any, as the Board of
Directors of the Company determines not to apply the Net Cash Proceeds relating
to such Asset Sale as set forth in clauses (c)(i) through (c)(iv) of the next
preceding sentence (each a "Net Proceeds Offer Trigger Date"), such aggregate
amount of Net Cash Proceeds which have been received by the Company or such
Restricted Subsidiary but which have not been applied on or before such Net
Proceeds Offer Trigger Date as permitted in clauses (c)(i) through (c)(iv) of
the next preceding sentence (each a "Net Proceeds Offer Amount") shall be
applied by the Company or such Restricted Subsidiary, as the case may be, to
make an offer to purchase (a "Net Proceeds Offer") on a date (the "Net Proceeds
Offer Payment Date") not less than 30 nor more than 45 days following the
applicable Net Proceeds Offer Trigger Date, from all Holders on a pro rata
basis, that principal amount of Notes purchasable with the Net Proceeds Offer
Amount at a price equal to 100% of the principal amount of the Notes to be
purchased, plus accrued and unpaid interest, if any, thereon to the date of
purchase; provided, however, that if at any time any non-cash consideration
received by the Company or any Restricted Subsidiary, as the case may be, in
connection with any Asset Sale is converted into or sold or otherwise disposed
of for cash (other than interest received with respect to any such non-cash
consideration), then such conversion or disposition shall be deemed to
constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be
applied in accordance with this covenant. The Company may defer the Net Proceeds
Offer until there is an aggregate unutilized Net Proceeds Offer Amount equal to
or in excess of $5,000,000 resulting from one or more Asset Sales (at which
time, the entire unutilized Net Proceeds Offer Amount, and not just the amount
in excess of $5,000,000, shall be applied as required pursuant to this
paragraph).
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "-- Merger, Consolidation
and Sale of Assets," the successor corporation shall be deemed to have sold the
properties and assets of the Company and its Restricted Subsidiaries not so
transferred for purposes of this covenant, and shall comply with the provisions
of this covenant with respect to such deemed sale as if it were an Asset Sale.
In addition, the fair market value of such properties and assets of the Company
or its Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash
Proceeds for purposes of this covenant.
Notwithstanding the two immediately preceding paragraphs, the Company
and its Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent (a) the consideration for
such Asset Sale constitutes Replacement Assets and/or Crude Oil and Natural Gas
Related Assets and (b) such Asset Sale is for fair market value; provided,
however, that any consideration not constituting Replacement Assets and Crude
Oil and Natural Gas Related Assets received by the Company or any of its
Restricted Subsidiaries in connection with any Asset Sale permitted to be
consummated under this paragraph shall constitute Net Cash Proceeds subject to
the provisions of the two immediately preceding paragraphs.
Notice of each Net Proceeds Offer will be mailed to the record Holders
as shown on the register of Holders within 30 days following the Net Proceeds
Offer Trigger Date, with a copy to the Trustee, 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 Notes in whole or in part in integral
multiples of $1,000 in exchange for cash. To the extent Holders properly tender
Notes with an aggregate principal amount exceeding the Net Proceeds Offer
Amount, Notes of tendering Holders will be purchased on a pro rata basis (based
on principal amounts tendered). A Net Proceeds Offer shall remain open for a
period of 20 Business Days or such longer period as may be required by law.
The Company's ability to repurchase Notes in a Net Proceeds Offer is
restricted by the terms of the New Credit Facility and may be prohibited or
otherwise limited by the terms of any then existing borrowing arrangements and
by the Company's financial resources.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset Sale"
provisions of the Indenture, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the "Asset Sale" provisions of the Indenture by virtue
thereof.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
RESTRICTED SUBSIDIARIES. The Company will not, and will not cause or permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or permit to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (a) pay dividends or make any other
distributions on or in respect of its Capital Stock; (b) make loans or advances,
or to pay any Indebtedness or other obligation owed, to the Company or any other
Restricted Subsidiary; (c) guarantee any Indebtedness or any other obligation of
the Company or any Restricted Subsidiary; or (d) transfer any of its property or
assets to the Company or any other Restricted Subsidiary (each such encumbrance
or restriction, a "Payment Restriction"), except for such encumbrances or
restrictions existing under or by reason of: (i) applicable law; (ii) the
Indenture; (iii) the New Credit Facility; (iv) customary non-assignment
provisions of any contract or any lease governing a leasehold interest of any
Restricted Subsidiary; (v) 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; (vi) agreements existing on
the Issue Date to the extent and in the manner such agreements are in effect on
the Issue Date; (vii) customary restrictions with respect to a Restricted
Subsidiary of the Company 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;
(viii) 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 (ix) an agreement governing Refinancing
Indebtedness incurred to Refinance the Indebtedness issued, assumed or incurred
pursuant to an agreement referred to in clause (ii), (iii), (v) or (vi) above;
provided, however, that the provisions relating to such encumbrance or
restriction contained in any such Refinancing Indebtedness are no less favorable
to the Holders in any material respect as determined by the Board of Directors
of the Company in their reasonable and good faith judgment than the provisions
relating to such encumbrance or restriction contained in the applicable
agreement referred to in such clause (ii), (iii), (v) or (vi).
LIMITATION ON PREFERRED STOCK OF RESTRICTED SUBSIDIARIES. The Company
will not cause or permit any of its Restricted Subsidiaries to issue any
Preferred Stock (other than to the Company or to a Wholly Owned Restricted
Subsidiary) or permit any Person (other than the Company or a Wholly Owned
Restricted Subsidiary) to own any Preferred Stock of any Restricted Subsidiary.
Limitation on Liens. Other than Permitted Liens, the Company will not,
and will not cause or permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume or permit or suffer to exist any Liens of any
kind against or upon any property or assets of the Company or any of its
Restricted Subsidiaries (whether owned on the Issue Date or acquired after the
Issue Date) or any proceeds therefrom, or assign or otherwise convey any right
to receive income or profits therefrom unless (a) in the case of Liens securing
Indebtedness that is expressly subordinate or junior in right of payment to the
Notes or any Guarantee, the Notes or such Guarantee, as the case may be, are
secured by a Lien on such property, assets or proceeds that is senior in
priority to such Liens at least to the same extent as the Notes are senior in
priority to such Indebtedness and (b) in all other cases, the Notes and the
Guarantees are equally and ratably secured.
MERGER, CONSOLIDATION AND SALE OF ASSETS. The Company will not, in a
single transaction or series of related transactions, consolidate or merge with
or into any Person, or sell, assign, transfer, lease, convey or otherwise
dispose of (or cause or permit any Restricted Subsidiary to sell, assign,
transfer, lease, convey or otherwise dispose of) all or substantially all of the
Company's assets (determined on a consolidated basis for the Company and its
Restricted Subsidiaries), whether as an entirety or substantially as an entirety
to any Person unless: (a) either (i) the Company or such Restricted Subsidiary,
as the case may be, shall be the surviving or continuing corporation or (ii) the
Person (if other than the Company) formed by such consolidation or into which
the Company is merged or the Person which acquires by sale, assignment,
transfer, lease, conveyance or other disposition the properties and assets of
the Company and its Restricted Subsidiaries substantially as an entirety (the
"Surviving Entity") (x) 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 (y) 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 Notes and the performance of every covenant of the Notes, the
Indenture and the Registration Rights Agreement on the part of the Company to be
performed or observed; (b) immediately after giving effect to such transaction
and the assumption contemplated by clause (a)(ii)(y) above (including giving
effect to any Indebtedness incurred or anticipated to be incurred in connection
with or in respect of such transaction), the Company or such Surviving Entity,
as the case may be, (i) shall have a Consolidated Net Worth equal to or greater
than the Consolidated Net Worth of the Company immediately prior to such
transaction and (ii) shall be able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to "-- Limitation on
Incurrence of Additional Indebtedness" above; (c) immediately before and
immediately after giving effect to such transaction and the assumption
contemplated by clause (a)(ii)(y) 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 (d) the Company or
the Surviving Entity, as the case may be, shall have delivered to the Trustee an
officers' certificate and an opinion of counsel, each stating that such
consolidation, merger, sale, assignment, transfer, lease, conveyance or other
disposition and, if a supplemental indenture is required in connection with such
transaction, such supplemental indenture comply with the applicable provisions
of the Indenture and that all conditions precedent in the Indenture relating to
such transaction have been satisfied; provided, however, that such counsel may
rely, as to matters of fact, on a certificate or certificates of officers of the
Company.
For purposes of the foregoing, the transfer (by lease, assignment, sale
or otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries the Capital Stock of which constitutes all or substantially all of
the properties and assets of the Company, shall be deemed to be the transfer of
all or substantially all of the properties and assets of the Company.
Upon any consolidation, combination or merger or any transfer of all or
substantially all of the assets of the Company in accordance with the foregoing,
in which the Company is not the continuing corporation, the successor Person
formed by such consolidation or into which the Company is merged or to which
such conveyance, lease or transfer is made shall succeed to, and be substituted
for, and may exercise every right and power of, the Company under the Indenture
and the Notes with the same effect as if such surviving entity had been named as
such.
Each Subsidiary Guarantor (other than any Subsidiary Guarantor whose
Guarantee is to be released in accordance with the terms of the Guarantee and
the Indenture in connection with any transaction complying with the provisions
of the Indenture described under "Merger, Consolidation and Sale of Assets")
will not, and the Company will not cause or permit any Subsidiary Guarantor to,
consolidate with or merge with or into any Person other than the Company or
another Subsidiary Guarantor that is a Wholly Owned Restricted Subsidiary
unless: (a) the entity formed by or surviving any such consolidation or merger
(if other than the Subsidiary Guarantor) or to which such sale, lease,
conveyance or other disposition shall have been made is a corporation organized
and existing under the laws of the United States or any state thereof or the
District of Columbia; (b) such entity assumes by execution of a supplemental
indenture all of the obligations of the Subsidiary Guarantor under its
Guarantee; (c) immediately after giving effect to such transaction, no Default
or Event of Default shall have occurred and be continuing; and (d) immediately
after giving effect to such transaction and the use of any net proceeds
therefrom on a pro forma basis, the Company could satisfy the provisions of
clause (b) of the first paragraph of this covenant. Any merger or consolidation
of a Subsidiary Guarantor with and into the Company (with the Company being the
surviving entity) or another Subsidiary Guarantor that is a Wholly Owned
Restricted Subsidiary need only comply with clause (d) of the first paragraph of
this covenant.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. (a) The Company will not,
and will not cause or permit any of its Restricted Subsidiaries to, directly or
indirectly, enter into, amend or permit or suffer to exist any transaction or
series of related transactions (including, without limitation, the purchase,
sale, lease or exchange of any property, the guaranteeing of any Indebtedness or
the rendering of any service) with, or for the benefit of, any of their
respective Affiliates (each an "Affiliate Transaction"), other than (i)
Affiliate Transactions permitted under paragraph (b) of this covenant and (ii)
Affiliate Transactions that are on terms that are fair and reasonable to the
Company or the applicable Restricted Subsidiary and are no less favorable to the
Company or the applicable Restricted Subsidiary than those that might reasonably
have been obtained in a comparable transaction at such time on an arm's-length
basis from a Person that is not an Affiliate of the Company or such Restricted
Subsidiary. All Affiliate Transactions (and each series of related Affiliate
Transactions which are similar or part of a common plan) involving aggregate
payments or other property with a fair market value in excess of $1,000,000
shall be approved by the Board of Directors of the Company, such approval to be
evidenced by a Board Resolution stating that such Board of Directors has
determined that such transaction complies with the foregoing provisions. If the
Company or any Restricted Subsidiary enters into an Affiliate Transaction (or a
series of related Affiliate Transactions related to a common plan) that involves
an aggregate fair market value of more than $10,000,000, the Company shall,
prior to the consummation thereof, obtain a favorable opinion as to the fairness
of such transaction or series of related transactions to the Company 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.
(b) The restrictions set forth in clause (a) shall not apply to (i)
reasonable fees and compensation paid to and indemnity provided on behalf of,
officers, directors, employees or consultants of the Company or any Restricted
Subsidiary as determined in good faith by the Board of Directors or senior
management of the Company or such Restricted Subsidiary, as the case may be;
(ii) transactions exclusively between or among the Company and any of its
Restricted Subsidiaries or exclusively between or among such Restricted
Subsidiaries; provided, however, that such transactions are not otherwise
prohibited by the Indenture; (iii) Restricted Payments permitted by the
Indenture; and (iv) the payment of such portion of the CGGS purchase price, if
any, as shall have been held in escrow to the former shareholders of CGGS.
LIMITATION ON RESTRICTED AND UNRESTRICTED SUBSIDIARIES. The Indenture
provides that the Board of Directors may, if no Default or Event of Default
shall have occurred and be continuing or would arise therefrom, designate an
Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however, that
(i) any such redesignation shall be deemed to be an incurrence as of the date of
such redesignation by the Company and its Restricted Subsidiaries of the
Indebtedness (if any) of such redesignated Subsidiary for purposes of "--
Limitation on Incurrence of Additional Indebtedness" above, (ii) unless such
redesignated Subsidiary shall not have any Indebtedness outstanding, other than
Indebtedness which would be Permitted Indebtedness, no such designation shall be
permitted if immediately after giving effect to such redesignation and the
incurrence of any such additional Indebtedness the Company could not incur $1.00
of additional Indebtedness (other than Permitted Indebtedness) pursuant to "--
Limitation on Incurrence of Additional Indebtedness" above and (iii) such
Subsidiary assumes by execution of a supplemental indenture all of the
obligations of a Subsidiary Guarantor under a Guarantee.
The Board of Directors of the Company also may, if no Default or Event
of Default shall have occurred and be continuing or would arise therefrom,
designate any Restricted Subsidiary to be an Unrestricted Subsidiary if (i) such
designation is at that time permitted under "-- Limitation on Restricted
Payments" above and (ii) immediately after giving effect to such designation,
the Company could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) pursuant to "--Limitation on Incurrence of Additional
Indebtedness" above. Any such designation by the Board of Directors shall be
evidenced to the Trustee by the filing with the Trustee of a certified copy of
the resolution of the Board of Directors giving effect to such designation or
redesignation and an Officers' 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.
The Indenture provides that for purposes of the covenant described under
"-- Limitation on Restricted Payments" above, (i) an "Investment" shall be
deemed to have been made at the time any Restricted Subsidiary is designated as
an Unrestricted Subsidiary in an amount (proportionate to the Company's equity
interest in such Subsidiary) equal to the net worth of such Restricted
Subsidiary at the time that such Restricted Subsidiary is designated as an
Unrestricted Subsidiary; (ii) 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 Company's equity interest in such Subsidiary)
equal to the net worth of any Unrestricted Subsidiary at the time that such
Unrestricted Subsidiary is designated a Restricted Subsidiary, not to exceed, in
the case of any such redesignation of an Unrestricted Subsidiary as a Restricted
Subsidiary, the amount of Investments previously made by the Company and its
Restricted Subsidiaries in such Unrestricted Subsidiary (in each case (i) and
(ii) "net worth" to be calculated based upon the fair market value of the assets
of such Subsidiary as of any such date of designation); and (iii) any property
transferred to or from an Unrestricted Subsidiary shall be valued at its fair
market value at the time of such transfer.
The Indenture provides that notwithstanding the foregoing, the Board of
Directors may not designate any Subsidiary of the Company to be an Unrestricted
Subsidiary if, after such designation, (a) the Company or any Restricted
Subsidiary (i) provides credit support for, or a guarantee of, any Indebtedness
of such Subsidiary (including any undertaking, agreement or instrument
evidencing such Indebtedness) or (ii) is directly or indirectly liable for any
Indebtedness of such Subsidiary or (b) 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 Indenture provides that Subsidiaries of the Company that are not
designated by the Board of Directors as Restricted or Unrestricted Subsidiaries
will be deemed to be Restricted Subsidiaries. Notwithstanding any provisions of
this covenant, all Subsidiaries of an Unrestricted Subsidiary will be
Unrestricted Subsidiaries.
ADDITIONAL SUBSIDIARY GUARANTEES. If the Company or any of its
Restricted Subsidiaries transfers or causes to be transferred, in one
transaction or a series of related transactions, any property to any Restricted
Subsidiary that is not a Subsidiary Guarantor, or if the Company 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 (a) execute and
deliver to the Trustee a supplemental indenture in form reasonably satisfactory
to the Trustee pursuant to which such Restricted Subsidiary shall
unconditionally guarantee all of the Company's obligations under the Notes and
the Indenture on the terms set forth in the Indenture and (b) 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 CONDUCT OF BUSINESS. The Company 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. The Company will deliver to the Trustee within 15
days after the filing of the same with the Commission, copies of the quarterly
and annual reports and of the information, documents and other reports, if any,
which the Company is required to file with the Commission pursuant to Section 13
or 15(d) of the Exchange Act. Notwithstanding that the Company may not be
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company will file with the Commission, to the extent permitted, and
provide the Trustee and Holders with such annual reports and such information,
documents and other reports specified in Sections 13 and 15(d) of the Exchange
Act. The Company will also comply with the other provisions of 314(a) of the
TIA.
<PAGE>
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of
Default":
(a) the failure to pay interest (including any Additional Interest) on
any Notes when the same becomes due and payable and the default continues for a
period of 30 days;
(b) the failure to pay the principal on any Notes, when such principal
becomes due and payable, at maturity, upon redemption or otherwise (including
the failure to make a payment to purchase Notes tendered pursuant to a Change of
Control Offer or a Net Proceeds Offer);
(c) 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 Issuer receives written notice specifying the default (and
demanding that such default be remedied) from the Trustee or the Holders of at
least 25% of the outstanding principal amount of the Notes (except in the case
of a default with respect to observance or performance of any of the terms or
provisions of "-- Change of Control" or "Certain Covenants -- Merger,
Consolidation and Sale of Assets" or "-- Limitation on Asset Sales" which will
constitute an Event of Default with such notice requirement but without such
passage of time requirement);
(d) a default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness of the Company or of any Restricted Subsidiary (or the payment of
which is guaranteed by the Issuers or any Restricted Subsidiary), whether such
Indebtedness now exists or is created after the Issue Date, which default (i) 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 (ii) 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;
(e) one or more judgments in an aggregate amount in excess of $5,000,000
(unless covered by insurance by a reputable insurer as to which the insurer has
acknowledged coverage) shall have been rendered against the Company 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;
(f) certain events of bankruptcy affecting the Company or any of its
Subsidiaries; or
(g) any of the Guarantees cease to be in full force and effect or any of
the Guarantees are declared to be null and void or invalid and unenforceable or
any of the Subsidiary Guarantors denies or disaffirms its liability under its
Guarantees (other than by reason of release of a Subsidiary Guarantor in
accordance with the terms of the Indenture).
The Indenture provides that, if an Event of Default (other than an Event
of Default specified in clause (f) above) shall occur and be continuing, the
Trustee or the Holders of at least 25% in principal amount of outstanding Notes
may declare the principal of, premium, if any, and accrued and unpaid interest
on all the Notes to be due and payable by notice in writing to the 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 specified in clause (f) above occurs and is continuing, then
all unpaid principal of, and premium, if any, and accrued and unpaid interest on
all of the outstanding Notes shall ipso facto become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holder.
The Indenture provides that, at any time after a declaration of
acceleration with respect to the Notes as described in the preceding paragraph,
the Holders of a majority in principal amount of the Notes may rescind and
cancel such declaration and its consequences (a) if the rescission would not
conflict with any judgment or decree, (b) if all existing Events of Default have
been cured or waived except nonpayment of principal or interest that has become
due solely because of such acceleration, (c) 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, (d) if the Issuers have paid the Trustee its
reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (e) in the event of the cure or waiver of an
Event of Default of the type described in clause (f) of the description of
Events of Default above, the Trustee shall have received an officers'
certificate and an opinion of counsel that such Event of Default has been cured
or waived; provided, however, that such counsel may rely, as to matters of fact,
on a certificate or certificates of officers of the Company. No such rescission
shall affect any subsequent Default or impair any right consequent thereto.
The Indenture provides that, at any time prior to the declaration of
acceleration of the Notes, the Holders of a majority in principal amount of the
Notes may waive any existing Default or Event of Default under the Indenture,
and its consequences, except a default in the payment of the principal of or
interest on any Notes.
The Indenture provides that, Holders of the Notes may not enforce the
Indenture or the Notes except as provided in the Indenture and under the TIA.
During the existence of an Event of Default, the Trustee is required to exercise
such rights and powers vested in it under the Indenture and use the same degree
of care and skill in its exercise thereof as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs. Subject to the
provisions of the Indenture relating to the duties of the Trustee, whether or
not an Event of Default shall occur and be continuing, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding Notes have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee.
Under the Indenture, the Issuers are required to provide an officers'
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.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Issuers may, at their option and at any time, elect to have their
obligations and the corresponding obligations of the Subsidiary Guarantors
discharged with respect to the outstanding Notes ("Legal Defeasance"). Such
Legal Defeasance means that the Issuers shall be deemed to have paid and
discharged the entire indebtedness represented by the outstanding Notes, and
satisfied all of their obligations with respect to the Notes, except for (a) the
rights of Holders to receive payments in respect of the principal of, premium,
if any, and interest on the Notes when such payments are due, (b) the Issuers'
obligations with respect to the Notes concerning issuing temporary Notes,
registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payments, (c) the rights, powers, trust,
duties and immunities of the Trustee and the Issuers' obligations in connection
therewith and (d) 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 released with respect to certain covenants that are described in
the Indenture ("Covenant Defeasance") and thereafter any omission to comply with
such obligations shall not constitute a Default or Event of Default with respect
to the Notes. In the event Covenant Defeasance occurs, certain events (other
than non-payment, bankruptcy, receivership, reorganization and insolvency
events) described under "-- Events of Default" will no longer constitute an
Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (a)
the Issuers must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders cash in United States dollars, non-callable United States
government obligations, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest on the Notes
on the stated date for payment thereof or on the applicable redemption date, as
the case may be; (b) in the case of Legal Defeasance, the Issuers shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (i) the Issuers have received from, or
there has been published by, the Internal Revenue Service a ruling or (ii) since
the date of the Indenture, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon such
opinion of counsel shall confirm that, the Holders will not recognize income,
gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred, (c) in the case of Covenant Defeasance, the Issuers
shall have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that the Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
such Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred; (d) 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; (e) such
Legal Defeasance or Covenant Defeasance shall not result in a breach or
violation of, or constitute a default under the Indenture or any other agreement
or instrument to which the Company or any of its Restricted Subsidiaries is a
party or by which the Company or any of its Restricted Subsidiaries is bound;
(f) the Issuers shall have delivered to the Trustee an officers' certificate
stating that the deposit was not made by the Issuers with the intent of
preferring the Holders over any other creditors of either Issuer or with the
intent of defeating, hindering, delaying or defrauding any other creditors of
the Issuers or others; (g) the Issuers shall have delivered to the Trustee an
officers' certificate and an opinion of counsel, each stating that all
conditions precedent provided for or relating to the Legal Defeasance or the
Covenant Defeasance, as the case may be, have been complied with; provided,
however, that such counsel may rely, as to matters of fact, on a certificate or
certificates of officers of the Company; (h) the Issuers shall have delivered to
the Trustee an opinion of counsel to the effect that after the 91st day
following the deposit, the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; provided, however, that such counsel may rely, as
to matters of fact, on a certificate or certificates of officers of the Issuers;
and (i) certain other customary conditions precedent are satisfied.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (a) either (i) all the Notes, theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Issuers and thereafter repaid to the Issuers
or discharged from such trust) have been delivered to the Trustee for
cancellation or (ii) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Issuers have irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together with
irrevocable instructions from the Issuers directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be; (b)
the Issuers have paid all other sums payable under the Indenture by the Issuers;
and (c) the Issuers have delivered to the Trustee an officers' certificate and
an opinion of counsel stating that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with; provided, however, that such counsel may rely, as to matters of fact, on a
certificate or certificates of officers of the Issuers.
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 for certain
specified purposes, including curing ambiguities, defects or inconsistencies, to
comply with any requirements of the Commission in order to effect or maintain
the qualification of the Indenture under the TIA or to make any change that
would provide any additional benefit or rights to the Holders or that does not
adversely affect the rights of any Holder. In formulating its opinion on such
matters, the Trustee will be entitled to rely on such evidence as it deems
appropriate, including, without limitation, solely on an opinion of counsel;
provided, however, that in delivering such opinion of counsel, such counsel may
rely, as to matters of fact, on a certificate or certificates of officers of the
Company. Other modifications and amendments of the Indenture may be made with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes issued under the Indenture, except that, without the consent
of each Holder affected thereby, no amendment may: (a) reduce the amount of
Notes whose Holders must consent to an amendment; (b) reduce the rate of or
change or have the effect of changing the time for payment of interest,
including defaulted interest, on any Notes; (c) reduce the principal of or
change or have the effect of changing the fixed maturity of any Notes, or change
the date on which any Notes may be subject to redemption or repurchase, or
reduce the redemption or repurchase price therefor; (d) make any Notes payable
in money other than that stated in the Notes; (e) make any change in provisions
of the Indenture protecting the right of each Holder to receive payment of
principal of and interest on such Note on or after the due date thereof or to
bring suit to enforce such payment, or permitting Holders of a majority in
principal amount of Notes to waive Defaults or Events of Default; (f) 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; (g) modify or change any provision of the Indenture or the related
definitions affecting ranking of the Notes or any Guarantee in a manner which
adversely affects the Holders; or (h) release any Subsidiary Guarantor from any
of its obligations under its Guarantee or the Indenture otherwise than in
accordance with the terms of the Indenture.
GOVERNING LAW
The Indenture provides that the Indenture, the Notes and the Guarantees
will be governed by, and construed in accordance with, the laws of the State of
New York but without giving effect to applicable principles of conflicts of law
to the extent that the application of the law of another jurisdiction would be
required thereby.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the Trustee
will exercise such rights and powers vested in it by the Indenture, and use the
same degree of care and skill in its exercise as a prudent man would exercise or
use under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations
on the rights of the Trustee, should it become a creditor of the Issuers or a
Subsidiary Guarantor, to obtain payments of claims in certain cases or to
realize on certain property received in respect of any such claim as security or
otherwise. Subject to the TIA, the Trustee will be permitted to engage in other
transactions; provided, however, that if the Trustee acquires any conflicting
interest as described in the TIA, it must eliminate such conflict or resign.
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 (i) existing at the time such Person becomes a Restricted
Subsidiary or at the time it merges or consolidates with the Company or any of
its Restricted Subsidiaries or (ii) which becomes Indebtedness of the Company or
a Restricted Subsidiary in connection with the acquisition of assets from such
Person, in each case not incurred in connection with, or in anticipation or
contemplation of, such Person becoming a Restricted Subsidiary or such
acquisition, merger or consolidation.
"ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS" means (without duplication),
as of the date of determination, (a) the sum of (i) discounted future net
revenues from proved oil and gas reserves of the Company and its consolidated
Subsidiaries, calculated in accordance with Commission guidelines (before any
state or federal income tax), as estimated by a nationally recognized firm of
independent petroleum engineers as of a date no earlier than the date of the
Company's latest annual consolidated financial statements, as increased by, as
of the date of determination, the estimated discounted future net revenues from
(A) estimated proved oil and gas reserves acquired since the date of such
year-end reserve report, and (B) estimated oil and gas reserves attributable to
upward revisions of estimates of proved oil and gas reserves since the date of
such year-end reserve report due to exploration, development or exploitation
activities, in each case calculated in accordance with Commission guidelines
(utilizing the prices utilized in such year-end reserve report), and decreased
by, as of the date of determination, the estimated discounted future net
revenues from (C) estimated proved oil and gas reserves produced or disposed of
since the date of such 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 such year-end reserve report due to changes in
geological conditions or other factors which would, in accordance with standard
industry practice, cause such revisions, in each case calculated in accordance
with Commission guidelines (utilizing the prices utilized in such year-end
reserve report); provided, however, that, in the case of each of the
determinations made pursuant to clauses (A) through (D), such increases and
decreases shall be as estimated by the Company's petroleum engineers, unless in
the event that there is a Material Change as a result of such acquisitions,
dispositions or revisions, then the discounted future net revenues utilized for
purposes of this clause (a)(i) shall be confirmed in writing, by a nationally
recognized firm of independent petroleum engineers (which may be the Company's
independent petroleum engineers who prepare the Company's annual reserve report)
plus (ii) the capitalized costs that are attributable to oil and gas properties
of the Company and its Subsidiaries to which no proved oil and gas reserves are
attributable, based on the Company's books and records as of a date no earlier
than the date of the Company's latest annual or quarterly financial statements,
plus (iii) the Net Working Capital on a date no earlier than the date of the
Company's latest consolidated annual or quarterly financial statements plus (iv)
with respect to each other tangible asset of the Company or its consolidated
Restricted Subsidiaries specifically including, but not to the exclusion of any
other qualifying tangible assets, the Company's or its consolidated Restricted
Subsidiaries' gas producing facilities and unproved oil and gas properties (less
any remaining deferred income taxes which have been allocated to such gas
processing facilities in connection with the acquisition thereof), land,
equipment, leasehold improvements, investments carried on the equity method,
restricted cash and the carrying value of marketable securities, the greater of
(A) the net book value of such other tangible asset on a date no earlier than
the date of the Company's latest consolidated annual or quarterly financial
statements or (B) the appraised value, as estimated by a qualified Independent
Advisor, of such other tangible assets of the Company and its Restricted
Subsidiaries, as of a date no earlier than the date of the Company's latest
audited financial statements minus (b) minority interests and, to the extent not
otherwise taken into account in determining Adjusted Consolidated Net Tangible
Assets, any gas balancing liabilities of the Company and its consolidated
Restricted Subsidiaries reflected in the Company's latest audited financial
statements. In addition to, but without duplication of, the foregoing, for
purposes of this definition, "Adjusted Consolidated Net Tangible Assets" shall
be calculated after giving effect, on a pro forma basis, to (1) any Investment
not prohibited by the Indenture, to and including the date of the transaction
giving rise to the need to calculate Adjusted Consolidated Net Tangible Assets
(the "Assets Transaction Date"), in any other Person that, as a result of such
Investment, becomes a Restricted Subsidiary of the Company, (2) the acquisition,
to and including the Assets Transaction Date (by merger, consolidation or
purchase of stock or assets), of any business or assets, including, without
limitation, Permitted Industry Investments, and (3) any sales or other
dispositions of assets permitted by the Indenture (other than sales of
Hydrocarbons or other mineral products in the ordinary course of business)
occurring on or prior to the Assets Transaction Date.
"AFFILIATE" means, with respect to any specified Person, (a) 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 (b)
any Related Person of such Person. The term "control" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative of the foregoing.
"AFFILIATE TRANSACTION" has the meaning set forth under "Certain
Covenants -- Limitation on Transactions with Affiliates."
"ASSET ACQUISITION" means (a) an Investment by the Company or any
Restricted Subsidiary in any other Person pursuant to which such Person shall
become a Restricted Subsidiary, or shall be merged with or into the Company or
any Restricted Subsidiary, or (b) the acquisition by the Company or any
Restricted Subsidiary of the assets of any Person (other than a Restricted
Subsidiary) which constitute all or substantially all of the assets of such
Person or comprises any division or line of business of such Person or any other
properties or assets of such Person other than in the ordinary course of
business.
"ASSET SALE" means any direct or indirect sale, issuance, conveyance,
transfer, exchange, lease (other than operating leases entered into in the
ordinary course of business), assignment or other transfer for value by the
Company or any of its Restricted Subsidiaries (including any Sale and Leaseback
Transaction) to any Person other than the Company or a Restricted Subsidiary of
(a) any Capital Stock of any Restricted Subsidiary; or (b) any other property or
assets (including any interests therein) of the Company or any Restricted
Subsidiary, including any disposition by means of a merger, consolidation or
similar transaction; provided, however, that Asset Sales shall not include (i)
the sale, lease, conveyance, disposition or other transfer of all or
substantially all of the assets of the Company in a transaction which is made in
compliance with the provisions of "-- Certain Covenants --Merger, Consolidation
and Sale of Assets", (ii) any Investment in an Unrestricted Subsidiary which is
made in compliance with the provisions of "-- Certain Covenants -- Limitation on
Restricted Payments" above, (iii) disposals or replacements of obsolete
equipment in the ordinary course of business, (iv) the sale, lease, conveyance,
disposition or other transfer (each, a "Transfer") by the Company or any
Restricted Subsidiary of assets or property to the Company or one or more
Restricted Subsidiaries, (v) any disposition of Hydrocarbons or other mineral
products for value in the ordinary course of business and (vi) the Transfer by
the Company or any Restricted Subsidiary of assets or property in the ordinary
course of business; provided, however, that the aggregate amount (valued at the
fair market value of such assets or property at the time of such Transfer) of
all such assets and property Transferred since the Issue Date pursuant to this
clause (vi) shall not exceed $1,000,000 in any one year.
"BOARD OF DIRECTORS" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.
"BOARD RESOLUTION" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"BUSINESS DAY" means any day other than a Saturday, Sunday or any other
day on which banking institutions in the City of New York are required or
authorized by law or other governmental action to be closed.
"CAPITALIZED LEASE OBLIGATION" means, as to any Person, the discounted
present value of the rental obligations of such Person under a lease of (or
other agreement conveying the right to use) any property (whether real, personal
or mixed) that is required to be classified and accounted for as a capital lease
obligation at such date, determined in accordance with GAAP.
"CAPITAL STOCK" means (a) with respect to any Person that is a
corporation, any and all shares, interests, participations or other equivalents
(however designated and whether or not voting) of corporate stock, including
each class of Common Stock and Preferred Stock of such Person and including any
warrants, options or rights to acquire any of the foregoing and instruments
convertible into any of the foregoing and (b) with respect to any Person that is
not a corporation, any and all partnership or other equity interests of such
Person.
"CASH EQUIVALENTS" means (a) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (b)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (c) commercial paper maturing no more than
one year from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from S&P or at least P-1 from Moody's; (d)
certificates of deposit or bankers' acceptances maturing within one year from
the date of acquisition thereof issued by any bank organized under the laws of
the United States of America or any state thereof or the District of Columbia or
any United States branch of a foreign bank having at the date of acquisition
thereof combined capital and surplus of not less than $250,000,000; (e)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clause (a) above entered into with any bank
meeting the qualifications specified in clause (d) above and (f) money market
mutual or similar funds having assets in excess of $100,000,000.
"CHANGE OF CONTROL" means the occurrence of one or more of the following
events: (a) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Company to any Person or group of related Persons for purposes of Section 13(d)
of the Exchange Act (a "Group") (whether or not otherwise in compliance with the
provisions of the Indenture); (b) the approval by the holders of Capital Stock
of the Company of any plan or proposal for the liquidation or dissolution of the
Company (whether or not otherwise in compliance with the provisions of the
Indenture); (c) any Person or Group shall become the owner, directly or
indirectly, beneficially or of record, of shares representing more than 35% of
the aggregate ordinary voting power represented by the issued and outstanding
Capital Stock of the Company; or (d) the replacement of a majority of the Board
of Directors of the Company over a two-year period from the directors who
constituted the Board of Directors of the Company at the beginning of such
period with directors whose replacement shall not have been approved (by
recommendation, nomination or election, as the case may be) by a vote of at
least a majority of the Board of Directors of the Company then still in office
who either were members of such Board of Directors at the beginning of such
period or whose election as a member of such Board of Directors was previously
so approved.
"CHANGE OF CONTROL OFFER" has the meaning set forth under "-- Change of
Control."
"CHANGE OF CONTROL PAYMENT DATE" has the meaning set forth under "--
Change of Control."
"COMMON STOCK" of any Person means any and all shares, interests or
other participations in, and other equivalents (however designated and whether
voting or non-voting) of such Person's common stock, whether outstanding on the
Issue Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"COMMISSION" means the Securities and Exchange Commission.
"COMPANY" means Abraxas Petroleum Corporation, a Nevada corporation.
"COMPANY PROPERTIES" means all Properties, and equity, partnership or
other ownership interests therein, that are related or incidental to, or used or
useful in connection with, the conduct or operation of any business activities
of the Company or the Subsidiaries, which business activities are not prohibited
by the terms of the Indenture.
"CONSOLIDATED EBITDA" means, for any period, the sum (without
duplication) of (a) Consolidated Net Income and (b) to the extent Consolidated
Net Income has been reduced thereby, (i) all income taxes of the Company and its
Restricted Subsidiaries paid or accrued in accordance with GAAP for such period
(other than income taxes attributable to extraordinary, unusual or nonrecurring
gains or losses or taxes attributable to sales or dispositions outside the
ordinary course of business), (ii) Consolidated Interest Expense, (iii) the
amount of any Preferred Stock dividends paid by the Company and its Restricted
Subsidiaries and (iv) Consolidated Non-cash Charges, less any non-cash items
increasing Consolidated Net Income for such period, all as determined on a
consolidated basis for the Company and its Restricted Subsidiaries in accordance
with GAAP.
"CONSOLIDATED EBITDA COVERAGE RATIO" means, with respect to the Company,
the ratio of (a) Consolidated EBITDA of the Company during the four full fiscal
quarters for which financial information in respect thereof is available (the
"Four Quarter Period") ending on or prior to the date of the transaction giving
rise to the need to calculate the Consolidated EBITDA Coverage Ratio (the
"Transaction Date") to (b) Consolidated Fixed Charges of the Company for the
Four Quarter Period. In addition to and without limitation of the foregoing, for
purposes of this definition, "Consolidated EBITDA" and "Consolidated Fixed
Charges" shall be calculated after giving effect (without duplication) on a pro
forma basis for the period of such calculation to (a) the incurrence or
repayment of any Indebtedness of the Company or any of its Restricted
Subsidiaries (and the application of the proceeds thereof) giving rise to the
need to make such calculation and any incurrence or repayment of other
Indebtedness (and the application of the proceeds thereof), other than the
incurrence or repayment of indebtedness in the ordinary course of business for
working capital purposes pursuant to working capital facilities, occurring
during the Four Quarter Period or at any time subsequent to the last day of the
Four Quarter Period and on or prior to the Transaction Date, as if such
incurrence or repayment, as the case may be (and the application of the proceeds
thereof), occurred on the first day of the Four Quarter Period and (b) any Asset
Sales or Asset Acquisitions (including, without limitation, any Asset
Acquisition giving rise to the need to make such calculation as a result of the
Company or one of its Restricted Subsidiaries (including any Person who becomes
a Restricted Subsidiary as a result of the Asset Acquisition) incurring,
assuming or otherwise being liable for Acquired Indebtedness, and also
including, without limitation, any Consolidated EBITDA attributable to the
assets which are the subject of the Asset Acquisition or Asset Sale during the
Four Quarter Period) occurring during the Four Quarter Period or at any time
subsequent to the last day of the Four Quarter Period and on or prior to the
Transaction Date, as if such Asset Sale or Asset Acquisition (including the
incurrence, assumption or liability for any such Acquired Indebtedness) occurred
on the first day of the Four Quarter Period. If the Company or any of its
Restricted Subsidiaries directly or indirectly guarantees Indebtedness of a
third Person, the preceding sentence shall give effect to the incurrence of such
guaranteed Indebtedness as if the Company or the Restricted Subsidiary, as the
case may be, had directly incurred or otherwise assumed such guaranteed
Indebtedness. Furthermore, in calculating "Consolidated Fixed Charges" for
purposes of determining the denominator (but not the numerator) of this
"Consolidated EBITDA Coverage Ratio," (i) interest on outstanding Indebtedness
determined on a fluctuating basis as of the Transaction Date and which will
continue to be so determined thereafter shall be deemed to have accrued at a
fixed rate per annum equal to the rate of interest on such Indebtedness in
effect on the Transaction Date; (ii) 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; (iii) notwithstanding clauses (i) and (ii) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to Interest Swap Obligations, shall be deemed to
accrue at the rate per annum resulting after giving effect to the operation of
such agreements.
"CONSOLIDATED FIXED CHARGES" means, with respect to the Company for any
period, the sum, without duplication, of (a) Consolidated Interest Expense
(including any premium or penalty paid in connection with redeeming or retiring
Indebtedness of the Company and its Restricted Subsidiaries prior to the stated
maturity thereof pursuant to the agreements governing such Indebtedness), plus
(b) the product of (i) the amount of all dividend payments on any series of
Preferred Stock of the Company (other than dividends paid in Qualified Capital
Stock) paid, accrued or scheduled to be paid or accrued during such period times
(ii) a fraction, the numerator of which is one and the denominator of which is
one minus the then current effective consolidated federal, state and local
income tax rate of such Person, expressed as a decimal.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to the Company for
any period, the sum of, without duplication: (a) the aggregate of the interest
expense of the Company and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, including without
limitation, (i) any amortization of original issue discount, (ii) the net costs
under Interest Swap Obligations, (iii) all capitalized interest and (iv) the
interest portion of any deferred payment obligation; and (b) the interest
component of Capitalized Lease Obligations paid, accrued and/or scheduled to be
paid or accrued by the Company and its Restricted Subsidiaries during such
period, as determined on a consolidated basis in accordance with GAAP.
"CONSOLIDATED NET INCOME" means, with respect to the Company for any
period, the aggregate net income (or loss) of the Company and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided, however, that there shall be excluded therefrom (a)
after-tax gains from Asset Sales or abandonments or reserves relating thereto,
(b) after-tax items classified as extraordinary or nonrecurring gains, (c) the
net income of any Person acquired in a "pooling of interests" transaction
accrued prior to the date it becomes a Restricted Subsidiary or is merged or
consolidated with the Company or any Restricted Subsidiary, (d) 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, (e)
the net income of any Person in which the Company has an interest, other than a
Restricted Subsidiary, except to the extent of cash dividends or distributions
actually paid to the Company or to a Restricted Subsidiary by such Person, (f)
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 (g) in the case of a successor
to the Company by consolidation or merger or as a transferee of the Company's
assets, any net income (or loss) of the successor corporation prior to such
consolidation, merger or transfer of assets.
"CONSOLIDATED NET WORTH" of any Person as of any date means the
consolidated stockholders' equity of such Person, determined on a consolidated
basis in accordance with GAAP, less (without duplication) amounts attributable
to Disqualified Capital Stock of such Person.
"CONSOLIDATED NON-CASH CHARGES" means, with respect to the Company, for
any period, the aggregate depreciation, depletion, amortization and other
non-cash expenses of the Company and its Restricted Subsidiaries reducing
Consolidated Net Income of the Company for such period, determined on a
consolidated basis in accordance with GAAP (excluding any such charges
constituting an extraordinary item or loss or any such charge which requires an
accrual of or a reserve for cash charges for any future period).
"CONSOLIDATION" means, with respect to any Person, the consolidation of
the accounts of the Restricted Subsidiaries of such Person with those of such
Person, all in accordance with GAAP; provided, however, that "consolidation"
will not include consolidation of the accounts of any Unrestricted Subsidiary of
such Person with the accounts of such Person. The term "consolidated" has a
correlative meaning to the foregoing.
"COVENANT DEFEASANCE" has the meaning set forth under "-- Legal
Defeasance and Covenant Defeasance."
"CRUDE OIL AND NATURAL GAS BUSINESS" means (i) the acquisition,
exploration, development, operation and disposition of interests in oil, gas and
other hydrocarbon properties located in North America, and (ii) the gathering,
marketing, treating, processing, storage, selling and transporting of any
production from such interests or properties of the Company or of others.
"CRUDE OIL AND NATURAL GAS HEDGE AGREEMENTS" means, with respect to any
Person, any oil and gas agreements and other agreements or arrangements or any
combination thereof entered into by such Person in the ordinary course of
business and that is designed to provide protection against oil and natural gas
price fluctuations.
"CRUDE OIL AND NATURAL GAS PROPERTIES" means all Properties, including
equity or other ownership interests therein, owned by any Person which have been
assigned "proved oil and gas reserves" as defined in Rule 4-10 of Regulation S-X
of the Securities Act as in effect on the Issue Date.
"CRUDE OIL AND NATURAL GAS RELATED ASSETS" means any Investment or
capital expenditure (but not including additions to working capital or
repayments of any revolving credit or working capital borrowings) by the Company
or any Subsidiary of the Company which is related to the business of the Company
and its Subsidiaries as it is conducted on the date of the Asset Sale giving
rise to the Net Cash Proceeds to be reinvested.
"CURRENCY AGREEMENT" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary of the Company against fluctuations in
currency values.
"DEFAULT" means an event or condition the occurrence of which is, or
with the lapse of time or the giving of notice or both would be, an Event of
Default.
"DISQUALIFIED CAPITAL STOCK" means that portion of any Capital Stock
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is mandatorily redeemable at the sole option of the
holder thereof, in whole or in part, in either case, on or prior to the final
maturity of the Notes.
"EQUITY OFFERING" means an offering of Qualified Capital Stock of the
Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any successor statute or statutes thereto.
"FAIR MARKET VALUE" means, with respect to any asset or property, the
price which could be negotiated in an arm's-length, free market transaction, for
cash, between an informed and willing seller and an informed and willing buyer,
neither of whom is under undue pressure or compulsion to complete the
transaction. Fair market value shall be determined by the Board of Directors of
the Company acting reasonably and in good faith and shall be evidenced by a
Board Resolution of the Company delivered to the Trustee; provided, however,
that (A) if the aggregate non-cash consideration to be received by the Company
or any Restricted Subsidiary from any Asset Sale shall reasonably be expected to
exceed $5,000,000 or (B) if the net worth of any Restricted Subsidiary to be
designated as an Unrestricted Subsidiary shall reasonably be expected to exceed
$10,000,000, then fair market value shall be determined by an Independent
Advisor.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board as of any date of determination.
"HOLDER" means any Person holding a Note.
"HYDROCARBONS" means oil, gas, casinghead gas, drip gasoline, natural
gasoline, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons and
all constituents, elements or compounds thereof and products processed
therefrom.
"INCUR" has the meaning set forth under "-- Certain Covenants --
Limitation on Incurrence of Additional Indebtedness."
"INDEBTEDNESS" means with respect to any Person, without duplication,
(a) all Obligations of such Person for borrowed money, (b) all Obligations of
such Person evidenced by bonds, debentures, notes or other similar instruments,
(c) all Capitalized Lease Obligations of such Person, (d) all Obligations of
such Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable), (e) all Obligations for the
reimbursement of any obligor on a letter of credit, banker's acceptance or
similar credit transaction, (f) guarantees and other contingent obligations in
respect of Indebtedness referred to in clauses (a) through (e) above and clause
(h) below, (g) all Obligations of any other Person of the type referred to in
clauses (a) through (f) 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, (h) all Obligations under Currency Agreements and
Interest Swap Obligations and (i) all Disqualified Capital Stock issued by such
Person with the amount of Indebtedness represented by such Disqualified Capital
Stock being equal to the greater of its voluntary or involuntary liquidation
preference and its maximum fixed redemption price or repurchase price. For
purposes hereof, the "maximum fixed repurchase price" of any Disqualified
Capital Stock which does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Disqualified Capital Stock as if such
Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the fair market value of such Disqualified
Capital Stock, such fair market value shall be determined reasonably and in good
faith by the Board of Directors of the Company. The "amount" or "principal
amount" of Indebtedness at any time of determination as used herein represented
by (a) any Indebtedness issued at a price that is less than the principal amount
at maturity thereof shall be the face amount of the liability in respect
thereof, (b) any Capitalized Lease Obligation shall be the amount determined in
accordance with the definition thereof, (c) any Interest Swap Obligations
included in the definition of Permitted Indebtedness shall be zero, (d) all
other unconditional obligations shall be the amount of the liability thereof
determined in accordance with GAAP and (e) all other contingent obligations
shall be the maximum liability at such date of such Person.
"INDEPENDENT ADVISOR" means a reputable accounting, appraisal or
nationally recognized investment banking, engineering or consulting firm (a)
which does not, and whose directors, officers and employees or Affiliates do
not, have a direct or indirect material financial interest in the Company and
(b) which, in the judgment of the Board of Directors of the Company, is
otherwise disinterested, independent and qualified to perform the task for which
it is to be engaged.
"INITIAL PURCHASERS" means, collectively, BT Securities Corporation,
Bankers Trust International plc, Jefferies & Company, Inc. and ING Baring (U.S.)
Securities Corporation.
"INTEREST SWAP OBLIGATIONS" means the obligations of any Person pursuant
to any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"INVESTMENT" means, with respect to any Person, any direct or indirect
(i) loan, advance or other extension of credit (including, without limitation, a
guarantee) or capital contribution to (by means of any transfer of cash or other
property (valued at the fair market value thereof as of the date of transfer)
others or any payment for property or services for the account or use of
others), (ii) purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any Person (whether by merger, consolidation, amalgamation or otherwise and
whether or not purchased directly from the issuer of such securities or
evidences of Indebtedness), (iii) guarantee or assumption of the Indebtedness of
any other Person (other than the guarantee or assumption of Indebtedness of such
Person or a Restricted Subsidiary of such Person which guarantee or assumption
is made in compliance with the provisions of "-- Certain Covenants -- Limitation
on Incurrence of Additional Indebtedness" above), and (iv) other items that
would be classified as investments on a balance sheet of such Person prepared in
accordance with GAAP. Notwithstanding the foregoing, "Investment" shall exclude
extensions of trade credit by the Company and its Restricted Subsidiaries on
commercially reasonable terms in accordance with normal trade practices of the
Company or such Restricted Subsidiary, as the case may be. The amount of any
Investment shall not be adjusted for increases or decreases in value, or
write-ups, write-downs or write-offs with respect to such Investment. If the
Company or any Restricted Subsidiary sells or otherwise disposes of any Capital
Stock of any Restricted Subsidiary such that, after giving effect to any such
sale or disposition, it ceases to be a Subsidiary of the Company, the Company
shall be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Capital Stock of such
Restricted Subsidiary not sold or disposed of.
"ISSUE DATE" means the date of original issuance of the Notes.
"LEGAL DEFEASANCE" has the meaning set forth under "-- Legal Defeasance
and Covenant Defeasance."
"LIEN" means any lien, mortgage, deed of trust, pledge, security
interest, charge or encumbrance of any kind (including any conditional sale or
other title retention agreement, any lease in the nature thereof and any
agreement to give any security interest).
"MATERIAL CHANGE" means an increase or decrease of more than 10% during
a fiscal quarter in the discounted future net cash flows (excluding changes that
result solely from changes in prices) from proved oil and gas reserves of the
Company and consolidated Subsidiaries (before any state or federal income tax);
provided, however, that the following will be excluded from the Material Change
calculation: (i) 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, (ii) any disposition of properties existing at the
beginning of such quarter that have been disposed of as provided in "Limitation
on Asset Sales" and (iii) 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.
"NET CASH PROCEEDS" means, with respect to any Asset Sale, the proceeds
in the form of cash or Cash Equivalents including payments in respect of
deferred payment obligations when received in the form of cash or Cash
Equivalents received by the Company or any of its Restricted Subsidiaries from
such Asset Sale net of (a) reasonable out-of-pocket expenses and fees relating
to such Asset Sale (including, without limitation, legal, accounting and
investment banking fees and sales commissions), (b) 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, (c) repayment of
Indebtedness that is required to be repaid in connection with such Asset Sale
and (d) appropriate amounts (determined by the Chief Financial Officer of the
Company) to be provided by the Company or any Restricted Subsidiary, as the case
may be, as a reserve, in accordance with GAAP, against any post closing
adjustments or liabilities associated with such Asset Sale and retained by the
Company or any Restricted Subsidiary, as the case may be, after such Asset Sale,
including, without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities under
any indemnification obligations associated with such Asset Sale (but excluding
any payments which, by the terms of the indemnities will not, be made during the
term of the Notes).
"NET PROCEEDS OFFER" has the meaning set forth under "-- Certain
Covenants -- Limitation on Asset Sales."
"NET PROCEEDS OFFER AMOUNT" has the meaning set forth under "-- Certain
Covenants -- Limitation on Asset Sales."
"NET PROCEEDS OFFER PAYMENT DATE" has the meaning set forth under "--
Certain Covenants --
Limitation on Asset Sales."
"NET PROCEEDS OFFER TRIGGER DATE" has the meaning set forth under "--
Certain Covenants -- Limitation on Asset Sales."
"NET WORKING CAPITAL" means (i) all current assets of the Company and
its consolidated Subsidiaries, minus (ii) all current liabilities of the Company
and its consolidated Subsidiaries, except current liabilities included in
Indebtedness, in each case as set forth in financial statements of the Company
prepared in accordance with GAAP.
"NEW CREDIT FACILITY" means the Amended and Restated Credit Agreement
dated as of November 14, 1996, by and among the Company, BTCo and ING Capital,
as Co-Agents, and each of the Lenders named therein, or any successor or
replacement agreement and whether by the same or any other agent, lender or
group of lenders, together with the related documents thereto (including,
without limitation, any guarantee agreements and security documents), in each
case as such agreements 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, increasing or
otherwise restructuring all or any portion of the Indebtedness under such
agreements.
"NON-RECOURSE INDEBTEDNESS" with respect to any Person means
Indebtedness of such Person for which (i) 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 (ii) no other assets of such Person may be realized upon in collection of
principal or interest on such Indebtedness; provided, however, that any such
Indebtedness shall not cease to be "Non-Recourse Indebtedness" solely as a
result of the instrument governing such Indebtedness containing terms pursuant
to which such Indebtedness becomes recourse upon (a) fraud or misrepresentation
by the Person in connection with such Indebtedness, (b) such Person failing to
pay taxes or other charges that result in the creation of liens on any portion
of the specific property securing such Indebtedness or failing to maintain any
insurance on such property required under the instruments securing such
Indebtedness, (c) the conversion of any of the collateral for such Indebtedness,
(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, however, that upon the occurrence of any of the foregoing
clauses (a) through (g) above, any such Indebtedness which shall have ceased to
be "Non-Recourse Indebtedness" shall be deemed to have been Indebtedness
incurred by such Person at such time.
"OBLIGATIONS" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"PAYMENT RESTRICTION" has the meaning set forth under "-- Certain
Covenants -- Limitation on Dividend and Other Payment Restrictions Affecting
Restricted Subsidiaries."
"PERMITTED INDEBTEDNESS" means, without duplication, each of the
following:
(a) Indebtedness under the Notes, the Exchange Notes, the Private
Exchange Notes, if any, the Indenture and the Guarantees;
(b) Indebtedness incurred pursuant to the New Credit Facility in an
aggregate principal amount at any time outstanding not to exceed $50,000,000,
reduced by any required permanent repayments (which are accompanied by a
corresponding permanent commitment reduction) thereunder;
(c) Interest Swap Obligations of the Company or a Restricted Subsidiary
covering Indebtedness of the Company or any of its Restricted Subsidiaries;
provided, however, that such Interest Swap Obligations are entered into to
protect the Company and its Restricted Subsidiaries from fluctuations in
interest rates on Indebtedness incurred in accordance with the Indenture to the
extent the notional principal amount of such Interest Swap Obligations does not
exceed the principal amount of the Indebtedness to which such Interest Swap
Obligation relates;
(d) Indebtedness of a Restricted Subsidiary to the Company or to a
Wholly Owned Restricted Subsidiary for so long as such Indebtedness is held by
the Company or a Wholly Owned Restricted Subsidiary, in each case subject to no
Lien held by a Person other than the Company or a Wholly Owned Restricted
Subsidiary; provided, however, that if as of any date any Person other than the
Company 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;
(e) Indebtedness of the Company 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 (i) any
Indebtedness of the Company to any Wholly Owned Restricted Subsidiary that is
not a Subsidiary Guarantor is unsecured and subordinated, pursuant to a written
agreement, to the Company's obligations under the Indenture and the Notes and
(ii) if as of any date any Person other than a Wholly Owned Restricted
Subsidiary owns or holds any such Indebtedness or holds a Lien in respect of
such Indebtedness, such date shall be deemed the incurrence of Indebtedness not
constituting Permitted Indebtedness by the Company;
(f) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except in the
case of daylight overdrafts) drawn against insufficient funds in the ordinary
course of business; provided, however, that such Indebtedness is extinguished
within two Business Days of incurrence;
(g) Indebtedness of the Company or any of its Restricted Subsidiaries
represented by letters of credit for the account of the Company or such
Restricted Subsidiary, as the case may be, in order to provide security for
workers' compensation claims, payment obligations in connection with
self-insurance or similar requirements in the ordinary course of business;
(h) Refinancing Indebtedness;
(i) Capitalized Lease Obligations of the Company outstanding on the
Issue Date;
(j) Capitalized Lease Obligations and Purchase Money Indebtedness of the
Company or any of its Restricted Subsidiaries not to exceed $5,000,000 at any
one time outstanding;
(k) Permitted Operating Obligations;
(l) Obligations arising in connection with Crude Oil and Natural Gas
Hedge Agreements of the Company or a Restricted Subsidiary;
(m) Non-Recourse Indebtedness;
(n) Indebtedness under Currency Agreements; provided, however, that in
the case of Currency Agreements which relate to Indebtedness, such Currency
Agreements do not increase the Indebtedness of the Company and its Restricted
Subsidiaries outstanding other than as a result of fluctuations in foreign
currency exchange rates or by reason of fees, indemnities and compensation
payable thereunder;
(o) additional Indebtedness of the Company or any of its Restricted
Subsidiaries in an aggregate principal amount at any time outstanding not to
exceed the greater of (i) $10.0 million or (ii) 5.0% of Adjusted Consolidated
Net Tangible Assets of the Company; and
(p) Indebtedness outstanding on the Issue Date.
"Permitted Industry Investments" means (i) capital expenditures,
including, without limitation, acquisitions of Company Properties and interests
therein; (ii) (a) entry into operating agreements, joint ventures, working
interests, royalty interests, mineral leases, unitization agreements, pooling
arrangements or other similar or customary agreements, transactions, properties,
interests or arrangements, and Investments and expenditures in connection
therewith or pursuant thereto, in each case made or entered into in the ordinary
course of the oil and gas business, and (b) exchanges of Company Properties for
other Company Properties of at least equivalent value as determined in good
faith by the Board of Directors of the Company; (iii) Investments of operating
funds on behalf of co-owners of Crude Oil and Natural Gas Properties of the
Company or the Subsidiaries pursuant to joint operating agreements.
"PERMITTED INVESTMENTS" means (a) Investments by the Company or any
Restricted Subsidiary in any Person that is or will become immediately after
such Investment a Restricted Subsidiary or that will merge or consolidate into
the Company or a Restricted Subsidiary that is not subject to any Payment
Restriction, (b) Investments in the Company by any Restricted Subsidiary;
provided, however, that any Indebtedness evidencing any such Investment held by
a Restricted Subsidiary that is not a Subsidiary Guarantor is unsecured and
subordinated, pursuant to a written agreement, to the Company's obligations
under the Notes and the Indenture; (c) investments in cash and Cash Equivalents;
(d) Investments made by the Company 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 (e)
Permitted Industry Investments.
"PERMITTED LIENS" means each of the following types of Liens:
(a) Liens existing as of the Issue Date to the extent and in the manner
such Liens are in effect on the Issue Date (and any extensions, replacements or
renewals thereof covering property or assets secured by such Liens on the Issue
Date);
(b) Liens securing Indebtedness outstanding under the New Credit
Facility and Liens arising under the Indenture;
(c) Liens securing the Notes and the Guarantees;
(d) Liens of the Company or a Restricted Subsidiary on assets of any
Restricted Subsidiary;
(e) Liens securing Refinancing Indebtedness which is incurred to
Refinance any Indebtedness which has been secured by a Lien permitted under the
Indenture and which has been incurred in accordance with the provisions of the
Indenture; provided, however, that such Liens (x) are no less favorable to the
Holders and are not more favorable to the lienholders with respect to such Liens
than the Liens in respect of the Indebtedness being Refinanced and (y) do not
extend to or cover any property or assets of the Company or any of its
Restricted Subsidiaries not securing the Indebtedness so Refinanced;
(f) Liens for taxes, assessments or governmental charges or claims
either (i) not delinquent or (ii) contested in good faith by appropriate
proceedings and as to which the Company or a Restricted Subsidiary, as the case
may be, shall have set aside on its books such reserves as may be required
pursuant to GAAP;
(g) 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, 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;
(h) Liens incurred or deposits made in the ordinary course of business
(i) 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 (ii) 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);
(i) judgment and attachment Liens not giving rise to an Event of
Default;
(j) easements, rights-of-way, zoning restrictions, restrictive
covenants, minor imperfections in title and other similar charges or
encumbrances in respect of real property not interfering in any material respect
with the ordinary conduct of the business of the Company or any of its
Restricted Subsidiaries;
(k) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or assets
which is not leased property subject to such Capitalized Lease Obligation;
(l) Liens securing Purchase Money Indebtedness of the Company or any
Restricted Subsidiary; provided, however, that (i) the Purchase Money
Indebtedness shall not be secured by any property or assets of the Company or
any Restricted Subsidiary other than the property and assets so acquired or
constructed and (ii) the Lien securing such Indebtedness shall be created within
90 days of such acquisition or construction;
(m) 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;
(n) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company or
any of its Restricted Subsidiaries, including rights of offset and set-off;
(o) 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;
(p) Liens securing Acquired Indebtedness incurred in accordance with "--
Certain Covenants --Limitation on Incurrence of Additional Indebtedness" above;
provided, however, that (i) such Liens secured such Acquired Indebtedness at the
time of and prior to the incurrence of such Acquired Indebtedness by the Company
or a Restricted Subsidiary and were not granted in connection with, or in
anticipation of, the incurrence of such Acquired Indebtedness by the Company or
a Restricted Subsidiary and (ii) such Liens do not extend to or cover any
property or assets of the Company or of any of its Restricted Subsidiaries other
than the property or assets that secured the Acquired Indebtedness prior to the
time such Indebtedness became Acquired Indebtedness of the Company or a
Restricted Subsidiary and are no more favorable to the lienholders than those
securing the Acquired Indebtedness prior to the incurrence of such Acquired
Indebtedness by the Company or a Restricted Subsidiary;
(q) Liens on, or related to, properties and assets of the Company and
its Subsidiaries to secure all or a part of the costs incurred in the ordinary
course of business of exploration, drilling, development, production,
processing, transportation, marketing or storage, or operation thereof;
(r) Liens on pipeline or pipeline facilities, Hydrocarbons or properties
and assets of the Company and its Subsidiaries which arise out of operation of
law;
(s) royalties, overriding royalties, revenue interests, net revenue
interests, net profit interests, revisionary interests, production payments,
production sales contracts, operating agreements and other similar interests,
properties, arrangements and agreements, all as ordinarily exist with respect to
Properties and assets of the Company and its Subsidiaries or otherwise as are
customary in the oil and gas business;
(t) with respect to any Properties and assets of the Company and its
Subsidiaries, Liens arising under, or in connection with, or related to,
farm-out, farm-in, joint operation, area of mutual interest agreements and/or
other similar or customary arrangements, agreements or interests that the
Company or any Subsidiary determines in good faith to be necessary for the
economic development of such Property;
(u) 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, 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);
(v) Liens in favor of collecting or payor banks having a right of
setoff, revocation, refund or chargeback with respect to money or instruments of
the Company or any Restricted Subsidiary on deposit with or in possession of
such bank; and
(w) Liens securing Non-recourse Indebtedness.
"PERMITTED OPERATING OBLIGATIONS" means Indebtedness of the Company or
any Restricted Subsidiary in respect of one or more standby letters of credit,
bid, performance or surety bonds, or other reimbursement obligations, issued for
the account of, or entered into by, the Company or any Restricted Subsidiary in
the ordinary course of business (excluding obligations related to the purchase
by the Company or any Restricted Subsidiary of Hydrocarbons for which the
Company or such Restricted Subsidiary has contracts to sell), or in lieu of any
thereof or in addition to any thereto, guarantees and letters of credit
supporting any such obligations and Indebtedness (in each case, other than for
an obligation for borrowed money, other than borrowed money represented by any
such letter of credit, bid, performance or surety bond, or reimbursement
obligation itself, or any guarantee and letter of credit related thereto).
"PERSON" means an individual, partnership, corporation, unincorporated
organization, limited liability company, trust, estate, or joint venture, or a
governmental agency or political subdivision thereof.
"PREFERRED STOCK" of any Person means any Capital Stock of such Person
that has preferential rights to any other Capital Stock of such Person with
respect to dividends or redemptions or upon liquidation.
"PROPERTY" means, with respect to any Person, any interests of such
Person in any kind of property or asset, whether real, personal or mixed, or
tangible or intangible, including, without limitation, Capital Stock,
partnership interests and other equity or ownership interests in any other
Person.
"PURCHASE MONEY INDEBTEDNESS" means Indebtedness the net proceeds of
which are used to finance the cost (including the cost of construction) of
property or assets acquired in the normal course of business by the Person
incurring such Indebtedness.
"QUALIFIED CAPITAL STOCK" means any Capital Stock that is not
Disqualified Capital Stock.
"REFERENCE DATE" has the meaning set forth under "-- Certain Covenants
- -- Limitation on Restricted Payments."
"REFINANCE" means, in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue a security or Indebtedness in exchange or replacement for, such
security or Indebtedness in whole or in part. "Refinanced" and "Refinancing"
shall have correlative meanings.
"REFINANCING INDEBTEDNESS" means any Refinancing by the Company or any
Restricted Subsidiary of the Company of Indebtedness incurred in accordance with
"-- Certain Covenants -- Limitation on Incurrence of Additional Indebtedness"
above (other than pursuant to clause (b), (c), (d), (e), (f), (g), (j), (k),
(l), (n) or (o) of the definition of Permitted Indebtedness), in each case that
does not (i) result in an increase in the aggregate principal amount of
Indebtedness of such Person as of the date of such proposed Refinancing (plus
the amount of any premium required to be paid under the terms of the instrument
governing such Indebtedness and plus the amount of reasonable expenses incurred
by the Company and its Restricted Subsidiaries in connection with such
Refinancing) or (ii) create Indebtedness with (x) a Weighted Average Life to
Maturity that is less than the Weighted Average Life to Maturity of the
Indebtedness being Refinanced or (y) a final maturity earlier than the final
maturity of the Indebtedness being Refinanced; provided, however, that (1) if
such Indebtedness being Refinanced is Indebtedness of the Company or a
Subsidiary Guarantor, then such Refinancing Indebtedness shall be Indebtedness
solely of the Company and/or such Subsidiary Guarantor and (2) if such
Indebtedness being Refinanced is subordinate or junior to the Notes or a
Guarantee, then such Refinancing Indebtedness shall be subordinate to the Notes
or such Guarantee, as the case may be, at least to the same extent and in the
same manner as the Indebtedness being Refinanced.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement
dated as of the Issue Date among the Company, the Subsidiary Guarantors and the
Initial Purchasers.
"RELATED PERSON" of any Person means any other Person directly or
indirectly owning 10% or more of the outstanding voting Common Stock of such
Person (or, in the case of a Person that is not a corporation, 10% or more of
the equity interest in such Person).
"REPLACEMENT ASSETS" has the meaning set forth under "-- Certain
Covenants -- Limitation on Asset Sales."
"RESTRICTED PAYMENT" has the meaning set forth under "-- Certain
Covenants -- Limitation on Restricted Payments."
"RESTRICTED SUBSIDIARY" means any Subsidiary of the Company (including,
without limitation, Canadian Abraxas) that has not been designated by the Board
of Directors of the Company, by a Board Resolution delivered to the Trustee, as
an Unrestricted Subsidiary pursuant to and in compliance with "-- Certain
Covenants -- Limitation on Restricted and Unrestricted Subsidiaries" above. Any
such designation may be revoked by a Board Resolution of the Company delivered
to the Trustee, subject to the provisions of such covenant.
"SALE AND LEASEBACK TRANSACTION" means any direct or indirect
arrangement with any Person or to which any such Person is a party, providing
for the leasing to the Company or a Restricted Subsidiary of any property,
whether owned by the Company or any Restricted Subsidiary at the Issue Date or
later acquired which has been or is to be sold or transferred by the Company or
such Restricted Subsidiary to such Person or to any other Person from whom funds
have been or are to be advanced by such Person on the security of such property.
"SUBSIDIARY", with respect to any Person, means (a) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or (b) any
other Person of which at least a majority of the voting interests under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"SUBSIDIARY GUARANTOR" means each of the Company's Restricted
Subsidiaries that in the future executes a supplemental indenture in which such
Restricted Subsidiary agrees to be bound by the terms of the Indenture as a
Subsidiary Guarantor; provided, however, that any Person constituting a
Subsidiary Guarantor as described above shall cease to constitute a Subsidiary
Guarantor when its Guarantee is released in accordance with the terms of the
Indenture.
"SURVIVING ENTITY" has the meaning set forth under "-- Certain Covenants
- -- Merger, Consolidation and Sale of Assets."
"UNRESTRICTED SUBSIDIARY" means any Subsidiary of the Company designated
as such pursuant to and in compliance with "-- Certain Covenants -- Limitation
on Restricted and Unrestricted Subsidiaries" above; provided, however, that
Unrestricted Subsidiaries shall initially include Cascade Oil & Gas Ltd., an
Alberta, Canada corporation, Grey Wolf Exploration, Ltd., an Alberta
corporation, and Western Associated Energy Corporation, a Texas corporation. Any
such designation may be revoked by a Board Resolution of the Company 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 (a) the then
outstanding aggregate principal amount of such Indebtedness into (b) the sum of
the total of the products obtained by multiplying (i) 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 (ii)
the number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" means any Restricted Subsidiary of
which all the outstanding voting securities normally entitled to vote in the
election of directors are owned by the Company or another Wholly Owned
Restricted Subsidiary.
<PAGE>
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
ABRAXAS
Abraxas is authorized to issue 50,000,000 shares of Common Stock, par
value $.01 per share. At December 20, 1996, there were 5,804,812 shares of
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,
subject to the rights of the holders of Abraxas' Series 1995-B Preferred Stock
and any subsequently issued classes or series of Abraxas' Preferred Stock. No
dividend may be declared or paid on the Common Stock and no Common Stock may be
purchased by Abraxas, unless all accrued and unpaid dividends on the outstanding
Series 1995-B Preferred Stock for all past or current dividend periods, if any,
have been paid, except for a purchase of shares of the Common Stock by Abraxas
pursuant to Rule 13e-4(h)(5) of the Exchange Act. In addition, under the terms
of the New Credit Facility , 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 the Series 1995-B 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".
CANADIAN ABRAXAS
Canadian Abraxas is authorized to issue an unlimited number shares of
Common Stock, without par value. At December 20, 1996, there was one (1) share
of Common Stock issued and outstanding which was held by Abraxas. 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
Canadian 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,
subject to the rights of the holders of the class or series of Canadian Abraxas'
preferred stock. Under the terms of the New Credit Facility , Canadian 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 Canadian Abraxas' assets remaining after payment of liabilities,
subject to the preferences and rights of the holders of any shares of preferred
stock. All of the outstanding shares of the Common Stock are fully paid and
nonassessable.
PREFERRED STOCK
ABRAXAS
General. 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.
Description of Series 1995-B Preferred Stock. Abraxas is authorized to
issue 1,000,000 shares of Preferred Stock, of which 45,741 shares have been
designated as the Series 1995-B Preferred Stock. The holders of the Series
1995-B Preferred Stock have the full right and power to vote with the holders of
the Common Stock on all matters on which the stockholders of the Common Stock
are entitled to vote. Holders of the Series 1995-B Preferred Stock are entitled
to 11.11 votes for each share of the Series 1995-B Preferred Stock and are not
entitled to cumulate votes in the election of directors. Holders of the Series
1995-B Preferred Stock do not have preemptive rights to subscribe for or to
purchase any additional shares of the Series 1995-B Preferred Stock. All or any
shares of the Series 1995-B Preferred Stock may be redeemed at the option of
Abraxas at any time after January 1, 1997 at $100 per share plus the amount of
accrued and unpaid dividends. If Abraxas redeems, repurchases, exchanges any
security or property for, or otherwise acquires for consideration any shares of
Common Stock (other than an acquisition pursuant to Rule 13e-4(h)(5) promulgated
under the Exchange Act) at a price equal to or greater than $100 divided by the
number of shares of Common Stock into which one share of the Series 1995-B
Preferred Stock is then convertible, any holder of shares of Series 1995-B
Preferred Stock may require Abraxas to redeem a number of shares of such
holder's Series 1995-B Preferred Stock equal to the product of (i) the
percentage of the shares of the Common Stock so redeemed or otherwise acquired
times (ii) the total number of shares of the Series 1995-B Preferred Stock held
by such holder at a price per share equal to the product of (x) the number of
shares of Common Stock that such holder's shares of Series 1995-B Preferred
Stock is then convertible times (y) the per share price paid for a share of
Common Stock by Abraxas plus all accrued and unpaid dividends. Each share of
Series 1995-B Preferred Stock may be converted, subject to adjustment, into
11.11 shares of the Common Stock.
Shares of the Series 1995-B Preferred Stock are entitled to a cumulative
dividend of $8.00 per share per annum payable on a quarterly basis, when and if
declared by the Board of Directors. In the event of the dissolution, liquidation
or winding up of Abraxas, the holders of the Series 1995-B Preferred Stock shall
be entitled to receive an amount of money equal to the redemption price per
share plus all accrued and unpaid dividends thereon in cash or in any assets of
Abraxas remaining after the debts of Abraxas have been paid in full and before
any payment is made or assets set aside for payment to the holders of the Common
Stock. All outstanding shares of the Series 1995-B Preferred Stock are fully
paid and nonassessable.
CANADIAN ABRAXAS
Canadian Abraxas' Articles of Incorporation authorize the issuance of an
unlimited number of First Preferred Shares, without par value. 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 the First Preferred
Shares. The rights of the holders of Canadian Abraxas' Common Stock will be
subject to, and may be adversely affected by, the rights of holders of the First
Preferred Shares that may be issued in the future.
CONTINGENT VALUE RIGHTS
GENERAL. The CVRs were issued under the CVR Agreement (the "CVR
Agreement") between Abraxas and First Union. 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 shall issue to each holder of the CVRs (each such person, a "CVR
Holder") on the Extended Maturity Date (as defined below), for each CVR held by
such CVR Holder, Abraxas shall issue a number of shares of Common Stock, if any,
equal to (a) the Target Price (as defined below) minus the Current Market Value
divided by (b) the Current Market Value; provided, however, in no event shall
more than 1.5 shares of Common Stock be issued in exchange for each CVR at the
Extended Maturity Date. Such determination by Abraxas absent manifest error
shall be final and binding on Abraxas and the CVR Holder.
Determination that No Shares are Issuable With Respect to the CVRs. If
the Current Market Value of a share of the Common Stock equals or exceeds $12.50
on the Extended Maturity Date, no shares of the Common Stock will be issuable
with respect to the CVRs. In addition, the CVRs will terminate if the Per Share
Market Value (as defined below) equals or exceeds the Target Price for any
period of 30 consecutive Trading Days during the period from and after November
17, 1996 to and including November 17, 1997.
In the event that Abraxas determines that no shares of the Common Stock
are issuable with respect to the CVRs to the CVR Holders, Abraxas shall give to
the CVR Holders notice of such determination. Upon making such determination and
absent manifest error, the CVRs shall terminate and become null and void and the
CVR Holders shall have no further rights with respect thereto. The failure to
give such notice or any defect therein shall not affect the validity of such
determination.
ANTIDILUTION. In the event Abraxas shall in any manner subdivide (by
stock split, stock dividend or otherwise) or combine (by reverse stock split or
otherwise) the number of outstanding shares of the Common Stock, Abraxas shall
similarly subdivide or combine the CVRs and shall approximately adjust the
Target Price. Whenever such an adjustment is made, Abraxas shall (i) promptly
prepare a certificate setting forth such adjustment and a brief statement of the
facts accounting for such adjustment, (ii) promptly file with First Union a copy
of such certificate and (iii) mail a brief summary thereof to each CVR Holder.
First Union shall be fully protected in relying on any such certificate and on
any adjustment therein contained. Such adjustment absent manifest error shall be
final and binding on Abraxas and the CVR Holders. Each outstanding CVR
Certificate shall thenceforth represent that number of adjusted CVRs necessary
to reflect such subdivision or combination and reflect the adjusted Target
Price.
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 with or merge into any other entity or convey, transfer or
lease its properties and assets substantially as an entirety to any entity,
provided that (i) the Surviving Person (as defined below) assumes Abraxas'
obligations under the CVRs and the CVR Agreement and (ii) Abraxas delivers to
First Union an officer's certificate regarding compliance with the foregoing.
For the purposes hereof, "convey, transfer or lease its properties and assets
substantially as an entirety" shall mean properties and assets contributing in
the aggregate of 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 Commission.
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 Common
Stock (each, a "Transaction"), the holders of the CVRs would be entitled to
receive securities of the Surviving Person or such other consideration that
holders of shares of the Common Stock received in such a Transaction on the
basis described herein. In the event of a Transaction in which the consideration
received by the stockholders of Abraxas were shares of capital stock or other
securities of the Surviving Person, the CVRs would mature on the Extended
Maturity Date, the Target Price would be adjusted by dividing the Target Price
by the Conversion Ratio (as defined below) and the holders of the CVRs would
receive on the Extended Maturity Date a number of shares of the capital stock or
other securities of the Surviving Person equal to (a) the Adjusted Target Price
(as defined below) minus the Adjusted Current Market Value (as defined below)
divided by (b) the Adjusted Current Market Value; provided, however, in no event
shall the Surviving Person (a) be required to issue a number of shares of its
capital stock or other securities greater than 1.5 times the Conversion Ratio at
the Extended Maturity Date and (b) issue shares of its capital stock or other
securities which are not publicly traded to the holders of the CVRs for any CVRs
held by them. In the event that the shares of capital stock or other securities
of the Surviving Person to be issued in a Transaction are not publicly traded,
the consideration to be received by the holders of the CVRs for any CVRs held by
them shall be cash calculated in the manner described in the following sentence.
In the event of a Transaction in which the holders of Abraxas' Common Stock
received cash, the holders of the CVRs would receive cash in an amount equal to
the Adjusted Target Price minus the cash received by the stockholders of Abraxas
for one share of the Common Stock on the effective date of such a Transaction;
provided, however that the holders of the CVRs would not receive greater than
$7.50 per CVR in cash from and after November 17, 1996 to and including the
Extended Maturity Date.
CERTAIN DEFINITIONS.
"ADJUSTED CURRENT MARKET VALUE" per share means, with respect to the
Extended Maturity Date, the median of the averages of the closing bid prices of
the shares of capital stock or other securities of the Surviving Person received
by the holders of Common Stock in a Transaction on the principal stock exchange
on which such shares of capital stock or other securities are traded during each
20 consecutive Trading Day period that both begins and ends in the Valuation
Period.
"ADJUSTED TARGET PRICE" means the Target Price divided by the Conversion
Ratio.
"AUTHORIZED NEWSPAPER" means The Wall Street Journal, or if The Wall
Street Journal shall cease to be published, or, if the publication or general
circulation of The Wall Street Journal shall be suspended for whatever reason,
such other English language newspaper as is selected by Abraxas with general
circulation in The City of New York, New York.
"CONVERSION RATIO" means the number of shares of capital stock or other
securities of the Surviving Person received by the holder of one (1) share of
the Common Stock.
"CURRENT MARKET VALUE" means with respect to the Extended Maturity Date,
the median of the averages of the closing bid prices on the NASDAQ Stock Market
(or, if the Common Stock is listed on a securities exchange, on such exchange)
of shares of the Common Stock during each 20 consecutive trading day period that
both begins and ends in the Valuation Period.
"EXTENDED MATURITY DATE" means November 17, 1997.
"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 the Common Stock on such date on the principal stock
exchange on which the Common Stock has been listed or, if there is no such price
on such date, then the average of such prices on such exchange on the date
nearest preceding such date, or (b) if the Common Stock is not listed on any
stock exchange, the average of the high and low sales prices for a share of
Common Stock in the over-the-counter market, as reported by the NASDAQ Stock
Market for such date, or, if there are no such prices on such date, then the
average of such prices on the date nearest preceding such date, or (c) if the
Common Stock is not quoted on the NASDAQ Stock Market, the average of the final
bid and final asked prices for a share of Common Stock in the over-the-counter
market as reported by the National Quotation Bureau Incorporated (or any similar
organization or agency succeeding to its functions of reporting prices), or (d)
if the Common Stock is no longer publicly traded, as determined by a nationally
recognized or major regional investment banking firm or firm of independent
certified public accountants of recognized standing (which may be the firm that
regularly examines the financial statements of 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 $12.50. Upon each occurrence of an event specified
under "Antidilution" above, such amount, as it may have been previously
adjusted, shall be adjusted as described under "Antidilution" above.
"TRADING DAY" means (a) a day on which the Common Stock is traded on the
principal stock exchange on which the Common Stock has been listed, or (b) if
the Common Stock is not listed on any stock exchange, a day on which the Common
Stock is traded in the over-the-counter market, as reported by the NASDAQ Stock
Market, or (c) if the Common Stock is not traded on the NASDAQ Stock Market, a
day on which the Common Stock is traded in the over-the-counter market as
reported by the National Quotation Bureau Incorporated (or any similar
organization or agency succeeding to its functions of reporting prices).
"VALUATION PERIOD" means the 60 Trading Day period immediately preceding
(and including) the Maturity Date or the Extended Maturity Date.
WARRANTS
Abraxas has warrants ("Warrants") outstanding to purchase an aggregate
of 437,500 shares of Common Stock. Associated Energy Managers, Inc. ("AEM"), has
Warrants to purchase 13,500 shares at an exercise price of $7.00 per share.
First Union has Warrants to purchase 424,000 shares of Common Stock at an
exercise price of $9.79 per share. These Warrants were issued to First Union in
connection with Abraxas' credit agreement. First Union and AEM have certain
registration rights with respect to shares of the Common Stock issued pursuant
to the exercise of such Warrants. See " -- Registration Rights."
All outstanding Warrants contain provisions that protect AEM and First
Union against dilution by adjusting the price at which the Warrants are
exercisable and the number of shares of the Common Stock issuable upon exercise
thereof upon the occurrence of certain events, including payment of stock
dividends and distributions, stock splits, recapitalizations, reclassifications,
mergers, consolidations or the issuance or sale of Common Stock or options,
rights or securities convertible into shares of the Common Stock, in the case of
AEM, at less than the current market price or, in the case of First Union, at a
price less than the greater of the current market price or the exercise 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.
REGISTRATION RIGHTS
The shares of the Common Stock to be received by AEM and First Union
upon exercise of Warrants and any shares of the Common Stock owned by Endowment
Energy Partners, L.P. ("EEP") and Endowment Energy Partners II, Limited
Partnership ("EEP II") are entitled to certain rights with respect to the
registration of such shares under the Securities Act.
Under the terms of the Registration Rights Agreement with EEP and EEP
II, in the event that Abraxas proposes to register any shares of the Common
Stock or securities convertible into Common Stock under the Securities Act for
its own account, except in certain circumstances, EEP and EEP II are entitled to
unlimited Piggyback Registrations, subject to the right of the underwriters of
any such offering to limit the number of shares included in such registration.
Abraxas has agreed to pay all expenses in connection with a Piggyback
Registration except for underwriting discounts and selling commissions which
shall be borne by EEP and/or EEP II with respect to shares of the Common Stock
owned by EEP and EEP II other than the 211,500 shares of Common Stock acquired
by EEP and EEP II through the exercise of the Warrants formerly owned by EEP and
EEP II ("Warrant Shares"). EEP and EEP II have the additional right to require
Abraxas to effect one Demand Registration of all shares of the Common Stock
(other than Warrant Shares) in the aggregate at any time and Abraxas is required
to effect such registration, subject to certain conditions and limitations.
Abraxas is required to bear the expenses of a Demand Registration except for
underwriting discounts and selling commissions which shall be borne by EEP
and/or EEP II with respect to shares of Common Stock owned by EEP and EEP II
other than Warrant Shares. Abraxas has agreed to customary indemnities including
an agreement to indemnify, subject to certain limited exceptions, EEP and EEP II
in connection with a Demand Registration and a Piggyback Registration.
Under the terms of its Warrants, AEM has the right to unlimited
Piggyback Registrations. EEP and EEP II have the right to one Demand
Registration in the aggregate at any time after December 20, 1995 and unlimited
Piggyback Registrations with respect to Warrant Shares. Abraxas has agreed to
pay all expenses in connection with Piggyback Registrations by AEM and by EEP
and EEP II with respect to Warrant Shares and to share expenses equally with EEP
and EEP II with respect to Warrant Shares registered in a Demand Registration;
provided, however, all underwriting discounts and selling commissions shall be
borne by EEP, EEP II or AEM, as the case may be.
Under the terms of its Warrants, First Union has the right to two Demand
Registrations and, subject to the rights to Piggyback Registration of EEP, EEP
II and AEM, unlimited Piggyback Registrations. Abraxas will pay all expenses
incurred in connection with any such registration other than underwriting
discounts and selling commissions which shall be borne by First Union. Abraxas
has also agreed to customary indemnities, including an agreement to indemnify,
subject to certain limitations, First Union in connection with a Demand
Registration and a Piggyback 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 Common Stock must be
effected at a duly called annual or special meeting of such holders, and may not
be taken by any written consent of such stockholders. These provisions may have
the effect of delaying consideration of a stockholder proposal until the next
annual meeting unless a special meeting is called by the persons set forth
above. The provisions of the Articles of Incorporation and Bylaws prohibiting
stockholder action by written consent could prevent the holders of a majority of
the voting power of Abraxas from using the written consent procedure to take
stockholder action and taking action by consent without giving all the
stockholders of Abraxas entitled to vote on a proposed action the opportunity to
participate in determining such proposed action.
STOCKHOLDER RIGHTS PLAN
On November 17, 1994, the Board of Directors of Abraxas adopted a
stockholder rights plan (the "Rights Plan"). Under the terms of the Rights Plan,
the Board of Directors of Abraxas declared a dividend of one common share
purchase right ("Right") on each share of the Common Stock outstanding on
November 17, 1994. Each Right entitles the holder thereof to buy one-half of one
share of Common Stock at an exercise price of $40 per share ($20 per half
share), subject to adjustment.
The 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 Rights
then become exercisable (unless redeemed by the Board of Directors) for a number
of shares of Common Stock having a market value of four times the exercise price
of the Right. If the acquiror were to conclude the acquisition of Abraxas, the
Rights would then become exercisable for shares of the controlling/surviving
corporation having a value of four times the exercise price of the Rights. If
the 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 Rights Plan
provides that the Rights may be redeemed under prescribed circumstances by the
Board of Directors.
The 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 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 GCL contains two provisions, described below as "Combination
Provisions" and the "Control Share Act," that may make more difficult the
accomplishment of unsolicited or hostile attempts to acquire control of a
corporation through certain types of transactions.
RESTRICTIONS ON CERTAIN COMBINATIONS BETWEEN NEVADA RESIDENT CORPORATIONS AND
INTERESTED STOCKHOLDERS
The Nevada GCL includes certain provisions (the "Combination
Provisions") prohibiting certain "combinations" (generally defined to include
certain mergers, disposition of assets transactions, and share issuance or
transfer transactions) between a resident domestic corporation and an
"interested stockholder" (generally defined to be the beneficial owner of 10% or
more of the voting power of the outstanding shares of the corporation), except
those combinations which are approved by the board of directors before the
interested stockholder first obtained a 10% interest in the corporation's stock.
There are additional exceptions to the prohibition, which apply to combinations
if they occur more than three years after the interested stockholder's date of
acquiring shares. The Combination Provisions apply unless the corporation elects
against their application in its original articles of incorporation or an
amendment thereto, or in its bylaws. Abraxas' Articles of Incorporation and
Bylaws do not currently contain a provision rendering the Combination Provisions
inapplicable.
NEVADA CONTROL SHARE ACT
Nevada's Control Share Acquisition Act (the "Control Share Act") imposes
procedural hurdles on and curtails greenmail practices of corporate raiders. The
Control Share Act temporarily disenfranchises the voting power of "control
shares" of a person or group ("Acquiring Person") purchasing a "controlling
interest" in an "issuing corporation" (as defined in the Nevada GCL) not opting
out of the Control Share Act. In this regard, the Control Share Act will apply
to an "issuing corporation" unless, before an acquisition is made, the articles
of incorporation or bylaws in effect on the tenth day following the acquisition
of a controlling interest provide that it is inapplicable. Abraxas' Articles of
Incorporation and Bylaws do not currently contain a provision rendering the
Control Share Act inapplicable.
Under the Control Share Act, an "issuing corporation" is a corporation
organized in Nevada which has 200 or more stockholders, at least 100 of whom are
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.
CERTAIN UNITED STATES AND CANADIAN INCOME TAX CONSIDERATIONS
The discussion below is intended to be a general description of the
material United States and Canadian tax consequences of the Exchange Offer to
holders of the Exchange Notes. It does not take into account the individual
circumstances of any particular investor and does not purport to discuss all of
the possible tax consequences of the Exchange Offer or the, ownership or
disposition of the Notes, and is not intended as tax advice. The summary below
is general in nature and does not discuss all aspects of United States and
Canadian income taxation that may be relevant to a particular investor in the
light of the investor's particular circumstances.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain United States federal income tax
consequences associated with the acquisition, ownership, and disposition of the
Notes. The following summary does not discuss all of the aspects of federal
income taxation that may be relevant to a prospective holder of the Notes in
light of his or her particular circumstances, or to certain types of holders
which are subject to special treatment under the federal income tax laws
(including persons who hold the Notes as part of a conversion, straddle or
hedge, dealers in securities, insurance companies, tax-exempt organizations,
financial institutions, broker-dealers and S corporations). Further, this
summary pertains only to holders that are citizens or residents of the United
States, corporations, partnerships or other entities created in or under the
laws of the United States or any political subdivision thereof, or estates or
trusts the income of which is subject to United States federal income taxation
regardless of its source. In addition, this summary does not describe any tax
consequences under state, local, or foreign tax laws.
This summary is based upon the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury Regulations (the "Regulations"), rulings and
pronouncements issued by the Internal Revenue Service ("IRS") and judicial
decisions now in effect, all of which are subject to change at any time by
legislative, judicial or administrative action. Any such changes may be applied
retroactively in a manner that could adversely affect the holders of the Notes.
The Issuers have not sought and will not seek any rulings from the IRS or
opinions from counsel with respect to the matters discussed below. There can be
no assurance that the IRS will not take positions concerning the tax
consequences of the valuation, purchase, ownership or disposition of the Notes
which are different from those discussed herein.
TAX CONSEQUENCES OF THE EXCHANGE OFFER
An exchange of the Series A Notes for the Exchange Notes pursuant to the
Exchange Offer should be treated as a modification of the Exchange Notes that
does not constitute a material change in their terms. Accordingly, an Exchange
Note should be treated as a continuation of the corresponding Series A Note and
an exchanging Holder should not recognize any gain or loss as a result of the
exchange. In addition, an exchanging Holder's basis in an Exchange Note would be
equal to the basis of the corresponding Series A Note and the holding period for
an Exchange Note would include such Holder's holding period for the
corresponding Series A Note.
The Exchange Offer will not have any federal income tax consequences to
a non-exchanging Holder.
TAXATION OF ACCRUED STATED INTEREST ON NOTES
Accrued stated interest paid on a Note will generally be taxable to a
holder as ordinary interest income at the time it accrues or is received, in
accordance with the holder's regular method of accounting for federal income tax
purposes.
The Company will annually furnish to certain record holders of the Notes
and the IRS information with respect to any stated interest accruing during the
calendar year as may be required under applicable Regulations.
MARKET DISCOUNT
If a holder purchases a Note, other than in connection with the
Offering, for less than the stated redemption price of the Note at maturity, the
difference is considered "market discount," unless such difference is "de
minimis," i.e., less than one-fourth of one percent of the stated redemption
price of the Note at maturity multiplied by the number of complete years to
maturity (after the holder acquires the Note). Under market discount rules, any
gain realized by the holder on a taxable disposition of a Note having "market
discount," as well as any partial principal payment made with respect to such a
Note, will be treated
as ordinary income to the extent of the then "accrued market discount" of the
Note. The rules concerning the calculation of "accrued market discount" are set
forth in the paragraph immediately below. In addition, a holder of such a Note
may be required to defer the deduction of all or a portion of the interest
expense on any indebtedness incurred to purchase or carry a Note having "market
discount."
Any market discount will accrue ratably from the date of acquisition to
the maturity date of the Note, unless the holder elects, irrevocably, to accrue
market discount on a constant interest rate method. The constant interest rate
method generally accrues interest at times and in amounts equivalent to the
result which would have occurred had the market discount been original issue
discount computed from the date of the holder's acquisition of the Note through
the maturity date. The election to accrue market discount on a constant interest
rate method is irrevocable but may be made separately as to each Note held by
the holder.
Accrual of market discount will not cause the accrued amounts to be
included currently in a holder's taxable income, in the absence of a disposition
of, or principal payment on, the Note. Nevertheless, a holder may elect to
currently include market discount in income as it accrues on either a ratable or
constant interest rate method. In such event, interest expense relating to the
acquisition of a Note which would otherwise be deferred would be currently
deductible to the extent otherwise permitted by the Code. The election to
include market discount in income currently, once made, applies to all market
discount obligations acquired by such holder on or after the first day of the
first taxable year to which the election applies and all subsequent years unless
revoked with the consent of the IRS. Accrued market discount which is included
in a holder's gross income will increase the adjusted tax basis of the Note in
the hands of the holder.
ACQUISITION PREMIUM
If a subsequent holder acquires a Note for an amount which is greater
than the stated redemption price of the Note at maturity, such holder will be
considered to have purchased such Note with "amortizable bond premium" equal to
the amount of such excess. The holder may elect to amortize the premium using a
constant yield method employing six month compounding over the period from the
acquisition date to the maturity date of the Note. Amortized amounts may be
offset only against interest paid with respect to the Note and will reduce the
holder's adjusted tax basis in the Note to the extent so used. Once made, an
election to amortize and offset interest on the Note may be revoked only with
the consent of the IRS and will apply to all Notes held by the holder on the
first day of the taxable year to which the election relates and to subsequent
taxable years and to all Notes subsequently acquired by the holder.
SALE, EXCHANGE OR OTHER TAXABLE DISPOSITION OF THE NOTES
The sale, redemption or other taxable disposition of a Note will result
in the recognition of gain or loss to the holder in an amount equal to the
difference between (i) the amount of cash and fair market value of property
received (except to the extent attributable to the payment of accrued stated
interest) in exchange therefore and (ii) the holder's adjusted tax basis in such
Note. A holder's initial tax basis in a Note purchased by such holder will be
equal to the issue price of the Note.
Any gain or loss on the sale, redemption or other taxable disposition of
a Note will be capital gain or loss, except to the extent of any "accrued market
discount," assuming a purchaser of the Note holds such security as a "capital
asset" (generally property held for investment) within the meaning of Section
1221 of the Code. Any capital gain or loss will be long-term capital gain or
loss if the Note is held for more than one year and otherwise will be short-term
capital gain or loss. Payments on such disposition for accrued stated interest
not previously included in income will be treated as ordinary interest income.
PURCHASE OR REDEMPTION OF NOTES
Effect of Change of Control and Asset Sale. Upon a Change of Control,
the Issuers are required to offer to redeem all outstanding Notes for a price
equal to 101% of the principal amount thereof plus accrued and unpaid stated
interest. See "Description of the Notes -- Redemption -- Optional Redemption."
Under the Regulations, such a Change of Control redemption requirement will not
affect the yield or maturity date of the Notes unless, based on all the facts
and circumstances as of the issue date, it is more likely than not that a Change
of Control giving rise to the redemption will occur. Upon certain asset sales,
the Issuers will be obligated to offer to repurchase the Notes at one hundred
percent (100%) of the principal amount thereof plus accrued and unpaid interest
to the date of redemption. The Issuers will not treat the Change of Control or
the asset sale redemption provisions of the Notes as affecting the calculation
of the yield to maturity of any Note.
Optional Redemption. The Issuers, at their option, may redeem part or
all of the Notes at any time on or after November 1, 2000, at the redemption
prices set forth herein. In addition, if the Issuers consummate an Equity
Offering on or before November 1, 1999, the Issuers may, at their option, use
all or a portion of the proceeds from such Equity Offering to redeem up to
thirty-five percent (35%) of the aggregate principal amount of the Notes
originally issued in the Offering at a redemption price equal to 111.5%,
together with accrued and unpaid interest to the date of redemption; provided,
however, that, after giving effect to any such redemption, at least $139.75
million aggregate principal amount of the Notes remains outstanding. See
"Description of the Notes -- Redemption -- Optional Redemption." For purposes of
determining whether the Notes are issued with any "original issue discount," the
Regulations generally provide that an issuer will be treated as exercising any
such option if its exercise would lower the yield of the debt instrument. A
redemption of Notes at the optional redemption prices, however, would increase
rather than decrease the effective yield of the debt instrument as calculated
from the issue date.
The Issuers do not currently intend to exercise any of the options
described above with respect to the Notes. Should the Issuers exercise an option
and redeem a Note, the holder of the Note would be required to treat any amount
paid by the Issuers which exceeds the Note's then principal balance and all
accrued and unpaid interest thereon as an amount received in exchange for the
Note.
BACKUP WITHHOLDING
The backup withholding rules require a payor to deduct and withhold a
tax if (i) the payee fails to properly furnish a taxpayer identification number
("TIN") to the payor, (ii) the IRS notifies the payor that the TIN furnished by
the payee is incorrect, (iii) the payee has failed to report properly the
receipt of "reportable payments" and the IRS has notified the payor that
withholding is required, or (iv) there has been a failure of the payee to
certify under a penalty of perjury that a payee is not subject to withholding
under Section 3406 of the Code. As a result, if any one of the events discussed
above occurs with respect to a holder of Notes, the Company, its paying agent or
other withholding agent will be required to withhold a tax equal to 31% of any
"reportable payment" made in connection with the Notes to such holder. A
"reportable payment" includes, among other things, amounts paid in respect of
interest or original issue discount and amounts paid through brokers in
retirement of securities. Any amounts withheld from a payment to a holder under
the backup withholding rules will be allowed as a refund or credit against such
holder's federal income tax, provided, that the required information is
furnished to the IRS. Certain holders (including, among others, corporations and
certain tax-exempt organizations) are not subject to the backup withholding
rules.
CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of the Canadian federal and certain
provincial income tax consequences to a holder of the Notes or Exchange Notes
who is not a resident of Canada, who does not use or hold, and is not deemed to
use or hold, the Notes or Exchange Notes in the course of carrying on business
in Canada and is a person who, throughout the period during which the Notes are
held deals at arm's length with Canadian Abraxas and is not deemed to deal
otherwise than at arm's length with Canadian Abraxas. This summary has been
prepared by reference to the Income Tax Act (Canada) (the "Canadian Act"), the
Income Tax Regulations (the " Canadian Regulations"), with reference to all
published proposals for the amendment of the Canadian Act and the Canadian
Regulations.
RECEIPT OR DEEMED RECEIPT OF INTEREST
The terms of the Notes are such that interest paid or deemed to have
been paid (for example, where Notes are redeemed at a premium to their issue
price) on the Notes to a non-resident person with which Canadian Abraxas deals
at arm's length is exempt from taxation under the Canadian Act. Consequently,
provided the aforementioned conditions are met, holders of the Notes will on
disposition thereof not be subject to Canadian taxation in respect of the
receipt or deemed receipt of interest thereon.
DISPOSITIONS OF THE NOTES AND TAX CONSEQUENCES OF THE EXCHANGE OFFER
The Canadian Act does not impose a tax in respect of gains recognized
upon disposition of Notes held by non-resident persons who do not use or hold
the Exchange Notes or the Notes in the course of carrying on a business in
Canada. Consequently, provided that the aforementioned conditions are met, any
gain recognized by a holder of the Notes or the Exchange Notes on a sale,
redemption or other disposition (including any disposition under the Exchange
Offer) will not be subject to taxation under the Canadian Act. Any amount paid
upon a disposition of the Notes or the Exchange Notes which represents accrued
and unpaid interest will generally be treated as a deemed receipt of interest.
<PAGE>
TRANSACTIONS WITH RELATED PARTIES
Messrs. Watson, Phelps and Riggs were founders of Grey Wolf and in April
1995 purchased 900,000 shares of the capital stock of Grey Wolf (initially
representing 39% of the outstanding shares) for an aggregate of CDN$90,000 (or
CDN$0.10 per share) in cash. In January 1996, the Company purchased 20,325,096
shares of the capital stock of Grey Wolf (representing 78% of the outstanding
shares) for an aggregate of approximately CDN$4.1 million (or CDN$.20 per share)
in cash. Messrs. Bruton, Engle, Phelps, Riggs and Watson currently own 13.8% of
the issued and outstanding capital stock of Grey Wolf. In addition, Mr. Watson
owns options to purchase up to 450,000 shares of Grey Wolf's capital stock at an
exercise price of CDN$.10 per share.
Messrs. Bruton, Engle, Phelps and Riggs own options to purchase in the
aggregate up to 2,600,000 shares of capital stock of Cascade at an exercise
price of CDN$.20 per share, and Mr. Watson owns options to purchase up to
800,000 shares of Cascade's capital stock at an exercise price of CDN$.34 per
share. Cascade currently has 61,365,000 shares of capital stock outstanding.
Wind River Resources Corporation ("Wind River"), all of the capital
stock of which is owned by Mr. Watson, owns a twin-engine airplane. The airplane
is available for business use by employees of the Company from time to time at
$385 per hour. The Company paid Wind River a total of $80,678 for use of the
plane during 1995.
Mr. Watson and members of his family previously had an outstanding loan
of $328,259, including accrued interest, to Abraxas as of December 31, 1994.
Abraxas made principal and interest payments of $354,677 on the note during 1995
which represented payment of all principal and interest due and owing on the
note.
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.
BOOK-ENTRY; DELIVERY AND FORM
The Certificates representing the Exchange Notes will be issued in fully
registered form, without coupons and will be deposited with, or on behalf of,
the Depositary, and registered in the name of Cede & Co., as the Depository's
nominee in the form of a global Exchange Note certificate (the "Global
Certificate") or will remain in the custody of the Trustee.
Except as set forth below, the Global Certificate may be transferred, in
whole and not in part, only by the Depositary to its nominee to such Depositary
or another nominee of the Depositary or by the Depositary or its nominee to a
successor of the Depositary or a nominee of such successor.
The Issuers understand that the Depositary is a limited-purpose trust
company which was created to hold securities for its participating organizations
(the "Participants") and to facilitate the clearance and settlement of
transactions in such securities between Participants through electronic
book-entry changes in accounts of its Participants. Participants include
securities brokers and dealers (including the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organizations. Access to the
Depository's book-entry system is also available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("indirect
participants"). Persons who are not participants may beneficially own securities
held by the Depositary through Participants or indirect participants.
Pursuant to procedures established by the Depositary (i) upon deposit of
the Global Certificate, the Depositary will credit the accounts of Participants
with portions of the principal amount of the Global Certificate and (ii)
ownership of the Exchange Notes will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by the Depositary
(with respect to the interest on the Depository's participants), the
Depository's Participants and the Depository's indirect participants.
The laws of some jurisdictions require that certain persons take
physical delivery in definitive form of securities that they own. Consequently,
the ability to transfer interests in the Global Certificate will be limited to
such extent.
So long as the nominee of the Depositary is the registered owner of the
Global Certificate, such nominee will be considered the sole owner or holder of
the Exchange Notes for all purposes under the Indenture. Except as provided
below, the owners of interests in the Global Certificate will not be entitled to
have Exchange Notes registered in their names, will not receive or be entitled
to receive physical delivery of Exchange Notes in definitive form and will not
be considered the owners or holders thereof under the Indenture. As a result,
the ability of a person having a beneficial interest in Exchange Notes
represented by the Global Certificate to pledge such interest to persons or
entities that do not participate in the Depository's system or to otherwise take
actions in respect to such interest may be affected by the lack of a physical
certificate evidencing such interest.
Neither the Issuers, the Trustee nor any paying agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of interests in the Global Certificate or for
maintaining, supervising or reviewing any records relating to such interests.
Principal and interest payments on the Global Certificate registered in
the name of the Depository's nominee will be made by the Issuers or through a
paying agent to the Depository's nominee as the registered owner of the Global
Certificate. Under the terms of the Indenture, the Issuers and the Trustee will
treat the persons in whose names the Exchange Notes are registered as the owners
of such Exchange Notes for the purpose of receiving payments of principal and
interest on such Exchange Notes and for all other purposes whatsoever.
Therefore, neither the Issuers, the Trustee nor any paying agent has any direct
responsibility or liability for the payment of principal or interest on the
Exchange Notes to owners of interests in the Global Certificate. The Depositary
has advised the Issuers and the Trustee that its present practice is, upon
receipt of any payment of principal or interest, to credit immediately the
account of the Participants with payments in amounts proportionate to their
respective holdings in principal amount of interests in the Global Certificate
as shown on the records of the Depositary. Payments by Participants and indirect
participants to owners of interests in the Global Certificate will be governed
by standing instructions and customary practices, as is now the case with
securities held for the accounts of customers in bearer form or registered in
"street name," and will be the responsibility of such participants or indirect
participants.
If the Depositary is at any time unwilling or unable to continue as
depositary and a successor depositary is not appointed by the Issuers within 90
calendar days, the Issuers will issue Exchange Notes in certificated form in
exchange for the Global Certificate. In addition, the Issuers may at any time
determine not to have the Exchange Notes represented by a Global Certificate,
and, in such event, will issue Exchange Notes in certificated form in exchange
for the Global Certificate. In either instance, an owner of an interest in the
Global Certificate would be entitled to physical delivery of such Exchange Notes
in certificated form. Exchange Notes so issued in certificated form will be
issued in denominations of $1,000 and integral multiples thereof and will be
issued in registered form only.
Neither the Issuers nor the Trustee shall be liable for any delay by the
Depositary or its nominee in identifying the beneficial owners or the related
Exchange Notes, and each such person may conclusively rely on, and shall be
protected in relying on, instructions from the Depositary or its nominee for all
purposes (including with respect to the registration and delivery, and the
respective principal amounts, of the Exchange Notes to be issued).
<PAGE>
AVAILABLE INFORMATION
The Issuers have filed with the Commission a Registration Statement on
Form S-4 (the "Exchange Offer Registration Statement", which term shall
encompass all amendments, exhibits, annexes and schedules thereto) pursuant to
the Securities Act and the rules and regulations promulgated thereunder,
covering the Exchange Notes being offered hereby. This Prospectus does not
contain all the information set forth in the Exchange Offer Registration
Statement. For further information with respect to the Issuers and the Exchange
Offer, reference is made to the Exchange Offer Registration Statement.
Statements made in this Prospectus as to the contents of any contract, agreement
or other document referred to are not necessarily complete. With respect to each
such contract, agreement or other document filed as an exhibit to the Exchange
Offer Registration Statement, reference is made to the exhibit for a more
complete description of the document or matter involved, and each such statement
shall be deemed qualified in its entirety by such reference. The Exchange Offer
Registration Statement, including the exhibits thereto, can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Regional
Offices of the Commission at 7 World Trade Center, New York, New York 10048 and
at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates.
The Company is subject to the informational reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy and information statements and other
information with the Commission. Such material filed by the Company with the
Commission may be inspected by anyone without charge at the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Commission located at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of such material may also be obtained at the Public Reference Section of
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of prescribed fees. The Common Stock of the
Company is quoted on The Nasdaq National Market under the symbol "AXAS" and such
reports, proxy and information statements and other information concerning the
Company are available at the offices of The Nasdaq National Market located at
1735 K Street, N.W., Washington, D.C. 20006.
In the event that the Company ceases to be subject to the informational
reporting requirements of the Exchange Act, the Issuers have agreed that, so
long as the Series A Notes or the Exchange Notes remain outstanding, they will
file with the Commission and distribute to holders of the Series A Notes or the
Exchange Notes, as applicable, copies of the financial information that would
have been contained in annual reports and quarterly reports, including
management's discussion and analysis of financial condition and results of
operations, that the Company would have been required to file with the
Commission pursuant to the Exchange Act. Such financial information shall
include annual reports containing consolidated financial statements and notes
thereto, together with an opinion thereon expressed by an independent public
accounting firm, as well as quarterly reports containing unaudited condensed
consolidated financial statements for the first three quarters of each fiscal
year. The Company will also make such reports available to prospective
purchasers of the Series A Notes or the Exchange Notes, as applicable,
securities analysts and broker-dealers upon their request. In addition, the
Issuers have agreed that for so long as any of the Series A Notes remain
outstanding they will make available to any prospective purchaser of the Series
A Notes or beneficial owner of the Series A Notes in connection with any sale
thereof the information required by Rule 144A(d)(4) under the Securities Act,
until such time as the Issuers have either exchanged the Series A Notes for
securities identical in all material respects which have been registered under
the Securities Act or until such time as the holders thereof have disposed of
such Series A Notes pursuant to an effective registration statement filed by the
Issuers.
ENFORCEABILITY OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS
Canadian Abraxas is a Canadian corporation, certain of its officers and
directors may be residents of various jurisdictions outside the United States
and its Canadian counsel, Burnet, Duckworth & Palmer, 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,
Burnet, Duckworth & Palmer, 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.
LEGAL MATTERS
Certain legal matters related to the Notes offered hereby are being
passed upon for the Company by Cox & Smith Incorporated, San Antonio, Texas and
for Canadian Abraxas by Burnet, Duckworth and Palmer, Barristers and Solicitors,
Calgary, Alberta.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1995 and 1994 and for each of the three years in the period ended December 31,
1995, the statements of Combined Oil and Gas Revenues and Direct Operating
Expenses of Certain Overriding Royalty Interests in the Portilla Field Acquired
by Abraxas Petroleum Corporation for the years ended December 31, 1994 and 1995
and the balance sheet of Canadian Abraxas Petroleum Limited at September 30,
1996 included in this Prospectus and the Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
reports appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The Statements of Revenues and Direct Operating Expenses of Enserch
Exploration, Inc.'s Wamsutter Area Package for the three years ended December
31, 1995, 1994 and 1993 included in this Prospectus and the Registration
Statement, have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
The financial statements oc CGGS Canadian Gas Gathering Systems, Inc. as
of October 31, 1995 and 1994 and for the years ended October 31, 1995 1994 and
1993 have been included herin and in the Registration Statement in reliance upon
the report of KPMG, Charterd Accountants appearing elsewhere herin, and upon the
authority of said firm as experts in accounting and auditing.
The historical reserve information prepared by DeGolyer and MacNaughton
and Sproule Associates Limited included in this Prospectus and the Registration
Statement has been included herein in reliance upon the authority of such firms
as experts with respect to matters contained in such reserve reports.
<PAGE>
GLOSSARY OF TERMS
Unless otherwise indicated in this Prospectus, natural gas volumes are
stated at the legal pressure base of the State or area in which the reserves are
located at 60 degrees Fahrenheit. Natural gas equivalents are determined using
the ratio of six Mcf of natural gas to one barrel of crude oil, condensate or
NGLs.
The following definitions shall apply to the technical terms used in
this Prospectus.
"Bbl" means barrel or barrels.
"Bblpd" means barrels per day.
"Bcf" means billion cubic feet.
"BOE" means barrel of crude oil equivalent.
"DD&A" means depletion, depreciation and amortization.
"Developed acreage" means acreage which consists of acres spaced or
assignable to productive wells.
"Development well" means a well drilled within the proved area of a
crude oil or natural gas reservoir to the depth of stratigraphic horizon (rock
layer or formation) known to be productive for the purpose of extraction of
proved crude oil or natural gas reserves.
"Dry hole" means an exploratory or development well found to be
incapable of producing either crude oil or gas in sufficient quantities to
justify completion as a crude oil or natural gas well.
"EBITDA" means earnings from continuing operations before income taxes,
interest expense, DD&A and other non-cash charges.
"EBITDA Margin" means EBITDA divided by total operating revenue.
"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.
"Finding cost", expressed in dollars per BOE, is calculated by dividing
the amount of total exploration and development capital expenditures (excluding
any amortization with respect to deferred financing fees) by the amount of
proved reserves added during the same period (including the effect on proved
reserves of reserve revisions).
"G&A" means general and administrative.
"Gross" natural gas and crude oil wells or "gross" wells or acres is the
number of wells or acres in which the Company has an interest.
"LOE" means lease operating expenses and production taxes.
"MBbl" means thousand barrels.
"MBOE" means thousand barrels of crude oil equivalent.
"Mcf" means thousand cubic feet.
"Mcfpd" means thousand cubic feet per day.
"MMBbls" means million barrels of crude oil.
"MMBOE" means million barrels of crude oil equivalent.
"MMBTU" means million British Thermal Units.
"MMcf" means million cubic feet.
"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 Company's working interest in such
wells or acres.
"NGL" means natural gas liquid.
"PV-10" means estimated future net revenue, discounted at a rate of 10%
per annum, before income taxes and with no price or cost escalation or
de-escalation in accordance with guidelines promulgated by the Securities and
Exchange Commission.
"Production costs" means lease operating expenses and taxes on natural
gas and crude oil production.
"Productive wells" mean producing wells and wells capable of production.
"Proved developed reserves" includes only those proved reserves expected
to be recovered from existing completion intervals in existing wells and those
reserves that exist behind the casing of existing wells when the cost of making
such reserves available for production is relatively small compared to the cost
of a new well.
"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.
INDEX TO FINANCIAL STATEMENTS
Page
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
Report of Independent Auditors F-2
Consolidated Balance Sheets at December 31, 1994 and 1995
and September 30, 1996 (Unaudited) F-3
Consolidated Statements of Operations for the years ended
December 31, 1993, 1994, and 1995 and for the nine months
ended September 30, 1995 and 1996 (Unaudited) F-5
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1993, 1994, and 1995 and for the nine
months ended September 30, 1996 (Unaudited) F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1993, 1994, and 1995 and for the nine months
ended September 30, 1995 and 1996 (Unaudited) F-9
Notes to Consolidated Financial Statements F-12
Supplemental Information Relating to Oil and Gas Producing Companies F-34
CGGS CANADIAN GAS GATHERING SYSTEMS INC.
Auditors' Report to the Directors F-38
Balance Sheets at October 31, 1994 and 1995
and October 31, 1996 (Unaudited) F-39
Statements of Earnings (Loss) and Deficit for the years ended
October 31, 1993, 1994, and 1995 and for the year ended
October 31, 1996 (Unaudited) F-40
Statements of Changes in Financial Position for the years
ended October 31, 1993, 1994, and 1995 and for the year ended
October 31, 1996 (Unaudited) F-41
Notes to Financial Statements F-42
ENSERCH EXPLORATION, INC.'S WAMSUTTER AREA PACKAGE
Independent Auditors' Report F-49
Statements of Revenues and Direct Operating Expenses for the
years ended December 31, 1993, 1994, and 1995 and for the
nine months ended September 30, 1995 and 1996 (Unaudited) F-50
Notes to Statements of Revenues and Direct Operating Expenses F-51
CERTAIN OVERRIDING ROYALTY INTERESTS IN THE PORTILLA FIELD ACQUIRED BY
ABRAXAS PETROLEUM CORPORATION
Report of Independent Auditors F-53
Statements of Combined Oil and Gas Revenues and Direct
Operating Expenses for the years ended December 31, 1994
and 1995 and for the nine months ended September 30, 1995
and 1996 (Unaudited) F-54
Notes to Statements of Combined Oil and Gas Revenues and
Direct Operating Expenses F-55
CANADIAN ABRAXAS PETROLEUM LIMITED
Report of Independent Auditors F-59
Balance Sheet at September 30, 1996 F-60
Note to Balance Sheet F-61
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
Abraxas Petroleum Corporation
We have audited the accompanying consolidated balance sheets of Abraxas
Petroleum Corporation and Subsidiaries as of December 31, 1994 and 1995, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Abraxas
Petroleum Corporation and Subsidiaries at December 31, 1994 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
San Antonio, Texas
March 19, 1996, except for paragraph 2
of Note 16, as to which the date is March 21, 1996
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31 September 30
--------------------------------------
1994 1995 1996
------------------ ------------------- -------------------
(Unaudited)
<S> <C> <C> <C>
Current assets:
Cash ............................................. $ 5,297 $ 4,249,767 $ 9,992,902
Accounts receivable, less allowance for doubtful
accounts of $44,369, $35,900, and $35,900 at
December 31, 1994 and 1995, and September 30,
1996, respectively:
Joint owners ................................. 1,260,090 1,334,873 593,481
Oil and gas production sales ................. 2,206,037 2,945,681 2,748,505
Affiliates, officers, and shareholders ....... 66,497 53,224 59,463
Other ........................................ 54,646 60,367 563,081
------------------ ------------------- -------------------
3,587,270 4,394,145 3,964,530
Equipment inventory .............................. 51,309 80,070 142,023
Other current assets ............................. 126,664 124,820 138,986
------------------ ------------------- -------------------
Total current assets ........................... 3,770,540 8,848,802 14,238,441
Property and equipment:
Oil and gas properties, including $8,000,000
excluded from the amortization base at September
30, 1996 and gas processing plants, less
accumulated depreciation, depletion, and
amortization of $24,338,518, $29,651,521, and
$37,601,185 at December 31, 1994 and 1995, and
September 30, 1996, respectively ............... 70,178,563 74,475,683 111,103,581
Other property and equipment:
Land ........................................... 152,536 139,466 139,466
Equipment ...................................... 552,906 692,508 969,835
Leasehold improvements ......................... - 37,430 129,398
Less accumulated depreciation and amortization . (146,158) (266,686) (366,586)
------------------ ------------------- -------------------
Net property and equipment .......................... 70,737,847 75,078,401 111,975,694
Investments in and advances to oil and gas
partnership ........................................ - - 2,396,992
Deferred financing fees, net of accumulated
amortization of $75,000, $289,231, and
$850,650 at December 31, 1994 and 1995,
and September 30, 1996, respectively ............. 381,284 353,514 970,807
Restricted cash ..................................... 130,000 134,419 91,160
Marketable securities ............................... 326,000 326,000 -
Other assets ........................................ 15,188 326,222 766,994
------------------ ------------------- -------------------
Total assets ....................................... $ 75,360,859 $ 85,067,358 $ 130,440,088
================== =================== ===================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31 September 30
--------------------------------------
1994 1995 1996
------------------ ------------------- -------------------
(Unaudited)
<S> <C> <C> <C>
Current liabilities:
Accounts payable ................................. $ 3,813,272 $ 3,928,824 $ 4,694,034
Oil and gas production payable ................... 867,756 1,787,152 1,414,212
Accrued interest ................................. 336,268 362,750 -
Other accrued expenses ........................... 116,806 46,207 356,263
Dividends payable on preferred stock ............. 91,462 91,482 91,482
Liabilities related to discontinued operations ... 150,000 - -
------------------ ------------------- -------------------
Total current liabilities ....................... 5,375,564 6,216,415 6,555,991
Long-term debt:
Financing agreements ............................. 40,906,652 41,556,651 85,000,000
Principal shareholder ............................ 328,259 - -
------------------ ------------------- -------------------
41,234,911 41,556,651 85,000,000
Other long-term obligations ......................... 61,696 44,737 123,538
Deferred income taxes ............................... 186,749 186,749 186,749
Minority interest in foreign subsidiary ............. - - 2,153,223
Commitments and contingencies
Shareholders' equity:
Preferred stock 8%, authorized 1,000,000
shares; issued and outstanding 45,741 shares
at December 31, 1994 and 1995, and at September
30, 1996 ....................................... 4,574,100 457 457
Common stock, par value $.01 per share -
authorized 50,000,000 shares; issued and
outstanding 4,461,890, 5,799,762, and 5,804,812
shares at December 31, 1994 and 1995, and
September 30, 1996, respectively ............... 44,620 57,999 58,050
Additional paid-in capital ....................... 36,216,694 50,914,078 50,920,154
Unrealized holding loss on securities ............ (244,000) (244,000) -
Retained deficit ................................. (12,089,475) (13,663,903) (14,184,400)
Treasury stock, at cost, -0- , 2,571, and 70,711
shares at December 31, 1994 and 1995, and
September 30, 1996, respectively ............... - (1,825) (374,079)
Foreign currency translation adjustment ............ - - 405
------------------ ------------------- -------------------
Total shareholders' equity .......................... 28,501,939 37,062,806 36,420,587
------------------ ------------------- -------------------
Total liabilities and shareholders' equity $ 75,360,859 $ 85,067,358 $ 130,440,088
================== =================== ===================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended
Year Ended December 31 September 30
--------------------------------------------------------- ------------------------------------
1993 1994 1995 1995 1996
----------------- ------------------- ------------------- ----------------- -------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Oil and gas
production
sales .......... $ 7,274,676 $ 11,114,028 $ 13,659,556 $ 9,794,667 $ 11,785,848
Rig revenues ..... 118,081 160,605 108,400 92,250 106,000
Other ........... 101,580 73,882 48,559 42,257 17,210
----------------- ------------------- ------------------- ----------------- -------------------
7,494,337 11,348,515 13,816,515 9,929,174 11,909,058
Operating costs and
expenses:
Lease operating
and production
taxes 2,895,651 3,693,085 4,333,240 3,182,567 3,295,659
Depreciation,
depletion, and
amortization 2,373,400 3,790,023 5,433,531 3,540,882 4,145,047
Abandoned prospects 22,343 - - - -
Rig operations 68,118 132,522 125,353 94,978 112,581
General and
Administrative 509,511 810,315 1,041,740 768,575 1,250,458
Provision for losses
on accounts
receivable 13,000 - - - -
Hedging loss ..... - - - - 510,767
----------------- ------------------- ----------------- ------------------- -------------------
5,882,023 8,425,945 10,933,864 7,587,002 9,314,512
----------------- ------------------- ------------------- ----------------- -------------------
1,612,314 2,922,570 2,882,651 2,342,172 2,594,546
Other (income)expense:
Interest income .. (38,917) (16,411) (33,749) (8,392) (155,674)
Amortization of
deferred
financing fee 649,000 400,000 214,231 120,000 192,419
Amortization ..... 100,000 66,667 - - -
Interest expense . 2,530,669 2,359,310 3,910,669 2,915,260 2,141,816
Loss (recovery) on
marketable securities (235,500) - - - 235,197
----------------- ------------------- ------------------- ----------------- -------------------
3,005,252 2,809,566 4,091,151 3,026,868 2,413,758
----------------- ------------------- ------------------- ----------------- -------------------
Income (loss) from
continuing
operations before
taxes and
extraordinary
items .......... (1,392,938) 113,004 (1,208,500) (684,696) 180,788
Deferred income tax
expense (186,749) - - - -
Minority interest in
income of
consolidated
foreign
subsidiary ....... - - - - 57,839
----------------- ------------------- ------------------- ----------------- -------------------
Income (loss) from
continuing
operations before
extraordinary
items ............ (1,579,687) 113,004 (1,208,500) (684,696) 122,949
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
Nine Months Ended
Year Ended December 31 September 30
--------------------------------------------------------- ------------------------------------
1993 1994 1995 1995 1996
----------------- ------------------- ------------------- ----------------- -------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Discontinued operations:
Loss from
operations of
discontinued
coal properties $ (279,673) $ (347,596) $ - $ - $ -
Loss on disposal
of discontinued
coal properties - (987,543) - - -
----------------- ------------------- ----------------- ------------------- -------------------
Loss from discontinued
operatings (279,673) (1,335,139) - - -
----------------- ------------------- ----------------- ------------------- -------------------
Income (loss) before
extraordinary items (1,859,360) (1,222,135) (1,208,500) (684,696) 122,949
Extraordinary items:
Gain from partial
extinguishment
of debt 2,462,664 - - - -
Debt extinguishment
costs (3,036,000) (1,171,832) - - (369,000)
----------------- ------------------- ------------------- ----------------- -------------------
Net income (loss) . (2,432,696) (2,393,967) (1,208,500) (684,696) (246,051)
Less dividend
requirement on
cumulative
preferred stock (186,285) (182,924) (365,928) (274,464) (274,446)
----------------- ------------------- ------------------- ----------------- -------------------
Net income (loss)
applicable to
common stock ..... $ (2,618,981) $ (2,576,891) $ (1,574,428) $ (959,160) $ (520,497)
================= =================== =================== ================= ===================
Income (loss) per
common share:
Income (loss)
from
continuing
operations $ (.91) $ (.02) $ (.34) $ (.21) $ (.03)
Discontinued
operations (.14) (.31) - - -
Extraordinary
items .... (.29) (.27) - - (.06)
----------------- ------------------- ------------------- ----------------- -------------------
Net loss per common
share ........... $ (1.34) $ (.60) $ (.34) $ (.21) $ (.09)
================= =================== =================== ================= ===================
Weighted average shares
outstanding 1,947,256 4,309,878 4,635,412 4,456,462 5,804,145
================= =================== =================== ================= ===================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Preferred Stock Common Stock Treasury Stock
Shares Amount Shares Amount Shares Amount
------------- ------------ ------------ -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993 ... 24,910 $ 2,491,000 1,362,600 $ 13,626 -- $ --
Issuance of common stock
for acquisitions and
compensation .............. -- -- 154,394 1,543 -- --
Conversion of preferred
stock and related
dividends in arrears
into common stock ......... (24,910) (2,491,000) 317,539 3,175 -- --
Issuance of common stock .... -- -- 2,250,000 22,500 -- --
Options exercised ........... -- -- 1,250 13 -- --
Issuance of common stock
for debt prepayment ....... -- -- 116,666 1,167 -- --
Net loss for the year ....... -- -- -- -- -- --
------------- ------------ ------------ -------- -------- ---------
Balance at December 31, 1993 . -- -- 4,202,449 42,024 -- --
Issuance of common stock
for compensation .......... -- -- 10,033 101 -- --
Issuance of preferred
stock for acquisition ..... 45,741 4,574,100 -- -- -- --
Options and warrants
exercised ................. -- -- 249,408 2,495 -- --
Changes in unrealized
holding loss on
securities ................ -- -- -- -- -- --
Dividend on preferred
stock ..................... -- -- -- -- -- --
Net loss for the year ....... -- -- -- -- -- --
------------- ------------ ------------ -------- -------- ---------
Balance at December 31, 1994 . 45,741 4,574,100 4,461,890 44,620 -- --
Issuance of common stock
for compensation .......... -- -- 7,872 79 -- --
Issuance of common stock .... -- -- 1,330,000 13,300 -- --
Treasury stock purchased, net -- -- -- -- 2,571 (1,825)
Changes in preferred
stock par value ........... -- (4,573,643) -- -- -- --
Dividend on preferred stock . -- -- -- -- -- --
Net loss for the year ....... -- -- -- -- -- --
------------- ------------ ------------ -------- -------- ---------
Balance at December 31, 1995 . 45,741 $ 457 5,799,762 57,999 2,571 (1,825)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
Additional Unrealized Foreign
Paid-in Holding Loss Retained Currency
Capital on Securities Deficit Translation Total
------------ ---------------- -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993 ... $ 5,874,383 $ -- $ (6,145,763) $ -- $ 2,233,246
Issuance of common stock
for acquisitions and
compensation .............. 964,180 -- -- -- 965,723
Conversion of preferred
stock and related
dividends in arrears
into common stock ......... 3,421,950 -- (934,125) -- --
Issuance of common stock .... 23,022,635 -- -- -- 23,045,135
Options exercised ........... 6,863 -- -- -- 6,876
Issuance of common stock
for debt prepayment ....... 1,323,833 -- -- -- 1,325,000
Net loss for the year ....... -- -- (2,432,696) -- (2,432,696)
------------ ---------------- -------------- ----------- ---------------
Balance at December 31, 1993 . 34,613,844 -- (9,512,584) -- 25,143,284
Issuance of common stock
for compensation .......... 106,652 -- -- -- 106,753
Issuance of preferred
stock for acquisition ..... -- -- -- -- 4,574,100
Options and warrants
exercised ................. 1,496,198 -- -- -- 1,498,693
Changes in unrealized
holding loss on
securities ................ -- (244,000) -- -- (244,000)
Dividend on preferred
stock ..................... -- -- (182,924) -- (182,924)
Net loss for the year ....... -- -- (2,393,967) -- (2,393,967)
------------ ---------------- -------------- ----------- ---------------
Balance at December 31, 1994 . 36,216,694 (244,000) (12,089,475) -- 28,501,939
Issuance of common stock
for compensation .......... 73,936 -- -- -- 74,015
Issuance of common stock .... 10,049,805 -- -- -- 10,063,105
Treasury stock purchased, net -- -- -- -- (1,825)
Changes in preferred
stock par value ........... 4,573,643 -- -- -- --
Dividend on preferred stock . -- -- (365,928) -- (365,928)
Net loss for the year ....... -- -- (1,208,500) -- (1,208,500)
Balance at December 31, 1995 . $ 50,914,078 (244,000) (13,663,903) -- 37,062,806
------------ ---------------- -------------- ----------- ---------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
Preferred Stock Common Stock Treasury Stock
Shares Amount Shares Amount Shares Amount
------------- ------------ ------------ -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
for compensation
(Unaudited) ........... -- $ -- 5,050 $ 51 -- --
Expenses paid related to
private placement
offering (Unaudited) .. -- -- -- -- -- --
Treasury stock
purchased, net
(Unaudited) ........... -- -- -- -- 68,140 (372,254)
Dividend on preferred
stock (Unaudited) ..... -- -- -- -- -- --
Foreign currency
translation adjustment
(Unaudited) ............ -- -- -- -- -- --
Changes in unrealized
holding loss on
securities ............ -- -- -- -- -- --
Net income (loss) for
the nine month period
(Unaudited) ........... -- -- -- -- -- --
------------- ------------ ------------ -------- ------- ----------
Balance at September 30,
1996 (Unaudited) ........ 45,741 $ 457 5,804,812 $ 58,050 70,711 $(374,079)
============= ============ ============ ========= ======= ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
Additional Unrealized Foreign
Paid-in Holding Loss Retained Currency
Capital on Securities Deficit Translation Total
------------ ---------------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock for
for compensation
(Unaudited) ........... $ 42,829 $ -- $ -- $ -- $ 42,880
Expenses paid related to
private placement
offering (Unaudited) .. (36,753) -- -- -- (36,753)
Treasury stock
purchased, net
(Unaudited) ........... -- -- -- -- (372,254)
Dividend on preferred
stock (Unaudited) ..... -- -- (274,446) -- (274,446)
Foreign currency
translation adjustment
(Unaudited) ............ -- -- -- 405 405
Changes in unrealized
holding loss on
securities ............ -- 244,000 -- -- 244,000
Net income (loss) for
the nine month period
(Unaudited) ........... -- -- (246,051) -- (246,051)
------------ -------------- -------------- ----------- ---------------
Balance at September 30,
1996 (Unaudited) ........ $ 50,920,154 -- $(14,184,400) $ 405 $ 36,420,587
============ ============== ============== =========== ===============
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
F-1
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
Year Ended December 31 September 30
-------------------------------------------------------- -------------------------------------
1993 1994 1995 1995 1996
------------------ ------------------ ------------------ ----------------- -------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (2,432,696) $ (2,393,967) $ (1,208,500) $ (684,696) $ (246,051)
Adjustments to
reconcile net loss
to net cash provided
by operating
activities:
Minority interest
in income of
foreign subsidiary - - - - 57,839
Abandoned
prospects 22,343 - - - -
Loss on disposal
of discontinued
operations - 987,543 - - -
Depreciation,
depletion, and
amortization 2,373,400 3,790,023 5,433,531 3,540,882 4,145,047
Amortization of
deferred
financing fees 649,000 400,000 214,231 120,000 192,419
Issuance of common
stock - - - 55,512 -
Amortization 100,000 66,667 - - -
Provision for
deferred income
taxes 186,749 - - - -
(Recovery) on
marketable
securities (235,500) - - - -
Provision for
losses on
accounts
receivable 13,000 - - - -
Net loss from debt
restructurings .. 573,336 1,171,832 - - 369,000
Changes in
operating assets
and liabilities:
(Increase)
decrease in
accounts
receivable (1,898,220) (814,053) (806,875) (1,892,866) 429,615
(Increase)
decrease in
equipment
inventory 170,030 (9,208) (28,761) (16,872) (61,953)
(Increase)
decrease in
other assets 55,902 (73,912) 1,831 (127,947) (340,166)
Decrease in
notes receivable 38,484 - - - -
(Decrease)
increase in
accounts payable
accrued expenses
and dividends
payable 1,053,000 1,274,702 (78,545) 107,469 712,516
Decrease in
accounts
payable to
affiliates (63,323) (42,839) - - -
Decrease in
advances on
drilling in
progress (242,823) - - - -
Increase
(decrease) in
oil and gas
production
payable 301,952 (62,493) 919,396 325,992 (372,940)
------------------ ------------------ ------------------ ----------------- -------------------
Net cash provided by
operating activities 664,634 4,294,295 4,446,308 1,427,474 4,885,326
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine Months Ended
Year Ended December 31 September 30
-------------------------------------------------------- -------------------------------------
1993 1994 1995 1995 1996
------------------ ------------------ ------------------ ----------------- -------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
INVESTING ACTIVITIES
Development of oil and
gas properties $ (5,166,747) $ (7,150,943) $ (11,398,088) $ (8,934,853) $ (10,016,286)
Purchase of oil and gas
producing properties (14,393,911) (28,900,000) (635,435) (153,139) (46,430,993)
Purchase of gas
processing plants
and equipment (3,172,430) (123,072) (83,436) (45,843) (123,532)
Proceeds from sale of
oil and gas
properties and
Eequipment inventory 767,812 69,717 2,556,491 2,724,001 16,794,137
Purchase of interest in
real estate
partnership - - (311,021) - -
Purchase of equipment (540,515) (158,268) (139,602) (89,252) (369,295)
Assets of acquired
companies, net of
cash - - - - (645,001)
Investment in and
advances to oil and
gas partnership - - - - (2,396,992)
Purchase of interest in
real estate
partnership - - - - (27,810)
Minority interest
related to assets
acquired of foreign
subsidiary - - - - 2,095,384
Acquisition costs
allocated to
deferred financing
fees (2,380,000) - - - -
Purchases of unproved
oil and gas
prospects, net - (4,786) - - -
Development of coal
properties (46,017) - - - -
(Purchase) sale of
marketable
securities (300,000) - - - -
Sale of common stock in
Castle Minerals - 371,000 - - -
----------------- ------------------- ------------------ ----------------- -------------------
Net cash (used in)
provided by
investing activities (25,231,808) (35,896,352) (10,011,091) (6,499,086) (41,120,388)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine Months Ended
Year Ended December 31 September 30
-------------------------------------------------------- -------------------------------------
1993 1994 1995 1995 1996
------------------ ------------------ ------------------ ----------------- -------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
FINANCING ACTIVITIES
Preferred stock
dividends $ - $ (91,462) $ (365,928) $ (274,464) $ (274,464)
Issuance of common
stock, net of
expenses 23,052,011 1,498,693 10,063,105 - 30,313
Purchase of treasury
stock, net - - (1,825) - (372,254)
Proceeds from long-term
borrowings 20,631,793 40,906,652 5,950,000 2,750,000 90,400,000
Proceeds from short-term
borrowings - - - 3,000,000 -
Payments on long-term
borrowings (17,236,327) (12,658,997) (5,645,219) (10,552) (46,956,650)
Loan origination fees - (451,116) (186,461) (171,996) (970,807)
Increase in long-term
liabilities - - - - 78,800
----------------- ------------------- ------------------ ----------------- -------------------
Net cash provided by
(used in) financing
activities 26,447,477 29,203,770 9,813,672 5,292,988 41,934,938
----------------- ------------------- ------------------ ----------------- -------------------
Increase (decrease) in
cash 1,880,303 (2,398,287) 4,248,889 221,376 5,699,876
Cash at beginning of
year 653,281 2,533,584 135,297 135,297 4,384,186
----------------- ------------------- ------------------ ----------------- -------------------
Cash at end of year,
including restricted
cash $ 2,533,584 $ 135,297 $ 4,384,186 $ 356,673 $ 10,084,062
================= =================== ================== ================= ===================
SUPPLEMENTAL DISCLOSURES
Supplemental
disclosures of cash
flow information:
Interest paid ..... $ 2,567,785 $ 2,150,425 $ 3,884,187 $ 2,953,296 $ 2,141,816
================= =================== ================== ================= ===================
Supplemental schedule
of noncash investing
and financing
activities:
Accrual of
preferred
dividends ....... $ - $ - $ - $ 91,482 $ 91,482
================= =================== ================== ================= ===================
Exchange of common
stock for
acquisitions and
compensation ....... $ 965,723 $ 106,753 $ 74,015 $ 55,512 $ 42,880
================= =================== ================== ================= ===================
Exchange of
treasury stock
for noncompete
agreement ....... $ - $ - $ - $ 70,625 $ -
================= =================== ================== ================= ===================
Exchange of
preferred stock
in exchange for
oil and gas
producing
properties ...... $ - $ 4,574,100 $ - $ - $ -
================= =================== ================== ================= ===================
Issuance of
subsidiary
preferred stock
in
extinguishment
of subsidiary
debt ............ $ 840,000 $ - $ - $ - $ -
================= =================== ================== ================= ===================
Conversion of
preferred stock
and related
dividend in
arrears into
common stock .... $ 3,425,125 $ - $ - $ - $ -
================= =================== ================== ================= ===================
</TABLE>
See accompanying notes.
<PAGE>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993, 1994, and 1995
(Information as to September 30, 1996 and for the Nine Months
Ended September 30, 1995 and 1996 is Unaudited)
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 and in the Permian Basin of west Texas for sale into the U.S.
energy market. The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The accompanying unaudited interim consolidated financial statements
include all adjustments, consisting of only normal recurring adjustments, that,
in the opinion of management, are necessary to present fairly the financial
position as of September 30, 1996 and the results of operations and cash flows
for the nine months ended September 30, 1995 and 1996. The results for the nine
months ended September 30, 1996 are not necessarily indicative of the results to
be expected for the full year. Information as of September 30, 1996 and for the
nine months ended September 30, 1995 and 1996, as well as disclosures of events
occurring after March 1996 are unaudited.
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.
MARKETABLE SECURITIES
Management determines the appropriate classification of marketable
equity and debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Debt securities that the Company has
both the positive intent and ability to hold to maturity are carried at
amortized cost. Debt securities that the Company does not have the positive
intent and ability to hold to maturity and all marketable equity securities are
classified as available-for-sale or trading and carried at fair value.
Unrealized holding gains and losses on securities classified as
available-for-sale are carried as a separate component of shareholders' equity.
Unrealized holding gains and losses on securities classified as trading are
reported in earnings.
ACCOUNTS RECEIVABLE
Substantially all accounts receivable relate to transactions relating
to crude oil and natural gas activities with customers or joint owners in the
United States. The Company does not require collateral for its receivables.
<PAGE>
EQUIPMENT INVENTORY
Equipment inventory consists of casing and tubing, 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, exploration, and development are capitalized. The Company does not
capitalize internal costs, except for the expenses of its geologist.
Depreciation, depletion, and amortization (DD&A) of crude oil and natural gas
properties are based on the unit-of-production method. If unamortized
capitalized costs are in excess of the discounted present value of future cash
flows relating to proved reserves (ceiling), a charge to operations is recorded.
No gain or loss is recognized upon sale or disposition of crude oil and natural
gas properties, except in unusual circumstances.
OTHER PROPERTY AND EQUIPMENT
Other property and equipment are recorded on the basis of cost.
Depreciation is provided at amounts calculated to amortize costs of the assets
over their 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.
STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to
employees and directors with an exercise price equal to the fair value of the
shares at the date of grant. The Company accounts for stock option grants in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and, accordingly, recognizes no compensation expense for the stock option
grants.
REVENUE RECOGNITION AND MAJOR CUSTOMERS
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. For the years ended December 31, 1993, 1994, and 1995, the Company sold
30%, 35%, and 20%, respectively, of its total crude oil and natural gas sales to
one purchaser. Additionally, for the years ended December 31, 1993, 1994, and
1995, approximately 80%, 74%, and 64%, respectively, of the Company's total
crude oil and natural gas sales were made to five purchasers.
DEFERRED FINANCING FEES
Deferred financing fees are being amortized on a level yield basis over
the term of the related debt.
<PAGE>
FEDERAL INCOME TAXES
The Company records income taxes under Financial Accounting Standards
Board Statement No. 109 using the liability method. Under this method, deferred
tax assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is computed by dividing net income
(loss) (adjusted for dividends on preferred stock) by the weighted average
number of shares of common stock outstanding during the period. The weighted
average number of shares includes the number of shares that would be issuable
under the Contingent Value Rights Agreement (CVR Agreement), if the current
market value of the Company's common stock at year-end is less than a specified
target price (see Note 7). Common stock equivalents, including any shares
issuable under the CVR Agreement, are not considered in the computation of
periods with a loss, as their effect is anti-dilutive.
RECLASSIFICATIONS
Certain balances for 1993 and 1994 have been reclassified for
comparative purposes.
2. ACQUISITIONS AND DIVESTITURES
TEXAS GULF COAST PROPERTIES ACQUISITION
In October 1995, the Company acquired additional working interests in
certain producing crude oil and natural gas properties in which the Company had
an existing working interest ownership. The net purchase price to Abraxas
amounted to approximately $635,000. Revenues and expenses have been included in
the consolidated financial statements since October 1, 1995.
WEST TEXAS PROPERTIES ACQUISITION
In July 1994, the Company acquired from various parties interests in
certain producing crude oil and natural gas properties located in West Texas
(the West Texas Properties). The net purchase price to Abraxas amounted to
approximately $28,242,000 including closing costs of approximately $383,000. The
acquisition was accounted for as a purchase and the purchase price was allocated
to crude oil and natural gas properties based on the fair values of the
properties acquired. The transaction was financed principally by additional
borrowings under the Company's credit agreement with First Union National Bank
of North Carolina (First Union), referred to in Note 6. Revenue and expenses
from the West Texas Properties have been included in the consolidated financial
statements since July 1, 1994.
<PAGE>
OVERRIDING ROYALTY INTEREST ACQUISITION
In June 1994, the Company acquired from its prior secured lenders,
Endowment Energy Partners, L.P. (EEP) and Endowment Energy Co-Investment
Partnership (EECIP), 80% of the previously granted overriding royalty interests.
The net purchase price of approximately $5,174,100 consisted of $600,000 cash
and 45,741 shares of the Company's Series B 8% nonvoting cumulative convertible
preferred stock with a par value of $100 per share (Series B Preferred) at the
time of issuance. The preferred shares were recorded at $4,574,100 at the date
of the acquisition. In November 1995, the Company exchanged the Series B
Preferred for an equal number of shares of its Series 1995-B Preferred Stock,
par value $.01 per share, with a liquidation preference of $100 per share. The
preferred shares are convertible into 508,182 shares of the Company's common
stock. The acquisition was accounted for as a purchase, and the purchase price
was allocated to crude oil and natural gas properties based on the fair values
of the properties acquired. The cash portion of the transaction was financed
principally under the Company's credit agreement with First Union. Revenues and
expenses related to these properties have been included in the consolidated
financial statements since July 1, 1994.
MOBIL ACQUISITION
In April 1993, the Company acquired from Mobil Producing Texas and New
Mexico, Inc. (Mobil) interests in certain producing crude oil and natural gas
properties and natural gas processing plants located in Texas (the Sinton
Properties). The net purchase price to Abraxas amounted to approximately
$19,600,000 ($41,000,000 gross purchase price plus closing costs of $472,000
less the sale of 50% of the Company's interest to an unrelated pension trust
fund for $21,000,000 and the reimbursement from Mobil for net production from
January 1, 1993 through the closing date). The acquisition was accounted for as
a purchase and the purchase price was allocated to crude oil and natural gas
properties, natural gas processing plants and other assets based upon an
estimate of the fair values of the properties acquired and the reimbursement
from Mobil described above. The transaction was financed principally by
additional borrowings under the Company's financing agreement with EECIP
referred to in Note 6. Under the financing agreement, the Company was required
to assign a 10% overriding royalty interest in and to the future gross revenues
to be received from the sales of crude oil and natural gas produced from the
acquired properties. Revenues and expenses from the Sinton Properties have been
included in the consolidated financial statements since April 1, 1993.
GAELIC PROPERTIES
In January 1993, the Company acquired from Gaelic Resources the
remaining 75% working interest in the Alice Deep wells for $300,000 and
18,200,000 shares of Gaelic common stock for $300,000. The purchase price of
$600,000 cash was financed through an increase in the financing agreement with
EEP. Revenues and expenses of the Gaelic Properties have been included in the
consolidated financial statements since January 1, 1993.
<PAGE>
The condensed unaudited combined pro forma financial information for
the periods presented assumes the purchases of the West Texas Properties, the
Overriding Royalty Interest, the Sinton Properties, and the Gaelic Properties
were effective as of January 1, 1993. The pro forma information does not
necessarily represent what the actual consolidated results would have been for
these periods and is not intended to be indicative of future results.
December 31
----------------------------
1993 1994
-------------- -------------
(Unaudited)
Revenues ......................... $ 14,903,431 $ 13,971,761
Operating costs and expenses ..... 16,893,094 14,157,384
----------- -------------
Loss from continuing operations .. $ (1,989,663) $ (185,623)
=========== =============
Net loss ......................... $ (3,029,421) $ (2,692,594)
=========== =============
Loss per common share:
Continuing operations .......... $ (1.30) $ (.13)
Net loss ..................... (1.83) (.71)
DIVESTITURE
In July 1995, the Company sold its C.S. Dean Unit for approximately
$2,550,000.
3. DISCONTINUED OPERATIONS
In January 1995, the Company entered into a plan to discontinue the
operations of its coal properties and commenced the permanent closing of the
mine. As of December 31, 1994, the Company wrote off its investment in its coal
properties and related equipment, eliminated the related minority interest in
the coal entities, and established a liability of $150,000 pursuant to a plan to
discontinue operations for future costs related to closing the mine.
Additionally, during 1994, the Company sold its interest in Castle Minerals,
Inc., which was acquired in 1992 to finance the coal operations, for $371,000,
net of expenses related to the sale (see Note 11). The Company recorded a loss
on these transactions in 1994 of $987,543. The revenues from coal sales for the
years ended 1993, 1994, and 1995 were $23,759, $104,310, and $-0-, respectively.
<PAGE>
4. MARKETABLE SECURITIES
In May 1993, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" (SFAS 115), effective for fiscal years beginning
after December 15, 1993. At December 31, 1994, the Company's marketable equity
securities were classified as available-for-sale. As of December 31, 1994, the
Company recognized a decrease of approximately $244,000 in shareholders' equity,
representing the recognition in shareholders' equity of unrealized depreciation,
net of taxes, for the Company's investment in equity securities determined to be
available-for-sale, previously carried at the lower of cost or market.
The marketable securities represent an equity investment in a foreign
corporation which the Company considers as available-for-sale. The securities
had an original cost of $570,000 at December 31, 1994 and 1995, and at September
30, 1996. In October 1996, the Company sold its investment in marketable
securities, realizing a loss of $235,197. Such loss was recorded as of September
30, 1996.
Prior to the adoption of SFAS 115, and to increase the carrying amount
of its marketable securities portfolio to market, a recovery of $235,000 was
recorded during 1993.
5. RELATED PARTY TRANSACTIONS
Accounts receivable from affiliates, officers, and shareholders
represents amounts receivable relating to joint interest billings on properties
which the Company operates and advances made to officers.
Oil and gas production payable includes $5,054 and $-0- at December 31,
1994 and 1995, respectively, which represent amounts due to affiliates and
related parties.
Note payable to the principal shareholder amounted to $328,259 and $-0-
at December 31, 1994 and 1995, respectively, including accrued interest of
$10,550 and $-0-. Principal and interest payments amounted to $333,081 and
$354,677 in the years ended December 31, 1994 and 1995, respectively.
Overhead reimbursements charged to affiliates and related parties
amounted to $70,039, $7,087, and $-0- in 1993, 1994, and 1995, respectively.
Charges to the Company for well and other services performed by related
parties were $52,719, $-0-, and $-0- during 1993, 1994, and 1995, respectively.
Rental expense for office furnishings and equipment of $25,000 in 1993,
$-0- in 1994, and $-0- in 1995, was paid to a related party.
<PAGE>
During 1993, the Company purchased from a shareholder and director
various working interests in wells. The Company issued 10,368 shares of its
common stock in exchange for the shareholder's working interests in these wells.
The Company increased its full cost pool by $77,760 with a corresponding
increase to shareholder's equity.
Wind River Resources Corporation ("Wind River"), all of the capital
stock of which is owned by the Company's President, owns a twin-engine airplane.
The airplane is available for business use by employees of the Company from time
to time at $385 per hour. The Company paid Wind River a total of $80,678 for use
of the plane during 1995.
6. LONG-TERM DEBT
Long-term debt consists of the following:
December 31 September 30
------------------------ -------------
1994 1995 1996
------------- ---------- ------------
(Unaudited)
Revolving lines of credit due
under the First Union credit
agreement (see below). ....... $ 32,906,652 $ 35,556,651 $ -
Term notes due under the First
Union credit agreement (see
below). ...................... 8,000,000 6,000,000 -
Bridge facility due to Bankers
Trust Company and ING Capital
(see Note 17). ............... - - 85,000,000
Principal shareholder, interest
at 10% (including accrued
interest of $10,550 and $-0-
at December 31,1994 and 1995,
respectively), with remaining
balance of principal and unpaid
interest due December 20, 2001. 328,259 - -
------------- ----------- ------------
41,234,911 41,556,651 85,000,000
Less current maturities ........ - - -
------------- ----------- ------------
$ 41,234,911 $ 41,556,651 $ 85,000,000
============= =========== ============
<PAGE>
In June 1994, the Company entered into a credit agreement with First
Union which was subsequently amended during the year. The Company borrowed
$40,906,652 during 1994 under the agreement. The borrowings were composed of
advances of $32,906,652 under a revolving line of credit which was due June
1997, and $8,000,000 under a term note which was due June 15, 1995. In August
1995, the Company amended the credit agreement with First Union. Under the
amended credit agreement, the Company has two lines of credit, one for
$23,000,000 and one for $17,000,000 and two term notes, one for $3,450,000 and
one for $2,550,000. At December 31, 1995, the Company's borrowings under the
credit agreement were $41,556,651. The borrowings were composed of advances of
$12,656,651 and $22,900,000 under the revolving lines of credit which are due
June 30, 1997, and $6,000,000 under the term notes which are also due June 30,
1997. The interest rate for the revolving credit lines is, at the option of the
Company, either (a) the higher of First Union prime plus 1/4% or the federal
funds rate plus 3/4%, floating, payable monthly, or (b) LIBOR plus 2 1/4% (30-,
60-, 90-, and 180-day options), with interest payable the earlier of maturity of
each LIBOR tranche or quarterly. The interest rate for the term notes is, at the
option of the Company, either (a) the higher of First Union prime plus 3/4% or
the federal funds rate plus 1 1/4%, floating, payable monthly, or (b) LIBOR plus
3 1/4% (30-, 60-, 90-, and 180-day options), with interest payable the earlier
of maturity of each LIBOR tranche or quarterly. At December 31, 1995, the
$12,656,651 revolver carried interest at 8.19%, the $22,900,000 revolver carried
interest at 8.06%, and the term notes at 8.16%. The revolvers provide for
borrowing based principally on the Company's crude oil and natural gas reserve
base, which was $44,000,000 at December 31, 1995.
In April 1996, the Company amended the credit agreement with First
Union, extending the due date to June 1999. In accordance with the credit
agreement, in July 1996 the borrowing base was adjusted to $35,000,000. At
September 30, 1996, the Company's borrowings under this line of credit was $-0-.
The revolving lines of credit may be extended, at First Union's
discretion, and are subject to semi-annual redeterminations of the borrowing
base each June and December. The borrowings under the First Union credit
agreement are secured by a first-priority mortgage on all of the Company's crude
oil and natural gas properties and gas plants, as well as a security interest in
accounts receivable, inventory, contracts, and general intangibles, and are
guaranteed by the Company. The First Union credit agreement requires compliance
with certain covenants including, among other things, the ratio of current
assets to current liabilities, excluding any current portion of the credit
agreement, of not less than 1.0 to 1.0; and the ratio of the Company's
indebtedness compared to annualized net income plus non-cash charges shall not
be greater than 7.5 to 1.0 through December 31, 1995, and 5.0 to 1.0 after
December 31, 1995. In August 1996, the ratio of the Company's indebtedness
compared to annualized net income plus non-cash charges was amended to 8.0 to
1.0 through December 31, 1996, effective December 31, 1995, and to 5.0 to 1.0
after December 31, 1996. In addition, the credit agreement requires certain
financial reporting requirements and limits the payments of dividends on common
stock, additional indebtedness, mergers and acquisitions. Loan fees paid in
connection with the origination of the credit agreement and the amended
agreement have been classified as deferred financing fees. In addition, terms
include a commitment fee of 1/2 of 1% per annum, payable quarterly in arrears on
the average unused portion of the borrowing base. The debt's carrying value
approximate its fair values.
<PAGE>
On June 30, 1994, the Company secured advances under the First Union
facility adequate to extinguish the total debt and accrued interest owed to the
Company's previous lenders, EEP and EECIP. The prepayment resulted in the
Company recording an extraordinary debt extinguishment charge of $1,171,832,
representing the reduction of the deferred financing fees related to the EEP and
EECIP debt origination.
In August 1993, EEP and EECIP agreed to permit the Company to prepay
$14,000,000 of the outstanding balances of the Company's notes out of the
proceeds of the Company's common stock offering. In consideration of this
agreement, the Company issued an aggregate of 50,000 shares of its common stock
to EEP and EECIP's general partners, EEP and Endowment Energy Partners II, L.P.
(EEP II) and, upon making the prepayment of $14,000,000 in October 1993, issued
an additional 66,666 shares of common stock to EEP and EEP II. The prepayment of
debt and the issuance of the above-discussed shares of common stock resulted in
the Company recording an extraordinary debt extinguishment charge of $3,036,000,
representing the fair value of the shares of common stock issued of $1,325,000
and the reduction of the deferred financing fees of $1,711,000 in proportion to
the amount of debt prepaid. The issuance of the above shares resulted in a
corresponding increase in common stock and additional paid-in capital.
The Company has approximately $90,000 of standby letters of credit open
at December 31, 1995. Approximately $134,419 of cash is restricted and in escrow
related to the letters of credit.
7. SHAREHOLDERS' Equity
COMMON STOCK
Holders of common stock are entitled to one vote for each share and are
not entitled to preemptive rights to subscribe to additional shares of common
stock issued by the Company. Holders are entitled to receive dividends as may be
declared by the Board of Directors, subject to the rights of holders of
preferred stock and the terms of the Company's credit agreement, which restrict
the payment of dividends.
In October 1993, the Company issued an additional 2,250,000 common
shares through a public offering, resulting in net proceeds of $23,045,135. Loss
per share, calculated on a supplemental basis as if the foregoing event had
occurred at the beginning of the year, would have been $(.16) loss per share
from continuing operations and $(.37) net loss per share for the year ended
December 31, 1993. The supplemental earnings per share assumes that interest
expense would have been reduced by $939,000 from the prepayment of $14,000,000
of long-term debt from the proceeds of the issuance of the additional common
stock. The preferred stock was assumed to be converted as of the beginning of
1993; therefore, income was not required to be adjusted for preferred stock
dividends.
<PAGE>
In 1994, the Board of Directors adopted a Shareholders' 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.
In November 1995, the Company issued 1,330,000 units, each consisting
of one share of common stock and one Contingent Value Right (CVR), through a
private placement, resulting in net proceeds of $10,063,105. Each CVR allows the
holder the right to acquire additional shares of common stock under certain
circumstances. See further discussion of CVRs below. Loss per share, calculated
on a supplemental basis as if the foregoing event had occurred at the beginning
of the year, would have been $(.19) loss per share for the year ended December
31, 1995. The supplemental earnings per share assumes that interest expense
would have been reduced by $455,800 from the prepayment of $5,300,000 of
long-term debt from the proceeds of the issuance of the units for the year ended
December 31, 1995.
PREFERRED STOCK
In June 1994, in connection with the Company's acquisition of the
overriding royalty interest from EEP and EECIP, 45,741 shares of the Company's
Series B 8%, nonvoting cumulative convertible preferred stock with a par value
of $100 were issued. The preferred shares are convertible into 508,182 shares of
the Company's common stock. Preferred stock dividends during 1995 amounted to
$365,928. During 1995, the Company exchanged the Series B 8%, nonvoting
cumulative convertible preferred stock for an equal number of shares of Series
1995-B cumulative convertible preferred stock which have a par value of $.01 per
share and a stated value of $100 per share.
The Board of Directors of the Company is authorized to approve the
issuance of one or more classes or series of preferred stock without further
authorization of the Company's shareholders. At December 31, 1992, 24,910 shares
of preferred stock were outstanding. The stock was entitled to a cumulative
dividend of $10 per share, payable in shares of preferred stock, was redeemable
at the option of the Company, and was convertible into common stock at the rate
of 9.271 shares of common stock for each share of preferred stock plus unpaid
dividend. In October 1993, in connection with the Company's common stock
offering, the holders of the preferred stock converted all of the then
outstanding preferred shares, including the preferred shares issued in payment
of approximately $934,000 cumulative dividends in arrears, into 317,539 shares
of common stock.
<PAGE>
CONTINGENT VALUE RIGHTS (CVR)
The CVRs were issued under the CVR Agreement between the Company, the
purchasers, and First Union, as rights agent. The CVR Agreement provides that,
subject to adjustment as described below, the Company shall issue to each holder
of the CVRs on the Maturity Date (November 17, 1996), unless the Company shall,
in its sole discretion, extend the Maturity Date to the Extended Maturity Date
(November 17, 1997), then on the Extended Maturity Date, a number of shares of
common stock, if any, equal to (a) the Target Price ($10.00 on the Maturity Date
or $12.50 on the Extended Maturity Date) minus the current market value divided
by (b) the current market value; provided, however, that in no event shall more
than one share of common stock be issued in exchange for each CVR at the
Maturity Date or more than 1.5 shares of common stock be issued in exchange for
each CVR at the Extended Maturity Date. Such determination by the Company shall
be final and binding on the Company and the holders of CVRs.
If the median of the average prices of the common stock for the three
20-trading day periods immediately preceding the Maturity Date or the Extended
Maturity Date, as the case may be, equals or exceeds $10.00 on the Maturity Date
or $12.50 on the Extended Maturity Date (if the Maturity Date is extended by the
Company to the Extended Maturity Date), as the case may be, no shares of the
common stock will be issuable with respect to the CVRs. In addition, the CVRs
will terminate if the per share market value equals or exceeds the Target Price
for any period of 30 consecutive trading days during either the period from and
after November 17, 1995 to and including November 17, 1996, or from and after
November 17, 1996 to and including November 17, 1997.
In the event that the Company determines that no shares of the common
stock are issuable with respect to the CVRs to such holders, the CVRs shall
terminate and become null and void and the holders shall have no further rights
with respect thereto. If the Maturity Date of the CVR Agreement had been
December 31, 1995 and September 30, 1996, an aggregate of 746,480 and 1,117,200
shares, respectively, of common stock would have been issued to the holders of
the CVRs.
Should any additional shares of common stock be required to be issued
under the terms of the CVR Agreement, such issuance will be considered to be an
adjustment to the original sales price per share received in connection with the
sale of the associated common shares; accordingly, the Company will increase its
common stock for the par value related to the additional shares at the time such
shares are issued with a corresponding decrease in additional paid-in capital.
TREASURY STOCK
During the nine months ended September 30, 1996, the Company purchased
68,140 shares of its common stock at a cost of $372,254, which are being held as
treasury stock.
<PAGE>
8. STOCK OPTION PLANS AND WARRANTS
The Company grants options to its officers, directors, and key
employees under its 1984 Incentive Stock Option Plan, Non-Qualified Stock Option
Plan, Key Contributor Stock Option Plan, Long-Term Incentive Plan, and Director
Stock Option Plan.
The following is a summary of activity in the stock option plans for
the years ended December 31, 1994 and 1995, and the nine-month period ended
September 30, 1996:
Price Options
Per Share (1) Outstanding
-------------- ---------------
Outstanding at December 31, 1993 ..... $4.50 - $9.75 132,616
Granted .............................. 9.75 - 10.75 27,500
Canceled ............................. 5.50 - 9.75 (18,675)
Exercised ............................ 4.50 - 9.75 (37,908)
---------------
Outstanding at December 31, 1994 ..... 4.50 - 10.75 103,533
Granted .............................. 9.50 157,500
Canceled ............................. 9.50 - 10.75 (42,000)
Exercised ............................ -
---------------
Outstanding at December 31, 1995 ..... 5.50 - 9.75 219,033
Granted .............................. 5.00 - 6.75 200,777 (2)
Canceled ............................. 9.75 (20,000)
Exercised ............................ -
---------------
Outstanding at September 30, 1996 .... 399,810
===============
Options exercisable at December 31, 1995 52,850
===============
(1) During the nine months ended September 30, 1996, the Company
amended the exercise price to $6.75 per share on all previously issued
options with an exercise price greater than $6.75 per share.
(2) Includes 70,000 options granted at an exercise price of $5.00
for which vesting does not begin until the closing price of the Company's
common stock exceeds $8.00 per share.
<PAGE>
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 1994 and 1995, the
Company made direct awards of common stock of 6,111 shares and 4,800 shares,
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 1994 and 1995, the Company made direct awards of common stock of
2,400 shares and 3,072 shares, respectively.
During the nine months ended September 30, 1996, the Company's
shareholders 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. Under the Plan, each of the seven eligible directors
was granted an option to purchase 8,000 common shares at $6.75.
STOCK WARRANTS
In connection with the EEP and EECIP financing agreements entered into
in 1992 and 1993, the Company granted stock warrants covering 90,000 shares at
$5.25 per share and 135,000 shares at $7.00 per share. During 1994, 211,500
warrants were exercised to purchase common stock for $1,323,000. In 1995, no
warrants were exercised by EEP or EECIP. For the nine month period ended
September 30, 1996, no warrants were exercised.
In connection with an amendment and increase in the facility under the
credit agreement with First Union and the extension of the due date on the term
note, the Company granted stock warrants to First Union covering 424,000 shares
of its common stock at an average price of $9.79 a share. The warrants are
exercisable in whole or in part through December 1999 and are nontransferable
without the consent of the Company.
At December 31, 1995, the Company has approximately 6,470,000 shares
reserved for future issuance for conversion of its stock options, warrants,
Rights, preferred stock, CVRs, and incentive plans for the Company's Directors
and employees.
<PAGE>
9. 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
------------------------
1994 1995
---------- -------------
Deferred tax liabilities:
Full cost pool, including intangible
drilling costs ............................. $ 1,292,000 $ 661,000
State taxes .................................. 187,000 187,000
Other ........................................ - 101,000
---------- ------------
Total deferred tax liabilities ................. 1,479,000 949,000
Deferred tax assets:
Coal mine valuation provisions ............... 1,740,000 -
Depletion .................................... 242,000 242,000
Net operating losses ......................... 4,771,000 6,163,000
Other ........................................ 21,000 13,000
---------- ------------
Total deferred tax assets ...................... 6,774,000 6,418,000
Valuation allowance for deferred tax assets .... (5,482,000) (5,656,000)
---------- ------------
Net deferred tax assets ........................ 1,292,000 762,000
---------- ------------
Net deferred tax liabilities ................... $ 187,000 $ 187,000
========== ============
At December 31, 1995, the Company had, subject to the limitations
discussed below, $18,127,000 of net operating loss carryforwards for tax
purposes, of which approximately $4,697,000 are available for utilization
without limitation. These loss carryforwards will expire from 2002 through 2010
if not utilized.
As the result of the acquisition of certain partnership interests and
crude oil and natural gas properties in 1990 and 1991, an ownership change under
Section 382 of the Internal Revenue Code of 1986, as amended (Section 382),
occurred in December 1991. Accordingly, it is expected that the use of net
operating loss carryforwards generated prior to December 31, 1991 of $6,916,000
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 $3,607,000
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 net operating loss carryforwards generated through October 1993 of
<PAGE>
$13,430,000 will be limited to approximately $1,034,000 per year, subject to the
lower limitations described above. Of the $13,430,000 net operating loss
carryforwards existing at October 1993, it is anticipated that the maximum net
operating loss that may be utilized before it expires is $7,188,000. Future
changes in ownership may further limit the use of the Company's carryforwards.
In addition to the Section 382 limitations, uncertainties exist as to
the future utilization of the operating loss carryforwards under the criteria
set forth under FASB Statement No. 109. Therefore, the Company has established a
valuation allowance of $5,482,000 and $5,656,000 for deferred tax assets at
December 31, 1994 and 1995, respectively.
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense is:
December 31
----------------------------------
1993 1994 1995
---------- ----------- ----------
Tax (expense) benefit at U.S.
statutory rates (34%) .......... $ 569,000 $ (38,400) $ 411,000
(Increase) decrease in deferred
tax asset valuation allowance .. (469,000) 31,600 (174,000)
Deferred state income taxes ...... (186,749) - -
Other ............................ (100,000) 6,800 (237,000)
----------- ---------- -----------
$ (186,749) $ - $ -
=========== ========== ===========
10. LEASES
The Company leases its existing primary office space for $8,591 per
month under a noncancelable lease expiring on June 30, 1998. During 1995, the
Company entered into a noncancelable lease for new primary office space at
$13,700 per month through March 2001 and $18,975 per month through March 2006.
During the years ended December 31, 1993, 1994, and 1995, the Company
incurred rent expense of approximately $143,000, $108,000, and $103,000,
respectively. Future minimum rental payments are as follows at December 31,
1995:
1996 ................................ $ 225,816
1997 ................................ 219,016
1998 ................................ 217,848
1999 ................................ 164,448
2000 ................................ 227,700
Thereafter .......................... 1,138,500
Aggregate future minimum rentals to be received under noncancelable
subleases as of December 31, 1995 amount to $92,664.
<PAGE>
11. INVESTMENT IN COAL PROPERTIES
Over the past years the Company, through a subsidiary, had been
developing certain coal properties in Colorado. During this period, development
costs along with interest on its bank debt have been capitalized as coal
properties. The interest accrued into the subsidiary bank debt, which was
nonrecourse to the parent.
Effective July 1, 1992, the subsidiary commenced expensing interest and other
related operating costs.
In March 1992, the subsidiary acquired for $15,000 a controlling
interest in an inactive Vancouver publicly traded company, Castle Minerals, Inc.
(CMI). In December 1992, the subsidiary received approval from the Vancouver
Stock Exchange, whereby the subsidiary contributed all of its coal-related
assets to CMI in exchange for additional shares amounting to approximately 86%
of the capital stock of CMI.
During 1992, the Company recorded as a charge against operations,
$3,137,000, representing interest expense and other operating costs of the coal
mine of approximately $512,000 and a reduction in the carrying value of the coal
mine by $2,625,000. The estimated fair value of the coal mine was determined
based upon an appraisal that assumes the startup of commercial production and
the availability of markets in which to sell the coal production.
On April 14, 1993, the Company entered into a letter agreement with the
lender of the subsidiary bank debt (Bank) effective March 31, 1993, wherein the
Company assumed a portion of the subsidiary bank debt by issuing a note to the
Bank in the principal amount of $1,000,000. In addition, the subsidiary issued
to the Bank its preferred stock with a par value of $2,000,000, and the Bank
canceled the subsidiary bank debt of $4,302,675. The preferred stock of the
subsidiary requires no dividends prior to April 1, 1996 and at 8% thereafter
payable in cash or property of the subsidiary, carries a liquidation preference
of $2,000,000, and is redeemable at the option of the subsidiary at $2,000,000.
The preferred stock had been recorded at management's estimate of the stock's
fair market value of $840,000 and was carried as minority interest in the
December 31, 1993 balance sheet. A pretax gain of $2,462,664, representing the
excess of the carrying value of the subsidiary bank debt over the estimated fair
value of the preferred stock and the future cash payments of the $1,000,000
subsidiary bank debt assumed by the Company, was recorded as an extraordinary
item for the year ended December 31, 1993. On October 29, 1993, the Company paid
its note of $1,000,000 plus interest to the Bank. In December 1994, the Company
discontinued its operation of the coal properties (see Note 3).
12. BENEFIT PLANS
During 1993, the Company established a defined contribution plan
(401(k)) covering all eligible employees of the Company. No contributions were
made by the Company during 1993, 1994, or 1995. 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 overall contribution is limited to the lesser of 20% of the
employee's annual compensation or $9,240.
<PAGE>
13. INCENTIVE BONUS PLAN
In January 1995, the Company created the Technical Employees Incentive
Bonus Plan, whereby technical employees have an incentive to find and develop
crude oil and natural gas reserves on an economic basis beneficial to the
Company and its shareholders. Participants are any technical employees
(geologist, geophysicist, engineer) not covered by another incentive bonus plan.
A participant may earn a monetary bonus of up to 65% of the participant's base
salary each year. The bonuses are determined in the first quarter of each year
and are based upon the amount of new proved developed producing reserves booked
each year on approved exploration and exploitation projects taking into
consideration the cost per equivalent barrel of developing the new reserves. No
bonuses were paid under this plan in 1995.
14. CONTINGENCIES
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, 1995 and September 30, 1996, 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's financial statements.
15. COMMODITY SWAP AGREEMENT
In December 1995, the Company entered into a commodity swap agreement
with First Union. Under the commodity swap agreement, the Company receives or
makes payments to First Union based on the differential between a fixed and
variable price for natural gas. At December 31, 1995 and September 30, 1996, the
Company had agreed to exchange payments monthly on 5,000 MMBTU of natural gas
per day, beginning in March 1996 and extending through November 1996. Under the
swap agreement, the Company receives fixed prices averaging $1.747 per MMBTU and
pays a variable price based on the arithmetic average of the last three trading
days' settlement price of the first nearby contract for natural gas as quoted by
the New York Mercantile Exchange. For the year ended December 31, 1995, there
was no effect on income from continuing operations as there was no activity
related to the swap agreement, which begins in March 1996. At September 30,
1996, the effect on income was a loss of $510,767.
16. SUBSEQUENT EVENTS
In January 1996, the Company made a $3,000,000 investment in Grey Wolf,
a privately held Canadian corporation, which in turn invested these proceeds in
newly issued shares of Cascade Oil and Gas Ltd. (Cascade), an Alberta-based
corporation whose shares are traded on the Alberta Stock Exchange. The Company
owns 78% of the outstanding capital stock of Grey Wolf, and, through Grey Wolf,
the Company owns approximately 52% of the outstanding capital stock of Cascade.
Certain officers and directors of the Company own approximately 6% of the common
stock of Grey Wolf and serve as directors of Grey Wolf.
In March 1996, the Company sold all of its interest in its Portilla and
Happy Fields to an unrelated purchaser (Purchaser or Limited Partner).
Simultaneously with this sale, the Limited Partner also acquired the 50%
overriding royalty interest in the Portilla field owned by the Commingled
Pension Trust Fund (Petroleum II), the trustee of which is Morgan Guaranty Trust
Company of New York (Pension Fund). In connection with the purchase of both the
Company's interest in the Portilla and Happy Fields and the
<PAGE>
Pension Fund's interest in the Portilla Field (together, the
Properties), the Limited Partner obtained a loan (Bank Loan) secured by the
Properties and contributed the Properties to Portilla-1996, L.P., a Texas
limited partnership (Partnership). A subsidiary of the Company, Portilla-Happy
Corporation (Portilla-Happy), is the general partner of the Partnership. The
aggregate purchase price received by the Company was $17,600,000, of which
$2,000,000 was used to purchase a minority interest in the Partnership, which
has been accounted for using the equity method. At September 30, 1996, the
Company's investment in and advances to the Partnership represents the original
investment of $2,000,000 and advances made to the Partnership primarily for
development drilling net of production revenue collected by the Company on
behalf of the Partnership.
17. ACQUISITIONS AND RELATED FINANCING (UNAUDITED)
On September 30, 1996, the Company acquired interests in certain
producing crude oil and natural gas properties located in the Wamsutter area of
southwestern Wyoming (the Wyoming Properties) from Enserch Exploration, Inc. The
initially agreed to purchase price of $47,500,000 was adjusted to $45,856,000 to
reflect the preliminary estimate of net production revenue which accrued to the
Company from April 1, 1996, the effective date, until closing, net of interest
owed by the Company for the same period. As of September 30, 1996, the Company
recorded $45,856,000 in its oil and gas properties. The acquisition was financed
by borrowings under the Bridge Facility discussed below.
On September 30, 1996, the Company entered into a credit facility with
Bankers Trust Company (BTCo) and ING Capital (together the Lenders), providing a
bridge facility in the total amount of $90,000,000, consisting of a $30,000,000
revolving credit facility, with $25,000,000 initially available, a $35,000,000
term loan and a $25,000,000 term loan (the Bridge Facility). The Bridge Facility
is secured by a first priority lien on substantially all of the Company's U.S.
assets and matures on October 31, 1997. If borrowings under the Bridge Facility
have not been repaid by each of November 15, 1996 and January 1, 1997, the
Company will be obligated to pay the Lenders additional fees and/or warrants to
purchase common stock of the Company. The agreement limits the Company's debt to
the Bridge Facility, restricts the payment of dividends other than to the
existing preferred stock, and requires compliance with minimum tangible net
worth, current and interest coverage ratios and certain financial reporting
requirements.
The revolving credit facility and the $35,000,000 term loan carry
interest at LIBOR plus 2 1/4% and the $25,000,000 term loan carries interest at
the BTCo's prime rate plus 3%, increasing at 1/2% for each 90-day period
thereafter to a maximum of prime plus 4 1/2%. Under an interest rate swap
agreement, the Company pays a fixed rate of 6.15% on $25,000,000 of borrowings
while the lender under the Bridge Facility will pay a floating rate equal to the
USD-LIBOR-BBA rate for one month maturities to the Company. Settlements are due
monthly. The agreement terminates in August 1997 and may be extended for an
additional year by the lenders. On September 30, 1996, the Company borrowed
$85,000,000 under the Bridge Facility which was used to repay all amounts due
First Union and to finance the purchase of the Wyoming Properties. In connection
with the Bridge Facility the commodity swap agreement discussed in Note 15 was
terminated.
<PAGE>
On November 14, 1996, the Company repaid all amounts outstanding under
the Bridge Facility with proceeds from the offering of $215,000,000 of Senior
Notes described below and entered into an amended and restated credit agreement
(New Credit Facility). The New Credit Facility provides for a revolving line of
credit with an initial availability of $20.0 million, subject to certain
customary conditions including a borrowing base condition. No amounts were
outstanding on September 30, 1996.
Commitments available under the New Credit Facility are subject to
borrowing base redeterminations to be performed semi-annually and, at the option
of each of the Company and the Lenders, one additional time per year. Any
outstanding principal balance in excess of the borrowing base will be due and
payable in three equal monthly payments after a borrowing base redetermination.
The borrowing base will be determined in the Agent's sole discretion, subject to
the approval of the Lenders, based on the value of the Company's reserves as set
forth in the reserve report of the Company's independent petroleum engineers,
with consideration given to other assets and liabilities.
The New Credit Facility has an initial revolving term of two years and
a reducing period of three years from the end of the initial two-year period.
The commitment under the New Credit Facility will be reduced during such
reducing period by eleven equal quarterly reductions. Quarterly reductions will
equal 8.2% per quarter with the remainder due at the end of the three-year
reducing period.
The applicable interest rate charged on the outstanding balance of the
New Credit Facility is based on a facility usage grid. If the borrowings under
the New Credit Facility represent an amount less than or equal to 33.3% of the
available borrowing base, then the applicable interest rate charged on the
outstanding balance will be either (a) an adjusted rate of the London Inter-Bank
Offered Rate ("LIBOR") plus 1.25% or (b) the prime rate of the Agent (which is
based on the agent's published prime rate) plus 9.50%. If the borrowings under
the New Credit Facility represent an amount greater than or equal to 33.3% but
less than 66.7% of the available borrowing base, then the applicable interest
rate on the outstanding principal will be either (a) LIBOR plus 1.75% or (b) the
prime rate of the Agent plus 0.50%. If the borrowings under the New Credit
Facility represent an amount greater than or equal to 66.7% of the available
borrowing base, then the applicable interest rate on the outstanding principal
will be either (a) LIBOR plus 2.00% or (b) the prime rate of the Agent plus
0.50%. LIBOR elections can be made for periods of one, three or six months.
The New Credit Facility contains a number of covenants that, among
other things, restrict the ability of the Company to (i) incur certain
indebtedness or guarantee obligations, (ii) prepay other indebtedness including
the Notes, (iii) make investments, loans or advances, (iv) create certain liens,
(v) make certain payments, dividends and distributions, (vi) merge with or sell
assets to another person or liquidate, (vii) sell or discount receivables,
(viii) engage in certain intercompany transactions and transactions with
affiliates, (ix) change its business, (x) experience a change of control and
(xi) make amendments to its charter, by-laws and other debt instruments. In
addition, under the New Credit Facility, the Company is required to comply with
specified financial ratios and tests, including minimum debt service coverage
ratios, maximum funded debt to EBITDA tests, minimum net worth tests and minimum
working capital tests.
<PAGE>
The New Credit Facility contains customary events of default, including
nonpayment of principal, interest or fees, violation of covenants, inaccuracy of
representations or warranties in any material respect, cross default and cross
acceleration to certain other indebtedness, bankruptcy, material judgments and
liabilities and change of control.
In September 1996, the Company entered into an agreement with the
Limited Partner and certain noteholders (Noteholders) of the Partnership,
pursuant to which the Company agreed to purchase the Limited Partner's interest
in the Partnership and the Noteholders' notes in the aggregate principal amount
of $5,920,000 (Notes), resulting in the Company's owning, on a consolidated
basis, all of the equity interests in the Partnership. The aggregate
consideration for the purchase of the Limited Partner's interest in the
Partnership and the Notes is $6,961,000. The Company will also assume the Bank
Loan which had an outstanding principal balance of approximately $20,639,000 as
of October 31, 1996, and a commodity price hedge agreement. Under the terms of
the agreement, the Company will be required to receive or make payments to BTCo
and ING Capital based on a differential between a fixed and variable price for
crude oil and natural gas through November 2001 on volumes ranging from 8,160
barrels of crude oil to 20,000 barrels of crude oil per month and 14,850 MMBTU
of natural gas to 87,406 MMBTU of natural gas per month. Under this agreement,
the Company will receive fixed prices ranging from $17.20 per barrel of crude
oil to $18.55 per barrel of crude oil and $1.793 per MMBTU of natural gas to
$1.925 per MMBTU of natural gas and will make payments based on the price for
west Texas intermediate light sweet crude oil on the NYMEX for crude oil and the
Inside FERC, Tennessee Gas Properties Co. Texas price for natural gas. Currently
there is a net unrealized loss of approximately $1.8 million under the commodity
price hedge. On November 14, 1996, the Company closed the transaction.
As a result, the Company reacquired those interests in the Portilla and
Happy Fields which it previously owned, as well as the interest in the Portilla
Field previously owned by the Pension Fund. The Company will include in its
balance sheet the amount previously removed from oil and gas properties in
connection with the sale of its interest in the Portilla and Happy Fields during
the quarter ended March 31, 1996, as well as the amount of the purchase price
paid for the Pension Fund's interest in the Portilla Field, and all development
drilling expenditures incurred on the properties, less the amount of DD&A
related to the properties from the formation of the Partnership through the
closing of the transaction.
In October 1996, the Company entered into a letter of intent to
purchase 100% of the outstanding capital stock of CGGS Canadian Gas Gathering
Systems Inc. (CGGS) in Calgary, Canada after the consummation of the sale of
CGGS of its Nevis gas processing plant, for approximately U.S.$85,000,000 plus
the amount of CGGS's working capital at August 1, 1996, subject to price
adjustments. CGGS owns producing oil and gas properties in Western Canada and
adjacent gas gathering and processing facilities as well as undeveloped net
acres of leaseholds. On November 14, 1996, the Company, through its wholly owned
subsidiary, Canadian Abraxas Petroleum Limited (Canadian Abraxas) closed the
transaction and immediately merged CGGS with and into Canadian Abraxas, and
Canadian Abraxas, as the surviving entity, used the net proceeds from the sale
of the Nevis gas processing plant to retire all of the outstanding debentures of
CGGS. The transaction was financed by a portion of the proceeds from the
offering of $215,000,000 of Senior Notes discussed below.
<PAGE>
On November 14, 1996, the Company and Canadian Abraxas completed the
sale of $215,000,000 aggregate principal amount of Senior Notes due November 1,
2004. Interest at 11.5% is payable semi-annually on May 1 and November 1. The
Notes are general unsecured obligations of the Company and Canadian Abraxas and
the Company and Canadian Abraxas are joint and several obligors. The Notes are
redeemable, in whole or in part, at the option of the Company and Canadian
Abraxas on or after November 1, 2000, and any time prior to November 1, 1999,
the Company and Canadian Abraxas may redeem up to 35% of the aggregate principal
amount of the Notes with the cash proceeds of equity offerings at a redemption
price of 111.5% of the aggregate principal amount of the Notes to be redeemed.
The terms of the Indenture related to the Notes provide for certain financial
covenants which may limit the ability of the Company to incur additional debt.
In November 1996, the Company obtained a release of the 50% overriding
royalty interest in the East White Point Field in San Patricia County, Texas and
the Stedman Island Field in Nueces County, Texas from the Pension Fund for
9,300,000 before adjustment for accrual of net revenue to closing. The Company
will record the net purchase price of approximately $8,771,000 to its oil and
gas properties.
18. OIL AND GAS PROPERTIES
The Company's investment in crude oil and natural gas properties was as
follows:
December 31
----------------------------
1994 1995
------------- --------------
Proved crude oil and natural gas properties,
including gas processing plants ............ $ 94,542,481 $ 104,127,204
Accumulated depreciation, depletion, and
amortization, and valuation allowances ..... (24,363,918) (29,651,521)
------------- --------------
Net capitalized costs ....................... $ 70,178,563 $ 74,475,683
============= ==============
Costs incurred, capitalized, and expensed in crude oil and natural gas
producing activities are as follows:
December 31
-----------------------------------------
1993 1994 1995
------------ ------------ ------------
Property acquisition costs:
Proved ...................... $ 20,479,509 $ 33,597,172 $ 718,871
Unproved .................... 42,726 4,786 -
------------ ------------- ------------
$ 20,522,235 $ 33,601,958 $ 718,871
============ ============= ============
Property development and
exploration costs .......... $ 5,116,747 $ 7,150,943 $11,398,088
=========== ============= ============
Depreciation, depletion, and
amortization ............... $ 2,360,200 $ 3,776,823 $ 5,313,003
=========== ============ ============
Depletion per equivalent
barrel of production ....... $ 5.03 $ 4.35 $ 4.67
=========== ============ ============
<PAGE>
The results of operations for oil and gas producing activities are as
follows:
December 31
-----------------------------------------
1993 1994 1995
------------ ------------- -------------
Revenues ......................... $ 7,274,676 $ 11,114,028 $ 13,659,556
Production costs ................. (2,895,651) (3,693,085) (4,333,240)
Depreciation, depletion, and
amortization ................... (2,360,200) (3,776,823) (5,313,003)
Abandoned prospects .............. (22,343) - -
General and administrative ....... (127,377) (202,579) (260,435)
Income taxes ..................... - - -
------------ ------------- -------------
Results of operations from oil
and gas producing activities
(excluding corporate overhead
and interest costs) ............ $ 1,869,105 $ 3,441,541 $ 3,752,878
============ ============= =============
<PAGE>
SUPPLEMENTAL INFORMATION
RELATING TO
OIL AND GAS PRODUCING COMPANIES
For the Years Ended December 31, 1993, 1994, and 1995
and the Six-Month Period Ended June 30, 1996
<PAGE>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION - UNAUDITED
December 31, 1993, 1994, and 1995 and June 30, 1996
(All Supplemental Information for the Periods Presented is Unaudited)
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, 1993, 1994, and 1995, and
June 30, 1996. The Company's management emphasizes that reserve estimates are
inherently imprecise and that estimates of new discoveries are more imprecise
than those of producing oil and gas properties. Accordingly, the estimates are
expected to change as future information becomes available. The estimates have
been prepared by independent petroleum reserve engineers.
Liquid Natural
Hydrocarbons Gas
------------ -------------
(Barrels) (Mcf)
Proved developed and undeveloped reserves:
Balance at December 31, 1992 .............. 1,834,846 5,660,070
Revisions of previous estimates ......... (298,390) (1,339,668)
Extensions and discoveries .............. 9,728 1,486,680
Purchase of minerals in place ........... 3,063,401 11,822,353
Production .............................. (304,804) (985,385)
Sale of minerals in place ............... (218,510) (53,410)
----------- -------------
Balance at December 31, 1993 .............. 4,086,271 16,590,640
Revisions of previous estimates ......... 854,672 5,034,435
Extensions and discoveries .............. 2,267,787 15,061,671
Purchase of minerals in place ........... 2,416,646 33,288,229
Production .............................. (468,867) (2,392,855)
Sale of minerals in place ............... (19) (3,027)
----------- -------------
Balance at December 31, 1994 .............. 9,156,490 67,579,093
Revisions of previous estimates ......... (1,327,795) (18,941,473)
Extensions and discoveries .............. 1,335,349 6,819,415
Purchase of minerals in place ........... 213,998 2,888,885
Production .............................. (544,825) (3,552,671)
Sale of minerals in place ............... (565,975) (224,642)
----------- -------------
Balance at December 31, 1995 .............. 8,267,242 54,568,607
Revisions of previous estimates ......... (353,035) (3,260,607)
Extensions and discoveries .............. 862,674 4,772,542
Purchase of minerals in place ........... 230,647 1,700,440
Production .............................. (261,872) (1,758,034)
Sale of minerals in place ............... (2,104,957) (3,456,916)
----------- -------------
Balance at June 30, 1996 .................. 6,640,699(1) 52,566,032
=========== =============
<PAGE>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION - UNAUDITED (CONTINUED)
December 31, 1993, 1994, and 1995 and June 30, 1996
(All Supplemental Information for the Periods Presented is Unaudited)
Estimated Quantities of Proved Oil and Gas Reserves (continued)
Liquid Natural
Hydrocarbons Gas
------------ -------------
(Barrels) (Mcf)
Proved developed reserves:
December 31, 1993 .......................... 3,468,492 15,242,500
=========== =============
December 31, 1994 .......................... 5,705,678 48,973,212
=========== =============
December 31, 1995 .......................... 5,999,581 44,025,782
=========== =============
June 30, 1996 .............................. 4,885,838 41,902,598
=========== =============
(1) Includes 127,700 barrels of crude oil from the Company's Canadian
subsidiary, Cascade, which are not included in the Company's June 30, 1996
reserve report.
All proved reserves are located within the continental United States.
The significant downward revision in 1995 of previous liquid
hydrocarbons and natural gas was due principally to decreased estimates of
recoverable reserves in existing wells related to disappointing drilling results
principally in the East White Point field, resulting in reclassification of
proved undeveloped reserves to probable reserves.
The significant upward revision in 1994 of previous liquid hydrocarbons
and natural gas was due principally to increased estimates of recoverable
reserves in existing wells as a result of drilling and workover success in 1994,
combined with the completion of geological engineering studies on several major
fields.
The significant downward revision in 1993 of previous natural gas
quantities was due principally to the reclassification of natural gas liquids to
liquid hydrocarbons. The significant downward revision of liquid hydrocarbons
was caused by the approximate 30 percent decrease in the price of crude oil,
partially offset by the reclassification of the natural gas liquids.
<PAGE>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION - UNAUDITED (CONTINUED)
December 31, 1993, 1994, and 1995 and June 30, 1996
(All Supplemental Information for the Periods Presented is Unaudited)
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, 1995 and June 30, 1996, 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 Company's basis in the
associated proved crude oil and natural gas properties, less the tax basis of
the properties. Operating loss carryforwards, tax credits, and permanent
differences to the extent estimated to be available in the future were also
considered in the future income tax calculations, thereby reducing the expected
tax expense.
Future net cash inflows after income taxes were discounted using a 10%
annual discount rate to arrive at the Standardized Measure.
Set forth below is the Standardized Measure relating to proved oil and
gas reserves for:
<TABLE>
<CAPTION>
Years Ended December 31 Six-Month Period
---------------------------------------------------------- Ended June 30
1993 1994 1995 1996
------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Future cash inflows ... $ 91,302,460 $ 238,027,959 $ 243,968,579 $ 233,993,225
Future production and
development costs ... (27,045,914) (84,551,808) (79,910,127) (76,840,346)
Future income tax
expense ............. (11,109,000) (26,542,000) (28,014,454) (26,506,019)
------------------- ------------------ ------------------ ------------------
Future net cash flows . 53,147,546 126,934,151 136,043,998 130,646,860
Discount .............. (20,219,000) (49,241,151) (48,884,079) (50,073,402)
------------------- ------------------ ------------------ ------------------
Standardized Measure
of discounted future
net cash relating to
proved reserves ..... $ 32,928,546 $ 77,693,000 $ 87,159,919 $ 80,573,458
=================== ================== ================== ==================
</TABLE>
<PAGE>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION - UNAUDITED (CONTINUED)
December 31, 1993, 1994, and 1995 and June 30, 1996
(All Supplemental Information for the Periods Presented is Unaudited)
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO
PROVED OIL AND GAS RESERVES
The following is an analysis of the changes in the Standardized
Measure:
<TABLE>
<CAPTION>
Six-Month Period
Ended June 30
Year Ended December 31
----------------------------------------------------------
1993 1994 1995 1996
------------------- ------------------ ------------------ -------------------
<S> <C> <C> <C> <C>
Standardized Measure,
beginning of year ... $ 12,656,520 $ 32,928,546 $ 77,693,000 $ 87,159,919
Sales and transfers of
oil and gas
produced, net of
production costs .... (4,379,025) (7,420,942) (9,351,316) (5,833,143)
Net changes in prices
and development and
production costs
from prior year ..... 1,597,103 2,450,058 22,559,686 10,032,893
Extensions,
discoveries, and
improved recovery,
less related costs .. 1,613,724 13,509,056 13,475,100 9,467,077
Purchases of minerals
in place ............ 31,098,560 29,162,942 3,867,205 2,935,043
Sales of minerals in
place ............... (1,162,137) (2,000) (3,355,289) (15,308,066)
Revision of previous
quantity estimates ..
(3,282,778) 7,346,415 (24,936,935) (5,118,486)
Change in future
income tax expense .. (2,989,000) 5,804,000 382,460 (2,462,218)
Other ................. (3,490,071) (9,377,929) (943,292) (4,657,557)
Accretion of discount . 1,265,650 3,292,854 7,769,300 4,357,996
------------------- ------------------ ------------------ -------------------
Standardized Measure,
end of year ......... $ 32,928,546 $ 77,693,000 $ 87,159,919 $ 80,573,458
=================== ================== ================== ===================
</TABLE>
The net change in prices and production costs from prior years in the
Standardized Measure of discounted future net cash flows was predominantly due
to an approximate increase in the price of an equivalent barrel of oil of $2.39,
offset by an increase in the production cost of an equivalent barrel of oil of
$.70.
<PAGE>
AUDITORS' REPORT TO THE DIRECTORS
To the Board of Directors of
Canadian Gas Gathering Systems Inc.
We have audited the balance sheets of CGGS Canadian Gas Gathering
Systems Inc. as at October 31, 1995 and 1994 and the statements of earnings
(loss) and deficit and changes in financial position for the years ended October
31, 1995, 1994 and 1993. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all
material respects, the financial position of the Company as of October 31, 1995
and 1994 and the results of its operations and the changes in its financial
position for the years ended October 31, 1995, 1994 and 1993 in accordance with
generally accepted accounting principles.
KPMG
Chartered Accountants
Calgary, Canada
January 12, 1996
<PAGE>
<TABLE>
<CAPTION>
CGGS CANADIAN GAS GATHERING SYSTEMS INC.
BALANCE SHEETS
(In Canadian Dollars)
ASSETS
October 31
--------------------------------------- October 31
1994 1995 1996
------------------ -------------------- --------------------
(Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and short-term deposits ..................... $ 8,326,000 $ 1,274,000 $ 10,050,000
Accounts receivable .............................. 11,619,000 12,850,000 13,540,000
------------------ -------------------- --------------------
19,945,000 14,124,000 23,590,000
Capital assets (note 3) ............................. 129,432,000 128,095,000 123,857,000
Deferred financing costs (note 4) ................... 1,628,000 1,482,000 1,336,000
Deferred foreign exchange loss ........................ 9,775,000 7,882,000 6,858,000
------------------ -------------------- --------------------
Total assets ....................................... $ 160,780,000 $ 151,583,000 $ 155,641,000
================== ==================== ====================
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
October 31
---------------------------------------- October 31
1994 1995 1996
------------------- ------------------- -------------------
(Unaudited)
<S> <C> <C> <C>
Current liabilities:
Debenture interest payable to shareholders ....... $ 1,399,000 $ 1,344,000 $ 1,342,000
Accounts payable ................................. 10,108,000 4,335,000 7,201,000
------------------- ------------------- -------------------
Total current liabilities ........................ 11,507,000 5,679,000 8,543,000
Long-term shareholders' debt (note 5) ............... 114,167,000 113,070,000 113,179,000
Provision for future site restoration ............... 2,236,000 3,015,000 4,148,000
------------------- ------------------- -------------------
127,910,000 121,764,000 125,870,000
Shareholders' equity:
Share capital (note 6) ........................... 34,213,000 34,213,000 34,213,000
Deficit .......................................... (1,343,000) (4,394,000) (4,442,000)
------------------- ------------------- -------------------
Total shareholders' equity 32,870,000 29,819,000 29,771,000
Commitments (note 10)
Total liabilities and shareholders' equity ..... $ 160,780,000 $ 151,583,000 $ 155,641,000
=================== =================== ===================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
CGGS CANADIAN GAS GATHERING SYSTEMS INC.
STATEMENTS OF EARNINGS (LOSS) AND DEFICIT
(In Canadian Dollars)
Year Ended
Year Ended October 31 October 31
----------------------------------------------------------- ------------------
1993 1994 1995 1996
------------------- ------------------- ------------------- ------------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Processing ............................ $ 25,818,000 $ 30,408,000 $ 33,100,000 $ 36,954,000
Production ............................ 28,620,000 35,855,000 22,408,000 26,791,000
Royalties, net ........................ (5,321,000) (6,787,000) (3,366,000) (3,975,000)
Other income .......................... 264,000 1,028,000 996,000 690,000
------------------- ------------------- ------------------- ------------------
49,381,000 60,504,000 53,138,000 60,460,000
Expenses:
Processing ............................ 16,707,000 15,621,000 14,763,000 19,207,000
Production ............................ 4,649,000 4,866,000 5,689,000 5,308,000
Administration (note 7) ............... 3,685,000 3,960,000 4,507,000 4,117,000
Interest on acquisitions .............. 1,280,000 - - -
Interest on long-term shareholders'
debt ................................ 12,175,000 15,998,000 16,227,000 16,172,000
Depletion and depreciation ............ 13,408,000 14,361,000 13,754,000 14,092,000
Amortization of deferred financing 146,000 146,000 146,000 146,000
costs ...............................
Foreign exchange loss ................. 760,000 772,000 795,000 1,134,000
------------------- ------------------- ------------------- ------------------
52,810,000 55,724,000 55,881,000 60,176,000
------------------- ------------------- ------------------- ------------------
Earnings (loss) before taxes ............. (3,429,000) 4,780,000 (2,743,000) 284,000
Large corporation tax .................... 262,000 274,000 308,000 332,000
------------------- ------------------- ------------------- ------------------
Net earnings (loss) ...................... (3,691,000) 4,506,000 (3,051,000) (48,000)
Deficit - beginning of year .............. (2,158,000) (5,849,000) (1,343,000) (4,394,000)
------------------- ------------------- ------------------- ------------------
Deficit - end of year .................... $ (5,849,000) $ (1,343,000) $ (4,394,000) $ (4,442,000)
=================== =================== =================== ==================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
CGGS CANADIAN GAS GATHERING SYSTEMS INC.
STATEMENTS OF CHANGES IN FINANCIAL POSITION
(In Canadian Dollars)
Year Ended
Year Ended October 31 October 31
----------------------------------------------------------- ------------------
1993 1994 1995 1996
------------------- ------------------- ------------------- ------------------
(Unaudited)
<S> <C> <C> <C> <C>
Operating Activities:
Net earnings (loss) ................... $ (3,691,000) $ 4,506,000 $ (3,051,000) $ (48,000)
Depletion and depreciation ............ 13,408,000 14,361,000 13,754,000 14,092,000
Amortization of deferred financing 146,000 146,000 146,000 146,000
costs ...............................
Foreign exchange loss ................. 760,000 772,000 795,000 1,134,000
Decrease (increase) in non-cash working
capital items........................ 6,004,000 (5,443,000) (7,004,000) 2,176,000
------------------- ------------------- ------------------- ------------------
16,627,000 14,342,000 4,640,000 17,500,000
Financing Activities:
Issuance of share capital ............. 17,692,000 583,000 - -
Increase in long-term shareholders'
debt................................. 53,057,000 1,726,000 - -
------------------- ------------------- ------------------- ------------------
70,749,000 2,309,000 - -
Investing Activities:
Expenditures on capital assets ........ (49,010,000) (15,024,000) (11,638,000) (8,722,000)
Decrease in deferred revenue .......... (1,473,000) - - -
(Increase) decrease in non-cash (35,281,000) (3,771,000) (54,000) (2,000)
working capital ...................
------------------- ------------------- ------------------- ------------------
(85,764,000) (18,795,000) (11,692,000) (8,724,000)
Increase (decrease) in cash and 1,612,000 (2,144,000) (7,052,000) 8,776,000
short-term deposits ...................
Cash and Short-Term Deposits:
Beginning of year ................... 8,858,000 10,470,000 8,326,000 1,274,000
------------------- ------------------- ------------------- ------------------
End of year ......................... $ 10,470,000 $ 8,326,000 $ 1,274,000 $ 10,050,000
=================== =================== =================== ==================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CGGS CANADIAN GAS GATHERING SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
(Information as to October 31, 1996 and for the Year Then Ended is Unaudited)
The Company was incorporated on March 9, 1990 under the Canada Business
Corporations Act. The Company was formed to invest in gas plants, gas gathering
systems and related gas reserves in Canada. Morrison Petroleums Ltd., a
shareholder, manages the Company.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements are prepared in accordance with generally
accepted accounting principles in Canada.
FOREIGN CURRENCY TRANSLATION
Monetary assets and monetary liabilities are translated at the exchange
rate in effect at the balance sheet date. Gains and losses on translation are
recorded in the statement of earnings, except that gains or losses on monetary
liabilities with a fixed or ascertainable life are deferred and amortized over
the repayment period.
JOINT VENTURES
The Company's exploration and production activities related to oil and
gas are substantially conducted in joint participation with others and,
accordingly, the accounts reflect only the Company's proportionate interest in
such activities.
CAPITAL ASSETS
The Company follows the full cost method of accounting for exploration
and development expenditures wherein all costs related to the exploration for
and the development of oil and gas reserves are capitalized. These costs include
leasehold acquisition costs, carrying charges of non-producing properties, costs
of drilling and completing wells, and oil and gas production equipment. Proceeds
received from the disposal of properties are normally credited against
accumulated costs unless this would result in a significant change in the
depletion rate, in which case, a gain or loss is computed and reflected in the
earnings statement.
The Company carries its oil and gas properties at the lower of
capitalized cost and net recoverable value. Net recoverable value is future net
revenues from proven reserves plus unproven properties at cost less impairment,
if any, net of the provision for future site restoration. Future net revenues
are determined using unit prices and production costs in effect at year-end and
include an allowance for future overhead costs, site restoration, financing
charges and income taxes that will be incurred in earning these revenues.
Petroleum and natural gas properties are depleted and tangible
production equipment is depreciated using the unit-of-production method based
upon the estimated proven oil and gas reserves after royalties. Reserves are
converted to common units based on the approximate equivalent energy content of
each unit of reserves, which results in a conversion ratio of six thousand cubic
feet of gas to one barrel of oil equivalent.
Processing facilities are depreciated on a straight-line basis over the
estimated useful life of each facility.
<PAGE>
CGGS CANADIAN GAS GATHERING SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PROVISION FOR FUTURE SITE RESTORATION
Provision is made for future site restoration costs. This provision is
charged to earnings over the estimated life of the proven oil and gas reserves
and processing facilities using the unit of production and the straight-line
methods respectively, and is included with depletion and depreciation.
ROYALTIES
Crown, freehold and overriding royalties and mineral taxes are net of
Alberta Royalty Tax Credits.
DEFERRED FINANCING COSTS
The deferred financing costs are associated with obtaining the
subscriptions for units (see Note 2). These costs were amortized evenly over
fifteen years.
2. FORMATION AND UNIT SUBSCRIPTIONS
Under the Unit Subscription Agreement, the investors have subscribed
for units at U.S. $100,000 per unit consisting of U.S. $75,000 of debentures and
U.S. $25,000 of Class A shares (2,500 Class A shares at a price of U.S. $10 per
share) in a 3-to-1 ratio. The Company received commitments for unit
subscriptions totaling U.S. $114,700,000 (U.S. $86,025,000 of debentures and
2,867,500 Class A shares at U.S. $10 per share). At October 31, 1996, 1995 and
1994 98.12% of the subscriptions were paid for and debentures and shares issued.
On September 14, 1994, the Board of Directors approved a resolution to
end any further acquisitions by the investors and to close out the investor
obligations.
At October 31, 1996, U.S. $84,411,829 of debentures and U.S.
$28,137,367 Class A shares were issued and outstanding.
Under Amendment No. 4 to the Unit Subscription Agreement dated May 15,
1995, in 1995 the Company is permitted to expend all of its funds from
operations after debt servicing and all applicable corporate tax, on capital
enhancements, repairs and maintenance. In 1996 and subsequent years, subject to
approval by eighty percent of all shareholders, the Company is permitted to
expend two-thirds of its funds from operations after debt servicing and all
applicable corporate tax, on capital enhancements, repairs and maintenance.
F-43
<PAGE>
CGGS CANADIAN GAS GATHERING SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. Capital Assets
<TABLE>
<CAPTION>
October 31
--------------------------------------------------------------
1994 1995 1996
-------------------- -------------------- --------------------
(unaudited)
<S> <C> <C> <C>
Oil and Gas Properties:
Cost .............................. $ 42,310,000 $ 43,361,000 $ 44,963,000
Accumulated depletion ............. (20,267,000) (24,540,000) (28,197,000)
-------------------- -------------------- --------------------
22,043,000 18,821,000 16,766,000
-------------------- -------------------- --------------------
Tangible Production Equipment:
Cost .............................. 7,889,000 9,402,000 10,239,000
Accumulated depreciation .......... (3,523,000) (4,450,000) (5,283,000)
-------------------- -------------------- --------------------
4,366,000 4,952,000 4,956,000
-------------------- -------------------- --------------------
Processing Facilities:
Cost .............................. 118,623,000 127,696,000 133,979,000
Accumulated depreciation .......... (15,600,000) (23,374,000) (31,844,000)
-------------------- -------------------- --------------------
103,023,000 104,322,000 102,135,000
-------------------- -------------------- --------------------
$ 129,432,000 $ 128,095,000 $ 123,857,000
==================== ==================== ====================
</TABLE>
During 1996 no acquisition fees (1995 - $0, 1994 - $27,000) were
included in the cost of capital assets. A provision for future site restoration
of $1,132,347 (1995 - $779,000, 1994 - $740,000, 1993 - $644,935) was expensed
during 1996.
4. DEFERRED FINANCING COSTS
October 31
-------------------------------------------
1994 1995 1996
----------- ----------- -----------
(unaudited)
Deferred financing costs ....... $ 2,187,000 $ 2,187,000 $ 2,187,000
Accumulated amortization ....... (559,000) (705,000) (851,000)
=========== =========== ===========
$ 1,628,000 $ 1,482,000 $ 1,336,000
=========== =========== ===========
5. LONG-TERM SHAREHOLDERS' DEBT
The debentures are payable in U.S. dollars fifteen years from the date
of issue which is in the period 2005 to 2008. The debentures bear interest at
14% per annum payable on a quarterly basis.
The Company is entitled, if the after-tax cash flow is not sufficient
to make interest payments, to satisfy interest payments by issuing additional
debentures valued at an amount equal to 100% of the principal amount thereof,
and Class A shares at $10.00 per share.
The debentures are held by the Class A shareholders.
<PAGE>
CGGS CANADIAN GAS GATHERING SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SHARE CAPITAL
AUTHORIZED
Unlimited Class A voting common shares.
Unlimited Class B non-voting common shares.
The Class B shares are not entitled to dividends. Upon payout, as
defined in the Company's Articles, each Class B share may be converted to a
Class A share and the Class B shareholders have a call option to purchase, in
the aggregate, 25% of the then outstanding debentures at a price of U.S. $10 for
each U.S. $75,000 principal amount of debentures.
Class B shares are issued equal to 33% of the Class A shares issued
pursuant to subscription calls. Class B shares are issued for U.S. $.01 per
share.
ISSUED FOR CASH
Class A Class B
------------------------ -------------------
Inception to October 31, 1993 2,770,599 $ 33,619,000 923,530 $ 11,000
Issued during 1994 43,139 582,000 14,380 -
----------- ------------- --------- ---------
Balance at October 31, 1994,
1995 and 1996 (unaudited) 2,813,738 $ 34,201,000 937,910 $ 11,000
=========== ============= ========= =========
7. Administration
Pursuant to the administration and management agreements, the following
expenses have been recorded:
<TABLE>
<CAPTION>
Year Ended October 31
-------------------------------------------------------------------------
1993 1994 1995 1996
----------------- ------------------ ------------------ -----------------
(unaudited)
<S> <C> <C> <C> <C>
Management fees ................. $ 2,105,000 $ 2,384,000 $ 2,613,000 $ 2,531,000
Administration fees ............. 1,394,000 1,959,000 1,628,000 1,632,000
----------------- ------------------ ------------------ -----------------
3,499,000 4,343,000 4,241,000 4,163,000
Directors' fees and expenses .... 38,000 63,000 311,000 113,000
General corporate expenses ...... 148,000 550,000 400,000 299,000
----------------- ------------------ ------------------ -----------------
3,685,000 4,956,000 4,952,000 4,575,000
Recoveries ...................... - (996,000) (445,000) (458,000)
----------------- ------------------ ------------------ -----------------
$ 3,685,000 $ 3,960,000 $ 4,507,000 $ 4,117,000
================= ================== ================== =================
</TABLE>
<PAGE>
CGGS CANADIAN GAS GATHERING SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
General corporate expenses include third-party professional fees,
insurance and other items of a general corporate nature.
8. INCOME TAXES
At October 31, 1996, the Company has estimated deductions for income
tax purposes which exceed the related book value by $3,400,000, the potential
benefit of which have not been recognized in these financial statements. For
income tax purposes, the Company has reported non-capital loss carryforwards of
$50,350,000 at October 31, 1996 which expire as follows: 1997 - $415,000; 1998 -
$1,658,000; 1999 - $12,543,000; 2000 - $11,991,000; 2001 - $9,061,000; 2002 -
$11,247,000; 2003 - $3,435,000.
9. RELATED PARTY TRANSACTIONs
At times, the Company enters into agreements and transactions related
to gas plants and gas reserves with Morrison Petroleums Ltd. and Canadian Gas
Gathering Systems II, Inc. These transactions are carried out in accordance with
industry standard terms.
During 1995, a consulting fee of $158,000 was paid to a founder and
director.
10. COMMITMENTS
The Company has a Management Agreement with Morrison Petroleums Ltd. to
provide services with respect to evaluation, acquisition, development and
construction of projects and Consulting Agreements with two other founders. The
Agreements are for ten years and provide for annual management and consulting
fees to be paid to the three parties totaling 1.5% of the original cost of all
projects, subject to certain adjustments as provided in the Agreements.
The Company has an Administration Agreement with Morrison Petroleums
Ltd. to provide administrative functions to the Company. This Agreement is for
ten years and provides for an annual administration fee of 5% of the net
operating income as defined in the agreement.
Under these agreements, fees were incurred and accrue to the founders
as follows:
Morrison Gas B. Feshbach
Petroleums Ltd. Systems III & Sons
----------------- ------------- -----------
Year ended October 31, 1993 ...... $ 3,187,000 $ 496,000 $ 192,000
Year ended October 31, 1994 ...... 3,653,000 443,000 247,000
Year ended October 31, 1995 ...... 3,485,000 485,000 271,000
Year ended October 31, 1996
(unaudited)...... 3,363,000 513,000 287,000
<PAGE>
CGGS CANADIAN GAS GATHERING SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Of the above fees which accrued to the founders, the following amounts
were outstanding at the periods ended as follows:
Morrison Gas B. Feshbach
Petroleums Ltd. Systems III & Sons
---------------- ------------- ------------
Year ended October 31, 1994 ..... $ 854,000 $ 92,000 $ 53,000
Year ended October 31, 1995 ..... 850,000 88,000 40,000
Year ended October 31, 1996 ..... 616,000 131,000 1,000
In addition, under the Administration Agreement, where Morrison
Petroleums Ltd. is the operator of a gas system, capital and operating overhead
is recovered from the Company by Morrison Petroleums Ltd. following guidelines
prescribed by the Petroleum Accountants Society of Canada, Accounting Procedure
at negotiated rates.
11. SUBSEQUENT EVENTS
Subsequent to October 31, 1996 the Company became a wholly owned
subsidiary of Abraxas Petroleum Corporation. Prior to the change in ownership,
the Company sold its interest in the Nevis gas plant and related facilities to
Morrison Petroleum, LTD, for a consideration of $120,000,000, converted its U.S.
dollar denominated debt to Canadian dollars and repaid the debt.
12. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
These financial statements have been prepared in accordance with
Canadian generally accepted accounting principles ("Canadian GAAP") which, in
the case of the Company, conforms with United States generally accepted
accounting principles ("US GAAP") in all material respects except as follows:
(a) In accordance with U.S. GAAP, exchange gains and losses arising on
translation of long-term monetary liabilities, unless designated
as a hedge, are included in income currently instead of deferred
and amortized over the lives of such long term liabilities.
(b) The Company has applied Statement of Financial Accounting
Standards Number 109 "Accounting for Income Taxes" ("SFAS 109")
effective November 1, 1992. SFAS 109 requires the Company to
account for income taxes using the liability method for US GAAP
purposes. There was no cumulative effect or effect on current
results as a consequence of adopting SFAS 109.
<PAGE>
CGGS CANADIAN GAS GATHERING SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The impact of these changes on the Company's financial statements is as
follows:
STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
Years Ended October 31
------------------------------------------------------------------------------
1993 1994 1995 1996
------------------ ------------------- ------------------- -------------------
(unaudited)
<S> <C> <C> <C> <C>
Net earnings (loss) as reported . $ (3,691,000) $ 4,506,000 $ (3,051,000) $ (1,384,000)
Foreign currency translation .... (4,409,000) (1,829,000) 1,893,000 1,024,000
================== =================== =================== ===================
Net earnings (loss) in accordance
with U.S. GAAP ............... $ (8,100,000) $ 2,677,000 $ (1,158,000) $ (360,000)
================== =================== =================== ===================
</TABLE>
<TABLE>
<CAPTION>
Increase
As Reported (Decrease) U.S. GAAP
------------------ ------------------ --------------------
October 31, 1994
<S> <C> <C> <C>
Deferred foreign exchange loss ....... $ 9,775,000 $ (9,775,000) $ -
Deficit .............................. (1,343,000) 9,776,000 (11,119,000)
October 31, 1995
Deferred foreign exchange loss ....... 7,882,000 (7,882,000) -
Deficit .............................. (4,394,000) 7,883,000 (12,277,000)
October 31, 1996
Deferred foreign exchange loss ....... 6,858,000 (6,858,000) -
Deficit .............................. (5,778,000) 6,859,000 (12,637,000)
</TABLE>
<TABLE>
<CAPTION>
13. CHANGES IN NON-CASH WORKING CAPITAL COMPONENTS
Years Ended October 31
------------------------------------------------------------------------------
1993 1994 1995 1996
------------------ ------------------- ------------------- -------------------
(Unaudited)
<S> <C> <C> <C> <C>
Decrease (increase) in
non-cash working capital items:
Operating:
Accounts receivable $ (5,558,000) $ (562,000) $ (1,231,000) $ ( 690,000)
Accounts payable 11,562,000 (4,881,000) (5,773,000) 2,866,000
------------------ ------------------- ------------------- -------------------
$ 6,004,000 $ (5,443,000) $ (7,004,000) $ 2,176,000
================== =================== =================== ===================
Investing:
Accounts receivable $ (38,023,000) $ -- $ -- $ --
Debenture interest payable
to shareholders 2,742,000 (3,771,000) (54,000) (2,000)
------------------ ------------------- ------------------- -------------------
$(35,281,000) $ (3,771,000) $ (54,000) $ (2,000)
================== =================== =================== ===================
</TABLE>
<PAGE>
Independent Auditors' Report
To the Board of Directors of
Enserch Exploration, Inc.
We have audited the accompanying statements of revenues and direct
operating expenses of Enserch Exploration, Inc.'s Wamsutter Area Package (the
"Package") (see Note 1) to be sold to Abraxas Petroleum Corporation for the
years ended December 31, 1995, 1994, and 1993. These financial statements are
the responsibility of the management of Enserch Exploration, Inc., as operator
of the properties. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying statements of revenues and direct operating expenses
reflect the revenues and direct operating expenses attributable to the Package
as described in Note 1 to the financial statements and are not intended to be a
complete presentation of the revenues and expenses of the Package.
In our opinion, the accompanying financial statements present fairly,
in all material respects, the revenues and direct operating expenses of the
Package as described in Note 1 for the years ended December 31, 1995, 1994, and
1993, in accordance with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
June 26, 1996
<PAGE>
<TABLE>
<CAPTION>
ENSERCH EXPLORATION, INC.'S WAMSUTTER AREA PACKAGE
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
Nine Months Ended
Year Ended December 31 September 30
--------------------------------------------- ------------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- -------------- --------------
(in thousands) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil, gas and related
product sales ........... $ 10,655 $ 10,171 $ 7,542 $ 5,262 $ 7,280
Direct operating expenses:
Lease operating expense ... 431 640 1,029 894 776
Severance and
property taxes .......... 1,108 1,291 1,113 778 1,068
-------------- -------------- -------------- -------------- -------------
1,539 1,931 2,142 1,672 1,844
-------------- -------------- -------------- -------------- -------------
Excess of revenues over
direct operating expenses . $ 9,116 $ 8,240 $ 5,400 $ 3,590 $ 5,436
============== ============== ============== ============== =============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
ENSERCH EXPLORATION, INC.'S WAMSUTTER AREA PACKAGE
NOTES TO STATEMENTS OF REVENUES AND
DIRECT OPERATING EXPENSES
1. THE PROPERTIES
The accompanying statements represent the revenues and direct operating
expenses attributable to the net interest in Enserch Exploration, Inc.'s ("EEX")
Wamsutter Area Package producing wells and certain non-producing leases to be
sold to Abraxas Petroleum Corporation ("Abraxas"). The properties are located in
Sweetwater and Canton County, Wyoming. EEX acquired the properties on June 8,
1995 when it purchased all of the capital stock of Dalen Corporation. Effective
January 1, 1996, Dalen Corporation was merged into EEX.
Historical financial statements reflecting financial position, results
of operations and cash flows required by generally accepted accounting
principles are not presented, as such information is neither readily available
on an individual property basis nor meaningful for the properties acquired
because the entire acquisition cost is being assigned to oil and gas properties.
Accordingly, these statements of revenues and direct operating expenses are
presented in lieu of the financial statements required under Rule 3-05 of
Securities and Exchange Commission Regulation S-X.
The accompanying statements of revenues and direct operating expenses
represent EEX's net working interest in the properties to be acquired by Abraxas
and are presented on the full cost accrual basis of accounting. Depreciation,
depletion and amortization, allocated general and administrative expense,
interest expense and income, and income taxes have been excluded because the
property interests acquired represent only a portion of a business and the
expenses incurred are not necessarily indicative of the expenses to be incurred
by Abraxas.
2. CONTINGENT LIABILITIES
Given the nature of the properties acquired and as stipulated in the
purchase agreement, Abraxas is subject to loss contingencies pursuant to
existing or expected environmental laws, regulations, and losses covering the
acquired properties.
3. OIL AND GAS RESERVES (UNAUDITED)
The following table of estimated proved and proved developed reserves
of oil and gas related to the Wamsutter Area Package properties has been
prepared utilizing estimates of period-end reserve quantities provided by
independent petroleum consultants.
Oil Gas
(Bbl) (a) (Mcf)
------------------- ----------------
At January 1, 1993 .............. 547,125 43,339,881
Production ................... (65,283) (4,498,193)
Other changes, net ........... 28,903 553,355
---------------- ----------------
At January 1, 1994 .............. 510,745 39,395,043
Production ................... (288,763) (4,712,683)
Other changes, net ........... 1,915,650 1,298,888
---------------- ----------------
At January 1, 1995 .............. 2,137,632 35,981,248
Production ................... (303,076) (4,285,734)
Other changes, net ........... l,390,493 8,838,026
================ ================
At January 1, 1996 .............. 3,225,049 40,533,540
================ ================
<PAGE>
ENSERCH EXPLORATION, INC.'S WAMSUTTER AREA PACKAGE
NOTES TO STATEMENTS OF REVENUES AND
DIRECT OPERATING EXPENSES
Oil Gas
(Bbl) (Mcf)
------------------- ----------------
Proved Developed Reserves:
At January 1, 1993 .............. 547,125 43,339,881
At January 1, 1994 .............. 510,745 39,395,043
At January 1, 1995 .............. 2,137,632 35,981,248
At January 1, 1996 .............. 2,942,115 36,559,004
- ------------------
(a) Includes condensate and natural gas liquids attributable to leasehold
interests of 2,655,476 Bbls for January 1, 1996 and 1,669,664 Bbls for
January 1, 1995. Prior to l994, gas was not processed to extract
natural gas liquids.
4. STANDARDIZED MEASURE (UNAUDITED)
Discounted future net cash flows relating to proved gas and oil reserve
quantities (unaudited) have been prepared using estimated future production
rates and associated production and development costs. Continuation of economic
conditions existing at the balance sheet date was assumed. Accordingly,
estimated future net cash flows were computed by applying prices and contracts
in effect at period end to estimated future production of proved gas and oil
reserve, estimating future expenditures to develop proved reserves and
estimating costs to produce the proved reserves based on average costs for the
period. Average prices used in the computations were: Gas (per Mcf) $2.08 in
1995, $1.45 in 1994 and $2.40 in 1993; Oil (per barrel) $11.17 in 1995, $7.22 in
1994 and $13.52 in 1993.
Because reserve estimates are imprecise and changes in the other
variables are unpredictable, the standardized measure should be interpreted as
indicative of the order of magnitude only and not as precise amounts.
1995 1994 1993
---------------------------------
Standardized Measure (in thousands):
Future cash inflows ..................... $ 120,278 $ 67,597 $ 101,445
Future production and development costs . (25,971) (17,121) (19,710)
Future income-tax expense ............... (16,137) (14,873) (25,525)
--------------------------------
Future net cash flows ................... 78,170 35,603 56,210
Less 10% annual discount ................ 35,565 14,095 23,727
================================
Standardized measure of discounted
future net cash flows ................. $ 42,605 $ 21,508 $ 32,483
================================
Change in Standardized Measure (in thousands):
Sales and transfers of gas and oil
produced, net of production costs .... $ (5,400) $ (8,240) $ (9,116)
Changes in prices, net of production and
future development costs .............. 14,280 (21,828) 4,903
Accretion of discount ................... 2,151 3,248 3,326
Net change in income taxes .............. 190 5,765 240
Additions, revisions and offer changes .. 9,876 10,080 (125)
================================
Total ............................. $ 21,097 $(10,975) $ (772)
================================
<PAGE>
Report of Independent Auditors
Board of Directors
Abraxas Petroleum Corporation
We have audited the accompanying statements of combined oil and gas revenues and
direct operating expenses of the Certain Overriding Royalty Interests in the
Portilla Field Acquired by Abraxas Petroleum Corporation (Abraxas) for the years
ended December 31, 1994 and 1995. These statements are the responsibility of
Abraxas' management. Our responsibility is to express an opinion on the
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements of combined oil and gas
revenues and direct operating expenses are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statements of combined oil and gas revenues and direct
operating expenses. An audit also includes assessing the basis of accounting
used and significant estimates made by management, as well as evaluating the
overall presentation of statements. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying statements of combined oil and gas revenues and direct
operating expenses were prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission as described in Note 1,
are not intended to be a complete presentation of the combined oil and gas
revenues and expenses of Certain Overriding Royalty Interests in the Portilla
Field Acquired by Abraxas.
In our opinion, the statements referred to above present fairly, in all material
respects, the combined oil and gas revenues and direct operating expenses of
Certain Overriding Royalty Interests in the Portilla Field Acquired by Abraxas
for the years ended December 31, 1994 and 1995 in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
San Antonio, Texas
August 30, 1996
<PAGE>
<TABLE>
<CAPTION>
CERTAIN OVERRIDING ROYALTY INTERESTS IN THE PORTILLA FIELD
ACQUIRED BY ABRAXAS PETROLEUM CORPORATION
STATEMENTS OF COMBINED OIL AND GAS REVENUES
AND DIRECT OPERATING EXPENSES
Nine Months Ended
Year Ended December 31 September 30
-------------------------------------- --------------------------------------
1994 1995 1995 1996
------------------- ------------------ ------------------ -------------------
(Unaudited)
<S> <C> <C> <C> <C>
Oil and gas revenues ..... $ 3,529,234 $ 3,675,596 $ 2,608,169 $ 2,821,855
Direct operating expenses:
Production taxes ...... 908,421 835,092 590,019 621,656
------------------- ------------------ ------------------ -------------------
Oil and gas revenues in
excess of direct
operating expenses .... $ 2,620,813 $ 2,840,504 $ 2,018,150 $ 2,200,199
=================== ================== ================== ===================
</TABLE>
See accompanying notes.
<PAGE>
CERTAIN OVERRIDING ROYALTY INTERESTS IN THE PORTILLA FIELD
ACQUIRED BY ABRAXAS PETROLEUM CORPORATION
NOTES TO STATEMENTS OF COMBINED OIL AND GAS REVENUES
AND DIRECT OPERATING EXPENSES
Years Ended December 31, 1994 and 1995
(Information as to the Nine Months Ended September 30, 1995 and 1996 is
Unaudited)
1. BASIS OF PRESENTATION
The accompanying statement of combined oil and gas revenues and direct
operating expenses represents the results from certain oil and gas producing
properties located in the Portilla Field, San Patricia County, Texas --
(Properties) which were previously owned by the Commingled Pension Trust Fund
(Petroleum II) (the Pension Fund) which were acquired in connection with the
acquisition by Abraxas Petroleum Corporation (Abraxas). Abraxas acquired the
remaining 75% partnership interest in Portilla-1996, L.P., the limited partner
of which acquired the above interests from the Pension Fund on March 21, 1996
and contributed such interest to the Partnership.
Full historical financial statements reflecting financial position,
results of operations, and cash flows required by generally accepted accounting
principles are not presented, as such information is not readily available on an
individual property basis nor meaningful for the properties acquired because the
entire acquisition cost is being assigned to oil and gas properties.
Accordingly, these statements of combined oil and gas revenues and direct
operating expenses are presented in lieu of the financial statements required
under Rule 3-05 of Regulation S-X of the Securities and Exchange Commission.
The accompanying statements of combined oil and gas revenues and direct
operating expenses represent the net overriding royalty interests in the
Properties to be acquired by Abraxas and are presented on the accrual basis of
accounting. Depreciation, depletion and amortization, general and administrative
expenses, interest expense, and federal and state income taxes have been
excluded because the property interests acquired represent only a portion of a
business and the expenses incurred are not necessarily indicative of the
expenses to be incurred by Abraxas.
The unaudited statements of combined oil and gas revenues and direct
operating expenses for the nine months ended September 30, 1995 and 1996
include, in the opinion of management, all material adjustments (consisting of
only normal recurring adjustments) necessary for a fair presentation. The
results of the nine months ended September 30, 1996, are not necessarily
indicative of the results to be expected for the full year.
<PAGE>
CERTAIN OVERRIDING ROYALTY INTERESTS IN THE PORTILLA FIELD
ACQUIRED BY ABRAXAS PETROLEUM CORPORATION
NOTES TO STATEMENTS OF COMBINED OIL AND GAS REVENUES
AND DIRECT OPERATING EXPENSES (CONTINUED)
2. SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
The following table presents the estimate of the net proved crude oil
and natural gas quantities related to the interests in the Properties acquired
and have been prepared utilizing the estimates of reserve quantities prepared by
independent petroleum reserve engineers.
Liquid Natural
Hydrocarbons Gas
------------ -----------
(Barrels) (Mcf)
Proved developed and undeveloped reserves:
Balance at December 31, 1993 ............ 2,060,000 7,309,000
Revisions of previous estimates ....... 240,000 (1,374,000)
Production ............................ (207,000) (256,000)
----------- -----------
Balance at December 31, 1994 ............ 2,093,000 5,679,000
Revisions of previous estimates ....... (245,000) (2,290,000)
Production ............................ (176,000) (497,000)
Other changes, net .................... 306,000 681,000
----------- -----------
Balance at December 31, 1995 ............ 1,978,000 3,573,000
Revisions of previous estimates ....... (417,000) (974,000)
Production ............................ (81,000) (209,000)
Other changes, net .................... 208,000 10,000
----------- -----------
Balance at June 30, 1996 ................ 1,688,000 2,400,000
=========== ===========
Proved developed reserves:
December 31, 1994 ....................... 1,782,000 4,727,000
December 31, 1995 ....................... 1,722,000 3,378,000
June 30, 1996 ........................... 1,677,000 2,331,000
All of the above reserves are located in the United States.
<PAGE>
CERTAIN OVERRIDING ROYALTY INTERESTS IN THE PORTILLA FIELD
ACQUIRED BY ABRAXAS PETROLEUM CORPORATION
NOTES TO STATEMENTS OF COMBINED OIL AND GAS REVENUES
AND DIRECT OPERATING EXPENSES (CONTINUED)
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
Properties' 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 prices at December 31, 1995 and June 30, 1996 to the estimated future
production of period-end proved reserves. Future cash inflows were reduced by
estimated future production and development costs based on period-end costs to
determine pre-tax cash inflows. The Properties are not, nor is the Owner, a
separate tax paying entity. Accordingly, the standardized measure of discounted
future net cash flows from proved reserves is presented before deduction of
federal income taxes.
Future net cash inflows were discounted using a 10% annual discount
rate to arrive at the Standardized Measure.
<PAGE>
CERTAIN OVERRIDING ROYALTY INTERESTS IN THE PORTILLA FIELD
ACQUIRED BY ABRAXAS PETROLEUM CORPORATION
NOTES TO STATEMENTS OF COMBINED OIL AND GAS REVENUES
AND DIRECT OPERATING EXPENSES (CONTINUED)
Set forth below is the Standardized Measure relating to proved oil and
gas reserves for December 31, 1995 and June 30, 1996:
<TABLE>
<CAPTION>
December 31 June 30
--------------------------------------
1994 1995 1996
------------------ ------------------ -------------------
<S> <C> <C> <C>
Standardized Measure:
Future cash inflows ................. $ 40,963,000 $ 43,052,000 $ 38,232,000
Future production and development
costs ............................. 12,078,000 13,490,000 12,268,000
------------------ ------------------ -------------------
28,885,000 29,562,000 25,964,000
Discount ............................ (11,498,000) (10,622,000) (11,703,000)
------------------ ------------------ -------------------
Discounted future net cash flows
before income taxes ................. $ 17,387,000 $ 18,940,000 $ 14,261,000
================== ================== ===================
Change in Standardized Measure (in thousands):
Standardized Measure, beginning of
period ............................ $ 11,427,000 $ 17,387,000 $ 18,940,000
Sales and transfers of gas and
oil produced, net of
production costs ............ (2,621,000) (2,841,000) (1,482,000)
Changes in prices, net of
production and future
development costs ........... 6,639,000 2,661,000 627,000
Revisions of previous quantity
estimates ................... 63,000 (3,168,000) (4,001,000)
Accretion of discount ......... 1,854,000 1,739,000 947,000
Additions, revisions, and
other changes ............... 25,000 3,162,000 (770,000)
------------------ ------------------ -------------------
Standardized Measure, end of
period ......................... $ 17,387,000 $ 18,940,000 $ 14,261,000
================== ================== ===================
</TABLE>
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
Canadian Abraxas Petroleum Limited (a Canadian corporation)
We have audited the accompanying balance sheet of Canadian Abraxas
Petroleum Limited as of September 30, 1996. This balance sheet is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in
all material respects, the financial position of Canadian Abraxas Petroleum
Limited at September 30, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
San Antonio, Texas
October 7, 1996
<PAGE>
CANADIAN ABRAXAS PETROLEUM LIMITED
BALANCE SHEET
September 30, 1996
ASSETS
Subscription receivable .......................... $ 1
--------
Total assets ................................ $ 1
========
LIABILITIES AND SHAREHOLDER'S EQUITY
Shareholder's equity:
Common stock, no par value;
unlimited number of shares authorized,
issued and outstanding -0- shares
(Subscribed 1 share) .......................... $ 1
Preferred stock, no par value; unlimited
number of shares authorized, issued and
outstanding -0- shares ....................... -
--------
$ 1
========
See accompanying notes.
<PAGE>
CANADIAN ABRAXAS PETROLEUM LIMITED
NOTE TO BALANCE SHEET
September 30, 1996
1. ORGANIZATION
ORGANIZATION AND OPERATIONS
Canadian Abraxas Petroleum Limited, a Canadian Corporation (Canadian
Abraxas), was capitalized by Abraxas Petroleum Corporation for the principal
purpose of acquiring 100% of the outstanding capital stock of CGGS Canadian Gas
Gathering Systems, Inc. (CGGS), after the consummation of the sale of the Nevis
Plant. CGGS owns producing properties in western Canada, consisting primarily of
natural gas reserves, natural gas gathering systems, and processing facilities.
Canadian Abraxas has conducted no business and has no employees or operating
history as of September 30, 1996. Due to the absence of business activity as of
September 30, 1996, no statement of operations or cash flows is presented.
On November 14, 1996, Abraxas Petroleum Corporation, through its wholly
owned subsidiary, Canadian Abraxas, closed the acquisition of CGGS with a
portion of the proceeds from the issuance of $215,000,000 of Senior Notes due
2004 (Notes). Abraxas Petroleum Corporation and Canadian Abraxas are jointly and
severally liable for all obligations under the Notes. In connection with the
close of the transaction, Canadian Abraxas incurred a liability of approximately
$82,000,000 of the $215,000,000 liability. Additionally, in connection with the
close of the transaction, CGGS was immediately merged with and into Canadian
Abraxas, and Canadian Abraxas, as the surviving entity, used the net proceeds
from the sale of the Nevis gas processing plant to retire all of the outstanding
debentures of CGGS.
================================================================================
No person is authorized in connection
with any offer made hereby to give any
information or to make any
representation not contained in this
Prospectus in connection with the
offering made hereby and, if given or
made, such information or representation
must not be relied upon as having been
authorized by the Issuers. This
Prospectus does not constitute an offer
to sell, or a solicitation of an offer
to purchase, any securities in any
jurisdiction in which, or to any person
to whom, it is unlawful to make such
offer or solicitation. Neither the
delivery of this Prospectus or the
accompanying Letter of Transmittal or
both together nor any exchange of
securities made hereunder shall, under
any circumstances, create any inference ABRAXAS PETROLEUM
that there has not been any change in CORPORATION
the affairs of the Issuers since the
date hereof.
CANADIAN ABRAXAS
PETROLEUM LIMITED
------------------------
TABLE OF CONTENTS
Page
Summary............................ 5
Risk Factors....................... 16
Purpose of the Exchange Offer...... 23
Resale of the Exchange Note........ 24
Plan of Distribution............... 24
The Exchange Offer................. 25
Exchange Agent..................... 31
Use of Proceeds.................... 32
Capitalization..................... 33
Pro Forma Financial Information.... 34
Selected Consolidated Financial
Information....................... 42 Offer to Exchange
Management's Discussion and 11.5% Senior Notes Due 2004, Series B
Analysis of Financial Condition for any and all Outstanding
and Results of Operations ........ 43 11.5% Senior Notes due 2004, Series A
Business........................... 50
Management......................... 69
Executive Compensation............. 72
Securities Holdings of Principal
Stockholders, Directors and
Officers.......................... 75
Description of the Notes........... 77
Description of Capital Stock....... 105
Certain United States and Canadian
Income Tax Considerations........ 112
Transactions with Related Parties.. 116
Book-Entry; Delivery and Form...... 116
Available Information.............. 118
Enforceability of Civil
Liabilities Against Foreign
Persons........................... 118
Legal Matters...................... 118
Experts............................ 119
Glossary of Terms.................. 120
Index to Consolidated Financial
Statements........................ F-1
Until __________, 199_ (25 days after
the date of this Prospectus) all dealers [LOGO]
effecting transactions in the registered
securities, whether or not participating
in this distribution, may be required to
deliver a Prospectus. This is in
addition to the obligation of dealers to
deliver a prospectus when acting as Prospectus
underwriters and with respect to their , 199_
unsold allotments or subscriptions.
<PAGE>
II-1
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Abraxas' Articles of Incorporation contain a provision that eliminates
the personal monetary liability of directors and officers to Abraxas and its
stockholders for a breach of fiduciary duties to the extent currently allowed
under the Nevada General Corporation Law (the "Nevada Statute"). In respect of
Canadian Abraxas, the Canada Business Corporation Act ("CBCA") does not permit
any such limitations of a director's liability. If a director or officer of
Abraxas were to breach his fiduciary duties, neither Abraxas nor its
stockholders could recover monetary damages, and the only course of action
available to Abraxas' stockholders would be equitable remedies, such as an
action to enjoin or rescind a transaction involving a breach of fiduciary duty.
To the extent certain claims against directors or officers are limited to
equitable remedies, this provision of Abraxas' Articles of Incorporation may
reduce the likelihood of derivative litigation and may discourage stockholders
or management from initiating litigation against directors or officers for
breach of their duty of care. Additionally, equitable remedies may not be
effective in many situations. If a stockholder's only remedy is to enjoin the
completion of the Board of Director's action, this remedy would be ineffective
if the stockholder did not become aware of a transaction or event until after it
had been completed. In such a situation, it is possible that the stockholders
and the Company would have no effective remedy against the directors or
officers.
Liability for monetary damages has not been eliminated for acts or
omissions which involve intentional misconduct, fraud or a knowing violation of
law or payment of an improper dividend in violation of section 78.300 of the
Nevada Statute. The limitation of liability also does not eliminate or limit
director liability arising in connection with causes of action brought under the
Federal securities laws.
The Nevada Statute permits a corporation to indemnify certain persons,
including officers and directors, who are (or are threatened to be made) parties
against all expenses (including attorneys' fees) actually and reasonably
incurred by, or imposed upon, him in connection with the defense by reason of
his being or having been a director or officer if he acted in good faith and in
a manner which he reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful, except
where he has been adjudged by a court of competent jurisdiction (and after
exhaustion of all appeals) to be liable for gross negligence or willful
misconduct in the performance of duty. The Bylaws of Abraxas provide
indemnification to the same extent allowed pursuant to the foregoing provisions
of the Nevada Statute.
Nevada corporations also are authorized to obtain insurance to protect
officers and directors from certain liabilities, including liabilities against
which the corporation cannot indemnify its directors and officers. CBCA
corporations are permitted to obtain such insurance also, accept for liability
relating to the failure to act honestly and in good faith with a view to the
best interests of the corporation. Abraxas currently has a directors' and
officers' liability insurance policy in effect providing $3.0 million in
coverage and an additional $1.0 million in coverage for certain employment
related claims.
Abraxas has entered into indemnity agreements with each of its
directors and officers. These agreements provide for indemnification to the
extent permitted by the Nevada Statute.
Under the CBCA, except in respect of an action by or on behalf of a
corporation or a body corporate to procure a judgment in its favor, a
corporation may indemnify a director or officer, a former director or officer or
a person who acts or acted at the corporation's request as a director or officer
of a body corporate of which the corporation is or was a shareholder or
creditor, and his or her heirs and legal representatives (an "Indemnifiable
Person"), against all costs, charges and expenses, including an amount paid to
settle an action or satisfy a judgment, reasonably incurred by him or her in
respect of any civil, criminal or administrative action or proceeding to which
he or she is made a party by reason of being or having been a director or
officer of such corporation or such body corporate, if: (a) he or she acted
honestly and in good faith with a view to the best interests of such
corporation; and (b) in the case of a criminal or administrative action or
proceeding that is enforced by a monetary penalty, he or she had reasonable
grounds for believing that his or her conduct was substantially successful on
the merits in his or her defense of the action or proceeding, fulfilled the
conditions set out in (a) and (b), above and is fairly and reasonably entitled
to indemnity. A corporation may, with the approval of a court, also indemnify an
Indemnifiable Person in respect of an action by or on behalf of the corporation
or body corporate to procure a judgment in its favor, to which such person is
made a party by reason of being or having been a director or an officer of the
corporation or body corporate, if he or she fulfills the conditions set out in
(a) and (b), above. The Canadian Abraxas Bylaws provide for indemnification of
directors and officers to the fullest extent authorized by the CBCA.
Item 21. Exhibits and Financial Statement Schedules.
**3.1 Articles of Incorporation of Abraxas. (Filed as Exhibit 3.1 to the
Company's Form S-4 Registration Statement, Registration Statement No.
33-36565 (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 Company's Form S-3
Registration Statement No. 333-398 (the "S-3 Registration
Statement")).
**3.5 Amended and Restated Bylaws of Abraxas. (Filed as Exhibit 3.5 to the
S-3 Registration Statement).
**3.6 Certificate of Designation of Series 1995-B Preferred Stock of
Abraxas. (Filed as Exhibit 3.6 to the S-3 Registration Statement).
*3.7 Articles of Incorporation of Canadian Abraxas.
*3.8 By-Laws of Canadian Abraxas.
**4.1 Specimen Common Stock Certificate of Abraxas. (Filed as Exhibit 4.1 to
the S-4 Registration Statement).
**4.2 Specimen Preferred Stock Certificate of Abraxas. (Filed as Exhibit 4.2
to the Company's Annual Report on Form 10-K filed on March 31, 1995).
**4.3 Rights Agreement dated as of December 6, 1994 between of Abraxas and
First Union National Bank of North Carolina ("FUNB"). (Filed as
Exhibit 4.1 to the Company's Registration Statement on Form 8-A filed
on December 6, 1994).
**4.4 Contingent Value Rights Agreement dated November 17, 1995 by and
between Registrant and FUNB (Filed as Exhibit 4.1 to the Company's
Current Report on Form 8-K dated November 21, 1995).
**4.5 First Amendment to Contingent Value Rights Agreement dated May 2, 1996
by and between Registrant and FUNB. (Filed as Exhibit 4.5 to the S-3
Registration Statement).
**4.6 Indenture dated November 14, 1996 by and among the Company and IBJ
Schroder Bank and Trust Company. (Filed as Exhibit 4.1 to the
Company's Current Report on Form 8-K dated November 27, 1996).
*4.7 Form of Note.
*4.8 Form of Letter of Transmittal.
*4.9 Specimen Common Stock Certificate of Canadian Abraxas.
*5.1 Opinion of Cox & Smith Incorporated.
*5.2 Opinion of Burnet, Duckworth & Palmer.
***8.1 Tax Opinion of Cox & Smith Incorporated.
***8.2 Tax Opinion of Burnet, Duckworth & Palmer.
**10.1 Abraxas Petroleum Corporation 1984 Non-Qualified Stock Option Plan, as
amended and restated. (Filed as Exhibit 10.7 to the Company's Annual
Report on Form 10-K filed April 14, 1993).
**10.2 Abraxas Petroleum Corporation 1984 Incentive Stock Option Plan, as
amended and restated. (Filed as Exhibit 10.8 to the Company's Annual
Report on Form 10-K filed April 14, 1993).
**10.3 Abraxas Petroleum Corporation 1993 Key Contributor Stock Option Plan.
(Filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K
filed April 14, 1993).
+*10.4 Abraxas Petroleum Corporation 401(k) Profit Sharing Plan.
+*10.5 Abraxas Petroleum Corporation Director Stock Option Plan.
+**10.6 Abraxas Petroleum Corporation Restricted Share Plan for Directors.
(Filed as Exhibit 10.20 to the Company's Annual Report on Form 10-K
filed on April 12, 1994).
+**10.7 Abraxas Petroleum Corporation 1994 Long Term Incentive Plan. (Filed as
Exhibit 10.21 to the Company's Annual Report on Form 10-K filed on
April 12, 1994).
+**10.8 Abraxas Petroleum Corporation Incentive Performance Bonus Plan. (Filed
as Exhibit 10.24 to the Company's Annual Report on Form 10-K filed on
April 12, 1994).
**10.9 Registration Rights and Stock Registration Agreement dated as of
August 11, 1993 by and among Abraxas, EEP and Endowment Energy
Partners II, Limited Partnership ("EEP II"). (Filed as Exhibit 10.33
to the Company's Registration Statement on Form S-1, Registration No.
33-66446 (the "S-1 Registration Statement")).
**10.10 First Amendment to Registration Rights and Stock Registration
Agreement dated June 30, 1994 by and among Abraxas, EEP and EEP II.
(Filed as Exhibit 10.3 to the Registrant's Current Report on Form 8-K
filed on July 14, 1994).
**10.11 Second Amendment to Registration Rights and Stock Registration
Agreement dated September 2, 1994 by and among Abraxas, EEP and EEP
II. (Filed as Exhibit 10.3 to the Company's Annual Report on Form 10-K
filed March 31, 1995)
**10.12 Third Amendment to Registration Rights and Stock Registration
Agreement dated November 17, 1995 by and among Abraxas, EEP and EEP
II. (Filed as Exhibit 10.17 to the Company's Annual Report on Form
10-K filed March 31, 1995)
**10.13 Common Stock Purchase Warrant dated as of December 18, 1991 between
Abraxas and EEP. (Filed as Exhibit 12.3 to the Company's Current
Report on Form 8-K filed January 9, 1992).
**10.14 Common Stock Purchase Warrant dated as of August 1, 1993 between
Abraxas and EEP. (Filed as Exhibit 10.35 to the S-1 Registration
Statement).
**10.15 Common Stock Purchase Warrant dated August 11, 1993 between Abraxas
and EEP II. (Filed as Exhibit 10.36 to the S-1 Registration
Statement).
**10.16 Common Stock Purchase Warrant dated August 11, 1993 between Abraxas
and Associated Energy Managers, Inc. (Filed as Exhibit 10.37 to the
S-1 Registration Statement).
**10.17 Letter dated September 2, 1994 from Abraxas to EEP and EEP II. (Filed
as Exhibit 10.13 to the Company's Annual Report on Form 10-K filed
March 31, 1995)
**10.18 Amended and Restated Credit Agreement dated as of November 14, 1996
among Abraxas, Bankers Trust Company, Inc. (U.S.) Capital Corporation
and the Lenders named therein. (Filed as Exhibit 10.5 to the Company's
Current Report on Form 8-K filed November 27, 1996).
**10.19 Warrant Agreement dated as of July 27, 1994 between Abraxas and FUNB.
(Filed as Exhibit 10.3 to the Company's Current Report on Form 8-K
filed August 5, 1994).
**10.20 Warrant Agreement dated as of December 16, 1994, between Abraxas and
FUNB. (Filed as Exhibit 10.23 to the Company's Annual Report on Form
10-K filed March 31, 1995).
**10.21 First Amendment to Warrant Agreement dated as of August 31, 1995
between Abraxas and FUNB. (Filed as Exhibit 10.21 to the S-3
Registration Statement).
**10.22 Form of Indemnity Agreement between Abraxas and each of its directors
and officers. (Filed as Exhibit 10.30 to the S-1 Registration
Statement).
+**10.23 Employment Agreement between Abraxas and Robert L. G. Watson. (Filed
as Exhibit 10.23 to the S-3 Registration Statement).
+**10.24 Employment Agreement between Abraxas and Chris E. Williford. (Filed as
Exhibit 10.24 to the S-3 Registration Statement).
+**10.25 Employment Agreement between Abraxas and Robert Patterson. (Filed as
Exhibit 10.25 to the S-3 Registration Statement).
+**10.26 Employment Agreement between Abraxas and Stephen T. Wendel. (Filed as
Exhibit 10.26 to the S-3 Registration Statement).
**10.27 Common Stock and Contingent Value Rights Purchase Agreement dated as
of November 17, 1995 by and among Abraxas and the Purchasers named in
Schedule l thereto. (Filed as Exhibit 10.1 to the Company's Current
Report on Form 8-K dated November 21, 1995.)
**10.28 Registration Agreement dated November 17, 1995 by and among Registrant
and the parties named in Schedule I thereto. (Filed as Exhibit 10.2 to
the Company's Current Report on Form 8-K dated November 21, 1995.)
**10.29 Subscription Agreement between Registrant and Grey Wolf Exploration,
Ltd. (Filed as Exhibit 10.1 to the Company's Current Report on Form
8-K dated January 17, 1995.)
**10.30 Subscription Agreement between Grey Wolf Exploration, Ltd. and Cascade
Oil and Gas Ltd. (Filed as Exhibit 10.2 to the Company's Current
Report on Form 8-K dated January 17, 1995.)
**10.31 Purchase Agreement dated November 14, 1996 by and among Abraxas,
Canadian Abraxas, BT Securities Corporation, Jefferies & Company, Inc.
and ING Baring (U.S.) Securities Corporation (collectively, the
"Initial Purchasers"). (Filed as Exhibit 10.1 to the Company's Current
Report on Form 8-K filed November 27, 1996).
**10.32 Registration Rights Agreement dated November 14, 1996 by and among
Abraxas, Canadian Abraxas, and the Initial Purchasers. (Filed as
Exhibit 10.2 to the Company's Current Report on Form 8-K filed
November 27, 1996).
**10.33 Share Sale Agreement dated October 29, 1996 by and among Abraxas,
Canadian Abraxas, CGGS Canadian Gas Gathering Systems Inc. ("CGGS")
and the shareholders of CGGS. (Filed as Exhibit 10.3 to the Company's
Current Report on Form 8-K filed November 27, 1996).
**10.34 Purchase and Sale Agreement dated September 18, 1996 by and among
Abraxas, Acco, LLC, Massachusetts Bay Transportation Authority
Retirement Fund, Metropolitan Life Insurance Company Separate Account
No. 175, The General Mills, Inc. Master Trust: Pooled Real Estate Fund
and State Street Research Energy, Inc. (Filed as Exhibit 10.4 to the
Company's Current Report on Form 8-K filed November 27, 1996).
**10.35 Purchase and Sale Agreement dated May 22, 1996 between Abraxas and
Enserch Exploration, Inc. (Filed as Exhibit 10.1 to the Company's
Current Report on Form 8-K filed October 15, 1996).
*10.36 Management Agreement dated November 14, 1996 by and between Canadian
Abraxas and Cascade Oil & Gas Ltd.
**18.1 Letter regarding change in accounting principle. (Filed as Exhibit
18.1 to the Registrant's Annual Report on Form 10-K filed on April 12,
1994).
*22.1 Subsidiaries of Abraxas.
*23.1 Consent of Ernst & Young LLP.
*23.2 Consent of DeGolyer and MacNaughton.
*23.3 Consent of Sproule Associates Limited.
*23.4 Consent of Cox & Smith Incorporated (included in Exhibit 5.1).
*23.5 Consent of Deloitte & Touche LLP.
*23.6 Consent of KPMG.
*23.7 Consent of Burnet, Duckworth & Palmer (included in Exhibit 5.2).
*24.1 Power of Attorney of Franklin Burke.
*24.2 Power of Attorney of Harold D. Carter.
*24.3 Power of Attorney of Robert D. Gershen.
*24.4 Power of Attorney of Richard M. Kleberg, III.
*24.5 Power of Attorney of James C. Phelps.
*24.6 Power of Attorney of Paul A. Powell, Jr.
*25.1 Form T-1 Statement of Eligibility and Qualification of IBJ Schroder
Bank & Trust Company, as Trustee.
*27.1 Financial Data Schedule.
* Filed herewith.
** Incorporated by reference to the filing indicated.
*** To be filed by Amendment.
+ Management Compensatory Plan or Agreement.
<PAGE>
ITEM 22. UNDERTAKINGS
A. Each of the undersigned registrants hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the Registration Statement
through the date of responding to the request.
B. Each of the undersigned registrants hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934 that is incorporated by reference
in the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
C. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of each of the registrants pursuant to the foregoing provisions, or
otherwise, the registrants have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrants of expenses incurred or paid by a director, officer or
controlling person in the successful defense of any action, suit or proceedings)
is asserted by such director, officer or controlling person in connection with
the securities being registered, the registrants will, unless in the opinion of
their counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
either of them is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
D. Each of the undersigned registrants hereby undertakes to supply by
means of a post-effective amendment all information concerning a transaction,
and the company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-7
<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 23, 1996.
ABRAXAS PETROLEUM CORPORATION
By: /s/ Robert L. G. Watson
---------------------------------------
Robert L. G. Watson, Chairman of the Board,
Chief Executive Officer and President
II-8
<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 23, 1996
- --------------------------- President, Chief Executive
Robert L.G. Watson Officer (Principal Executive
Officer) and Director of the
Company
/s/ Chris E. Williford Executive Vice President, December 23, 1996
- -------------------------- Treasurer, Chief Financial
Chris E. Williford Officer and Director
(Principal Financial and
Accounting Officer) of the
Company
* Director of the Company December 23, 1996
- --------------------------
Franklin Burke
* Director of the Company December 23, 1996
- --------------------------
Harold D. Carter
* Director of the Company December 23, 1996
- --------------------------
Robert D. Gershen
* Director of the Company December 23, 1996
- --------------------------
Richard M. Kleberg, III
* Director of the Company December 23, 1996
- --------------------------
James C. Phelps
* Director of the Company December 23, 1996
- --------------------------
Paul A. Powell, Jr.
Director of the Company December 23, 1996
- --------------------------
Richard M. Riggs
By: /s/ Chris E. Williford
-----------------------
Chris E. Williford
Attorney-in-fact
<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 23, 1996.
CANADIAN ABRAXAS PETROLEUM LIMITED
By: /s/ Robert L. G. Watson
------------------------------
Robert L. G. Watson, President
<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 23, 1996
- --------------------------- President, and Director of
Robert L.G. Watson Canadian Abraxas (Principal
Executive Officer)
/s/Chris E. Williford Vice President and Assistant December 23, 1996
- --------------------------- Secretary of Canadian Abraxas
Chris E. Williford (Principal Accounting Officer)
/s/ Donald A. Engle Secretary and Director of December 23, 1996
- --------------------------- Canadian Abraxas
Donald A. Engle
/s/ Roger L. Bruton Executive Vice President and December 23, 1996
- --------------------------- Director of Canadian Abraxas
Roger L. Bruton
<PAGE>
EXHIBIT INDEX
Exhibit Number: Exhibit Page Number
3.7 Articles of Incorporation of Canadian Abraxas. __
3.8 By-Laws of Canadian Abraxas. __
4.7 Form of Note. __
4.8 Form of Letter of Transmittal. __
4.9 Specimen Common Stock Certificate of Canadian Abraxas. __
5.1 Opinion of Cox & Smith Incorporated. __
5.2 Opinion of Burnet, Duckworth & Palmer __
10.4 Abraxas Petroleum Corporation 401(k) Profit
Sharing Plan __
10.5 Abraxas Petroleum Corporation Director Stock Option
Plan __
10.36 Management Agreement dated November 14, 1996
by and between Canadian Abraxas and
Cascade Oil & Gas Ltd. __
22.1 Subsidiaries of Abraxas. __
23.1 Consent of Ernst & Young LLP. __
23.2 Consent of DeGolyer and MacNaughton. __
23.3 Consent of Sproule Associates Limited. __
23.4 Consent of Cox & Smith Incorporated
(included in Exhibit 5.1). __
23.5 Consent of Deloitte & Touche LLP. __
23.6 Consent of KPMG. __
23.7 Consent of Burnet, Duckworth & Palmer
(included in Exhibit 5.2). __
24.1 Power of Attorney of Franklin Burke. __
24.2 Power of Attorney of Harold D. Carter. __
24.3 Power of Attorney of Robert D. Gershen. __
24.4 Power of Attorney of Richard M. Kleberg, III. __
24.5 Power of Attorney of James C. Phelps. __
24.6 Power of Attorney of Paul A. Powell, Jr. __
25.1 Form T-1 Statement of Eligibility and Qualification
of IBJ Schroeder Bank & Trust Company, as Trustee. __
27.1 Financial Data Schedule. __
<PAGE>
1
EXHIBIT 3.7
CANADA BUSINESS CORPORATIONS ACT FORM 4
ARTICLES OF AMENDMENT
(SECTION 27 OR 177)
1. NAME OF CORPORATION: 2. CORPORATION NO.
3290751 CANADA INC. 329075-1
3. THE ARTICLES OF THE ABOVE-NAMED CORPORATION ARE AMENDED AS FOLLOWS:
i. Pursuant to Section 173(1)(a) of the Canada Business
Corporations Act, Article No. 1 of the Articles of
Incorporation is amended to change the name of the
Corporation to:
CANADIAN ABRAXAS PETROLEUM LIMITED
i. Pursuant to Section 173(1)(g ) of the Canada Business
Corporations Act, Article No. 3 of the Articles of
Incorporation is amended by amending the rights, privileges,
restrictions and conditions attached to the common shares and
pursuant to Section 173(1)(e) of the Canada Business
Corporations Act, Article No. 3 of the Articles of
Incorporation is amended by creating a new class of shares,
namely an unlimited number of First Preferred Shares, which
shares shall have the rights, privileges, restrictions and
conditions as set out in Schedule "A" attached hereto.
Article No. 3 of the Articles of Incorporation is replaced
with Schedule "A", which schedule is incorporated into and
forms a part of this Form.
- --------------------------------------------------------------------------------
DATE SIGNATURE TITLE
September 30, 1996 "Roger Bruton" "Director"
- --------------------------------------------------------------------------------
<PAGE>
SCHEDULE "A"
The authorized capital of the Corporation shall consist of an
unlimited number of Common Shares and an unlimited number of First Preferred
Shares which shares shall have the following rights, privileges, restrictions
and conditions:
COMMON SHARES
1. Voting Rights
The holders of Common Shares shall be entitled to notice of,
to attend and to one vote per share held at any meeting the shareholders' of the
Corporation (other than meetings of a class or series of shares of the
Corporation other than the Common Shares as such);
2. Dividend
The holders of Common Shares shall be entitled to receive
dividends as and when declared by the Board of Directors of the Corporation on
the Common Shares as a class, subject to prior satisfaction of all preferential
rights to dividends attached to all shares of other classes of shares of the
Corporation ranking in priority to the Common Shares in respect of dividends;
and
3. Liquidations
The holders of Common Shares shall be entitled in the event of
any liquidation, dissolution or winding-up of the Corporation, whether voluntary
or involuntary, or any other distribution of the assets of the Corporation among
its shareholders for the purpose of winding-up its affairs, and subject to prior
satisfaction of all preferential rights to return of capital on dissolution
attached to all shares of other classes of shares of the Corporation ranking in
priority to the Common Shares in respect of return of capital on dissolution, to
share rateably, together with the holders of shares of any other class of shares
of the Corporation ranking equally with the Common Shares in respect of return
of capital, in such assets of the Corporation as are available for distribution.
FIRST PREFERRED SHARES
1. Voting Rights
The holders of the First Preferred Shares shall be entitled to
receive notice of, to attend and to vote one (1) vote per share held at any
meeting of the shareholders of the Corporation (other than meetings of a class
or series of shares of the Corporation other than the First Preferred Shares as
such).
2. Dividends
The holders of the First Preferred Shares shall be entitled to
receive if, as and when declared by the Board of Directors of the Corporation
out of the monies of the Corporation applicable to the payment of dividends,
such dividends in any financial year as the Board of Directors in its absolute
discretion may by resolution determine, and the directors may, subject to
Section 11 hereof declare dividends on any other class of share at different
times or at the same time in different amounts than dividends declared on the
First Preferred Shares.
3. Redemption
3.1 Subject to applicable law, the Corporation shall have the right to redeem,
at any time all, or from time to time any part of, the then outstanding First
Preferred Shares at a price per share equal to the Redemption Value. For the
purpose of sections 3, 4, 5, 6 and 10, the Redemption Value of each First
Preferred Share shall be an amount equal to (i) the monetary consideration
received by the Corporation upon the issuance of such share (denominated in the
currency in which such consideration was paid to the Corporation), if such share
has been issued for money; or (ii) the fair market value of the consideration
received by the Corporation (including, without limitation, shares of another
class of the Corporation) upon the issuance of each share, if such share has
been issued for a consideration other than money together with all accrued and
unpaid dividends thereon up to the date fixed for redemption (the whole amount
being herein referred to as the "Redemption Price").
3.2 In case only a part of the then outstanding First Preferred Shares is at any
time to be redeemed, the shares so to be redeemed shall be redeemed pro rata,
excluding fractions, from the holdings of all shareholders of First Preferred
Shares or in such other manner as the Board of Directors deems reasonable.
3.3 On any redemption of First Preferred Shares under this Section 3, the
Corporation shall, subject to the unanimous waiver of notice by the registered
holders thereof, give at least 21 days before the date fixed for redemption (the
"Redemption Date"), a notice in writing of the intention of the Corporation to
redeem First Preferred Shares (the "Redemption Notice") to each person who at
the date of giving of such notice is a registered holder of First Preferred
Shares to be redeemed. The Redemption Notice shall set out the calculation of
the Redemption Price, the Redemption Date and, unless all the First Preferred
Shares held by the holder to whom it is addressed are to be redeemed, the number
of such shares so held which are to be redeemed.
3.4 The Redemption Price (less any tax required to be withheld by the
Corporation) shall be paid by cheque payable in lawful money of Canada at par at
any branch in Alberta of the Corporation's bankers for the time being or by such
other reasonable means as the Corporation deems desirable. The mailing of such
cheque from the Corporation's registered office, or the payment by such other
reasonable means as the Corporation deems desirable, on or before the Redemption
Date shall be deemed to be payment of the Redemption Price represented thereby
on the Redemption Date unless the cheque is not paid upon presentation or
payment by such other means is not received. Notwithstanding the foregoing, the
Corporation shall be entitled to require at any time, and from time to time,
that the Redemption Price be paid to holders of First Preferred Shares only upon
presentation and surrender at the registered office of the Corporation or at any
other place or places in Alberta designated by the Redemption Notice of the
certificate or certificates for such First Preferred Shares to be redeemed.
3.5 If a part only of the First Preferred Shares represented by any certificate
are to be redeemed, a new certificate for the balance shall be issued at the
expense of the Corporation.
3.6 At any time after the Redemption Notice is given, the Corporation shall have
the right to deposit the Redemption Price of any or all First Preferred Shares
to be redeemed with any chartered bank or banks or with any trust company or
trust companies in Alberta named for such purpose in the Redemption Notice to
the credit of a special account or accounts in trust for the respective holders
of such shares, to be paid to them respectively upon surrender to such bank or
banks or trust company or trust companies of the certificate or certificates
representing the same. Upon such deposit or deposits being made or upon the
Redemption Date, whichever is later, the shares in respect of which such deposit
has been made shall be and be deemed to be redeemed and the rights of the
holders of such shares shall be limited to receiving, without interest, the
proportion of the amount so deposited applicable to their respective shares. Any
interest allowed on such deposit or deposits shall accrue to the Corporation.
3.7 From and after the Redemption Date, the First Preferred Shares called for
redemption shall cease to be entitled to dividends and the holders thereof shall
not be entitled to exercise any of the rights of shareholders in respect thereof
unless payment of the Redemption Price shall not be duly made by the
Corporation, in which event the rights of such holders shall remain unaffected
until the Redemption Price has been paid in full.
3.8 First Preferred Shares which are redeemed or deemed to be redeemed in
accordance with this Section 3 shall, subject to applicable law, be and be
deemed to be returned to the authorized but unissued capital of the Corporation.
4. Retraction
4.1 A holder of First Preferred Shares shall have the right, at his option, at
any time or times, to require the Corporation to redeem at a price per share
equal to the Redemption Value thereof, together with all accrued and unpaid
dividends thereof up to the Retraction Date (as hereinafter defined) (the whole
amount being herein referred to as the "Retraction Price"), all or any of such
shares which are registered in such holder's name on the books of the
Corporation. Such right shall be exercised by the registered holder delivering
to the Corporation at its registered office:
a. a notice in writing executed by such holder (the "Retraction Notice")
specifying:
i. the number of First Preferred Shares which such holder wishes to
have redeemed by the Corporation; and
ii. the business day on which such holder wishes to have the
Corporation redeem such shares (the "Retraction Date"), which day shall not be
less than 21 days from the date the Retraction Notice is received by the
Corporation; and
b. a share certificate or certificates representing such shares, duly
endorsed, which such holder wishes to have the Corporation redeem.
4.2 Upon receipt of the documents set out in Section 4.1, the Corporation
shall, on the Retraction Date, pay the Retraction Price for each First Preferred
Share to be redeemed (less any tax required to be withheld by the Corporation).
Such payment shall be made by cheque payable in lawful money of Canada at par at
any branch in Alberta of the Corporation's bankers for the time being. Such
shares shall be redeemed on the Retraction Date, and from and after the
Retraction Date, the holder of such shares being redeemed shall cease to be
entitled to dividends, and shall not be entitled to exercise any rights in
respect thereof, unless payment of the Retraction Price is not made on the
Retraction Date, in which event the rights of such holders shall remain
unaffected until the Retraction Price has been paid in full.
4.3 First Preferred Shares which are retracted or deemed to be retracted
in accordance with this Section 4 shall, subject to applicable law, be and be
deemed to be returned to the authorized but unissued capital of the Corporation.
5. Purchase for Cancellation
5.1 In addition to its right to redeem First Preferred Shares as provided
in Section 3, the Corporation may at any time or times purchase for cancellation
the whole or any part of the outstanding First Preferred Shares at a price per
share equal to the Redemption Value thereof.
5.2 First Preferred Shares purchased in accordance with this Section 5
shall, subject to the applicable law, be and be deemed to be returned to the
authorized but unissued capital of the Corporation.
6. Liquidation
6.1 In the event of the liquidation, dissolution or winding up of the
Corporation or other distribution of the assets of the Corporation among its
shareholders for the purpose of winding up its affairs, the holders of First
Preferred Shares shall be entitled to receive the Redemption Value per share,
together with any accrued and unpaid dividends thereof up to the date of
commencement of any such liquidation, dissolution, winding up or other
distribution of the assets of the Corporation, to be paid all such money before
any money shall be paid or property or assets distributed to the holders of any
Common Shares or other shares in the capital of the Corporation ranking junior
to the First Preferred Shares with respect to return of capital.
6.2 After payment to the holders of the First Preferred Shares of the
amounts so payable to them in accordance with this Section 6, the holders of
First Preferred Shares shall not be entitled to share in any further
distribution of the property or assets of the Corporation.
7. Amendments
The rights, privileges, restrictions and conditions attached
to the First Preferred Shares may be amended, modified, suspended, altered or
repealed but only if consented to, or approved by, the holders of the First
Preferred Shares in the manner hereinafter specified and in accordance with any
requirements of applicable law.
8. Creation of Additional Shares
No class of shares may be created ranking as to capital or
dividends in priority to or on a parity with the First Preferred Shares without
the consent or approval of the holders of the First Preferred Shares in the
manner hereinafter specified and in accordance with any requirements of
applicable law.
9. Approval by Holders of First Preferred Shares
For the purpose of Sections 7 and 8, any consent or approval
given by the holders of First Preferred Shares shall be deemed to have been
sufficiently given if it shall have been given in writing by all the holders of
the outstanding First Preferred Shares or by a resolution passed at a meeting of
holders of First Preferred Shares duly called and held upon not less than 21
days' notice in writing to the holders at which the holders of at least 50% of
the outstanding First Preferred Shares are present or are represented by proxy
and carried by the affirmative vote of not less than two-thirds of the votes
cast at such meeting. On every ballot cast at every meeting of the holders of
the First Preferred Shares, every holder of a First Preferred Share shall be
entitled to one (1) vote in respect of each First Preferred Share held. Subject
to the foregoing, the formalities to be observed in respect of the giving or
waiving of notice of any such meeting or adjourned meeting and the conduct
thereof shall be those from time to time prescribed in the by-laws of the
Corporation.
10. Adjustment
10.1 The fair market value of any property received as
consideration for the issuance of any First Preferred Shares shall be determined
initially by the directors of the Corporation; but if it should subsequently be
ascertained that the fair market value of the said property is greater than or
less than such determined value whether by:
a. a tribunal or court of competent jurisdiction;
b. agreement between the Corporation and the Department of National
Revenue; or
c. agreement between the Corporation and the holders of the First
Preferred Shares; then subject to the Canada Business Corporations Act (the
"Act"), the Board of Directors, on behalf of the Corporation, shall ensure that
the Redemption Value be increased or decreased accordingly. This adjustment
shall be made retroactively effective as of the date of issuance of the First
Preferred Shares.
10.2 If an adjustment is made to the Redemption Value pursuant to
Section 10.1, and if the Board of Directors of the Corporation decide that an
adjustment to the stated capital of the First Preferred Shares is required, then
subject to the provisions of the Act, the stated capital of the First Preferred
Shares shall be adjusted retroactively to the date of issuance of the First
Preferred Shares to the amount determined by the Board of Directors of the
Corporation.
10.3 If dividends are paid on the First Preferred Shares between
the date of issue and the actual date of any adjustment provided for in Section
10.1, then forthwith upon any adjustment being made pursuant to Section 10.1, an
amount equal to the difference between the amount of dividend actually received
and the amount of dividend which would have been received if the adjustment,
pursuant to Section 10.1, had actually been made at the date of issuance of the
First Preferred Shares shall be paid to the Corporation by the recipients of the
dividend or to the recipients of the dividend by the Corporation, as the case
may be.
10.4 If any First Preferred Shares are redeemed, retracted or
purchased pursuant to any of Sections 3, 4 or 5 before the actual date of any
adjustment provided for in Section 10.1, then forthwith upon any adjustment
being made pursuant to Section 10.1, an amount equal to the difference between
the price actually paid on the redemption, retraction or purchase of the First
Preferred Shares and the price which would have been paid on the redemption,
retraction or purchase of the redeemed, retracted or purchased First Preferred
Shares if the adjustment pursuant to Section 10.1 had actually been made at the
date of issuance of the First Preferred Shares shall be paid by the Corporation
or the person whose First Preferred Shares were redeemed, retracted or
purchased, as the case may be.
11. Restriction on Distributions
No distribution shall be made to the holders of any of the
Common Shares or any shares of any class ranking junior to the First Preferred
Shares, if such distribution would result in the Corporation having insufficient
net assets to redeem or purchase the First Preferred Shares. For the purposes of
this section,
a. "net assets" of the Corporation means the amount for which the assets
of the Corporation could realize in cash at that time less the liabilities of
the Corporation at that time; and
b. "distribution" means any declaration, payment or distribution to or to
the account of any holders of any Common Shares of the Corporation, now or
hereafter outstanding by way of:
(1) dividends in cash or specie, except dividends payable in shares of
any class of share of the Corporation; or
(2) purchase, redemption or other retirement of any outstanding shares
except when such purchase, redemption or other retirement is paid for out of the
proceeds of a fresh issue of shares made for that purpose.
<PAGE>
CANADA BUSINESS LOI SUR LES SOCIETES
CORPORATIONS ACT COMMERCIALES CANADIENNES
FORM 1 FORMULE 1
ARTICLES OF INCORPORATION STATS CONSTITUTIFS
(SECTION 6) (ARTICLE 6)
1 - Name of Corporation Denomination de la societe
"3290751" CANADA INC.
2 - The place in Canada where the registered Lieu au Canada ou doit etre
office is to be situated situe le siege social
Calgary, Alberta
3 - The classes and any maximum number of Categorieset tout nombre maximal
shares that the corporation is authorized d'actions que la societe est
to issue autorisee a emettre
Unlimited Common shares which shares shall
have the right to (i) vote at any meeting of
the Shareholders of the Corporation; (ii)
receive any dividend declared by the
Corporation; and (iii) receive the remaining
property of the Corporation upon
dissolution.
4 - Restrictions if any on share transfers Restrictions sur le transfert des
actions, s'il y a lieu
No shares of the Corporation shall be
transferred without the approval of the
Directors evidenced by resolution of the
Board, provided that approval of any
transfer of shares may be given as aforesaid
after the transfer has been effected upon
the records of the Corporation, in which
event, unless the said resolutioon
stipulates otherwise, the said transfer
shall be valid and shall take effect as and
from the date of its very entry upon the
books of the Corporation.
5 - Number (or minimum and maximum number) Nombre (ou nombre minimum et
of directors maximum) d'administrateurs
Minimum 1 Maximum 11
6 - Restrictions if any on business the Limites imposees quant aux
corporation may carry on activites commerciales que la
socie-te peut exploiter, s'il
None y a lieu
7 - Other provisions if any Autres dispositions s'il y a lieu
See Schedule "A" attached hereto
8 - Incorporators Fondateurs
- ------------------------- --------------------------------- --------------------
Names - Noms Address (include postal code) Signature
Addresse (inclure le code postal)
- ------------------------- --------------------------------- --------------------
Joanne G. Yeo 1400, 350 - 7th Avenue S.W. /s/ Joanne G. Yeo
Calgary, Alberta, T2P 3N9
- ------------------------- --------------------------------- --------------------
========================= ================================= ====================
<PAGE>
SCHEDULE "A" - ARTICLES OF INCORPORATION
a. The number of shareholders of the Corporation, exclusive of
i. persons who are in its employment or that of an affiliate, and;
ii. persons who, having been formerly in its employment or that of
an affiliate, were, while in that employment, shareholders of
the Corporation and have continued to be shareholders of that
Corporation and have continued to be shareholders of that
Corporation after termination of that employment,
is limited to not more than 50 persons, 2 or more persons who are the
joint registered owners of 1 or more shares being counted as 1
shareholder;
b. any invitation to the public to subscribe for the securities of the
Corporation is prohibited;
c. The Board of Directors of the Corporation or any committee of the Board
authorized so to do may, without authorization of the shareholders and
without in any way limiting the authority conferred on the Directors by
Section 189 of the Canada Business Corporation Act:
i. borrow money upon the credit of the Corporation;
ii. issue, reissue, sell or pledge debt obligations of the
Corporation;
iii. mortgage, hypothecate, pledge or otherwise create a security
interest in all or any property of the Corporation, owned or
subsequently acquired, to secure any obligation of the
Corporation;
iv. subject to the Canada Business Corporation Act, give a
guarantee on behalf of the Corporation to secure performance
of an obligation of any person, and;
v. the Board of Directors and any such committee of the Board may
from time to time delegate to such one or more of the
Directors and officers of the Corporation as may be designated
by it, all or any of the powere conferred by sub-clauses
(c)(i), (ii), (iii) and (iv) to such extent and in such manner
as it shall determine at the time of each such delegation.
d. The Articles of the Corporation may be amended by special resolution
pursuant to Section 173 of the Canada Business Corporation Act to:
i. increase or decrease any maximum number of authorized shares
of such class, or increase any maximum number of authorized
shares of a class having rights or privileges equal or
superior to the shares of another class; or
ii. effect an exchange, reclassification or cancellation of all
or part of the shares of any class; or
iii. create a new class of shares or superior to the shares of
another class;
and no separate class or (except as may otherwise be provided for a
particular series in the provisions attaching thereto) series vote
shall be required under Section 176 of such Act in respect of the
amendment.
<PAGE>
EXHIBIT 3.8
CANADA BUSINESS CORPORATIONS ACT
GENERAL BY-LAW
BY-LAW NUMBER 1
A by-law relating generally to the conduct of the business and affairs of
3290751 CANADA INC.
(hereinafter called the "Corporation").
IT IS HEREBY ENACTED as a by-law of the Corporation as follows:
DIVISION ONE
INTERPRETATION
1.01 In the by-laws of the Corporation, unless the context
otherwise specifies or requires:
A. "Act" means the Canada Business Corporations Act, as
from time to time amended and every statute that may be substituted
therefore and, in the case of such substitution, any references in
the by-laws of the Corporation to provisions of the Act shall be
read as references to the substituted provisions therefor in the
new statute or statutes;
B. "appoint" includes "elect" and vice versa;
C. "board" means the board of directors of the
Corporation;
D. "by-laws" means this by-law and all other by-laws
of the Corporation from time to time in force and effect;
E. "meeting of shareholders" includes an annual or
other general meeting of shareholders and a special meeting of
shareholders;
F. "Regulations" means the regulations under the Act
as published or from time to time amended and every regulation
that may be substituted therefore and, in the case of such
substitution, any references in the by-laws of the Corporation to
provisions of the Regulations shall be read as references to the
substituted provisions therefore in the new regulations;
G. "signing officer" means, in relation to any
instrument, any person authorized to sign the same on behalf of
the Corporation by virtue of section 3.01 of this by-law or by a
resolution passed pursuant thereto; and
H. "special meeting of shareholders" means a meeting
of any particular class or classes of shareholders and a meeting
of all shareholders entitled to vote at any annual meeting of
shareholders at which special business is to be transacted.
Save as aforesaid, all terms which are contained in
the by-laws of the Corporation and which are defined in the Act or the
Regulations shall, unless the context otherwise specifies or requires, have the
meanings given to such terms in the Act or the Regulations. Words importing the
singular number include the plural and vice versa; the masculine shall include
the feminine; and the word "person" shall include an individual, partnership,
association, body corporate, body politic, trustee, executor, administrator and
legal representative.
Headings used in the by-laws are inserted for
reference purposes only and are not to be considered or taken into account in
construing the terms or provisions thereof or to be deemed in any way to
clarify, modify or explain the effect of any such terms or provisions.
DIVISION TWO
BANKING AND SECURITIES
2.01 Banking Arrangements
The banking business of the Corporation including,
without limitation, the borrowing of money and the giving of security therefor,
shall be transacted with such banks, trust companies or other bodies corporate
or organizations or any other persons as may from time to time be designated by
or under the authority of the board. Such banking business or any part thereof
shall be transacted under such agreements, instructions and delegations of power
as the board may from time to time prescribe or authorize.
2.02 Voting Rights in Other Bodies Corporate
The signing officers of the Corporation may execute and
deliver instruments of proxy and arrange for the issuance of voting certificates
or other evidence of the right to exercise the voting rights attaching to any
securities held by the Corporation. Such instruments, certificates or other
evidence shall be in favor of such person or persons as may be determined by the
person signing or arranging for them. In addition, the board may direct the
manner in which and the person or persons by whom any particular voting rights
or class of voting rights may or shall be exercised.
DIVISION THREE
EXECUTION OF INSTRUMENTS
3.01 Authorized Signing Officers
Unless otherwise authorized by the directors, deeds,
transfers, assignments, contracts, obligations, certificates and other
instruments may be signed on behalf of the Corporation by any two of the
president, chairman of the board, managing director, any vice-president, any
director, secretary, treasurer, any assistant secretary or any assistant
treasurer or any other office created by by-law or by the board. In addition,
the board may from time to time direct the manner in which the person or persons
by whom any particular instrument or class of instruments may or shall be
signed. Any signing officer may affix the corporate seal to any instrument
requiring the same, but no instrument is invalid merely because the corporate
seal is not affixed thereto.
3.02 Cheques, Drafts and Notes
All cheques, drafts or orders for the payment of money
and all notes and acceptances and bills of exchange shall be signed
by such officer or officers or person or persons, whether or not officers of the
Corporation, and in such manner as the board may from time to time designate by
resolution.
DIVISION FOUR
DIRECTORS
4.01 Number
The board shall consist of such number of directors as
is fixed by the articles, or where the articles specify a variable number, shall
consist of such number of directors as is not less than the minimum nor more
than the maximum number of directors provided in the articles and as shall be
fixed from time to time by resolution of the shareholders.
4.02 Election and Term
Subject to the articles or a unanimous shareholder
agreement, the election of directors shall take place at each annual meeting of
shareholders and all of the directors then in office, unless elected for a
longer period of time (not to exceed the close of the third (3rd) annual meeting
of shareholders following election), shall retire but, if qualified, shall be
eligible for re-election. The number of directors to be elected at any such
meeting shall, subject to the articles or a unanimous shareholder agreement, be
the number of directors then in office, or the number of directors whose terms
of office expire at the meeting, as the case may be, except that, if cumulative
voting is not required by the articles and the articles otherwise permit, the
shareholders may resolve to elect some other number of directors. Where the
shareholders adopt an amendment to the articles to increase the number or
minimum number of directors, the shareholders may, at the meeting at which they
adopt the amendment, elect the additional number of directors authorized by the
amendment. If an election of directors is not held at the proper time, the
incumbent directors shall continue in office until their successors are elected.
If the articles provide for cumulative voting, each director elected by
shareholders (but not directors elected or appointed by creditors or employees)
ceases to hold office at the annual meeting and each shareholder entitled to
vote at an election of directors has the right to cast a number of votes equal
to the number of votes attached to the shares held by him multiplied by the
number of directors he is entitled to vote for, and he may cast all such votes
in favor of one candidate or distribute them among the candidates in any manner.
If he has voted for more than one candidate without specifying the distribution
among such candidate, he shall be deemed to have divided his votes equally among
the candidates for whom he voted.
4.03 Removal of Directors
Subject to the Act and the articles, the shareholders
may by ordinary resolution passed at a special meeting remove any director from
office, except a director elected by employees or creditors pursuant to the
articles or a unanimous shareholder agreement, and the vacancy created by such
removal may be filled at the same meeting, failing which it may be filled by the
board. Provided, however, that if the articles provide for cumulative voting, no
director shall be removed pursuant to this section where the votes cast against
the resolution for his removal would, if cumulatively voted at an election of
the full board, be sufficient to elect one or more directors.
4.04 Consent
A person who is elected or appointed a director is not
a director unless:
A. he was present at the meeting when he was elected or
appointed and did not refuse to act as a director, or
B. if he was not present at the meeting when he was
elected or appointed;
C. he consented in writing to act as a director before
his election or appointment or within ten (10) days after it, or
D. he has acted as a director pursuant to the election
or appointment.
4.05 Vacation of Office
A director of the Corporation ceases to hold office
when:
A. he dies or resigns;
B. he is removed in accordance with section 109 of the
Act; or
C. he becomes disqualified under subsection 105(1) of
the Act.
4.06 Committee of Directors
The directors may appoint from among their number a
managing director, who must be a resident Canadian, or a committee of
directors, however designated, of which a majority of the members must be
resident Canadians, and subject to section 115 of the Act may delegate to the
managing director or such committee any of the powers of the directors. A
committee may be comprised of one director.
4.07 Transaction of Business of Committee
Subject to the provisions of this by-law with respect
to participation by telephone, the powers of a committee of directors may be
exercised by a meeting at which a quorum is present or by resolution in writing
signed by all of the members of such committee who would have been entitled to
vote on that resolution at a meeting of the committee. Meetings of such
committee may be held at any place in or outside Canada and may be called by any
one member of the committee giving notice in accordance with the by-laws
governing the calling of directors' meetings.
4.08 Procedure
Unless otherwise determined herein or by the board,
each committee shall have the power to fix its quorum at not less than a
majority of its members, to elect its chairman and to regulate its procedure.
4.09 Remuneration and Expenses
Subject to any unanimous shareholder agreement, the
directors shall be paid such remuneration for their services as the board may
from time to time determine. The directors shall also be entitled to be
reimbursed for traveling and other expenses properly incurred by them in
attending meetings of the board or any committee thereof. Nothing herein
contained shall preclude any director from serving the Corporation in any other
capacity and receiving remuneration therefor.
4.10 Vacancies
Subject to the Act, a quorum of the board may fill a
vacancy among the directors, except a vacancy resulting from an increase in the
number or minimum number of directors or from a failure to elect the number or
minimum number of directors required by the articles. If there is not a quorum
of directors, or if there has been a failure to elect the number or minimum
number of directors required by the articles, the directors then in office shall
forthwith call a special meeting of shareholders to fill the vacancy and, if
they fail to call a meeting or if there are no directors then in office, the
meeting may be called by any shareholder.
4.11 Action by the Board
Subject to any unanimous shareholder agreement, the
board shall manage the business and affairs of the Corporation. Notwithstanding
a vacancy among the directors, a quorum of directors may exercise all the powers
of the directors. If the Corporation has only one director, that director may
constitute a meeting.
DIVISION FIVE
MEETING OF DIRECTORS
5.01 Place of Meeting
Meetings of the board may be held at any place within
or outside Canada.
5.02 Notice of Meeting
Unless the directors have made regulations otherwise,
meetings of the board may be summoned on twenty-four (24) hours' notice,
verbally or in writing, and whether by means of telephone or telegraph, or any
other means of communication. A notice of a meeting of directors need not
specify the purpose of or the business to be transacted at the meeting except
any proposal to:
A. submit to the shareholders any question or matter
requiring approval of the shareholders;
B. fill a vacancy among the directors or in the office
of auditor;
C. issue securities, except in the manner and on the
terms authorized by the directors;
D. declare dividends;
E. purchase, redeem or otherwise acquire shares issued
by the Corporation, except in the manner and on the terms
authorized by the directors;
F. pay a commission for the sale of shares;
G. approve a management proxy circular;
H. approve a take-over bid circular or directors'
circulars;
I. approve any financial statements to be placed before
the shareholders at an annual meeting; or
J. adopt, amend or repeal by-laws.
Provided, however, that a director may in any manner
waive notice of a meeting and attendance of a director at a meeting of directors
shall constitute a waiver of notice of the meeting except where a director
attends a meeting for the express purpose of objecting to the transaction of any
business on the grounds that the meeting is not lawfully called.
For the first meeting of the board of directors to be
held immediately following an election of directors or for a meeting of the
board at which a director is to be appointed to fill a vacancy in the board, no
notice of such meeting shall be necessary to the newly elected or appointed
director or directors in order to legally constitute the meeting, provided that
a quorum of the directors is present.
5.03 Adjourned Meeting
Notice of an adjourned meeting of the board is not
required if the time and place of the adjourned meeting is announced at the
original meeting.
5.04 Calling of the Meetings
Meetings of the board shall be held from time to time
at such time and at such place as the board, the chairman of the board, the
managing director, the president or any two directors may determine. Should more
than one of the above-named call a meeting at or for substantially the same
time, there shall be held only one meeting and such meeting shall occur at the
time and place determined by, in order of priority, the board, the chairman, or
the president.
5.05 Regular Meetings
The board may appoint a day or days in any month or
months for regular meetings of the board at a place and hour to be named. A copy
of any resolution of the board fixing the place and time of such regular
meetings shall be sent to each director forthwith after being passed, and
forthwith to each director subsequently elected or appointed, but no other
notice shall be required for any such regular meeting except where the Act or
this by-law requires the purpose thereof or the business to be transacted
thereat to be specified.
5.06 Chairman
The chairman of any meeting of the board shall be the
first mentioned of such of the following officers as have been appointed and who
is a director and is present at the meeting: chairman of the board, managing
director or president. If no such officer is present, the directors present
shall choose one of their number to be chairman.
5.07 Quorum
Subject to the following section 5.08, the quorum for
the transaction of business at any meeting of the board shall consist of a
majority of the directors holding office or such greater number of directors as
the board may from time to time determine.
5.08 Majority Canadian Representation at Meetings
Directors shall not transact business at a meeting of
directors unless a majority of the directors present are resident Canadians.
Notwithstanding the foregoing, directors may transact business at a meeting of
directors when less than a majority of the directors present are resident
Canadians if:
A. a resident Canadian director who is unable to be
present approves in writing or by telephone or other
communications facilities the business transacted at the meeting;
and
B. the number of resident Canadian directors present at
the meeting, together with any resident Canadian director who
gives his approval under clause (a), constitutes a majority of the
directors present at the meeting.
5.09 Voting
Questions arising at any meeting of the board shall be
decided by a majority of votes, the chairman of the meeting shall be entitled to
vote and the chairman shall not have a second or casting vote in the event of an
equality of votes.
5.10 Meeting by Telephone
A director, if all the directors of the Corporation
consent, may participate in a meeting of the board or a committee of the board
by means of such telephone or other communication facilities as permit all
persons participating in the meeting to hear each other, and a director
participating in such meeting by such means is deemed to be present at the
meeting. Any such consent shall be effective whether given before or after the
meeting to which it relates and may be given with respect to all meetings of the
board and of committees of directors held while a director holds office.
5.11 Resolution in Lieu of Meeting
Notwithstanding any of the foregoing provisions of this
by-law, a resolution in writing signed by all the directors entitled to vote on
that resolution at a meeting of the directors or a committee of directors is as
valid as if it had been passed at a meeting of the directors or committee of
directors. A copy of every such resolution shall be kept with the minutes of the
proceedings of the directors or committee of directors. Any such resolution in
writing is effective for all purposes at such time as the resolution states
regardless of when the resolution is signed.
5.12 Amendments to the Act
It is hereby affirmed that the intention of sections
4.06, 5.08 and 7.03 as they relate to Canadian representation is to comply with
the minimum requirements of the Act and in the event that such minimum
requirements shall be amended, deleted or replaced such that no, or lesser,
requirements with respect to Canadian representation are then in force, such
sections shall be correspondingly amended, deleted or replaced.
DIVISION SIX
PROTECTION OF DIRECTORS, OFFICERS AND OTHERS
6.01 Conflict of Interest
A director or officer shall not be disqualified by his
office, or be required to vacate his office, by reason only that he is a party
to, or is a director or officer or has a material interest in any person who is
a party to, a material contract or proposed material contract with the
Corporation or a subsidiary thereof. Such a director or officer shall, however,
disclose the nature and extent of his interest in the contract at the time and
in the manner provided by the Act. Subject to the provisions of the Act, a
director shall not by reason only of his office be accountable to the
Corporation or to its shareholders for any profit or gain realized from such a
contract or transaction, and such contract or transaction shall not be void or
voidable by reason only of the director's interest therein, provided that the
required declaration and disclosure of interest is properly made, the contract
or transaction is approved by the directors or shareholders, if necessary, and
it was fair and reasonable to the Corporation at the time it was approved and,
if required by the Act, the director refrains from voting as a director on the
contract or transaction.
6.02 Limitation of Liability
Every director and officer of the Corporation in
exercising his powers and discharging his duties shall act honestly and in good
faith with a view to the best interests of the Corporation and shall exercise
the care, diligence and skill that a reasonably prudent person would exercise in
comparable circumstances. Subject to the foregoing, no director or officer for
the time being of the Corporation shall be liable for the acts, neglects or
defaults of any other director or officer or employee or for joining in any act
for conformity, or for any loss, damage or expense happening to the Corporation
through the insufficiency or deficiency of title to any property acquired by the
Corporation or for or on behalf of the Corporation or for the insufficiency or
deficiency of any security in or upon which any of the moneys of or belonging to
the Corporation shall be placed out or invested or for any loss, conversion,
misapplication or misappropriation of or any damage resulting from any dealings
with any moneys, securities or other assets belonging to the Corporation or for
any loss or damage arising from the bankruptcy, insolvency or tortious acts of
any person with whom any of the moneys, securities or effects of the Corporation
shall be deposited, or for any loss occasioned by any error of judgment or
oversight on his part, or for any other loss damage or misfortune whatever which
may happen in the execution of the duties of his respective office or trust or
in relation thereto; provided that nothing herein shall relieve any director or
officer from the duty to act in accordance with the Act and the Regulations
thereunder or from liability for any breach thereof. The directors for the time
being of the Corporation shall not be under any duty or responsibility in
respect of any contract, act or transaction whether or not made, done or entered
into in the name or on behalf of the Corporation, except such as shall have been
submitted to and authorized or approved by the board of directors.
No act or proceeding of any director or officer or the
board shall be deemed invalid or ineffective by reason of the subsequent
ascertainment of any irregularity in regard to such act or proceeding or the
election, appointment or qualification of such director or officer or board.
6.03 Indemnity
Subject to section 124 of the Act, the Corporation
shall indemnify a director or officer of the Corporation, a former director or
officer of the Corporation or a person who acts or acted at the Corporation's
request as a director or officer of a body corporate of which the Corporation is
or was a shareholder or creditor, and his heirs and legal representatives,
against all costs, charges and expenses, including an amount paid to settle an
action or satisfy a judgment, reasonably incurred by him in respect of any
civil, criminal or administrative action or proceeding to which he is made a
party by reason of being or having been a director or officer of the Corporation
or body corporate, if:
A. he acted honestly and in good faith with a view to
the best interests of the Corporation; and
B. in the case of a criminal or administrative action
or proceeding that is enforced by a monetary penalty, he had
reasonable grounds for believing that his conduct was lawful.
The Corporation shall also indemnify such persons in
such other circumstances as the Act permits or requires. Nothing herein
contained shall limit the right of any person entitled to indemnity to claim
indemnity apart from the provisions of this section 6.03.
6.04 Insurance
The Corporation may purchase and maintain insurance for
the benefit of any person referred to in section 6.03 against any liability
incurred by him:
A. in his capacity as a director or officer of the
Corporation, except where the liability relates to his failure to
act honestly and in good faith with a view to the best interests
of the Corporation; or
B. in his capacity as a director or officer of the
another body corporate where he acts or acted in that capacity at
the Corporation's request, except where the liability relates to
his failure to act honestly and in good faith with a view to the
best interests of the body corporate.
DIVISION SEVEN
OFFICERS
7.01 Election or Appointment
Subject to any unanimous shareholder agreement, the
board may, from time to time, appoint a chairman of the board, a president, one
or more vice-presidents, a secretary, a treasurer and such other officers as the
board may determine, including one or more assistants to any of the officers so
appointed. The board may specify the duties of and, in accordance with this
by-law and subject to the provisions of the Act, delegate to such officers
powers to manage the business and affairs of the Corporation. Except for a
managing director and a chairman of the board who must be directors, an officer
may, but need not be, a director and one person may hold more than one office.
7.02 Chairman of the Board
The chairman of the board shall, when present, preside
at all meetings of the board, committees of directors and at all meetings of
shareholders.
If no managing director is appointed, the board may
assign to the chairman of the board any of the powers and duties that, by any
provision of this by-law, are assigned to the managing director; and he shall,
subject to the provisions of the Act, have such other powers and duties as the
board may specify. During the absence or disability of the chairman of the
board, his duties shall be performed and his powers exercised by the managing
director, if any, or by the president.
7.03 Managing Director
The managing director, if any, shall be a resident
Canadian and shall have, subject to the authority of the board, general
supervision of the business and affairs of the Corporation; and he shall,
subject to the provisions of the Act, have such other powers and duties as the
board may specify.
7.04 President
The president shall, subject to the authority of the
board and the managing director, if any, have such powers and duties as the
board may specify. During the absence or disability of the managing director, or
if no managing director has been appointed, the president shall also have the
powers and duties of that office; provided, however, that unless he is a
director he shall not preside as chairman at any meeting of the board or of a
committee of directors.
7.05 Vice-President
During the absence or disability of the president, his
duties shall be performed and his powers exercised by the vice-president or, if
there is more than one, by the vice-president designated from time to time by
the board or the president; provided, however, that a vice-president who is not
a director shall not preside as chairman at any meeting of the board or of a
committee of directors. A vice-president shall have such other powers and duties
as the board or the president may prescribe.
7.06 Secretary
The secretary shall attend and be the secretary of all
meetings of the board, shareholders and committees of the board and shall enter
or cause to be entered in records kept for that purpose minutes of all
proceedings thereat; he shall give or cause to be given, as and when instructed,
all notices to shareholders, directors, officers, auditors and members of
committees of the board; he shall be the custodian of the stamp or mechanical
device generally used for affixing the corporate seal of the Corporation and of
all books, papers, records, documents and instruments belonging to the
Corporation, except when some other officer or agent has been appointed for that
purpose; and he shall have such other powers and duties as the board or the
chief executive officer may specify.
7.07 Treasurer
The treasurer shall keep proper accounting records in
compliance with the Act and shall be responsible for the deposit of money, the
safekeeping of securities and the disbursement of the funds of the Corporation;
he shall render to the board whenever required an account of all his
transactions and he shall have such other powers and duties as the board or
chief executive officer, if any, or the president may specify.
7.08 General Manager or Manager
If elected or appointed, the general manager shall
have, subject to the authority of the board, the managing director, if any, the
chief executive officer, if any, and the president, full power to manage and
direct the business and affairs of the Corporation (except such matters and
duties as by law must be transacted or performed by the board and/or by the
shareholders) and to employ and discharge agents and employees of the
Corporation and may delegate to him or them any lesser authority. A general
manager or manager shall conform to all lawful orders given to him by the board
and shall at all reasonable times give to the directors or any of them all
information they may require regarding the affairs of the Corporation. Any agent
or employee appointed by a general manager or manager shall be subject to
discharge by the board.
7.09 Powers and Duties of Other Officers
The powers and duties of all other officers shall be
such as the terms of their engagement call for or as the board, the managing
director, if any, or the chief executive officer, if any, or the president may
specify. Any of the powers and duties of an officer to whom an assistant has
been appointed may be exercised and performed by such assistant, unless the
board or the chief executive officer, if any, or the president otherwise
directs.
7.10 Variation of Powers and Duties
The board may from time to time and subject to the
provisions of the Act, vary, add to or limit the powers and duties of any
officer.
7.11 Vacancies
If the office of any officer of the Corporation shall
be or become vacant by reason of death, resignation, disqualification or
otherwise, the directors by resolution shall, in the case of the president or
the secretary, and may, in the case of any other office, appoint a person to
fill such vacancy.
7.12 Remuneration and Removal
The remuneration of all officers appointed by the board
of directors shall be determined from time to time by resolution of the board of
directors. The fact that any officer or employee is a director or shareholder of
the Corporation shall not disqualify him from receiving such remuneration as may
be determined. All officers, in the absence of agreement to the contrary, shall
be subject to removal by resolution of the board of directors at any time, with
or without cause.
7.13 Agents and Attorneys
The Corporation, by or under the authority of the
board, shall have power from time to time to appoint agents or attorneys for the
Corporation in or outside Canada with such powers (including the power to
sub-delegate) of management, administration or otherwise as may be thought fit.
7.14 Conflict of Interest
An officer shall disclose his interest in any material
contract or proposed material contract with the Corporation in accordance with
section 6.01.
7.15 Fidelity Bonds
The board may require such officers, employees and
agents of the Corporation as the board deems advisable to furnish bonds for the
faithful discharge of their powers and duties, in such forms and with such
surety as the board may from time to time determine.
DIVISION EIGHT
SHAREHOLDERS' MEETINGS
8.01 Annual Meetings
Subject to the Act, the annual meeting of shareholders
shall be held at such time and on such day in each year and subject to section
8.03, at such place or places as the board, the chairman of the board, the
managing director or the president may from time to time determine, for the
purpose of considering the financial statements and reports required by the Act
to be placed before the annual meeting, electing directors, appointing auditors
if required by the Act or the articles, and for the transaction of such other
business as may properly be brought before the meeting.
8.02 Special Meetings
The board shall have the power to call a special
meeting of shareholders at any time.
8.03 Place of Meetings
Meetings of shareholders shall be held at any place
within Canada as the directors may by resolution determine or, if all the
shareholders entitled to vote at the meeting so agree or if the articles so
provide, outside Canada.
8.04 Record Date for Notice
The board may fix in advance a date, preceding the date
of any meeting of shareholders by not more than fifty (50) days and not less
than twenty-one (21) days, as a record date for the determination of
shareholders entitled to notice of the meeting. If no record date is fixed, the
record date for the determination of the shareholders entitled to receive notice
of the meeting shall be the close of business on the date immediately preceding
the day on which the notice is given or, if no notice is given, the day on which
the meeting is held.
8.05 Notice of Meeting
Notice of the time and place of each meeting of
shareholders shall be sent not less than twenty-one (21) days and not more than
fifty (50) days before the meeting to each shareholder entitled to vote at the
meeting, each director and the auditor of the Corporation. Such notice may be
sent by mail addressed to, or may be delivered personally to, the shareholder,
at his latest address as shown in the records of the Corporation or its transfer
agent, to the director, at his latest address as shown in the records of the
Corporation or in the last notice filed pursuant to section 106 or 113 of the
Act, or to the auditor, at his most recent address as shown in the records of
the Corporation. A notice of meeting of shareholders sent by mail to a
shareholder, director or auditor in accordance with the above is deemed to be
sent on the day on which it was deposited in the mail. A notice of a meeting is
not required to be sent to shareholders who are not registered on the records of
the Corporation or its transfer agent on the record date as determined according
to section 8.04 hereof. Notice of a meeting of shareholders at which special
business is to be transacted shall state the nature of such business in
sufficient detail to permit the shareholder to form a reasoned judgment thereon
and shall state the text of any special resolution to be submitted to the
meeting.
8.06 Right to Vote
Subject to the provisions of the Act as to authorized
representatives of any other body corporate, at any meeting of shareholders in
respect of which the Corporation has prepared the list referred to in section
8.07 hereof, every person who is named in such list shall be entitled to vote
the shares shown thereon opposite his name except to the extent that such person
has transferred any of his shares after the record date set pursuant to section
8.04 hereof, or, if no record date is fixed, after the date on which the list
referred to in section 8.07 is prepared, and the transferee, upon producing
properly endorsed certificates evidencing such shares or otherwise establishing
that he owns such shares, demands not later than ten (10) days before the
meeting that his name be included to vote the transferred shares at the meeting.
In the absence of a list prepared as aforesaid in respect of a meeting of
shareholders, every person shall be entitled to vote at the meeting who at the
close of business on the record date, or if no record date is set, at the close
of business on the date preceding the date notice is sent, is entered in the
securities register as the holder of one or more shares carrying the right to
vote at such meeting.
8.07 List of Shareholders Entitled to Notice
For every meeting of shareholders the Corporation shall
prepare a list of shareholders entitled to receive notice of the meeting,
arranged in alphabetical order, and showing the number of shares held by each
shareholder. If a record date for the meeting is fixed pursuant to section 8.04
hereof by the board, the shareholders listed shall be those registered at the
close of business on the record date. If no record date is fixed by the board,
the shareholders listed shall be those listed at the close of business on the
day immediately preceding the day on which notice of a meeting is given, or
where no such notice is given, the day on which the meeting is held. The list
shall be available for examination by any shareholder during usual business
hours at the registered office of the Corporation or at the place where its
central securities register is maintained and at the place where the meeting is
held.
8.08 Meetings Without Notice
A meeting of shareholders may be held without notice at
any time and place permitted by the Act:
A. if all the shareholders entitled to vote thereat are
present in person or represented by proxy or if those not present
or represented by proxy waive notice of or otherwise consent to
such meeting being held; and
B. if the auditors and the directors are present or
waive notice of or otherwise consent to such meeting being held.
At such meetings any business may be transacted which
the Corporation at a meeting of shareholders may transact. If the meeting is
held at a place outside Canada, shareholders not present or represented by
proxy, but who have waived notice of or otherwise consented to such meeting,
shall also be deemed to have consented to a meeting being held at such place.
8.09 Waiver of Notice
A shareholder and any other person entitled to attend a
meeting of shareholders may in any manner waive notice of a meeting of
shareholders and attendance of any such person at a meeting of shareholders
shall constitute a waiver of notice of the meeting except where such person
attends a meeting for the express purpose of objecting to the transaction of any
business on the grounds that the meeting is not lawfully called.
8.10 Chairman, Secretary and Scrutineers
The chairman of the board or, in his absence, the
president, if such an officer has been elected or appointed and is present, or
otherwise a vice-president who is a shareholder of the Corporation shall be
chairman of any meeting of shareholders. If no such officer is present within
fifteen (15) minutes from the time fixed for holding the meeting, the persons
present and entitled to vote shall choose one of their number to be chairman. If
the secretary of the Corporation is absent, the chairman shall appoint some
person, who need not be a shareholder, to act as secretary of the meeting. If
desired, one or more scrutineers, who need not be shareholders, may be appointed
by a resolution or by the chairman with the consent of the meeting.
8.11 Persons Entitled to be Present
The only persons entitled to be present at a meeting of
shareholders shall be those entitled to vote thereat, the directors and auditors
of the Corporation and others who, although not entitled to vote, are entitled
or required under any provision of the Act or the articles or by-laws to be
present at the meeting. Any other person may be admitted only on the invitation
of the chairman of the meeting or with the consent of the meeting.
8.12 Quorum
A quorum at any meeting of shareholders (unless a
greater number of persons are required to be present or a greater number of
shares are required to be represented by the Act or by the articles or by any
other by-law) shall be persons present not being less than two (2) in number and
holding or representing not less than five (5%) per cent of the shares entitled
to be voted at the meeting. If a quorum is present at the opening of any meeting
of shareholders, the shareholders present or represented may proceed with the
business of the meeting notwithstanding that a quorum is not present throughout
the meeting. If a quorum is not present at the opening of the meeting of
shareholders, the shareholders present or represented may adjourn the meeting to
a fixed time and place but may not transact any other business.
8.14 Proxyholders and Representatives
Votes at meetings of the shareholders may be given
either personally or by proxy; or, in the case of a shareholder who is a body
corporate or association, by an individual authorized by a resolution of the
board of governing body of the body corporate or association to represent it at
a meeting of shareholders of the Corporation, upon producing a certified copy of
such resolution or otherwise establishing his authority to vote to the
satisfaction of the secretary or the chairman.
A proxy shall be executed by the shareholder or his
attorney authorized in writing and is valid only at the meeting in respect of
which it is given or any adjournment of that meeting. A person appointed by
proxy need not be a shareholder.
8.15 Time for Deposit of Proxies
The board may specify in a notice calling a meeting of
shareholders a time, preceding the time of such meeting by not more than
forty-eight (48) hours exclusive of Saturdays and holidays, before which time
proxies to be used at such meeting must be deposited. A proxy shall be acted
upon only if, prior to the time so specified, it shall have been deposited with
the Corporation or an agent thereof specified in such notice or, if no such time
having been specified in such notice, it has been received by the secretary of
the Corporation or by the chairman of the meeting or any adjournment thereof
prior to the time of voting.
8.16 Joint Shareholders
If two or more persons hold shares jointly, any one of
them present in person or duly represented at a meeting of shareholder may, in
the absence of the other or others, vote the shares; but if two or more of those
persons are present in person or represented and vote, they shall vote as one
the shares jointly held by them.
8.17 Votes to Govern
Except as otherwise required by the Act, all questions
proposed for the consideration of shareholders at a meeting of shareholders
shall be determined by a majority of the votes cast and in the event of an
equality of votes at any meeting of shareholders, either upon a show of hands or
upon a ballot, the chairman shall not have a second or casting vote.
8.18 Show of Hands
Subject to the Act, any question at a meeting of
shareholders shall be decided by a show of hands, unless a ballot thereon is
required or demanded as hereinafter provided. Upon a show of hands every person
who is present and entitled to vote shall have one vote. Whenever a vote by show
of hands shall have been taken upon a question, unless a ballot thereon is so
required or demanded, a declaration by the chairman of the meeting that the vote
upon the question has been carried or carried by a particular majority or not
carried and an entry to that effect in the minutes of the meeting shall be prima
facie evidence of the fact without proof of the number of the votes recorded in
favor of or against any resolution or other proceeding in respect of the said
question, and the result of the vote so taken shall be the decision of
shareholders upon the said question.
8.19 Ballots
On any question proposed for consideration at a meeting
of shareholders, a shareholder, proxyholder or other person entitled to vote may
demand and the chairman may require that a ballot be taken either before or upon
the declaration of the result of any vote by show of hands. If a ballot is
demanded on the election of a chairman or on the question of an adjournment it
shall be taken forthwith without an adjournment. A ballot demanded or required
on any other question shall be taken in such manner as the chairman shall
direct. A demand or requirement for a ballot may be withdrawn at any time prior
to the taking of the ballot. If a ballot is taken each person present shall be
entitled, in respect of the shares that he is entitled to vote at the meeting
upon the question, to the number of votes as provided for by the articles or, in
the absence of such provision in the articles, to one vote for each share he is
entitled to vote. The result of the ballot so taken shall be the decision of the
shareholders upon the question.
8.20 Adjournment
The chairman at a meeting of shareholders may, with the
consent of the meeting and subject to such conditions as the meeting may decide,
adjourn the meeting from time to time and from place to place. If a meeting of
shareholders is adjourned for less than thirty (30) days, it shall not be
necessary to give notice of the adjourned meeting, other than by announcement at
the time of the adjournment. Subject to the Act, if a meeting of shareholders is
adjourned by one or more adjournments for an aggregate of thirty (30) days or
more, notice of the adjourned meeting shall be given in the same manner as
notice for an original meeting but, unless the meeting is adjourned by one or
more adjournments for an aggregate of more than ninety (90) day, subsection
149(1) of the Act does not apply.
8.21 Resolution in Lieu of a Meeting
Except where not permitted in the Act, a resolution in
writing signed by all the shareholders entitled to vote on that resolution at a
meeting of shareholders is as valid as if it had been passed at a meeting of the
shareholders; and a resolution in writing dealing with all matters required to
be dealt with at a meeting of shareholders and signed by all the shareholders
entitled to vote at such meeting, satisfies all the requirements of the Act
relating to meetings of shareholders. A copy of every such resolution in writing
shall be kept with minutes of the meetings of shareholders. Any such resolution
in writing is effective for all purposes at such time as the resolution states
regardless of when the resolution is signed.
8.22 Only One Shareholder
Where the Corporation has only one shareholder or only
one holder of any class or series of shares, the shareholder present in person
or duly represented constitutes a meeting.
DIVISION NINE
SHARES
9.01 Non-Recognition of Trusts
Subject to the Act, the Corporation may treat the
registered holder of any share as the person exclusively entitled to vote, to
receive notices, to receive any dividend or other payment in respect of the
share, and otherwise to exercise all the rights and powers of an owner of the
share.
9.02 Certificates
The shareholder is entitled at his option to a share
certificate that complies with the Act or a non-transferable written
acknowledgment of his right to obtain a share certificate from the Corporation
in respect of the securities of the Corporation held by him. Share certificates
and acknowledgments of a shareholder's right to a share certificate,
respectively, shall be in such form as described by the Act and as the Board
shall from time to time approve. A share certificate shall be signed manually by
at least one director or officer of the Corporation or by or on behalf of a
registrar, transfer agent or branch transfer agent of the Corporation, or by a
trustee who certifies it in accordance with a trust indenture, and any
additional signatures required on the share certificate may be printed or
otherwise mechanically reproduced on it.
9.03 Replacement of Share Certificates
The board or any officer or agent designated by the
board may in its or his discretion direct the issuance of a new share
certificate or other such certificate in lieu of and upon cancellation of a
certificate that has been mutilated or in substitution for a certificate claimed
to have been lost, destroyed or wrongfully taken on payment of such reasonable
fee and on such terms as to indemnity, reimbursement of expenses and evidence of
loss and of title as the board may from time to time prescribe, whether
generally or in any particular case.
9.04 Joint Holders
The Corporation is not required to issue more than one
share certificate in respect of shares held jointly by several persons, and
delivery of a certificate to one of several joint holders is sufficient delivery
to all. Any one of such holders may give effectual receipts for the certificate
issued in respect thereof or for any dividend, bonus, return of capital or other
money payable or warrant issuable in respect of such certificate.
DIVISION TEN
TRANSFER OF SECURITIES
10.01 Registration of Transfer
If a share in registered form is presented for
registration of transfer, the Corporation shall register the transfer if:
A. the share is endorsed by an appropriate person, as
defined in section 65 of the Act;
B. reasonable assurance is given that the endorsement
is genuine and effective;
C. the Corporation has no duty to inquire into adverse
claims or has discharged any such duty;
D. any applicable law relating to the collection of
taxes has been complied with;
E. the transfer is rightful or is to a bona fide
purchaser; and
F. the transfer fee, if any, has been paid.
10.02 Transfer Agents and Registrar
The board may from time to time by resolution appoint
or remove one or more agents to maintain a central securities' register or
registers and a branch securities' register or registers. Agents so appointed
may be designated as transfer agent or registrar according to their functions,
and a person may be appointed and designated with functions as both registrar
and transfer or branch transfer agent. Registration of the issuance or transfer
of a security in the central securities' register or in a branch securities'
register is complete and valid registration for all purposes.
10.03 Securities' Registers
A central securities' register of the Corporation shall
be kept at its registered office or at any other place in Canada designated by
the directors to record the shares and other securities issued by the
Corporation in registered form, showing with respect to each class or series of
shares and other securities:
A. the names, alphabetically arranged, and the latest
known address of each person who is or has been a holder;
B. the number of shares or other securities held by
each holder; and
C. the date and particulars of the issuance and
transfer of each share or other security.
A branch securities' register or registers may be kept
either in or outside Alberta at such place or places as the board may determine.
A branch securities' register shall only contain particulars of securities
issued or transferred at that branch. Particulars of each issue or transfer of a
security registered in a branch securities' register shall also be kept in the
corresponding central securities' register.
10.04 Deceased Shareholders
In the event of the death of a holder, or of one of the
joint holders, of any share, the Corporation shall not be required to make any
entry in the securities' register in respect thereof or to make any dividend or
other payments in respect thereof except upon production of all such documents
as may be required by law and upon compliance with the reasonable requirements
of the Corporation and its transfer agents.
DIVISION ELEVEN
DIVIDENDS AND RIGHTS
11.01 Dividends
Subject to the Act, the board may from time to time
declare dividends payable to the shareholders according to their respective
rights and interest in the Corporation. Dividends may be paid in money or
property or by issuing fully-paid shares of the Corporation.
11.02 Dividend Cheques
A dividend payable in money shall be paid by cheque to
the order of each registered holder of shares of the class or series in respect
of which it has been declared and shall be mailed by prepaid ordinary mail to
such registered holder at his address recorded in the Corporation's securities'
register or registers unless such holder otherwise directs. In the case of joint
holders the cheque shall, unless such joint holders otherwise direct, be made
payable to the order of all such joint holders and mailed to them at their
recorded address. The mailing of such cheque as aforesaid, unless the same is
not paid on due presentation, shall satisfy and discharge the liability for the
dividend to the extent of the sum represented thereby plus the amount of any tax
which the Corporation is required to and does withhold.
11.03 Non-Receipt of Cheques
In the event of non-receipt of any dividend cheque by
the person to whom it is sent as aforesaid, the Corporation shall issue to such
person a replacement cheque for a like amount on such terms as to indemnity,
reimbursement of expenses and evidence of non-receipt and of title as the board
may from time to time prescribe, whether generally or in any particular case.
11.04 Unclaimed Dividends
Any dividend unclaimed after a period of six (6) years
from the date on which the same has been declared to be payable shall be
forfeited and shall revert to the Corporation.
11.05 Record Date for Dividends and Rights
The board may fix in advance a date, preceding by not
more than fifty (50) days the date for the payment of any dividend, as a record
date for the determination of the persons entitled to receive payment of such
dividend, provided that, unless waived as provided for in the Act, notice of any
such record date is given, not less than seven (7) days before such record date,
by newspaper advertisement in the manner provided in the Act and by written
notice to each stock exchange in Canada, if any, on which the Corporation's
shares are listed for trading. Where no record date is fixed in advance as
aforesaid, the record date for the determination of the persons entitled to
receive payment of any dividend shall be at the close of business on the day on
which the resolution relating to such dividend is passed by the board.
DIVISION TWELVE
INFORMATION AVAILABLE TO SHAREHOLDERS
12.01 Confidential Information
Except as provided by the Act, no shareholders shall be
entitled to obtain information respecting any details or conduct of the
Corporation's business which in the opinion of the directors it would be
inexpedient in the interests of the Corporation to communicate to the public.
12.02 Conditions of Access to Information
The directors may from time to time, subject to rights
conferred by the Act, determine whether and to what extent and at what time and
place and under what conditions or regulations the documents, books and
registers and accounting records of the Corporation or any of them shall be open
to the inspection of shareholders and no shareholders shall have any right to
inspect any document or book or register or account record of the Corporation
except as conferred by statute or authorized by the board of directors or by a
resolution of the shareholders.
12.03 Registered Office and Separate Records Office
The registered office of the Corporation shall be at a
place within Alberta and at such location therein as the board may from time to
time determine. The records office will be at the registered office or at such
location, if any, within Alberta, as the Board may from time to time determine.
DIVISION THIRTEEN
NOTICES
13.01 Method of Giving Notices
A notice or document required by the Act, the
Regulations, the articles or the by-laws to be sent to a shareholder or director
of the Corporation may be sent by prepaid mail addressed to, or may be delivered
personally to:
A. the shareholder at his latest address as shown in
the records of the Corporation or its transfer agent; and
B. the director at his latest address as shown in the
records of the Corporation or in the last notice filed under
section 106 or 113.
A notice or document sent by mail in accordance with
the foregoing to a shareholder or director of the Corporation is deemed to be
received by him at the time it would be delivered in the ordinary course of mail
unless there are reasonable grounds for believing that the shareholder or
director did not receive the notice or document at the time or at all.
13.02 Notice to Joint Shareholders
If two or more persons are registered as joint holders
of any share, any notice may be addressed to all of such joint holders but
notice addressed to one of such persons shall be sufficient notice to all of
them.
13.03 Persons Entitled by Death or Operation of Law
Every person who, by operation of law, transfer, death
of a shareholder or any other means whatsoever, shall become entitled to any
share, shall be bound by every notice in respect of such share which shall have
been duly given to the shareholders from whom he derives his title to such share
prior to his name and address being entered on the securities' register (whether
such notice was given before or after the happening of the event upon which he
became so entitled) and prior to his furnishing to the Corporation the proof of
authority or evidence of his entitlement prescribed by the Act.
13.04 Non-Receipt of Notices
If a notice or document is sent to a shareholder in
accordance with section 13.01 and the notice or document is returned on three
(3) consecutive occasions because the shareholder cannot be found, the
Corporation is not required to send any further notice or documents to the
shareholder until he informs the Corporation in writing of his new address;
provided always, that in the event of the return of a notice of a shareholders'
meeting mailed to a shareholder in accordance with section 13.01 of this by-law
the notice shall be deemed to be received by the shareholder on the date
deposited in the mail notwithstanding its return.
13.05 Omissions and Errors
Subject to the Act, the accidental omission to give any
notice to any shareholder, director, officer, auditor or member of a committee
of the board or the non-receipt of any notice by any such person or any error in
any notice not affecting the substance thereof shall not invalidate any action
taken at any meeting held pursuant to such notice or otherwise founded thereon.
13.06 Signature on Notices
Unless otherwise specifically provided, the signature
of any director or officer of the Corporation to any notice or document to be
given by the Corporation may be written, stamped, typewritten or printed or
partly written, stamped, typewritten or printed.
13.07 Waiver of Notice
If a notice or document is required by the Act or the
Regulations, the articles, the by-laws or otherwise to be sent, the sending of
the notice or document may be waived or the time for the notice or document may
be waived or abridged at any time with the consent in writing of the person
entitled to receive it.
DIVISION FOURTEEN
MISCELLANEOUS
14.01 Directors to Require Surrender of Share Certificates
The directors in office when a Certificate of
Continuance is issued under the Act are hereby authorized to require the
shareholders of the Corporation to surrender their share certificate, or such of
their share certificates as the directors may determine, for the purpose of
canceling the share certificates and replacing them with new share certificates
that comply with section 49 of the Act, in particular, replacing existing share
certificate with share certificates that are not negotiable securities under the
Act. The directors in office shall act by resolution under this section 14.01
and shall in their discretion decide the manner in which they shall require the
surrender of existing share certificates and the time within which the
shareholders must comply with the requirement and the form or forms of the share
certificates to be issued in place of the existing share certificates. The
directors may take such proceedings as they deem necessary to compel any
shareholder to comply with a requirement to surrender his share certificate or
certificates pursuant to this section. Notwithstanding any other provision of
this by-law, but subject to the Act, the director may refuse to register the
transfer of shares represented by a share certificate that has not been
surrendered pursuant to a requirement under this section.
14.02 Financial Assistance to Shareholders, Employees and
Others
The Corporation may give financial assistance by means
of a loan, guarantee or otherwise:
A. to any person in the ordinary course of business if
the lending of money is part of the ordinary business of the
Corporation;
B. to any person on account of expenditures incurred or
to be incurred on behalf of the Corporation;
C. to a holding body corporate if the Corporation is a
wholly-owned subsidiary of the holding body corporate;
D. to a subsidiary body corporate of the Corporation;
or
E. to employees of the Corporation or any of its
affiliates:
1. to enable or assist them to
purchase or erect living accommodation for their own
occupation; or
2. in accordance with the plan
for the purchase of shares of the Corporation or any
of its affiliates to be held by a trustee;
and, subject to the Act:
A. to any shareholder, director, officer or employee of
the Corporation or of an affiliated corporation; or
B. to any person for the purpose of or in connection
with a purchase of a share issued or to be issued by the
Corporation or an affiliated corporation.
14.03 Severability
The invalidity or unenforceability of any provision of
this by-law shall not affect the validity or enforceability of the remaining
provisions of this by-law.
MADE by the board the 30th day of September, A.D. 1996.
------------------------
"Robert L.G. Watson"
President
------------------------
"Donald A. Engle"
Secretary
CONFIRMED by the Shareholders in accordance with the
Business Corporations Act, the 30th day of September, A.D. 1996.
------------------------
"Donald A. Engle"
Secretary
<PAGE>
BANKING AND SECURITIES
Banking Arrangements....................................2.01........2
Voting Rights in Other Bodies Corporate.................2.02........2
DIRECTORS
Number ...............................................4.01........2
Election and Term.......................................4.02........3
Removal of Directors....................................4.03........3
Consent ...............................................4.04........3
Vacation of Office......................................4.05........3
Committee of Directors..................................4.06........4
Transaction of Business of Committee....................4.07........4
Procedure...............................................4.08........4
Remuneration and Expenses...............................4.09........4
Vacancies...............................................4.10........4
Action by the Board.....................................4.11........4
DIVIDENDS AND RIGHTS
Dividends..............................................11.01.......17
Dividend Cheques.......................................11.02.......17
Non-Receipt of Cheques.................................11.03.......17
Unclaimed Dividends......................... ..........11.04.......17
Record Date for Dividends and Rights...................11.05.......17
EXECUTION OF INSTRUMENTS
Authorized Signing Officers.............................3.01........2
Cheques, Drafts and Notes...............................3.02........2
INFORMATION AVAILABLE TO SHAREHOLDERS
Confidential Information...............................12.01.......18
Conditions of Access to Information....................12.02.......18
Registered Office and Separate Records Office..........12.03.......18
INTERPRETATION ..................................................1.01........1
MEETING OF DIRECTORS
Place of Meeting........................................5.01........5
Notice of Meeting.......................................5.02........5
Adjourned Meeting.......................................5.03........5
Calling of the Meeting..................................5.04........6
Regular Meetings........................................5.05........6
Chairman ...............................................5.06........6
Quorum ...............................................5.07........6
Half Canadian Representation at Meetings................5.08........6
Voting ...............................................5.09........6
Meeting by Telephone....................................5.10........7
Resolution in Lieu of Meeting...........................5.11........7
Amendments to the Act...................................5.12........7
MISCELLANEOUS
Directors to Require Surrender of Share Certificates...14.01.......19
Financial Assistance to Shareholders, Employees and....14.02.......20
Others
Severability...........................................14.03.......21
NOTICES
Method of Giving Notices...............................13.01.......18
Notice to Joint Shareholders...........................13.02.......19
Persons Entitled by Death or Operation of Law..........13.03.......19
Non-Receipt of Notices.................................13.04.......19
Omissions and Errors...................................13.05.......19
Signature on Notices...................................13.06.......19
Waiver of Notice.......................................13.07.......19
OFFICERS
Election or Appointment.................................7.01........9
Chairman of the Board...................................7.02........9
Managing Director.......................................7.03........9
President...............................................7.04........9
Vice-President..........................................7.05........9
Secretary...............................................7.06........9
Treasurer...............................................7.07.......10
General Manager or Manager..............................7.08.......10
Powers and Duties of Other Officers.....................7.09.......10
Variation of Powers and Duties..........................7.10.......10
Vacancies...............................................7.11.......10
Remuneration and Removal................................7.12.......10
Agents and Attorneys....................................7.13.......11
Conflict of Interest....................................7.14.......11
Fidelity Bonds..........................................7.15.......11
<PAGE>
PROTECTION OF DIRECTORS, OFFICERS AND OTHERS
Conflict of Interest....................................6.01........7
Limitation of Liability.................................6.02........7
Indemnity...............................................6.03........8
Insurance...............................................6.04........8
SHARES
Non-Recognition of Trusts...............................9.01.......15
Certificates............................................9.02.......15
Replacement of Share Certificates.......................9.03.......15
Joint Holders...........................................9.04.......16
SHAREHOLDERS' MEETINGS
Annual Meetings.........................................8.01.......11
Special Meetings........................................8.02.......11
Place of Meetings.......................................8.03.......11
Record Date for Notice..................................8.04.......11
Notice of Meeting.......................................8.05.......11
Right to Vote...........................................8.06.......12
List of Shareholders Entitled to Notice.................8.07.......12
Meetings Without Notice.................................8.08.......12
Waiver of Notice........................................8.09.......13
Chairman, Secretary and Scrutineers.....................8.10.......13
Persons Entitled to be Present..........................8.11.......13
Quorum ...............................................8.12.......13
Participation in Meeting by Telephone...................8.13.......13
Proxyholders and Representatives........................8.14.......13
Time for Deposit of Proxies.............................8.15.......14
Joint Shareholders......................................8.16.......14
Votes to Govern.........................................8.17.......14
Show of Hands...........................................8.18.......14
Ballots ...............................................8.19.......14
Adjournment.............................................8.20.......14
Resolution in Lieu of a Meeting.........................8.21.......15
Only One Shareholder....................................8.22.......15
TRANSFER OF SECURITIES
Registration of Transfer...............................10.01.......16
Transfer Agents and Registrar..........................10.02.......16
Securities' Registers..................................10.03.......16
Deceased Shareholders..................................10.04.......17
<PAGE>
EXHIBIT4.7
CUSIP No.: [ ]
ABRAXAS PETROLEUM CORPORATION
11 1/2% SENIOR NOTE DUE 2004, SERIES B
No. [ ] $[ ]
ABRAXAS PETROLEUM CORPORATION, a Nevada corporation, and
CANADIAN ABRAXAS PETROLEUM LIMITED, a Canadian corporation (the "Issuers", which
term includes any successor entities), for value received promise to pay to [ ]
or registered assigns the principal sum of [ ] Dollars on November 1, 2004.
Interest Payment Dates: May 1 and November 1, commencing May
1, 1997
Record Dates: April 15 and October 15
Reference is made to the further provisions of this Note
contained herein, which will for all purposes have the same effect as if set
forth at this place.
IN WITNESS WHEREOF, the Issuers have caused this Note to be
signed manually or by facsimile by their duly authorized officers and a
facsimile of their corporate seal to be affixed hereto or imprinted hereon.
ABRAXAS PETROLEUM CORPORATION
By:________________________________
Name:
Title:
CANADIAN ABRAXAS PETROLEUM LIMITED
By:________________________________
Name:
Title:
Dated:
Certificate of Authentication
This is one of the 11 1/2% Senior Notes due 2004, Series B
referred to in the within-mentioned Indenture.
IBJ SCHRODER BANK AND TRUST COMPANY,
as Trustee
By:________________________________
Authorized Signatory
Date of Authentication:
<PAGE>
7
(REVERSE OF SECURITY)
11 1/2% Senior Note due 2004, Series B
1. Interest. ABRAXAS PETROLEUM CORPORATION, a Nevada
corporation, and CANADIAN ABRAXAS PETROLEUM LIMITED, a Canadian corporation (the
"Issuers"), promise to pay interest on the principal amount of this Note at the
rate per annum shown above. Interest on the Notes will accrue from the most
recent date on which interest has been paid or, if no interest has been paid,
from November 14, 1996. The Issuers will pay interest semi-annually in arrears
on each Interest Payment Date, commencing May 1, 1997. Interest will be computed
on the basis of a 360-day year of twelve 30-day months and, in the case of a
partial month, the actual number of days elapsed.
The Issuers shall pay interest on overdue principal and on
overdue installments of interest from time to time on demand at the rate borne
by the Notes and on overdue installments of interest (without regard to any
applicable grace periods) to the extent lawful.
2. Method of Payment. The Issuers shall pay interest on the
Notes (except defaulted interest) to the Persons who are the registered Holders
at the close of business on the Record Date immediately preceding the Interest
Payment Date even if the Notes are cancelled on registration of transfer or
registration of exchange after such Record Date. Holders must surrender Notes to
a Paying Agent to collect principal payments. The Issuers shall pay principal
and interest in money of the United States that at the time of payment is legal
tender for payment of public and private debts ("U.S. Legal Tender"). However,
the Issuers may pay principal and interest by their check payable in such U.S.
Legal Tender. The Issuers may deliver any such interest payment to the Paying
Agent or to a Holder at the Holder's registered address.
3. Paying Agent and Registrar. Initially, IBJ Schroder Bank &
Trust Company (the "Trustee") will act as Paying Agent and Registrar. The
Company may change any Paying Agent, Registrar or co-Registrar without notice to
the Holders.
4. Indenture. The Issuers issued the Notes under an Indenture,
dated as of November 14, 1996 (the "Indenture"), among the Issuers, the
Subsidiary Guarantors and the Trustee. This Note is one of a duly authorized
issue of Exchange Notes of the Issuers designated as their 11 1/2% Senior Notes
due 2004, Series B (the "Exchange Notes"). The Notes are limited in aggregate
principal amount to $215,000,000. The Notes include the 11 1/2% Notes due 2004
(the "Initial Notes") and the Exchange Notes, issued in exchange for the Initial
Notes pursuant to the Registration Rights Agreement. The Initial Notes and the
Exchange Notes are treated as a single class of securities under the Indenture.
Capitalized terms herein are used as defined in the Indenture unless otherwise
defined herein. The terms of the Notes include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of 1939
(15 U.S. Code ss.ss. 77aaa-77bbbb) (the "TIA"), as in effect on the date of the
Indenture. Notwithstanding anything to the contrary herein, the Notes are
subject to all such terms, and Holders of Notes are referred to the Indenture
and said Act for a statement of them. The Notes are general unsecured
obligations of the Issuers.
5. Indenture. Each Holder, by accepting a Note, agrees to be
bound by all of the terms and provisions of the Indenture, as the same may be
amended from time to time in accordance with its terms.
6. Redemption. The Notes will be redeemable, at the Issuers'
option, in whole at any time or in part from time to time, on and after November
1, 2000, upon not less than 30 nor more than 60 days' notice, at the following
Redemption Prices (expressed as percentages of the principal amount thereof) if
redeemed during the twelve-month period commencing on November 1 of the years
set below, plus, in each case, accrued and unpaid interest, if any, thereon to
the date of redemption:
Year Percentage
---- ----------
2000................... 105.750%
2001................... 102.875%
2002 and thereafter.... 100.000%
At any time, or from time to time, on or prior to _________,
1999, the Issuers may, at their option, use all or a portion of the net cash
proceeds of one or more Equity Offerings (as defined in the Indenture) to redeem
up to 35% of the aggregate principal amount of the Notes originally issued at a
Redemption Price equal to 111.5% of the aggregate principal amount of the Notes
to be redeemed, plus accrued and unpaid interest, if any, thereon to the date of
redemption; provided, however, that at least $139.75 million aggregate principal
amount of Notes remains outstanding immediately after giving effect to any such
redemption (it being expressly agreed that for purposes of determining whether
this condition is satisfied, Notes owned by either Issuer or any of their
Affiliates shall be deemed not to be outstanding). In order to effect the
foregoing redemption with the proceeds of any Equity Offering, the Issuers shall
make such redemption not more than 60 days after the consummation of any Equity
Offering.
7. Notice of Redemption. Notice of redemption will be mailed
at least 30 days but not more than 60 days before the Redemption Date to each
Holder of Notes to be redeemed at such Holder's registered address. Notes in
denominations larger than $1,000 may be redeemed in part.
Except as set forth in the Indenture, if monies for the
redemption of the Notes called for redemption shall have been deposited with the
Paying Agent for redemption on such Redemption Date, then, unless the Issuers
default in the payment of such Redemption Price plus accrued interest, if any,
the Notes called for redemption will cease to bear interest from and after such
Redemption Date and the only right of the Holders of such Notes will be to
receive payment of the Redemption Price plus accrued interest, if any.
8. Offers to Purchase. Sections 4.15 and 4.16 of the Indenture
provide that, after certain Asset Sales (as defined in the Indenture) and upon
the occurrence of a Change of Control (as defined in the Indenture), and subject
to further limitations contained therein, the Issuers will make an offer to
purchase certain amounts of the Notes in accordance with the procedures set
forth in the Indenture.
9. Denominations; Transfer; Exchange. The Notes are in
registered form, without coupons, and (except Notes issued as payment of
Interest) in denominations of $1,000 and integral multiples of $1,000. A Holder
shall register the transfer of or exchange Notes in accordance with the
Indenture. The Registrar may require a Holder, among other things, to furnish
appropriate endorsements and transfer documents and to pay certain transfer
taxes or similar governmental charges payable in connection therewith as
permitted by the Indenture. The Registrar need not register the transfer of or
exchange of any Notes or portions thereof selected for redemption.
10. Persons Deemed Owners. The registered Holder of a Note
shall be treated as the owner of it for all purposes.
11. Unclaimed Money. If money for the payment of principal or
interest remains unclaimed for one year, the Trustee and the Paying Agent will
pay the money back to the Issuers. After that, all liability of the Trustee and
such Paying Agent with respect to such money shall cease.
12. Discharge Prior to Redemption or Maturity. If the Issuers
at any time deposit with the Trustee U.S. Legal Tender or U.S. Government
Obligations sufficient to pay the principal of and interest on the Notes to
redemption and comply with the other provisions of the Indenture relating
thereto, the Issuers will be discharged from certain provisions of the Indenture
and the Notes (including certain covenants, including, under certain
circumstances, their obligation to pay the principal of and interest on the
Notes but without affecting the rights of the Holders to receive such amounts
from such deposit).
13. Amendment; Supplement; Waiver. Subject to certain
exceptions set forth in the Indenture, the Indenture or the Notes may be amended
or supplemented with the written consent of the Holders of not less than a
majority in aggregate principal amount of the Notes then outstanding, and any
past Default or Event of Default or noncompliance with any provision may be
waived with the written consent of the Holders of not less than a majority in
aggregate principal amount of the Notes then outstanding. Without notice to or
consent of any Holder, the parties thereto may amend or supplement the Indenture
or the Notes to, among other things, cure any ambiguity, defect or
inconsistency, provide for uncertificated Notes in addition to or in place of
certificated Notes, comply with any requirements of the Commission in order to
effect or maintain the qualification of the Indenture under the TIA or comply
with Article Five of the Indenture or make any other change that does not
adversely affect the rights of any Holder of a Note.
14. Restrictive Covenants. The Indenture imposes certain
limitations on the ability of the Issuers and the Restricted Subsidiaries to,
among other things, incur additional Indebtedness, make payments in respect of
their Capital Stock or certain Indebtedness, make certain Investments, create or
incur liens, enter into transactions with Affiliates, create dividend or other
payment restrictions affecting Restricted Subsidiaries, issue Preferred Stock of
their Restricted Subsidiaries, and on the ability of the Issuers and their
Restricted Subsidiaries to merge or consolidate with any other Person or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of the Issuers' and their Restricted Subsidiaries' assets or adopt a plan of
liquidation. Such limitations are subject to a number of important
qualifications and exceptions. Pursuant to Section 4.06 of the Indenture, the
Issuers must annually report to the Trustee on compliance with such limitations.
15. Successors. When a successor assumes, in accordance with
the Indenture, all the obligations of its predecessor under the Notes and the
Indenture, the predecessor, subject to certain exceptions, will be released from
those obligations.
16. Defaults and Remedies. If an Event of Default occurs and
is continuing, the Trustee or the Holders of not less than 25% in aggregate
principal amount of Notes then outstanding may declare all the Notes to be due
and payable in the manner, at the time and with the effect provided in the
Indenture. Holders of Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. The Trustee is not obligated to enforce the Indenture
or the Notes unless it has received indemnity reasonably satisfactory to it. The
Indenture permits, subject to certain limitations therein provided, Holders of a
majority in aggregate principal amount of the Notes then outstanding to direct
the Trustee in its exercise of any trust or power. The Trustee may withhold from
Holders of Notes notice of any continuing Default or Event of Default (except a
Default in payment of principal or interest when due, for any reason or a
Default in compliance with Article Five of the Indenture) if it determines that
withholding notice is in their interest.
17. Trustee Dealings with Issuers. The Trustee under the
Indenture, in its individual or any other capacity, may become the owner or
pledgee of Notes and may otherwise deal with the Issuers, their Subsidiaries or
their respective Affiliates as if it were not the Trustee.
18. No Recourse Against Others. No partner, director, officer,
employee or stockholder, as such, of either Issuer or any Subsidiary Guarantor,
as such, shall have any liability for any obligations of either Issuer or any
Subsidiary Guarantor under the Notes, the Indenture, the Guarantees or the
Registration Rights Agreement or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder of Notes by accepting
a Note waives and releases all such liability. The waiver and release are part
of the consideration for the issuance of the Notes.
19. Guarantees. This Note will be entitled to the benefits of
certain Guarantees, if any, made for the benefit of the Holders. Reference is
hereby made to the Indenture for a statement of the respective rights,
limitations of rights, duties and obligations thereunder of the Subsidiary
Guarantors, the Trustee and the Holders.
20. Authentication. This Note shall not be valid until the
Trustee or Authenticating Agent manually signs the certificate of authentication
on this Note.
21. Governing Law. This Note and the Indenture shall be
governed by and construed in accordance with the laws of the State of New York,
as applied to contracts made and performed within the State of New York, without
regard to principles of conflict of laws. Each of the parties hereto agrees to
submit to the jurisdiction of the courts of the State of New York in any action
or proceeding arising out of or relating to this Note.
22. Abbreviations and Defined Terms. Customary abbreviations
may be used in the name of a Holder of a Note or an assignee, such as: TEN COM
(= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint
tenants with right of survivorship and not as tenants in common), CUST (=
Custodian), and U/G/M/A (= Uniform Gifts to Minors Act).
23. CUSIP Numbers. Pursuant to a recommendation promulgated by
the Committee on Uniform Security Identification Procedures, the Issuers have
caused CUSIP numbers to be printed on the Notes as a convenience to the Holders
of the Notes. No representation is made as to the accuracy of such numbers as
printed on the Notes and reliance may be placed only on the other identification
numbers printed hereon.
The Issuers will furnish to any Holder of a Note upon written
request and without charge a copy of the Indenture, which has the text of this
Note. Requests may be made to: Abraxas Petroleum Corporation, 500 North Loop
1604 East, Suite 100, San Antonio, Texas 78232.
<PAGE>
ASSIGNMENT FORM
If you the Holder want to assign this Note, fill in the form
below and have your signature guaranteed:
I or we assign and transfer this Note to:
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
(Print or type name, address and zip code and
social security or tax ID number of assignee)
and irrevocably appoint_______________________________________________________ ,
agent to transfer this Note on the books of the Issuers. The agent may
substitute another to act for him.
Dated:_________________ Signed:_____________________
(Sign exactly as name appears
on the other side of this Note)
Signature Guarantee:_________________________________________________________
<PAGE>
[OPTION OF HOLDER TO ELECT PURCHASE]
If you want to elect to have this Note purchased by the
Issuers pursuant to Section 4.15 or Section 4.16 of the Indenture, check the
appropriate box:
Section 4.15 [ ]
Section 4.16 [ ]
If you want to elect to have only part of this Note purchased
by the Issuers pursuant to Section 4.15 or Section 4.16 of the Indenture, state
the amount you elect to have purchased:
$-------------------
Dated: _________________ ___________________________________________________
NOTICE: The signature on
this assignment must
correspond with the name
as it appears upon the
face of the within Note
in every particular
without alteration or
enlargement or any
change whatsoever and be
guaranteed.
Signature Guarantee:
<PAGE>
EXHIBIT 4.8
1
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON___________ , 1997, UNLESS EXTENDED.
FORM OF LETTER OF TRANSMITTAL
TO ACCOMPANY 11.5% SENIOR NOTES DUE 2004,
SERIES A (CUSIP NO. ____________) OF
ABRAXAS PETROLEUM CORPORATION
(a Nevada corporation)
AND
CANADIAN ABRAXAS PETROLEUM LIMITED
(a Canada corporation)
TENDERED PURSUANT TO THE PROSPECTUS
DATED ____________, 1996
<PAGE>
(PLEASE READ THE INSTRUCTIONS CAREFULLY)
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR A FACSIMILE HEREOF) AND ALL OTHER
DOCUMENTS AND INSTRUMENTS REQUIRED HEREBY SHOULD BE SENT OR DELIVERED TO THE
EXCHANGE AGENT AT THE ADDRESS SET FORTH BELOW. TENDERS MUST BE RECEIVED BY THE
EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON , 1997, UNLESS THE
EXCHANGE OFFER IS EXTENDED (THE "EXPIRATION DATE").
The Exchange Agent
IBJ SCHRODER BANK & TRUST COMPANY
Facsimile Transmission Telephone Number: Address for Mailing:
(212) _________ One State Street
New York, N.Y. 10004
Attn: ______________
Confirm by Telephone: Address for Couriers and
Hand Deliveries:
(212) 858-2000 One State Street
New York, N.Y. 10004
Attn: ______________
------------------------
DELIVERY TO ANY ADDRESS OTHER THAN AS SET FORTH HEREIN WILL NOT CONSTITUTE VALID
DELIVERY.
------------------------
THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ
CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
This Letter of Transmittal is to be completed by holders of Series A
Notes (as defined below) only (a) if Series A Notes are to be forwarded herewith
or (b) if delivery of such Series A Notes is to be made by book-entry transfer
to the account maintained by the Exchange Agent at The Depository Trust Company
(DTC) pursuant to the procedures set forth under the caption "The Exchange Offer
- -- How to Tender" in the Prospectus (as defined below). DELIVERY OF DOCUMENTS TO
DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
Holders of Series A Notes who cannot deliver their Series A Notes or
deliver confirmation of the book-entry transfer of their Series A Notes into the
Exchange Agent's account at DTC and all other documents required hereby to the
Exchange Agent on or prior to the Expiration Date must tender their Series A
Notes pursuant to the guaranteed delivery procedure set forth under the caption
"The Exchange Offer -- How to Tender" in the Prospectus. See Instruction 2
herein.
<PAGE>
(BOXES BELOW TO BE CHECKED BY ELIGIBLE INSTITUTIONS ONLY)
/ / CHECK HERE IF TENDERED SERIES A NOTES ARE BEING DELIVERED BY
BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE
AGENT WITH DTC AND COMPLETE THE FOLLOWING:
Name of Tendering Institution_________________________________________________
DTC Account Number ___________________________________________________________
Transaction Code Number ______________________________________________________
/ / CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED
DELIVERY IF TENDERED SERIES A NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND
COMPLETE THE FOLLOWING:
Name of Registered Owner(s) __________________________________________________
Date of Execution of Notice of Guaranteed Delivery ___________________________
Name of Institution which Guaranteed delivery ________________________________
If Delivered By Book-Entry Transfer:
Name of Tendering Institution _______________________________________________
DTC Account Number __________________________________________________________
Transaction Code Number _____________________________________________________
/ / CHECK HERE IF TENDERING BY BOOK-ENTRY TRANSFER AND NON-EXCHANGED
SERIES A NOTES ARE TO BE RETURNED BY CREDITING THE DTC ACCOUNT NUMBER
SET FORTH ABOVE.
<PAGE>
DESCRIPTION OF SERIES A NOTES TENDERED
SERIES A NOTES TENDERED______________________________________________________
IF BLANK, PRINT NAME AND ADDRESS OF REGISTERED HOLDER.
- -----------------------------------------------------------------------------
(ATTACH ADDITIONAL LIST IF NECESSARY)
- -----------------------------------------------------------------------------
AGGREGATE PRINCIPAL AMOUNT PRINCIPAL AMOUNT OF
SERIES A OF SERIES A NOTES SERIES A NOTES
NOTES NUMBER(S)* TENDERED**
- -------- ------------------ -------------------------- -----------------------
- -------- ------------------ -------------------------- -----------------------
- -------- ------------------ -------------------------- -----------------------
- -------- ------------------ -------------------------- -----------------------
- -------- ------------------ -------------------------- -----------------------
- -------- ------------------ -------------------------- -----------------------
- -------- ------------------ -------------------------- -----------------------
- -------- ------------------ -------------------------- -----------------------
- -------- ------------------ -------------------------- -----------------------
- -------- ------------------ -------------------------- -----------------------
- -------- ------------------ -------------------------- -----------------------
TOTALS:
- ------------------------------------------------------------------------------
* Need not be completed by Book-Entry Holders.
** The aggregate principal amount of all Series A Notes held shall be deemed
tendered unless a lesser principal amount is specified in this column. See
Instruction 4.
<PAGE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Pursuant to the terms and subject to the conditions of the Exchange
Offer (as described below) of Abraxas Petroleum Corporation, a Nevada
corporation ("Abraxas") and Canadian Abraxas Petroleum Limited, a Canada
corporation ("Canadian Abraxas" and, together with Abraxas, the "Issuers"), to
holders of the Issuers' 11.5% Senior Notes due 2004, Series A issued pursuant to
the Offering Memorandum dated November 5, 1996 (the "Series A Notes"), as set
forth in the Prospectus dated ___________, 1996 (the "Prospectus") and this
Letter of Transmittal (which, together with the Prospectus, constitute the
Exchange Offer), the signer of this Letter of Transmittal (the "Holder") hereby
accepts the Exchange Offer and tenders the Series A Notes listed on this Letter
of Transmittal in exchange for a like principal amount of 11.5% Senior Notes due
2004, Series B (the "Exchange Notes"). The Exchange Notes are substantially
identical to the Series A Notes except that the resale of the Exchange Notes
will not be subject to the restrictions of Rule 144A under the Securities Act of
1933, as amended (the "Securities Act"), and the Exchange Notes will not be
subject to certain interest rate increase provisions which were applicable to
the Series A Notes in certain circumstances relating to the timing of the
Exchange Offer. The Holder hereby acknowledges receipt of the Prospectus.
Capitalized terms used but not defined herein have the respective meanings given
such terms in the Prospectus.
Accordingly, subject to, and effective upon, acceptance for exchange of
the Series A Notes tendered herewith in accordance with the terms and conditions
of the Exchange Offer, the Holder hereby sells, assigns and transfers to the
Issuers all right, title and interest in and to all of the Series A Notes that
are being tendered for exchange hereby, and hereby irrevocably constitutes and
appoints the Exchange Agent the true and lawful agent and attorney-in-fact of
the Holder with respect to such securities, with full power of substitution
(such power of attorney being deemed to be an irrevocable power coupled with an
interest), to (i) deliver Series A Notes tendered hereby or transfer ownership
of such securities on the account books maintained by DTC together, in either
such case, with the accompanying evidences of transfer and authority, to the
Issuers upon the receipt by the Exchange Agent, as the Holder's agent, of the
consideration therefor pursuant to the Exchange Offer, and (ii) receive all
benefits and otherwise exercise all rights of beneficial ownership of such
Series A Notes.
THE HOLDER HEREBY REPRESENTS AND WARRANTS THAT THE HOLDER HAS FULL
POWER AND AUTHORITY TO TENDER, EXCHANGE, SELL, ASSIGN AND TRANSFER THE SERIES A
NOTES TENDERED HEREBY AND TO ACQUIRE THE EXCHANGE NOTES ISSUABLE UPON THE
EXCHANGE OF SUCH TENDERED SECURITIES, THAT THE ISSUERS WILL ACQUIRE GOOD AND
UNENCUMBERED TITLE TO SUCH TENDERED SERIES A NOTES, FREE AND CLEAR OF ALL LIENS,
RESTRICTIONS, CHARGES AND ENCUMBRANCES, AND THE SERIES A NOTES TENDERED HEREBY
ARE NOT SUBJECT TO ANY ADVERSE CLAIM OR ENCUMBRANCE WHEN THE SAME ARE ACCEPTED
BY THE ISSUERS. THE HOLDER WILL, UPON REQUEST, EXECUTE AND DELIVER ANY
ADDITIONAL DOCUMENTS DEEMED BY THE ISSUERS OR THE EXCHANGE AGENT TO BE NECESSARY
OR DESIRABLE TO COMPLETE THE EXCHANGE, SALE, ASSIGNMENT AND TRANSFER OF THE
SERIES A NOTES TENDERED HEREBY.
All authority herein conferred or agreed to be conferred in this Letter
of Transmittal shall survive the death or incapacity of the Holder, and any
obligation of the Holder hereunder shall be binding upon the heirs, personal
representatives, successors and assigns of the Holder. Except as stated in the
Prospectus, this tender is irrevocable.
A tender of Series A Notes pursuant to the procedures described in the
Prospectus and in the instructions hereto will constitute the Holder's
acceptance of the terms and conditions of the Exchange Offer and a binding
agreement between the tendering Holder of Series A Notes and the Issuers upon
the terms and subject to the conditions of the Exchange Offer. The Holder
recognizes that, under certain circumstances set forth in the Prospectus, the
Issuers may not be required to accept any of the Series A Notes tendered for
exchange hereby. The Holder hereby directs that the Exchange Notes and/or any
Series A Notes representing any principal amount of such securities not
exchanged be issued in the name of the Holder. The Holder understands that
Holders who tender Series A Notes by book-entry transfer ("Book-Entry Holders")
will receive their Exchange Notes and any principal amount of Series A Notes not
exchanged will be returned to such Book-Entry Holder by crediting in the name of
such Book-Entry Holder the account maintained by DTC. The Holder recognizes that
the Issuers have no obligation to transfer any Series A Notes from the name(s)
of the registered holder(s) thereof.
BY TENDERING SERIES A NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL,
THE HOLDER IS DEEMED TO REPRESENT AND AGREE, AND HEREBY REPRESENTS AND AGREES,
THAT (I) IT IS ACQUIRING EXCHANGE NOTES ISSUABLE IN EXCHANGE THEREFOR IN THE
ORDINARY COURSE OF ITS BUSINESS, (II) UNLESS IT IS A BROKER-DEALER REFERRED TO
IN THE NEXT SENTENCE, IT IS NOT ENGAGING AND DOES NOT INTEND TO ENGAGE IN THE
DISTRIBUTION OF THE EXCHANGE NOTES, (III) AT THE TIME OF CONSUMMATION OF THE
EXCHANGE OFFER THE HOLDER WILL HAVE NO ARRANGEMENT OR UNDERSTANDING WITH ANY
PERSON TO PARTICIPATE IN THE DISTRIBUTION OF THE EXCHANGE NOTES IN VIOLATION OF
THE PROVISIONS OF THE SECURITIES ACT, (IV) THE HOLDER IS NOT AN AFFILIATE OF ANY
OF THE ISSUERS WITHIN THE MEANING OF RULE 405 UNDER THE SECURITIES ACT AND (V)
IF IT PARTICIPATES IN THE EXCHANGE OFFER FOR THE PURPOSE OF DISTRIBUTING THE
EXCHANGE NOTES IT MUST COMPLY WITH THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF THE SECURITIES ACT IN CONNECTION WITH ANY RESALE OF THE EXCHANGE
NOTES. EACH HOLDER WHO IS A PARTICIPATING BROKER-DEALER (AS DEFINED IN THE
PROSPECTUS) HOLDING SERIES A NOTES ACQUIRED FOR ITS OWN ACCOUNT AS A RESULT OF
MARKET-MAKING OR OTHER TRADING ACTIVITIES THAT WILL RECEIVE EXCHANGE NOTES IN
EXCHANGE FOR SUCH SERIES A NOTES PURSUANT TO THE EXCHANGE OFFER FURTHER
REPRESENTS AND AGREES THAT IT WILL DELIVER A PROSPECTUS (WHICH MAY BE THE
PROSPECTUS) IN CONNECTION WITH ANY RESALE OF SUCH EXCHANGE NOTES DURING THE
PERIOD REQUIRED BY THE SECURITIES ACT. BY ACKNOWLEDGING THAT IT WILL DELIVER AND
BY DELIVERING A PROSPECTUS, A PARTICIPATING BROKER-DEALER WILL NOT BE DEEMED TO
ADMIT THAT IT IS AN "UNDERWRITER" WITHIN THE MEANING OF THE SECURITIES ACT.
<PAGE>
HOLDER SIGN HERE
X__________________________________
X__________________________________
(Signature( ) of Owner(s))
Dated____________________ , 1995
Holder's Telephone Number
(Must be signed by the registered holder(s) exactly as name(s) appear(s) on
Series A Notes. If signature is by an attorney, executor, administrator,
trustee, guardian or others acting in a fiduciary capacity, please set forth
full title and see Instruction 5.)
Signature(s)
Guaranteed
(See Instruction 1)
- -----------------------------------------------------------------------------
(Firm -- Please Print)
- -----------------------------------------------------------------------------
(Authorized Signature)
- -----------------------------------------------------------------------------
(Date)
SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 1, 4, 5 and 6)
To be completed ONLY by registered holders and ONLY if Exchange Notes
or Series A Notes representing any principal amount of such securities not
exchanged are to be sent to the Holder at an address other than that shown
above.
Mail Exchange Notes (or Series A Notes) to:
(Name -- Please Print)______________________________________________________
(Address) (Include Zip Code)________________________________________________
================================================================================
FOR PARTICIPATING BROKER-DEALERS ONLY
(See Instruction 11)
Please send_______ copies of the Prospectus and any supplements or amendments
thereto to the following address:
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. GUARANTEE OF SIGNATURES. Signatures on Letters of Transmittal need not
be guaranteed, except as provided in this Instruction 1. In cases where
Series A Notes are tendered for exchange by a registered holder of
Series A Notes who has completed the box entitled "Special Delivery
Instructions" on the Letter of Transmittal, signatures on Letters of
Transmittal (or facsimiles thereof) must be guaranteed by a commercial
bank or trust company having an office or correspondent in the United
States or a firm which is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers,
Inc. (an "Eligible Institution").
2. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES. In order to
participate in the Exchange Offer and receive Exchange Notes, a holder
must properly complete and duly execute (with signatures guaranteed if
required by Instruction 1) the Letter of Transmittal (or a facsimile
thereof) and mail or deliver it, together with the Series A Notes to be
tendered for exchange (or the Exchange Agent must receive a timely
confirmation of a book-entry transfer of such Series A Notes into the
Exchange Agent's account at DTC as described in the Prospectus) and any
other required documents, to the Exchange Agent. The Exchange Agent
must receive the foregoing documents and instruments on or prior to the
Expiration Date. DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE
DELIVERY TO THE EXCHANGE AGENT.
If a holder desires to tender Series A Notes pursuant to the Exchange
Offer and such holder's Series A Notes are not immediately available,
or if the procedure for book-entry transfer cannot be completed on a
timely basis, or such holder cannot deliver the Series A Notes and all
other required documents to the Exchange Agent prior to the Expiration
Date, such Series A Notes may be tendered if all of the following
guaranteed delivery procedures are complied with: (i) such tenders are
made by or through an Eligible Institution; (ii) a properly completed
and duly executed Notice of Guaranteed Delivery, in substantially the
form provided by the Issuers, is received by the Exchange Agent on or
prior to the Expiration Date; and (iii) the Series A Notes, in proper
form (or transfer for confirmation of book-entry transfer of such
Series A Notes into the Exchange Agent's account at DTC as described in
the Prospectus), together with a properly completed and duly executed
Letter of Transmittal and all other documents required by this Letter
of Transmittal, are received by the Exchange Agent within five New York
Stock Exchange, Inc. trading days after the date of execution of such
Notice of Guaranteed Delivery, all as provided under the caption "The
Exchange Offer -- How to Tender" in the Prospectus.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptability of Series A Notes tendered will be
determined by the Issuers in their sole discretion, and such
determinations will be final and binding. The Issuers reserve the right
to reject any and all tenders determined by their not to be in proper
form or otherwise not valid or the acceptance for exchange of which
may, in the opinion of the Issuers' counsel, be unlawful or to waive
any irregularities or conditions. The Issuers' interpretation of the
terms and conditions of the Exchange Offer (including the Letter of
Transmittal and Instructions thereto) will also be final and binding.
The Issuers and the Exchange Agent are not under any duty to give
notification of any irregularities or defects and shall not incur any
liability for failure to give any such notification. Tenders will not
be deemed to have been made until such irregularities or defects have
been cured or waived. Any tender (including the Letter of Transmittal
and Series A Notes) that is not properly completed and executed, and as
to which irregularities or defects are not cured or waived, will be
returned by the Exchange Agent to the tendering holder promptly after
the Expiration Date (or, in the case of Series A Notes delivered by
book-entry transfer within DTC, the tendered Series A Notes will be
credited to the account maintained within DTC by the participant).
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE SERIES A
NOTES AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH DTC,
IS AT THE ELECTION AND RISK OF THE TENDERING HOLDER AND, EXCEPT AS
OTHERWISE PROVIDED IN THIS INSTRUCTION 2, THE DELIVERY WILL BE DEEMED
MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF DELIVERY IS
BY MAIL, REGISTERED MAIL, WITH RETURN RECEIPT REQUESTED, PROPERLY
INSURED, IS RECOMMENDED.
No alternative, conditional or contingent tenders will be accepted. All
tendering holders, by execution of this Letter of Transmittal or
facsimile hereof, waive any rights to receive any notice of the
acceptance of their tender.
3. INADEQUATE SPACE. If the space provided herein is inadequate, the
Series A Note numbers and the principal amount of Series A Notes should
be listed on a separate signed schedule attached hereto.
4. PARTIAL TENDERS. If less than all of the principal amount represented
by any Series A Note submitted is to be tendered, the principal amount
of the Series A Notes which are to be tendered should be stated in the
box entitled "Principal Amount of Series A Notes Tendered." New Series
A Notes for the remaining principal amount of the old Series A Note(s)
will either be sent to the registered holder of the Series A Note(s)
tendered as soon as practicable after the tender has been accepted or
credited to the holder's account in accordance with appropriate
book-entry procedures. The aggregate principal amount of all Series A
Notes listed are deemed to have been tendered unless otherwise
indicated. Partial tenders of all Series A Notes may be made only if
(i) the principal amount tendered is equal to $1,000 or an integral
multiple thereof; and (ii) the remaining untendered portion of such
Series A Note is in a principal amount of $250,000, or any integral
multiple of $1,000 in excess of such amount.
5. SIGNATURES ON LETTER OF TRANSMITTAL. This Letter of Transmittal must be
signed by the registered holder of the Series A Note(s) tendered hereby
and if the Series A Notes are registered the signature must correspond
exactly with the name as written on the face of the Series A Note(s)
with alteration, enlargement or any change whatsoever.
If the Series A Notes tendered hereby are owned of record by two or
more joint owners, all such owners must sign this Letter of
Transmittal.
If this Letter of Transmittal is signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations
or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and proper evidence
satisfactory to the Issuers of their authority to so act must be
submitted.
6. DELIVERY OF EXCHANGE NOTES. Delivery of Exchange Notes will be made
promptly after the Expiration Date for all Series A Notes properly
tendered and accepted for exchange by the Issuers. The Exchange Notes
of registered holders will be issued in the name of the registered
holder(s) of the Series A Notes and will either be mailed to such
holder(s) or credited to such holder's account in accordance with
appropriate book-entry procedures. In the case of tenders by Notice of
Guaranteed Delivery, Exchange Notes will not be delivered until the
Letter of Transmittal, the Series A Notes relating to such Notice of
Guaranteed Delivery (or a timely confirmation of a book-entry transfer
of such Series A Notes into the Exchange Agent's account of DTC) and
all other required documents have been received by the Exchange Agent.
7. SECURITY TRANSFER TAXES. The Issuers will pay all security transfer
taxes, if any, applicable to the exchange of Series A Notes tendered
and accepted pursuant to the Exchange Offer.
8. BACKUP FEDERAL INCOME TAX WITHHOLDING AND SUBSTITUTE FORM W9. Under the
federal income tax laws, payments that may be made by the Issuers on
account of Exchange Notes issued pursuant to the Exchange Offer may be
subject to backup withholding at the rate of 31%. In order to avoid
such backup withholding, each tendering holder should complete and sign
the Substitute Form W-9 included in this Letter of Transmittal and
either (a) provide the correct taxpayer identification number ("TIN")
and certify, under penalties of perjury, that the TIN provided is
correct and that (i) the holder has not been notified by the Internal
Revenue Service (the "IRS") that the holder is subject to backup
withholding as a result of failure to report all interest or dividends
or (ii) the IRS has notified the holder that the holder is no longer
subject to backup withholding; or (b) provide an adequate basis for
exemption. If the tendering holder has not been issued a TIN and has
applied for one, or intends to apply for one in the near future, such
holder should write "Applied For" in the space provided for the TIN in
Part I of the Substitute Form W-9, sign and date the Substitute Form
W-9 and sign the Certificate of Payee Awaiting Taxpayer Identification
Number. If "Applied For" is written in Part I, the Issuers (or the
Paying Agent under the Indenture governing the Exchange Notes) shall
retain 31% of payments made to the tendering holder during the sixty
day period following the date of the Substitute Form W-9. If the holder
furnishes the Exchange Agent or the Issuers with its TIN within sixty
days after the date of the Substitute Form W-9, the Issuers (or the
Paying Agent) shall remit such amounts retained during the sixty day
period to the holder and no further amounts shall be retained or
withheld from payments made to the holder thereafter. If, however, the
holder has not provided the Exchange Agent or the Issuers with its TIN
within such sixty day period, the Issuers (or the Paying Agent) shall
remit such previously retained amounts to the IRS as backup
withholding. In general, if a holder is an individual, the TIN is the
Social Security number of such individual. If the Exchange Agent or the
Issuers are not provided with the correct TIN, the holder may be
subject to a $50 penalty imposed by the IRS. Certain holders
(including, among others, all corporations and certain foreign
individuals) are not subject to these backup withholding and reporting
requirements. In order for a foreign individual to qualify as an exempt
recipient, such holder must submit a statement (generally, IRS Form
W-8), signed under penalties of perjury, attesting to that individual's
exempt status. Such statements can be obtained from the Exchange Agent.
Failure to complete the Substitute Form W-9 will not, by itself, cause
Notes to be deemed invalidly tendered, but may require the Issuers (or
the Paying Agent) to withhold 31% of the amount of any payment made on
account of the Exchange Notes. Backup withholding is not an additional
federal income tax. Rather, the federal income tax liability of a
person subject to backup withholding will be reduced by the amount of
tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained from the IRS.
9. WAIVER OF CONDITIONS. Subject to limitations set forth in the
Prospectus, the conditions of the Exchange Offer may be waived by the
Issuers, in whole or in part, at any time or from time to time, in the
Issuers' sole discretion in the case of any Series A Notes tendered.
10. LOST, DESTROYED OR STOLEN NOTES. If any Series A Note has been lost,
stolen, mutilated or destroyed, the holder should promptly notify the
Trustee, IBJ Schroder Bank & Trust Company, of such fact in writing, or
call (212) 858-2000. The holder will then be directed as to the steps
that must be taken in order to replace the Series A Note. The Letter of
Transmittal and related documents cannot be processed until the
procedures for replacing lost, stolen, mutilated or destroyed Series A
Notes have been followed.
11. REQUEST FOR ADDITIONAL COPIES. Questions and requests for additional
copies of the Prospectus and this Letter of Transmittal may be obtained
from the Exchange Agent at the address and telephone number set forth
in the Prospectus.
12. PARTICIPATING BROKER-DEALERS. Each Holder which is a Participating
Broker-Dealer must advise the Exchange Agent as to the number of copies
of the Prospectus (including supplements and amendments thereto) it
will require in order to satisfy the prospectus delivery requirements
for resales of Exchange Notes which are exchanged for Series A Notes
acquired by it for its own account as a result of market-making or
other trading activities.
(DO NOT WRITE IN SPACE BELOW)
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CERTIFICATE SURRENDERED EXISTING NOTES TENDERED EXISTING NOTES ACCEPTED
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Dated Received
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Accepted by
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Checked by
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Delivery Prepared by
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Checked by
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Date
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IMPORTANT TAX INFORMATION
Under federal income tax laws, a holder whose tendered Series A Notes
are accepted for payment is required to provide the Exchange Agent (as payor)
with such holder's correct TIN on Substitute Form W-9 below or otherwise
establish a basis for exemption from backup withholding. If such holder is an
individual, the TIN is his social security number. If the Exchange Agent is not
provided with the correct TIN, a $50 penalty may be imposed by the Internal
Revenue Service.
Certain holders (including, among others, all corporations and certain
foreign persons) are not subject to these backup withholding and reporting
requirements. Exempt holders should indicate their exempt status on Substitute
Form W-9. A foreign person may qualify as an exempt recipient by submitting to
the Exchange Agent a properly completed Internal Revenue Service Form W-8,
signed under penalties of perjury, attesting to that holder's exempt status. A
Form W-8 can be obtained from the Exchange Agent.
If backup withholding applies, the Exchange Agent is required to
withhold 20% of any payments made to the holder or other payee. Backup
withholding is not an additional federal income tax. Rather, the federal income
tax liability of persons subject to backup withholding will be reduced by the
amount of tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained from the Internal Revenue Service.
<PAGE>
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on payments made with respect to the
Exchange Offer, the holder is required to provide the Exchange Agent with
either: (i) the holder's correct TIN by completing the form below, certifying
that the TIN provided on Substitute Form W-9 is correct (or that such holder is
awaiting a TIN) and that (A) the holder has been notified by the Internal
Revenue Service that the holder is subject to backup withholding as a result of
failure to report all interest or dividends or (B) the Internal Revenue Service
has notified the holder that the holder is no longer subject to backup
withholding, or (ii) an adequate basis for exemption.
<PAGE>
2
EXHIBIT 4.9
Incorporated Under the
Laws of Canada
Number Shares _____
Common Stock
CANADIAN ABRAXAS PETROLEUM LIMITED
This certifies that ____________________ is the registered holder of _____(___)
common Shares without nominal or par value transferable only on the books of the
Corporation by the holder hereof in person or by Attorney upon surrender of this
Certificate properly endorsed. There are rights, privileges, restrictions and
conditions attached to these shares. The full text of the rights, privileges,
restrictions and conditions attached to each class of shares of the Corporation
and, if applicable, to each series of any such class insofar as they have been
fixed by the Directors, together with the authority of the Directors to fix the
rights, privileges, restrictions and conditions of any subsequent series, are
obtainable on demand, and without fee, from the Secretary of the Corporation.
In witness whereof, the said Corporation has caused this Certificate to be
signed by its duly authorized officer(s) and its Corporate Seal to be hereunto
affixed this ____ day of _____________, A.D. 1996.
"Robert L.G. Watson" "Donald A. Engle"
President Secretary
<PAGE>
December 23, 1996
Page 2
EXHIBIT 5.1
COX & SMITH
I N C O R P O R A T E D
ATTORNEYS COUNSELORS
112 East Pecan Street
Suite 1800
San Antonio, Texas 78205-1521
(210) 554-5500
Fax (210) 226-8395
Writer's Direct Number Writer's E-Mail Address
(210) 554-5255 [email protected]
December 23, 1996
Abraxas Petroleum Corporation
500 North Loop 1604 East
Suite 100
San Antonio, Texas 78232
Re: Registration Statement on Form S-4 filed
by Abraxas Petroleum Corporation and
Canadian Abraxas Petroleum Limited
Dear Sirs:
We have acted as counsel to Abraxas Petroleum Corporation, a Nevada
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933, as amended, pursuant to Registration Statement on Form
S-4 (the "Registration Statement"), of an aggregate of $215,000,000 principal
amount of the Company's and Canadian Abraxas Petroleum Limited's 11.5% Senior
Notes Due 2004 (the "Exchange Notes").
We have examined and are familiar with originals or copies, the
authenticity of which have been established to our satisfaction, of all such
documents, corporate records, certificates of officers of the Company and public
officials, and other instruments as we have deemed necessary to express the
opinion hereinafter set forth. In expressing our opinion as to the valid
issuance of shares of the Exchange Notes, we express no opinion as to compliance
with federal and state securities laws.
Based upon the foregoing, it is our opinion that:
(1) the Exchange Notes to be issued and sold as described in the
Registration Statement have been duly and validly authorized for such issue and
sale and, when so issued, sold and delivered, will be validly issued, fully paid
and nonassessable; and
(2) the Exchange Notes, when issued, sold and delivered, will be
binding obligations of the Company except to the extent that the enforceability
of the Exchange Notes may be limited by bankruptcy, insolvency, moratorium,
reorganization, fraudulent conveyance or other laws or decisions relating to or
affecting the enforcement of creditors' rights generally and by general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law).
The opinion expressed herein is limited to the laws of the State of
Texas, the corporation laws of the State of Nevada and the federal laws of the
United States.
We hereby consent to the use of our name in the Registration Statement
as counsel who has expressed an opinion upon certain legal matters in connection
with the issue and sale of the Exchange Notes (including specifically the
reference contained under the caption "Legal Matters") and to the use of this
opinion as an exhibit to the Registration Statement.
Yours very truly,
COX & SMITH INCORPORATED
By: /s/ Steven R. Jacobs
Steven R. Jacobs,
For the Firm
SRJ/lrk/0147069.01
<PAGE>
2
EXHIBIT 5.2
[Opinion of Burnet, Duckworth & Palmer]
December 23, 1996
Abraxas Petroleum Corporation
500 North Loop 1604 East
Suite 100
San Antonio, Texas 78232
Re: Registration Statement on Form S-4
filed by Canadian Abraxas Petroleum
Limited
Dear Sirs:
We have acted as counsel to Canadian Abraxas Petroleum Limited, a
Canada corporation (the "Company"), in connection with the registration under
the Securities Act of 1933, as amended, pursuant to Registration Statement on
Form S-4 (the "Registration Statement"), of an aggregate of $215,000,000
principal amount of the Company's 11.5% Senior Notes Due 2004 (the "Exchange
Notes").
We have examined and are familiar with originals or copies, the
authenticity of which have been established to our satisfaction, of all such
documents, corporate records, certificates of officers of the Company and public
officials, and other instruments as we have deemed necessary to express the
opinion hereinafter set forth. In expressing our opinion as to the valid
issuance of shares of the Exchange Notes, we express no opinion as to compliance
with federal and state securities laws.
Based on the foregoing, it is our opinion that:
1. the Exchange Notes to be issued and sold as described in the
Registration Statement have been duly and validly authorized for such issue and
sale and, when so issued, sold and delivered, will be validly issued, fully paid
and non-assessable; and
2. the Exchange Notes to be issued, sold and delivered, will be binding
obligations of the Company.
Our opinion is subject to the following qualifications:
1. the enforceability of the Exchange Notes is subject to or may be
limited by applicable bankruptcy, insolvency, reorganization, arrangement,
moratorium or other similar laws relating to or affecting the rights of
creditors generally;
2. the enforceability of the Exchange Notes is subject to general
principles of equity, including the fact that equitable remedies, such as
specific performance and injunctions, may only be awarded in the discretion of
the court;
3. an Alberta court will only render a judgment in lawful currency of
Canada;
4. each of the Exchange Notes are stated to be governed by and
construed in accordance with the laws of the State of New York. With respect to
any opinions relating to enforceability of the Exchange Notes, we have assumed
that the laws of the State of New York are not materially different from those
of the Province of Alberta and the laws of Canada applicable therein.
The opinion expressed herein is limited to the laws of the Province of
Alberta and the federal laws of Canada applicable therein.
This opinion is intended solely for the use of the persons to whom it
is addressed in connection with the transactions provided for in the Agreements
and may not be relied upon by any other person or for any other purpose, nor
quoted from or referred to in any other document, without our prior written
consent.
We hereby consent to the use of our name in the Registration Statement
as counsel who has expressed an opinion upon certain legal matters in connection
with the issue and sale of the Exchange Notes (including specifically the
references contained under the captions "Enforceability of Civil Liabilities
Against Foreign Persons" and "Legal Matters") and to the use of this opinion as
an exhibit to the Registration Statement.
Yours very truly,
/s/ Burnet, Duckworth & Palmer
<PAGE>
EXHIBIT 10.4
ADOPTION AGREEMENT #006
STANDARDIZED CODE ss.401(K) PLAN
(PAIRED PROFIT SHARING PLAN)
The undersigned. Abraxas Petroleum Corporation ("Employer"), by
executing this Adoption Agreement, elects to become a participating Employer in
the Bank One, Texas, N.A. Defined Contribution Master Plan (basic plan document
#01) by adopting the accompanying Plan and Trust in full as if the Employer were
a signatory to that Agreement. The Employer makes the following elections
granted under the provisions of the Master Plan.
ARTICLE I
DEFINITIONS
1.02 TRUSTEE. The Trustee executing this Adoption Agreement is: (Choose (a)
or (b))
[X] (a) A discretionary Trustee. See Section 10.03[A] of the Plan.
[N/A] (b) A nondiscretionary Trustee. See Section 10.03[B] of the Plan.
[Note: The Employer may not elect Option (b) if a Custodian executes
the Adoption Agreement.]
1.03 PLAN. The name of the Plan as adopted by the Employer is Abraxas
401(k) Profit Sharing Plan.
1.07 EMPLOYEE. The following Employees are not eligible to participate
in the Plan: (Choose (a) or at least one of (b) or (c)).
[X] (a) No exclusions.
[N/A] (b) Collective bargaining employees (as defined in Section 1.07 of the
Plan). [Note: If the Emp1gyer excludes union employees from the Plan,
the Employer must be able to provide evidence that retirement benefits
were the subject of good faith bargaining.]
[N/A] (c) Nonresident aliens who do not receive any earned income (as defined
in Code ss.911(d)(2)) from the Employer which constitutes United States
source income (as defined in Code ss.861(a)(3)).
Related Employers/Leased Employees. An Employee of any member of the Employer's
related group (as defined in Section 1.30 of the Plan), and any Leased Employee
treated as an Employee under Section 131 of the Plan, is eligible to participate
in the Plan, unless excluded by reason of Options (b) or (c). [Note A related
group member mg not contribute to this Plan unless it executes a Participation
Agreement, even if its Employees are Participants in the Plan.]
1.12 COMPENSATION.
Treatment of elective contributions. (Choose (a) or (b))
[X] (a) "Compensation" includes elective contributions made by the Employer
on the Employee's behalf.
[N/A] (b) "Compensation" does not include elective contributions.
Modifications to Compensation definition. (Choose (c) or at least one of (d) and
(e))
[N/A] (c) No modifications other than as elected under Options (a) or (b).
[N/A] (d) The Plan excludes Compensation in excess of $_________________ .
[X] In lieu of the definition in Section 1.12 of the Plan, Compensation
means any earnings reportable as W-2 wages for Federal income tax
withholding purposes, subject to any other election under this Adoption
Agreement Section 1.12.
Special definition for salary reduction contributions. An Employee's salary
reduction agreement applies to his Compensation determined prior to the
reduction authorized by that salary reduction agreement, with the following
exceptions: (Choose (D or any combination of (g) and (h). if applicable)
[X] (f) No exceptions.
[N/A] (g) The dollar limitation described in Option (d) does not apply.
(N/A] (h) If the Employee makes elective contributions to another plan
maintained by the Employer, the Advisory Committee will determine the
amount of the Employee's salary reduction contribution for the
withholding period: (Choose (1) or (2))
[N/A] ( 1) After the reduction for such period of elective
contributions to the other plan(s).
[N/A] ( 2) Prior to. the reduction for such period of elective
contributions to the other plan(s).
1.17 PLAN YEAR/LIMITATION YEAR.
Plan Year. Plan Year means: (Choose (a) or (b))
[X] (a) The 12 consecutive month period ending every December 31.
[N/A] (b) (Specify)
Limitation Year. The Limitation Year is: (Choose (c) or (d))
[X] (c) The Plan Year.
[N/A] (d) The 12 consecutive month period ending every .
-------------
1.18 EFFECTIVE DATE.
New Plan. The "Effective Date" of the Plan is.
Restated Plan. The restated Effective Date is January 1, 1994. This Plan is a
substitution and amendment of an existing retirement plan(s) originally
established January 1, 1993. [Note- See the Effective Date Addendum.]
1.27 HOUR OF SERVICE. The crediting method for Hours of Service is:
(Choose (a) -or (b))
[X] (a) The actual method.
[N/A] (b) The N/A equivalency method, except:
[N/A] (1) No exceptions.'.
[N/A] (2) The actual method applies for purposes of- (Choose at least
one)
[N/A] (i) Participation under Article 11.
[N/A] (ii) Vesting under Article V.
[N/A] (iii) Accrual of benefits under Section 3.06.
[Note: On the blank line, insert "daily," "weekly," "semimonthly," payroll
periods" or "monthly."]
1.29 SERVICE FOR PREDECESSOR EMPLOYER. In addition to the predecessor
service the Plan must credit by reason of Section 1.29 of the Plan, the Plan
credits Service with the following predecessor employer(s): N/A . Service with
the designated predecessor employer(s) applies: (,Choose at-least one of (a) or
(b))
[N/A] (a) For purposes of participation under Article II.
[N/A] ( b) For purposes of vesting under Article V.
[Note: If the Plan does not credit any predecessor service under this-
provision, insert "N/A" in the First blank line. The Employer may attach a
schedule to this Adoption Agreement in the same format as this Section 1.29,
designating additional predecessor employers and the applicable service
crediting elections.1
1.31 LEASED EMPLOYEES. If a Leased Employee participates in a safe harbor money
purchase plan (as described in Section 1.31) maintained by the leasing
organization, but the Employer is not eligible for the safe harbor plan
exception: (Choose (a) or (b))
[N/A] (a) The Advisory Committee will determine the Leased Employee's
allocation of Employer contributions under Article III without taking
into account the Leased Employee's allocation under the safe harbor
plan.
[N/A] (b) The Advisory Committee will reduce the Leased Employee's allocation
of Employer nonelective contributions (other than designated Qualified
nonelective contributions) under this Plan by the Leased Employee's
allocation under the safe harbor plan, but only to the extent that
allocation is attributable to the Leased Employee's service provided to
the Employer. [Note: The Employer may not elect Option (b) if a Paired
Plan or any other plan of the Employer makes a similar reduction for
the same plan of the leasing organization.]
ARTICLE II
EMPLOYEE PARTICIPANTS
2.01 ELIGIBILITY.
Eligibility conditions. To become a Participant in the Plan, an Employee must
satisfy the following eligibility conditions: (Choose (a) or (b) or both)
[N/A] (a) Attainment of age_____ (specify age, not exceeding 21).
[N/A] (b) Service requirement. (Choose (1), (2) or (3))
[N/A] (1) One; Year of Service.
[N/A] (2) months (not exceeding 12) following the Employee's Employment
Commencement Date.
[N/A] (3) One Hour of Service.
Plan Entry Date. "Plan Entry Date" means the Effective Date and: (Choose (c),
(d) or (e))
[N/A] (c) Semi-annual Entry Dates. The first day of the Plan Year and
the first day of the seventh month of the Plan Year.
[N/A] (d) The first day of the Plan Year.
[X] (e) (Specify entry dates) the first day of the month coinciding
with or next following the date on which an employee met the requires
Time of Participation. An Employee will become a Participant, unless excluded
under Adoption Agreement Section 1.07, on the Plan Entry Date (if employed on
that date): (Choose (D. (g) or (h)
[X] (f) immediately following
[N/A] (g) immediately preceding
[N/A] (h) nearest
the date the Employee completes the eligibility conditions described in Options
(a) and (b) of this Adoption Agreement Section 2.01. [Note: The Employer must
coordinate the selection of (D. (g) or (h) with the "Plan Entry Date" selection
in (c). (d) or (e). Unless otherwise excluded under Section 1.07, the Employee
must become' a Participant by the earlier of- (1) the first day of the Plan Year
beginning after the date the Employee completes the age and service requirements
of Code ss.410(a); or (2) 6 months after the date the Employee completes those
requirements.]
Dual eligibility. The eligibility conditions of this Section 2.01 apply to:
(Choose (i) or (ii)
[N/A] (i) All Employees of the Employer, except: (Choose (1) or (2))
[N/A] (1) No exceptions.
[N/A] (2) Employees who are Participants in the Plan as of the
Effective Date.
[N/A] (j) Solely to an Employee employed by the Employer after . If
the Employee was employed by the Employer on or before
------------- the specified date, the Employee will become a
Participant: (Choose (1) or (2)) -------------------
[N/A] (1) On the latest of the Effective Date, his Employment
Commencement Date or the date he attains age (not to exceed
------------- 21).
[N/A] (2) Under the eligibility conditions in effect under the Plan
prior to the restated Effective Date. If the restated Plan
required more than one Year of Service to participate, the
eligibility condition under this Option (2) for participation
in the Code ss.401(k) arrangement under this Plan is one Year
of Service for Plan Years beginning after December 31, 1988.
[For restated plans only].
2.02 YEAR OF SERVICE - PARTICIPATION.
Hours of Service. An Employee must complete: (Choose (a) or (b))
[N/A] (a) 1,000 Hours of Service [
[X] (b) 0 Hours of Service
during an eligibility computation period to receive credit for a Year of
Service. [Note: The Hours of Service requirement may not exceed 1,000.]
Eligibility computation period. After the initial eligibility computation period
described in Section 2.02 of the Plan, the Plan measures the eligibility
computation period as: (Choose (c) or (d))
[N/A] (c) The 12 consecutive month period beginning with each
anniversary of an Employee's Employment Commencement Date.
[X] (d) The Plan Year, beginning with the Plan Year which includes the
first anniversary of the Employee's Employment Commencement Date.
2.03 BREAK IN SERVICE - PARTICIPATION. The Break in Service rule
described in Section 2.03(B) of the Plan: (Choose (a) or (b))
[X] (a) Does not apply to the Employer's Plan.
[N/A] (b) Applies to the Employer's Plan.
ARTICLE III
EMPLOYER CONTRIBUTIONS AND FORFEITURES
3.01 AMOUNT.
Part 1. [Options (a) through (g)] Amount of Employer's contribution. The
Employer's annual contribution to the Trust will equal the total amount of
deferral contributions, matching contributions, qualified nonelective
contributions and nonelective contributions, as determined under this Section
3.01. (Choose any combination of (a), (b), (c) and (d) or choose (e))
[X] (a) Deferral contributions (Code ss.401(k) arrangement). The
Employer must contribute the amount by which the Participants have
reduced their Compensation for the Plan Year, pursuant to their salary
reduction agreements on file with the Advisory Committee. A reference
in the Plan to salary reduction contributions is a reference to these
amounts.
[X] (b) Matching contributions. The Employer will make matching
contributions in accordance with the formula(s) elected in Part 11 of
this Adoption Agreement Section 3.01.
[X] (c) Designated qualified nonelective contributions. The Employer,
in its sale discretion, may contribute an amount which it designates as
a qualified nonelective contribution.
[X] (d) Nonelective contributions.
[X] (1) Discretionary contribution. The am9un t (or additional amount)
the Employer may from time to time deem advisable. [N/A] (2) % of the
Compensation of all Participants under the Plan, determined for the
Employer's taxable year for which it makes the contribution. [Note: The
percentage selected may not exceed 15%.]
[N/A] (3)______% of Net Profits but not more than $___________ .
[N/A] (e) Frozen Plan. This Plan is a frozen Plan effective The
Employer will not contribute to the Plan with respect to any period
following the stated date.
Net Profits. The Employer: (Choose (b or (g))
[X] (f) Need not have Net Profits to make its annual contribution under
this Plan.
[N/A] (g) Must have current or accumulated Net Profits exceeding $.. to
make the following contributions: (Choose at least one of (1), (2) and
(3)).
[N/A] (1) Matching contributions described in Option (b), except: .
[N/A] (2) Qualified nonelective contributions described in Option (c).'
[N/A] (3) Nonelective contributions described in Option_____________ .
"Net Profits" means the Employer's net income or profits for any taxable year
determined by the Employer upon the basis of its books of account in accordance
with generally accepted accounting practices consistently applied without any
deductions for Federal and state taxes upon income or for contributions made by
the Employer under this Plan or under any other employee benefit plan the
Employer maintains. The term "Net Profits" specifically excludes . [Note: Enter
"N/A" if no exclusions apply.]
If the Employer requires Net Profits for matching contributions and the Employer
does not have sufficient Net Profits under Option (g), it will reduce the
matching contribution under a fixed formula on a prorata basis for all
Participants. A Participant's share of the reduced contribution will bear the
same ratio as the matching contribution the Participant would have received if
Net Profits were sufficient bears to the total matching contribution all
Participants would have received if Net Profits were sufficient. If more than
one member of a related group (as defined in Section 1.30) execute this Adoption
Agreement, each participating member will determine Net Profits separately but
will not apply this reduction unless, after combining the separately determined
Net Profits, the aggregate Net Profits are insufficient to satisfy the matching
contribution liability.
"Net Profits" includes both current and accumulated Net Profits.
Part II. [Options (h) and (i)] Matching contribution formula. [Note: If the
Employer elected Option(b), complete Options (h) and (i).]
[X] (h) Amount of matching contributions. Subject to Option (i), for each
Plan Year, the Employer's matching contribution is: (Choose any
combination of (1), (2),--(3) and (4))
[N/A] (1) An amount equal to % of each Participant's salary
reduction contributions for the Plan Year. ------------
[N/A] (2) An amount equal to % of each Participant's first tier of
salary reduction contributions for the Plan Year, plus the
following matching percentage(s) for the following subsequent
tiers of salary reduction contributions for the Plan year:
.
[X] (3) Discretionary formula.
[X] (i) An amount (or additional amount) equal to a
matching percentage the Employer from time to time
may deem advisable of the Participant's salary
reduction contributions for the Plan Year.
[N/A] (ii) An amount (or additional amount) equal to a
matching percentage the Employer from time to time
may deem advisable of each tier of the Participant's
salary reduction contributions for the Plan Year.
[Note: Under Options (2) or (3)(ii), the matching percentage for any
subsequent tier of salary reduction contributions may not exceed the
matching for any prior tier.]
[N/A] (4) A Participant's matching contributions may not:
[N/A] (i) Exceed
.
[N/A] ii) Be less than
.
[X] (i) Amount or salary reduction contributions taken into account. When
determining a Participant's salary reduction contributions taken into
account under the matching contributions formula(s), the following
rules apply: (Choose any combination of (1) through (3))
[X] (1) The Advisory Committee will take into account all salary
reduction contributions credited for the Plan Year.
[N/A] (2) The Advisory Committee will disregard salary reduction
contributions exceeding .
[N/A] (3) The Advisory Committee will treat as the first tier of
salary reduction contributions, an amount not exceeding: . The
subsequent tiers of salary reduction contributions are .
Part 111. [Option (j).]. Special rules for Code ss.401(k) Arrangement. (Choose
(j), if applicable)
[X] (j) Salary Reduction Agreements. The following rules and restrictions
apply to an Employee's salary reduction agreement: (Make a selection
under (1), (2), (3) and (4))
(1) Limitation on amount. The Employee's salary reduction
contributions: (Choose (i) or at least one of (ii) or (iii))
---------------------------------------------
[X] (i) No maximum limitation other than as provided in
the Plan.
[N/A] (ii) May not exceed % of Compensation for the Plan
Year, subject to the annual additions limitation
described in Part 2 of Article III and the 402(g)
limitation described in Section 14.07 of the Plan.
[N/A] (iii) Based on percentages of Compensation must equal
at least .
(2) An Employee may revoke on a prospective basis, a salary reduction
agreement: Choose (i), (ii), (iii) or (iv))
[N/A] (i) Once during any Plan Year but not later than
of the Plan Year.
[N/A] (ii) As of any Plan Entry Date.
[X] (iii) As of the first day of any month.
[N/A] (iv) (Specify, but must be. at least once per Plan
Year) .
(3) An Employee who revokes his salary reduction agreement may rile a
new salary reduction agreement with an effective date: (Choose (i),
(ii), (iii) or (iv))
[N/A] (i) No earlier than the first day of the next Plan
Year.
[N/A] (ii) As of any subsequent Plan Entry Date.
[X] (iii) As of the first day of any month subsequent to
the month in which he revoked an Agreement.
[N/A] (iv) (Specify, but must be at least once per Plan
Year following the Plan Year of revocation) .
(4) A Participant may increase or may decrease, on a prospective basis,
his salary reduction percentage or dollar amount: (Choose (i) (ii),
(iii) or (iv))
[N/A] (i) As of the beginning of each payroll period.
[X] (ii) As of the first day of each month.
[N/A] (iii) As of any Plan Entry Date.
[N/A] (iv) (Specify, but must permit an increase or a
decrease at least once per Plan Year) .
3.04 CONTRIBUTION ALLOCATION. The Advisory Committee will allocate
deferral contributions, matching contributions, qualified nonelective
contributions and nonelective contributions in accordance with Section 14.06 of
the Plan and the elections under this Adoption Agreement Section 3.04.
Part I. [Options (a) through (d)]. Special Accounting Elections. (Choose
whichever elections are applicable to the Employer's Plan).
[
X] (a) Matching Contributions Account. The Advisory Committee will allocate
matching contributions to a Participant's: (Choose (1) or (2): (3) is available
only in addition to (I)l [XI
[X] (1) Regular Matching Contributions Account.
[N/A] (2) Qualified Matching Contributions Account.
[N/A] (3) Except, matching contributions under Option(s) N/A of
Adoption Agreement Section 3.01 are allocable to the Qualified
Matching Contributions Account.
[X] (b) Special Allocation Dates for Salary Reduction Contributions. The
Advisory Committee will allocate salary reduction contributions as of
the Accounting Date and as of the following additional allocation
dates: 3/31, 6/30 and 9/30.
[X] (c) Special Allocation Dates for Matching Contributions. The Advisory
Committee will allocate matching contributions as of the Accounting
Date and as of the following additional allocation dates: 3/31, 6/30
and 9/30.
[X] (d) Designated Qualified Nonelective Contributions - Definition of
Participant. For purposes of allocating the designated qualified
nonelective contribution, "Participant" means: (Choose (1) or
[N/A] (1) All Participants.
[X] (2) Participants who are Nonhighly Compensated Employees.
Part II. Method of Allocation - Nonelective Contribution. Subject to any
restoration allocation required under Section 5.04, the Advisory Committee will
allocate and credit the annual nonelective contributions (and Participant
forfeitures treated as nonelective contributions) to the Employer Contributions
Account of each Participant who satisfies the conditions of Section 3.06, in
accordance with the method selected under this Part II. (Choose an allocation
method under (e), (f). (g) or (h); (i) is mandatory if the Employer elects (f),
(g) or (h))
[X] (e) Nonintegrated Allocation Formula. The Advisory Committee will
allocate the annual nonelective contributions in the same ratio that
each Participant's Compensation for the Plan Year bears to the total
Compensation of all Participants for the Plan Year.
[N/A] (f) Two-Tiered Integrated Allocation Formula - Maximum Disparity.
First, the Advisory Committee will allocate the annual nonelective
contributions in the same ratio that each Participant's Compensation
plus Excess Compensation for the Plan Year bears to the total
Compensation plus Excess Compensation of all Participants for the Plan
Year. The allocation under this paragraph, as a percentage of each
Participant's Compensation plus Excess Compensation, must not exceed
the applicable percentage (5.7%, 5.4% or 4.3%) listed under the Maximum
Disparity Table following Option (i).
The Advisory Committee then will allocate any remaining nonelective
contributions in the same ratio that each Participant's Compensation
for the Plan Yea r bears to the total Compensation-of all Participants
for the Plan Year.
[N/A] (g) Three-Tiered Integrated Allocation Formula. First, the Advisory
Committee will allocate the annual nonelective contributions in the
same ratio that each Participant's Compensation for the Plan Year bears
to the total Compensation of all Participants for the Plan Year. The
allocation under this paragraph, as a percentage of each Participant's
Compensation may not exceed the applicable percentage (5.7%, 5.4% or
4.3%) listed under the Maximum Disparity Table following Option (i).
As a second tier allocation, the Advisory Committee will allocate the
nonelective contributions in the same ratio that each Participant's
Excess Compensation for the Plan Year bears to the total' Excess
Compensation of all Participants for the Plan Year. The allocation
under this paragraph, as a percentage of each Participant's Excess
Compensation, may not exceed the allocation percentage in the first
paragraph.
Finally, the Advisory Committee will allocate any remaining nonelective
contributions in the same ratio that each Participant's Compensation
for the Plan Year bears to the total Compensation of all Participants
for the Plan Year.
[N/A] (h) Four-Tiered Integrated Allocation Formula. First, the Advisory
Committee will allocate the annual nonelective contributions in the
same ratio that each Participant's Compensation for the Plan Year bears
to the total Compensation of all Participants for the Plan Year, but
not exceeding 3% of each Participant's Compensation.
As a second tier allocation, the Advisory Committee will allocate the
nonelective contributions in the same ratio that each Participant's
Excess Compensation for the Plan Year bears to the total Excess
Compensation of all Participants for the Plan Year, but not exceeding
3% of each Participant's Excess Compensation.
As a third tier allocation, the Advisory Committee will allocate the
annual contributions in the same ratio that each Participant's
Compensation plus Excess Compensation for the Plan Year bears to the
total Compensation plus Excess Compensation of all Participants for the
Plan Year. The allocation under this paragraph, as a percentage of each
Participant's Compensation plus Excess Compensation, must not exceed
the applicable percentage (2.7%, 2.4% or 1.3%) listed under the Maximum
Disparity Table following Option (i).
The Advisory Committee then will allocate any remaining nonelective
contributions in the same ratio that each Participant's Compensation
for the Plan Year bears to the total Compensation of all Participants
for the Plan Year.
[N/A] (i) Excess Compensation. For purposes of Option (0, (g) or (h), "Excess
Compensation" means Compensation in excess of the following Integration
Level: (Choose (1) or (2))
[N/A] (1)__% (not exceeding 100%) of the taxable wage base, as
determined under Section 230 of the Social Security Act, in
effect on the First day of the Plan Year: (Choose any
combination of (i) and.(ii) or choose (iii))
[N/A] (i) Rounded to(but not exceeding the taxable wage
base).
[N/A] (ii) But not greater than $____________________ .
[N/A] (iii) Without any further adjustment or limitation.
[N/A] (2) $____________[Note: Not exceeding the taxable wage base
for the Plan Year in which this Adoption Agreement first is
effective.]
Maximum Disparity Table. For purposes of Options (f), (g) and (h), the
applicable percentage is:
Applicable
Percentages Applicable
Integration Level for Option (f) Percentages
(as percentage of taxable wage base) or Option (g) for Option (h)
- ------------------------------------ ---------------- --------------
100% 5.7% 2.7%
More than 80% but less than 100% 5.4% 2.4%
More than 20% (but not less than 4.3% 1.3%
$10,001)and not more than 80%
20% (or $10,000, if greater) or less 5.7% 2.7%
Top Heavy Minimum Allocation - Application of Requirement. The Plan applies the
top heavy minimum Allocation requirements of Section 3.04(B)(1): (Choose (j) or
(k))
[N/A] (j) In all Plan Years. A Participant is entitled to the top heavy
minimum allocation if he is employed by the Employer on the last day of
the Plan Year, unless: (Choose (1) or (2))
[N/A] (1) No exceptions.
[N/A] (2) The Participant is a Key Employee for the Plan Year.
[Note: If the Employer selects this Option (2), it will have
to determine for each Plan Year who are the Key Employees
under the Plan.1
[X] (k) Only in Plan Years for which the Plan is top heavy. A Participant
is entitled to the top heavy minimum allocation if he is employed by
the Employer on the last day of the Plan Year, unless he is a Key
Employee. [Note: Option (k) will require the Advisory Committee to
determine whether the Plan is top heavy for a Plan Year.]
Top Heavy Minimum Allocation - Method of Compliance. If a Participant's
allocation under this Section 3.04 is less than the top heavy minimum
allocation to which he is entitled under Section 3.04(B): (Choose (l) or (m))
[X] (l) The Employer will make any necessary additional contribution to the
Participant's Account, as described in Section 3.04(B)(7)(a) of the
Plan.
[N/A] (m) The Employer will satisfy the top heavy minimum allocation under
the Paired Pension Plan the Employer also maintains under this Master
Plan. However, the Employer will make any necessary additional
contribution to satisfy the top heavy minimum allocation for an
Employee covered only under this Plan and not under tile Paired Pension
Plan. See Section 3.04(B)(7)(b) of the Plan.
If the Employer maintains another plan which is not a Paired Pension Plan
offered under this Master Plan, the Employer may provide in an addendum to this
Adoption Agreement, numbered Section 3.04, any modifications to the Plan
necessary to satisfy tile top heavy requirements under Code ss.416.
Related employers. If two or more related employers (as defined in Section 1.30)
contribute to this Plan, the Advisory Committee must allocate all Employer
contributions and forfeitures to each Participant in the Plan, in accordance
with the elections in this Adoption Agreement Section 3.04, without regard to
which contributing related group member employs the Participant. A Participant's
Compensation includes Compensation from all related employers, irrespective of
which related employers are contributing to the Plan. The signatory Employer and
any Participating Employer(s) will satisfy any fixed matching contribution
formula under Adoption Agreement Section 3.01 as agreed upon by those Employers.
3.05 FORFEITURE ALLOCATION. Subject to any restoration allocation
required under Section is 5.04 or 9.14, the Advisory Committee will allocate a
Participant forfeiture in accordance with Section 3.04: (Choose (a) or (b): (c)
and (d) are optional in. addition to (a) or (b))
[X] (a) As an Employer nonelective contribution for the Plan Year in which
the forfeiture occurs, as if the Participant forfeiture were an
additional nonelective contribution for that Plan Year.
[N/A] (b) To reduce the Employer matching contributions and nonelective
contributions for the Plan Year: (Choose (1) or (2))
[N/A] (1) in which the forfeiture occurs.
[N/A] (2) immediately following the Plan Year in which the forfeiture
occurs.
[X] (c) To the extent attributable to matching contributions: (Choose (1).
(2) or (3))
[X] (1) In the manner elected under Options (a) or (b).
[N/A] (2) First to reduce Employer matching contributions for the
Plan Year: (Choose (i) or (ii))
[N/A] (i) in which the forfeiture occurs,
[N/A] (ii) immediately following the Plan Year in which the
forfeiture occurs, then as elected in Options (a) or (b).
[N/A] (3) As a discretionary matching contribution for the Plan Year
in which the forfeiture occurs, in lieu of the manner elected
under Options (a) or (b).
[N/A] (d) First to reduce (lie Plan's ordinary and necessary administrative
expenses for the Plan Year, and then will allocate any remaining
forfeitures in the manner described in Options (a), (b) or (c),
whichever applies. If the Employer elects Option (c), the forfeitures
used to reduce Plan expenses: (Choose (1) or (2))
[N/A] (1) relate proportionately to forfeitures described in Option (c)
and to forfeitures described in Options (a) or (b).
[N/A] (2) relate first to forfeitures described in Option
Allocation of forfeited excess aggregate contributions. The Advisory Committee
will allocate any forfeited excess aggregate contributions (as described in
Section 14.09): (Choose (e), (f) or (g))
[N/A] (e) To reduce Employer matching contributions for the Plan Year: (Choose
(1) or (2))
[N/A] (1) in which the forfeiture occurs.
[N/A] (2) immediately following the Plan Year in which the forfeiture
occurs.
[X] (f) As Employer discretionary matching contributions for the Plan Year
in which forfeited, except the Advisory Committee will not allocate
these forfeitures to the Highly Compensated Employees who incurred the
forfeitures.
[N/A] (g) In accordance with Options (a) through (d), whichever applies,
except the Advisory Committee will not allocate these forfeitures under
Option (a) or under Option (c)(3) to the. Highly Compensated Employees
who incurred the forfeitures.
3.06 ACCRUAL OF BENEFIT.
Compensation taken into account. For the Plan Year in which the Employee first
becomes a Participant, the Advisory Committee will determine the allocation of
any designated qualified nonelective contribution or nonelective contribution by
taking into account: (Choose (a) or (b))
[X] (a) The Employee's Compensation for the entire Plan Year.
[N/A] (b) The Employee's Compensation for the portion of the Plan Year in which
the Employee actually is a Participant in the Plan, except:
(Choose (1) or (2))
[N/A] (1) No exceptions.
[N/A] (2) For purposes of the first 3% of Compensation allocated
under Option (e), (g) or (h) of Adoption Agreement Section
3.04, whichever applies, the Advisory Committee will take into
account the Employee's Compensation for the entire Plan Year.
Accrual Requirements. To receive an allocation of designated qualified
nonelective contributions, nonelective contributions and Participant forfeitures
treated as nonelective contributions for the Plan Year, a Participant must
satisfy the accrual requirements of this paragraph. If the Participant is
employed by the Employer on the last day of the Plan Year, the Participant must
complete at least one Hour of Service for that Plan Year. If the Participant
terminates employment with the Employer during the Plan Year, the Participant
must complete at least 501 Hours of Service (not exceeding 501) during the Plan
Year, except: (Choose (c) or (d))
[N/A] (c) No exceptions.
[X] (d) No Hour of Service requirement if the Participant terminates
employment during the Plan Year on account of. (,Choose at least one of
(1), (2) and
[X] (1) Death.
[X] (2) Disability.
[X] (3) Attainment of Normal Retirement Age in the current Plan
Year or in a prior Plan Year.
Special accrual requirements for matching contributions. To receive an
allocation of matching contributions (and forfeitures applied to reduce matching
contributions) a Participant must satisfy the following condition(s): (Choose
(e) or any combination of (f), (g) and (h))
[X] (e) No conditions other than making salary reduction contributions.
[N/A] (f) The accrual requirements prescribed for an allocation of nonelective
contributions.
[N/A] (g) The Participant does not revoke his salary reduction agreement
effective during the Plan Year.
[N/A] (h) The Participant is not a Highly Compensated Employee for the Plan
Year. This Option (h) applies to: (Choose (1) or (2))
[N/A] (1) All matching contributions.
[N/A] (2) Matching contributions described in Option(s)_________
of Adoption Agreement Section 3.01.
3.15 MORE THAN ONE PLAN LIMITATION. If the provisions of Section 3.15
apply, the Excess Amount attributed to this Plan equals: (Choose (a), (,b) or
(c))
[N/A] (a) The product of:
(i) the total Excess -Amount allocated as or such date
(including any amount which the Advisory Committee would have
allocated but for the limitations of Code ss.415), times
(ii) the ratio of (1) the amount allocated to the Participant
as of such date under this Plan divided by (2) the total
amount allocated as of such date under all qualified defined
contribution plans (determined without regard to the
limitations of Code ss.415).
[X] (b) The total Excess Amount.
[N/A] (c) None of the Excess Amount.
[Note: If the Employer adopts Paired Plans available under this Master Plan, the
Employer must coordinate; its elections under Section 3.15 of each Adoption
Agreement.]
3.18 DEFINED BENEFIT PLAN LIMITATION.
Application of limitation. The limitation under Section 3.18 of the Plan:
(Choose (a) or (b))
[N/A] (a) Does not apply to the Employer's Plan because the Employer does not
maintain and never has maintained a defined benefit plan covering any
Participant in this Plan.
[N/A] (b) Applies to the Employer's Plan. To the extent necessary to satisfy
the limitation under Section 3-19, the Employer will reduce: (Choose
(1) or (2))
[N/A] (1) The Participant's projected annual benefit under the
defined benefit plan under which the Participant participates.
[N/A] (2) Its contribution or allocation on behalf of the
Participant to the defined contribution plan under which the
Participant participates and then, if necessary, the
Participant's projected annual benefit under the defined
benefit plan under which the Participant participates.
[Note: If the Employer selects (a), the remaining options in this Section 3.18
do not apply to the Employer's Plan
Override or 100% Limitation. The Employer elects: (Choose (c) or (d))
[N/A] (c) To apply the 100% limitation described in Section 3.19(1) of the
Plan in all Limitation Years. [Note: This election will avoid having to
calculate the Plan's top heavy ratio for any year, unless the Employer
has elected Adoption Agreement Section 3.04K.]
[N/A] (d) Not to apply the 100% limitation for Limitation Years in which the
Plan's top heavy ratio (as determined under Section 1.33 of the Plan)
does not exceed 90%, but only if the defined benefit plan satisfies the
extra minimum benefit requirements of Code ss.416(h)(2) (and the
applicable Treasury regulations) after taking into account the
Employer's election under Options (e), (f), (g) or (h) of this Section
3.18. To determine the top heavy ratio, the Advisory Committee will use
the following interest rate and mortality assumptions to value accrued
benefits under a defined benefit plan: N/A . [Note: This election will
require the Advisory Committee to calculate the Plan's top heavy
ratio.]
Coordination with top heavy minimum allocation. The Advisory Committee will
apply the top heavy minimum allocation provisions of Section 3.04(B) of the Plan
with the following modifications: (Choose (e) (d). (g) or (h))
[N/A] (e) No modifications.
[N/A] (f) By substituting 4% for 3% in Paragraph (b) of Section 3.04(B)(1) or
of Section 3.04(B)(2) of the Plan, whichever applies, but only for any
Plan Year in which Option (d) applies to override the 100% limitation.
[N/A] (g) By increasing the top heavy minimum allocation to 5% for any Plan
Year in which the 100% limitation applies, and to 7 for any Plan Year
in which Option (d) applies to override the 1001yo limitation. The
increased percentage under this Option (g) applies irrespective of
whether the highest contribution rate for the Plan Year is less than
that increased percentage.
[N/A] (h) By eliminating the top heavy minimum allocation. [Note: The
Employer may not select this Option (h) if the defined benefit plan
does not guarantee the top heavy minimum benefit under Code 4416 for
every Participant in this Plan who is a Non-Key Employee.]
If the elections under this Section 3.18 are not appropriate to satisfy the
limitations of Section 3.18, or the top heavy requirements under Code ss.416,
the Employer must provide the appropriate provisions in an addendum to' this
Adoption Agreement.
ARTICLE IV
PARTICIPANT CONTRIBUTIONS
4.01 PARTICIPANT NONDEDUCTIBLE CONTRIBUTIONS. This Plan: (Choose (a) or
(b))
[X] (a) Does not permit Participant nondeductible contributions.
[N/A] (b) Permits Participant nondeductible contributions, pursuant to
Section 14.04 of the Plan.
Allocation dates. The Advisory Committee will allocate nondeductible
contributions for each Plan Year as of the Accounting Date and the following
additional allocation dates: (Choose (c) or (d))
[N/A] (c) No other allocation dates.
[N/A] (d) (Specify)________________________________________________
____________________________________________________________
As of an allocation date, the Advisory Committee will credit all nondeductible
contributions made for the relevant allocation period. Unless otherwise
specified in (d), a nondeductible contribution relates to an allocation period
only if actually made to the Trust no later than 30 days after that allocation
period ends.
ARTICLE V
TERMINATION OF SERVICE - PARTICIPANT VESTING
5.01 NORMAL RETIREMENT. Normal Retirement Age under the Plan is:
(Choose (a) or (b))
[X] (a) 65 [State age, but may not exceed age, 65].
[N/A] (b) The later of the date the Participant attains years of age or the
anniversary of the first day of the Plan Year in which the Participant
commenced participation in the Plan.. [The age selected may not exceed
age 65 and the anniversary selected may not exceed the 5th.]
5.02 PARTICIPANT DEATH OR DISABILITY. The 1009s' vesting rule under
Section 5.02 of the Plan: (Choose (a) or choose one or both of (b) and (g))
[N/A] (a) Does not apply.
[X] (b) Applies to death.
[X] (c) Applies to disability.
5.03 VESTING SCHEDULE.
Deferral Contributions Account/Qualified Matching Contributions
Account/Qualified Nonelective Contributions Account. A Participant has a 10001o
Nonforfeitable interest at all times in his Deferral Contribution Account, his
Qualified Matching Contributions Account and in his Qualified Nonelective
Contributions Account.
Regular Matching Contributions Account/Employer Contributions Account. With
respect to a Participant's Regular Matching Contributions Account and Employer
Contributions Account, the, Employer elects the following vesting schedule:
(Choose (a) or (b); (c) and (d) are available only as additional options)
[N/A] (a) Immediate vesting. 100% Nonforfeitable at all times.
[X] (b) Graduated Vesting Schedules.
Years of Nonforfeitable Years of Nonforfeitable
Service Percentage Service Percentage
Less than 1............ 0% Less than 1.......... 0%
1................. 0% 1............... 0%
2................. 20% 2............... 20%
3................. 40% 3............... 40%
4................. 60% 4............... 60%
5................. 80% 5............... 80%
6 or more......... 100% 6 or more....... 100%
7 or more....... 100%
[X] (c) Special vesting election for Regular Matching Contributions
Account. In lieu of the election under Options (a) or (b), the Employer
elects the following vesting schedule for a Participant's Regular
Matching Contributions Account: (Choose (1) or (2))
[N/A] (1) 100% Nonforfeitable at all times.
[X] (2) In-accordance with the vesting schedule described in the
addendum to this Adoption Agreement, numbered. 5.03(c). [Note:
If the Employer -elects this Option (g)M. the addendum must
designate the applicable vesting schedule(s) using the same
format as used in Option (b).]
[Note: Under Options (b) and (c)(2), the Employer must complete a Top Heavy
Schedule which satisfies Code ss.416. The Employer, at its option, met complete
a Non Top Heavy Schedule only if the Employer elected Adoption Agreement Section
3.04(k). The Non Top Heavy Schedule must satisfy Code ss.411 (a) (2). Also see
Section 7.05 of the Plan.]
[X] (d) The Top Heavy Schedule under-.0ption (b) (and, if applicable, under
Option (c)(2)) applies: (Choose (1) or (2))
[N/A] (1) Only in a Plan Year for which the Plan is top heavy.
[X] (2) In the Plan Year for which the Plan first is top heavy and
then in all subsequent Plan Years. [Note: The Employer may not
elect Option (d) unless it has completed a Non Top Heavy
Schedule.]
Minimum vesting. (Choose (e) or (f))
[X] (e) The Plan does not apply a minimum vesting rule.
[N/A] (f) A Participant's Nonforfeitable Accrued Benefit will never be less
than the lesser of $_____ or his entire Accrued Benefit, even if the
application of a graduated vesting schedule under Options (b) or (c)
would result in a smaller Nonforfeitable Accrued Benefit.
5.04 CASH OUT DISTRIBUTIONS TO PARTIALLY-VESTED
PARTICIPANTS/RESTORATION OF FORFEITED ACCRUED BENEFIT. The deemed cash-out rule
described in Section 5.04(C) of the Plan: (Choose (a) or (b))
[N/A] (a) Does not apply.
[X] (b) Will apply to determine the timing of forfeitures for 0% vested
Participants. A Participant is not a 0% vested Participant if he has a
Deferral Contributions Account.
5.06 YEAR OF SERVICE - VESTING.
Vesting computation period. The Plan measures a Year of Service on the basis of
the following 12 consecutive month periods: (Choose (a) or (b))
[X] (a) Plan Years.
[N/A] (b) Employment Years. An Employment Year is the 12 consecutive month
period measured from the Employee's Employment Commencement Date and
each successive 12 consecutive month period measured from each
anniversary of that Employment Commencement Date.
Hours of Service. The minimum number of Hours of Service an Employee must
complete during a vesting computation period to receive credit for a Year of
Service is: (Choose (c) or (d))
[X] (c) 1,000 Hours of Service
[N/A] (d) _____ Hours of Service. [Note: The Hours of Service requirement may
not exceed 1,000.]
5.08.....INCLUDED YEARS OF SERVICE - VESTING. The Employer specifically
excludes the following Years of Service: (Choose (a) or at least one of (b), (c)
and (d))
[N/A] (a) None other than as specified in Section 5.08(a) of the Plan.
[N/A] (b) Any Year of Service before the Participant attained the age of
____. [Note: The age selected may not exceed age 18.]
[X] (c) Any Year of Service during the period the Employer did not maintain
this Plan or a predecessor plan.
[N/A] (d) Any Year of Service before a Break in Service if the number of
consecutive Breaks in Service equals or exceeds the greater of 5 or the
aggregate number of the Years of Service prior to the Break. Ibis
exception applies only if the Participant is 0% vested in his Accrued
Benefit derived from Employer contributions at the time he has a Break
in Service. Furthermore, the aggregate number of Years of Service
before a Break in Service do not include any Years of Service not
required to be taken into account under this exception by reason of any
prior Break in Service.
ARTICLE VI
TIME AND METHOD OF PAYMENTS OF BENEFITS
Code ss.411(d)(6) Protected Benefits. The elections under this Article VI may
not eliminate Code ss.411(d)(6) protected benefits. To the extent the elections
would eliminate a Code ss.411(d)(6) protected benefit, see Section 13.02 of the
Plan. Furthermore, if the elections liberalize the optional forms of benefit
under the Plan, the more liberal options apply on the later of the adoption date
or the effective date of this Adoption Agreement.
6.01 TIME OF PAYMENT OF ACCRUED BENEFIT.
Distribution date. A distribution date under the Plan means 30 days following
the month the participant terminated service with the employer. [Note: The
Employer must specify the appropriate date(s). The specified distribution dates
primarily establish annuity starting dates and the notice and consent periods
prescribed by the Plan. The Plan allows the Trustee an administratively
practicable period of time to make the actual distribution relating to a
particular distribution date.]
Nonforfeitable Accrued Benefit Not Exceeding $3,500. Subject to the limitations
of Section 6.01(A)(1), the distribution date for distribution of a
Nonforfeitable Accrued Benefit not exceeding $3,500 is: (Choose (a), (b), (c) or
(d))
[N/A] (a)________________________________________________________ of the ____
Plan Year beginning after the Participant's Separation from Service.
[X] (b) as soon as administratively possible following the Participant's
Separation from Service.
[N/A] (c)___________________________________________________________________
of the Plan Year after the Participant incurs ______ Break(s) in
Service (as defined in Article V).
[N/A] (d)_________________________ following the Participant's attainment of
Normal Retirement Age, but not earlier than_______days following his
Separation from Service.
Nonforfeitable Accrued Benefit Exceeds $3,500. See the elections under Section
6.03.
Disability. The distribution date, subject to the limitations of Section
6.01(A)(3), is: (Choose (e) or (f))
[N/A] (e)___________________________________________________________________
after the Participant terminates employment because of disability.
[X] (f) The same as if the Participant had terminated employment without
disability.
Hardship. (Choose (g) or (h))
[X] (g) The Plan does not permit a hardship distribution to a Participant
who has separated from Service.
[N/A] (h) The Plan permits a hardship distribution to a Participant who has
separated from Service in accordance with the hardship distribution
policy stated in: (Choose (1) or (2))
[N/A] (1) Section 6.01(A)(4) of the Plan.
[N/A] (2) Section 14.11 of the Plan.
Default on a Loan. If a Participant or Beneficiary defaults on a loan made-
pursuant to a loan policy adopted by the Advisory Committee pursuant to Section
9.04, the Plan: (Choose (i) or (j))
[X] (i) Treats tile default as a distributable event. The Trustee, at the
time of the default, will reduce the Participant's Nonforfeitable
Accrued Benefit by the lesser of the amount in default (plus accrued
interest) or the Plan's security interest in that Nonforfeitable
Accrued Benefit. To the extent the loan is attributable to the
Participant's Deferral Contributions Account, Qualified Matching
Contributions Account or Qualified Nonelective Contributions Account,
the Trustee will not reduce the Participant's Nonforfeitable Accrued
Benefit unless the Participant has separated from Service or unless the
Participant has attained age 591/2.
[N/A] (j) Does not treat the default as a distributable event. When an
otherwise distributable event first occurs pursuant to Section 6.01 or
Section 6.03 of the Plan, the Trustee will reduce the Participant's
Nonforfeitable Accrued Benefit by the lesser of the amount in default
(plus accrued interest) or tile Plan's security interest in that
Nonforfeitable Accrued Benefit.
6.02 METHOD OF PAYMENT OF ACCRUED BENEFIT. The Advisory Committee will
apply Section 6.02 of the Plan with the following modifications: (Choose (a) or
(b))
[X] (a) No modifications.
[N/A] (b) The Plan permits the following annuity options:
.
Any Participant who elects a life annuity option is subject to the
requirements of Sections 6.04(A), (B), (C) and (D) of the Plan. See
Section 6.04(E). [Note: The Employer may specify additional annuity
options in an addendum to this Adoption Agreement numbered 6.02(b).]
6.03 BENEFIT PAYMENT ELECTIONS
Participant Elections after Separation from Service. A Participant is eligible
to make distribution elections under Section 6.03 of the Plan may elect to
commence distribution of his Nonforfeitable Accrued Benefit: (Choose (a) or (b))
[N/A] (a) As of any distribution date, but not earlier than Plan Year beginning
after the Participant's Separation from Service.
[X] (b) As of the following date(s): (Choose at least one of Options (1)
through(5))
[N/A] (1) As of any distribution date after the close of the Plan Year
in which the Participant attains Normal Retirement Age.
[X] (2) Any distribution date following his Separation from
Service.
[N/A] (3) Any distribution date in the__________________Plan Year(s)
beginning after his Separation from Service.
[N/A] (4) Any distribution date in the Plan Year after the
Participant incurs Break(s) in Service (as defined
in Article V).
[N/A] (5) Any distribution date following attainment of age______
and completion of at least _____ Years of Service (as defined
in Article V).
The distribution events described in the Elections made under Options
(a) or (b) apply equally to all Accounts maintained for the Participant.
Participant Elections Prior to Separation from Service - Regular Matching
Contributions Account and Employer Contributions Account. Subject to the
restrictions of Article VI, the following distribution options apply to a
Participant's Regular Matching Contributions Account and Employer Contributions
Account prior to his Separation from Service: (Choose (c) or at least one of (d)
through (f))
[X] (c) No distribution options prior to Separation from Service.
[N/A] (d) Attainment of Specified Age. Until he retires, the Participant has
a continuing election to receive all or any portion of his
Nonforfeitable interest in these Accounts after he attains: Choose (1)
or (2))
[N/A] (1) Normal Retirement Age.
[N/A] (2) _____ years of age and is at least _____% vested in these
Accounts. [Note: If the percentage is less than 100%, see the
special vesting formula in Section 5.03.]
[N/A] (e) After a Participant has participated in the Plan for a period of
not less than _____ years and he is 100% vested in these Accounts,
until he retires, the Participant has a continuing election to receive
all or any portion of the Accounts. [Note: The number in the blank
space may not be less than 5.]
[N/A] (f) Hardship. A Participant may elect a hardship distribution prior to
his Separation from Service in accordance with the hardship
distribution policy: (Choose (1) or (2); (3) is available only in
addition to (1) or (2))
[N/A] (1) Under Section 6.01(A)(4) of the Plan.
[N/A] (2)..Under Section 14.11 of the Plan.
[N/A] (3) In no event may a Participant receive a hardship
distribution before he is at least ______% vested in these
Accounts. [Note: If the percentage in the blank is less than
100%, see the special vesting formula in Section 5.03.]
Participant Elections Prior to Separation front Service - Deferral Contributions
Account, Qualified Matching Contributions Account and Qualified Nonelective
Contributions Account. Subject to the restrictions of Article VI, the following
distribution options apply to a Participant's Deferral Contributions Account,
Qualified Matching Contributions Account and Qualified Nonelective Contributions
Account prior to his Separation from Service: (Choose (g) or at least one of (h)
or (i))
[N/A] (g) No distribution options prior to Separation from Service.
[N/A] (h) Until he retires, the Participant has a continuing election to
receive all or any portion of these Accounts after he attains: (Choose
(1) or (2))
[N/A] (1) The later of Normal Retirement Age or age 59 1/2.
[N/A] (2) Age - (at least 59 1/2).
[X] (i) Hardship. A Participant, prior to this Separation from Service, may
elect. a hardship distribution in accordance with the hardship
distribution policy under Section 14.11 of the Plan.
Sale of trade or business/subsidiary. If the Employer sells substantially all of
the assets (within the meaning of Code ss.409(d)(2)) used in a trade or business
or sells a subsidiary (within the meaning of Code ss.409(d)(3)), a Participant
who continues employment with the acquiring corporation is eligible for
distribution from his Deferral Contributions Account, Qualified Matching
Contributions Account and Qualified Nonelective Contributions Account: (Choose
(i) or (k))
[X] (j) Only as described in this Adoption Agreement Section 6.03 for
distributions prior to Separation from Service.
[N/A] (k) As if he has a Separation from Service. After March 31, 1988, a
distribution authorized solely by reason of this Option (k) must
constitute a lump sum distribution, determined in a manner consistent
with Code ss.401(k)(10) and the applicable Treasury regulations.
6.04 ANNUITY DISTRIBUTIONS TO PARTICIPANTS AND SURVMNG SPOUSES. The
annuity distribution requirements of Section 6.04: (Choose (a) or (b))
[X] (a) Apply only to a Participant described in Section 6.04(E) of the
Plan (relating to the profit sharing exception to the joint and
survivor requirements).
[N/A] (b) Apply to all Participants.
ARTICLE IX
ADVISORY COMMITTEE - DUTIES WITH RESPECT TO PARTICIPANTS ACCOUNTS
9.10 VALUE OF PARTICIPANT'S ACCRUED BENEFIT. If a distribution (other than a
distribution from a segregated Account and other than a corrective
distribution described in Sections 14.07, 14.08, 14.09 or 14.10 of the
Plan) occurs more than 90 days after the most recent valuation date,
the distribution will include interest at: (Choose (a) or (b))
[X] (a) 0% per annum. [Note: The percentage may equal 0%]
[N/A] (b) The 90 day Treasury bill rate in effect at the beginning of the
current valuation period.
9.11 ALLOCATION AND DISTRIBUTION OF NET INCOME GAIN OR LOSS. Pursuant
to Section 14.12, to determine the allocation of net income, gain or loss:
(Qhgoseonj1y those items, if any, which are applicable to the Employer's Plan)
[X] (a) For salary reduction contributions, the Advisory Committee will:
(Choose (1), (2). (3) or (4))
[X] (1) Apply Section 9.11 without modification.
[N/A] (2) Use the segregated account approach described in Section
14.12.
[N/A] (3) Use the weighted average method described in Section
14.12, based on a weighting period.
[N/A] (4) Treat as part of the relevant Account at the beginning of
the valuation period ____% of the salary reduction
contributions: (Choose (i) or (ii))
[N/A] (i) made during that valuation period.
[N/A] (ii) made by the following specified time:
[X] (b) For matching contributions, the Advisory Committee will: (Choose
(1), (2) or (3))
[X] (1) Apply Section 9.11 without modification.
[N/A] (2) Use the weighted average method described in Section
14.12, based on a weighting period.
[N/A] (3) Treat as part of the relevant Account at the beginning of
the valuation period ____% of the matching contributions
allocated during the valuation period.
[N/A] (c) For Participant nondeductible contributions, the Advisory Committee
will: (Choose (1), (2), (3) or (4))
[N/A] (1) Apply Section 9.11 without modification.
[N/A] (2) Use the segregated account approach described in Section
14.12-
[N/A] (3) Use the weighted average method described in Section
14.12, based on a weighting period.
[N/A] (4) Treat as part of the relevant Account at the beginning of
the valuation period _____% of the Participant nondeductible
contributions: (Choose (i) or (ii))
[N/A] (i) made during that valuation period.
[N/A] (ii) made by the following specified time:
ARTICLE X
TRUSTEE AND CUSTODIAN, POWERS AND DUTIES
10.14 VALUATION OF TRUST. In addition to each Accounting Date, the
Trustee must value the Trust Fund on the following valuation date(s): Choose (a)
or (b))
[N/A] (a) No other mandatory valuation dates.
[X] (b) (Specify) 3/31, 6/30 and 9/30.
<PAGE>
EFFECTIVE, DATE, ADDENDUM
(Restated Plans Only)
The Employer must complete this addendum only if the restated Effective
Date specified in Adoption Agreement Section 1.18 is different than the restated
effective date for at least one of the provisions listed in this addendum. In
lieu of the restated Effective Date in Adoption Agreement Section 18, the
following special effective dates apply: (Choose whichever elections apply)
[N/A] (a) Compensation definition. The Compensation definition of Section
1.12 (other than the $200,000 limitation) is effective for Plan Years
beginning after_____________________. [Note. May not be effective later
than the first day of the first Plan Year beginning after the Employer
executes this Adoption Agreement to restate the Plan for the Tax Reform
Act of 1986, if applicable.]
[N/A] (b) Eligibility conditions. The eligibility conditions specified in
Adoption Agreement Section 2.01 are effective for Plan Years beginning
after.
[N/A] (c) Suspension of Years of Service. The suspension of Years of Service
rule elected under Adoption Agreement Section 2.03 ineffective for Plan
Years beginning after.
[N/A] (d) Contribution/allocation formula. The contribution formula elected
under Adoption Agreement Section 3.01 and the method of allocation
elected under Adoption Agreement Section 3.04 is effective for Plan
Years beginning after .
[N/A] (e) Accrual requirements. The accrual requirements of Section 3.06 are
effective for Plan Years beginning after . [Note; If the effective date
is later -than Plan Years beginning after December 31, 1989, the
accrual requirements in the Plan prior to its restatement may not be
more restrictive for post-1989 Plan Years than the requirements
permitted under Adoption Agreement Section 3.06.]
[N/A] (f) Elimination of Net Profits. The requirement for the Employer not to
have net profits to contribute to this Plan is effective for Plan Years
beginning after__________________. [Note: The date specified may not be
earlier than December 31, 1985.]
[N/A] (g) Vesting Schedule. The vesting schedule elected under Adoption
Agreement Section 5.03 is effective for Plan Years beginning after .
[N/A] (h) Allocation of Earnings. The special allocation provisions elected
under Adoption Agreement Section 9.11 are effective for Plan Years
beginning after .
For Plan Years prior to the special Effective Date, the terms of the
Plan prior to its restatement under this Adoption Agreement will control for
purposes of the designated provisions. A special Effective Date may not result
in the delay of a Plan provision beyond the permissible Effective Date under any
applicable law requirements.
<PAGE>
Execution Page
The Trustee (and Custodian, if applicable), by executing this-Adoption
Agreement, accepts its position and agrees to all of the obligations,
responsibilities and duties imposed upon the Trustee (or Custodian) under the
Master Plan and Trust. The Employer hereby agrees to the provisions of this Plan
and Trust, and in witness of its agreement, the Employer by its duly authorized
officers, has executed this Adoption Agreement, and the Trustee (and Custodian,
if applicable) signified its acceptance, on this 28th -day of January, 1994.
Name and EIN of Employer: Abraxas Production Corporation 74-2579442
---------------------------------------------
Signed:____________________________
Robert L. G. Watson
Name(s) of Trustee: Bank One, Texas, N.A., San Antonio, Texas
------------------------------------------------
Signed:____________________________
Name of Custodian: N/A
----------------
Signed:____________________________
[Note; A Trustee is mandatory. but a Custodian is optional. See Section 10.03 of
the Plan.]
PLAN NUMBER. The 3-digit plan number the Employer assigns to this Plan for ERISA
reporting purposes (Form 5500 Series) is: 001.
Use of Adoption Agreement. Failure to complete properly the elections in this
Adoption Agreement may result in disqualification of the Employer's Plan. The
3-digit number assigned to this Adoption Agreement (see page 1) is solely for
the Master Plan Sponsor's recordkeeping purposes and does not necessarily
correspond to the plan number the Employer designated in the prior paragraph.
The Master Plan Sponsor offers the following Paired Pension Plan(s) with this
Paired Profit Sharing Plan, identified by 3-digit adoption agreement number: 005
006.
MASTER PLAN SPONSOR. The Master Plan Sponsor identified on the First page of the
basic plan document will notify all adopting employers of any amendment of this
Master Plan or of any abandonment or discontinuance by the Master Plan Sponsor
of its maintenance of this Master Plan. For inquiries regarding the adoption of
the Master Plan, the Master Plan Sponsor's intended meaning of any plan
provisions or the effect of the opinion letter issued to the Master Plan
Sponsor, please contact the Master Plan Sponsor at the following address and
telephone number: 105 South St. Mary's Street - Trust Department San Antonio,
Texas 78205-2810 (210) 271-8689.
RELIANCE ON OPINION LETTER. If the Employer does not maintain (and has never
maintained) any other plan other than this Plan and a Paired Pension Plan, it
may rely on the Master Plan Sponsor's opinion letter covering this Plan for
purposes of plan qualification. For this purpose, the Employer has not
maintained another plan if this Plan, or the Paired Pension Plan, amended and
restated that prior plan and the prior plan was the same type of plan as the
restated plan. If the Employer maintains or has maintained another plan other
than a Paired Pension Plan, including a welfare benefit fund, as defined in Code
ss.419(e), which provides post-retirement medical benefits for key employees (as
defined in Code ss.419A(d)(3)), or an individual medical account (as defined in
Code ss.415(l)(2)), the Employer may not rely on this Plan's qualified status
unless it obtains a determination letter from the applicable IRS Key District
office.
<PAGE>
PARTICIPATION AGREEMENT
For Participation by Related Group Members (Plan Section 1.30)
The undersigned Employer, by executing this Participation Agreement,
elects to become a Participating Employer in the Plan identified in Section 1.03
of the accompanying Adoption Agreement, as if the Participating Employer were a
signatory to that Agreement. The Participating Employer accepts, and agrees to
be bound by, all of the elections granted under the provisions of the Master
Plan as made by Abraxas Production Corporation, the Signatory Employer to the
Execution Page of the Adoption Agreement.
1. The Effective Date of the undersigned Employer's participation in
the designated Plan is: January 1, 1993.
2. The undersigned Employer's adoption of this Plan constitutes:
[N/A] (a) The adoption of a new plan by the Participating Employer.
[X] (b) The adoption of an amendment and restatement of a plan currently
maintained by the Employer, identified as Abraxas 401(k) Profit Sharing
Plan and having an original effective date of January 1, 1993.
Dated this 28th day of January, 1994.
Name of Participating Employer: Abraxas Petroleum Corporation
Signed:_______________________________________
Participating Employer's EIN; 74-2584033
Acceptance by the Signatory Employer to the Execution Page of the Adoption
Agreement and by the Trustee.
Name of Signatory Employer: Abraxas Production Corporation
Accepted:________________
Date
Signed:________________________________
Name(s) of Trustee: Bank One, Texas, N.A.,
San Antonio, Texas
Accepted:________________
Date Signed:________________________________
[Note: Each Participating Employer must execute a separate Participation
Agreement. See the Execution Page of the Adoption Agreement for important Master
Plan information..]
<PAGE>
EXHIBIT 10.5
ABRAXAS PETROLEUM CORPORATION
DIRECTOR STOCK OPTION PLAN
Abraxas Petroleum Corporation, a Nevada corporation (the "Company"),
hereby formulates and adopts the following Director Stock Option Plan (the
"Plan") for non-officer members of the Board of Directors of the Company who are
not employees or officers of the Company.
1. Purpose.
The Abraxas Petroleum Corporation Director Stock Option Plan (the
"Plan") is intended to promote the best interests of the Company and its
stockholders by enabling the Company to attract and retain persons of
exceptional ability as directors and by providing an incentive to directors of
the Company in the form of an equity participation in the Company.
2. Definitions.
The following terms shall have the following meanings when used herein
unless the context clearly otherwise requires:
(a) "Code" means the Internal Revenue Code of 1986, as
amended from time to time.
(b) "Company" means Abraxas Petroleum Corporation, a Nevada
corporation, and any subsidiary corporation, as defined in Section 424(f) of the
Code, to which the Board of Directors of Abraxas Petroleum Corporation has
determined to extend the application of the Plan.
(c) "Common Stock" means Common Stock, par value $.01 per
share, of the Company issued pursuant to the Plan.
(d) "Eligible Participant" means any member of the Board of
Directors of the Company who has not, within one year immediately preceding the
determination of such director's eligibility, (i) been an employee of the
Company and (ii) received any award under any plan of the Company or any of its
affiliates that entitles the participants therein to acquire shares of Common
Stock or other securities of the Company or any of its affiliates (other than
the Plan or any other plan under which participants' entitlements are governed
by provisions meeting the requirements of Rule 16b-3(c)(2)(ii) promulgated under
the Exchange Act).
(e) "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
(f) "Exercise Price" means the price at which a share of
Common Stock may be purchased by a particular Participant pursuant to the
exercise of an Option, as determined in accordance with Section 8 hereof.
(g) "Option Agreement" means an agreement by and between a
Participant and the Company setting forth the specific terms and conditions of
an Option as well as the specific terms and conditions under which Common Stock
may be purchased by such Participant pursuant to the exercise of such Option.
Such Option Agreement shall be subject to the provisions of the Plan (which
shall be incorporated by reference therein) and shall be in substantially the
form attached hereto as Exhibit A.
(h) "Option" means the right of a Participant to purchase
shares of Common Stock in accordance with the terms of the Plan and the Option
Agreement which does not qualify as an incentive stock option under Section 422
of the Code, at a fixed option price equal to no less than 100 percent of the
Fair Market Value (as defined in Section 8 hereof) of the Common Stock on the
date the Option is granted.
(i) "Participant" means any Eligible Participant who is a
party to an Option Agreement.
3. Adoption and Administration of Plan.
The Plan shall become effective upon approval by the stockholders of
the Company at the Annual Meeting of Stockholders held on May 16, 1996 or at any
adjournments or postponements thereof. Upon such effectiveness, except as
otherwise set forth herein, any action taken by the Board of Directors of the
Company with respect to the implementation, interpretation or administration of
the Plan shall be final, conclusive and binding including, without limitation,
the grant of any Options pursuant to the Plan. The Plan shall be administered by
the Board of Directors.
4. Total Number of Shares of Common Stock.
The number of shares of Common Stock which may be issued in the
aggregate by the Company under the Plan pursuant to the exercise of Options
granted hereunder shall not be more than 104,000. Such shares of Common Stock
may be issued out of the authorized and unissued shares of Common Stock of the
Company or out of shares of Common Stock held in the Company's treasury. Any
shares subject to an Option which expires or is terminated unexercised as to
such shares may again be subject to an Option under the Plan, subject to
adjustment pursuant to the provisions of Section 12 hereof.
5. Term.
The Plan will continue until May 16, 2006 or until all shares of Common
Stock issuable pursuant to the Plan shall have been issued.
6. Eligibility and Formula Awards.
(a) All members of the Board of Directors of the Company who
are Eligible Participants shall be eligible to receive Options under the Plan.
All of the Options granted under the Plan shall be subject to all of the terms
and conditions of the Plan and of the Option Agreement under which they are
granted.
(b) On June 1, 1996, each person who is, as of June 1, 1996,
an Eligible Participant shall be granted an Option to purchase 8,000 shares of
Common Stock. Each person who becomes an Eligible Participant on or after June
1, 1996 shall be granted, on the date such person first becomes an Eligible
Participant, an Option to purchase 8,000 shares of Common Stock.
<PAGE>
7. Grant, Exercise Rights and Termination of Options.
(a) An Eligible Participant shall have an Option, and shall
thereby become and be a Participant, only upon the due execution by such
Eligible Participant and the Company of an Option Agreement (in the form
attached hereto as Exhibit A).
(b) An Option of a Participant may be exercised during the
period such Option is in effect and as set forth herein and in the Option
Agreement, and only if compliance with all applicable federal and state
securities laws can be effected, and may be exercised only by (i) such
Participant's completion, execution and delivery to the Company of a notice of
exercise as supplied by the Company and (ii) the payment to the Company of the
aggregate Exercise Price, as provided under Section 9 hereof, for the shares of
Common Stock to be purchased pursuant to such exercise (as shall be specified by
such Participant in such notice) in accordance with the terms of the Plan and
the Option Agreement. Except as specifically provided by a duly executed Option
Agreement or unless waived by the Board of Directors of the Company, an Option
or any of the rights thereunder may be exercised by such Participant only, and
may not be transferred or assigned, voluntarily, involuntarily or by operation
of law, except by will or the laws of descent and distribution.
(c) Notwithstanding any terms or provisions of the Plan to the
contrary, the Board of Directors of the Company may delegate to the appropriate
officer or officers of the Company the authority to prepare, execute and deliver
any Option Agreement reflecting any Option granted under the Plan; provided,
however, that any such Option Agreement shall be consistent with the terms and
conditions of the Plan.
(d) Subject to the provisions of Section 13 hereof, Options
granted pursuant to the Plan shall become exercisable according to the following
schedule: (i) 25% shall become exercisable on the first anniversary of the date
of grant; (ii) 25% shall become exercisable on the second anniversary of the
date of grant; (iii) 25% shall become exercisable on the third anniversary of
the date of grant; and (iv) 25% shall become exercisable on the fourth
anniversary of the date of grant; provided, however, that the Participant must
be an Eligible Participant at each of the vesting dates and, except as otherwise
set forth in the Option Agreement, no Options may be exercised after the
expiration of ninety (90) days from the date a Participant ceases to be an
Eligible Participant.
8. Purchase Price of Common Stock.
The Exercise Price of an Option shall be equal to one hundred percent
(100%) of the Fair Market Value of the shares of Common Stock of the Company on
the date that such Option shall be granted. The Fair Market Value of the shares
of Common Stock of the Company shall be the closing price on any given date or,
if no shares of the Common Stock are traded on such date, the most recent prior
date on which shares of the Common Stock were traded, as quoted on the principal
stock exchange on which the Common Stock has been listed, or if the Common Stock
is not listed on an exchange, the NASDAQ National Market or the NASDAQ Small Cap
Market or, if the Common Stock is not quoted on the NASDAQ Stock Market or the
NASDAQ Small Cap Market, the average of the final bid and final asked prices for
a share of the Common Stock in the over-the-counter market as reported by the
National Quotation Bureau Incorporated (or any similar organization or agency
succeeding to its functions of reporting prices) or if the Common Stock is no
longer publicly traded, as determined by the Board of Directors in good faith.
9. Payment for Shares of Common Stock.
Payment by each Participant for the shares of Common Stock purchased
hereunder shall be made in accordance with the terms of any Option Agreement
executed by such Participant.
10. Costs and Expenses.
All costs and expenses with respect to the adoption, implementation,
interpretation and administration of the Plan shall be borne by the Company;
provided, however, that, except as otherwise specifically provided in the Plan
or the applicable Option Agreement between the Company and a Participant, the
Company shall not be obligated to pay any costs or expenses (including legal
fees) incurred by any Participant in connection with any Option Agreement, the
Plan or any Option or Common Stock held by any Participant.
11. No Prior Right of Award.
Nothing in the Plan shall be deemed to give any director of the
Company, or his legal representatives or assigns, or any other person or entity
claiming under or through him, any contract or other right to participate in the
benefits of the Plan. Nothing in the Plan shall be construed as constituting a
commitment, guarantee, agreement or understanding of any kind or nature that the
Company shall continue to engage any individual (whether or not a Participant).
The Plan shall not affect, in any way, the right of the Company to remove any
director (whether or not a Participant) at any time and for any reason
whatsoever. No change of a Participant's duties as a director of the Company
shall result in a modification of the terms of any rights of such Participant
under the Plan or any Option Agreement executed by such Participant.
12. Changes in Capital Structure.
If the outstanding shares of Common Stock shall be changed into or
exchanged for a different number or kind of shares of stock or other securities
or property of the Company or of another corporation (whether by reason of
merger, consolidation, recapitalization, reclassification, split up, combination
of shares or otherwise), or if the number of such shares of Common Stock shall
be increased by a stock dividend or stock split, there shall be substituted for
or added to each share of Common Stock theretofore reserved for the purposes of
the Plan, whether or not such shares are at the time subject to outstanding
Options, the number and kind of shares of stock or other securities or property
into which each outstanding share of Common Stock shall be so changed or for
which it shall be so exchanged, or to which each such share shall be entitled,
as the case may be. Outstanding Options shall also be considered to be
appropriately amended as to price and other terms as may be necessary or
appropriate to reflect the foregoing events. If there shall be any other change
in the number or kind of the outstanding shares of Common Stock, or of any stock
or other securities or property into which such Common Stock shall have been
changed, or for which it shall have been exchanged, and if the Board shall in
its sole discretion determine that such change equitably requires an adjustment
in the number or kind or price of the shares then reserved for the purposes of
the Plan, or in any Options theretofore granted or which may be granted under
the Plan, then such adjustment shall be made by the Board and shall be effective
and binding for all purposes of the Plan. In making any such substitution or
adjustment pursuant to this Section 12, fractional shares may be ignored.
The Board shall have the power, in the event of any merger or
consolidation of the Company with or into any other corporation, or the merger
or consolidation of any other corporation with or into the Company, to amend all
outstanding Options to permit the exercise thereof in whole or in part at
anytime, or from time to time, prior to the effective date of any such merger or
consolidation (but not more than ten (10) years after the date of grant of any
incentive stock option) and to terminate each such Option as of such effective
date.
13. Acceleration; Change in Control. Unless expressly provided to the
contrary in the Option Agreement:
(a) Upon the occurrence of a Change of Control (as
hereinafter defined), Options shall automatically become fully vested and
exercisable;
(b) Anything in this Plan to the contrary notwithstanding, no
termination, amendment or modification of this Plan after the occurrence of a
Change of Control shall in any manner adversely affect any Eligible
Participant's rights under this Section 13 without the written consent of the
Eligible Participant affected by such termination, amendment or modification.
(c) The term "Change of Control" shall mean the occurrence of
any of the following events:
(i) any "person" or "group" (as such terms are used
in Section 13(d) and 14(d) of the Exchange Act is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act as in effect on the date
hereof, except that a person shall be deemed to be the "beneficial owner" of all
shares that any such person has the right to acquire pursuant to any agreement
or arrangement or upon exercise of conversion rights, warrants, options or
otherwise, without regard to the sixty day period referred to in such Rule),
directly or indirectly, of securities representing 20% or more of the combined
voting power of the Company's then outstanding securities;
(ii) any person or group shall make a tender offer or
an exchange offer for 20% or more of the combined voting power of the Company's
then outstanding securities;
(iii) at any time during any period of two
consecutive years, individuals who at the beginning of such period constituted
the Board and any new directors, whose election by the Board or nomination for
election by the Company's stockholders was approved by a vote of at least
two-thirds (2/3) of the Company directors then still in office who either were
the Company directors at the beginning of the period or whose election or
nomination for election was previously so approved ("Current Directors"), cease
for any reason to constitute a majority thereof;
(iv) the Company shall consolidate, merge or exchange
securities with any other entity and the stockholders of the Company immediately
before the effective time of such transaction do not beneficially own,
immediately after the effective time of such transaction, shares entitling such
stockholders to a majority of all votes (without consideration of the rights of
any class of stock entitled to elect directors by a separate class vote) to
which all stockholders of the corporation issuing cash or securities in the
consolidation, merger or share exchange would be entitled for the purpose of
electing directors or where the Current Directors immediately after the
effective time of the consolidation, merger or share exchange would not
constitute a majority of the Board of Directors of the corporation issuing cash
or securities in the consolidation, merger or share exchange; or
(v) any person or group acquires 50% or more of the
Company's assets.
Notwithstanding the foregoing, however, a Change in Control shall not
be deemed to occur merely by reason of an acquisition of Company securities by,
or any consolidation, merger or exchange of securities with, any entity that,
immediately prior to such acquisition, consolidation, merger or exchange of
securities, was a "subsidiary", as such term is defined below. For these
purposes, the term "subsidiary" means (a) any corporation of which 95% of the
capital stock of such corporation is owned, directly or indirectly, by the
Company and (b) any unincorporated entity in respect of which the Company has,
directly or indirectly, an equivalent degree of ownership.
14. Amendment or Termination of Plan.
Except as otherwise provided herein, the Plan may be amended or
terminated in whole or in part by the Board of Directors of the Company (in its
sole discretion), but no such action shall adversely affect or alter any right
or obligation with respect to any Option or Option Agreement then in effect,
except to the extent that any such action shall be required or desirable (in the
opinion of the Company or its counsel) in order to comply with any rule or
regulation promulgated or proposed under the Code by the Internal Revenue
Service. Notwithstanding anything else herein contained to the contrary, (a)
stockholder approval shall be required for any amendment which will (i) increase
the aggregate number of shares of Common Stock that may be issued and sold under
the Plan, or (ii) change the designation of class of persons eligible to receive
options; and (b) the provisions of the Plan relating to (i) the number of shares
of Common Stock for which an option may be granted, (ii) the option price, (iii)
the timing of the grant and vesting of an option, may not be amended more than
once every six months, with the exception of amendments required to be made so
that the Plan continues to comply with the Code, ERISA, or the regulations
promulgated or proposed thereunder.
15. Burden and Benefit.
The terms and provisions of the Plan shall be binding upon, and shall
inure to the benefit of, each Participant and such Participant's executors and
administrators, estate, heirs and personal and legal representatives.
16. Gender.
The use of any gender hereunder shall be deemed to be or include the
other genders and the use of the singular herein shall be deemed to be or
include the plural (and vice versa), wherever appropriate.
17. Headings.
The headings and other captions contained in the Plan are for
convenience and reference only and shall not be used in interpreting, construing
or enforcing any of the provisions of the Plan.
<PAGE>
EXHIBIT 10.36
MANAGEMENT AGREEMENT
BETWEEN
CANADIAN ABRAXAS PETROLEUM LIMITED
AND
CASCADE OIL & GAS LTD.
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1 INTERPRETATION...................................... 1
1.1 Definitions.................................................. 1
1.2 Other Definitions............................................ 2
1.3 Headings..................................................... 2
ARTICLE 2 THE MANAGER......................................... 2
2.1 Management Services and Duties............................... 2
2.2 Consultation................................................. 4
2.3 Budget 4
2.4 Disposition of Proceeds; Reports; Limitation of Authority.... 4
2.5 Standard of Care............................................. 5
2.6 Manager as Operator.......................................... 6
2.7 Marketing of Petroleum Substances............................ 6
2.8 Taking in Kind............................................... 6
ARTICLE 3 MANAGER'S FEES AND EXPENSES......................... 6
3.1 Reimbursable Costs........................................... 6
3.2 General and Administration Sharing........................... 7
ARTICLE 4 ACTIVITIES OF THE MANAGER........................... 8
4.1 Other Activities............................................. 8
4.2 Additional Information....................................... 8
4.3 Restrictions and Duties...................................... 8
4.4 No Liability for Advice...................................... 8
<PAGE>
ARTICLE 5 INDEMNIFICATION OF MANAGER.......................... 9
5.1 Indemnification.............................................. 9
5.2 Indemnification.............................................. 9
ARTICLE 6 TERM AND TERMINATION................................ 9
6.1 Term .................................................... 9
6.2 Resignation and Default...................................... 9
6.3 Waiver 10
6.4 Effect of Waiver.............................................11
6.5 Termination..................................................11
ARTICLE 7 COVENANTS OF THE MANAGER............................12
7.1 Terms ....................................................12
ARTICLE 8 MISCELLANEOUS.......................................12
8.1 No Partnership or Joint Venture .............................12
8.2 Amendments...................................................12
8.3 Assignment...................................................13
8.4 Severability.................................................13
8.5 Notices......................................................13
8.6 Reliance.....................................................14
8.7 Force Majeure................................................14
8.8 Power of Attorney............................................14
8.9 Applicable Law...............................................15
<PAGE>
MANAGEMENT AGREEMENT
This Agreement dated as of the 12th day of November, 1996 among: Cascade Oil &
Gas Ltd., a corporation incorporated under the laws of Alberta, having its
registered office and general place of business in Calgary, Alberta ("the
Manager") of the first part and Canadian Abraxas Petroleum Limited, a
corporation incorporated under the laws of Canada ("Abraxas") of the second part
WHEREAS, Abraxas has acquired and intends to acquire oil and gas
properties; and
WHEREAS, Abraxas wishes to retain the Manager to provide certain
services in connection with the Assets; and
WHEREAS, the Manager is willing to render such services on the terms
and conditions hereinafter set forth; and
NOW THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the sufficiency of which is hereby acknowledged by
the parties hereto, the parties hereto agree as follows:
ARTICLE 1
INTERPRETATION
1.1 Definitions
As used herein, the following terms shall have the meanings set forth
below:
"Administrative Cost Amount" means the amount payable to the Manager
pursuant to clause 3.2 hereof;
"Affiliates" means those corporations that are affiliated for the
purpose of the Business Corporations Act (Alberta);
"Assets" means the petroleum and natural gas assets of Abraxas acquired
through the acquisition of CGGS Canadian Gas Gathering Systems Inc. and not
disposed of by Abraxas together with other petroleum and natural gas assets
acquired by Abraxas from time to time and expressly made subject to the terms
hereof by agreement among the parties;
"Controlled" shall have the meaning ascribed to such term in the
Business Corporations Act (Alberta);
"Operator" means the operators appointed pursuant to the Operating
Agreements from time to time;
"Operating Agreements" means the operating agreements, if any,
governing the operation of the Assets;
"Operating Procedure" shall mean the CAPL 1990 Operating Procedure
together with the PASC 1988 Accounting Procedure, each incorporating the
elections and amendments set out and described in Schedule "A";
1.2 Other Definitions
Capitalized terms not otherwise defined herein shall be ascribed the meaning
ascribed thereto in the Operating Procedure.
<PAGE>
1.3 Headings
The section headings hereof have been inserted for convenience of reference only
and shall not be construed to affect the meaning, construction or effect of this
agreement.
ARTICLE 2
THE MANAGER
2.1 Management Services and Duties
Subject to the terms hereof, Abraxas hereby appoints the Manager and
the Manager hereby accepts the appointment to undertake on behalf of Abraxas all
matters pertaining to the management of the Assets including, without limiting
the generality of the foregoing, the following matters:
(a) on a timely basis to keep Abraxas fully informed with respect to
the exploration, development, operation and disposition of, and other dealings
with the Assets and with respect to the marketing or other disposition of the
Petroleum Substances produced therefrom;
(b) administer all land records and documents relating to the Assets
including the setting up and maintaining of document and correspondence files,
land files and records and provide land and title services related to the Assets
(including the examination and evaluation of any title documents) and arrange
for the examination and preparation of legal documents or such other services as
may be required in connection with the maintenance of land and title records
relating to the Assets; provided that the Manager shall not be deemed to make
any warranty of title with respect to the Assets;
(c) keep and maintain at its office in Calgary, Alberta at all times
books, records and accounts which shall contain particulars of all operations,
receipts and disbursements relating to the Assets, which books, records and
accounts shall record the revenue, expenses and other business transactions of
Abraxas in respect of the Assets in form satisfactory to Abraxas;
(d) provide all necessary services where Abraxas acts or is required to
act as operator of any of the Assets (but in the event the Manager does so act,
it shall be entitled to the fees paid to the operator pursuant to the Operating
Agreements applicable to such Assets), and where no third party Operating
Agreement exists in respect of any Petroleum Rights, act as operator thereof
pursuant to the terms of the Operating Procedure;
(e) review all data, information, notices and requests tendered by any
third party operator, and take such action as is determined by the Manager to be
in Abraxas' best interest unless the matter involves an expenditure over $50,000
net to Abraxas (other than operating costs incurred in the ordinary course of
business) in which case, the Manager shall advise Abraxas as to its alternative
courses of action, make Manager's recommendation and then obtain approval of
such action as Abraxas shall determine and, where necessary, to facilitate the
action so determined, arrange for any required expertise on behalf of Abraxas;
(f) negotiate, on behalf of and in the name of Abraxas and arrange for
any and all contracts with third parties for the proper management and operation
of the Assets;
(g) make available, in performing its duties hereunder, the office
space, equipment and staff including all accounting, secretarial, corporate and
administrative services as may be reasonably necessary to perform its duties
hereunder;
(h) unless produced Petroleum Substances are taken in kind by Abraxas
as herein provided, sell or arrange for the sale of Petroleum Substances
produced from the Assets, invoice third parties as required and effect the
collection of receivables relating thereto;
(i) arrange for such audit, legal, insurance and other professional
services as are required by Abraxas in connection with the Assets from time to
time;
(j) arrange for all required petroleum engineering and geological
services to adequately assess and evaluate the Assets from time to time and as
requested or required by Abraxas or its lenders;
(k) arrange for the payment of all properly payable costs, expenses,
rentals, royalties and similar payments and all property, severance and similar
taxes in respect of the Assets incurred by or on behalf of Abraxas;
(l) where requested by Abraxas, provide assistance in connection with
arranging financing or production hedging in respect of the Assets including
providing, or where appropriate to the circumstances, technical engineering and
geological assistance, and providing financial analysis and general business
advice on the terms and conditions of any such financing;
(m) subcontract to third parties, with the prior written consent of and
on terms satisfactory to Abraxas, the responsibilities of the Manager hereunder;
(n) prepare and distribute to Abraxas all statements, reports,
receipts, notices, and other papers as may be necessary, desirable or requested
from time to time by Abraxas;
(o) file, or cause to be filed, all reports or other information
required by any governmental authority with jurisdiction over the Assets; and
(p) do all other and further things necessary or desirable to operate
the Assets for the benefit of Abraxas in accordance with good oil and gas
industry practice.
2.2 Consultation
The Manager shall advise and consult with Abraxas from time to time as
requested by Abraxas and in any event with regard to any material matters
relating to the orderly development and operation of the Assets. For greater
certainty, but without limiting the generality of the foregoing, the Manager
shall consult with Abraxas before commencing, initiating or participating in any
operation in respect of the Assets which has the possibility of causing material
damage to the Assets (such damage to include such things as damaging the
reserves so as to cause a loss of recoverability of reserves and environmental
damage) or which is a novel operation or is a novel use of an operation which
does not yet have general acceptance in the oil and gas industry unless required
due to an emergency risking life or property.
2.3 Budget
The Manager shall on or prior to November 30 of each year prepare and
furnish to Abraxas for approval, a budget, setting forth the expected production
from its respective interests in the Assets and the expected operating and
capital expenditures related to the Assets and containing such other matters as
should properly be included in such an annual budget or as are requested by
Abraxas.
2.4 Disposition of Proceeds; Reports; Limitation of Authority
Notwithstanding that Abraxas may be named in any land and Operating
Agreements applicable to the Assets, Abraxas shall direct all third party
operators of the Assets to pay proceeds owing to Abraxas to the Manager.
The Manager shall maintain a cash float (the "cash float") as may be
agreed to by the Manager and Abraxas from time to time. The Manager may retain
revenues from time to time to maintain the cash float balance.
Unless otherwise directed by Abraxas, the Manager shall distribute all
net proceeds received by it in respect of the Assets, less the amounts necessary
to maintain the cash float, on a monthly basis by the 15th day after the end of
each month in which such proceeds were received by Manager, commencing December
15, 1996, together with a cash reconciliation and a report for the month
immediately preceding such month describing operations in respect of the Assets
for such preceding month, which report shall include an accounting of all
revenues and expenses, a general description of operations carried out in
respect of the Assets, a report on the sale price received for the production of
Petroleum Substances from the Assets, any extraordinary events affecting the
Assets, a description of any and all spills, leaks or discovery of environmental
damage caused by or affecting the Assets, and any other information as may be
requested by Abraxas from time to time.
The Manager shall promptly notify Abraxas when it discovers or is
advised of any significant environmental damage or potential environmental
damage affecting or caused by the Assets and shall, subject to consultation with
Abraxas, take such action as it deems necessary or desirable to deal with such
environmental damage in accordance with good oil and gas industry practice.
Notwithstanding anything contained herein, the Manager shall not be
entitled to commit Abraxas to any expenditure for the account of Abraxas for any
single operation the total estimated cost of which is in excess of $50,000 to
the account of Abraxas other than operating costs incurred in the ordinary
course of business, without the prior direction of Abraxas, unless required due
to an emergency risking life or property.
Where cash calls are made by the Operator pursuant to the Operating
Agreements, the Manager shall satisfy such cash calls out of the proceeds
received by the Manager on account of Abraxas, and the cash float and to the
extent the Manager does not have sufficient monies of Abraxas to satisfy the
cash calls, the Manager shall timely notify Abraxas of the cash call and Abraxas
shall deliver to the Manager the amount of the cash call within the time
specified by the Manager in respect of such cash call. The Manager shall in no
event be required to lend any money to Abraxas.
2.5 Standard of Care
In exercising its powers and discharging its duties under this
agreement, the Manager shall act in a manner determined by it to be in Abraxas'
best interest and shall exercise that degree of care, diligence and skill that a
reasonably prudent advisor and manager in respect of petroleum and natural gas
properties in Western Canada would exercise in comparable circumstances. It is
acknowledged and understood by the parties hereto that the Manager may in its
capacity as advisor and manager delegate specific aspects of its obligations
hereunder to any corporation, firm, person or other entity, provided that such
obligation shall not relieve the Manager of any of its obligations under this
agreement.
2.6 Manager as Operator
Where the Manager is required to act as the Operator on behalf of
Abraxas, it shall operate in accordance with the terms and conditions of the
applicable Operating Agreements. In the event the Manager and Abraxas own 100%
of the working interest in Assets not otherwise operated, the Operating
Procedure shall apply to them and the Manager shall operate such assets in
accordance with the Operating Procedure; provided that in the event there is a
conflict between the Operating Procedure and this agreement, this agreement
shall prevail.
<PAGE>
2.7 Marketing of Petroleum Substances
Subject to terms of the applicable Operating Agreements, the Manager,
unless Abraxas is taking produced Petroleum Substances in kind, shall market and
dispose of all Petroleum Substances produced from the Assets on such terms and
conditions as it shall determine satisfactory to it except where it is satisfied
with the terms of sale by the third party operator in which case it shall
supervise the marketing and disposition of the Petroleum Substances as conducted
by the third party operator. Notwithstanding the foregoing, the Manager shall
not enter into any sales contract without the written consent of Abraxas (i) for
oil having a term in excess of one year unless such contract can be terminated
on not greater than 60 days notice; and (ii) for natural gas with volumes, net
to Abraxas, in excess of one million cubic feet per day having a term exceeding
one year, unless the contract may be terminated by Abraxas at any time on not
greater than one year's notice to the applicable purchaser.
2.8 Taking in Kind
Subject to terms of the applicable Operating Agreements,
Abraxas shall have the right to take its share of the Petroleum Substances
produced from the Assets in kind and separately dispose of same and if Abraxas
chooses to do so, the Manager shall promptly supply Abraxas any and all
information required to effectively market and dispose of Abraxas' share of
Petroleum Substances.
ARTICLE 3
MANAGER'S FEES AND EXPENSES
3.1 Reimbursable Costs
Abraxas shall reimburse or pay the Manager for all reasonable costs and
expenses paid or to be paid by the Manager properly attributable to Abraxas and
paid directly to third parties by or on behalf of Abraxas including, without
limitation, all costs and expenses relating to financial accounting, audits,
bank consulting services, legal, engineering and geological consulting services,
joint venture audits, land administration, insurance and those duties for which
the Manager is obligated to arrange in clause 2.1 hereof. Where any services are
requested by Abraxas for its sole benefit, Abraxas shall be solely responsible
for such costs. The Manager shall not be entitled to contract out services with
third parties without the written consent of Abraxas unless such services are
not within the expertise of the Manager or are not services ordinarily conducted
by the Manager, in which case the Manager will consult with and advise Abraxas
of preferable third party service providers. Nothing herein shall be interpreted
as requiring the Manager to expend its own funds on behalf of Abraxas.
3.2 General and Administration Sharing
It is the intention of the parties that Abraxas shall reimburse the
Manager for that proportion of the Manager's general overhead attributable to
its management expenses for the performance of its obligations hereunder (the
"Administrative Cost Amount"), and no more. Abraxas shall pay to the Manager an
estimated annual Administrative Cost Amount for the Manager's general overhead,
as determined below, payable in equal monthly installments. The Administrative
Cost Amount for each calendar year, or lesser period for any period in which the
Manager provides services for less than a twelve (12) month period (such stub
period or twelve (12) month period being referred to as a "Period") shall be,
unless otherwise agreed by the Manager and Abraxas, that percentage of the
general and administrative costs of the Manager (excluding, for greater
certainty any corporate costs relating to its corporate existence, compliance
with corporate and securities legislation, costs of financing, whether debt or
equity, and costs of a similar nature) equivalent to that percentage that the
gross revenues attributable to the Assets of Abraxas managed by the Manager are
of the aggregate gross revenues of all assets managed by Cascade. On or before
sixty (60) days following the commencement of any period, the Manager shall
reasonably and in good faith estimate the Administrative Cost Amount for such
period and notify Abraxas of such estimated Administrative Cost Amount. The
estimated Administrative Cost Amount for the initial period shall be as
determined by the Manager. For all subsequent periods, in the event Abraxas does
not agree with the Manager's estimate and Abraxas and the Manager cannot agree
on an estimated Administrative Cost Amount for a period, the estimated
Administrative Cost Amount for such period shall be equal to the estimated
Administrative Cost Amount for the previous period. If at any time during a
period, the Manager or Abraxas determine that the estimated Administrative Cost
Amount shall be materially incorrect as a result of an event, the Manager shall
provide a new estimated Administrative Cost Amount and all subsequent monthly
installments of such period shall be adjusted so that the aggregate of
installments to the Manager shall equal "to the revised estimated Administrative
Cost Amount". As soon as possible after the end of each period, but in no event
no later than 140 days after the end of such period, the Manager shall cause its
auditors to calculate the actual general administrative costs and the percentage
allocated to the performance of its obligations hereunder calculated as set
forth in this clause or as otherwise agreed by Abraxas and the Manager. Abraxas
and the Manager shall make an adjustment based on the difference between the
amount calculated by the auditor as the actual Administrative Cost Amount and
the estimated Administrative Cost Amount for such period. For greater certainty,
any fees received as overhead reimbursements under operating agreements shall be
deducted from the Manager's general and administrative costs for the purpose of
calculating the Administrative Cost Amount pursuant hereto.
ARTICLE 4
ACTIVITIES OF THE MANAGER
4.1 Other Activities
The parties hereto hereby acknowledge that the Manager is engaged in
and will continue to engage in the oil and gas business in Canada and elsewhere.
Accordingly, the Manager will divide its resources between its obligations under
this agreement and other operations in which Abraxas will not have, or be
entitled to, any interest. Such other operations will include the acquisition,
disposition and exploitation of Canadian resource properties. The parties hereto
consent to such activities and they agree that nothing herein shall prevent the
Manager or any of its officers, directors or employees or any of its Affiliates
from having other business interests or from engaging in any other business
activities relating to Canadian resource property including the ownership
thereof. In the event that the interests of the Manager are in conflict with
those of Abraxas, the Manager shall notify Abraxas of such conflict and shall be
obliged to make decisions acting in good faith, having regard to the best
interests of such parties and in a manner that would not contravene the
obligations of the Manager to Abraxas.
4.2 Additional Information
The parties hereto acknowledge that exploration and development
activities on the Assets may have the incidental affect of providing additional
information with respect to, or augmenting the value of, properties in which the
Manager or its Affiliates have an interest and the parties hereto agree that
neither the Manager nor its Affiliates shall be liable to account to any of them
with respect to such activities or results, provided that the Manager shall not
act in a manner that would contravene its obligations to Abraxas.
4.3 Restrictions and Duties
During the term of this agreement, the Manager shall:
(a) unless otherwise agreed, not commingle its own funds or the funds
of any other persons with any funds held by it on behalf of Abraxas; and
(b) not "step-up" any cost by reason of transactions among Affiliates
of the Manager and accordingly, all costs charged to Abraxas will be the lowest
amount of costs incurred by the Manager or any Affiliate thereof.
4.4 No Liability for Advice
The Manager shall not be liable, answerable or accountable for any loss
or damage resulting from the advice given by the Manager or the exercise by the
Manager of a discretion or its refusal to exercise a discretion, provided that
the Manager has acted in a faithful, diligent and honest manner and is not in
breach of any of its obligations hereunder.
ARTICLE 5 INDEMNIFICATION OF MANAGER
5.1 Indemnification
The Manager and any person who, at the request of the Manager,
is serving or shall have served as a director, officer or employee of the
Manager shall be indemnified by Abraxas against all liabilities and expenses
(including judgments, fines, penalties, amounts paid in settlement and counsel
fees) arising from or related in any manner to this agreement, unless the
liability or expenses (as described above) results from the willful misfeasance,
bad faith or gross negligence of the Manager or its Affiliates.
5.1 Indemnification
The foregoing right of indemnification shall not be exclusive of any
other rights to which the Manager or any person referred to in Section 5.1 may
be entitled as a matter of law or which may be lawfully granted to it.
ARTICLE 6
TERM AND TERMINATION
6.1 Term
The term of this agreement is for an initial term of twenty-four (24)
months from and including the date hereof (the "Primary Term") and thereafter
this agreement shall be automatically renewed from month to month unless and
until terminated by either party by written notice delivered to the other at any
time after the Primary Term, which notice shall be delivered at least 90 days
prior to the proposed termination date, subject to earlier termination in
accordance with the terms of this agreement.
6.2 Resignation and Default
This agreement shall terminate automatically in the event that:
A. the Manager:
institutes proceedings to be adjudicated as a voluntary bankrupt, or
consents to the filing of a bankruptcy proceeding against it;
files a petition or consent seeking reorganization, readjustment,
arrangement or similar relief under any Federal or provincial debtor
legislation;]
consents or is subject to the appointment of a receiver, liquidator,
trustee or assignee in bankruptcy in respect of all or any portion of its assets
or the Manager or its assets become subject to foreclosure or other realization;
makes an assignment of its assets for the benefit of creditors other
than by way of security for a then current loan; or
a court having jurisdiction in the premises enters a decree or order:
judging the Manager bankrupt or insolvent under any Canadian bankruptcy
law; or
for the appointment of a receiver or trustee or assignee in bankruptcy
of the Manager or its assets; or
any proceeding with respect to the Manager is commenced under the
Companies Creditors Arrangements Act (Canada) or similar legislation relating to
a compromise or arrangement with creditors or claimants;
B. Abraxas may terminate this agreement on ten (10) days written notice in the
event that:
the Manager defaults in the performance of any material obligations
under this agreement and has not remedied such default within 30 days of receipt
by the Manager of notice of such default from Abraxas or, where such default can
be remedied but not within 30 days, promptly commenced to remedy and diligently
pursues the remedy of such default but the Manager has not remedied such default
within ninety days of receipt of notice of such default. Any such notice of
default shall not be valid unless reasonable particulars of the default are
provided;
the Manager voluntarily suspends transaction of its usual business in
connection with the Assets;
the Manager ceases to be controlled by Abraxas Petroleum Corporation or
its affiliates; or
Don Engle or Roger Bruton cease to be employed by Manager as President
and Vice-President, respectively.
6.3 Waiver
Abraxas may, by written notice, at any time and from time to time:
waive performance of any term or provision of this agreement required
to be performed by the Manager;
waive any default under this agreement; and
grant any extension of time for the performance of any term or
provision of this agreement including the period of time after which an event
becomes a default.
6.4 Effect of Waiver
If a default has been waived, it shall be deemed for all
purposes never to have occurred and if a period of time has been extended, such
extended period shall, for all purposes, be deemed to have begun from the
beginning of such period provided that no waiver shall constitute a waiver of
any subsequent default for non-performance.
6.5 Termination
Upon the effective date of termination of this agreement, the
Manager shall forthwith:
pay to or to the order of Abraxas all monies, if any, collected and
held pursuant to this agreement, after deducting any amounts incurred to which
it is then entitled;
deliver to or to the order of Abraxas complete reports including
statements showing all payments collected, and a statement of all monies held by
it pursuant to this agreement during the period following the date of the last
statements furnished to such parties pursuant to this agreement;
to the extent that it is able, subject to legislative and contractual
restrictions, deliver or cause to be delivered to Abraxas and, where applicable,
transfer and novate into the name of Abraxas or their nominees, as appropriate,
all property, files, reports and documents then in the custody or subject to
control of the Manager which it is holding pursuant to the terms hereof; and
transfer its duties and responsibilities as Operator under the
Operating Agreements and Operating Procedure to Abraxas or its designate.
The Manager shall do all such things and execute all such documents,
instruments and assurances as may be desirable or required to provide an orderly
transfer of the duties and responsibilities of the Manager to Abraxas or its
designee.
Notwithstanding the termination of this agreement, unless terminated
pursuant to clause 6.2, other than 6.2(B)(c), Abraxas shall compensate for any
financial commitments incurred by the Manager with the approval of Abraxas which
were required to perform its duties hereunder which cannot be terminated on
ninety days notice or less to the extent the underlying equipment or services
are not required by the Manager in its other activities; provided that the
Manager shall take all reasonable steps to minimize the expense of any such
commitment to Abraxas.
ARTICLE 7
COVENANTS OF THE MANAGER
7.1 Terms
The Manager covenants and agrees as follows:
it shall conduct its activities required pursuant hereto in the best
interests of Abraxas and in a good, workmanlike manner in full compliance with
all applicable laws in compliance with the good oil and gas industry practice;
it shall not commingle funds of Abraxas with any other funds;
it shall not buy or sell petroleum and natural gas rights on behalf of
Abraxas except with the express written consent of Abraxas and on terms
specified by Abraxas, however, the Manager shall make recommendations and shall
give or, where appropriate to the circumstances, arrange technical engineering,
geological and financial services together with giving business advice with
respect to potential, recommended or proposed acquisitions or dispositions of
Petroleum Rights to or by Abraxas.
it shall be registered and shall maintain registration to do business
and maintain all required licenses and permits to carry on its business in all
jurisdictions in which the Assets are located;
it shall not enter into any contract respecting the Assets or its
duties hereunder with a non-arm's length party without the prior written consent
of Abraxas.
<PAGE>
ARTICLE 8
MISCELLANEOUS
8.1 No Partnership or Joint Venture
The parties to this agreement are not and shall not be deemed to be
partners or joint venturers with one another and nothing herein shall be
construed so as to impose any liability as such on any of them. The Manager
shall perform its duties hereunder as an independent contractor.
8.2 Amendments
This agreement shall not be amended or varied in its terms
except by instrument in writing executed by the duly authorized representatives
of the parties hereto or their respective successors or assigns.
8.3 Assignment
This agreement shall not be assigned by any party without the prior
written consent of the other party.
8.4 Severability
If any provision of this agreement shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provisions in such jurisdiction and shall not in any manner
affect or render invalid or unenforceable such provision in any other
jurisdiction or any other provision of this agreement in any jurisdiction.
8.5 Notices
All notices required or permitted pursuant to this agreement shall be
in writing and may be given by delivering same, mailing same by prepaid
registered mail or telefaxing same to the address or telefax number set forth
below. Any such notice or other communication shall, if delivered, be deemed to
have been given if delivered before 5:00 p.m. (Calgary time), on the Business
Day delivered, if mailed except in the case of a strike, lock out or other work
stoppage, actual or threatened involving postal employees, on the fifth Business
Day following the day on which it was so mailed and if telefaxed, on the
Business Day received if received before 12:00 noon (Calgary time) on such date
and if not, on the following Business Day provided that when telefaxing, the
sender shall have received its telefax machine's confirmation that the telefax
was sent and received without error. The parties hereto may give from time to
time written notice of the change of address or telefax number in the manner
aforesaid at which time the address so communicated shall be the address of that
party for the purposes hereof.
Manager: CASCADE OIL & GAS LTD.
#303, 630 - 6th Avenue S.W.
Calgary, Alberta
T2P 0S8
Attention: President
Telefax: (403) 262-1969
<PAGE>
Abraxas CANADIAN ABRAXAS PETROLEUM LIMITED
c/o Abraxas Petroleum Corporation
500 N. Loop 1604 East, Suite 100
San Antonio, Texas 78232
Attention: Robert L.G. Watson
Telefax: (210) 490-8816
8.6 Reliance
The Manager, acting reasonably shall be entitled to rely on statements,
advice or opinions (including financial statements and auditor's reports) of
agents (any of which may be persons with which the Manager or an agent is
affiliated) whose professions give authority to a statement made by them on the
subject in question and who are considered by the Manager to be competent. The
Manager may rely, and shall be protected in acting, upon any instrument or other
documents reasonably believed by it to be genuine and in force.
8.7 Force Majeure
No party shall be deemed to be in default in respect of non-performance
of its obligations hereunder, if any, so long as its non-performance is due to
strike, walk out, industrial disturbance, storm, fire, flood, explosion,
lightning, tempest, act of God or Queen's enemies, governmental restraint, or
any other cause (with similar or dissimilar to those enumerated) beyond its
control; provided that lack of finance shall in no event be deemed to be a cause
beyond the party's control.
8.8 Power of Attorney
Abraxas hereby irrevocably nominates, constitutes, appoints and
authorizes the Manager as the true and lawful attorney and agent of Abraxas
during the term of this agreement with full power and authority, in Abraxas'
name, place and stead to do any and all of the matters, things and acts required
of the Manager pursuant to the terms of this agreement. The Manager is
authorized to execute authorities for expenditure, notices, Petroleum Substances
sales contracts, operating documents, assignments, transfers, conveyances and
such other documents as are required to be executed by the Manager to perform
any of its functions required pursuant to the terms of this agreement.
Notwithstanding the foregoing, the Manager shall have no authority to execute
any documents which:
pursuant to the terms hereof, requires the consent of Abraxas; without
the written approval of Abraxas, creates a liability to Abraxas in excess of
$50,000.00 other than arising out of an emergency risking life or property; or
without the written approval of Abraxas, encumbers or burdens the Assets of
Abraxas other than in the ordinary course of business.
The foregoing power of attorney is hereby declared by Abraxas to be an
irrevocable power coupled with an interest and shall survive the liquidation or
reorganization of Abraxas and shall extend to and bind the receivers, assigns
and trustees of Abraxas. For greater certainty, Abraxas shall execute such
documents, instruments and assurances as shall be necessary for the Manager to
cash, deposit and otherwise negotiate cheques to a maximum of $50,000.00 on
behalf of Abraxas.
8.9 Applicable Law
This agreement shall be deemed to have been made and shall be construed
in accordance with the laws of the Province of Alberta and the laws of Canada
applicable therein and shall in all respects be treated as an Alberta contract.
The parties hereto hereby irrevocably submit and attorn to the jurisdiction of
the courts of the Province of Alberta.
IN WITNESS WHEREOF the parties hereto have executed this agreement by
their proper officers duly authorized in that behalf as of the day and year
first above written.
CANADIAN ABRAXAS PETROLEUM CASCADE OIL & GAS LTD.
LIMITED
Per:_____________________________ Per:_______________________
"Robert L.G. Watson "Donald A. Engle"
Per: _____________________________ Per:_______________________
<PAGE>
SCHEDULE "A"
THIS IS SCHEDULE "A" attached to and forming part of a Management Agreement
dated as of the ___ day of _________, 1996, among CANADIAN ABRAXAS PETROLEUM
LIMITED and CASCADE OIL & GAS LTD.
1990 CAPL OPERATING AGREEMENT
Insurance Election (Clause 311):................................A........B
Marketing Fee Election (Clause 604):............................A........B
Casing Point Election (Clause 903):.............................A........B
Penalty for Independent Operations (Clause 1007):
Development wells 200%; Exploratory wells 400%
Exception to Clause 1007 (Clause 1010(a)(IV)
Where Well Preserves Title: 180 days
Disposition of Interest (Clause 2401):..........................A........B
Recognition Upon Assignment (Clause 2404):......................A........B
PASC 1988 ACCOUNTING PROCEDURE
Operating Advances (Clause 105):
Net billing only
Approvals (Clause 110): 2 or more parties totaling 65%
Labour (Clause 202(b)(1) & (2)):
(1) Second Level Supervisors shall_____ / shall not___X___be
chargeable.
(2) Technical Employees shall /shall not X be chargeable.
Employee Benefits (Clause 203(b)): 20%
Warehouse Handling (Clause 217(a)(1) & (2)):
(1) 2 1/2% for tubular goods 50.8 mm in diameter and over, and other
items with new price over $5,000.00;
(2) 5% of the cost of all other material.
<PAGE>
Overhead Rates (Clause 302):
(a) For each Exploration Project:
(1)...................................3% of first $50,000.00
(2)...................................2% of next $100,000.00
(3).........................1% of cost exceeding (1) and (2)
(b) For each Drilling Well:
(1)...................................3% of first $50,000.00
(2)...................................2% of next $100,000.00
(3).........................1% of cost exceeding (1) and (2)
(c) For each Construction Project:
(1)...................................3% of first $50,000.00
(2)...................................2% of next $100,000.00
(3).........................1% of cost exceeding (1) and (2)
(d) For Operation and Maintenance:
(1)..................................10% of first $50,000.00
(2)......................................................N/A
(3).....................$225.00 per producing well per month.
The rates in subclause d(2) and d(3) herein will __X__/will not _____ be
adjusted as of the first day of July each year following the year . . . . .
Pricing of Joint Material Purchases. Transfers and Dispositions
$10,000.00 for requiring approval.
Periodic Inventory (Clause 501):
at 5 year intervals.
<PAGE>
EXHIBIT 22.1
SUBSIDIARIES OF ABRAXAS
Abraxas Petroleum Corporation,
a Nevada corporation ("Abraxas")
Canadian Abraxas Petroleum Limited,
a Canada corporation and wholly-
owned subsidiary of Abraxas
Grey Wolf Exploration Ltd.,
a Canada corporation ("Grey Wolf").
Abraxas owns 78% of the capital
stock of Grey Wolf
Cascade Oil & Gas Ltd.,
an Alberta corporation ("Cascade")
Grey Wolf owns approximately 67%
of the capital stock of Cascade
Western Associated Energy Corporation,
a Texas corporation and wholly-owned
subsidiary of Abraxas.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 19, 1996 except for paragraph 2 of Note 16, as to
which the date is March 21, 1996 with respect to the consolidated financial
statements of Abraxas Petroleum Corporation, to the use of our report dated
August 30, 1996 with respect to the statements of combined oil and gas revenues
and direct operating expenses of certain overriding royalty interests in the
Portilla Field acquired by Abraxas Petroleum Corporation, and to the use of our
report dated October 7, 1996 with respect to the financial statements of
Canadian Abraxas Petroleum Limited, in the Registration Statement (Form S-4) of
Abraxas Petroleum Corporation and Canadian Abraxas Petroleum Limited for the
registration of $215,000 of 11.5% Senior Notes due 2004, Series B.
/s/ Ernst & Young LLP
San Antonio, Texas
December 23, 1996
<PAGE>
EXHIBIT 23.2
December 23, 1996
Abraxas Petroleum Corporation
500 North Loop 1604 East, Suite 100
San Antonio, Texas 78232
Gentlemen:
We hereby consent to the incorporation in your Registration Statement on
Form S-4 of the references to us in the "Reserves Information" section on page
59 and in the "Experts" section on page 119, and to the use by reference of
information contained in our "Appraisal Report as of June 30, 1996 on Certain
Interests owned by Abraxas Petroleum Corporation," in our "Appraisal Report as
of June 30, 1996 on Certain Properties owned by Enserch Exploration, Inc. in the
Wamsutter Area prepared for Abraxas Petroleum Corporation," and in our
"Appraisal Report as of June 30, 1996 on Certain Interests owned by
Portilla-1996, L.P. in the Happy and Portilla Fields prepared for Abraxas
Petroleum Corporation."
Very truly yours,
/s/ DeGOLYER and MacNAUGHTON
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to the reference to our firm under the caption
"Business - Reserves Information" and "Experts" in the Registration Statement on
Form S-4 (the "Registration Statement") of Abraxas Petroleum Corporation and
Canadian Abraxas Petroleum Limited.
/s/ SPROULE ASSOCIATES LIMITED
Calgary, Alberta
December 23, 1996
<PAGE>
EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement on Form S-4 of Abraxas
Petroleum Corporation and Canadian Abraxas Petroleum Limited of our report on
Ensearch Exploration, Inc.'s Wamsutter Area Package dated June 26, 1996
appearing in the Prospectus, which is a part of such Registration Statement, and
to the reference to us under the headings "Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
December 23, 1996
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
To the Board of Directors of
CGGS Canadian Gas Gathering Systems Inc.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the Prospectus and the Registration
Statement.
/s/ KPMG
Chartered Accountants
Calgary, Canada
December 23, 1996
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Robert L. G. Watson and Chris Williford, and each
of them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign the Registration Statement on Form S-4 of
Abraxas Petroleum Corporation and Canadian Abraxas Petroleum Limited and any or
all amendments (including post-effective amendments) thereto and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the foregoing, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to
be done by virtue hereof.
Dated: December 23, 1996.
/s/ Franklin Burke
------------------
Franklin Burke
<PAGE>
EXHIBIT 24.2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Robert L. G. Watson and Chris Williford, and each
of them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign the Registration Statement on Form S-4 of
Abraxas Petroleum Corporation and Canadian Abraxas Petroleum Limited and any or
all amendments (including post-effective amendments) thereto and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the foregoing, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to
be done by virtue hereof.
Dated: December 23, 1996.
/s/ Harold D. Carter
--------------------
Harold D. Carter
<PAGE>
EXHIBIT 24.3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Robert L. G. Watson and Chris Williford, and each
of them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign the Registration Statement on Form S-4 of
Abraxas Petroleum Corporation and Canadian Abraxas Petroleum Limited and any or
all amendments (including post-effective amendments) thereto and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the foregoing, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to
be done by virtue hereof.
Dated: December 23, 1996.
/s/ Robert D. Gershen
---------------------
Robert D. Gershen
<PAGE>
EXHIBIT 24.4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Robert L. G. Watson and Chris Williford, and each
of them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign the Registration Statement on Form S-4 of
Abraxas Petroleum Corporation and Canadian Abraxas Petroleum Limited and any or
all amendments (including post-effective amendments) thereto and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the foregoing, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to
be done by virtue hereof.
Dated: December 23, 1996.
/s/ Paul A. Powell, Jr.
-----------------------
Paul A. Powell, Jr.
<PAGE>
EXHIBIT 24.5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Robert L. G. Watson and Chris Williford, and each
of them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign the Registration Statement on Form S-4 of
Abraxas Petroleum Corporation and Canadian Abraxas Petroleum Limited and any or
all amendments (including post-effective amendments) thereto and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the foregoing, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to
be done by virtue hereof.
Dated: December 23, 1996.
/s/ Richard M. Kleberg, III
---------------------------
Richard M. Kleberg, III
<PAGE>
EXHIBIT 24.6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Robert L. G. Watson and Chris Williford, and each
of them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign the Registration Statement on Form S-4 of
Abraxas Petroleum Corporation and Canadian Abraxas Petroleum Limited and any or
all amendments (including post-effective amendments) thereto and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the foregoing, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to
be done by virtue hereof.
Dated: December 23, 1996.
/s/ James C. Phelps
-------------------
James C. Phelps
<PAGE>
EXHIBIT 25.1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
---------------
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2)
---------------
IBJ SCHRODER BANK & TRUST COMPANY
(Exact name of trustee as specified in its charter)
New York 13-5375195
(Jurisdiction of incorporation (I.R.S. employer
or organization if not a U.S. national bank) identification No.)
One State Street, New York, New York 10004
(Address of principal executive offices) (Zip code)
IBJ SCHRODER BANK & TRUST COMPANY
One State Street
New York, New York 10004
(212) 858-2000
(Name, address and telephone number of agent for service)
ABRAXAS PETROLEUM CORPORATION
CANADIAN ABRAXAS PETROLEUM LIMITED
(Exact names of obligors as specified in its charter)
Delaware 74-2584033
Canada N/A
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
500 North Loop 1604 East, Suite 100
San Antonio, Texas 78232
(Address of principal executive offices) (Zip code)
11.5% Series B Senior Notes due 2004
--------------------
(Title of indenture securities)
<PAGE>
Item 1. General information
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
New York State Banking Department,
Two Rector Street, New York, New York
Federal Deposit Insurance Corporation, Washington, D.C.
Federal Reserve Bank of New York Second District,
33 Liberty Street, New York, New York
(b) Whether it is authorized to exercise corporate trust powers.
Yes
Item 2. Affiliations with the Obligors.
If the obligors are an affiliate of the trustee, describe each
such affiliation.
The obligors are not an affiliate of the trustee.
Item 13. .........Defaults by the Obligors.
(a) State whether there is or has been a default with respect
to the securities under this indenture. Explain the nature of
any such default.
None
<PAGE>
(b) If the trustee is a trustee under another indenture under
which any other securities, or certificates of interest or
participation in any other securities, of the obligors are
outstanding, or is trustee for more than one outstanding
series of securities under the indenture, state whether there
has been a default under any such indenture or series,
identify the indenture or series affected, and explain the
nature of any such default.
None
List of exhibits.
List below all exhibits filed as part of this statement of eligibility.
*1. A copy of the Charter of IBJ Schroder Bank & Trust Company as
amended to date. (See Exhibit 1A to Form T-1, Securities and
Exchange Commission File No. 22-18460).
*2. A copy of the Certificate of Authority of the trustee to
Commence Business (Included in Exhibit 1 above).
*3. A copy of the Authorization of the trustee to exercise
corporate trust powers, as amended to date (See Exhibit 4 to
Form T-1, Securities and Exchange Commission File No.
22-19146).
*4. A copy of the existing By-Laws of the trustee, as amended to
date (See Exhibit 4 to Form T-1, Securities and Exchange
Commission File No. 22-19146).
5. Not Applicable
6. The consent of United States institutional trustee required by
Section 321(b) of the Act.
7. A copy of the latest report of condition of the trustee
published pursuant to law or the requirements of its
supervising or examining authority.
* The Exhibits thus designated are incorporated herein by
reference as exhibits hereto. Following the description of
such Exhibits is a reference to the copy of the Exhibit
heretofore filed with the Securities and Exchange Commission,
to which there have been no amendments or changes.
NOTE
In answering any item in this Statement of Eligibility which relates to matters
peculiarly within the knowledge of the obligors and its directors or officers,
the trustee has relied upon information furnished to it by the obligors.
Inasmuch as this Form T-1 is filed prior to the ascertainment by the trustee of
all facts on which to base responsive answers to Item 2, the answer to said Item
is based on incomplete information.
Item 2, may, however, be considered as correct unless amended by an amendment to
this Form T-1.
Pursuant to General Instruction B, the trustee has responded to Items 1, 2 and
16 of this form since to the best knowledge of the trustee as indicated in Item
13, the obligors are not in default under any indenture under which the
applicant is trustee.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
trustee, IBJ Schroder Bank & Trust Company, a corporation organized and existing
under the laws of the State of New York, has duly caused this statement of
eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of New York, and State of New York, on the 23rd day
of December, 1996.
IBJ SCHRODER BANK & TRUST COMPANY
By: /s/ Barbara McCluskey
-------------------------
Barbara McCluskey
Vice President
<PAGE>
Exhibit 6
CONSENT OF TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture
Act of 1939, as amended, in connection with the issue by Abraxas Petroleum
Corporation and Canadian Abraxas Petroleum Limited, of its 11.5% Series B Senior
Notes due 2004, we hereby consent that reports of examinations by Federal,
State, Territorial, or District authorities may be furnished by such authorities
to the Securities and Exchange Commission upon request therefor.
IBJ SCHRODER BANK & TRUST COMPANY
By: /s/Barbara McCluskey
-------------------------
Barbara McCluskey
Vice President
Dated: December 23, 1996
<PAGE>
EXHIBIT 7
CONSOLIDATED REPORT OF CONDITION OF
IBJ SCHRODER BANK & TRUST COMPANY
of New York, New York
And Foreign and Domestic Subsidiaries
Report as of June 30, 1996
Dollar Amounts
in Thousands
ASSETS
Cash and balance due from depository institutions:
Noninterest-bearing balances and currency and coin ........$ 39,834
Interest-bearing balances....................................$ 236,748
Securities: Held to Maturity..................................$ 173,034
Available-for-sale..........................$ 35,882
Federal funds sold and securities purchased under
agreements to resell in domestic offices of the bank
and of its Edge and Agreement subsidiaries and in IBFs:
Federal Funds sold...........................................$ 36,968
Securities purchased under agreements to resell..............$ -0-
Loans and lease financing receivables:
Loans and leases, net of unearned income.......$ 1,668,191
LESS: Allowance for loan and lease losses......$ 54,288
LESS: Allocated transfer risk reserve..........$ -0-
Loans and leases, net of unearned income,
allowance, and reserve.......................................$ 1,613,903
Assets held in trading accounts..................................$ 500
Premises and fixed assets........................................$ 7,413
Other real estate owned..........................................$ 397
Investments in unconsolidated subsidiaries and
associated companies............................................$ -0-
Customers' liability to this bank on acceptances outstanding.....$ 223
Intangible assets................................................$ -0-
Other assets.....................................................$ 55,007
TOTAL ASSETS.....................................................$ 2,199,909
<PAGE>
LIABILITIES
Deposits:
In domestic offices..........................................$ 652,676
Noninterest-bearing ......................$ 278,082
Interest-bearing .........................$ 374,594
In foreign offices, Edge and Agreement
subsidiaries, and IBFs.......................................$ 893,475
Noninterest-bearing ......................$ 15,577
Interest-bearing .........................$ 877,898
Federal funds purchased and securities sold
under agreements to repurchase in domestic
offices of the bank and of its Edge and Agreement
subsidiaries, and in IBFs:
Federal Funds purchased......................................$ 212,000
Securities sold under agreements to repurchase...............$ -0-
Demand notes issued to the U.S. Treasury.........................$ 48,606
Trading Liabilities..............................................$ 293
Other borrowed money:
a) With original maturity of one year or less................$ 102,049
b) With original maturity of more than one year..............$ 3,000
Mortgage indebtedness and obligations under
capitalized leases...............................................$ -0-
Bank's liability on acceptances executed
and outstanding..................................................$ 223
Subordinated notes and debentures................................$ -0-
Other liabilities................................................$ 74,608
TOTAL LIABILITIES................................................$ 1,986,930
Limited life preferred stock and related surplus.................$ -0-
EQUITY CAPITAL
Perpetual preferred stock........................................$ -0-
Common Stock.....................................................$ 29,649
Surplus..........................................................$ 217,008
Undivided profits and capital reserves...........................$ (34,414)
Plus: Net unrealized gains (losses) on marketable
equity securities................................................$ 736
Cumulative foreign currency translation adjustments..............$ -0-
TOTAL EQUITY CAPITAL.............................................$ 212,979
TOTAL LIABILITIES AND EQUITY CAPITAL.............................$ 2,199,909
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> SEP-30-1996
<CASH> 10,084,062
<SECURITIES> 0
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0
457
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<NET-INCOME> (520,497)
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</TABLE>
