As filed with the Securities and Exchange Commission on January 9, 1998
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
(Exact name of registrant as specified in its charter)
Nevada 1331 74-2584033
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification Number)
incorporation or
organization)
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, (Name, Address, including zip
and telephone number, including code, and telephone number,
executive offices) including area, of agent
offices) for service)
Copies to:
Steven R. Jacobs Christine B. LaFollette
Cox & Smith Incorporated King & Spalding
112 E. Pecan Street, Suite 1800 1100 Louisiana, Suite 3300
San Antonio, Texas 78205 Houston, Texas 77002-5219
(210) 554-5500 (713) 751-3200
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective and all
other conditions to the Merger of a wholly-owned subsidiary of Abraxas Petroleum
Corporation ("Abraxas") with and into Vessels Energy, Inc. ("Vessels") pursuant
to the Agreement and Plan of Merger filed as Exhibit 2.1 hereto (the "Merger
Agreement") have been satisfied or waived.
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.
If this form is filed to register additional securities for an offering
pursuant to rule 462 (b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering
If this form is a post-effective amendment filed pursuant to rule 462
(d) under the Securities act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering
<PAGE>
CALCULATION OF REGISTRATION FEE
Title of each class Proposed Maximum Proposed Maximum Amount of
of Securities to be Amount to be Offering Price Aggregate Registration
Registered Registered Per Share Offering Price Fee
- ------------------- -------------- ------------- --------------- -----------
Common Stock, par 1,900,000 $14.19 (2) $26,961,000(3) $7,954 (4)
value $.01 per share shares (1)
(1) The number of shares of common stock, par value $.01 per share, of Abraxas
("Abraxas Common Stock") to be registered has been determined based on the
estimated maximum number of shares of Abraxas Common Stock to be issued in
exchange for shares of common stock, par value $.10 per share, of Vessels
("Vessels Common Stock"), in the merger of a wholly-owned subsidiary of Abraxas
with and into Vessels (the "Merger") and upon exercise of certain warrants of
Vessels following the Merger, all as contemplated by the Merger Agreement.
(2) Estimated pursuant to Rule 457(f) under the Securities Act of 1933 (the
"Securities Act"), based on the market value of $14.19 for Abraxas Common Stock
(which is the average of the bid and asked prices of shares of Abraxas Common
Stock on the Nasdaq National Market on January 7, 1998).
(3) Estimated pursuant to Rule 457(f) under the Securities Act based on the
product of the estimated maximum offering price per share and the estimated
number of shares of Abraxas Common Stock to be issued in connection with the
Merger.
(4) The Registrant previously paid $5,600 in connection with the filing of the
preliminary Proxy Statement-Prospectus contained in this Registration Statement.
The amount of $2,354, the difference between the Registration Fee referenced
above and $5,600, is being paid concurrently with the filing of this
Registration Statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT WILL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A)
MAY DETERMINE.
ii
<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 FROM 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 Cove Pages Outside Front Cover Page;
of Prospectus Outside Back Cover Page;
Available Information;
Table of Contents
3. Risk Factors, Ratio of Earnings to Summary; Risk Factors; Selected
Fixed Charges and Other Information Consolidated Financial
Information; Unaudited Pro
Forma Financial Information
4. Terms of the Transaction Outside Front Cover Page;
Summary; The Merger; Description
of Abraxas Capital Stock;
Certain Federal Income Tax
Consequences; Comparison of
Rights of Stockholders of the
Company and Stockholders of
Vessels; Certain Differences
Between Nevada and Delaware
Corporate Laws
5. Pro Forma Financial Information Unaudited Pro Forma Financial
Information
6. Material Contacts with the Company Summary; The Merger
Being Acquired
7. Additional Information Required for Inapplicable
Reoffering by Persons and Parties Deemed
to be Underwriters
8. Interests of Named Experts and Counsel Legal Matters; Experts
9. Disclosure of Commission Position on Inapplicable
Indemnification for Securities Act
Liabilities
10. Information with Respect to S-3 Inapplicable
Registrants
11. Incorporation of Certain Information Incorporation of Certain
by Reference Documents by Reference
12. Information with Respect to S-2 or Inapplicable
S-3 Registrants
13. Incorporation of Certain Information Inapplicable
by Reference
14. Information with Respect to Registrants Summary; Business of Abraxas;
Other than S-3 or S-2 Registrants Consolidated Financial
Statements of Abraxas;
Selected Historical Financial
Data of Abraxas; Unaudited
Pro Forma Financial Information;
Abraxas Management's Discussion
and Analysis of Financial
Condition and Results of
Operation; Financial Statements
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<PAGE>
15. Information with Respect to S-3 Inapplicable
Companies
16. Information with Respect to S-2 Inapplicable
or S-3 Companies
17. Information with Respect to Companies Summary; Business of Vessels;
Other than S-2 or S-3 Companies Selected Historical Financial
Data of Vessels; Unaudited Pro
Forma Financial Information;
Vessels Management's Discussion
and Analysis of Financial
Condition and Results of
Operation; Financial Statements
18. Information if Proxies, Consents or Front Cover Page; Summary; The
Authorizations are to be Solicited Special Meeting; Appraisal
Rights; Interests of Certain
Persons in the Merger; Security
Ownership of Certain Beneficial
Owners and Management;
Management of Abraxas After the
Merger; Certain Transactions
19. Information if Proxies, Consents or Inapplicable
Authorizations are not to be Solicited
or in an Exchange Offer
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<PAGE>
ABRAXAS PETROLEUM CORPORATION
500 North Loop 1604 East, Suite 100
San Antonio, Texas 78232
January 9, 1998
Dear Stockholders:
You are invited to attend the Special Meeting of Stockholders of
Abraxas Petroleum Corporation ("Abraxas") to be held on Friday, February 13,
1998, at 9:00 a.m., Central Time, at Abraxas' offices, 500 North Loop 1604 East,
Suite 100, San Antonio, Texas 78232 (including any postponement or adjournment
thereof, the "Special Meeting").
At the Special Meeting, you will be asked to consider and vote upon a
proposal to approve the merger (the "Merger") of a wholly-owned subsidiary of
Abraxas with and into Vessels Energy, Inc. ("Vessels") and the issuance (the
"Share Issuance") of a total of 1,900,000 shares of Common Stock, par value $.01
per share, of Abraxas ("Abraxas Common Stock") in connection with the Merger.
The Merger is provided for in an Agreement and Plan of Merger dated as
of November 12, 1997 (the "Merger Agreement") by and among Abraxas, a
wholly-owned subsidiary of Abraxas and Vessels. As a result of the Merger, each
outstanding share of Common Stock, par value $.10 per share, of Vessels
("Vessels Common Stock") will be converted into the right to receive a number of
shares of Abraxas Common Stock equal to the sum of approximately 22.8 shares of
Abraxas Common Stock plus approximately 29.98 additional shares to be issued by
Abraxas pursuant to a formula set forth in the Merger Agreement and described in
the accompanying Proxy Statement-Prospectus.
Abraxas' Board of Directors has determined that the Merger is fair and
in the best interests of Abraxas and its stockholders and has unanimously
approved the Merger and the Share Issuance.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF
ABRAXAS VOTE "FOR" THE APPROVAL OF THE MERGER AND THE SHARE ISSUANCE.
Please read carefully the accompanying Notice of Special Meeting of
Stockholders and Proxy Statement-Prospectus for additional information regarding
the Merger and the Share Issuance. Whether or not you plan to attend the Special
Meeting, please complete, sign, and date the enclosed proxy card and return it
promptly in the enclosed postage prepaid envelope. If you attend the Special
Meeting, you may vote in person if you wish, even though you have previously
returned your proxy card.
Sincerely,
Robert L. G. Watson
Chairman of the Board,
Chief Executive Officer
and President
<PAGE>
ABRAXAS PETROLEUM CORPORATION
500 North Loop 1604 East, Suite 100
San Antonio, Texas 78232
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON FEBRUARY 13, 1998
To the Stockholders:
Notice is hereby given that a Special Meeting of Stockholders of
Abraxas Petroleum Corporation ("Abraxas") is to be held on Friday, February 13,
1998, at 9:00 a.m., Central Time, at Abraxas' offices, 500 North Loop 1604 East,
Suite 100, San Antonio, Texas 78232(including any postponement or adjournment
thereof, the "Special Meeting") for the following purpose:
To consider and vote upon the merger (the "Merger") of a subsidiary of
Abraxas ("Sub") with and into Vessels Energy, Inc.("Vessels") pursuant to an
Agreement and Plan of Merger dated as of November 12, 1997 (the "Merger
Agreement") by and among Abraxas, Sub and Vessels and the issuance of a total of
1,900,000 shares of Common Stock, par value $0.01 per share, of Abraxas in
connection with the Merger.
Please read the accompanying Proxy Statement-Prospectus carefully. The
Proxy Statement-Prospectus and the Annexes thereto form a part of this Notice.
Only stockholders of record at the close of business on January 6, 1998
are entitled to notice of and to vote at the Special Meeting.
By Order of the Board of Directors
Stephen T. Wendel,
Secretary
San Antonio, Texas
January 9, 1998
<PAGE>
PROXY STATEMENT
OF
ABRAXAS PETROLEUM CORPORATION
PROSPECTUS OF ABRAXAS PETROLEUM CORPORATION
This Proxy Statement-Prospectus is furnished to holders of shares of
common stock, par value $0.01 per share ("Abraxas Common Stock"), of Abraxas
Petroleum Corporation, a Nevada corporation ("Abraxas" or the "Company"), in
connection with the solicitation by and on behalf of the Board of Directors of
Abraxas (the "Abraxas Board") of proxies for use at a Special Meeting of
Stockholders of Abraxas (the "Special Meeting") to be held at Abraxas' offices,
500 North Loop 1604 East, Suite 100, San Antonio, Texas, 78232 at 9:00 a.m.,
Central Time, on February 13, 1998. This Proxy Statement-Prospectus, the Notice
of Special Meeting of Stockholders, and the accompanying proxy card are first
being sent to holders of Abraxas Common Stock on or about January 13, 1998.
At the Special Meeting, holders of record of Abraxas Common Stock as of
the close of business on January 6, 1998 (the "Record Date") will consider and
vote upon a proposal to approve the merger (the "Merger") of a wholly-owned
subsidiary of Abraxas ("Sub") with and into Vessels Energy, Inc. ("Vessels") and
the issuance (the "Share Issuance") of a total of 1,900,000 shares of Abraxas
Common Stock in connection with the Merger. The Merger will result in Vessels
becoming a wholly-owned subsidiary of Abraxas.
This Proxy Statement-Prospectus also constitutes the Prospectus of
Abraxas included in a Registration Statement on Form S-4 (together with any
amendments thereto, the "Registration Statement") filed with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the issuance of up to 1,900,000
shares of Abraxas Common Stock in connection with the Merger. All information
concerning Abraxas contained in this Proxy Statement-Prospectus has been
furnished by Abraxas and all information concerning Vessels contained in this
Proxy Statement-Prospectus has been furnished by Vessels.
At the effective time of the Merger (the "Effective Time"), each then
outstanding share of Common Stock, par value $.10 per share, of Vessels
("Vessels Common Stock") (other than shares held by stockholders of Vessels, if
any, who properly exercised their appraisal rights under Delaware law) will be
converted into the right to receive approximately 30.3 shares of Abraxas Common
Stock, of which approximately 7.5 shares of Abraxas Common Stock will be in
consideration of the Projected Provisional Payment (as defined herein). Of the
aggregate of approximately 1,023,543 shares of Abraxas Common Stock issued
pursuant to the Projected Provisional Payment, 25%, or an aggregate of
approximately 255,886 shares of Abraxas Common Stock, will be issued at the
Effective Time and the remainder will be issued and deposited into an escrow
account (the "Provisional Payment Escrow"). On April 30, 1999 (the "Provisional
Payment Date"), Abraxas will release that number of shares of Abraxas Common
Stock from the Provisional Payment Escrow as are necessary to pay the
Provisional Payment (as defined herein) in full. In the event that the
Provisional Payment is greater than the Projected Provisional Payment, Abraxas
will release all of the shares deposited into the Provisional Payment Escrow and
will issue any additional shares necessary to pay the Provisional Payment. In
the event that the Provisional Payment is less than the Projected Provisional
Payment, an appropriate number of shares of Abraxas Common Stock will be
released from the Provisional Payment Escrow to the Vessels stockholders with
the remainder being returned to Abraxas. Pursuant to the terms of the Merger
Agreement, if the amount of the Provisional Payment is the same as the amount of
the Projected Provisional Payment, Abraxas is required to issue a total of
approximately 1,801,949 shares of Abraxas Common Stock in the Merger. Abraxas is
seeking the approval of its stockholders to issue a total of 1,900,000 shares of
Abraxas Common Stock in the Merger in order to cover any additional shares
Abraxas would be required to issue if the Provisional Payment is greater than
the Projected Provisional Payment as well as to reserve a total of 12,190 shares
of Abraxas Common Stock for issuance pursuant to the exercise of certain
warrants to purchase Vessels Common Stock which, upon consummation of the
Merger, will become warrants to purchase Abraxas Common Stock. See "Description
of Abraxas Common Stock - Warrants."
<PAGE>
For example, pursuant to the terms of the Merger Agreement, Abraxas is
required to issue to the Vessels stockholders a total of approximately 1,023,543
shares of Abraxas Common Stock in consideration of the Projected Provisional
Payment, of which a total of approximately 255,886 will be delivered at the
Effective Time directly to the Vessels stockholders and 767,657 will be
deposited into the Provisional Payment Escrow. If the Provisional Payment
entitled the Vessels stockholders to an aggregate of 1,000,000 shares of Abraxas
Common Stock, 744,114 shares of Abraxas Common Stock which had been deposited
into the Provisional Payment Escrow would be released to the Vessels
stockholders and 23,543 shares would be returned to Abraxas.
SEE "RISK FACTORS" BEGINNING ON PAGE 23 HEREOF FOR A DISCUSSION OF
CERTAIN RISKS THAT YOU SHOULD CONSIDER IN DETERMINING HOW TO VOTE UPON THE
MATTERS DESCRIBED ABOVE.
THE SHARES OF ABRAXAS COMMON STOCK OFFERED HEREBY HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT-PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Proxy Statement-Prospectus is January 9, 1998.
2
<PAGE>
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT-PROSPECTUS IN
CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE
HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY ABRAXAS, VESSELS, OR ANY OTHER PERSON.
THIS PROXY STATEMENT-PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES, OR THE SOLICITATION OF A PROXY,
IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH
OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT-PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF ABRAXAS OR VESSELS SINCE THE DATE HEREOF OR THAT THE INFORMATION
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
AVAILABLE INFORMATION
Abraxas is subject to the information and reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files periodic reports, proxy statements, and other
information with the Commission. Such reports, proxy statements, and other
information may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549; 7 World Trade Center, Suite 1300, New York, New York 10048; and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
The Commission also maintains a Website, located at http://www.sec.gov, that
contains reports, proxy statements, and other information regarding registrants
that file electronically with the Commission. Copies of such reports, proxy
statements, and other information also can be obtained by mail from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates.
Abraxas has filed with the Commission a Registration Statement under
the Securities Act on Form S-4 with respect to the secutities offered hereby. As
permitted under the Securities Act and the Exchange Act, this Proxy
Statement-Prospectus does not contain all the information set forth in the
Registration Statement. Such additional information can be inspected and copied
or obtained from the Commission in the manner described above. Statements
contained in this Proxy Statement-Prospectus as to the contents of any other
document referred to herein are not necessarily complete, and each such
statement is qualified in all respects by reference to the copy of such other
document filed as an exhibit to the Registration Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission
(Commission file number 0-19118) by Abraxas pursuant to the Exchange Act are
incorporated by reference in this Proxy Statement - Prospectus:
1. Abraxas' Annual Report on Form 10-K for the year ended December 31,
1996 (which incorporates by reference certain information from Abraxas' Proxy
Statement relating to the 1997 Annual Meeting of Stockholders);
2. Abraxas' Quarterly Reports on Form 10-Q for the quarters ended March
31, 1997, June 30, 1997 and September 30, 1997.
3. Abraxas' Current Report on Form 8-K dated June 27, 1997; and
4. The description of Abraxas Common Stock set forth in the
registration statements filed pursuant to Section 12 of the Exchange Act
including any amendment or report filed for purposes of updating any such
description.
3
<PAGE>
All documents filed by Abraxas pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Proxy Statement - Prospectus
and prior to the date of the Special Meeting shall be deemed to be incorporated
by reference in this Proxy Statement - Prospectus and to be a part hereof from
the dates of filing such documents or reports. Any statement contained herein or
in a document incorporated or deemed to be incorporated herein by reference
shall be deemed to be modified or superseded for purposes of this Proxy
Statement - Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which is also incorporated or deemed to be
incorporated herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Proxy Statement - Prospectus.
THIS PROXY STATEMENT-PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WITH RESPECT TO ABRAXAS THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH.
ABRAXAS HEREBY UNDERTAKES TO PROVIDE WITHOUT CHARGE TO EACH PERSON, INCLUDING
ANY BENEFICIAL OWNER, TO WHOM A COPY OF THIS PROXY STATEMENT-PROSPECTUS HAS BEEN
DELIVERED, ON WRITTEN OR ORAL REQUEST OF ANY SUCH PERSON, A COPY OF ANY AND ALL
OF THE DOCUMENTS REFERRED TO ABOVE THAT HAVE BEEN OR MAY BE INCORPORATED INTO
THIS PROXY STATEMENT-PROSPECTUS BY REFERENCE, OTHER THAN EXHIBITS TO SUCH
DOCUMENTS (UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO
SUCH DOCUMENTS). DOCUMENTS RELATING TO ABRAXAS ARE AVAILABLE UPON REQUEST FROM
ABRAXAS PETROLEUM CORPORATION, 500 NORTH LOOP 1604 EAST, SUITE 100, SAN ANTONIO,
TEXAS 78232, ATTENTION: EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER,
TELEPHONE NUMBER (210) 490-4788. IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY REQUEST SHOULD BE RECEIVED BY FEBRUARY 1, 1998.
NOTE REGARDING FORWARD-LOOKING INFORMATION
This Proxy Statement-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 Company's
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
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it 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 Company's expectations ("Cautionary Statements") are
disclosed under "Risk Factors" and elsewhere in this Proxy Statement-Prospectus
including, without limitation, in conjunction with the forward-looking
statements included in this Proxy Statement-Prospectus. All subsequent written
and oral forward-looking statements attributable to the Company, or persons
acting on behalf of the Company, are expressly qualified in their entirety by
the Cautionary Statements.
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<PAGE>
TABLE OF CONTENTS
SUMMARY OF PROXY STATEMENT-PROSPECTUS........................................9
Introduction........................................................9
The Parties.........................................................9
Background of and Reasons for the Merger...........................10
The Special Meeting................................................11
The Merger.........................................................12
Risk Factors.......................................................15
Market Price Data..................................................15
Summary Historical Financial Information of Vessels................17
Summary Historical Financial Information of Abraxas................18
Summary Historical and Pro Forma Reserve
and Operating Data..........................................20
Selected Per Share Financial Information...........................21
RISK FACTORS................................................................23
Merger Considerations..............................................23
Integration of Operations; Foreign Operations......................23
High Degree of Leverage............................................23
Net Losses.........................................................24
Industry Conditions; Impact on Company's Profitability.............24
Restrictions Imposed by Terms of the Company's Indebtedness........25
Substantial Capital Requirements...................................25
Future Availability of Natural Gas Supply..........................26
Operating Hazards; Uninsured Risks.................................26
Competition........................................................26
Reliance on Estimates of Proved Reserves and Future Net Revenue....27
Certain Business Risks.............................................27
Depletion of Reserves..............................................28
Government Regulation..............................................28
Dependence on Key Personnel........................................28
Limitations on the Availability of the Company's
Net Operating Loss Carryforwards..............................28
THE SPECIAL MEETING.........................................................30
General............................................................30
Voting at the Special Meeting......................................30
Proxies; Revocation................................................30
THE MERGER 32
Background of the Merger...........................................32
Abraxas' Reasons for the Merger....................................32
The Merger Agreement...............................................33
Restrictions on Resales by Affiliates..............................38
Escrow of Shares...................................................39
Board Representation and Voting Agreement..........................39
Accounting Treatment...............................................40
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.....................................40
INTERESTS OF CERTAIN PERSONS IN THE MERGER..................................43
APPRAISAL RIGHTS............................................................43
CAPITALIZATION..............................................................44
UNAUDITED PRO FORMA FINANCIAL INFORMATION...................................45
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996.......................................47
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997.......................48
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<PAGE>
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET.................................49
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION..........................50
SELECTED HISTORICAL FINANCIAL DATA OF VESSELS...............................52
VESSELS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................53
Results of Operations..............................................53
Comparison of Nine Months Ended September 30, 1997 to
Nine Months Ended September 30, 1996..........................53
Comparison of Year Ended December 31, 1996 to Year
Ended December 31, 1995.......................................54
Comparison of Year Ended December 31, 1995 to Year
Ended December 31, 1994.......................................55
Liquidity and Capital Resources....................................56
SELECTED HISTORICAL FINANCIAL DATA OF ABRAXAS...............................59
ABRAXAS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................61
Results of Operations..............................................61
Comparison of Nine Months Ended September 30, 1997 to
Nine Months Ended September 30, 1996..........................61
Comparison of Year Ended December 31, 1996 to Year
Ended December 31, 1995.......................................61
Comparison of Year Ended December 31, 1995 to Year
Ended December 31, 1994.......................................63
Liquidity and Capital Resources....................................64
BUSINESS OF ABRAXAS.........................................................70
General............................................................70
Recent Developments................................................70
Primary Operating Areas............................................70
Texas..............................................................70
Southwestern Wyoming...............................................72
Western Canada.....................................................72
Exploration Opportunities..........................................74
Exploratory and Developmental Acreage..............................75
Productive Wells...................................................76
Reserves Information...............................................76
Crude Oil, NGLs and Natural Gas Production and Sales Prices........78
Drilling Activities................................................78
Markets and Customers..............................................78
Competition........................................................79
Regulatory Matters.................................................80
Title to Properties................................................85
Employees..........................................................85
Office Facilities..................................................85
Other Properties...................................................85
Litigation.........................................................86
BUSINESS OF VESSELS.........................................................87
General............................................................87
Primary Operating Areas............................................87
Western Colorado...................................................87
Southwestern Wyoming...............................................87
Exploration Opportunities..........................................87
Exploratory and Development Acreage................................88
Productive Wells...................................................88
Reserves Information...............................................88
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<PAGE>
Drilling Activities................................................90
Markets and Customers..............................................90
Competition........................................................91
Regulatory Matters.................................................91
Title to Properties................................................91
Employees..........................................................92
Office Facilities..................................................92
Litigation.........................................................92
MANAGEMENT OF ABRAXAS AFTER THE MERGER......................................93
Directors and Executive Officers...................................93
Executive Compensation.............................................95
CERTAIN TRANSACTIONS.......................................................100
Abraxas...........................................................101
Vessels...........................................................101
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............104
Abraxas...........................................................106
Vessels...........................................................106
DESCRIPTION OF ABRAXAS CAPITAL STOCK.......................................106
Common Stock......................................................106
Preferred Stock...................................................106
Warrants..........................................................106
Registration Rights...............................................107
Anti-takeover Effects of Certain Provisions of the Articles
of Incorporation and Bylaws....................................108
Stockholder Rights Plan...........................................108
Anti-takeover Statutes............................................109
Restrictions on Certain Combinations Between Nevada Resident
Corporations and Interested Stockholders.....................109
Nevada Control Share Act..........................................109
COMPARISON OF RIGHTS OF STOCKHOLDERS OF THE COMPANY
AND STOCKHOLDERS OF VESSELS.......................................110
Number of Directors...............................................110
Monetary Liability of Directors...................................111
Removal of Directors..............................................111
Amendment of Articles/Certificate of Incorporation................111
CERTAIN DIFFERENCES BETWEEN NEVADA AND
DELAWARE CORPORATE LAWS...........................................112
Amendment of Articles/Certificate of Incorporation................112
Cumulative Voting.................................................112
Preemptive Rights.................................................112
Classified Board..................................................112
Indemnification of Directors and Officers; Insurance..............113
Limitation on Director Liability..................................113
Removal of Directors..............................................113
Inspection of Books and Records...................................114
Right to Call Special Meetings of Stockholders....................114
Action Without a Meeting..........................................114
Mergers, Sales of Assets and Other Transactions...................114
Provisions Affecting Business Combinations........................115
Appraisal Rights..................................................116
Dividends and Stock Repurchase and Redemption.....................117
Dissolution.......................................................117
LEGAL MATTERS..............................................................118
EXPERTS....................................................................118
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STOCKHOLDERS' PROPOSALS....................................................118
GLOSSARY OF TERMS..........................................................119
ANNEX I AGREEMENT AND PLAN OF MERGER
ANNEX II SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
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SUMMARY OF PROXY STATEMENT-PROSPECTUS
The following Summary is qualified in its entirety by the more detailed
information contained in this Proxy Statement-Prospectus, its Annexes and the
other documents incorporated by reference or otherwise referred to herein.
Certain capitalized terms used in this summary are defined elsewhere in this
Proxy Statement-Prospectus. See "Glossary of Terms." Unless otherwise indicated,
all calculations of Abraxas Common Stock upon completion of the Merger set forth
in this Proxy Statement-Prospectus assume that no stockholder of Vessels
exercises appraisal rights and that an aggregate of 1,801,949 shares of Abraxas
Common Stock are issued to Vessels stockholders. 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 Merger and the sale by Vessels of the DJ Basin Properties (as defined
herein).
Introduction
At the Special Meeting, the stockholders of Abraxas will be asked to
consider and vote upon the Merger and the Share Issuance. Each share of Vessels
Common Stock outstanding immediately prior to the Merger (other than shares held
by stockholders of Vessels, if any, who properly exercise their appraisal rights
under Delaware law) will be converted into the right to receive approximately
30.3 shares of Abraxas Common Stock, of which 7.5 shares of Abraxas Common Stock
will be in consideration of the Projected Provisional Payment. A copy of the
Agreement and Plan of Merger dated November 12, 1997 (the "Merger Agreement") by
and among Abraxas, Sub and Vessels is attached as Annex I hereto and is
incorporated herein by reference. See "The Merger."
The Parties
Abraxas and Sub. Abraxas 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 Merger, the Company's principal areas of
operation will be Texas, western Canada, northwestern Colorado and southwestern
Wyoming and the Company will own interests in 1,041,676 gross acres (547,942 net
acres) and 754 gross wells (432.7 net wells), 544 of which will be operated by
the Company. The Company will also own varying interests in 20 natural gas
processing plants or compression facilities. On a pro forma basis, at December
31, 1996, the Company had total proved reserves of 52,739 MBOE (66% natural
gas), of which 85.68% was proved developed with a PV-10 of $463.0 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 Merger, the Company will have completed 18 acquisitions of producing
properties totaling 56,309 MBOE of proved reserves at an average net acquisition
cost of $4.20 per BOE since January 1, 1991. From January 1, 1991, on an
historical basis, to September 30, 1997, on a pro forma basis, the Company's
total proved reserves increased from 889 MBOE to 52,739 MBOE; aggregate PV-10
increased from $11.9 million, on an historical basis, to $463.0 million, on a
pro forma basis; and average net daily production increased from 0.141 MBOE per
day, on an historical basis, to 16.4 MBOE per day, on a pro forma basis. As of
September 30, 1997, the Company had net natural gas processing capacity of 128
MMcf per day. From the year ended December 31, 1991, on an historical basis, to
the nine months ended September 30, 1997, on a pro forma basis, the Company's
direct operating expenses per BOE decreased from $6.30 per BOE to $2.71 per BOE
and G&A expenses per BOE decreased from $5.39 per BOE to $0.80 per BOE.
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The Company was founded in 1977 by Robert L.G. Watson, the Company's
Chairman of the Board, President and Chief Executive Officer. 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.
Sub is a wholly-owned subsidiary of Abraxas incorporated in November
1997 in the State of Delaware solely for the purpose of effecting the Merger.
Vessels. Vessels is an independent energy company engaged in the
acquisition, exploration, development, production and gathering of natural gas
and crude oil. From its predecessor's inception in the 1970's until the spring
of 1997, Vessels' core operations were in the Denver-Julesburg Basin in
northeast Colorado (the "DJ Basin"). Beginning in 1993, Vessels began to slowly
diversify its production base outside the DJ Basin by the selective acquisition
of mineral leases and producing properties in other Rocky Mountain basins.
Because of the growth potential of its other properties and a more favorable
acquisition market outside the DJ Basin, Vessels elected, in late 1996, to sell
its DJ Basin properties (the "DJ Basin Properties") and focus its efforts on
higher potential growth opportunities elsewhere. In April 1997, Vessels
completed the sale for cash of its DJ Basin producing, gathering, processing and
marketing business. Sales proceeds were used to extinguish Vessels' debt to its
lenders at such time and fund an aggressive 1997 capital expenditure program
primarily focused on drilling in western Colorado.
Vessels owns interests in 73 producing wells and 159,600 gross (139,100
net) acres of mineral leases. Vessels operates all wells in which it has an
interest, as well as 100 miles of gas gathering pipelines.
Vessels employs 27 persons full-time. Its principal offices are located
in Suite 2000, 1050 Seventeenth Street, Denver, Colorado 80265, and its
telephone number is (303) 825-3500
Background of and Reasons for the Merger
Vessels, in 1996, coincident with the pending divestiture of the DJ
Basin Properties, began to review strategic alternatives that would expose its
stockholders to growth potential in the hydrocarbon extraction sector. To assist
in reviewing strategic alternatives, Vessels engaged Weisser Johnson & Co., an
investment banking firm located in New York and Houston ("Weisser Johnson"), in
April 1997. After an extensive review of Vessels and industry opportunities,
Vessels determined that a stock for stock, tax-free exchange would be the most
practical manner to enhance stockholder value.
Since January 1, 1991, Abraxas' principal means of growth has been
through the acquisition and subsequent development and exploitation of producing
properties and related assets. Abraxas 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.
Between April 1997 and May 1997, Weisser Johnson worked with Vessels to
pursue a stock merger and contacted several potential merger candidates. One of
these candidates was Abraxas, which learned of Vessels' interest in a stock
merger through discussions with Weisser Johnson in April 1997.
On May 30, 1997, Robert L. G. Watson, President of Abraxas, met with W.
M. Neumann, President and CEO of Vessels, and Scott Johnson, a partner of
Weisser Johnson, to discuss the nature of Abraxas' and Vessels' business and
explore the strategic value of a merger.
Shortly thereafter, Mr. Watson advised Mr. Johnson that based on the
earlier discussions, Abraxas would appreciate further and more in-depth data
about Vessels and expressed a willingness to convey similar information about
Abraxas.
After execution of a confidentiality agreement, representatives of
Vessels and Abraxas met in San Antonio on June 18, 1997 for the further exchange
of information.
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Following the meeting on June 18, 1997, Frank Weisser, a partner in
Weisser Johnson, advised Mr. Watson of Vessels' interests in furthering
conversations regarding a merger. As a result, on July 3, 1997 Abraxas forwarded
a proposal for a transaction structure. After further discussion of the
transaction structure, Abraxas forwarded a proposed letter of intent regarding a
merger and after further negotiation, on August 19, 1997, the parties entered
into a letter of intent providing for the conducting of due diligence and
negotiation of a definitive merger agreement.
Abraxas' review of Vessels' business indicated that ownership of
Vessels' properties would be consistent with Abraxas' disciplined acquisition
strategy.
Vessels' review of Abraxas' business and of the proposed merger steps
indicated that Vessels' objectives of diversifying project risk while retaining
some exposure to its properties' growth potential would be efficiently
accomplished through the merger.
On November 12, 1997, the Merger Agreement was executed by the parties.
The Special Meeting
Date, Time and Place. The Special Meeting will be held on February 13,
1998 at 9:00 a.m., local time, at Abraxas' offices, 500 North Loop 1604 East,
Suite 100, San Antonio, Texas 78232.
Purpose. The purpose of the Special Meeting is for Abraxas'
stockholders to consider and vote upon a proposal to approve the Merger and the
Share Issuance. See "The Special Meeting."
Abraxas' stockholders must approve the Share Issuance in order to
comply with the requirements of the Nasdaq National Market. Under the Nasdaq
National Market's stockholder approval policy, stockholder approval generally is
required prior to the issuance of securities when common stock or securities
convertible into common stock are to be issued in any transaction or series of
related transactions if (i) upon issuance the common stock will have voting
power equal to or in excess of 20% of the voting power outstanding before the
issuance of such stock or convertible securities or (ii) the number of shares of
common stock to be issued will be equal to or in excess of 20% of the number of
shares of common stock outstanding before such issuance.
Record Date; Stockholders Entitled to Vote. Holders of record of shares
of Abraxas Common Stock at the close of business on January 6, 1998 (the "Record
Date") will be entitled to notice of and to vote at the Special Meeting. At the
close of business on the Record Date, 6,422,540 shares of Abraxas Common Stock
were issued and outstanding. See "The Special Meeting."
Required Vote. The affirmative vote of the holders of a majority of the
outstanding shares of Abraxas Common Stock is required to approve the Merger and
the Share Issuance. Each share of Abraxas Common Stock is entitled to one vote
in connection with the approval of the Merger and the Share Issuance. As of the
Record Date, Abraxas' directors and executive officers exercised voting power,
directly and indirectly, over an aggregate of approximately 646,586 shares of
Abraxas Common Stock or approximately 10.07% of the outstanding shares of
Abraxas Common Stock. Abraxas' directors and executive officers have agreed to
vote their shares of Abraxas Common Stock in favor of the Merger and the Share
Issuance. See "The Special Meeting - Voting at the Special Meeting" and "The
Merger - Board Representation and Voting Agreement."
The affirmative vote of the holders of approximately 71.0% of the
outstanding shares of Vessels Common Stock is required to approve the Merger.
Each share of Vessels Common Stock is entitled to one vote in connection with
the approval of the Merger. The record date to determine holders of Vessels
Common Stock entitled to vote on the Merger is January 6, 1998. On that date,
34,136.24 shares of Vessels Common Stock were outstanding, and Vessels'
directors, executive officers and their affiliates exercised voting power,
directly or indirectly, over an aggregate of approximately 29,979 shares of
Vessels Common Stock or approximately 88% of the outstanding shares of Vessels
Common Stock. Vessels' directors and executive officers have not agreed to vote
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their shares of Vessels Common Stock in favor of the Merger. See "The Merger
Conditions to the Merger."
Revocation of Proxies. Any proxy given pursuant to this solicitation
may be revoked by the person giving it at any time before the proxy is voted at
the Special Meeting. A proxy may be revoked by filing with the Secretary of
Abraxas prior to the voting of the proxy either a written instrument revoking
the proxy or an executed proxy bearing a later date, or by voting in person at
the Special Meeting. Attendance at the Special Meeting will not, in itself,
constitute the revocation of a proxy. See "The Special Meeting - Proxies;
Revocation."
The Merger
General. On the terms and subject to the conditions set forth in the
Merger Agreement, Sub will be merged with and into Vessels, with Vessels being
the surviving corporation in the Merger. At the Effective Time, each then
outstanding share of common stock of Sub will be converted into one share of
Vessels, which will thereby become a wholly-owned subsidiary of Abraxas.
Conversion of Vessels Shares. At the Effective Time of the Merger, each
then outstanding share of Vessels Common Stock (other than shares held by
stockholders of Vessels, if any, who properly exercised their appraisal rights
under Delaware law) will be converted into the right to receive approximately
22.8 shares of Abraxas Common Stock plus a number of shares of Abraxas Common
Stock equal to a fraction, the numerator of which is Vessels' Non-PDP/PDNP
EBITDX (as defined herein), which is equal to $4,364,415, times .80 times 5.33
minus the amount payable by Vessels to Weisser Johnson on April 30, 1999, and
the denominator of which is $18.00 (the "Projected Provisional Payment"). The
Projected Provisional Payment entitles the Vessels stockholders to an aggregate
of approximately 1,023,543 shares of Abraxas Common Stock or approximately 29.98
shares of Abraxas Common Stock for each share of Vessels Common Stock. Of the
shares of Abraxas Common Stock issued pursuant to the Projected Provisional
Payment, 25%, or an aggregate of approximately 255,886 shares of Abraxas Common
Stock (or approximately 7.5 shares of Abraxas Common Stock for each share of
Vessels Common Stock), will be issued at the Effective Time and the remainder
will be issued and deposited into the Provisional Payment Escrow. On the
Provisional Payment Date, Abraxas will release that number of shares of Abraxas
Common Stock from the Provisional Payment Escrow as are necessary to pay the
Provisional Payment in full. In the event that the Provisional Payment is
greater than the Projected Provisional Payment, Abraxas will release all of the
shares deposited into the Provisional Payment Escrow and will issue any
additional shares necessary to make the Provisional Payment. In the event that
the Provisional Payment is less than the Projected Provisional Payment, an
appropriate number of shares of Abraxas Common Stock will be released to the
Vessels stockholders from the Provisional Payment Escrow with the remainder
being returned to Abraxas. Pursuant to the terms of the Merger Agreement, if the
amount of the Provisional Payment is the same as the amount of the Projected
Provisional Payment, Abraxas is required to issue a total of approximately
1,801,949 shares of Abraxas Common Stock in the Merger. Abraxas is seeking the
approval of its stockholders to issue a total of 1,900,000 shares of Abraxas
Common Stock in the Merger in order to cover any additional shares Abraxas would
be required to issue if the Provisional Payment is greater than the Projected
Provisional Payment as well as to reserve a total of 12,190 shares of Abraxas
Common Stock for issuance pursuant to the exercise of certain warrants to
purchase Vessels Common Stock which, upon consummation of the Merger, will
become warrants to purchase Abraxas Common Stock. See "Description of Abraxas
Common Stock - Warrants."
For example, pursuant to the terms of the Merger Agreement, Abraxas is
required to issue to the Vessels stockholders a total of approximately 1,023,543
shares of Abraxas Common Stock in consideration of the Projected Provisional
Payment, of which a total of approximately 255,886 will be delivered at the
Effective Time directly to the Vessels stockholders and 767,657 will be
deposited into the Provisional Payment Escrow. If the Provisional Payment
entitled the Vessels stockholders to an aggregate of 1,000,000 shares of Abraxas
Common Stock, 744,114 shares of Abraxas Common Stock which had been deposited
into the Provisional Payment Escrow would be released to the Vessels
stockholders and 23,543 shares would be returned to Abraxas.
Under the Merger Agreement, the Vessels' Non-PDP/PDNP EBITDX for the
Projected Provisional Payment was determined based upon the average of the
earnings before interest, taxes, depreciation, depletion and amortization
("EBITDX") estimated in the reserve reports prepared by Vessels' independent
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petroleum engineers, Netherland, Sewell & Associates ("NSA"), and an engineering
firm jointly engaged by Abraxas and Vessels with respect to Vessels' properties
("Non-PDP/PDNP Properties") other than proved developed producing ("PDP") and
proved developed non-producing ("PDNP") properties. The Provisional Payment will
be based upon Vessels' Non-PDP/PDNP EBITDX for the period from February 1, 1998
to January 31, 1999. Under the terms of the Merger Agreement, "Non-PDP/PDNP
EBITDX" is defined as the EBITDX (or projected EBITDX for the wells deemed to be
productive as total undrilled locations at a rate equal to the average of the
first month's EBITDX for the wells in the proved undeveloped reserves in the
reserve report of Vessels prepared by NSA) plus any allocated fixed facility
operating expenses utilized in determining EBITDX and plus any allocated G&A
expenses utilized in determining EBITDX for the period from February 1, 1998 to
January 31, 1999, produced or deemed to be produced from the Vessels
Non-PDP/PDNP Properties which are drilled pursuant to the Development Plan (as
defined below) or constituted total undrilled locations in the Development Plan.
Under the Development Plan (the "Development Plan") agreed to by Vessels and
Abraxas in connection with the Merger Agreement, Abraxas is obligated to drill
and, if commercially feasible, complete and initiate production from wells on
the Non-PDP/PDNP Properties in accordance with a specified schedule from which
Vessels' Non-PDP/PDNP EBITDX will be determined.
Escrow of Shares. At the Closing, Abraxas and a representative of the
stockholders of Vessels (the "Representative") will enter into an escrow
agreement (the "Escrow Agreement") pursuant to which an aggregate of 472,222
shares of Abraxas Common Stock (the "Escrow Shares") will be issued to the
Vessels stockholders and deposited into a separate escrow account to secure
certain reimbursement obligations of the stockholders of Vessels to Abraxas
relating to the breach of certain representations and warranties set forth in
the Merger Agreement and certain liabilities of Vessels arising under a natural
gas supply contract between Vessels and a third party (the "Supply Contract").
The Escrow Shares include 388,889 shares of Abraxas Common Stock issued
to the Vessels stockholders which will be collateral for claims related to the
Supply Contract (the "Supply Contract Escrow Shares"). These shares will not be
deposited into the escrow account if the Supply Contract is Terminated (as
defined in the Escrow Agreement) prior to Closing. If the Supply Contract is not
Terminated prior to Closing, however, the Supply Contract Escrow Shares will
remain in escrow and be subject to certain claims by Abraxas for damages related
to the Supply Contract. The Supply Contract Escrow Shares, and any Escrow Cash
Payment (as defined herein), will be released to the Vessels stockholders 15
days after the Termination of the Supply Contract, provided a sufficient number
of shares will remain in escrow as collateral for any pending or unresolved
claims related to the Supply Contract until such claims are resolved. See "The
Merger -- Escrow of Shares."
Board Representation and Voting Agreement. Pursuant to a voting
agreement between Vessels and each of the executive officers and directors of
Abraxas (the "Voting Agreement"), each of the executive officers and directors
of Abraxas has agreed to vote any shares of Abraxas Common Stock owned by him in
favor of the Merger and the Share Issuance at the Special Meeting and to vote
for Robert F. Semmens as a director of Abraxas at the 1998 Annual Meeting of
Stockholders for a three-year term.
Pursuant to an agreement (the "Letter Agreement") to be executed and
delivered at the Closing (as defined herein), Abraxas has agreed to appoint
Robert F. Semmens to the Board of Directors at the Closing and to nominate Mr.
Semmens as a director of Abraxas at the 1998 Annual Meeting of Stockholders for
a three-year term and each subsequent annual meeting of the stockholders of
Abraxas beginning with the 2001 Annual Meeting until the later of (i) the
release of all of the Escrow Shares, (ii) the receipt by the Vessels
stockholders of the Provisional Payment or (iii) the date upon which The Beacon
Group Energy Investment Fund, L.P. ("Beacon") or its affiliates no longer own
15% or more of the aggregate number of votes which may be cast by holders of
those securities outstanding of Abraxas which entitle the holders thereof to
vote generally on all matters submitted to Abraxas' securityholders for a vote.
Conditions to the Merger. The obligations of the Company, Sub, and
Vessels to consummate the Merger are subject to a number of conditions,
including approval and adoption of the Merger Agreement by the Vessels
stockholders and the approval of the Merger and the Share Issuance by the
Abraxas stockholders. No assurance can be given that such conditions will be
satisfied. If the Closing has not occurred prior to February 28, 1998, each of
Vessels and Abraxas has the right to terminate the Merger Agreement. There are
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no federal, state or other regulatory requirements that remain to be satisfied
in order to consummate the Merger, other than the filing of the Certificate of
Merger by Sub and Vessels, respectively. See "The Merger -- The Merger Agreement
- -- Conditions to the Merger."
Effective Time. Immediately after the Merger Agreement has been
approved and the satisfaction or waiver of all the conditions precedent to
effectuate the Merger Agreement has occurred (the "Closing"), a Certificate of
Merger shall be filed in accordance with the Delaware General Corporation Law
(the "Delaware Statute" or the "DGCL") and at the Effective Time, the Merger
shall become effective.
Conduct of Business of Vessels and Abraxas. Pursuant to the Merger
Agreement, Vessels and Abraxas have each agreed to conduct their respective
businesses prior to the Closing only in the ordinary and usual course and,
subject to certain exceptions, not to make certain changes in their respective
operations or corporate structure, including amending their respective
organizational documents or entering into any contract other than in the
ordinary course of business. See "The Merger Agreement - Conduct of Business of
Vessels and Abraxas."
Amendment and Termination of Merger Agreement. The Merger Agreement may
be terminated at any time prior to the Closing by (i) the mutual consent of the
Boards of Directors of Vessels and Abraxas, (ii) Abraxas or Vessels if the
Closing has not occurred on or before February 28, 1998; provided, however, that
this right to terminate shall not be available to any party whose failure to
fulfill any obligation, covenant or condition was the cause of, or resulted in,
the failure of the Closing to occur on or before such date; (iii) Abraxas or
Vessels if a court of competent jurisdiction or other governmental body shall
have issued an order, decree or ruling or taken any action enjoining or
prohibiting the Merger and such order, decree, ruling or other action shall
become final and non-appealable; (iv) Abraxas, Sub or Vessels if any of its
conditions to Closing could not be satisfied prior to February 28, 1998, unless
the failure to satisfy such condition resulted from such parties' failure to
perform in any material respect a material covenant or agreement or from such
party's breach of a material representation or warranty; (v) Abraxas, Sub or
Vessels if the stockholders of either Vessels or Abraxas do not approve the
Merger; or (vi) Vessels if the executive officers and directors of Abraxas
breach the Voting Agreement. The Merger Agreement may be amended only by the
written agreement of Abraxas, Sub and Vessels. In certain circumstances, either
Vessels or Abraxas will be required to pay the other a fee of $1.5 million upon
the termination of the Merger Agreement. See "The Merger Agreement --
Termination", "--Effect of Termination" and " -- Amendment and Modification."
Appraisal Rights. Under the DGCL, appraisal rights will be available to
holders of Vessels Common Stock in connection with the Merger. Any such holder
desiring to exercise appraisal rights must follow precisely the procedures
prescribed by the DGCL. The holders of Abraxas Common Stock will not have any
appraisal rights in connection with the Merger or the Share Issuance. See
"Appraisal Rights" and Annex II.
Recommendation of Abraxas. The Board of Directors of Abraxas has
unanimously approved the Merger Agreement and believes that the Merger is in the
best interests of Abraxas and its stockholders. Accordingly, the Board of
Directors of Abraxas recommends that stockholders of Abraxas vote FOR approval
of the Merger and the Share Issuance. For a discussion of the various factors
the Abraxas' Board considered in determining its recommendation, see "The Merger
- - Abraxas' Reasons for the Merger."
Interest of Certain Persons in the Merger. If approved by the Abraxas'
stockholders, Robert F. Semmens will become a director of Abraxas at the
Closing. Mr. Semmens is currently a director of Vessels and a partner of the
entities that control VOG Holdings, LLC, Vessels' majority stockholder. See
"Management of Abraxas After the Merger."
In addition, the Merger Agreement provides for certain officers,
directors and other employees of Vessels to continue to receive or be eligible
for certain benefits and other matters following the Closing. See "Interests of
Certain Persons in the Merger."
Accounting Treatment. The Merger will be accounted for as a purchase of
Vessels by Abraxas in accordance with the "Accounting Principles Board Opinion
No. 16-Business Combinations."
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Certain Federal Income Tax Consequences. The Merger is intended to be a
tax-free transaction for federal income tax purposes to Abraxas, Sub, Vessels
and the Vessels stockholders; however, no rulings have been or will be requested
from the Internal Revenue Service (the "IRS") regarding the Merger. Under the
Merger Agreement, Abraxas and Vessels have each agreed to use its best efforts
to qualify the Merger as a tax-free reorganization. An opinion of counsel
concerning certain federal income tax consequences of the Merger discussed
herein will be delivered in connection with the Merger. See "Certain Federal
Income Tax Consequences of the Merger."
Each holder of Vessels Common Stock should consult his or her own tax
advisor regarding the tax consequences of the Merger in light of such holder's
own situation, including the application and the effect of any state, local or
foreign income and other tax laws.
Risk Factors
For information regarding certain factors that should be considered
carefully in determining whether to vote for approval of the Merger Agreement,
see "Risk Factors."
Market Price Data
Abraxas Common Stock is traded in the Nasdaq National Market. The
following table sets forth, for the periods indicated, the range of the high and
low bid quotations for Abraxas Common Stock. Information with respect to
over-the-counter bid quotations represents prices between dealers, does not
include retail mark-ups, mark-downs or commissions, and does not necessarily
represent actual transactions.
Period High Low
1994
First Quarter $13.50 $9.00
Second Quarter 13.50 9.75
Third Quarter 13.13 9.00
Fourth Quarter 11.50 9.25
1995
First Quarter $10.25 $8.50
Second Quarter 9.63 8.00
Third Quarter 8.88 7.94
Fourth Quarter 8.88 6.13
1996
First Quarter $ 7.75 $4.13
Second Quarter 7.25 5.00
Third Quarter 7.13 4.75
Fourth Quarter 10.50 5.75
1997
First Quarter $14.00 $8.88
Second Quarter 14.13 10.00
Third Quarter 15.75 12.50
Fourth Quarter 19.50 13.88
1998
First Quarter (through January 8, 1998) $14.50 $13.75
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As of November 11, 1997, the date before the public announcement of the
Merger, the high and low sales prices of Abraxas Common Stock were $18.00 and
$17.75 per share, respectively. As of January 8, 1998, the closing sale price on
the Nasdaq National Market for the Abraxas Common Stock was $13.75. As of
January 6, 1998, there were approximately 1,874 holders of record of the Abraxas
Common Stock. Abraxas has never declared or paid any dividends to holders of
Abraxas Common Stock and has no present intention to pay cash dividends to
holders of Abraxas Common Stock in the future. Under the terms of the Indenture
(as defined herein) and the Credit Agreement (as defined herein), the payment of
dividends is prohibited.
There is no established trading market for the Vessels Common Stock.
There were 18 holders of record of Vessels Common Stock as of January 6, 1998.
Vessels has not paid its stockholders any cash dividends and does not anticipate
paying any dividends in the foreseeable future.
16
<PAGE>
Summary Historical Financial Information of Vessels
The following table presents summary historical consolidated financial
data of Vessels for the five years ended December 31, 1996, which have been
derived from the audited consolidated financial statements of Vessels, and as of
and for the nine months ended September 30, 1996 and 1997, which have been
derived from Vessels' unaudited consolidated historical financial statements.
The historical consolidated financial data of Vessels as of and for the nine
months ended September 30, 1996 and 1997 have been derived from Vessels' interim
consolidated financial statements which, in the opinion of management of
Vessels, 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 statement of operations data for the nine months ended
September 30, 1997 is not necessarily indicative of results for a full year. The
information in this table should be read in conjunction with "Vessels'
Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Selected Historical Financial Data of Vessels" and the
Consolidated Financial Statements of Vessels and the notes thereto included
elsewhere in this Proxy Statement-Prospectus.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------------------------- -------------------------
1992 1993 1994 1995 1996 1996 1997
-------------------------------------------------------- -------------------------
(dollars in thousands, except for ratios)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Total operating revenue (1) $47,928 $45,654 $46,429 $53,659 $53,421 $35,660 $22,555
Operating expense (2) 39,834 35,495 35,671 38,590 38,178 25,164 15,130
DD&A expense 3,343 3,503 6,146 11,358 9,754 6,733 5,737
Exploration expense - - 223 272 1,713 300 914
G&A expense 2,189 3,410 3,095 3,399 3,238 2,413 2,223
Interest expense 1,617 2,580 5,321 2,388 3,473 2,387 1,503
Amortization of deferred 387 468 13 183 917 147 92
financing fee
Income (loss) before 221 16 (2,503) (2,296) (3,030) (794) (3,106)
extraordinary items
Net income (loss) 221 16 (4,006) (2,296) (3,030) (794) (3,106)
</TABLE>
<TABLE>
<CAPTION>
September 30,
1997
--------------
(dollars in
thousands)
<S> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 991
Total assets 48,085
Total debt (3) 337
Shareholders' equity 34,993
</TABLE>
- -------------------
(1) Consists of crude oil and natural gas production sales, gas gathering,
processing and marketing revenues, and other miscellaneous revenue.
(2) Consists of lease operating and production taxes, gas gathering, processing,
and marketing expenses. (3) Consists of current and long-term portion of capital
lease obligations.
17
<PAGE>
Summary Historical Financial Information of Abraxas
The following table presents summary historical consolidated financial
data of the Company for the five years ended December 31, 1996 and as of and for
the nine months ended September 30, 1996 and 1997, which have been derived from
the Company's consolidated financial statements and unaudited historical and pro
forma financial data. The unaudited Pro Forma Statement of Operations for the
year ended December 31, 1996 reflects the acquisition of the Wyoming Properties
(as defined herein), acquired on September 30, 1996; the acquisition of CGGS
Canadian Gas Gathering Systems Inc. ("CGGS"), acquired on November 14, 1996; the
acquisition of the Portilla Field ("Portilla") and the Happy Field ("Happy"),
acquired on November 14, 1996; the acquisition of the 50% overriding royalty
interests in the East White Point Field ("East White Point") and the Stedman
Island Field ("Stedman Island"), acquired in November 1996; the sale by Vessels
of the DJ Basin Properties; and the Merger, as if all were consummated on
January 1, 1996. The unaudited Pro Forma Statement of Operations for the nine
months ended September 30, 1997 reflects such adjustments as if the sale by
Vessels of the DJ Basin Properties and the Merger had occurred on January 1,
1997. The unaudited Pro Forma Condensed Balance Sheet reflects such adjustments
as if the Merger had occurred at September 30, 1997. The historical consolidated
financial data of the Company as of and for the nine months ended September 30,
1996 and 1997 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
statement of operations data for the nine months ended September 30, 1997 is not
necessarily indicative of results for a full year. The information in this table
should be read in conjunction with "Abraxas Management's Discussion and Analysis
of Financial Condition and Results of Operations," "Selected Historical
Financial Data of Abraxas," the Consolidated Financial Statements of the Company
and the notes thereto and the Unaudited Pro Forma Financial Information and the
notes thereto included elsewhere in this Proxy Statement-Prospectus.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------------------------ ---------------------------------
Pro Forma Pro Forma
1992 1993 1994 1995 1996 1996(1) 1996 1997 1997(2)
------------------------------------------------------ ---------------------------------
(dollars in thousands, except for ratios)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Total operating
revenue (3) $2,691 $7,494 $11,349 $13,817 $26,653 $68,972 $11,909 $50,691 $60,187
Operating expense (4) 1,075 2,964 3,826 4,458 6,289 19,264 3,408 12,009 17,339
DD&A expense 957 2,373 3,790 5,434 9,605 25,520 4,145 19,780 22,420
G&A expense 770 510 810 1,042 1,933 3,755 1,250 3,119 3,596
Interest expense 906 2,531 2,359 3,911 6,241 23,331 2,142 18,757 18,750
Amortization of
deferred financing fee - 649 400 214 280 1,249 192 933 1,025
Income (loss) from
continuing
operations before
extraordinary items (1,072) (1,580) 113 (1,208) 8,826 (1,863) 122 (2,598) (1,696)
Preferred stock
dividends (249) (186) (183) (366) (366) (366) (274) (183) (183)
Net income(loss)
applicable to common
stockholders (4,204) (2,619) (2,577) (1,574) 1,147 (2,229) (520) (2,781) (1,879)
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
September 30, 1997
Historical Pro Forma (5)
--------------------------------
(dollars in thousands)
<S> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash equivalents $ 7,559 $ 8,550
Total assets 317,182 345,339
Total debt (6) 217,573 217,845
Shareholders' equity 32,126 (7) 42,243 (8)
</TABLE>
- -------------------
(1) Reflects the acquisitions of the Wyoming Properties, CGGS, Portilla,
Happy, the 50% overriding royalty interest in East White Point and Stedman
Island, the sale by Vessels of the DJ Basin Properties and the Merger as if
they occurred on January 1, 1996.
(2) Reflects the sale by Vessels of the DJ Basin Properties and the Merger as
if they occurred on January 1, 1997.
(3) Consists of crude oil and natural gas production sales, revenue from rig
operations and processing facilities, and other miscellaneous revenue.
(4) Consists of lease operating and production taxes, rig operating expenses,
and processing expenses.
(5) Reflects the Merger as if it occurred at September 30, 1997.
(6) Consists of long-term debt, including capital lease obligations.
(7) Consists of 6,324,730 shares of Abraxas' Common Stock of which 53,023 are
treasury shares.
(8) Consists of 6,886,797 shares of Abraxas' Common Stock of which 53,023 are
treasury shares.
19
<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 "Abraxas 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 Proxy
Statement-Prospectus. The pro forma reserve data at December 31, 1996 gives
effect to the sale by Vessels of the DJ Basin Properties and the Merger as if
they had occurred on December 31, 1996. The pro forma operations data for the
year ended December 31, 1996 gives effect to the acquisitions of the Wyoming
Properties, CGGS, Portilla, Happy, the 50% overriding royalty interest in East
White Point and Stedman Island and the sale by Vessels of the DJ Basin
Properties and the Merger as if they occurred on January 1, 1996 and the pro
forma operations data for the nine months ended September 30, 1997 give effect
to the sale by Vessels of the DJ Basin Properties and the Merger as if they had
occurred on January 1, 1997.
Historical
-------------------------- Pro Forma
1994 1995 1996 1996 (1)
---------------------------------------
Estimated Proved Reserves
(period-end):
Crude oil and NGLs (MBbls) 9,156 8,267 18,036 18,967 (1)(2)
Natural gas (MMcf) 67,579 54,569 177,260 202,633 (1)(2)
Crude oil equivalents (MBOE) 20,420 17,362 47,579 52,739 (1)(2)
% Proved developed 67.9% 76.8% 86.7% 85.68%
Estimated future net revenue
before income taxes (in
thousands) $153,476 $164,058 $756,352 (3) $836,810 (2)(3)
PV-10 (in thousands) 78,868 89,992 415,908 (3) 462,574 (2)(3)
% Proved developed 76.7% 78.4% 87.5% 86.9%
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1997
------------------------------------
Historical Pro Forma
1996 1997 1997
------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Net Daily Production:
Crude oil and NGLs (Bbls) 1,285 1,493 1,985 4,408 (4) 1,358 5,359 5,689 (5)
Natural gas (Mcf) 6,556 9,733 17,397 60,755 (4) 9,582 54,900 64,055 (5)
Average Sales Price:
Crude oil (per Bbl) $ 15.47 $ 17.16 $ 20.85 $20.08 (4) $ 19.94 $ 18.79 $ 18.69 (5)
NGLs (per Bbl) 10.54 10.83 14.55 12.04 (4) 12.73 10.63 10.63 (5)
Natural gas (per Mcf) 1.85 1.47 1.97 1.61 (4) 1.95 1.71 1.66 (5)
Natural Gas Processing Plants:
Net plant capacity (MMcfpd)
(period-end) 25 25 128 128 25 130 130
</TABLE>
- -------------------
(1) Reflects the sale by Vessels of the DJ Basin Properties and the Merger as
if they occurred on December 31, 1996.
(2) Includes only that portion of Vessels Proved Undeveloped reserves as of
December 31, 1996 related to the 25% Projected Provisional Payment to be
issued at the Effective Time.
(3) Does not include the present value of future net cash flow from processing
natural gas of third parties at the Canadian Abraxas Plants (as defined
herein).
(4) Reflects the acquisitions of the Wyoming Properties, CGGS, Portilla, Happy,
the 50% overriding royalty interest in the East White Point and Stedman
Island, the sale by Vessels of the DJ Basin Properties and the Merger, as
if they occurred on January 1, 1996.
(5) Reflects the sale by Vessels of the DJ Basin Properties and the Merger as
if they occurred at January 1, 1997.
20
<PAGE>
Selected Per Share Financial Information
The following table sets forth selected historical per share financial
information for each of Abraxas and Vessels and unaudited pro forma per share
financial information for Abraxas giving effect to the Merger, as if it had been
consummated as of September 30, 1997, in the case of book value information, and
January 1, 1996 in the case of earnings information. The information presented
below is derived from (i) the consolidated historical financial statements of
Abraxas and Vessels, including the related notes thereto, contained elsewhere in
this Proxy Statement-Prospectus and (ii) the Unaudited Pro Forma Financial
Information, including the notes thereto, contained elsewhere in this Proxy
Statement-Prospectus, and should be read in conjunction therewith. See
"Unaudited Pro Forma Financial Information," "Selected Historical Financial Data
of Vessels," "Selected Historical Financial Data of Abraxas," the Consolidated
Financial Statements of the Company and the notes thereto and the Consolidated
Financial Statements of Vessels and the notes thereto. The pro forma per share
information set forth herein assumes the initial issuance of 562,070 shares of
Abraxas Common Stock in connection with the Merger (computed based on an assumed
determination price of $18.00, an assumed exchange ratio of 16.47 shares of
Abraxas Common Stock for each share of Vessels Common Stock and is net of the
472,222 shares of Abraxas Common Stock issued to the Vessels stockholders and
deposited pursuant to the Escrow Agreement and the 767,657 shares deposited into
the Provisional Payment Escrow). The pro forma information set forth below is
not necessarily indicative of what Abraxas' actual financial position or results
of operations would have been had the Merger been consummated as of the above
referenced dates or of the financial position or results of operations that may
be reported by Abraxas in the future.
Year Ended Nine Months Ended
December 31, 1996 September 30, 1997
----------------- ------------------
Abraxas - Historical:
Earnings (loss) per common share from
continuing operations $0.23 $(0.47)
Book value per common share (2) 6.22 5.12
Dividends per common share (1) -- --
Abraxas - Pro Forma:
Earnings (loss) per common share from
continuing operations (3) $(0.35) $(0.29)
Book value per common share (4) 7.27 6.18
Dividends per common share (1) -- --
Vessels - Historical:
Earnings (loss) per common share from
continuing operations $(63.54) $(97.70)
Book value per common share (2) 1,116.09 1,025.11
Dividends per common share (1) -- --
Vessels - Pro Forma Equivalents: (5)
Earnings (loss) per common share from
continuing operations $(5.76) $(4.78)
Book value per common share 119.79 101.78
Dividends per common share -- --
(1) Abraxas' ability to pay dividends on it's Common Stock is restricted
pursuant to the terms of the Indenture (as defined herein) and the Credit
Facility (as defined herein).
(2) Historical book value per share of Abraxas and Vessels is computed by
dividing each entities stockholders' equity at December 31, 1996 and
September 30, 1997 by the number of common shares outstanding at the end of
the respective periods excluding any shares held in the treasury and the
dilutive effect of options, warrants and convertible preferred stock.
(3) Pro forma earnings per share from continuing operations is computed by
dividing income from continuing operations, less any preferred stock
dividends, by the historical weighted average shares outstanding for the
respective periods plus the 562,070 shares of Abraxas Common Stock assumed
to be initially issued in the Merger. If the 472,222 shares of Abraxas
Common Stock deposited under the Escrow Agreement to secure the Supply
Contract and certain other liabilities had been issued the pro forma loss
per share would be $(0.33) and $(0.27) for the periods December 31, 1996
21
<PAGE>
and September 30, 1997, respectively. The shares issuable in the future
pursuant to the Projected Provisional Payment are not considered to be
outstanding in this computation.
(4) Pro forma book value per share of Abraxas is computed by dividing pro forma
stockholders equity at September 30, 1997 by the number of common shares
outstanding at the end of the period plus 562,070 shares of Abraxas Common
Stock assumed to be initially issued in the Merger. If the 472,222 shares
of Abraxas Common Stock escrowed under the Escrow Agreement to secure the
Supply Contract and certain other liabilities had been issued the pro forma
book value per share would be $8.01 and $6.95 as of December 31, 1996 and
September 30, 1997, respectively.
(5) Pro forma equivalent data of Vessels is computed by multiplying the Abraxas
pro forma data by the exchange ratio of 16.47. If the 472,222 shares of
Abraxas Common Stock escrowed under the Escrow Agreement to secure the
Supply Contract and certain other liabilities had been issued, the pro
forma equivalent earnings (loss) per common share from continuing
operations would have been $(10.61) and $(8.79) for the year ended December
31, 1996 and the nine months ended September 30, 1997, respectively, and
the book value per common share would have been $242.57 and $187.25 at
December 31, 1996 and September 30, 1997, respectively.
22
<PAGE>
RISK FACTORS
Prior to voting on the proposal described herein, Abraxas stockholders
should carefully consider the risk factors discussed below as well as all of the
information contained elsewhere in this Proxy Statement-Prospectus, including
the Annexes hereto. See also "Note Regarding Forward-Looking Information." Any
or all of the risk factors discussed below could have a material adverse effect
on the business, financial condition, results of operations, and prospects of
Abraxas and its subsidiaries, including, from and after the Effective Time,
Vessels, and/or on the price at which shares of Abraxas Common Stock may trade.
Merger Considerations
In determining whether to approve the transactions pursuant to the
Merger Agreement, stockholders should consider that the price of the Abraxas
Common Stock at the Effective Time, as well as the prices at the date of this
Proxy Statement-Prospectus and at the date of the Special Meeting, may vary as a
result of changes in the business, operations or prospects of Abraxas, market
assessments of the likelihood that the Merger will be consummated and the timing
thereof, general market and economic conditions and other factors. Because the
Effective Time may occur at a later date than the date of the Special Meeting,
there can be no assurance that the trading price of Abraxas Common Stock on the
date of the Special Meeting will be indicative of the price at which Abraxas
Common Stock trades at or after the Effective Time. Vessels stockholders should
also consider that the rights of holders of Abraxas Common Stock differ in
certain respects from the rights of holders of Vessels Common Stock. See
"Comparison of Rights of Stockholders of the Company and Stockholders of
Vessels" and "Certain Differences Between Nevada and Delaware Corporate Laws."
The Effective Time will occur as soon as practicable following the Special
Meeting and the satisfaction or waiver of the other conditions set forth in the
Merger Agreement. See "The Merger -- The Merger Agreement -- Conditions to the
Merger."
Integration of Operations; Foreign Operations
The Company's future operations and earnings will depend, in part, upon
the Company's ability to integrate the operations of Vessels into the current
operations of the Company. 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 to
consummate the Merger, 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, uncertainty of reserve estimates,
competition, drilling and operating risks, operating hazards and changes in
regulations. 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 receives 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 a material 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.
High Degree of Leverage
The Company's total debt and stockholders' equity were approximately
$217.5 million and $32.1 million, respectively, at September 30, 1997. See
"Capitalization." In addition, the Company has borrowing capacity of up to $40
million under the Credit Facility. 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
Credit Facility. See "Abraxas Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" and the
23
<PAGE>
Company's Consolidated Financial Statements and the notes thereto and the
Unaudited Pro Forma Financial Information and the notes thereto included
elsewhere in this Proxy Statement-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 "Abraxas
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 Proxy Statement-Prospectus, the
Company's Consolidated Financial Statements and the notes thereto included
elsewhere in this Proxy Statement-Prospectus and "Abraxas 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 Company's 11.5% Senior Notes due
2004 (the "Notes") are subject to certain limitations on redemption. See
"Abraxas Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources."
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,
1997, the Company recorded net losses of $4.0 million, $2.4 million, $2.4
million, $1.2 million and $2.6 million, respectively. See "Abraxas 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 Proxy Statement-Prospectus.
Industry Conditions; Impact on Company's Profitability
The Company's and Vessels' 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 1996, prices decreased during 1997. 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 or Vessels' financial condition and results of operations,
including reduced cash flow and borrowing capacity. All of these factors are
beyond the control of the Company and Vessels. 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 and
Vessels' ability to produce and market its crude oil and natural gas. If market
24
<PAGE>
factors were to change dramatically, the financial impact on the Company and
Vessels could be substantial. The availability of markets and the volatility of
product prices are beyond the control of the Company and Vessels 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
and Vessels' 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 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 Credit Facility contain certain restrictions on certain sales of assets by
the Company. See "Abraxas Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" and
"Vessels 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 and Vessels from time to time have
entered into fixed price delivery contracts, financial swaps and crude oil and
natural gas futures contracts as hedging devices. To ensure a fixed price for
future production, the Company or Vessels 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 and Vessels to the risk of financial loss in certain
circumstances, including instances where production is less than expected, the
Company's or Vessels' 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 or Vessels to benefit from unexpected increases in crude
oil and natural gas prices. See "Abraxas Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
and "Vessels Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
Restrictions Imposed by Terms of the Company's Indebtedness
The indenture relating to the Notes (the "Indenture") and the Credit
Facility 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 Credit Facility contains additional and
more restrictive covenants. The Indenture and the Credit Facility also 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 "Abraxas 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 Credit Facility. Upon the occurrence of an event
of default under the Credit Facility, the lenders thereunder could elect to
declare all amounts outstanding under the 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 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 are pledged as security under the Credit Facility. See
"Abraxas 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
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revenue or the Company's borrowing base under the Credit Facility decreases 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 "Abraxas Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Future Availability of Natural Gas Supply
To obtain volumes of committed natural gas reserves to supply the
Company's natural gas processing plants in Canada (the "Canadian Abraxas
Plants"), the Company's wholly-owned subsidiary, Canadian Abraxas Petroleum
Limited ("Canadian Abraxas") contracts 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 Canadian Abraxas and its predecessors have been successful in the past
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 or Vessels. In accordance with customary industry practices, the
Company and Vessels maintain 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 and Vessels.
Competition
The Company and Vessels encounter 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 and Vessels' competitors have financial resources, staff
and facilities substantially greater than those of the Company and Vessels. 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
and Vessels, 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 and Vessels must
compete for such raw materials and resources with both major crude oil and
natural gas companies and independent operators. Although the Company and
Vessels believe their current operating and financial resources are adequate to
preclude any significant disruption of their operations in the immediate future,
the continued availability of such materials and resources to the Company and
Vessels cannot be assured.
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The Company and Vessels 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 and Vessels' 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 and Vessels. Smaller local
distributors may enjoy a marketing advantage in their immediate service areas.
The Company and Vessels will compete against other companies in their
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 and Vessels. The reserve data included in this Proxy
Statement-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 Proxy
Statement-Prospectus are based on the assumption that future crude oil and
natural gas prices remain the same as crude oil and natural gas prices at
December 31, 1996. The average sales prices as of such dates used for purposes
of such estimates of Abraxas were $23.19 per Bbl of crude oil, $16.31 per Bbl of
NGLs and $2.96 per Mcf of natural gas and the average sales prices used for
purposes of such estimate of Vessels were $24.80 per Bbl of crude oil and $3.32
per Mcf of natural gas. Also assumed is the Company's and Vessels' making future
capital expenditures of approximately $35.1 million in the aggregate, 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
"Abraxas Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources" and "Business of Abraxas --
Reserves Information" and "Vessels Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Business of Vessels-- 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, including with respect to
Vessels, 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 and
Vessels undertake. No assurance can be given that crude oil or natural gas will
be discovered to replace reserves currently being developed, produced and sold,
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or that if crude oil or natural gas reserves are found, they will be of a
sufficient quantity to enable the Company or Vessels 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.
Such activities will likewise impact the Provisional Payment. The cost of
drilling, completing and operating wells is often uncertain. The Company's or
Vessels' operations may be curtailed, delayed or canceled 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 or Vessels' 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 and Vessels
acquire additional properties containing proved reserves, conduct successful
exploration and development activities or, through engineering studies, identify
additional behind-pipe zones or secondary recovery reserves, the proved reserves
of the Company and Vessels will decline as reserves are produced. Future crude
oil and natural gas production is therefore highly dependent upon the Company's
and Vessels' level of success in acquiring or finding additional reserves. See
"-- Certain Business Risks."
The Company's and Vessels' 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 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 and Vessels' businesses are 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, neither the Company
nor Vessels is able to predict the ultimate cost of compliance with such
requirements. There can be no assurance that laws and regulations enacted in the
future will not adversely affect the Company's or Vessels' financial condition
and results of operations. See "Business of Abraxas -- Regulatory Matters" and
"Business of Vessels -- Regulatory Matters."
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 of Abraxas After the
Merger." 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
At December 31, 1996, the Company had, subject to the limitations
discussed below, $20.1 million of net operating loss carryforwards for U.S. tax
purposes, of which approximately $17.5 million are available for utilization
without limitation. These loss carryforwards will expire from 2002 through 2010
if not utilized. At December 31, 1996, the Company had approximately $830,000 of
net operating loss carryforwards for Canadian tax purposes which expire in 2003.
As a result of the acquisition of certain partnership interests and crude oil
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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 with respect to the Company in December 1991. Accordingly, it
is expected that the use of net operating loss carryforwards generated prior to
December 31, 1991 of $4.9 million will be limited to approximately $235,000 per
year. As a result of the issuance of additional shares of Common Stock for
acquisitions and sales of stock, an additional ownership change under Section
382 occurred in October 1993. Accordingly, it is expected that the use of all
U.S. net operating loss carryforwards generated through 1993, or $8.2 million,
will be limited to approximately $1 million per year subject to the lower limits
described above. Of the $8.2 million net operating loss carryforwards, it is
anticipated that the maximum net operation loss that may be utilized before it
expires is $5.7 million. Further changes in ownership, including changes as a
result of the Merger, 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 $5.7 million and $5.7 million for deferred tax assets at December
31, 1996 and 1995 respectively.
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THE SPECIAL MEETING
General
This Proxy Statement-Prospectus is being furnished by Abraxas to its
stockholders in connection with the solicitation of proxies, by and on behalf of
the Abraxas Board, for use at the Special Meeting. The Special Meeting will be
held on Friday, February 13, 1998 at 9:00 a.m., Central Time, at Abraxas'
offices, 500 North Loop 1604 East, Suite 100, San Antonio, Texas 78232. The
purpose of the Special Meeting is for Abraxas stockholders to consider and vote
upon a proposal to approve the Merger and the Share Issuance.
THE ABRAXAS BOARD BELIEVES THAT THE MERGER AND THE SHARE ISSUANCE ARE
IN THE BEST INTERESTS OF ABRAXAS AND ITS STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS
THAT STOCKHOLDERS VOTE "FOR" THE APPROVAL OF THE MERGER AND THE SHARE ISSUANCE.
Voting at the Special Meeting
The holders of record of shares of Abraxas Common Stock as of the close
of business on January 6, 1998, the Record Date, are entitled to notice of and
to vote at the Special Meeting. As of the Record Date, there were 6,422,540
shares of Abraxas Common Stock outstanding, and there were approximately 1,874
holders of record of Abraxas Common Stock. Each outstanding share of Abraxas
Common Stock is entitled to one vote at the Special Meeting. Shares of Abraxas
Common Stock held in the treasury of Abraxas or by any of its subsidiaries are
not considered to be outstanding.
The holders of shares representing a majority of the shares of Abraxas
Common Stock outstanding as of the Record Date will constitute a quorum for the
transaction of business at the Special Meeting. If the persons present or
represented by proxy at the Special Meeting constitute holders of shares
representing less than a majority of the shares of Abraxas Common Stock
outstanding as of the Record Date, the Special Meeting may be adjourned to a
subsequent date for the purpose of obtaining a quorum.
Pursuant to the Merger Agreement, the consummation of the Merger is
conditioned upon, among other things, the approval of the Merger and the Share
Issuance by the affirmative vote of the holders of a majority of the shares of
Abraxas Common Stock present at the Special Meeting and entitled to vote
thereon. Abstentions (i.e., properly executed proxies marked "ABSTAIN") and
shares represented by broker non-votes (i.e., shares held by brokers or nominees
which are represented at a meeting but with respect to which the broker or
nominee is not empowered to vote on this proposal for the Merger) will be
included in determining the number of shares held by persons present or
represented by proxy at the Special Meeting for purposes of determining whether
a quorum exists. Consequently, an abstention or a broker non-vote has the same
effect as a vote against the proposal as each abstention or broker non-vote
would be one less vote in favor of the proposal.
As of the Record Date, directors and executive officers of Abraxas and
their affiliates owned beneficially, in the aggregate, approximately 10.07% of
the outstanding shares of Abraxas Common Stock. Abraxas' directors and executive
officers have agreed to vote their shares of Abraxas Common Stock in favor of
the Merger and the Share Issuance. See "The Merger-Board Representation and
Voting Agreement."
Proxies; Revocation
All shares of Abraxas Common Stock represented at the Special Meeting
by properly executed proxies received prior to or at the Special Meeting, unless
such proxies shall have been revoked, will be voted at the Special Meeting in
accordance with the instructions on the proxies. If no instructions are
indicated, such proxies will be voted for the approval of the Merger and the
Share Issuance.
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A proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before the proxy is voted at the Special Meeting. A
proxy may be revoked by filing with the Secretary of Abraxas prior to the voting
of the proxy either a written instrument revoking the proxy or an executed proxy
bearing a later date, or by voting in person at the Special Meeting. Attendance
at the Special Meeting will not, in itself, constitute the revocation of a
proxy.
Abraxas will bear the cost of the preparation of this Proxy
Statement-Prospectus and the solicitation of proxies for voting at the Special
Meeting.
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THE MERGER
Background of the Merger
Vessels, in 1996, coincident with the pending divestiture of the DJ
Basin Properties, began to review strategic alternatives that would expose its
stockholders to growth potential in the hydrocarbon extraction sector. To assist
in reviewing strategic alternatives, Vessels engaged Weisser Johnson in April
1997. After an extensive review of Vessels and industry opportunities, Vessels
determined that a stock for stock, tax-free exchange would be the most practical
manner to enhance stockholder value.
Since January 1, 1991, Abraxas' principal means of growth has been
through the acquisition and subsequent development and exploitation of producing
properties and related assets. Abraxas 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.
Between April 1997 and May 1997, Weisser Johnson worked with Vessels to
pursue a stock merger and contacted several potential merger candidates. One of
these candidates was Abraxas, which learned of Vessels' interest in a stock
merger through discussions with Weisser Johnson in April 1997.
On May 30, 1997, Robert L. G. Watson, President of Abraxas, met with W.
M. Neumann, President and CEO of Vessels, and Scott Johnson, a partner of
Weisser Johnson, to discuss the nature of Abraxas' and Vessels' business and
explore the strategic value of a merger.
Shortly thereafter, Mr. Watson advised Mr. Johnson that based on the
earlier discussions, Abraxas would appreciate further and more in-depth data
about Vessels and expressed a willingness to convey similar information about
Abraxas.
After execution of a confidentiality agreement, representatives of
Vessels and Abraxas met in San Antonio on June 18, 1997 for the further exchange
of information.
Following the meeting on June 18, 1997, Frank Weisser, a partner in
Weisser Johnson, advised Mr. Watson of Vessels' interests in furthering
conversations regarding a merger. As a result, on July 3, 1997, Abraxas
forwarded a proposal for a transaction structure. After further discussion of
the transaction structure, Abraxas forwarded a proposed letter of intent
regarding a merger and after further negotiation, on August 19, 1997, the
parties entered into a letter of intent providing for the conducting of due
diligence and negotiation of a definitive merger agreement.
Abraxas' review of Vessels' business indicated that ownership of
Vessels' properties would be consistent with Abraxas' disciplined acquisition
strategy.
Vessels' review of Abraxas' business and of the proposed merger steps
indicated that Vessels' objectives of diversifying project risk while retaining
some exposure to its properties' growth potential would be efficiently
accomplished through the merger.
On November 12, 1997, the Merger Agreement was executed by the parties.
Abraxas' Reasons for the Merger
The Abraxas Board has determined that the Merger and the Share Issuance
are in the best interests of Abraxas and its stockholders. ACCORDINGLY, THE
ABRAXAS BOARD HAS UNANIMOUSLY APPROVED THE MERGER AND THE SHARE ISSUANCE AND
RECOMMENDS THAT THE ABRAXAS STOCKHOLDERS VOTE "FOR" THE APPROVAL OF THE MERGER
AND THE SHARE ISSUANCE.
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Since January 1, 1991, Abraxas' principal means of growth has been
through the acquisition and subsequent development and exploitation of producing
properties and related assets. Abraxas 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 Merger with Vessels satisfies the Company's acquisition criteria.
The Vessels' operating assets are geographically concentrated in close proximity
to existing Abraxas oil and gas properties. Abraxas' management believes that
efficiencies in operations to be gained due to this concentration should
translate to lower field operating costs. The Vessels assets include numerous
development and exploratory prospects that, Abraxas management believes, possess
significant upside potential. The historical field operating costs of Vessels
assets compare favorably to the existing Abraxas cost structure in the area.
Abraxas expects that the elimination of virtually the entire Vessels
administrative staff, with those functions being absorbed by existing Abraxas
staff, will result in Abraxas' G&A expense, on a per BOE basis, being reduced
following the Merger.
In reaching its recommendation with respect to the Merger and the Share
Issuance, the Abraxas Board considered a number of factors including, without
limitation, the reasons for the Merger described above. In view of the numerous
factors taken into consideration, the Abraxas Board did not consider it
practical to, and did not attempt to, quantify or otherwise assign relative
weights to the factors considered by it in reaching its decision.
The Merger Agreement
The following is a summary of the material terms of the Merger
Agreement. This summary is not a complete description of the terms and
conditions of the Merger Agreement and is qualified in its entirety by reference
to the full text of the Merger Agreement and Section 262 of the DGCL, which are
incorporated by reference and copies of which are attached as Annexes I and II,
respectively, to this Proxy Statement-Prospectus. Capitalized terms not
otherwise defined herein or in the following summary shall have the meanings set
forth in the Merger Agreement.
The Merger. On the terms and subject to the conditions of the Merger
Agreement, at the Effective Time Sub will be merged with and into Vessels in
accordance with the applicable provisions of the DGCL with Vessels being the
surviving corporation and a subsidiary of Abraxas.
As soon as practicable following the date on which the last of the
conditions set forth in the Merger Agreement is satisfied or waived, Sub and
Vessels will cause a certificate of merger to be filed with the Secretary of
State of the State of Delaware as provided in the DGCL. Upon completion of such
filing, the Merger will become effective in accordance with the DGCL.
Conversion of Vessels Shares. At the Effective Time of the Merger, each
then outstanding share of Vessels Common Stock (other than shares held by
stockholders of Vessels, if any, who properly exercised their appraisal rights
under Delaware law) will be converted into the right to receive approximately
22.8 shares of Abraxas Common Stock plus a number of shares of Abraxas Common
Stock equal to a fraction, the numerator of which is Vessels' Non-PDP/PDNP
EBITDX, which is equal to $4,364,415, times .80 times 5.33 minus the amount
payable by Vessels to Weisser Johnson on April 30, 1999, and the denominator of
which is $18.00 (the "Projected Provisional Payment"). The Projected Provisional
Payment entitles the Vessels stockholders to an aggregate of approximately
1,023,543 shares of Abraxas Common Stock or approximately 29.98 shares of
Abraxas Common Stock for each share of Vessels Common Stock. Of the shares of
Abraxas Common Stock issued pursuant to the Projected Provisional Payment, 25%,
or an aggregate of approximately 255,886 shares of Abraxas Common Stock (or
approximately 7.5 shares of Abraxas Common Stock for each share of Vessels
Common Stock), will be issued at the Effective Time and the remainder will be
issued and deposited into the Provisional Payment Escrow. On the Provisional
Payment Date, Abraxas will release that number of shares of Abraxas Common Stock
from the Provisional Payment Escrow as are necessary to pay the Provisional
Payment in full. In the event that the Provisional Payment is greater than the
Projected Provisional Payment, Abraxas will release all of the shares deposited
into the Provisional Payment Escrow and will issue any additional shares
necessary to make the Provisional Payment. In the event that the Provisional
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Payment is less than the Projected Provisional Payment, an appropriate number of
shares of Abraxas Common Stock will be released to the Vessels stockholders from
the Provisional Payment Escrow with the remainder being returned to Abraxas.
Pursuant to the terms of the Merger Agreement, if the amount of the Provisional
Payment is the same as the amount of the Projected Provisional Payment, Abraxas
is required to issue a total of approximately 1,801,949 shares of Abraxas Common
Stock in the Merger. Abraxas is seeking the approval of its stockholders to
issue a total of 1,900,000 shares of Abraxas Common Stock in the Merger in order
to cover any additional shares Abraxas would be required to issue if the
Provisional Payment is greater than the Projected Provisional Payment as well as
to reserve a total of 12,190 shares of Abraxas Common Stock for issuance
pursuant to the exercise of certain warrants to purchase Vessels Common Stock
which, upon consummation of the Merger, will become warrants to purchase Abraxas
Common Stock. See "Description of Abraxas Common Stock - Warrants."
For example, pursuant to the terms of the Merger Agreement, Abraxas is
required to issue to the Vessels stockholders a total of approximately 1,023,543
shares of Abraxas Common Stock in consideration of the Projected Provisional
Payment, of which a total of approximately 255,886 will be delivered at the
Effective Time directly to the Vessels stockholders and 767,657 will be
deposited into the Provisional Payment Escrow. If the Provisional Payment
entitled the Vessels stockholders to an aggregate of 1,000,000 shares of Abraxas
Common Stock, 744,114 shares of Abraxas Common Stock which had been deposited
into the Provisional Payment Escrow would be released to the Vessels
stockholders and 23,543 shares would be returned to Abraxas.
Under the Merger Agreement, the Projected Provisional Payment was
determined based upon the average of the EBITDX estimated in the reserve reports
prepared by Vessels' independent petroleum engineers, NSA, and an engineering
firm jointly engaged by Abraxas and Vessels with respect to Vessels'
Non-PDP/PDNP Properties. The Provisional Payment will be based upon the actual
EBITDX from Vessels' Non-PDP/PDNP Properties for the period from February 1,
1998 to January 31, 1999. Under the Development Plan, Abraxas is obligated to
drill and, if commercially feasible, complete and initiate production from wells
on Vessels' Non-PDP/PDNP Properties in accordance with a specified schedule from
which Vessels' Non-PDP/PDNP EBITDX will be determined.
Appraisal Rights. In the event that the Merger is effected and Vessels
stockholders are entitled to receive the applicable consideration described
above, shares of Vessels Common Stock issued and outstanding immediately prior
to the Effective Time held by a holder (if any) who has the right to demand, and
who has properly demanded an appraisal of such shares of Vessels Common Stock in
accordance with Section 262 of the DGCL (or any successor provision) ("Appraisal
Shares") will not be converted into the right to receive the applicable
consideration, unless such holder fails to perfect or otherwise loses such
holder's right to such appraisal, if any. If, after the Effective Time, such
holder fails to perfect or loses any such right to appraisal, each Appraisal
Share of such holders shall be treated as a share of Vessels Common Stock that
has been converted as of the Effective Time into the right to receive the
applicable consideration, in accordance with the terms of the Merger Agreement.
The holders of Abraxas Common Stock will not have any appraisal rights in
connection with the Merger or the Share Issuance. See Annex II.
Fractional Shares. No fractional shares of Abraxas Common Stock will be
issued pursuant to the Merger. In lieu of any such fractional shares, Abraxas
will issue to each holder of Vessels Common Stock who would otherwise be
entitled to receive a fraction of a share of Abraxas Common Stock equal to or
exceeding .50 of Abraxas Common Stock promptly after the Effective Time, one (1)
share of Abraxas Common Stock. Fractional shares equal to less than .50 will not
be converted into any shares of Abraxas Common Stock.
Conduct of Business of Abraxas, Sub and Vessels. Pursuant to the Merger
Agreement, the Company, Sub and Vessels have agreed that, subject to certain
limited exceptions, prior to the Effective Time, each will (i) conduct its
respective operations according to their ordinary and usual courses of business
consistent with past practice; and (ii) use its best efforts to preserve intact
its business organization, keep available the services of its officers and
employees as a group and maintain satisfactory relationships with licensors,
suppliers, distributors, lessees, clients and others having business
relationships with it. In addition, each of Vessels, Abraxas and Sub will (i)
cause its corporate charter and by-laws to be maintained in their form as of the
date of the Merger Agreement; (ii) refrain from making any bonus, pension,
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retirement or insurance payment or arrangement to or with any such persons
except those that may already have been accrued; (iii) refrain from entering
into any contract or commitment except contracts in the ordinary course of
business; (iv) refrain from making any change affecting any bank, safe deposit
or power of attorney arrangements; and (v) refrain from declaring setting aside,
paying or distributing any dividends or distribution with respect to its capital
stock or engage in any similar recapitalization. Vessels, Abraxas and Sub have
agreed to confer on a regular and frequent basis to report material operational
matters and the general status of ongoing operations. Vessels, Abraxas and Sub
are required to notify each other of any unexpected emergency or other change in
the normal course of their respective businesses or in the operation of their
respective properties and of any governmental complaints, investigations or
hearings, adjudicatory proceedings, budget meetings or submissions involving any
material property and to keep each other fully informed of such events and
permit each other's respective representatives prompt access to all related
materials.
Additional Agreements. In the Merger Agreement, Abraxas and Vessels
have promised that they each will (i) afford to one another full and complete
access during normal business hours to its properties, books and records; (ii)
make all regulatory filings required to be made as a result of the Merger
Agreement and use all reasonable efforts to obtain all necessary regulatory
approvals; (iii) subject to the fiduciary duties of the directors of Abraxas and
Vessels, use their best efforts to effectuate the transactions contemplated by
the Merger Agreement, including filings with and approvals of governmental
agencies and consents and waivers required under any material contracts,
agreements, leases, licenses or other documents to which Abraxas or Vessels is a
party; (iv) hold in strict confidence, unless compelled to disclose by judicial
or administrative process, all non-public documents and information concerning
the other furnished to them in connection with the Merger Agreement; and (v)
consult with each other before issuing any press release or other public
announcement about the Merger, and not issue any such release or other public
announcement about the Merger, and not issue any such release or announcement
without the consent of the other unless required by law or by obligations
pursuant to any listing agreement with any national securities exchange. Each of
Vessels and Abraxas has also agreed to use its best efforts to qualify the
Merger as a tax-free reorganization within the meaning of Section 368(a) of the
Code. In addition, Vessels has agreed that, from November 12, 1997 until the
Effective Time, Vessels will not take any action to encourage, initiate, or
engage in discussions or negotiations with, or provide any information to, any
individual or entity (other than Abraxas) concerning any purchase of the Vessels
Common Stock, or any merger or sale of all or substantially all of the assets of
Vessels and its subsidiaries or similar transactions involving Vessels.
Representations and Warranties. The Merger Agreement contains certain
customary representations and warranties of Vessels relating to organization and
qualification, capitalization, corporate authority, subsidiaries and
investments, financial statements, books and records, title to properties, real
property, reserve reports, title to oil and gas interests, compliance with
leases and applicable laws, sale of production, status of wells, tax
partnerships, equipment, material contracts, restrictive documents, litigation,
taxes, insurance, intellectual properties, accounts receivable, employment
relations, employee benefit plans, interests in clients, suppliers, etc., bank
accounts and powers of attorney, no changes prior to closing date, broker's or
finder's fees, copies of documents, environmental protection and full
disclosure.
The Merger Agreement also sets forth certain customary representations
and warranties of Abraxas and Sub relating to organization and qualification of
Abraxas, Sub and Canadian Abraxas, corporate authority, broker's or finder's
fees, capital stock, books and records, litigation, taxes, reports filed with
the Commission, restrictive documents, title to properties, reserve report,
title to oil and gas interests and full disclosure.
Except for certain representations and warranties the survival of which
is provided for in the Escrow Agreement, the representations and warranties
generally expire at Closing.
Conditions to the Merger. The obligations of Abraxas and Vessels to
effectuate the Merger Agreement are subject to the satisfaction of the following
conditions: (a) the Merger Agreement shall have been duly approved by the
Vessels stockholders and the Abraxas stockholders; (b) the Registration
Statement on Form S-4 shall have become effective and neither a stop order
suspending its effectiveness shall be in effect nor proceedings for such purpose
shall be pending or threatened before the Commission; (c) no governmental action
or proceeding shall have been commenced or threatened seeking to prohibit,
restrain, invalidate or set aside the effectuation of the Merger; and (d) no
court or governmental order, statute, rule, regulation, executive order, stay,
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decree, judgment or injunction shall have been effected which prohibits or
restricts the effectuation of the Merger. Vessels and Abraxas, as the case may
be, may waive compliance of any of the foregoing conditions.
The obligations of Vessels to consummate the Merger Agreement are also
subject to the satisfaction or waiver of the following additional conditions:
(a) the representations and warranties of Abraxas contained in the Merger
Agreement shall have been materially true and correct on and as of the Closing
Date; (b) Vessels shall have received certain legal opinions, including an
opinion that the Merger will be treated as a tax-free transaction for federal
income tax purposes, and closing certificates; (c) Abraxas shall have entered
into the Registration Rights Agreement, the Letter Agreement and the Escrow
Agreements; (d) the receipt by Abraxas of any necessary waivers and consents
under the Credit Agreement; (e) the shares of Abraxas Common Stock to be issued
in the Merger shall have been accepted for trading on the Nasdaq National
Market; (f) there shall have been no material adverse change in the assets or
liabilities, the business or condition, financial or otherwise, the results of
operations, or prospects of Abraxas on a consolidated basis that would or would
be reasonably likely to have a Material Adverse Effect (as defined in the Merger
Agreement) other than a change that affects Abraxas and Vessels in a
substantially similar manner; (g) Abraxas shall have performed and complied with
the agreements and obligations contained in the Merger Agreement to be performed
and complied with by it prior to the Effective Time; (h) the directors of
Abraxas and Sub shall have recommended and voted in favor of adoption and
approval of the Merger Agreement; and (i) Vessels shall have received a
favorable opinion of King & Spalding concerning the qualification of the Merger
as a reorganization under Section 368(a) of the Code.
The obligations of Abraxas are also subject to the satisfaction or
waiver of the following additional conditions: (a) Vessels shall have performed
and complied with the agreements and obligations contained in the Merger
Agreement that are required to be performed and complied with by it at or prior
to the Effective Date; (b) the representations and warranties of Vessels
contained in the Merger Agreement shall have been materially true and correct on
and as of the Closing; (c) all consents of third parties shall have been
obtained or effected; (d) Abraxas shall have received certain legal opinions and
closing certificates; (e) the Representative shall have entered into the Escrow
Agreements; (e) Abraxas shall have obtained from each person who may be deemed
to be an "affiliate" (as such term is defined under Rule 145 of the Securities
Act) of Vessels, a written agreement with respect to the shares of Abraxas
Common Stock to be received by such person in the Merger; (f) the number of
Vessels Appraisal Shares shall not exceed 5% of the shares of Vessels Common
Stock outstanding as of the date of the Merger Agreement; (g) all options and
certain warrants to purchase shares of Vessels Common Stock shall have been
terminated; (h) there shall have been no material adverse change in the assets
or liabilities, the business or condition, financial or otherwise, the results
of operations, or prospects of Vessels on a consolidated basis that would or
would be reasonably likely to have a Material Adverse Effect other than a change
that affects Abraxas and Vessels in a substantially similar manner; (i) all
indebtedness of the directors, officers and employees of Vessels and its
subsidiaries to Vessels and its subsidiaries shall have been repaid in full; (j)
the Vessels Oil and Gas Company Amended and Restated Stockholders Agreement
shall have been terminated; and (k) Vessels' credit agreement with Bank of
Montreal shall have been terminated with funds provided by Abraxas and all
liens, encumbrances and security interests on the assets of Vessels shall have
been released.
Termination. The Merger Agreement may be terminated and abandoned at
any time prior to the Closing, whether before or after the approval of the
Merger Agreement by the stockholders of Abraxas, by (i) the mutual written
consent of the Boards of Directors of Abraxas and of Vessels; (ii) Abraxas or
Vessels if the Effective Time has not occurred on or before February 28, 1998;
provided, however, that this right to terminate shall not be available to any
party whose failure to fulfill any obligation, covenant or condition was the
cause of, or resulted in, the failure of the Closing to occur on or before such
date; (iii) Abraxas or Vessels if any court of competent jurisdiction in the
United States or other United States governmental body shall have issued an
order, decree or ruling or taken any other action restraining, enjoining or
otherwise prohibiting the Merger and such order, decree, ruling or other action
shall become final and nonappealable; (iv) Abraxas, Sub or Vessels if any of its
conditions to Closing could not be satisfied prior to February 28, 1998; unless
the failure to satisfy such condition resulted from such parties' failure to
perform in any material respect a material covenant or agreement or from such
party's breach of a material representation or warranty; (v) Abraxas, Sub or
Vessels if the stockholders of either Abraxas or Vessels do not approve the
Merger; or (vi) Vessels if the executive officers and directors of Abraxas
breach the Voting Agreement.
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Effect of Termination. In the event of the termination of the Merger
Agreement: (i) each party will redeliver or destroy all documents, work papers
or other materials of the other party relating to the transactions contemplated
by the Merger Agreement, whenever obtained, to the party furnishing the same;
and (ii) all nonpublic information obtained by any party with respect to the
business of the other party cannot be used for the advantage of, or disclosed to
third parties by, such party to the detriment of the party furnishing such
information.
The Merger Agreement obligates Vessels to pay to Abraxas a fee of $1.5
million if the Merger Agreement is terminated by Abraxas or Sub by reason of the
failure of any of Abraxas' and Sub's conditions to Closing not being satisfied
prior to February 28, 1998; provided, however, that Vessels shall not be
obligated to pay such fee if Abraxas and Sub terminate the Merger Agreement on
account of the conditions relating to the delivery of the opinion of King &
Spalding (but only to the extent the opinion cannot substantively legally be
given), the effectiveness of the S-4 Registration Statement or dissenters'
rights not having been satisfied or if Abraxas and Sub terminate the Merger
Agreement on account of the failure to receive necessary consents and approvals
for which Abraxas has responsibility, approvals typically received after
consummation of a transaction similar to the Merger or approvals the failure of
which to be obtained would not have a Material Adverse Effect; provided, further
that Vessels shall not be obligated to pay such fee if (i) Abraxas and Sub shall
not have satisfied all of Vessels' conditions to closing other than the
conditions to closing relating to the opinion of Cox & Smith Incorporated (but
only to the extent the opinion cannot substantively legally be given) and the
approval of the stockholders of Abraxas of the Merger, (ii) the executive
officers and directors of Abraxas shall not have satisfied their obligations
under the Voting Agreements or (iii) Abraxas shall have taken any action
intended or reasonably calculated to prevent the Closing.
The Merger Agreement obligates Abraxas to pay to Vessels a fee of $1.5
million if the Merger Agreement is terminated by Vessels by reason of the
failure of any of Vessels' conditions to Closing not being satisfied prior to
February 28, 1998; or if the executive officers and directors of Abraxas shall
have breached the Voting Agreements; provided, however, that Abraxas shall not
be obligated to pay such fee if Vessels terminates the Merger Agreement on
account of the conditions relating to the delivery of the opinion of Cox & Smith
Incorporated (but only to the extent the opinion cannot substantively legally be
given) or the receipt of Abraxas stockholder approval of the Merger not having
been satisfied or Vessels terminates the Merger Agreement on account of the
failure to receive necessary consents and approvals for which Vessels has
responsibility, approvals typically received after consummation of a transaction
similar to the Merger or approvals the failure of which to be obtained would not
have a Material Adverse Effect; provided, further that Abraxas shall not be
obligated to pay such fee if (i) Vessels shall not have satisfied all of
Abraxas' conditions to closing other than the conditions to closing relating to
the opinion of King & Spalding (but only to the extent the opinion cannot
substantively legally be given), the effectiveness of the S-4 Registration
Statement or dissenters' rights or (ii) Vessels shall have taken any action
intended or reasonably calculated to prevent the Closing.
Amendment and Modification. The Merger Agreement may, subject to
applicable law, be amended, modified or supplemented at any time prior to the
Closing only by written agreement of the parties to the Merger Agreement.
Indemnification. The Merger Agreement provides that the certificate of
incorporation and by-laws of Vessels will contain the provisions with respect to
indemnification set forth in the Vessels Certificate and the Vessels Bylaws on
the date of the Merger Agreement, which provisions will not be amended,
repealed, or otherwise modified after the Effective Time in any manner that
would adversely affect the rights thereunder of individuals who at any time
prior to the Effective Time were directors or officers of Vessels in respect of
actions or omissions occurring at or prior to the Effective Time (including
without limitation the transactions contemplated by the Merger Agreement),
unless such modification is required by law. The Merger Agreement further
provides that Vessels will, and from and after the Effective Time, Abraxas will,
or will cause Vessels to, indemnify, defend, and hold harmless each person who
is now, or has previously been at any time or who becomes prior to the Effective
Time, an officer or director of Vessels (the "Indemnified Parties") against all
losses, claims, damages, costs, expenses (including reasonable attorneys' fees
and expenses), liabilities, or judgments or amounts that are paid in settlement,
with the approval of the indemnifying party (which approval is not to be
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unreasonably withheld), of or in connection with any threatened or actual claim,
action, suit, proceeding, or investigation based in whole or in part on or
arising in whole or in part out of the fact that such person is or was a
director or officer of Vessels whether pertaining to any matter existing or
occurring at or prior to the Effective Time and whether asserted or claimed
prior to, or at or after, the Effective Time ("Indemnified Liabilities"),
including all Indemnified Liabilities based in whole or in part on, or arising
in whole or in part out of, or pertaining to the Merger Agreement or the
transactions contemplated thereby, in each case, to the full extent a
corporation is permitted under the DGCL to indemnify its own directors or
officers as the case may be (and Abraxas and Vessels, as the case may be, will
pay expenses in advance of the final disposition of any such action or
proceeding to each Indemnified Party to the full extent permitted by law).
Vessels, Abraxas, and Sub have agreed that all rights to indemnification,
including provisions relating to advances of expenses incurred in defense of any
action or suit, existing in favor of the Indemnified Parties with respect to
matters occurring through the Effective Time, will survive the Merger and will
continue in full force and effect for a period of not less than six years from
the Effective Time.
The Merger Agreement further provides that for a period of six years
after the Effective Time, Abraxas will cause to be maintained in effect the
current policies of directors' and officers' liability insurance maintained by
Vessels (except that Abraxas may substitute therefor policies of at least the
same coverage and amounts containing terms and conditions that are no less
advantageous in any material respect to the Indemnified Parties), with respect
to matters arising before the Effective Time, except that Abraxas will not be
required to pay an annual premium for such insurance in excess of 150% of the
last annual premium paid by Vessels prior to the date of the Merger Agreement,
but in such case will purchase as much coverage as it maintains for directors
and officers of Abraxas.
Employee Benefit Matters. Abraxas, Sub, and Vessels have agreed in the
Merger Agreement to certain matters with respect to the compensation and benefit
programs of Vessels and its subsidiaries. The Merger Agreement provides that
Abraxas will, and will cause its subsidiaries following the Effective Time
(including Vessels) to: (i) honor and provide for payment of all obligations and
benefits under all Vessels Plans in accordance with their terms; (ii) provide
employee benefits which are substantially comparable in the aggregate to the
level of employee benefits provided by Vessels and its subsidiaries under the
Vessels ERISA Plans in effect as of the Closing for the benefit of employees or
former employees who are or had been employees of Vessels or any of its
subsidiaries on or before the Closing ("Covered Employees"), until the sixth
month anniversary of the Closing; (iii) honor and provide for the payment of all
obligations and benefits under all employment or severance agreements between
Vessels and any Covered Employee in accordance with their terms; and (iv)
maintain the Vessels Oil and Gas Company Employee Savings Plan in effect until
the six month anniversary of the Closing.
The Merger Agreement further provides that, if Covered Employees are
included in any benefit plan (including without limitation provision for
vacation) of Abraxas or its subsidiaries, Covered Employees will receive credit
as employees of Vessels and its subsidiaries to the same extent such service was
counted under similar plans of Vessels for purposes of eligibility, vesting,
eligibility for retirement, and, with respect to vacation, disability, and
severance, benefit accrual.
In the Merger Agreement, the parties thereto acknowledged that nothing
therein will be deemed to be a commitment on the part of Abraxas or Vessels to
provide employment to any person for any period of time.
Fees and Expenses. The Merger Agreement provides that, except as
described above, all costs and expenses incurred in connection with the Merger
Agreement and the transactions contemplated by the Merger Agreement will be paid
by the party incurring the expenses, except that the costs incurred in
connection with printing and mailing proxy materials to Abraxas stockholders
will be paid by Abraxas.
Restrictions on Resales by Affiliates
The shares of Abraxas Common Stock to be received by Vessels
stockholders in connection with the Merger have been registered under the
Securities Act and, except as set forth in this paragraph, may be traded without
restriction. The shares of Abraxas Common Stock to be issued in connection with
the Merger and received by persons who are deemed to be "affiliates" (as that
term is defined in Rule 144 under the Securities Act) of Vessels prior to the
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Merger may be resold by them only in transactions permitted by the resale
provisions of Rule 145 under the Securities Act (or, in case any such person
should become an affiliate of Abraxas, Rule 144 under the Securities Act) or as
otherwise permitted under the Securities Act. Accordingly, the Merger Agreement
provides that Vessels will use all reasonable efforts to cause its affiliates to
execute an agreement (an "Affiliates' Agreement") to the effect that such
persons will not sell, transfer or otherwise dispose of Abraxas Common Stock at
any time in violation of the Securities Act or the rules and regulations
promulgated thereunder, including Rule 145. Abraxas has agreed to grant certain
registration rights to former Vessels stockholders in connection with the
Merger. See "Description of Abraxas Capital Stock -- Registration Rights."
Escrow of Shares
At the Closing, Abraxas and a representative of the stockholders of
Vessels will enter into the Escrow Agreement pursuant to which an aggregate of
472,222 shares of Abraxas Common Stock will be issued to the Vessels
stockholders and deposited into an escrow account to secure certain
reimbursement obligations of the stockholders of Vessels to Abraxas relating to
the breach of certain representations and warranties set forth in the Merger
Agreement and liabilities, if any, arising under the Supply Contract.
The Escrow Shares include the Supply Contract Escrow Shares which will
be collateral for claims related to the Supply Contract. These shares will not
be deposited into the escrow account if the Supply Contract is Terminated prior
to the Closing. Generally, a Termination means (i) a termination of the Supply
Contract pursuant to its terms, (ii) an assignment of the Supply Contract with
no liabilities or obligations retained by Vessels or (iii) Vessels' entering
into other substantially similar natural gas supply contracts and commodity
price swaps sufficient to cause the floating price in such other supply
contracts to be exchanged for the fixed price of the Supply Contract without any
residual gain or loss. If the Supply Contract is not Terminated prior to
Closing, however, the Supply Contract Escrow Shares will remain in escrow and be
subject to certain claims by Abraxas for damages related to the Supply Contract.
Generally, such damages will include any damages required to be paid for
Vessels' breach of the Supply Contract and any damages related to the
Termination of the Supply Contract. Such damages shall be adjusted for (i) gains
or losses from the settlement of put options and call options entered into by
Vessels to hedge the Supply Contract sales prices, (ii) net realized gains or
losses from sales of gas pursuant to the Supply Contract from August 31, 1997 to
the date of Termination and (iii) net revenues from the purchase and sale of gas
through certain of Vessels' transportation agreements. To the extent the offsets
and adjustments exceed the damages, Abraxas will deposit cash funds into the
escrow account (the "Escrow Cash Payment") to be distributed to the Vessels
stockholders. The Supply Contract Escrow Shares, and any Escrow Cash Payment,
will be released to the Vessels stockholders 15 days after the Termination of
the Supply Contract, provided a sufficient number of shares will remain in
escrow as collateral for any pending or unresolved claims related to the Supply
Contract until such claims are resolved.
In addition, at the Closing, Abraxas and a representative of the
stockholders of Vessels will enter into the Provisional Payment Escrow
Agreement, pursuant to which 75% of the shares of Abraxas Common Stock issued
pursuant to the Projected Provisional Payment, or 767,657 shares, will be
deposited into the Provisional Payment Escrow, to be released on the Provisional
Payment Date as necessary to pay the Provisional Payment.
Board Representation and Voting Agreement
Pursuant to the Voting Agreement, each of the executive officers and
directors of Abraxas has agreed to vote any shares of Abraxas Common Stock owned
by him in favor of the Merger and the Share Issuance at the Special Meeting and
to vote for Robert F. Semmens as a director of Abraxas at the 1998 Annual
Meeting of Stockholders for a three-year term.
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Pursuant to the Letter Agreement to be executed and delivered at the
Closing, Abraxas has agreed to appoint Robert F. Semmens to the Board of
Directors at the Closing and to nominate Mr. Semmens as a director of Abraxas at
the 1998 Annual Meeting of Stockholders for a three-year term and each
subsequent annual meeting of the stockholders of Abraxas beginning with the 2001
Annual Meeting until the later of (i) the release of all of the Escrow Shares,
(ii) the receipt by the Vessels stockholders of the Provisional Payment or (iii)
the date upon which Beacon or its affiliates no longer own 15% or more of the
aggregate number of votes which may be cast by holders of those securities
outstanding of Abraxas which entitle the holders thereof to vote generally on
all matters submitted to Abraxas' securityholders for a vote.
Accounting Treatment
The Merger will be accounted for under the purchase method of
accounting, in accordance with generally accepted accounting principles. Under
the purchase method of accounting, the purchase price paid by Abraxas for
Vessels (including direct costs of the Merger) will be allocated to the
identifiable assets of Vessels based upon estimates of the fair value of
Vessels' identifiable assets and liabilities as of the Effective Time. After the
Merger, the financial condition and results of operations of Vessels will be
included in the consolidated financial condition and results of operations of
Abraxas.
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER
Abraxas
Set forth below is a summary discussion of certain federal income tax
consequences of the Merger to Abraxas. The discussion is based upon the Internal
Revenue Code of 1986, as amended, reports and statements of Congressional
Committees, Treasury Regulations (the "Regulations"), published rulings of the
IRS and court decisions as in effect on the date of this Registration Statement.
Future legislation, administrative changes or court decisions may significantly
modify the statements made herein; furthermore, any such changes may or may not
apply retroactively. Accordingly, no assurance can be given that the foregoing
legal precedents will remain in full force and effect.
The discussion does not address any foreign, state, local or federal
alternative minimum tax consequences. The discussion also does not address any
aspects of federal income taxation that may be relevant to the shareholders of
Vessels. The discussion below is only a summary and not intended to be a
complete analysis or a substitute for careful tax planning.
The federal income tax consequences of the Merger to Abraxas are expected
to be as follows:
(a) No gain or loss will be recognized by Abraxas, Abraxas shareholders or
Sub in connection with the Merger;
(b) The basis of the Vessels assets will remain unchanged; and
(c) As a result of the Merger, any of Vessels net operating loss
carryovers, credit carryovers or any net unrealized built-in losses will be
subject to an annual use limitation under Sections 382 and 383 of the Code.
Vessels
The following is a discussion of certain federal income tax
consequences of the Merger to Vessels and the Vessels stockholders. This
discussion is based on provisions of the Code, the Regulations thereunder and
rulings and court decisions as of the date hereof, all of which are subject to
change, possibly retroactively. The discussion is included for general
information purposes only.
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The Merger. At or prior to the Effective Date, Vessels will receive an
opinion (the "Tax Opinion"), unless waived by the Vessels stockholders, from
King & Spalding that, based upon its review of the Merger Agreement, the
Registration Statement of which this Proxy Statement-Prospectus is a part,
certain other facts and documents which it has considered relevant, and certain
representations made to it by Vessels, Abraxas and Sub, the Merger will have the
federal income tax consequences set forth below:
(1) the Merger will constitute a "reorganization" within the meaning of
Section 368(a) of the Code;
(2) no gain or loss will be recognized by the Vessels stockholders upon
the exchange in the Merger of their Vessels Common Stock for Abraxas Common
Stock;
(3) the aggregate tax basis of the Abraxas Common Stock received in the
Merger by each Vessels stockholder will be the same as the aggregate tax basis
of the Vessels Common Stock exchanged for such Abraxas Common Stock; and
(4) the holding period of the Abraxas Common Stock received in the
Merger by each Vessels stockholder will include the holding period of such
stockholder in the Vessels Common Stock exchanged for such Abraxas Common Stock,
provided that the Vessels Common Stock is held as a capital asset on the
Effective Date.
In rendering the Tax Opinion, counsel will rely upon certain written
representations as to factual matters by appropriate officers of Vessels,
Abraxas and Sub. Such representations are customary for opinions of this type;
the Tax Opinion cannot be relied upon, however, if any such representation is,
or later becomes, inaccurate. No ruling from the IRS with respect to the tax
consequences of the Merger has been, or will be, requested, and the Tax Opinion
will not be binding upon the IRS or the courts. If the Merger is consummated,
and it is later determined that the Merger did not qualify as a "reorganization"
under the Code, then each Vessels stockholder would recognize taxable gain or
loss equal to the difference between the fair market value of the Abraxas Common
Stock received by him or her in the Merger and his or her tax basis in the
Vessels Common Stock exchanged therefor.
The foregoing discussion does not consider the tax effects of the
Escrow Arrangement, the Escrow Cash Payment, or the Provisional Payment
Arrangement, each of which are discussed below.
The Escrow Arrangement. Pursuant to Section 1.09 of the Merger
Agreement, at or prior to the Effective Time, Abraxas will deposit certificates
representing 472,222 shares of Abraxas Common Stock into an escrow account (the
"Escrow"). The conditions of the Escrow (the "Escrow Arrangement") are set forth
in the Escrow Agreement.
For federal income tax purposes, shares of Abraxas Common Stock held in
the Escrow should be treated as owned by the former Vessels stockholders,
notwithstanding the fact that such shares may be forfeited at a later date. If
shares of Abraxas Common Stock held in the Escrow are delivered back to Abraxas
in satisfaction of Claims pursuant to Section 4(c) of the Escrow Agreement, each
former Vessels stockholder should be treated as having sold his or her pro rata
portion of those shares for their value as determined under Section 4(c) and
should be entitled to increase the tax basis of his or her remaining shares of
Abraxas Common Stock by the value of the shares so delivered.
The Escrow Cash Payment. Pursuant to Section 1.04(a) of the Merger
Agreement and Section 1(e) of the Escrow Agreement, Abraxas may be required to
deposit into the Escrow the Escrow Cash Payment, depending on the occurrence or
non-occurrence of certain events by a defined date (15 days after the date of
the Termination of the Supply Contract); the Escrow Cash Payment, if any, will
then be immediately distributed to the Vessels stockholders.
The Escrow Cash Payment, if any, is part of the consideration to be
received by the Vessels stockholders in exchange for their Vessels Common Stock.
Generally, the receipt by a Vessels stockholder of property other than Abraxas
Common Stock in the Merger will be taxable if the total consideration received
exceeds the stockholder's tax basis in his or her shares of Vessels Common
Stock.
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Vessels believes that, because it cannot be determined whether the
Escrow Cash Payment will ever be paid, the Escrow Cash Payment will not have any
ascertainable value at the Effective Time of the Merger. Accordingly, Vessels
believes that the Vessels stockholders should not be required to take the Escrow
Cash Payment into account as additional consideration received in the Merger
unless and until the Escrow Cash Payment is actually paid. If the Escrow Cash
Payment eventually is paid to the former Vessels stockholders, a portion of that
payment may be treated as imputed interest under Section 1274 of the Code which
will be taxable as ordinary income. The remainder of the payment will be taxable
as capital gain to the extent that the total consideration received in the
Merger (including the portion of the Escrow Cash Payment not treated as imputed
interest) by a Vessels stockholder exceeds such stockholder's tax basis in his
or her shares of Vessels Common Stock.
The Provisional Payment Arrangement. Pursuant to Section 1.04 of the
Merger Agreement, the Vessels stockholders will receive in the Merger the right
to receive on April 30, 1999, shares of Abraxas Common Stock equal to 75% of the
Provisional Payment. The Merger Agreement provides that an estimate of the
Provisional Payment (the Projected Provisional Payment) will be made at the
Effective Time. In the Merger, Abraxas will issue shares of Abraxas Common Stock
equal to the Projected Provisional Payment, 25% of which will be issued directly
to the Vessels stockholders and 75% of which (the "Deposited Shares") will be
issued to the Vessels stockholders and deposited into the Provisional Payment
Escrow.
Under the terms and conditions of this arrangement (the "Provisional
Payment Arrangement"), if it turns out that the Provisional Payment is less than
the Projected Provisional Payment, then shares of Abraxas Common Stock equal to
the difference will be returned to Abraxas and the balance distributed to the
former Vessels stockholders on the Provisional Payment Date. Conversely, if the
Provisional Payment exceeds the Projected Provisional Payment, then all the
Deposited Shares will be distributed to the former Vessels stockholders along
with additional shares of Abraxas Common Stock equal to the excess (the
"Additional Provisional Payment Shares").
For federal income tax purposes, the Deposited Shares should be treated
as owned by the former Vessels stockholders, notwithstanding the fact that such
shares may be forfeited at a later date. If any of the Deposited Shares are
returned to Abraxas pursuant to the terms of the Provisional Payment
Arrangement, the former Vessels stockholders will recognize no gain or loss on
the return and each Vessels stockholder should be entitled to increase the tax
basis of his or her remaining shares of Abraxas Common Stock by the tax basis of
the shares so delivered.
Although the matter is not free from doubt, Vessels believes that
neither the potential right to receive Additional Provisional Payment Shares nor
the actual receipt of such shares (if any) should trigger any gain or loss to
the Vessels stockholders; however, if and when the Additional Provisional
Payment Shares are issued to the former Vessels stockholders, a portion of such
shares will be treated as imputed interest under Section 483 of the Code which
will be taxable as ordinary income.
THIS DISCUSSION IS LIMITED TO THE UNITED STATES FEDERAL INCOME TAX
MATTERS SPECIFICALLY COVERED THEREBY, AND DOES NOT ADDRESS ANY OTHER TAX
CONSEQUENCES THAT MAY RESULT FROM THE MERGER OR ANY OTHER TRANSACTION (INCLUDING
ANY TRANSACTION UNDERTAKEN IN CONNECTION WITH THE MERGER). THIS DISCUSSION
ASSUMES THE VESSELS STOCKHOLDERS HOLD THEIR VESSELS COMMON STOCK AS CAPITAL
ASSETS, AND MAY NOT APPLY TO VESSELS STOCKHOLDERS WHO ARE SUBJECT TO SPECIAL TAX
RULES, SUCH AS STOCKHOLDERS, IF ANY, WHO RECEIVED THEIR VESSELS COMMON STOCK
UPON THE EXERCISE OF EMPLOYEE STOCK OPTIONS OR OTHERWISE AS COMPENSATION, AND
STOCKHOLDERS THAT ARE INSURANCE COMPANIES, SECURITIES DEALERS, FINANCIAL
INSTITUTIONS OR FOREIGN PERSONS. BECAUSE CERTAIN TAX CONSEQUENCES OF THE MERGER
MAY VARY DEPENDING ON THE PARTICULAR CIRCUMSTANCES OF EACH STOCKHOLDER, EACH
STOCKHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR TO DETERMINE THE
42
<PAGE>
PARTICULAR TAX CONSEQUENCES TO SUCH STOCKHOLDER OF THE MERGER (INCLUDING THE
APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS).
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Vessels' management and the Vessels Board may be
deemed to have certain interests in the Merger that are in addition to their
interests as stockholders of Vessels generally. Such interests relate to, among
other things, provisions in the Merger Agreement regarding the performance and
provision of obligations and benefits under existing severance agreements and
compensation and benefit plans, and the indemnification of and provision of
insurance coverage for the directors and officers of Vessels. Vessels' employees
generally will receive, upon termination of employment, a severance payment
equal to six months' salary and a bonus payment equal to three months' salary if
the Merger is consummated and such employees are employed by Vessels at the time
of Closing. Under the Merger Agreement, Abraxas has agreed to provide former
employees of Vessels with continued employee benefits after the Effective Time
as required by COBRA and to maintain health benefit and other welfare plan
coverage for former Vessels' employees for six months after the Effective Time
under the plans maintained by Vessels immediately before the Effective Time. W.
Michael Neumann, Jr., Vessels' President and CEO, will receive either (i) a
bonus equal to one year's salary upon termination of his employment and, if the
Merger is consummated and he is employed by Vessels at the time of Closing, 12
monthly payments equal to his current monthly salary or (ii) 24 monthly payments
equal to his current monthly salary. Thomas J. Vessels, Chairman of the Board of
Vessels, will receive a severance payment of $600,000 over three years, $200,000
paid each year, and will be eligible to participate in employee benefit plans in
accordance with the terms of his employment contract. The Vessels Board was
aware of these interests and considered them, among other matters, in approving
the Merger Agreement and the transactions contemplated thereby. See "The Merger
- -- The Merger Agreement -- Indemnification."
If the Merger is approved by Abraxas stockholders, at the Effective
Time, Robert F. Semmens will be appointed to the Abraxas Board of Directors and
will be nominated as a director of Abraxas at the 1998 Annual Meeting of
Stockholders to serve a three-year term. Mr. Semmens is currently a director of
Vessels and a partner of the entities that control VOG Holdings, LLC, Vessels'
majority stockholder.
APPRAISAL RIGHTS
Under the DGCL, appraisal rights will be available to holders of
Vessels Common Stock in connection with the Merger. Any such holder desiring to
exercise appraisal rights must follow precisely the procedures prescribed by the
DGCL. The holders of Abraxas Common Stock will not have any appraisal rights in
connection with the Merger or the Share Issuance. See "The Merger -- The Merger
Agreement --Appraisal Rights" and Annex II.
43
<PAGE>
CAPITALIZATION
The following table sets forth (i) the historical consolidated
capitalization of Abraxas and Vessels at September 30, 1997, respectively, and
(ii) Abraxas' pro forma consolidated capitalization as of such date (giving
effect to the Merger as of September 30, 1997). This table should be read in
conjunction with the financial statements and related notes appearing elsewhere
in this Proxy Statement-Prospectus.
<TABLE>
<CAPTION>
(Unaudited)
Pro Forma Pro Forma
Abraxas Vessels Adjustments Combined as
Historical Historical for Merger Adjusted
---------------- ----------------- ---------------- -----------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Debt (including current portion):
Credit Agreement $ - $ - $ - $ -
Long-term debt and capital lease
obligations 217,573 272 - 217,845
---------------- ----------------- ---------------- -----------------
Total Long-Term Debt 217,573 272 - 217,845
Equity:
Common Stock 63 3 3 69
Additional paid-in capital 51,119 43,501 (33,390) 61,230
Accumulated deficit (15,298) (8,511) 8,511 (15,298)
Treasury stock (281) - - (281)
Foreign currency translation (3,477) - - (3,477)
---------------- ----------------- ---------------- -----------------
Total Stockholder's Equity 32,126 34,993 (24,876) 42,243
---------------- ----------------- ---------------- -----------------
Total capitalization $249,699 $ 35,265 $ (24,876) $ 260,088
================ ================= ================ =================
</TABLE>
44
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information is derived from
the historical financial statements of the Company and Vessels set forth
elsewhere in this Proxy Statement-Prospectus and is adjusted to reflect the
following:
The Unaudited Pro Forma Condensed Balance Sheet of the Company as of
September 30, 1997 has been prepared assuming the Merger was consummated on
September 30, 1997. The Unaudited Pro Forma Statement of Operations of the
Company for the year ended December 31, 1996 has been prepared assuming the sale
of the DJ Basin Properties by Vessels and the Merger were consummated on January
1, 1996 and have also been prepared assuming the acquisition of the Wyoming
Properties, acquired on September 30, 1996, the acquisition of CGGS, acquired on
November 14, 1996, the acquisition of Portilla and Happy, acquired on November
14, 1996 and the acquisition of the East White Point and Stedman Island 50%
overriding royalty interests, acquired in November 1996, were all consummated on
January 1, 1996. The Unaudited Pro Forma Statement of Operations of the Company
for the nine months ended September 30, 1997 has been prepared assuming the sale
of the DJ Basin Properties by Vessels and the Merger were consummated on January
1, 1997. The historical revenues and expenses of Vessels, CGGS, the Wyoming
Properties, Portilla, Happy, 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 rate of $0.7437 to one Canadian dollar for the fiscal
year ended December 31, 1996. The monetary amounts on the 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-five month period. See "Business
of Abraxas- Primary Operating Areas - Western Canada."
The Company previously owned a 50% working interest in Portilla and a
12% working interest in Happy. In March 1996, the Company sold it interests in
Portilla and Happy to Acco, LLC ("Acco") for net consideration of $15.6 million
(the "Acco Sale"). Acco separately obtained the release of the 50% overriding
royalty interest in Portilla previously owned by a third party and subsequently
contributed its interests in Portilla and Happy to Portilla - 1996, L.P. (the
"Partnership"). At the time of the sale of its working interests in Portilla and
Happy, the Company received a 25% interest in the Partnership. In November 1996,
the Company acquired the remaining 75% interest in the Partnership for $27.5
million and obtained the release of a third party's overriding royalty interest
in East White Point and Stedman Island for $9.3 million. The pro forma
adjustments assume that the Company obtained the release of the third party's
interest in Portilla, East White Point and Stedman Island at January 1, 1996 and
that the Company owned Portilla and Happy during the period from March 21, 1996
to November 14, 1996.
The Unaudited Pro Forma Condensed Balance Sheet reflects the
preliminary allocation of the purchase price for the Merger to the assets and
liabilities of the Company. The final allocation of the purchase price, and the
resulting effect on DD&A expense in the accompanying Unaudited Pro Forma
Statement of Operations, will differ from the preliminary estimates because the
final allocation will be based on the purchase price allocated to assets and
liabilities on the basis of the fair values of the assets and liabilities
determined at the end of the allocation period as allowed by Accounting
Principles Board Opinion No. 38.
The Unaudited Pro Forma Financial Information should be read in
conjunction with the notes thereto, the Consolidated Financial Statements of the
Company and the notes thereto and the historical financial statements and the
notes thereto relating to Vessels, CGGS, the Wyoming Properties and the
Overriding Royalty Interests in the Portilla Field included elsewhere in this
Proxy Statement-Prospectus.
45
<PAGE>
The Unaudited Pro Forma Financial Information is not indicative of the
financial position or results of operations of the Company which would actually
have occurred if the acquisitions and the Merger 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 the Unaudited Pro Forma
Financial Information 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.
46
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
COMPLETED ACQUISITIONS
-----------------------------------------------------------------------
CGGS
-------------------------------
Abraxas
Petroleum Adjustments East White
Corporation CGGS to Reflect CGGS Wyoming Portilla/ Point/
12/31/96 Historical Sale of (Net) Properties Happy Stedman/
Nevis (a) (h)
-------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenue:
Oil and gas
production......... $ 25,749 $ 14,343 $ -- $ 14,343 $ 7,280 $ 5,313 $ 2,728
Processing .......... 600 24,269 (20,679) 3,590 -- -- --
Rig revenue ......... 139 -- -- -- -- -- --
Other ............... 165 168 -- 168 -- -- --
--------- --------- --------- --------- --------- -------- ---------
Total operating revenue 26,653 38,780 (20,679) 18,101 7,280 5,313 2,728
Operating cost and expenses:
LOE ................. 5,858 3,473 10 3,483 1,844 1,378 465
Processing .......... 262 13,188 (11,194) 1,994 -- -- --
Exploration expense . -- -- -- -- -- -- --
DD&A ................ 9,605 8,762 (1,352) 7,410 -- 2,090 --
Rig operating ....... 169 -- -- -- -- -- --
G&A ................. 1,933 2,625 (583) 2,042 -- -- --
--------- --------- --------- --------- --------- -------- ---------
Total operating expense 17,827 28,048 (13,119) 14,929 1,844 3,468 465
--------- --------- --------- --------- --------- -------- ---------
Operating income (loss) 8,826 10,732 (7,560) 3,172 5,436 1,845 2,263
Other (income) expense:
Interest income ..... (254) (236) -- (236) -- (2) --
Amortization
deferred financing 280 1,776 (1,407) 369 -- -- --
fees
Interest expense .... 6,241 10,271 (5,037) 5,234 -- 1,524 --
Other ............... 443 (27,735) 27,686 (49) -- 73 --
--------- --------- --------- --------- --------- -------- ---------
6,710 (15,924) 21,242 5,318 -- 1,595 --
--------- --------- --------- --------- --------- -------- ---------
Income (loss) before tax 2,116 26,656 (28,802) (2,146) 5,436 250 2,263
Income tax (expense)
benefit:
Current ........... (176) 219 (7) (212) -- -- --
Deferred .......... -- 9,020 (9,020) -- -- -- --
--------- --------- --------- --------- --------- -------- ---------
Income (loss)from
continuing operations 1,940 17,417 (19,775) (2,358) 5,436 250 2,263
Less dividend
requirement on
cumulative preferred
stock ............... (366) -- -- -- -- -- --
--------- --------- --------- --------- --------- -------- ---------
Income (loss) applicable
to common stockholders $ 1,574(1) $ 17,417 $(19,775) $ (2,358) $ 5,436 $ 250 $ 2,263
========= ========= ========= ========= ========= ======== =========
Earnings (loss) per share
from continuing
operations.......... $ 0.03
=========
</TABLE>
(1) Excludes loss incurred in connection with extinguishment of debt recorded as
an extraordinary item. 47
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS (continued)
YEAR ENDED DECEMBER 31, 1996
MERGER
-------------------------------------
VESSELS
-------------------------------------
Adjustment
to reflect
Sale of
Vessels DJ Basin Vessels
Energy Properties Energy Merger Pro
(Historical) (b) (net) Adjustments Forma
----------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Operating revenue:
Oil and gas ......... $ 14,811 $ (7,780) $ 7,031 $ -- $ 62,444
production
Processing .......... 38,439 (36,573) 1,866 -- 6,056
Rig revenue ......... -- -- -- -- 139
Other ............... 171 (171) -- -- 333
---------- --------- --------- --------- ----------
Total operating revenue 53,421 (44,524) 8,897 -- 68,972
Operating cost and expenses:
LOE ................. 4,813 (3,337) 1,476 -- 14,504
Processing .......... 33,365 (31,030) 2,335 -- 4,591
Exploration expense . 1,713 (775) 938 (938)(c) --
DD&A ................ 9,754 (5,499) 4,255 2,160(d) 25,520
Rig operating ....... -- -- -- -- 169
G&A ................. 3,238 117 3,355 (3,575)(e) 3,755
---------- --------- --------- --------- ----------
Total operating expense 52,883 (40,524) 12,359 (2,353) 48,539
---------- --------- --------- --------- ----------
Operating income (loss) 538 (4,000) (3,462) 2,353 20,433
Other (income) expense:
Interest income ..... -- -- -- -- (492)
Amortization of
deferred financing
fees.............. -- -- -- 600(f) 1,249
Interest expense .... 4,390 (4,354) 36 10,296(g) 23,331
Other ............... -- -- -- -- 467
---------- --------- --------- --------- ----------
4,390 (4,354) 36 10,896 24,555
---------- --------- --------- --------- ----------
Income (loss) before tax (3,852) 354 (3,498) (8,543) (4,122)
Income tax (expense)
benefit:
Current ........... -- (388)
Deferred .......... 822 75 747 1,900(i) 2,647
---------- --------- --------- --------- ----------
Income (loss)from
continuing operations (3,030) 279 (2,751) (6,643) (1,863)
Less dividend
requirement on
cumulative preferred
stock ............... -- -- -- -- (366)
---------- --------- --------- --------- ----------
Income (loss) applicable
to common stockholders $ (3,030) $ 279 $ (2,751) $ (6,643) $ (2,229)
========== ========= ========= ========= ==========
Earnings (loss) per
share from continuing
operations .......... $ (0.35)
==========
</TABLE>
47a
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS For the Nine
Months Ended September 30, 1997
Historical Merger
------------------- ---------------------------------------
Vessels
---------------------------------------
Adjustments
Abraxas to Reflect
Petroleum Sale of Merger
Corporation Historical DJ Basin Adjustments Pro Forma
Properties (b)
------------------- ----------------- -------------------- ------------------ ------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Operating revenue:
Oil and gas production $ 46,920 $ 7,060 $ (1,907) $ - $ 52,073
Gas gathering,
processing and 2,793 14,722 (10,379) - 7,136
marketing
Rig revenue 250 - - - 250
Other 728 773 (773) - 728
------------------- ----------------- -------------------- ------------------ -----------------
Total operating revenue 50,691 22,555 (13,059) - 60,187
Operating costs and
expenses:
LOE 10,604 2,201 (703) - 12,102
Gas gathering,
processing and 1,191 12,929 (9,097) 5,023
marketing
DD&A 19,780 5,737 (1,177) (1,920)(d) 22,420
Exploration expense - 914 (28) (886)(c) -
Rig operations 214 - - - 214
G&A 3,119 2,223 (315) (1,431)(e) 3,596
------------------- ----------------- -------------------- ------------------ -----------------
Total operating expenses 34,908 24,004 (11,320) (4,237) 43,355
------------------- ----------------- -------------------- ------------------ -----------------
Operating income (loss) 15,783 (1,449) (1,739) 4,237 16,832
Other (income) expense:
Interest income (438) - - - (438)
Amortization of deferred 933 92 - - 1,025
financing fee
Interest expense 18,757 1,503 (1,510) - 18,750
Minority interest 85 - - - 85
Other 115 - - - 115
------------------- ----------------- -------------------- ------------------ -----------------
Income (loss) before tax (3,669) (3,044) (229) 4,237 (2,705)
Income tax (expense)
benefit:
Current (156) - - - (156)
Deferred 1,227 (62) -- - 1,165
------------------- ----------------- -------------------- ------------------ -----------------
Net income (loss) (2,598) (3,106) (229) 4,237 (1,696)
Less dividend requirement
on cumulative preferred (183) - - - (183)
stock
------------------- ----------------- -------------------- ------------------ -----------------
Income (loss) applicable to
common stockholders $ (2,781) $ (3,106) $ (229) $ 4,237 $ (1,879)
=================== ================= ==================== ================== =================
Earnings (loss) per share: $ (.47) $ (.29)
=================== =================
</TABLE>
- -------------
See notes to unaudited pro forma financial information.
48
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
As of September 30, 1997
Historical Merger
------------------- -------------------
Abraxas
Petroleum Vessels Merger
Corporation Historical Adjustments Pro Forma
------------------- ------------------- ------------------ ----------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Assets:
Cash $ 7,559 $ 991 $ - $ 8,550
Accounts Receivable 10,980 3,412 - 14,392
Other 635 1,111 - 1,746
------------------- ------------------- ------------------ ----------------
Total current assets 19,174 5,514 - 24,688
Property and equipment:
Oil and gas properties 346,459 56,997 (34,710)(c) 368,746
Less accumulated DD&A 58,250 15,207 (15,207)(c) 58,250
------------------- ------------------- ------------------ ----------------
Net property and equipment 288,209 41,790 (19,503) 310,496
Deferred financing fees 8,432 425 (425)(c) 8,432
Other assets 1,367 356 - 1,723
=================== =================== ================== ================
Total assets $ 317,182 $ 48,085 $ (19,928) $ 345,339
=================== =================== ================== ================
Liabilities and stockholders'
equity:
Total current liabilities $ 28,831 $ 6,755 $ 2,077 (c) $ 37,663
Long-term debt:
Senior notes 215,000 - - 215,000
Other 2,330 - - 2,330
Other liabilities 2,491 6,337 2,871 (c) 11,699
Deferred income taxes 32,024 - - 32,024
Minority interest 4,380 - - 4,380
Shareholders' equity:
Common stock 63 3 (3)(b)
6 (a) 69
Additional paid-in-capital 51,119 43,501 (43,501)(b)
10,111 (a) 61,230
Accumulated deficit (15,298) (8,511) 8,511 (b) (15,298)
Foreign currency (3,477) - - (3,477)
translation adjustment
Treasury stock (281) - - (281)
------------------- ------------------- ------------------ ----------------
Total stockholders' equity 32,126 34,993 (24,876) 42,243
------------------- ------------------- ------------------ ----------------
Total liabilities and
stockholders' equity $ 317,182 $ 48,085 $ (19,928) $ 345,339
=================== =================== ================== ================
</TABLE>
- -------------
See notes to unaudited pro forma financial information.
49
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
Note 1. The Unaudited Pro Forma Statement of Operations for the year ended
December 31, 1996 reflects the acquisition of the Wyoming Properties, acquired
on September 30, 1996; the acquisition of CGGS net of the sale of the Nevis
Plant (as defined below) prior to the acquisition, acquired on November 14,
1996; the acquisition of Portilla and Happy, acquired on November 14, 1996; and
the acquisition of East White Point and Stedman Island 50% overriding royalty
interests, acquired in November 1996; (see Note 2 to the Notes to Consolidated
Financial Statements of the Company) as well as the sale of the DJ Basin
Properties by Vessels and the Merger, as if all were consummated on January 1,
1996. The unaudited pro forma Statement of Operations for the nine months ended
September 30, 1997 reflects the sale of the DJ Basin Properties by Vessels and
the Merger as if they were consummated on January 1, 1997.
a. To adjust the results of operation of CGGS for the sale of CGGS's Nevis Gas
Processing Plant and related assets (the "Nevis Plant") which were sold to a
third party just prior to the acquisition of CGGS by Abraxas on November 14,
1996.
b. To adjust the results of operations of Vessels for the sale of certain assets
comprising Vessels' interest in the DJ Basin Properties which were sold in April
1997.
c. To adjust for the capitalization of exploration activity under the full cost
method of accounting utilized by Abraxas as compared to the successful efforts
method of accounting utilized by Vessels.
d. To adjust DD&A expense for the year ended December 31, 1996 to reflect the
acquisitions of CGGS, the Wyoming Properties, the reacquisition of Portilla and
Happy, the acquisition of the 50% overriding royalty interest in Portilla
previously owned by a third party, the 50% overriding royalty interest in East
White Point and Stedman Island, the sale by Vessels of the DJ Basin Properties
and the Merger; and to adjust DD&A expense for the nine months ended September
30, 1997 to reflect the sale of the DJ Basin Properties by Vessels and the
Merger for the nine months ended September 30, 1997. 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.
e. To adjust G&A expense to reflect (1) the reversal of contractual management
and administrative fees charged to CGGS on a percentage basis and to record
estimated actual costs to be incurred and (2) to reflect the reduction of
Vessels expenses for the closing of the corporate office including the
elimination of the administrative personnel.
f. To adjust the amortization of the deferred financing fee for the Company's
credit facility with First Union National Bank of North Carolina (the "First
Union Credit Facility") and the repayment of certain debentures of CGGS and the
fees and expenses related to the issuance of the Notes.
g. To adjust interest expense using a rate of 11.5% for the issuance of the
Notes and to reflect the repayment of a revolving credit and loan facility and
the retirement of the CGGS debentures.
h. Reflects the results of operations of the 50% overriding royalty interest in
Portilla previously owned by a third party for the period from January 1, 1996
to November 14, 1996 and the results from Portilla and Happy previously owned by
the Company for the period March 21, 1996 to November 14, 1996.
i. To reflect the deferred tax benefit relating to the CGGS operating losses.
Note 2. The Unaudited Pro Forma Condensed Balance Sheet as of September 30,
1997, reflects the acquisition of Vessels as if it had occurred as of September
30, 1997 as follows:
On November 12, 1997, the Company and Vessels executed the Merger Agreement
for Abraxas' purchase of 100% of the capital stock of Vessels in exchange for
Abraxas Common Stock. Under the terms of the Merger Agreement, the Company will
initially issue approximately 562,070 shares of Abraxas Common Stock in exchange
50
<PAGE>
for all of the capital stock of Vessels and is obligated to issue additional
shares of Abraxas Common Stock under an agreed to Projected Provisional Payment.
The Projected Provisional Payment is based upon the Vessels Non-PDP/PDNP EBITDX
for the period from February 1, 1998 to January 31, 1999. The Company
anticipates issuing to the Vessels stockholders and depositing approximately
767,657 shares of Abraxas Common Stock in the Provisional Payment Escrow account
which will entitle the Vessels stockholders to voting rights and other rights of
ownership including receipt of any dividends. Upon the final determination of
the Provisional Payment, the number of shares of Abraxas Common Stock as
determined by the Projected Provisional Payment formula will be released from
the Provisional Payment Escrow and will be recorded at the current value at the
time the Provisional Payment is determined and such additional shares of Abraxas
Common Stock are released. To the extent the Projected Provisional Payment would
require the issuance of shares in excess of those escrowed, such shares will be
issued by the Company.
Additionally, at the Closing the Company and a representative of the
stockholders of Vessels will enter into the Escrow Agreement pursuant to which
an aggregate of 472,222 shares of Abraxas' Common Stock will be issued to the
Vessels stockholders and deposited into a separate escrow account to secure
certain reimbursement obligations of the stockholders of Vessels to the Company
relating to the breach of certain representations and warranties set forth in
the Merger Agreement and liabilities, if any, arising under the Supply Contract.
The Escrow Shares include 388,889 shares which will be collateral for
claims related to the Supply Contract (the "Supply Contract Escrow Shares").
These shares will not be deposited into the escrow account if the Supply
Contract is Terminated (as defined in the Escrow Agreement) prior to Closing. If
the Supply Contract is not Terminated prior to Closing, however, the Supply
Contract Escrow Shares will remain in escrow and be subject to any claims by the
Company for damages related to the Supply Contract. The Supply Contract Escrow
Shares, and any Escrow Cash Payment, will be released to the Vessels
stockholders 15 days after the Termination of the Supply Contract, provided a
sufficient number of shares will remain in escrow as collateral for any pending
or unresolved claims related to the Supply Contract until such claims are
resolved. The Supply Contract obligates Vessels to supply a third party with gas
volumes sufficient to cover the annual contract quantity obligations
(approximately 1,537,000 Mmbtus). Ninety-five percent of the annual contract
quantity will be delivered to the third party at prices of $1.70 and $1.65 per
Mmbtu in 1998 and 1999, respectively, and at escalated prices, as defined, in
years 2000 - 2008. Five percent of the annual contract quantity will be
delivered to the third party at prices of $2.16 per Mmbtu in 1998 - 1999 and at
escalated prices, as defined, for years 2000 - 2008.
Under the Escrow Agreement, the escrow shares ultimately issuable will be
reduced by any damages incurred by the Company in payment of such liabilities.
In connection with the Unaudited Pro Forma Condensed Balance Sheet at September
30, 1997, liabilities have been recorded in the amount of $8.5 million related
to the Escrow Agreement. To the extent no liabilities are incurred, the shares
of Abraxas Common Stock issued and deposited in escrow will be released with the
liability reduced and equity increased. The purchase price of $22,643,000,
includes the number of the 562,070 shares of Abraxas Common Stock initially
issued ($10,117,000), the liability related to the Escrow Shares ($8,500,000)
plus the remaining net liabilities of Vessels being assumed ($4,026,000).
a. To record issuance of new common shares:
Common Stock $ 6
Additional paid-in capital 10,111
b. To eliminate Vessels' equity:
Common Stock (3)
Additional paid-in capital (43,501)
Accumulated deficit 8,511
c. Allocation of change in basis:
Decrease in oil and gas properties 34,710
Decrease accumulated DD&A (15,207)
Decrease in deferred financing fees 425
Increase in current liabilities 2,077
Increase in other liabilities 2,871
51
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF VESSELS
The following table sets forth certain consolidated financial data for
Vessels as of and for each of the periods indicated. The financial data for each
year in the five years ended December 31, 1996 are derived from the audited
financial statements of Vessels. The financial data for the nine months ended
September 30, 1997 and 1996 are derived from Vessels' unaudited financial
statements which, in the opinion of management of Vessels, have been prepared on
the same basis as the annual 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 following data
should be read in conjunction with "Vessels Management's Discussion and Analysis
of Financial Condition and Results of Operations," which includes a discussion
of factors materially affecting the comparability of the information presented,
and Vessels Consolidated Financial Statements and the notes thereto included
elsewhere in this Proxy Statement--Prospectus. The results for the nine months
ended September 30, 1997 are not necessarily indicative of results that may be
expected for the full year. Historical financial data are not necessarily
predictive of Vessels' future results of operations and financial condition.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
-------------------------------------------------------------- -------------------------
1992 1993 1994 1995 1996 1996 1997
----------- ---------------------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of (dollars in thousands)
Operations
Operating revenue:
Oil and gas production revenues $ 6,122 $ 5,705 $ 8,463 $13,804 $14,811 $9,951 $ 7,060
Gas gathering, processing and
marketing 41,562 39,155 37,706 39,355 38,439 25,680 14,722
Other 244 794 260 500 171 29 773
----------- ------------- ----------- ---------- ----------- ----------- -------------
Total operating revenue 47,928 45,654 46,429 53,659 53,421 35,660 22,555
----------- ------------- ----------- ---------- ----------- ----------- -------------
Operating costs and expenses:
Lease operating and production
taxes 3,777 3,040 4,051 4,556 4,813 3,456 2,201
Gas gathering, processing and
marketing 36,057 32,455 31,620 34,034 33,365 21,708 12,929
Depreciation, depletion and
amortization 3,343 3,503 6,146 11,358 9,754 6,733 5,737
Exploration expense - - 223 272 1,713 300 914
General and administrative
expenses 2,189 3,410 3,095 3,399 3,238 2,413 2,223
----------- ------------- ----------- ---------- ----------- ----------- -------------
Total operating expenses 45,366 42,408 45,135 53,619 52,883 34,610 24,004
----------- ------------- ----------- ---------- ----------- ----------- -------------
Operating income (loss) 2,562 3,246 1,294 40 538 1,050 (1,449)
Interest expense 1,617 2,580 5,321 2,388 3,473 2,387 1,503
Amortization of deferred
financing fees 387 468 13 183 917 147 92
Other (income) expense - - - 1,344(1) - - -
----------- ------------- ----------- ---------- ----------- ----------- -------------
Income (loss) before tax and
extraordinary items 558 198 (4,040) (3,875) (3,852) (1,484) (3,044)
Deferred income tax (expense)
benefit 343 (148) 1,537 1,579 822 690 (62)
----------- ------------- ----------- ---------- ----------- ----------- -------------
Income (loss) before
extraordinary items 901 50 (2,503) (2,296) (3,030) (794) (3,106)
Minority interest (680) (34) - - - - -
Extraordinary items (2) - - (1,503) - - - -
=========== ============= =========== ========== =========== =========== =============
Net income (loss) $ 221 $ 16 $(4,006) $(2,296) $(3,030) $ (794) $ (3,106)
=========== ============= =========== ========== =========== =========== =============
Consolidated Balance Sheet Data:
Working capital $(5,153) $(3,744) $ 4,180 $(3,283) $(12,700) $(4,626) $ (1,241)
Total assets 43,556 67,902 79,901 89,605 120,995 110,557 48,085
Long-term debt and capital lease
obligations (3) 13,707 30,443 23,482 32,334 56,282 56,150 272
Stockholders' equity 9,562 12,362 43,257 40,976 38,099 40,260 34,993
</TABLE>
(1) Consists of recapitalization expense.
(2) Consists of loss incurred in connection with extinguishment of debt.
(3) Includes current maturities of long-term debt and capital lease obligations.
52
<PAGE>
VESSELS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of Vessels' consolidated financial
condition, results of operations, liquidity and capital resources. This
discussion should be read in conjunction with the Consolidated Financial
Statements of Vessels and the Notes thereto.
Results of Operations
The factors which most significantly affect Vessels' results of
operations are (i) the sales prices of crude oil, natural gas liquids and
natural gas, (ii) the level of total sales volumes of crude oil, natural gas
liquids and natural gas, (iii) costs to operate Vessels' oil and gas properties
and gas processing facilities, (iv) cost of third party volumes purchased for
resale, (v) the level of and interest rates on borrowings and (vi) the level and
success of exploration and development activity.
Selected Operating Data. The following table sets forth certain
operating data of Vessels for the periods presented:
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31 September 30
---------------------------------------- ----------------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating revenue (in thousands):
Natural gas sales .................. $ 5,304 $ 8,737 $ 9,495 $ 5,946 $ 4,932
Crude oil and condensate sales ..... 3,159 5,067 5,316 4,005 2,128
Gas gathering, processing and marketing
revenue .......................... 37,706 39,355 38,439 25,680 14,722
Other .............................. 260 500 171 29 773
======================================== ============================
Total operating revenue $ 46,429 $ 53,659 $ 53,421 $ 35,660 $ 22,555
======================================== ============================
Operating income (in thousands) .... $ 1,294 $ 40 $ 538 $ 1,050 $ (1,449)
Natural gas production (Mmcf) ...... 4,162 5,664 5,922 4,203 3,265
Crude oil production (Mbbls) ....... 203 279 299 222 117
Average natural gas sales price ($/Mcf) $ 1.27 $ 1.54 $ 1.60 $ 1.41 $ 1.51
Average crude oil sales price ($/Bbl) $ 15.56 $ 18.16 $ 17.78 $ 18.04 $ 18.19
</TABLE>
Comparison of Nine Months Ended September 30, 1997 to Nine Months Ended
September 30, 1996
Operating Revenue. During the nine months ended September 30, 1997,
operating revenue from natural gas and crude oil and condensate sales and
natural gas gathering, processing and marketing decreased significantly to $21.8
million from $35.6 million in the year earlier period. The decrease was
primarily attributable to the effects of the sale of the DJ Basin Properties in
April 1997. As more fully described below under Liquidity and Capital Resources,
Vessels consummated a transaction in April 1997 in which all of its assets in
the DJ Basin Properties were sold. As of December 31, 1996, these assets
represented approximately 62% of Vessels' net production and 65% of its proved
oil and gas reserves. In conjunction with this transaction, Vessels recognized a
$593,000 gain.
Lease Operating Expenses. Lease operating expenses ("LOE")
decreased by 36.3% to $2.2 million for the nine months ended September 30, 1997
from $3.5 million for the same period of 1996. This decrease was due primarily
to the effect of the sale of Vessels' DJ Basin assets. Vessels' LOE on a per BOE
basis for the nine months ended September 30, 1997 was $3.33 per BOE as compared
to $3.75 per BOE for the same period in 1996. These lower costs per BOE were
caused primarily by the increased portion of Vessels' total active wells that
are gas wells, with typically lower unit operating costs, following the sale of
Vessels' DJ Basin Properties.
53
<PAGE>
Gas Gathering, Processing and Marketing Costs. Gas gathering,
processing and marketing costs decreased by 40.4% to $12.9 million for the nine
months ended September 30, 1997 from $21.7 million for the same period of 1996,
due primarily to the sale of Vessels' DJ Basin assets which included Vessels'
Wattenburg processing plant.
General and Administrative. General and administrative expenses
decreased 7.9% to $2.2 million for the nine months ended September 30, 1997 from
$2.4 million for the same period in 1996, as a result of greater cost control
and improvements in business process and the departure of staff in conjunction
with the sale of Vessels' DJ Basin assets.
DD&A Expenses. Depreciation, depletion and amortization expense
decreased 14.8% to $5.7 million for the nine months ended September 30, 1997
from $6.7 million for the same period in 1996 due primarily to a decrease in
production volume as a result of the sale of Vessels' DJ Basin assets. Vessels'
depletion on a per BOE basis for the nine months ended September 30, 1997 was
$7.43 per BOE as compared to $5.96 per BOE in the same period of 1996. This
increase in depletion per BOE was due primarily to the sale of the DJ Basin
Properties and higher finding costs for the remaining properties.
Exploration Expense. Exploration expense increased by 204% to $.9
million for the nine months ended September 30, 1997 from $.3 million for the
same period of 1996. The increase was due primarily to a dry hole being drilled
in the period ending September 30, 1997.
Interest Expense. Interest expense decreased 37.0% to $1.5 million
for the nine months ended September 30, 1997 from $2.4 million for the same
period of 1996. This decrease is due to lower debt balances during 1997 as a
result of a pay down of debt with proceeds from the sale of Vessels' DJ Basin
assets.
Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995
Operating Revenue. During the year ended December 31, 1996,
operating revenue from natural gas and crude oil and condensate sales and
natural gas gathering, processing and marketing increased slightly from $53.2
million in 1995 to $53.3 million in 1996. The increase in revenues from natural
gas sales from $8.7 million in 1995 to $9.5 million in 1996 was primarily
attributable to a 4.6% increase in natural gas sales volumes resulting from
Vessels' 1996 drilling program and a 3.8% increase in the average price received
for Vessels' natural gas. The increase in revenues from crude oil and condensate
sales from $5.1 million in 1995 to $5.3 million in 1996 was primarily
attributable to a 7.2% increase in crude oil and condensate sales volumes
resulting from Vessels' 1996 drilling program offset partially by a 2.1%
decrease in the average price received for Vessels' crude oil and condensate. In
connection with the 1996 drilling program, Vessels successfully completed 19 net
gas wells and 13 net oil wells during 1996. The decrease in gas gathering,
processing and marketing revenue from $39.4 million in 1995 to $38.4 million in
1996 is due to a decrease in marketing revenues resulting primarily from a
reduction in gas user marketing volumes sold to end users offset partially by an
increase in processing revenues resulting from the acquisition of the Third
Creek processing plant in August 1996.
Lease Operating Expenses. LOE increased by 5.6% from $4.6 million
for the year ended December 31, 1995 to $4.8 million for the same period of
1996. This increase was due primarily to the number of net wells added by
Vessels in 1996, certain one time environmental compliance costs incurred in
1996 and higher severance taxes in 1996 due to higher revenues, which were
offset partially by a reduction in operating expenses in 1996 as a result of
sales of non-strategic properties in December of 1995. Vessels' LOE on a per BOE
basis for 1996 was $3.74 per BOE as compared to $3.73 per BOE in 1995.
Gas Gathering, Processing and Marketing Costs. Gas gathering,
processing and marketing costs decreased by 2.0% from $34.0 million in 1995 to
$33.4 million in 1996, due to a decrease in marketing costs resulting primarily
from a reduction in gas marketing volumes sold to end users which were offset
partially by an increase in processing costs resulting from the acquisition of
the Third Creek processing plant in August 1996.
54
<PAGE>
G&A Expenses. General and administrative expenses decreased 4.7%
from $3.4 million for the year ended December 31, 1995, to $3.2 million for the
year ended December 31, 1996, as a result of greater cost control and
improvements in business processes, the departure of staff who were not replaced
and the elimination of recruiting costs incurred in 1995. Vessels' G&A expense
on a per BOE basis was $2.52 per BOE in 1996 compared to $2.78 per BOE for 1995.
DD&A Expenses. Depreciation, depletion and amortization expense
decreased 14.1% from $11.4 million for the year ended December 31, 1995 to $9.8
million for the year ended December 31, 1996, due primarily to a $2.6 million
impairment of certain oil and gas properties in 1995. Excluding impairments (in
both years), depreciation, depletion and amortization expense increased 7.5% due
primarily to costs associated with wells drilled in 1996 and an increase in
sales volume. Vessels' depletion on a per BOE basis (excluding impairments) for
1996 was $5.89 per BOE as compared to $6.00 per BOE in 1995.
Exploration Expense. Exploration expense increased by 530% to $1.7
million for the twelve months ended December 31, 1996 from $.3 million for the
same period of 1995. The increase was due primarily to two dry holes being
drilled and a three dimensional seismic program being completed in the period
ending December 31, 1996.
Interest Expense. Interest expense increased 45.4% from $2.4
million to $3.5 million for the year end December 31, 1996, compared to the 1995
period. This increase is attributable to increased borrowings by Vessels to
finance its 1996 drilling program and acquisition of the Third Creek plant
offset by slight improvements in borrowing rates. Long-term debt increased from
$30.8 million at December 31, 1995 to $55.1 million at December 31, 1996.
Comparison of Year Ended December 31, 1995 to Year Ended December 31, 1994
Operating Revenue. During the year ended December 31, 1995,
operating revenue from natural gas, crude oil and condensate sales and natural
gas gathering, processing and marketing increased 15.1% from $46.2 million in
1994 to $53.2 million in 1995. The increase in revenues from natural gas sales
from $5.3 million in 1994 to $8.7 million in 1995 was primarily attributable to
a 36.1% increase in natural gas sales volumes resulting from Vessels' 1995
drilling program and a 21.3% increase in the average price received for Vessels'
natural gas. The increase in revenues from crude oil and condensate sales from
$3.2 million in 1994 to $5.1 million in 1995 was primarily attributable to a
37.4% increase in crude oil and condensate sales volumes resulting from Vessels'
1995 drilling program and a 16.7% increase in the average price received for
Vessels' crude oil and condensate. During 1995 Vessels successfully completed 28
net gas wells and 5 net oil wells. The increase in gas gathering, processing and
marketing revenue from $37.7 million in 1994 to $39.4 million in 1995 is due
primarily to an increase in equity and third party gas available for processing
as a result of Vessels' 1995 drilling program along with additional spot volumes
processed in 1995.
Lease Operating Expense. LOE increased 12.5% from $4.1 million for the
year ended December 31, 1994 to $4.6 million for the same period of 1995. This
increase was due primarily to the number of net wells added by Vessels during
the year ended December 31, 1995 and an increase in severance taxes in 1995 due
to higher revenues. Vessels' LOE on a per BOE basis for the year ended December
31, 1994 was $4.52 per BOE as compared to $3.73 per BOE for the year ended
December 31, 1995. The decrease from 1994 to 1995 in LOE per BOE was the result
of a proportionately greater increase in volumes compared to costs as a result
of Vessels' 1995 drilling program.
Gas Gathering, Processing and Marketing Costs. Gas gathering,
processing and marketing costs increased by 7.6% from $31.6 million in 1994 to
$34.0 million in 1995, due primarily to an increase in equity and third party
gas available for processing as a result of Vessels' 1995 drilling program along
with additional spot volumes processed in 1995.
G&A Expenses. G&A expense increased by 9.8% from $3.1 million to $3.4
million, from the year ended December 31, 1994 to the year ended December 31,
1995 as a result of hiring cost and ongoing salaries associated with additional
55
<PAGE>
staff hired to develop and manage Vessels' new strategic business plan. Vessels'
G&A expenses on a per BOE basis for the year ended December 31, 1994 were $3.45
per BOE as compared to $2.78 per BOE for the year ended December 31, 1995. The
decrease from 1994 to 1995 in G&A per BOE was the result of a proportionately
greater increase in volumes as a result of Vessels' 1995 drilling program
compared to costs.
DD&A Expenses. Depreciation, depletion and amortization expense
increased 84.8% from $6.1 million for the year ended December 31, 1994 to $11.4
million for the year ended December 31, 1995. Excluding impairments,
depreciation, depletion and amortization expense increased 42.5% due primarily
to costs associated with wells drilled in 1995 and an increase in sales volume.
Vessels' depletion expenses on a per BOE basis (excluding impairments) for the
year ended December 31, 1994 was $4.31 per BOE compared to $6.00 per BOE at in
1995. The increase from 1994 to 1995 in depletion per BOE was due primarily to
downward reserve revisions at yearend 1995.
Interest Expenses. Interest expense decreased 55.1% from $5.3 million
to $2.4 million from the year ended December 31, 1994 to the year ended December
31, 1995 period. This decrease was attributable to repayment of a portion of
Vessels' debt with proceeds from a private equity placement and refinancing the
balance of Vessels' debt at yearend 1994 to debt with a significantly lower
interest rate.
Liquidity and Capital Resources
At September 30, 1997 Vessels had current assets of $5.5 million and
current liabilities of $6.8 million resulting in a working capital deficit of
$1.3 million. At December 31, 1996, Vessels had current assets of $11.7 million
and current liabilities of $24.4 million resulting in a working capital deficit
of $12.7 million. This compares to a working capital deficit of $3.3 million at
December 31, 1995.
Vessels presently has no major capital expenditure commitments pending.
Its capital expenditures are generally discretionary and activity levels are
determined by a number of factors, including oil and gas prices, interest rates,
availability of funds, quantity and character of identified investment projects
and competition. Most capital expenditures during the past several years have
been for the acquisition and development of properties with established proved
and probable oil and gas reserves and acquisition of natural gas processing
plants. Vessels' capital expenditures have typically exceeded its cash flow from
operating activities, with the excess funded primarily with bank borrowings.
In July 1996, Vessels entered into a $75 million revolving credit
facility with a commercial bank syndicate, which replaced its previous credit
facility. Borrowings available under the revolving credit facility are limited
to semiannual borrowing base determination amounts. The borrowing base on the
revolving credit facility as of December 31, 1996 was $64 million compared to
$55 million as of December 31, 1995. Borrowings under the agreement bear
interest, at Vessels' option, either at prime or at LIBOR plus 1.25% - 1.65%,
based on the total amount of debt outstanding under the facility. On December
31, 1996, the weighted average interest rate was 7.27%. Interest is paid
quarterly. The revolving credit facility is secured by virtually all of Vessels'
assets and contains typical covenants that restrict distributions, additional
borrowings and exploration expenditures and that require the maintenance of
certain financial ratios. At December 31, 1996, Vessels' current ratio was below
the minimum required by the revolving credit facility. Vessels received a waiver
for this covenant violation from the holder of the note.
In order to improve its liquidity, Vessels determined in 1996 to pursue
a transaction to monetize a portion of its developed oil and gas reserves and
its natural gas processing facilities. This objective was satisfied in April
1997 through the sale of Vessels' DJ Basin assets for approximately $80 million.
Following this transaction, Vessels' revolving credit facility was repaid
completely at such time. In an effort to reduce bank costs, Vessels elected to
reduce the borrowing base under the revolving credit facility to $6.0 million.
Vessels can elect to increase the borrowing base under the revolving credit
facility in the future based on then existing reserves. This transaction
significantly improved Vessels' liquidity and financial flexibility, but also
greatly reduced Vessels' oil and gas property base and related cash flows.
Another consequence of this asset sale was a significant reduction in Vessels'
inventory of development projects, resulting in an increased portion of Vessels'
56
<PAGE>
capital budget being targeted toward remaining proved properties and new proved
property acquisitions and exploration. Vessels' credit facility will be
terminated at the Effective Time.
The following is a summary of selected operating data related to the DJ
Basin Properties sold and other oil and gas properties owned by Vessels:
DJ Basin
Properties Sold Other
April 1997 Assets Total
--------------------------------------------
Proved reserves
(December 31, 1996)
Oil (Mbbl) 3,187 1,596 4,783
Gas (MMcf) 52,158 44,296 96,454
MBOE 11,880 8,979 20,859
Proved developed reserves
(December 31, 1996)
Oil (Mbbl) 1,070 954 2,024
Gas (MMcf) 35,153 19,069 54,222
MBOE 6,929 4,132 11,061
1996 net production
Oil (Mbbl) 174 125 299
Gas (MMcf) 3,749 2,173 5,922
MBOE 799 487 1,286
Vessels' revenues, cash flow, and the value of its oil and gas
properties have been, and will continue to be, affected by changes in oil and
natural gas prices. Vessels' ability to maintain current borrowing capacity and
to obtain additional capital on attractive terms is also substantially dependent
on oil and natural gas prices. As such, changes in oil and gas prices can
significantly affect the amount of Vessels' capital expenditures. Oil and
natural gas prices are subject to significant seasonal and other fluctuations
that are beyond Vessels' ability to control or predict.
Vessels periodically enters into futures contracts, swap agreements or
option agreements in order to hedge its exposure to price fluctuations on the
purchase or sale of crude oil, natural gas or natural gas liquids. Gains or
losses attributable to such contracts and agreements that hedge specific future
deliveries or purchases are deferred and recognized in income when the
corresponding physical sale or purchase is recorded.
Vessels is a party to the Supply Contract, which is a long term fixed
price gas sale contract that expires in 2008 and provides for the sale of
approximately 1.5 Bcf of gas per year. To supply the sale, Vessels transports
its gas production from other points to the point of sale, or when financially
advantageous, sells its gas production nearer to the point of production, while
buying gas from other parties at or near the point of sale. When Vessels
transports its gas production it utilizes firm transportation capacity for which
it has contracted with interstate pipelines for terms approximating and
quantities greater than those of the Supply Contract for "forward haul"
transportation, and short-term interruptible transportation for "back hauls."
Certain claims related to the Supply Contract are subject to the Escrow
Agreement. See "The Merger - Escrow of Shares."
57
<PAGE>
Under the swap agreements, Vessels receives or makes payments to a
counterparty based on the differential between a fixed and floating price. Under
option agreements, Vessels will receive payments from the counterparty if the
floating price is less than a floor price and will make payments to the
counterparty if the floating price is greater than the ceiling price. At
December 31, 1996, Vessels had open swap and option agreements to hedge future
deliveries as follows:
Crude Oil (MBbls) Natural Gas
(Mmbtus)
------------------------------------
Year Ending December 31,
1997 ..................... 214 2,390
1998 ..................... 156 2,280
====================================
370 4,670
====================================
Cash flows from hedging activities are classified as operating
activities in the Statements of Cash Flows. Vessels realized a gain of $88,000
and losses of $264,000 and $3,257,000 on its hedging activities in 1994, 1995
and 1996, respectively.
Vessels is exposed to credit loss in the event of nonperformance
by counterparties on these swap or option agreements but does not anticipate
nonperformance by such counterparties. The amount of such exposure is generally
equal to the amount of Vessels' unrealized gains, if any, in such swap or collar
agreements.
58
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF ABRAXAS
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, 1997 is not necessarily indicative of
results for a full year. The consolidated financial information for each of the
nine month periods ended September 30, 1996 and 1997 are derived from the
unaudited financial statements and, in the opinion of management, include all
adjustments that are of a normal and recurring nature and necessary for a fair
presentation. The selected historical consolidated financial information should
be read in conjunction with the Consolidated Financial Statements of the Company
and the notes thereto included elsewhere in this Proxy Statement-Prospectus and
"Abraxas Management's Discussion and Analysis of Financial Condition and Results
of Operations."
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
----------------------------------------------------------------- --------------------------
1992 1993 1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------ ------------ ------------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements of Operations
Operating revenue:
Oil and gas production revenues $ 2,666 $ 7,275 $11,114 $13,660 $25,749 $11,275 $46,920
Gas processing revenues - - - - 600 - 2,793
Other revenue 25 219 235 157 304 123 978
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total operating revenue 2,691 7,494 11,349 13,817 26,653 11,398 50,691
------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating costs and expenses:
Lease operating and production taxes 1,075 2,896 3,693 4,333 5,858 3,295 10,604
Gas processing costs - - - - 262 - 1,191
Depreciation, depletion and
amortization 957 2,373 3,790 5,434 9,605 4,145 19,780
General and administrative expenses 770 510 810 1,042 1,933 1,250 3,119
Other (29) 103 133 125 169 113 214
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total operating expenses 2,773 5,882 8,426 10,934 17,827 8,803 34,908
------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating income (loss) (82) 1,612 2,923 2,883 8,826 2,595 15,783
Net interest expense 892 2,492 2,343 3,877 5,987 1,987 18,319
Amortization of deferred financing
fees (1) - 649 400 214 280 192 933
Other (income) expense 98 (136) 67 - 443 293 200
------------ ------------ ------------ ------------ ------------ ------------ ------------
Income (loss) from continuing
operations before tax and
extraordinary items (1,072) (1,393) 113 (1,208) 2,116 123 (3,669)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Deferred income tax (expense) benefit - (187) - - 176 - 1,071
Loss from discontinued operations (2) (2,883) (280) (1,335) - - - -
------------ ------------ ------------ ------------ ------------ ------------ ------------
Income (loss) before extraordinary
items (3,955) (1,860) (1,222) (1,208) 1,940 123 (2,598)
Extraordinary items (3) - (573) (1,172) - (427) (369) -
------------ ------------ ------------ ------------ ------------ ------------ ------------
Net income (loss) (3,955) (2,433) (2,394) (1,208) 1,513 (246) (2,598)
Preferred dividends requirement (249) (186) (183) (366) (366) (274) (183)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Net income (loss) applicable to
common stockholders $(4,204) $(2,619) $(2,577) $(1,574) $ 1,147 $ (520) $(2,781)
============ ============ ============ ============ ============ ============ ============
Earnings per share:
Income (loss) from continuing
operations $ (1.23) $ (0.91) $ (0.02) $ (0.34) $ 0.23 $ (0.03) $ (0.47)
Discontinued operations (2.69) (0.14) (0.31) - - - -
Extraordinary items - (0.29) (0.27) - (.06) (0.06) -
------------ ------------ ------------ ------------ ------------ ------------ ------------
Net income (loss) per common share $ (3.92) $ (1.34) $ (0.60) $ (0.34) $ 0.17 $ (0.09) $ (0.47)
============ ============ ============ ============ ============ ============ ============
Cash dividends per common shares $ -- $ -- $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ============ ============ ============
Weighted average shares outstanding 1,074 1,947 4,310 4,635 6,794 5,804 5,920
============ ============ ============ ============ ============ ============ ============
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
At December 31, At September 30,
---------------------------------------------------------------- --------------------------
1992 1993 1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------ ------------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data
Working capital (deficit) (4) $(7,184) $(1,368) $(1,605) $2,633 $6,433 $7,682 $(9,657)
Total assets 18,017 43,396 75,361 85,067 304,842 130,440 317,182
Long-term debt (5) 6,602 12,484 41,235 41,557 215,000 85,000 217,330
Stockholders' equity 2,233 25,143 28,502 37,063 35,656 36,421 32,126
</TABLE>
- -----------
(1) Consists of financing fees incurred in connection with the acquisition of
crude oil and natural gas producing properties and financing.
(2) Discontinued operations consist primarily of coal operations which were
terminated in January 1995. The Company anticipates no additional costs
associated with coal operations in the future. See "Abraxas 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.
60
<PAGE>
ABRAXAS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the Company's financial condition,
results of operations, liquidity and capital resources. This discussion should
be read in conjunction with the Consolidated Financial Statements of the Company
and the notes thereto included elsewhere in this Prospectus.
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 Company for the periods presented:
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
--------------------------------- ------------------------
(dollars in thousands, except per unit data)
1994 1995 1996 1996 1997
----------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operating revenue:
Crude oil sales ...................... $ 5,501 $ 6,889 $ 8,864 $ 5,306 $ 13,383
NGLs sales ........................... 1,193 1,553 4,359 1,350 7,980
Natural gas sales .................... 4,420 5,218 12,526 4,619 25,557
Other ................................ 235 157 904 123 3,771
---------- ---------- ------- ---------- ----------
Total operating revenue ................. $ 11,349 $ 13,817 $26,653 $ 11,398 $ 50,691
========== ========== ======= ========== ==========
Operating income ........................ $ 2,923 $ 2,883 $ 8,826 $ 2,595 $ 15,783
Crude oil production (MBbls) ............ 355.7 401.4 425.2 266.0 712.2
NGLs production (MBbls) ................. 113.2 143.4 299.5 106.1 750.9
Natural gas production (MMcf) ........... 2,392.9 3,552.7 6,350.0 2,625.4 14,984.9
Average crude oil sales prices (per Bbl) $ 15.47 $ 17.16 $ 20.85 $ 19.94 $ 18.79
Average NGLs sales price (per Bbl) ...... $ 10.54 $ 10.83 $ 14.55 $ 12.73 $ 10.63
Average natural gas sales price (per Mcf) $ 1.85 $ 1.47 $ 1.97 $ 1.95 $ 1.71
</TABLE>
61
<PAGE>
Comparison of Nine Months Ended September 30, 1997 to Nine Months Ended
September 30, 1996
Operating Revenue. During the nine months ended September 30, 1997
operating revenue from crude oil, natural gas and natural gas liquid sales
increased to $46.9 million compared to $11.3 million in the nine months ended
September 30, 1996. The $35.6 million increase in revenue was primarily
attributable to increased volumes which was partially offset by a decline in the
average sales price per BOE. Volume increases from 809,670 BOE to 3,961 MBOE
contributed $43.8 million which was offset by $(8.2) million from lower
commodity prices. Volume increases were due primarily to increased production
from acquisitions of producing properties acquired in the fourth quarter of
1996, as well as increased production attributable to the Company's ongoing
development program on existing and acquired properties. Oil and natural gas
liquids volumes increased by 293% to 1,493 Mbbls from 372 Mbbls for the same
period of 1996. Acquisitions and subsequent development of acquired properties
contributed 777 Mbbls while ongoing development of existing properties
contributed 314 Mbbls of the increase. Natural gas volumes increased from 2,625
MMcf to 14,985 MMcf for the nine months ended September 30, 1997. Acquisitions
and subsequent development of acquired properties contributed 9,287 MMcf while
existing properties contributed 3,073 MMcf. Average sales prices were $18.79 per
Bbl of crude oil, $1.71 per Mcf of natural gas and $10.63 per Bbl of natural gas
liquids for the nine months ended September 30, 1997, compared with $19.94 per
Bbl of crude oil, $1.95 per Mcf of natural gas and $12.73 per Bbl of natural gas
liquids in the same period of 1996.
Lease Operating Expenses. LOE and natural gas processing expenses were
$11.8 million for the nine months ended September 30, 1997, compared to $3.3
million for the same period of 1996. The increase of $8.5 million was due to an
increase in the number of wells the Company owned as of September 30, 1997,
compared to the same period of the prior year. LOE on a per barrel basis
decreased to $2.68 per BOE for the nine months ended September 30, 1997, from
$4.07 for the same period of 1996.
G&A Expenses. G&A expenses increased from $1.2 million for the nine
months ended September 30, 1996, to $3.1 million for the same period of 1997.
The increase is primarily attributable to the hiring of additional staff,
including an increase in the personnel at the Company's Canadian administrative
office to manage and develop properties acquired in the fourth quarter of 1996.
G&A expense on a per BOE basis decreased to $.79 per BOE from $1.54 for same
period of 1996.
DD&A Expenses. Due to the increase in sales volumes of crude oil and
natural gas, DD&A expenses increased by $15.6 million to $19.8 million for the
nine months ended September 30, 1997, from $4.2 million for the same period of
1996. DD&A expense on a per BOE basis was $5.00 per BOE for the nine months
ended September 30, 1997, compared to $5.27 per BOE for the nine months ended
September 30, 1996.
Interest Expense and Preferred Dividends. Interest expense and
preferred dividends increased to $18.9 million for the nine months ended
September 30, 1997 from $2.4 million for the six months ended September 30,
1996. The increase was due to increased levels of borrowings by the Company to
finance acquisitions consummated in 1996. Long-term debt increased from $85
million as of September 30, 1996, to $217.3 million at September 30, 1997.
Preferred dividends were eliminated July 1, 1997 as a result of the conversion
of all outstanding preferred stock into Abraxas Common Stock.
Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995
Operating Revenue. During the year ended December 31, 1996, operating
revenue from crude oil, natural gas and natural gas liquids sales, and natural
gas processing revenues increased 92% from 13.7 million in 1995 to $26.3million.
This increase was primarily attributable to increased crude oil and natural gas
liquids sales volumes of 33.0% and natural gas sales volumes of 78.7% which was
attributable to increased production from the producing properties that the
Company owned for the entire year as well as producing properties acquired
during the year. This increase more than offset the loss of operating revenue
from Portilla and Happy during the portion of the year that the Company did not
own the properties. During 1995, Portilla and Happy contributed $4.6 million in
operating revenue compared to $2.0 million in 1996. Crude oil and NGLs sales
volumes increased from 545 MBbls to 725 MBbls, from 1995 to 1996 and natural gas
sales volumes increased from 3.6 Bcf to 6.4 Bcf, from 1995 to 1996 as a result
of increased production volumes from the Company's properties other than
62
<PAGE>
Portilla and Happy in 1996 as compared to 1995 and the acquisitions of the
Wyoming Properties, CGGS and the Company's ongoing development drilling program.
Portilla and Happy contributed 226.0 MBbls of crude oil and NGLs (41.5% of
Company total) and 492.6 MMcf of natural gas (13.9% of Company total) during
1995 as compared to 91.7 MBbls of crude oil and NGLs (12.7% of Company total)
and 215.6 MMcf of natural gas (3.4% of Company total) for 1996. Average sales
prices were $20.85 per Bbl of crude oil, $14.55 per Bbl of natural gas liquids
and $1.97 per Mcf of natural gas for the year ended December 31, 1996 compared
with $17.16 per Bbl of crude oil, $10.83 per Bbl of natural gas liquid and $1.47
per MMcf of natural gas for the year ended December 31, 1995. A general
strengthening of crude oil and natural gas prices at the wellhead during 1996
resulted in a higher average sales prices received by the Company during the
year ended December 31, 1996 compared to the same period in 1995.
Lease Operating Expenses. LOE increased by 41.2% from $4.3 million for
the year ended December 31, 1995 to $6.1 million for the same period of 1996,
primarily due to the greater number of wells owned by the Company for the year
ended December 31, 1996 compared to the year ended December 31, 1995. The
Company's LOE on a per BOE basis for 1996 was $3.28 per BOE as compared to $3.81
per BOE in 1995.
G & A Expenses. G&A increased by 85.5% from $1.0 million for the year
ended December 31, 1995, to $1.9 million for the year ended December 31, 1996,
as a result of the Company's hiring additional staff, including establishment of
a Canadian administrative office, to manage the additional properties acquired
by the Company and subsequent development of those properties. The Company's G &
A expense on a per BOE basis was $1.08 per BOE in 1996 compared to $0.92 per BOE
for 1995.
DD & A Expenses. Due to the increase in sales volumes of crude oil and
natural gas, DD&A expense increased by 76.8% from $5.4 million for the year
ended December 31, 1995 to $9.6 million for the year ended December 31, 1996.
The Company's DD&A expense on a per BOE basis for 1996 was $5.38 per BOE as
compared to $4.78 per BOE in 1995.
Interest Expense and Preferred Dividends. Interest expense and
preferred dividends increased 54.5%, from $4.3 million to $6.6 million for the
year end December 31, 1996, compared to the 1995 period. This increase is
attributable to increased borrowings by the Company to finance the acquisitions
consummated during 1996. Long-term debt increased from $41.6 million at December
31, 1995 to $215.0 million at December 31, 1996.
Comparison of Year Ended December 31, 1995 to Year Ended December 31, 1994
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.
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<PAGE>
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 Company's credit
facility to acquire the West Texas Properties in July 1994.
Liquidity and Capital Resources
Capital expenditures for the years ended December 31, 1994, 1995 and
1996 were $40.9 million, $12.3 million and $172.9 million, respectively. For the
nine months ended September 30, 1996, capital expenditures were $58.0 million
compared to $44.6 million during the same period in 1997. The table below sets
forth the components of these capital expenditures on a historical basis for the
three years ended December 31, 1994, 1995 and 1996 and the nine months ended
September 30, 1996 and 1997.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31 September 30,
---------------------------------------- ----------------------------
(dollars in thousands)
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
Expenditure category:
<S> <C> <C> <C> <C> <C>
Property acquisitions (1) $ 33,597 $ 719 $ 154,242 $ 47,655 (1) $ 2,067
Development 7,151 11,398 18,465 10,016 41,980
Facilities and other 158 139 206 369 557
--------- --------- --------- --------- ---------
Total $ 40,906 $ 12,256 $ 172,913 $ 58,040 $ 44,604
========= ========= ========= ========= =========
</TABLE>
(1) Acquisition costs include 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 Oil & Gas, Ltd., a subsidiary of the Company, in the nine months
ended September 30, 1996.
Acquisitions of crude oil and natural gas producing properties
beginning during 1994 and continuing through the nine months ended September 30,
1997 account for the majority of the capital expenditures made by the Company
since January 1, 1994. These expenditures were funded through internally
generated cash flow, borrowings from the Company's previous and current lenders,
the issuance of shares of the Company's Common and Preferred Stock to property
sellers and the issuance of the Notes.
At September 30, 1997, the Company had current assets of $19.2 million
and current liabilities of $28.8 million resulting in a working capital deficit
of $9.6 million. This compares to working capital of $6.4 million at December
31, 1996 and $7.6 million at September 30, 1996. The material components of the
Company's current liabilities at September 30, 1997 include trade accounts
payable of $14.2 million, revenues due third parties of $2.4 million and accrued
interest of $10.4 million. Shareholders' equity decreased from $35.7 million at
December 31, 1996 to $32.1 million at September 30, 1997 primarily due to a net
loss incurred during the first nine months of 1997.
64
<PAGE>
The Company's current budget for capital expenditures other than
acquisition expenditures is $80.0 million for 1998. Such expenditures will be
made primarily for the development of existing properties. Additional capital
expenditures may be made for acquisition of producing properties if such
opportunities arise, but the Company currently has no agreements, arrangements
or undertakings regarding any material acquisitions. The Company has no material
long-term capital commitments, other than an estimated $11.0 million pursuant to
the Development Plan related to the Vessels producing properties, 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.
On November 14, 1996, Abraxas and Canadian Abraxas consummated the
offering of $215 million of the Notes. Interest on the Notes accrues from their
date of original issuance (the "Issue Date") and is 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. The Notes are redeemable, in whole or in part, at the
option of Abraxas and Canadian Abraxas, on or after November 1, 2000, at the
redemption prices set forth below, plus accrued and unpaid interest to the date
of redemption, if redeemed during the 12-month period commencing on November 1
of the years set forth below:
Year Percentage
2000 105.75%
2001 102.875
2002 and thereafter 100%
In addition, at any time on or prior to November 1, 1999, Abraxas and
Canadian Abraxas may, at their option, redeem up to 35% of the aggregate
principal amount of the Notes originally issued with the net cash proceeds of
one or more equity offerings, at a redemption price equal to 111.5% of the
aggregate principal amount of the 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.
The Notes are joint and several obligations of Abraxas and Canadian
Abraxas, and rank pari passu in right of payment to all existing and future
unsubordinated indebtedness of Abraxas and Canadian Abraxas. The Notes rank
senior in right of payment to all future subordinated indebtedness of Abraxas
and Canadian Abraxas. The Notes are, however, effectively subordinated to
secured indebtedness of Abraxas and Canadian Abraxas to the extent of the value
of the assets securing such indebtedness.
The Notes are unconditionally guaranteed, jointly and severally, by
certain of Abraxas' and Canadian Abraxas' future subsidiaries (the "Subsidiary
Guarantors"). The guarantees are general unsecured obligations of the Subsidiary
Guarantors and rank pari passu in right of payment to all unsubordinated
indebtedness of the Subsidiary Guarantors and senior in right of payment to all
subordinated indebtedness of the Subsidiary Guarantors. The Guarantees are
effectively subordinated to secured indebtedness of the Subsidiary Guarantors to
the extent of the value of the assets securing such indebtedness. As of
September 30, 1997, Abraxas, Canadian Abraxas and the Subsidiary Guarantors had
no secured indebtedness outstanding.
Upon a Change of Control (as defined in the Indenture governing the
Notes), each holder of the Notes will have the right to require Abraxas and
Canadian Abraxas 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, Abraxas and Canadian
Abraxas 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.
The net proceeds to Abraxas and Canadian Abraxas from the offering of
the Notes were approximately $207.0 million after deducting underwriting
discounts and estimated offering expenses payable by Abraxas and Canadian
Abraxas. Abraxas and Canadian Abraxas used the net proceeds to (i) repay all
amounts outstanding under the Company's then existing credit facility in the
amount of $85.0 million, (ii) acquire the outstanding capital stock of CGGS for
$94.7 million, (iii) acquire Portilla and Happy and repay certain indebtedness
for $27.5 million and (iv) provide working capital for general corporate
65
<PAGE>
purposes including future acquisitions and development of producing properties.
After consummation of the offering of the Notes and application of the
net proceeds therefrom, the Company increased its total outstanding debt to
approximately $215.1 million. In addition, on November 14, 1996, the Company
entered into a credit facility (the "Credit Facility") with Bankers Trust
Company ("BT") and other lenders concurrently with the consummation of the
offering of the Notes. The Credit Facility provides for a revolving line of
credit with an availability of $40 million, subject to certain customary
conditions including a borrowing base condition.
Commitments available under the Credit Facility are subject to
borrowing base redeterminations to be performed semi-annually and, at the option
of each of the Company and the lenders thereunder (the "Banks"), 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 BT's sole discretion,
subject to the approval of the Banks, based on the value of the Company's
reserves as set forth in the reserve report of the Company's independent
petroleum engineers, with consideration given to other assets and liabilities.
The Credit Facility has an initial revolving term of two years and a
reducing period of three years from the end of the initial two-year period. The
commitment under the Credit Facility will be reduced during such reducing period
by eleven equal quarterly reductions. Quarterly reductions will equal 8.2% per
quarter with the remainder due at the end of the three-year reducing period.
The applicable interest rate charged on the outstanding balance of the
Credit Facility is based on a facility usage grid. If the borrowings under the
Credit Facility represent an amount less than or equal to 33.3% of the available
borrowing base, then the applicable interest rate charged on the outstanding
balance will be either (a) an adjusted rate of the London Inter-Bank Offered
Rate ("LIBOR") plus 1.25% or (b) the prime rate of BT (which is based on BT's
published prime rate) plus 0.50%. If the borrowings under the Credit Facility
represent an amount greater than or equal to 33.3% but less than 66.7% of the
available borrowing base, then the applicable interest rate on the outstanding
principal will be either (a) LIBOR plus 1.75% or (b) the prime rate of BT plus
0.50%. If the borrowings under the Credit Facility represent an amount greater
than or equal to 66.7% of the available borrowing base, then the applicable
interest rate on the outstanding principal will be either (a) LIBOR plus 2.00%
or (b) the prime rate of BT plus 0.50%. LIBOR elections can be made for periods
of one, three or six months.
The Credit Facility contains a number of covenants that, among other
things, restrict the ability of the Company to (i) incur certain indebtedness or
guarantee obligations, (ii) prepay other indebtedness including the Notes, (iii)
make investments, loans or advances, (iv) create certain liens, (v) make certain
payments, dividends and distributions, (vi) merge with or sell assets to another
person or liquidate, (vii) sell or discount receivables, (viii) engage in
certain intercompany transactions and transactions with affiliates, (ix) change
its business, (x) experience a change of control and (xi) make amendments to its
charter, by-laws and other debt instruments. In addition, under the Credit
Facility, the Company is required to comply with specified financial ratios and
tests, including minimum debt service coverage ratios, maximum funded debt to
EBITDA tests, minimum net worth tests and minimum working capital tests.
The 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. The Indenture also contains a number of
covenants and events of default including covenants restricting, 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 and events of
default including nonpayment of principal or interest on the Notes, violation of
covenants, cross default on other indebtedness, bankruptcy and material
judgments.
66
<PAGE>
The Indenture also provides that the Company may not, and may not cause
or permit certain of its subsidiaries, including Canadian Abraxas, to, directly
or indirectly, create or otherwise cause to permit to exist or become effective
any encumbrance or restriction on the ability of such subsidiary to pay
dividends or make distributions on or in respect of its capital stock, make
loans or advances or pay debts owed to Abraxas, guarantee any indebtedness of
Abraxas or transfer any of its assets to Abraxas except for such encumbrances or
restrictions existing under or by reason of: (i) applicable law; (ii) the
Indenture; (iii) the Credit Facility; (iv) customary non-assignment provisions
of any contract or any lease governing leasehold interests of such subsidiaries;
(v) any instrument governing indebtedness assumed by the Company in an
acquisition, which encumbrance or restriction is not applicable to such
subsidiaries or the properties or assets of such subsidiaries other than the
entity or the properties or assets of the entity so acquired; (vi) customary
restrictions with respect to subsidiaries of the Company pursuant to an
agreement that has been entered in to for the sale or disposition of capital
stock or assets of such subsidiaries to be consummated in accordance with the
terms of the Indenture solely in respect of the assets or capital stock to be
sold or disposed of; (vii) any instrument governing certain liens permitted by
the Indenture, to the extent and only to the extent such instrument restricts
the transfer or other disposition of assets subject to such lien; or (viii) an
agreement governing indebtedness incurred to refinance the indebtedness issued,
assumed or incurred pursuant to an agreement referred to in clause (ii), (iii)
or (v) above; provided, however, that the provisions relating to such
encumbrance or restriction contained in any such refinancing indebtedness are no
less favorable to the holders of the Notes in any material respect as determined
by the Board of Directors of the Company in their reasonable and good faith
judgment than the provisions relating to such encumbrance or restriction
contained in the applicable agreement referred to in such clause (ii), (iii) or
(v).
In August 1995, the Company entered into a rate swap agreement with a
previous lender relating to $25.0 million of principal amount of outstanding
indebtedness. This agreement was assumed by the Banks in connection with a
bridge facility that was subsequently paid off. Under the agreement, the Company
pays a fixed rate of 6.15% while the Banks 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 1998. At September 30, 1997, the fair value of this swap,
as determined by BT was approximately $78,000.
In connection with the re-acquisition of Portilla and Happy, the
Company assumed a commodity price hedge on variable volumes of crude oil and
natural gas. Monthly settlements with amounts either due to or from Christiania
Bank og Kreditkasse ("Christiania") are based on the differential between a
fixed and a variable price for crude oil and natural gas. During 1997, the
approximate monthly volume of crude oil sales subject to this agreement is
15,800 barrels at a fixed price of $17.20. This agreement reduces to
approximately 13,200 barrels per month in 1998, 11,000 barrels per month in
1999, 9,100 barrels per month in 2000 and 8,200 barrels per month in 2001 until
November 1. The fixed price paid to the Company over this five year period
averages $17.55 per barrel. The natural gas component of this agreement calls
for approximately 54,000 MMBTU per month at a fixed price of $1.80 during 1997
with volumes decreasing to 37,000 MMBTU per month in 1998, 24,000 MMBTU per
month in 1999, 19,000 MMBTU per month in 2000 and 15,000 MMBTU per month in 2001
through October. The fixed price paid to the Company over this five year period
averages $1.84 per MMBTU.
The Company has also entered into a fixed price agreement relating to
approximately 7,500 net Mcf per day of natural gas. This agreement expires on
March 31, 1998 and calls for a fixed price of $2.07 per MMBTU being paid to the
Company.
Operating activities during the nine months ended September 30, 1997
provided $32.6 million cash to the Company compared to $4.8 million in the same
period in 1996. Net operating income plus non-cash expense items during 1997 and
net changes in operating assets and liabilities accounted for most of these
funds. Investing activities used $36.1 million during the first nine months of
1997 primarily for development of oil and gas properties. This compares to $41.1
million provided during the same period of 1996. Financing activities provided
$2.3 million for the first nine months of 1997 compared to requiring $41.9
million for the same period of 1996.
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<PAGE>
Operating activities for the year ended December 31, 1996 provided
$13.5 million of cash to the Company. Investing activities required $172.6
million during 1996 primarily for the acquisition of the Wyoming Properties,
CGGS and Portilla and Happy. Financing provided $163.0 million during 1996.
For the year ended December 31, 1995, operating activities provided
$4.5 million of cash. Investing activities required $10.1 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 $4.4 million of cash.
Investing activities during 1994 utilized $36.0 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.
The Company is heavily dependent on crude oil and natural gas prices
which have historically been volatile. Although the Company has hedged a portion
of its natural gas production and intends to continue this practice, future
crude oil and natural gas price declines would have a negative impact on the
Company's overall results, and therefore, its liquidity. Furthermore, low crude
oil and natural gas prices could affect the Company's ability to raise capital
on terms favorable to the Company.
At December 31, 1996, the Company had, subject to the limitations
discussed below, $20.1 million of net operating loss carryforwards for U.S. tax
purposes, of which approximately $17.5 million are available for utilization
without limitation. These loss carryforwards will expire from 2002 through 2010
if not utilized. At December 31, 1996, the Company had approximately $830,000 of
net operating loss carryforwards for Canadian tax purposes which expire in 2003.
As a result of the acquisition of certain partnership interests and crude oil
and natural gas properties in 1990 and 1991, an ownership change under Section
382 of the Code, occurred with respect to the Company in December 1991.
Accordingly, it is expected that the use of net operating loss carryforwards
generated prior to December 31, 1991 of $4.9 million will be limited to
approximately $235, 000 per year. As a result of the issuance of additional
shares of Common Stock for acquisitions and sales of stock, an additional
ownership change under Section 382 occurred in October 1993. Accordingly, it is
expected that the use of all U.S. net operating loss carryforwards generated
through October 1993, or $8.2 million, will be limited to approximately $1
million per year subject to the lower limitations described above. Of the $8.2
million net operating loss carryforwards, it is anticipated that the maximum net
operating loss that may be utilized before it expires is $5.7 million. Future
changes in ownership, including changes as a result of the Merger, 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 $5.7 million and
$5.7 million for deferred tax assets at December 31, 1996 and 1995,
respectively.
As a result of the consummation of the Merger, Abraxas will operate the
existing businesses of Abraxas and Vessels on a combined basis. See "Business of
Abraxas," "Business of Vessels," "Capitalization" and "Unaudited Pro Forma
Financial Information." The financial condition and results of operations of
Abraxas after the Effective Time will not be directly comparable to the
historical financial conditions or results of operations of Abraxas and Vessels,
either individually or on a combined basis. See "Vessels Management's Discussion
and Analysis of Financial Condition and Results of Operation and "Abraxas
Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere in this Proxy Statement-Prospectus.
Abraxas will have three principal sources of liquidity during the
period immediately following the Effective Time: (i) cash on hand, (ii)
borrowing capacity under the Credit Facility and (iii) cash generated by
operations. See "Unaudited Pro Forma Financial Information." Immediately
following the Effective Time, Abraxas expects to have at least $5.0 million of
borrowing capacity under the Credit Facility.
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<PAGE>
While the availability of capital resources cannot be predicted with
certainty and is dependent upon a number of factors including factors outside of
management's control, management believes that Abraxas' cash flow from
operations plus availability under the Credit Facility will be adequate to fund
operations and planned capital expenditures. Abraxas may also sell additional
equity or debt securities in order to fund operations and planned capital
expenditures as well as to finance future acquisitions.
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<PAGE>
BUSINESS OF ABRAXAS
General
Abraxas 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 Merger , the Company's principal areas of operation will be
Texas, western Canada, northwestern Colorado and southwestern Wyoming and will
own interests in 1,041,676 gross acres 547,942 net acres) and 754 gross wells
(432.7 net wells), 544 of which will be operated by the Company. The Company
will also own varying interests in 20 natural gas processing plants or
compression facilities. On a pro forma basis, at December 31, 1996, the Company
had total proved reserves of 52,739 MBOE (66% natural gas), of which 85.68% was
proved developed with a PV-10 of $463.0 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 Merger, the Company will have completed 18 acquisitions of producing
properties totaling 56,309 MBOE of proved reserves at an average net acquisition
cost of $4.20 per BOE since January 1, 1991. From January 1, 1991, on an
historical basis, to September 30, 1997, on a pro forma basis, the Company's
total proved reserves increased from 889 MBOE to 52,739 MBOE; aggregate PV-10
increased from $11.9 million to $463.0 million; and average net daily production
increased from 0.141 MBOE per day, on a historical basis, to 16.4 MBOE per day,
on a pro forma basis. As of September 30, 1997, the Company had net natural gas
processing capacity of 130 MMcf per day. From the year ended December 31, 1991,
on an historical basis, to the nine months ended September 30, 1997, on a pro
forma basis, the Company's direct operating expenses per BOE decreased from
$6.30 per BOE to $2.71 per BOE and G&A expenses per BOE decreased from $5.39 per
BOE to $.80 per BOE.
The Company was founded in 1977 by Robert L.G. Watson, the Company's
Chairman of the Board, President and Chief Executive Officer. 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.
Recent Developments
On October 15, 1997, Canadian Abraxas and Cascade Oil and Gas LTD, a
subsidiary of Abraxas ("Cascade"), completed the acquisition of the Canadian
assets of Pacalta Resources LTD for C$21.75 million in cash and four million
Cascade Special Warrants. The initial ownership of the assets acquired is 92% by
Canadian Abraxas and 8% by Cascade. Cascade has the opportunity to acquire the
Canadian Abraxas ownership upon arranging satisfactory financing in 1998. At
closing, the Pacalta properties were producing 115net barrels of oil per day and
8,000net Mcf of gas per day. The assets acquired are expected to provide
significant development and exploratory opportunities for the Company in the
future.
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,
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<PAGE>
this field has become the principal focus of the Company's development activity.
To date, 40 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 December 31, 1996, this field
had estimated net proved reserves of 4,767 MBOE (38% natural gas) with a PV-10
of $53.5 million, 87% of which was attributable to proved developed reserves.
For the nine months ended September 30, 1997, this field produced an average of
approximately 1,175 net Bbls of crude oil and NGLs and approximately 4,815 net
Mcf of natural gas per day from 29.4 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
December 31, 1996, these fields had estimated total net proved reserves of 3,135
MBOE (85% natural gas) with a PV-10 of $26.3 million, 100% of which was
attributable to proved developed reserves. For the nine months ended September
30, 1997, these fields produced an average of approximately 145 net Bbls of
crude oil and NGLs and 4,121 net Mcf of natural gas per day from 23.5 net wells.
Portilla Field, San Patricio County, Texas. The Company originally
acquired a 50% working interest in the Portilla Field ("Portilla") in April
1993. In March 1996, the Company sold its interest in Portilla to a third party,
which subsequently contributed it to a limited partnership of which the Company
owned a 25% interest (the "Partnership"). In November 1996, the Company
reacquired Portilla, including a 50% interest previously owned by a pension fund
(the "Pension Fund"). 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 December 31, 1996, this field
had estimated net proved reserves of 4,146 MBOE (20% natural gas) with a PV-10
of $36.1 million, 100% of which was attributable to proved developed reserves.
For the nine months ended September 30, 1997, the field produced an average of
approximately 616 net Bbls of crude oil and NGLs and approximately 1,339 net Mcf
of natural gas per day from 51 net wells. The Company owns a 100% interest in a
natural gas processing plant located at Portilla which had aggregate capacity of
approximately 20.0 MMcf of natural gas per day at September 30, 1997. During the
nine months ended September 30, 1997, the Portilla plant processed an average of
approximately 14.1 MMcf of natural gas per day and extracted an average of
approximately 213 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. In November 1996, the Company obtained the release of the Pension Fund's
50% overriding royalty interest in this field. 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 December 31, 1996, this field had estimated
net proved reserves of 8,171 MBOE (61% natural gas) with a PV-10 of $60 million,
84% 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, 1997, this field produced an average of approximately 347 Net Bbls
of crude oil and NGLs and 3,100 net Mcf of natural gas per day from 11.9 net
wells. The Company also owns an approximate 38% interest in and operates a
natural gas processing plant in this field. The East White Point natural gas
processing plant, a modern cryogenic plant with capacity of approximately 25
MMcf of natural gas per day, processed an average of approximately 8.6 MMcf of
natural gas per day and extracted approximately 500 Bbls of NGLs per day for the
nine months ended September 30, 1997.
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. In November 1996, the Company obtained the release of the
Pension Fund's 50% overriding royalty interest in this field. This field
produces crude oil and natural gas from Frio sands at depths ranging from 8,500
feet to 10,000 feet. At December 31, 1996, this field had estimated net proved
reserves of 2,208 MBOE (76% natural gas) with a PV-10 of $16.5 million, 43% of
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<PAGE>
which was attributable to proved developed reserves. For the nine months ended
September 30, 1997, this field produced an average of approximately 215 net Bbls
of crude oil and NGLs and 3,181 net Mcf of natural gas per day from 5 net wells.
production in the field.
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 December 31, 1996, this field had estimated net proved
reserves of 1,689 MBOE (30% natural gas) with a PV-10 of $12 million, 64% of
which was attributable to proved developed reserves. For the nine months ended
September 30, 1997, the field produced an average of approximately 121 net Bbls
of crude oil and NGLs and approximately 276 net Mcf natural gas per day from 31
net wells.
Southwestern Wyoming
The Company acquired properties in the Wamsutter area of southwestern
Wyoming (the "Wyoming Properties") in September 1996. The Wyoming Properties
produce natural gas from numerous sands at depths ranging from 8,500 feet to
12,000 feet. At December 31, 1996, the Wyoming Properties had estimated total
net proved reserves of 10,570 MBOE (69% natural gas) with a PV-10 of $108.2
million, 87% of which was attributable to proved developed reserves. For the
nine months ended September 30, 1997, the Wyoming Properties produced an average
of approximately 1,784 net Bbls of crude oil and NGLs and 15,605 net Mcf of
natural gas per day from 42 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 Oil & Gas Ltd. ("Cascade"), an Alberta-based corporation whose common
shares are traded on The Alberta Stock Exchange under the symbol "COL." In
November 1997, Grey Wolf merged with Cascade. The Company owns approximately 46%
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 120 MBbls of crude oil with a PV-10 of C$1.24 million, or
approximately U.S.$.92 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." During the nine months ended
September 30, 1997, Cascade drilled one dry exploratory well and Grey Wolf
drilled six successful development wells.
In November 1996, Canadian Abraxas acquired CGGS. As of December 31,
1996, the producing properties acquired by Canadian Abraxas from CGGS (the
"Canadian Abraxas Properties") had estimated total net proved reserves of 10,382
MBOE (88% natural gas) with a PV-10 of $85.4 million, 88.6% of which was
attributable to proved developed reserves. For the nine months ended September
30, 1997, the Canadian Abraxas Properties produced an average of approximately
512 net Bbls of crude oil and NGLs and 22,152 net Mcf of natural gas per day
from 101 net wells.
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<PAGE>
The following table sets forth a summary of certain information, by
field, of the Canadian Abraxas Properties:
<TABLE>
<CAPTION>
Average Daily Production
for Nine Months Ended
September 30, 1997
----------------------------
Reserves at Crude Oil &
December 31, 1996 NGLs Natural Gas
Name of Field Working Net Wells (MBOE) (Bbls) (Mcf)
- ------------- -------- ----------- ------ ------ -----
Interest
--------
<S> <C> <C> <C> <C> <C>
Quirk Creek (1) 3.5 1,692 125 2,530
Sundre (2) 10.2 2,475 216 4,412
Bellis (3) 17.8 897 - 2,337
Chinchaga (4) 2.6 389 8 2,879
Pouce Coupe (5) 2.0. 752 - 2,555
Valhalla (6) 6.5 136 4 2,137
Other (8) (7) 33.2 4,049 159 5,303
---------------- --------------------------------- ---------------
Total 75.8 10,382 512 22,152
</TABLE>
(1) Canadian Abraxas owns working interest ranging from 21% to 48% in 13 wells.
(2) Canadian Abraxas owns working interests ranging from 1% to 70% in 26 wells.
(3) Canadian Abraxas owns working interest from 7.5% to 100% in 40 wells.
(4) Canadian Abraxas owns working interests ranging from 70% to 100% in 4 wells.
(5) Canadian Abraxas owns interest of 100% in 2 wells.
(6) Canadian Abraxas owns working interest ranging from 50% to 100% in 8 wells.
(7) Canadian Abraxas owns working interest ranging from 21% to 100% in 94 wells.
(8) Consist of Big Bend, Kbnopcik, Eaglesham, Giroux Lake and minor properties.
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.
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<PAGE>
The following table sets forth certain information with respect to the
Canadian Abraxas Plants for the nine months ended September 30, 1997.
Gross Net
Plant Plant
Working Capacity Capacity
Plant Location Interest (MMcfpd) (MMcfpd)
- -------------- -------- -------- --------
Quirk Creek 21% 80 16.8
Knopcik (1) 10% 56 5.6
Valhalla 100% 30 30.0
Sundre 23% 20 4.6
Bellis (2) 49% 44 21.7
Big Bend 77% 8 6.2
Pouce Coupe 100% 8 8.0
Eaglesham 25% 5 1.3
=========== ============
Total 251 94.2
=========== ============
(1) Consists of three plants.
(2) Consists of eight 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:
South Texas
Muy Bueno Prospect Area, Goliad County, Texas. The W.W. Pettus Heirs #1
in Goliad County, Texas was drilled to a total depth of 10,150 feet and logged
at 110 feet of net pay from ten zones between 8,500 feet and 10,100 feet in the
Wilcox formation. The well was completed in one zone between depths of 9,788
feet and 9,808 feet and following perforation initially flowed to sales at an
average of 4.1 million cubic feet of gas per day and 120 barrels of condensate
per day. The Company is planning to dually complete the well in another zone in
the near future.
Abraxas is currently completing a second exploratory well, the Ramsey
#1, on its South Big Oak prospect which adjoins the discovery acreage to the
southwest. Together with a third prospective area, the Southwest Big Oak
prospect, Abraxas operates with a 90% working interest in all three prospects,
covering 2,890 acres.
During 1998, the Company plans also to drill several shallow wells to
develop existing Miocene gas sands and to drill a deeper test to the Lower
Wilcox.
Live Bee Prospect, Live Oak County, Texas . The Schultz #2H well in
Live Oak County initially flowed at an average rate of 4.1 million cubic feet of
gas per day. Production from the horizontally drilled well is from dual 1,500
feet lateral sections, completed open hole, in the Edwards Reef Trend, which was
encountered at a true vertical depth of approximately 13,120 feet. The Company
plans to drill four additional wells on the prospect during 1998. Abraxas is the
operator and owns a 100% working interest in the 3,400 acre prospect.
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<PAGE>
Canada
Ten Mile Island Prospect, NWT, Canada In May 1997, the Company, and its
consolidated Canadian subsidiaries, acquired 116,000 exploratory acres in the
Northwest Territories of Canada for a work commitment of $2.2 million This
acreage adjoins the Norman Wells Field, currently the largest producing oil
field in Canada, with average daily production of 30,000 barrels of oil per day.
A seismic survey is expected to begin this winter with first drilling expected
in the winter of 1998-1999.
Cranberry/Chinchaga Area, Alberta, Canada. A total of 53 sections have
been leased to date in the Cranberry area of northern Alberta Canada where
Abraxas and Fina Canada have a 50/50 exploratory venture with an AMI covering
150 townships (5,400 square miles). Five initial prospects have been identified
and seismic activity is expected to begin this winter with first drilling
expected in the winter of 1998-1999. Producing Slave Point Reef Fields in that
area have estimated reserves as high as 400 billion cubic feet of gas and 15
million barrels of oil.
Exploratory and Developmental Acreage
Abraxas' principal crude oil and natural gas properties consist of
non-producing and producing crude oil and natural gas leases, including reserves
of crude oil and natural gas in place. The following table indicates Abraxas'
interest in developed and undeveloped acreage as of December 1, 1997:
<TABLE>
<CAPTION>
Developed and Undeveloped Acreage
As of December 1, 1997
Developed Acreage Undeveloped Acreage
--------------------------------- -----------------------------------
Gross Acres Net Acres Gross Acres Net Acres
--------------- --------------- --------------- ------------------
<S> <C> <C> <C> <C>
Canada 201,951 84,486 600,155 274,352
Texas 41,074` 24,456 15,693 11,353
N. Dakota 1,864 1,021 -- --
Montana 320 10 -- --
Kansas 640 142 -- --
Wyoming 5,239 3,620 14,020 9,476
Alabama 720 23 -- --
--------------- --------------- --------------- ------------------
Total 251,808 113,758 629,868 295,181
</TABLE>
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<PAGE>
Productive Wells
The following table sets forth the total gross and net productive wells
of Abraxas, expressed separately for crude oil and natural gas, as of December
1, 1997:
<TABLE>
<CAPTION>
Productive Wells
As of December 1, 1997
State/Country Crude Oil Natural Gas
-------------------------------- ----------------------------------
Gross Net Gross Net
--------------------- --------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
Canada 44.0 11.5 143.0 64.3
Texas 331.0 188.0 104.0 66.4
N. Dakota 4.0 1.7 - -
Montana 1.0 0.1 - -
New Mexico - - 1.0 0.1
Wyoming 3.0 0.2 43.0 30.0
Alabama 2.0 0.1 1.0 0.1
Kansas 4.0 0.9 - -
=============== ============== =============== ================
Total 389.0 202.5 292.0 160.9
=============== ============== =============== ================
</TABLE>
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 "Abraxas Management's Discussion
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Reserves Information
The crude oil and natural gas reserves of Abraxas have been estimated
as of December 31, 1994, December 31, 1995 and December 31, 1996, by DeGolyer &
MacNaughton, Dallas, Texas. 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.
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<PAGE>
The following table sets forth certain information regarding estimates
of the Company's crude oil, NGLs and natural gas reserves as of December 31,
1994, December 31, 1995 and December 31, 1996, on a historical basis:
Estimated Proved Reserves
---------------------------------------
Proved Proved Total
Developed Undeveloped Proved
---------- ----------- ----------
As of December 31, 1994
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 December 31, 1995
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 December 31, 1996
Crude oil (MBbls) 7,871 1,930 9,801(1)
NGLs (MBbls) 7,090 1,144 8,234
Natural gas (MMcf) 157,660 19,600 177,260
(1) Includes 120,400 barrels of crude oil reserves owned by Cascade of which
57,600 barrels are applicable to the minority interest's share of the reserves.
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 Proxy Statement-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 Proxy
Statement-Prospectus are based on the assumption that future oil and gas prices
remain the same as crude oil and natural gas prices at December 31, 1996, with
respect to the Company's then existing properties. The average sales prices as
of such dates used for purposes of such estimates were $23.19 per Bbl of crude
oil, $16.31 per Bbl of NGLs and $2.96 per Mcf of natural gas. Also assumed is
the Company's making future capital expenditures of approximately $23.1 million
in the aggregate, 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 "Risk
Factors" and "Abraxas 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.
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<PAGE>
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, 1996 and the
nine months ended September 30, 1997:
September
30,
1994 1995 1996 1997
------------ ----------- ----------- ----------
Production
Crude oil (MBbls) 355.7 401.4 425.2 712.2
NGLs (MBbls) 113.2 143.4 299.5 750.9
Natural gas (MMcf) 2,392.9 3,552.7 6,350.1 14,984.9
Average sales price
Crude oil (per Bbl) $ 15.47 $ 17.16 $ 20.85 $ 18.79
NGLs (per Bbl) $ 10.54 $ 10.83 $ 14.55 $ 10.63
Natural gas (per Mcf) $ 1.85 $ 1.47 $ 1.97 $ 1.71
LOE (per BOE) (1) $ 4.26 $ 3.81 $ 3.28 $ 2.68
(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.
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, 1996, and the nine months ended September 30, 1997:
1996 1997 (through September 30)
-------------------- ---------------------------
Gross Net Gross Net
-------------------- ----------- ---------------
Exploratory
Productive
Crude oil 2.0 1.2 - -
Natural gas 2.0 1.2 4.0 3.2
Dry holes 4.0 1.4 2.0 1.8
----------- -------- ----------- ---------------
Total 8.0 3.8 6.0 5.0
=========== ======== =========== ===============
Development
Productive
Crude oil 20.0 15.8 25.0 22.4
Natural gas 10.0 3.7 14.0 10.6
Service - 1.0
Dry holes 1.0 - 1.0 1.0
----------- -------- ----------- ---------------
Total 31.0 20.5 40.0 34.0
=========== ======== =========== ===============
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,
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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 in connection with the
consummation of the acquisition of Portilla and Happy. Under the terms of this
commodity price hedge, the Company is required to receive or make payment to
Christiania 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, 1996, six purchasers accounted for
approximately 61% 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.
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.
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The Company will face significant competition for obtaining additional
natural gas supplies for gathering and processing operations, for marketing
NGLs, residue gas, helium, condensate and sulfur, and for transporting natural
gas and liquids. The Company's principal competitors will include major
integrated oil companies and their marketing affiliates and national and local
gas gatherers, brokers, marketers and distributors of varying sizes, financial
resources and experience. Certain competitors, such as major crude oil and
natural gas companies, have capital resources and control supplies of natural
gas substantially greater than the Company. Smaller local distributors may enjoy
a marketing advantage in their immediate service areas. The Company will compete
against other companies in its natural gas processing business both for supplies
of natural gas and for customers to which it will sell its products. Competition
for natural gas supplies is based primarily on location of natural gas gathering
facilities and natural gas gathering plants, operating efficiency and
reliability and ability to obtain a satisfactory price for products recovered.
Competition for customers is based primarily on price and delivery capabilities.
Regulatory Matters
The Company's operations are affected from time to time in varying
degrees by political developments and federal, state, provincial and local laws
and regulations. In particular, oil and gas production operations and economics
are, or in the past have been, affected by price controls, taxes, conservation,
safety, environmental, and other laws relating to the petroleum industry, by
changes in such laws and by constantly changing administrative regulations.
Price Regulations
In the recent past, maximum selling prices for certain categories of
crude oil, natural gas, condensate and NGLs 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.
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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
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
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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
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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 C$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 C$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
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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
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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.
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 January 1, 1998, Abraxas had 55 full-time employees, including
two executive officers, four non-executive officers, five petroleum engineers,
one landman, four managers, thirteen secretarial and clerical personnel and 26
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.
The Company's Canadian subsidiary, as of November 30, 1997, had 18
full-time employees, including three executive officers, one non-executive
officer, one manager, one petroleum engineer, one geologist, seven secretarial
and clerical personnel and four field personnel.
Office Facilities
The Company's executive and administrative offices are located at 500
North Loop 1604 East, Suite 100, San Antonio, Texas 78232. The Company 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.
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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.
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<PAGE>
BUSINESS OF VESSELS
General
Vessels is an independent energy company engaged in the acquisition,
exploration, development, production and gathering of natural gas and crude oil.
From its predecessor's inception in the 1970's until the spring of 1997,
Vessels' core operations were in the DJ Basin in northeast Colorado. Beginning
in 1993, Vessels began to slowly diversify its production base outside the DJ
Basin by the selective acquisition of mineral leases and producing properties in
other Rocky Mountain basins. Because of the growth potential of its other
properties and a more favorable acquisition market outside the DJ Basin, Vessels
elected, in late 1996, to sell its DJ Basin Properties and focus its efforts on
higher potential growth opportunities elsewhere. In April 1997, Vessels
completed the sale for cash of its DJ Basin producing, gathering, processing and
marketing business. Sales proceeds were used to extinguish Vessels' debt to its
lenders at such time and fund an aggressive 1997 capital expenditure program
primarily focused on drilling in western Colorado.
Vessels owns interest in 73 producing wells and 159,600 gross (139,000
net) acres of mineral leases. Vessels operates all wells in which it has an
interest, as well as 100 miles of gas gathering pipelines.
Vessels employs 27 persons full-time. Its principal offices are located
in Suite 2000, 1050 Seventeenth Street, Denver, Colorado 80265, and its
telephone number is (303) 825-3500.
Primary Operating Areas
Western Colorado
In 1994, Vessels acquired an 80% interest in 20,000 acres on the
eastern flank of the Piceance Basin, including 5 producing wells. In 1994 and
1995, Vessels drilled 2 and 3 wells, respectively, on this acreage. Based on
drilling results and plans to accelerate drilling, Vessels began acquiring the
balance of outstanding interests, as well as leasing additional mineral rights
in the area. In 1996 and 1997, Vessels drilled 10 and 16 wells, respectively, in
this area.
There are now 33 wells on Vessels' acreage in which Vessels owns a 99%
working interest. Net production in October 1997 averaged 8,638 Mcf of gas per
day and 61 BOPD of condensate.
Southwestern Wyoming
In 1993, Vessels acquired an interest in 6,500 acres on the eastern
flank of the Washakie/Green River Basin, including 12 producing wells. In 1996,
Vessels initiated the acquisition of 17 square miles of 3-D seismic data on a
part of this acreage. Based on drilling results targeted in part by the 3-D
seismic interpretations and plans to accelerate drilling, Vessels began
acquiring other producing interests as well as leasing additional mineral rights
in the area. In 1997, Vessels drilled 3 wells in this area.
There are now 40 wells on Vessels' acreage in which Vessels owns a
96.8% working interest. Net production in October 1997 averaged 1,757 Mcf of gas
per day and 323 BOPD of condensate.
Exploration Opportunities
Vessels utilizes its geologic expertise to acquire substantial
interests in developing exploration prospects with significant reserve potential
with the intent to recover its initial investment in these prospects by selling
a portion of such interests before outlaying substantial risked capital for
drilling and development. Depending upon the drilling outcome, Vessels either
sells its remaining interest, continues to participate in the development of the
prospect, or, as was done in Western Colorado and Southwestern Wyoming, begins
to acquire those interests not held by Vessels in the prospect or surrounding
acreage and fields. Currently, Vessels is involved in the following prospects:
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Schuster Flats Prospect, Big Horn Basin, Washakie County, Wyoming.
Vessels controls long-term mineral leases over approximately 47,000 nearly
contiguous acres and certain geophysical data over this area. Vessels has
entered into an agreement with another independent oil operator in which Vessels
will convey 60% of its interest in the acreage in return for the operator
acquiring further geophysical data and drilling two wells in 1998.
Montana Overthrust Prospect, Montana Overthrust Belt, Lewis and Clark
County, Montana. Vessels controls long-term mineral leases over approximately
12,000 acres and certain geophysical data over this area. Other operators are
conducting exploration activities along this trend which is geologically similar
to the highly productive Foothills trend in Alberta and British Columbia. The
Company is in the process of reviewing geophysical data acquired from others to
determine if further seismic data acquisition is appropriate before drilling
operations are commenced. At this time, Vessels controls 100% of this acreage
block which appears to overlie more than one drilling prospect.
Exploratory and Development Acreage
Vessels' principal crude oil and natural gas properties consist of
non-producing and producing crude oil and natural gas leases, including reserves
of crude oil and natural gas in place. The following table indicates Vessels'
interest in developed and undeveloped acreage as of December 1, 1997:
<TABLE>
<CAPTION>
Developed and Undeveloped Acreage
As of December 1, 1997
Developed Acreage Undeveloped Acreage
--------------------------------- -----------------------------------
Gross Acres Net Acres Gross Acres Net Acres
--------------- --------------- --------------- ------------------
<S> <C> <C> <C> <C>
Wyoming 23,695 16,420 103,305 96,580
Montana --` -- 12,600 11,600
Colorado 14,750 14,750 5,250 2,360
--------------- --------------- --------------- ------------------
Total 38,445 31,170 121,155 110,540
</TABLE>
Productive Wells
The following table sets forth the total gross and net productive wells
of Vessels, expressed separately for crude oil and natural gas, as of December
1, 1997:
Productive Wells (1)
As of December 1, 1997
Crude Oil Natural Gas
--------------------- --------------------
State/Country Gross Net Gross Net
--------------------- ---------- ---------- --------------------
Colorado -- -- 33.0 32.9
Wyoming 18.0 17.4 22.0 19.0
========== ========== ====================
Total 18.0 17.4 55.0 51.9
========== ========== ====================
Reserves Information
The crude oil and natural gas reserves of Vessels have been estimated
as of January 1, 1995, 1996 and 1997, by Netherland, Sewell & Associates,
Dallas, Texas. These estimates included the DJ Basin Properties sold in April
1997. The reserves in the DJ Basin comprised in excess of 65% of the reserves in
each of the aforementioned years. Crude oil and natural gas reserves, and the
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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 Vessels crude oil, and natural gas reserves as of January 1, 1995, January 1,
1996 and January 1, 1997, on a historical basis:
Estimated Proved Reserves (1)
-------------------------------------
Proved Proved Total
Developed Undeveloped Proved
----------- -------------- ----------
As of January 1, 1995
Crude oil (MBbls) 1,933 2,808 4,741
Natural gas (MMcf) 37,890 26,226 64,116
As of January 1, 1996
Crude oil (MBbls) 1,726 1,642 3,368
Natural gas (MMcf) 40,458 17,323 59,271
As of January 1, 1997
Crude oil (MBbls) 2,024 2,759 4,783
Natural gas (MMcf) 54,222 42,232 96,454
(1) Includes reserves related to the DJ Basin Properties.
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 Vessels.
The reserve data included in this Prospectus represent only estimates. In
addition, the estimates of future net revenue from proved reserves of Vessels
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 Vessels' crude oil and
natural gas properties included in this Proxy Statement-Prospectus are based on
the assumption that future oil and gas prices remain the same as crude oil and
natural gas prices at January 1, 1997, with respect to Vessels' then existing
properties. The average sales prices as of such dates used for purposes of such
estimates were $24.80 per Bbl of crude oil and $3.32 per Mcf of natural gas.
Also assumed is Vessels' making future capital expenditures of approximately
$12.0 million in the aggregate, 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 "Risk Factors" and "Vessels 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 Vessels
acquires properties containing proved reserves or conducts successful
exploration and development activities, or both, the proved reserves of Vessels
will decline as reserves are produced. Vessels' future crude oil and natural gas
production is therefore highly dependent upon its level of success in acquiring
or finding additional reserves.
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Drilling Activities
The following table sets forth Vessels' gross and net working interest
in exploratory, development and service wells drilled outside the DJ Basin
during the year ended December 31, 1996 and the nine months ended September 30,
1997.
1996 1997 (through September 30)
---------------------- ------------------------------
Gross Net Gross Net
------------ --------- --------------- --------------
Exploratory
Productive
Crude oil -- -- -- --
Natural gas -- -- -- --
Dry holes 2.0 2.0 1.0 1.0
------------ --------- --------------- --------------
Total 2.0 2.0 1.0 1.0
============ ========= =============== ==============
Development
Productive
Crude oil 3.0 3.0 1.0 1.0
Natural gas 15.0 14.6 16.0 15.9
Dry holes 5.0 5.0 1.0 1.0
------------ --------- --------------- --------------
Total 23.0 22.6 18.0 17.9
============ ========= =============== ==============
Markets and Customers
In order to manage its exposure of price risks in the marketing of its
crude oil and natural gas, Vessels continually reviews opportunities to enter
into fixed price delivery contracts, financial swaps and crude oil and natural
gas futures contracts as hedging devises that lock in the value of Vessels'
current assets and the return on Vessels' near-term capital expenditure program.
Vessels is a party to the Supply Contract, which is a long term fixed
price gas sale contract that expires in 2008 and provides for the sale of
approximately 1.5 Bcf of gas per year. To supply the sale, Vessels transports
its gas production from other points to the point of sale, or when financially
advantageous, sells its gas production nearer to the point of production, while
buying gas from other parties at or near the point of sale. When Vessels
transports its gas production it utilizes firm transportation capacity for which
it has contracted with interstate pipelines for terms approximating and
quantities greater than those of the Supply Contract for "forward haul"
transportation, and short-term interruptible transportation for "back hauls."
Certain claims related to the Supply Contract are subject to the Escrow
Agreement. See "The Merger - Escrow of Shares."
The balance of Vessels' oil and gas production is sold at current
market prices under short-term contracts customary in the industry.
During the nine months ended September 30, 1997, 9 purchasers accounted
for approximately 80% of Vessels' oil and gas sales revenues.
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In addition, Vessels is a party to financial swaps and collars through
1999, as outlined below, with either Chase Bank or Enron Capital and Trade
Resources.
1998 1999
-------------- -----------
Annual volume of Oil 119,000 _
Range of Settlement Prices, $/BBL $15.45-$19.00 N/A
Annual Volume of Gas 2,480,000 840,000
Range of Settlement Prices, $/MMBTU $1.355-$1.95 $1.83
Competition
Vessels is subject to substantially the same competitive factors as
Abraxas. See "Business of Abraxas-- Competition."
Regulatory Matters
Vessels is subject to substantially the same regulatory factors as
Abraxas. See "Business of Abraxas--Regulatory Matters."
In addition to the regulations to which Abraxas is subject, Vessels is
subject, and after the consummation of the Merger Abraxas will be subject, to
regulation by the State of Colorado. Colorado amended its statute concerning oil
and natural gas development in 1994 to provide the state's Oil and Gas
Conservation Commission (the "Colorado OGC Commission") with enhanced authority
to regulate oil and gas activities to protect public health, safety and welfare,
including the environment. Several rule makings pursuant to these statutory
changes have been undertaken by the Colorado OGC Commission concerning
groundwater protection, soil conservation and site reclamation, setbacks in
urban areas and other safety concerns, and financial assurance for industry
obligations in these areas. To date, these rule changes have not adversely
affected operations of Vessels, as the Colorado OGC Commission is required to
enact cost-effective and technically feasible regulations. However, there can be
no assurance that, in the aggregate, these and other regulatory developments
will not increase the cost of conducting operations in the future.
In Colorado, a number of city and county governments have enacted oil
and natural gas regulations. These ordinances increase the involvement of local
governments in the permitting of oil and natural gas operations, and require
additional restrictions or conditions on the conduct of operations so as to
reduce their impact on the surrounding community. Accordingly, these local
ordinances have the potential to delay, and increase the cost of, drilling and
recompletion operations.
Title to Properties
As is customary in the crude oil and natural gas industry, Vessels
makes only a cursory review of title to undeveloped crude oil and natural gas
leases at the time they are acquired by Vessels. However, before drilling
commences, Vessels 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, Vessels, rather than the seller of the undeveloped
property, is typically obligated to cure any title defect at its expense. If
Vessels 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, Vessels
could suffer a loss of its entire investment in the property. Vessels 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 Vessels are also typically subject
to royalty and other similar non-cost bearing interests customary in the
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industry. Vessels does not believe that any of these encumbrances or burdens
will materially affect Vessels' ownership or use of its properties.
Employees
As of November 30, 1997, Vessels had 27 full-time employees.
Additionally, Vessels 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
Vessels leases approximately 20,000 square feet of office space at 1050
Seventeenth Street, Suite 2000, Denver, Colorado 90285 for its executive
offices. The primary lease term is set to expire in the third quarter of 1998.
Litigation
Vessels is currently not a defendant in any ongoing litigation.
The Environmental Protection Agency has issued administrative orders to
certain parties who were former customers of Weld County Waste Disposal, Inc.
("WCWDI") related to their disposal of waste at facilities owned by WCWDI
(matter of Weld County Waste Disposal, Inc., EPA Dockets No. RCRA 7003VIII
95-02, 95-04). Those parties have threatened to assert claims against Vessels,
who was also a customer of WCWDI, under a right of contribution theory but have
not filed a complaint. Vessels is unable to assess (i) whether any claims
regarding this matter will be asserted, (ii) whether any claims, if asserted,
would be successful, or (iii) if any claims are successfully asserted, the
magnitude and amount of the claims.
From time to time, Vessels is also involved in various other claims and
administrative proceedings arising in the normal course of business. In the
opinion of management, any liabilities that may result from these claims will
not, individually or in the aggregate, have a material adverse effect on
Vessels' financial position or results of operations.
Vessels is presently engaged in voluntary settlement discussions with
the owner, operator and two other companies regarding Vessels' participation in
the cleanup of the WCWDI Oil Field Waste Disposal Facility near Ft. Lupton,
Colorado, in lieu of litigation over the potential claims between Vessels and
such other companies. Vessels has recorded an accrual of $300,000 related to
this issue and Vessels' management believes its financial statements adequately
reflect the impact of a potential settlement.
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MANAGEMENT OF ABRAXAS AFTER THE MERGER
Directors and Executive Officers
Set forth below are the names, ages, 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 2000, the Class II directors expires in 1999 and the Class III
directors in 1998.
<TABLE>
<CAPTION>
Name Age Office Class
<S> <C> <C> <C>
Robert L. G. Watson 47 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 46 Executive Vice President, Chief Financial Officer, Treasurer and
director of Abraxas; Vice President and Assistant Secretary of
Canadian Abraxas III
Robert Patterson 40 Vice President/Operations of Abraxas -
Stephen T. Wendel 48 Vice President/Land and Marketing of Abraxas -
Franklin A. Burke 63 Director of Abraxas I
Harold D. Carter 58 Director of Abraxas I
Robert D. Gershen 44 Director of Abraxas I
Richard M. Kleberg, III 55 Director of Abraxas II
James C. Phelps 75 Director of Abraxas III
Paul A. Powell, Jr. 52 Director of Abraxas II
Richard M. Riggs 77 Director of Abraxas II
Robert F. Semmens* 40 Director of Abraxas
Roger L. Bruton 65 Executive Vice President and director of Cascade; Executive Vice
President and director of Canadian Abraxas -
Donald A. Engle 54 President and director of Cascade; Secretary and director of
Canadian Abraxas -
</TABLE>
* To be appointed upon consummation of the Merger
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
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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.
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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.
Robert F. Semmens will be appointed, and has consented to serve, as a
director of Abraxas, upon consummation of the Merger. Mr. Semmens is a partner
of The Beacon Group, an entity that controls VOG Holdings, LLC, the majority
stockholder of Vessels. Prior to the formation of The Beacon Group, Mr. Semmens
was a Vice President of Goldman, Sachs & Co. During his ten years at Goldman,
Sachs, Mr. Semmens worked in the Pipeline & Utilities Group, the Energy Group
and at J. Aron & Co. While working in the Energy Group and at J. Aron, Mr.
Semmens was responsible for a number of the firm's principal investment
activities, including reviewing and making investments in the oilfield services,
oil and gas, and refining businesses. Mr. Semmens is a graduate of the J. L.
Kellogg Graduate School of Management, Northwestern University (M.M.), the
Northwestern University School of Law (J.D.) and the University of Arizona
(B.A.).
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.
Executive Compensation
Compensation Summary. The following table sets forth a summary of
compensation for the fiscal years ended December 31, 1994, 1995 and 1996 paid by
the Company to Robert L.G. Watson, the Chairman of the Board, President and
Chief Executive Officer of the Company, Chris E. Williford, the Executive Vice
President, Chief Financial Officer and Treasurer of the Company, and Stephen T.
Wendel, the Company's Vice President-Land and Marketing and to Robert E.
Patterson, the Company's Vice President of Operations for the fiscal year ended
December 31, 1996. Abraxas did not have any executive officers other than
Messrs. Watson and Williford whose total annual salary and bonus exceeded
$100,000 for the years ended December 31, 1994, and 1995 and Messrs. Watson,
Williford, Patterson and Wendel for the year ended December 31, 1996.
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<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Compensation
------------------
Annual Compensation Awards
------------------------- -------- ---------------- -------------- ------------------
Options
Name and Principal /SARs
Position Year Salary ($) Bonus ($) (#)
------------------------- -------- ---------------- -------------- ------------------
<S> <C> <C> <C> <C>
Robert L. G. Watson, 1994 $157,763(1)(2) ---- ----
Chairman of the Board 1995 $108,281(1)(3) ---- 60,000
and President 1996 $133,187 $135,550 (4) 140,000
Chris E. Williford, 1994 $101,028 ---- ----
Executive Vice 1995 $115,795(5) ---- 20,000
President, 1996 $121,315 $72,000 (6) 40,000
Chief Financial Officer
and Treasurer
Robert E. Patterson, 1996 $124,615 $35,000 (7) 60,000
Vice President of
Operations
Stephen T. Wendel, 1994 $58,628 ---- ----
Vice President - Land 1995 $63,210 ---- 20,000
and Marketing 1996 $76,577 $40,000 (8) 18,660
------------------------- -------- ---------------- -------------- ----------------
</TABLE>
(1) Mr. Watson received repayments of loans to Abraxas of $287,940 during
1994 and $354,677 during 1995.
(2) Includes $50,000 of stock awards and $105,000 of salary.
(3) Includes $1,093 of stock awards and $107,188 of salary.
(4) Includes $95,000 in cash and $40,550 of stock awards.
(5) Includes $8,607 of stock awards and $107,188 of salary.
(6) Includes $36,000 in cash and $36,000 in stock awards.
(7) Includes $17,500 in cash and $17,500 in stock awards.
(8) Includes $20,000 in cash and $20,000 in stock awards.
Grants of Stock Options and Stock Appreciation Rights During the Fiscal
Year Ended December 31, 1996. Pursuant to the Abraxas Petroleum Corporation 1984
Incentive Stock Option Plan (the "ISO Plan"), the Abraxas Petroleum Corporation
1993 Key Contributor Stock Option Plan (the "1993 Plan") and the Abraxas
Petroleum Corporation 1994 Long Term Incentive Plan (the "LTIP"), the Company
grants to employees and officers of the Company (including directors of the
Company who are also employees) incentive stock options and non-qualified stock
options. The ISO Plan, the 1993 Plan and the LTIP are administered by the
Compensation Committee which, based upon the recommendation of the Chief
Executive Officer, determines the number of shares subject to each option.
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<PAGE>
The table below contains certain information concerning stock options
granted to Messrs. Watson, Williford, Patterson and Wendel during 1996:
<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL YEAR
- ------------------------------------------------------------------------------------------------------
% of Total Potential Realizable Value
Options Exercise at Assumed Annual Rates of
Options Granted to Price Per Expiration Stock Price Appreciation
Name Granted Employees Share Date for Option Term
=============== ============= ============== ============== ============= ============== =============
5% 10%
<S> <C> <C> <C> <C> <C> <C>
Robert L. G. 40,000(1) 13.25 $5.00 03/07/06 $325,779 $518,748
Watson 100,000(1) 33.14 $7.50 11/20/06 $1,221,671 $1,945,307
Chris E. 20,000(1) 6.63 $5.00 03/07/06 $162,890 $259,374
Williford 20,000(1) 6.63 $7.50 11/20/06 $244,344 $389,061
Robert E. 40,000(1) 13.25 $6.75 01/02/06 $439,802 $700,310
Patterson 10,000(1) 3.32 $5.00 03/07/06 $81,445 $129,687
10,000(1) 3.32 $7.50 11/20/06 $122,172 $194,531
Stephen T. 10,660 (1) 3.54 $5.00 03/07/06 $86,722 $138,260
Wendel 8,000 (1) 2.66 $7.50 11/20/06 $97,760 $155,600
</TABLE>
(1) One-fourth of the options become exercisable on each of the first four
anniversaries of the date of grant.
The table below contains certain information concerning exercises of
stock options during the fiscal year ended December 31, 1996 by Messrs. Watson,
Williford, Patterson and Wendel and the fiscal year end value of unexercised
options held by Messrs. Watson, Williford, Patterson and Wendel.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Fiscal 1996 and Fiscal Year End Option Values
Number of Unexercised Value of Unexercised
Options on December 31, in-the-Money Options on
Shares Acquired 1996 (#) Exercisable/ December 31, 1996 ($)
By Exercise (#) Value Unexercisable Exercisable/
Name Realized ($) Unexercisable
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert L. G. Watson - - 15,000/85,000 $46,875/$573,125
Chris E. Williford - - 20,000/60,000 $62,500/$207,500
Robert E. Patterson - - 0/60,000 $0/$197,500
Stephen T. Wendel - - 16,840/36/160 $56,375/$125,655
</TABLE>
Long Term Incentive Plan Awards During the Fiscal Year Ended December
31, 1996. The Company did not make any awards to any of Messrs. Watson,
Williford, Patterson and Wendel under a long term incentive plan during the
fiscal year ended December 31, 1996.
Employment Agreements. The Company has entered into Employment
Agreements (the "Employment Agreements") with each of Messrs. Watson, Williford,
Patterson and Wendel, pursuant to which each of Messrs. Watson, Williford,
Patterson and Wendel will receive compensation as determined from time to time
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<PAGE>
by the Board in its sole discretion. The Employment Agreements terminate on
December 31, 1998 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 Messrs. Watson, Williford, Patterson or Wendel, 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 Messrs. Watson's, Williford's, Patterson's and
Wendel'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, 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 and the expiration date of each of Mr. Patterson's and
Mr. Wendel's Employment Agreement is automatically extended to a date no earlier
than two years following the effective date of such change in control. If,
following a change in control, Messrs. Watson's, Williford's, Patterson's or
Wendel's employment is terminated other than for Cause (as defined in each of
the Employment Agreements) or Disability (as defined in each of the Employment
Agreements), by reason of Messrs. Watson's, Williford's, Patterson's or Wendel's
death or retirement or by Messrs. Watson, Williford, Patterson or Wendel, 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, Mr. Williford will be entitled to
receive a lump sum payment equal to three times his annual base salary and Mr.
Patterson and Mr. Wendel will each be entitled to receive a lump sum payment
equal to two times his annual base salary. If any such lump sum payment would
individually or together with any other amounts paid or payable constitute an
"excess parachute payment" within the meaning of Section 280G of the Code
("Section 280G"), the amounts to be paid will be increased so that Messrs.
Watson, Williford, Patterson or Wendel, 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. Each director of the Company, other
than Messrs. Watson, Williford, Carter and Gershen, has 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. Mr. Burke holds an option to purchase 8,900 shares of Common
Stock at an exercise price of $6.75 per share.
Restricted Share Plan for Directors. Pursuant to the Director Share
Plan, each director of the Company, other than Messrs. Watson and Williford, is
entitled to receive a grant of shares of Common Stock or cash 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 Share 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 Share Plan) divided by the Average Stock Price (as
defined in the Director Share Plan) as of the date of a meeting of the Board.
For 1996, each of the directors received the number of shares of Common Stock
set forth opposite his name under the Director Share Plan:
Number of
Name Shares
Franklin M. Burke 695
Harold D. Carter 493
Robert D. Gershen 695
Richard M. Kleberg 958
James C. Phelps 1,698
Paul A. Powell 796
Richard M. Riggs 1,698
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<PAGE>
Abraxas Petroleum Corporation Director Stock Option Plan. Pursuant to
the Director Stock Option Plan, each member of the Company's Board of Directors,
other than Messrs. Watson and Williford, was granted an option to acquire 8,000
shares at a price of $6.75 per share on June 1, 1996. Directors who join the
Board for the first time after June 1, 1996, including Mr. Semmens, will be
granted an option to acquire 8,000 shares of Common Stock on the date they
become Directors. Options vest evenly over a four year period commencing on the
first anniversary date of the grant and each option expires on the tenth
anniversary of the date of the grant.
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.
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<PAGE>
CERTAIN TRANSACTIONS
Abraxas
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 C$90,000 (or
C$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 C$4.1 million (or C$.20 per share) in
cash. In November 1997, Grey Wolf merged with Cascade. Messrs. Phelps, Riggs and
Watson currently own 4.8% of the issued and outstanding capital stock of
Cascade.
Messrs. Phelps and Riggs own options to purchase in the aggregate up to
1,000,000 shares of capital stock of Cascade at an exercise price of C$.20 per
share, and Mr. Watson owns options to purchase up to 800,000 shares of Cascade's
capital stock at an exercise price of C$.34 per share. Cascade currently has
76,980,913 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
Wind River's cost. The Company paid Wind River a total of $101,421 for use of
the plane during 1996.
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.
Vessels
Mr. Semmens received no compensation as director of Vessels, except for
reimbursement of travel expenses to attend board meetings.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Abraxas
Based upon information received from the persons concerned, each person
known to the Company to be the beneficial owner of more than five percent of the
outstanding shares of Common Stock of the Company, each executive officer and
director, and all directors and officers of the Company as a group, owned
beneficially as of January 1, 1998 the number and percentage of outstanding
shares of Common Stock of the Company indicated in the following table:
Name and Address of
Beneficial Owner Number of Shares (1) Percentage
Robert L. G. Watson 284,505 (2) 4.43
Endowment Advisors, Inc. 863,790 (3) 13.45
450 Post Road East
Westport, CT 06881
Wellington Management 569,000 (4) 8.86
Company
75 State Street
19th Floor
Boston, MA 02109
Westcliff Capital 471,300 (5) 7.34
Management, LLC
200 7th Avenue, # 105
Santa Cruz, CA 95062
Dimensional Fund Advisors, 332,700 (6) 5.18
Inc.
1299 Ocean Avenue
11th Floor
Santa Monica, CA
90401
Franklin A. Burke 116,642 (7) 1.82
Paul A. Powell, Jr. 34,291 (8) *
James C. Phelps 35,807 (9) *
Richard M. Kleberg, III 33,714 (10) *
Robert D. Gershen 25,689 (11) *
Chris E. Williford 40,908 (12) *
Richard M. Riggs 16,013 (13) *
Harold D. Carter 7,493 (14) *
Robert E. Patterson 22,223 (15) *
Stephen T. Wendel 29,301 (16) *
All Officers and Directors 646,586 (2)(7)(8) 10.07
as a (9)(10)(11)(12)
Group (11 persons) (13)(14)
(15)(16)
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<PAGE>
- ---------
* Less than 1%
(1) Unless otherwise indicated, all shares are held directly with sole
voting and investment power.
(2) Includes 20,316 shares owned by Wind River Resources Corporation, a
corporation owned by Mr. Watson, as to which Mr. Watson has sole voting
and investment power, 13,545 shares issuable upon exercise of options
granted pursuant to Abraxas Petroleum Corporation 1993 Key Contributor
Stock Option Plan and 51,645 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.
(3) Includes 643,585 shares of Common Stock owned by Endowment Energy
Partners, L.P. ("EEP") and 220,205 shares of Common Stock owned by
Endowment Energy Partners II, Limited Partnership ("EEP II"). EEP and
EEP II are limited partnerships whose investors are educational
institutions and which were formed to make loans to companies in the
crude oil and natural gas business. The general partner of both EEP and
EEP II is Fairfield Partners, Inc. (Del.) ("Fairfield") which is a
wholly-owned subsidiary of Endowment Advisers, Inc. ("EAI"), a Delaware
nonstock corporation controlled by its trustees and management. Voting
and investment power over the shares held by EEP and EEP II is
exercised by the Board of Trustees of EAI, and by Susan J. Carter, the
Senior Vice President and Chief Operating Officer of both EAI and
Fairfield. The trustees of EAI are principally individuals who are
financial officers of educational institutions that have invested in
investment partnerships sponsored by EAI, including EEP and EEP II.
(4) Wellington Management Company is an investment manager which has the
power to make investment decisions for unrelated clients.
(5) Westcliff Capital Management, LLC is an investment manager which has
the power to make investment decisions for unrelated clients.
(6) Persons who are officers of Dimensional Fund Advisors Inc. also serve
as officers of DFA Investment Dimensions Group, Inc. (the "Fund") and
The DFA Investment Trust Company (the "Trust"), each an open-end
management investment company registered under the Investment Company
Act of 1940. In their capacities as officers of the Fund and the Trust,
these persons vote 50,000 shares which are owned by the Fund and 57,200
shares which are owned by the Trust.
(7) Includes 8,900 shares issuable upon exercise of options granted
pursuant to the Abraxas Petroleum Corporation 1984 Non-Qualified Stock
Option Plan and 2,000 shares issuable upon exercise of options granted
pursuant to the Director Option Plan.
(8) 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, and 63 shares owned by NAD Properties
of which Mr. Powell is a general partner. Mr. Powell shares voting and
investment power as to all of such shares. Also includes 2,000 shares
issuable upon exercise of options granted pursuant to the Director
Option Plan.
(9) Includes 8,000 shares owned by Marie Phelps, Mr. Phelps' wife and 2,000
shares issuable upon exercise of options granted pursuant to the
Director Option Plan.
(10) Includes 16,688 shares owned by SFD Enterprises, Ltd., a private
investment partnership, and 2,000 shares issuable upon exercise of
options granted pursuant to the Director Option Plan. Mr. Kleberg
shares voting and investment power as to the shares owned by SFD
Enterprises.
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<PAGE>
(11) Includes warrants to purchase 13,500 shares of Common Stock at a price
of $7.00 per share owned by Associated Energy Managers, Inc., the
principal shareholder and Chief Executive Officer of which is Mr.
Gershen, and 2,000 shares issuable upon exercise of options granted
pursuant to the Director Option Plan.
(12) Includes 1,786 shares issuable upon exercise of options granted
pursuant to the Abraxas Petroleum Corporation 1984 Incentive Stock
Option Plan, 14,777 shares issuable upon exercise of options granted
pursuant to the Abraxas Petroleum Corporation 1993 Key Contributor
Stock Option Plan and 20,000 shares issuable upon exercise of options
granted pursuant to the Abraxas Petroleum Corporation 1994 Long Term
Incentive Plan.
(13) Includes 700 shares owned by the Riggs Family Trust of which Mr. Riggs
is one of the trustees, 1,000 shares owned jointly by Mr. Riggs and his
wife and 2,000 shares issuable upon exercise of options granted
pursuant to the Director Option Plan.
(14) Includes 2,000 shares issuable upon exercise of options granted
pursuant to the Director Option Plan.
(15) Includes 20,000 shares issuable upon exercise of options granted
pursuant to the Abraxas Petroleum Corporation 1994 Long Term Incentive
Plan.
(16) Includes 4,340 shares issuable upon exercise of options granted
pursuant to the Abraxas Petroleum Corporation 1984 Incentive Stock
Option Plan, 7,500 shares issuable upon exercise of options granted
pursuant to the Abraxas Petroleum Corporation Key Contributor Stock
Option Plan and 14,665 shares issuable upon exercise of options granted
pursuant to the Abraxas Petroleum Corporation 1994 Long Term Incentive
Plan.
103
<PAGE>
Vessels
Based upon information received from the persons concerned, the
following table sets forth certain information regarding the beneficial
ownership of Vessels Common Stock as of January 1, 1998 and the beneficial
ownership of Abraxas Common Stock such shares will represent after the Merger by
each person known to Vessels to be the beneficial owner of more than five
percent of the outstanding shares of Vessels Common Stock, each executive
officer and director of Vessels, and all directors and officers of Vessels as a
group:
Name and Address of Number of
Beneficial Owner Shares (1) Percentage
VOG Holdings, LLC 24,656.88(2) 68.92%
399 Park Avenue
New York, NY 10022
Thomas J. Vessels 4,112.38(3) 11.49
180 Marion Street
Denver, CO 80218
Mary W. Vessels 3,157.92(4) 8.83
#3 Cheesman Gardens
1510 E. 10th Avenue
Denver, CO 80218
Annette V. Lagunes 1,602.53(5) 4.48
Stephen T. Vessels 708.94(6) 1.98
W. Michael Neumann, Jr. 173.18(7) *
Robert F. Semmens 24,656.88(8) 68.92
Harold W. Pote 24,656.88(8) 68.92
Richard A. Aube -- --
William F. Wallace -- --
All Officers and Directors as a 31,253.91 87.36
Group (8 persons)
- -----------------------
* Less than 1%
(1) Unless otherwise indicated, all shares are held directly with sole voting
and investment power.
(2) Includes 1,004.88 shares subject to currently exercisable warrants which
will be terminated upon closing of the Merger.
(3) Includes 133.38 shares subject to currently exercisable warrants which will
be terminated upon closing of the Merger.
(4) Includes an option to purchase 347 shares from Stephen T. Vessels. Includes
150.41 shares subject to currently exercisable warrants which will be
terminated upon closing of the Merger.
(5) Includes 43 shares owned by the Minor's Trust for Paul F. Lagunes of which
Ms. Lagunes is the Trustee. Includes 62.33 shares subject to currently
exercisable warrants held by Ms. Lagunes and 0.70 shares subject to
currently exercisable warrants held by the Minor's Trust for Paul F.
Lagunes, all of which warrants will be terminated upon closing of the
Merger.
(6) Includes 27.44 shares subject to currently exercisable warrants which will
be terminated upon closing of the Merger.
(7) Includes 3.18 shares subject to currently exercisable options which will be
terminated upon closing of the Merger.
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<PAGE>
(8) Consists of 23,652 shares held by VOG Holdings, LLC with respect to which
Mr. Semmens and Mr. Pote exercise voting power and 1,004.88 shares subject
to currently exercisable warrants held by VOG Holdings, LLC which will be
terminated upon closing of the Merger.
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<PAGE>
DESCRIPTION OF ABRAXAS CAPITAL STOCK
Common Stock
Abraxas is authorized to issue 50,000,000 shares of Common Stock, par
value $.01 per share. AtJanuary 6, 1998, there were 6,422,540 shares of Abraxas
Common Stock issued and outstanding. Holders of the Abraxas 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 Abraxas Common Stock do not have preemptive
rights to subscribe for additional shares of Abraxas Common Stock issued by
Abraxas.
Holders of the Abraxas Common Stock are entitled to receive dividends
as may be declared by the Board of Directors out of funds legally available
therefor. Under the terms of the Credit Facility, Abraxas may not pay dividends
on shares of the Abraxas Common Stock. In the event of liquidation, holders of
the Common Stock are entitled to share pro rata in any distribution of Abraxas'
assets remaining after payment of liabilities, subject to the preferences and
rights of the holders of any outstanding shares of Preferred Stock. All of the
outstanding shares of the Abraxas 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 Abraxas Common Stock. See "-- Stockholder Rights
Plan".
Preferred Stock
Abraxas' Articles of Incorporation authorize the issuance of up to
1,000,000 shares of Preferred Stock, par value $.01 per share, in one or more
series. The Board of Directors is authorized, without any further action by the
stockholders, to determine the dividend rights, dividend rate, conversion
rights, voting rights, rights and terms of redemption, liquidation preferences,
sinking fund terms and other rights, preferences, privileges and restrictions of
any series of Preferred Stock, the number of shares constituting any such
series, and the designation thereof. The rights of the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of holders of
any Preferred Stock that may be issued in the future. There are no shares of
Preferred Stock outstanding.
Warrants
Abraxas has warrants ("Warrants") outstanding to purchase an aggregate
of 225,500 shares of Abraxas Common Stock. Associated Energy Managers, Inc.
("AEM"), has Warrants to purchase 13,500 shares at an exercise price of $7.00
per share. First Union National Bank of North Carolina ("First Union") has
Warrants to purchase 212,000 shares of Abraxas 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."
Vessels has Warrants outstanding to purchase an aggregate of 230 shares
of Vessels Common Stock. After consummation of the Merger, based upon the amount
of the Projected Provisional Payment, Chase Securities Inc. ("Chase") will have
Warrants to purchase 6,890 shares of Abraxas Common Stock at an exercise price
of $56.60 per share and AEM will have Warrants to purchase 2,650 shares of
Abraxas Common Stock at an exercise price of $56.60 per share and Warrants to
purchase an additional 2,650 shares of Abraxas Common Stock at an exercise price
of $25.47 per share. AEM and Chase have certain registration rights with respect
to shares of Abraxas Common Stock issued pursuant to the exercise of Warrants.
See "--Registration Rights."
All outstanding Warrants contain provisions that protect AEM, Chase and
First Union against dilution by adjusting the price at which the Warrants are
exercisable and the number of shares of the Abraxas Common Stock issuable upon
exercise thereof upon the occurrence of certain events, including payment of
stock dividends and distributions, stock splits, recapitalizations,
reclassifications, mergers, consolidations or the issuance or sale of Common
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<PAGE>
Stock or options, rights or securities convertible into shares of the Common
Stock, in the case of AEM and Chase, 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 Abraxas Common Stock to be received by AEM, Chase 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 Abraxas
Common Stock or securities convertible into Abraxas Common Stock under the
Securities Act for its own account, except in certain circumstances, EEP and EEP
II are entitled to include shares of Abraxas Common Stock in such registration
("Piggyback Registration"), subject to the right of the underwriters of any such
offering to limit the number of shares included in such registration. Abraxas
has agreed to pay all expenses in connection with a Piggyback Registration
except for underwriting discounts and selling commissions which shall be borne
by EEP and/or EEP II with respect to shares of the Abraxas Common Stock owned by
EEP and EEP II other than the 211,500 shares of Abraxas Common Stock acquired by
EEP and EEP II through the exercise of the Warrants formerly owned by EEP and
EEP II ("Warrant Shares"). EEP and EEP II have the additional right to require
("Demand Registration") Abraxas to effect one Demand Registration of all shares
of the Abraxas Common Stock (other than Warrant Shares) in the aggregate at any
time and Abraxas is required to effect such registration, subject to certain
conditions and limitations. Abraxas is required to bear the expenses of a Demand
Registration except for underwriting discounts and selling commissions which
shall be borne by EEP and/or EEP II with respect to shares of Abraxas Common
Stock owned by EEP and EEP II other than Warrant Shares. Abraxas has agreed to
customary indemnities including an agreement to indemnify, subject to certain
limited exceptions, EEP and EEP II in connection with a Demand Registration and
a Piggyback Registration.
Under the terms of its Warrants, AEM has the right to unlimited
Piggyback Registrations and, with respect to its Vessels Warrants, the right to
one Demand Registration. 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. AEM's Vessels Warrants require
Abraxas to pay all expenses incurred in connection with any such registration
other than underwriting discounts and selling commissions which shall be borne
by AEM. Abraxas has also agreed to customary indemnities, including an agreement
to indemnify, subject to certain limitations, AEM in connection with a Demand
Registration and a Piggyback Registration.
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.
Under the terms of its Warrants, Chase has the right to two (2) Demand
Registrations and 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 Chase.
Abraxas has also agreed to customary indemnities, including an agreement to
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<PAGE>
indemnify, subject to certain limitations, Chase in connection with a Demand
Registration and a Piggyback Registration.
At the Closing, Abraxas will enter into a Registration Rights Agreement
with VOG Holdings, LLC ("VOG") and a similar agreement with the remaining
Vessels stockholders (the "Stockholders"). Each of VOG and the Stockholders
shall have the right 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. Each of VOG and the Stockholders, as a group, also have
the right to require Abraxas to effect one (1) Demand Registration. Abraxas has
agreed to pay all expenses in connection with any registrations on behalf of VOG
and the Stockholders except for underwriters' discounts and commissions and fees
and disbursements of VOG's and the Stockholders' counsel. Abraxas has agreed to
customary indemnities including an agreement to indemnify, subject to certain
limited exceptions, VOG and the Stockholders 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 Abraxas Common Stock
must be effected at a duly called annual or special meeting of such holders, and
may not be taken by any written consent of such stockholders. These provisions
may have the effect of delaying consideration of a stockholder proposal until
the next annual meeting unless a special meeting is called by the persons set
forth above. The provisions of the Articles of Incorporation and Bylaws
prohibiting stockholder action by written consent could prevent the holders of a
majority of the voting power of Abraxas from using the written consent procedure
to take stockholder action and taking action by consent without giving all the
stockholders of Abraxas entitled to vote on a proposed action the opportunity to
participate in determining such proposed action.
Stockholder Rights Plan
On November 17, 1994, the Board of Directors of Abraxas adopted a
stockholder rights plan (the "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 Abraxas Common Stock outstanding
on November 17, 1994. Each Right entitles the holder thereof to buy one-half of
one share of Abraxas 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 Abraxas 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
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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. The Merger is not subject to the Combination Provisions.
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. Vessels
stockholders acquiring shares of Abraxas Common Stock in the Merger will not be
subject to the Control Share Act.
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
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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.
"Interested Stockholder" is defined as a person who, directly or
indirectly, exercises the voting power of an issuing corporation and who is (1)
an acquiring person, (2) an officer of the corporation or (3) an employee and
director of the corporation. 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.
COMPARISON OF RIGHTS OF STOCKHOLDERS
OF THE COMPANY AND STOCKHOLDERS OF VESSELS
Upon consummation of the Merger, the stockholders of Vessels will
become stockholders of the Company whose rights will (i) be defined and governed
by the Nevada Statute and cease to be defined and governed by the DGCL and (ii)
cease to be defined and governed by the Certificate of Incorporation and By-laws
of Vessels and will be defined and governed by the Company's Articles of
Incorporation, as amended (the "Company Articles"), and the Amended and Restated
By-laws of the Company (the "Company By-laws"). Certain provisions of the
Company Articles and the Company By-laws alter the rights which stockholders of
Vessels presently have and also alter certain powers of management. These
provisions are summarized below. This summary is qualified in its entirety by
reference to the Company Articles, the Certificate of Incorporation of Vessels
(the "Vessels Certificate"), the By-laws of Vessels (the "Vessels By-laws") and
applicable law. In addition, the Company could implement certain other changes
by amending the Company Articles or the Company By-laws. For a discussion of
such changes, see "Certain Differences Between Nevada and Delaware Corporate
Laws."
Number of Directors
The Company. The Company By-laws provide that its initial Board of
Directors shall consist of seven (7) directors, until changed by amendment of
the Company By-laws. The current number of directors of the Company is nine (9).
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The Company's current Board of Directors is divided into three classes, with the
term of three (3) directors to expire in each of 1998, 1999 and 2000,
respectively. See "Management of Abraxas After the Merger."
Vessels. The Vessels By-laws provide that its Board of Directors shall
consist of not less than three (3) directors, until changed by amendment of the
Vessels By-laws. The current number of directors of Vessels is seven (7). The
Vessels Board of Directors is not divided into classes and all directors are
elected at each annual meeting.
Monetary Liability of Directors
The Company. The Company Articles provide for the elimination of
personal monetary liability of directors and officers to the fullest extent
permissible under the Nevada Statute.
Vessels. The Vessels Certificate provides for the elimination of
personal monetary liability of directors to the fullest extent permissible under
the DGCL. This provision incorporates future amendments to Delaware law with
respect to the elimination of such liability.
Removal of Directors
The Company. The Company By-laws provide that any director, or the
entire Board of Directors, may be removed from office at any time, but only for
cause and only by the affirmative vote of the holders of at least 80% of the
voting power of the then outstanding shares of the Abraxas Common Stock entitled
to vote generally in the election of directors, voting together as a single
class.
Vessels. The Vessels By-laws provide that, except as provided by the
DGCL, the stockholders of Vessels may remove one or more directors with or
without cause at a meeting of stockholders duly called for such purposes or
otherwise in the manner provided in the DGCL.
Amendment of Articles/Certificate of Incorporation
The Company. The Company Articles reserve for the Company the right to
amend any provision contained in the Company Articles.
Vessels. The Vessels Certificate is silent with respect to the vote
required to amend the Vessels Certificate and, therefore, the DGCL governs. See
"Certain Differences Between Nevada and Delaware Corporate Laws --Amendment of
Articles/Certificate of Incorporation."
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CERTAIN DIFFERENCES BETWEEN NEVADA
AND DELAWARE CORPORATE LAWS
The Nevada Statute governs the rights of stockholders of the Company
and will govern the rights of Vessels stockholders who become stockholders of
the Company. The Nevada Statute and the DGCL differ in many respects. Certain of
the significant differences between the provisions of the Nevada Statute and the
DGCL that could materially affect the rights of Vessels stockholders are
discussed below.
Amendment of Articles/Certificate of Incorporation
Under the Nevada Statute, a corporation's articles of incorporation may
be amended by the affirmative vote of the holders of a majority of the voting
power, or such greater proportion of the voting power as may be required in the
case of a vote by classes or series. No such different amount is specified in
the Company Articles.
Under the DGCL, amendments to a corporation's certificate of
incorporation require the approval of a majority of the Board of Directors and
stockholders holding a majority of the outstanding shares entitled to vote on
such amendment and, in certain circumstances, the holders of a majority of the
outstanding stock of each class entitled to vote on such amendment as a class,
unless a greater proportion is specified in the certificate of incorporation or
by other provisions of the DGCL. No such different amount is specified in the
Vessels Certificate.
Cumulative Voting
Under the Nevada Statute and the DGCL, cumulative voting is not
available unless so provided in a corporation's articles of incorporation. The
Company Articles expressly prohibit cumulative voting. The Vessels Certificate
does not provide for cumulative voting.
Preemptive Rights
Under the Nevada Statute, for corporations formed before October 1,
1991, except to the extent limited or denied by the articles of incorporation,
stockholders of a corporation have a preemptive right to acquire unissued
shares, treasury shares or securities convertible into such shares. The Company
Articles expressly deny preemptive rights to the Company's stockholders.
Under the DGCL, stockholders have no preemptive rights to subscribe for
additional issues of stock or to any security convertible into such stock
unless, and except to the extent that, such rights are expressly provided in the
certificate of incorporation. The Vessels Certificate contains no express
provision providing preemptive rights to its stockholders.
Classified Board
The Nevada Statute permits the adoption of a board of directors
classified as to the duration of their respective terms of office or as to their
election by one or more authorized classes or series of shares. The Nevada
Statute requires that at least one-fourth in number of the directors of every
corporation be elected annually. The Company has adopted a classified board of
directors.
The DGCL permits the division of directors of a corporation into one,
two or three classes, with the term of one class of directors expiring at the
next annual meeting, the second class one year thereafter and the third class
two years thereafter; and at each annual meeting held after such classification
and election, directors shall be chosen for a full term, as the case may be, to
succeed those whose terms expire. Vessels has not adopted a classified board of
directors.
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Indemnification of Directors and Officers; Insurance
The Nevada Statute and the DGCL each permit 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 Company By-laws provide
indemnification to the same extent allowed pursuant to the foregoing provisions
of the Nevada Statute. The Vessels Articles and the Vessels By-laws provide
indemnification to the same extent allowed pursuant to the provisions of the
DGCL.
The Nevada Statute and the DGCL also authorize the purchase of
insurance to protect officers and directors from certain liabilities, including
liabilities against which the corporation cannot indemnify its directors and
officers. The Company and Vessels each currently maintain a directors' and
officers' liability insurance policy.
Limitation on Director Liability
The Nevada Statute provides that a corporation may include in its
articles of incorporation a provision eliminating or limiting the personal
liability of its directors or officers for damages for any breach of fiduciary
duty as a director or officer, except for (i) acts or omissions which involve
intentional misconduct, fraud or a knowing violation of law, or (ii) the payment
of improper dividends. The Company Articles contain a provision which eliminates
director and officer liability to the extent allowed by the Nevada Statute.
The DGCL permits a corporation to include in its certificate of
incorporation a provision eliminating or limiting a director's liability to the
corporation or its stockholders for monetary damages for breaches of fiduciary
duty. The DGCL expressly provides, however, that the liability for breaches of
the duty of loyalty, acts or omissions not in good faith or involving
intentional misconduct or knowing violation of the law, the unlawful purchase or
redemption of stock or payment of unlawful dividends or the receipt of improper
personal benefits cannot be eliminated in this manner. The DGCL further provides
that no such provision shall eliminate or limit the liability of a director for
any act or omission occurring prior to the date when such provision becomes
effective. The Vessels Certificate contains a provision eliminating director
liability to the extent permitted by the DGCL.
Removal of Directors
Under the Nevada Statute a director or the entire board of directors of
a corporation without a classified board of directors can be removed with or
without cause by the holders of not less than two-thirds of shares then entitled
to vote in an election of directors. The Company's By-laws provide that a
director or the entire board of directors may be removed only for cause and only
upon the affirmative vote of the holders of at least 80% of the voting power of
the then outstanding shares of the Company Common Stock.
Under the DGCL, unless otherwise provided in a corporation's
certificate of incorporation or by-laws, any director or the entire board of
directors may be removed, with or without cause, by the holders of a majority of
the shares then entitled to vote an election of directors, except (i) in the
case of a corporation having a classified board, and unless the certificate of
incorporation provides otherwise, stockholders may effect such removal only for
cause, and (ii) in the case of a corporation having cumulative voting, if less
than the entire board is to be removed, no director may be removed without cause
if the votes cast against his removal would be sufficient to elect him if they
were cumulatively voted at an election of the entire board of directors. The
Vessels By-laws provide that the stockholders of Vessels may remove one or more
directors with or without cause at a meeting of stockholders duly called for
such purpose and otherwise in the manner provided in the applicable law of the
State of Delaware.
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Inspection of Books and Records
The Nevada Statute permits any person who shall have been a stockholder
for at least six months immediately preceding his demand, or who is the holder
of at least 5% of the outstanding stock of the corporation, to examine the
stockholder ledger and to make abstracts therefrom, provided that a written
demand setting forth a proper purpose of such examination is made and served on
the statutory agent of the corporation.
The DGCL permits any stockholder of record to inspect a corporation's
stock ledger, the stockholder list and its other books and records for any
purpose reasonably related to such person's interest as a stockholder provided
that his written demand under oath is directed to the corporation's registered
office in Delaware or to its principal place of business.
Right to Call Special Meetings of Stockholders
Under the Nevada Statute special meetings of stockholders of a
corporation may be held as authorized by the corporation's articles of
incorporation or bylaws. The Company Articles provide that special meetings of
the stockholders of the Company may only be called by the Chairman of the Board,
the President or the Board of Directors pursuant to a resolution approved by a
majority of the entire Board of Directors of the Company.
Under the DGCL, a special meeting of stockholders may be called by the
board of directors or by any other person authorized in the certificate of
incorporation or the bylaws. The Vessels By-laws provide that the President or
the Board of Directors may call special meetings of the stockholders of Vessels,
and that, upon request of not less than one-tenth of all outstanding shares of
entitled to vote at the meeting, the president shall call a special meeting of
stockholders.
Action Without a Meeting
Under the Nevada Statute, unless prohibited by the articles of
incorporation or the bylaws, any action to be taken by stockholders at a meeting
may be taken without a meeting if a written consent thereto is signed by
stockholders holding at least a majority of the voting power, except that if a
different proportion of voting power is required for such an action at a
meeting, then that proportion of written consents is required. The Company's
Articles expressly provide that actions of stockholders of the Company may not
be taken without a meeting.
The DGCL provides that, unless otherwise provided in a corporation's
certificate of incorporation, any action that may be taken at a meeting of
stockholders may be taken without a meeting, without prior notice and without a
vote if the holders of outstanding stock, having not less than the minimum
number of votes that would be necessary to authorized such action, consent in
writing. The Vessels Certificate permits action by consent of its stockholders
in accordance with the DGCL.
Mergers, Sales of Assets and Other Transactions
Under the Nevada Statute, a merger or consolidation in which the
corporation is a constituent corporation must be approved by the board of
directors and by the holders of a majority of outstanding stock of the
corporation entitled to vote thereon, provided that no vote of stockholders of a
constituent corporation surviving a merger is required (unless the corporation
provides otherwise in its certificate of incorporation) if (a) the merger
agreement does not amend the existing certificate of incorporation, (b) each
share of stock of the surviving corporation outstanding before the merger is an
identical outstanding share after the merger and (c) the number of voting shares
outstanding immediately after the merger, plus the number of voting shares
issued as a result of the merger either by the conversion of securities issued
pursuant to the merger or the exercise of rights and warrants issued pursuant to
the merger, will not exceed 20% of the total number of voting shares of the
surviving corporation outstanding immediately before the merger.
Under the DGCL, a merger or consolidation in which the corporation is a
constituent corporation must be approved by the board of directors and by the
holders of a majority of outstanding stock of the corporation entitled to vote
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thereon, provided that no vote of stockholders of a constituent corporation
surviving a merger is required (unless the corporation provides otherwise in its
certificate of incorporation) if (a) the merger agreement does not amend the
existing certificate of incorporation, (b) each share of stock of the surviving
corporation outstanding before the merger is an identical outstanding share
after the merger and (c) either no shares of common stock of the surviving
corporation and no shares, securities or obligations convertible into such stock
are to be issued or delivered under the plan of merger, or the authorized,
unissued shares or the treasury shares of common stock of the surviving
corporation to be issued or delivered under the plan of merger plus those
initially issuable upon conversion of any other shares, securities or
obligations to be issued or delivered under such plan do not exceed 20% of the
shares of common stock of such constituent corporation outstanding immediately
prior to the effective date of the merger.
Under the Nevada Statute and the DGCL, a corporation may sell, lease or
exchange all or substantially all of its assets after such transaction has been
approved by the corporation's board of directors and by the holders of a
majority of the outstanding stock of the corporation entitled to vote thereon.
Provisions Affecting Business Combinations
Section 203 of the DGCL ("Section 203") prohibits a Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for three years following the date that such person becomes an
interested stockholder. With certain exceptions, an interested stockholder is a
person or group who or which owns 15% or more of the corporation's outstanding
voting stock (including any rights to acquire stock pursuant to an option,
warrant, agreement, arrangement or understanding, or upon the exercise of
conversion or exchange rights, and stock with respect to which the person has
voting rights only), or is an affiliate or associate of the corporation and was
the owner of 15% or more of such voting stock at any time within the previous
three years.
For purposes of Section 203, the term "business combination" is defined
broadly to include mergers with or caused by the interested stockholder; sales
or other dispositions to the interested stockholder (except proportionately with
the corporation's other stockholders) of assets of the corporation or a
subsidiary equal to ten percent or more of the aggregate market value of the
corporation's consolidated assets or its outstanding stock; the issuance or
transfer by the corporation or a subsidiary of stock of the corporation or such
subsidiary to the interested stockholder (except for certain transfers in a
conversion or exchange or a pro rata distribution or certain other transactions,
none of which increase the interested stockholders' proportionate ownership of
any class or series of the corporation's or such subsidiary's stock); or receipt
by the interested stockholder (except proportionately as a stockholder),
directly or indirectly, of any loans, advances, guarantees, pledges or other
financial benefits provided by or through the corporation or a subsidiary.
The three-year moratorium imposed on business combinations by Section
203 does not apply if: (i) prior to the date at which such stockholder becomes
an interested stockholder the board of directors approves either the business
combination or the transaction which resulted in the person becoming an
interested stockholder; (ii) the interested stockholder owns 85% of the
corporation's voting stock upon consummation of the transaction which made him
or her an interested stockholder (excluding from the 85% calculation shares
owned by directors who are also officers of the target corporation and shares
held by employee stock plans which do not permit employees to decide
confidentially whether to accept a tender or exchange offer; or (iii) on or
after the date such person becomes an interested stockholder, the board approves
the business combination and it is also approved at a stockholder meeting by 66
2/3% of the voting stock not owned by the interested stockholder. Section 203
does not apply if the business combination is proposed prior to the consummation
or abandonment of and subsequent to the earlier of the public announcement or
the notice required under Section 203 of the proposed transaction which (i)
constitutes certain (x) mergers or consolidations, (y) sales or other
transactions of assets having an aggregate market value equal to 50% or more of
the aggregate market value of all of the assets of the corporation determined on
a consolidated basis or the aggregate market value of all of the outstanding
stock of the corporation or (z) proposed tender or exchange offers for 50% or
more of the corporation's outstanding voting stock; (ii) is with or by a person
who was either not an interested stockholder during the last three years or who
became an interested stockholder with the approval of the corporation's board of
directors; and (iii) is approved or not opposed by a majority of the board
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members elected prior to any person becoming an interested stockholder during
the previous three years (other their chosen successors).
A Delaware corporation may elect not to be governed by Section 203 by a
provision of its original certificate of incorporation or an amendment thereto
or to the bylaws, which amendment must be approved by majority stockholder vote
and may not be further amended by the board of directors. Such an amendment is
not effective until 12 months following its adoption.
The Nevada Statute includes similar provisions (the "Nevada Combination
Provisions") prohibiting certain combinations with interested stockholders. See
"Description of Capital Stock -- Anti-takeover Statutes." The Nevada Statute
defines "interested stockholder" similarly to the DGCL, except that an
interested stockholder is defined to be a person or group who owns 10% or more
of the corporation's outstanding voting stock. The Nevada Statute defines the
term "combination" similarly to the DGCL, except that a combination is deemed to
occur when acquisitions of five percent or more of the aggregate market value of
the corporation's consolidated assets or its outstanding stock are consummated.
Neither the Company Articles nor the Vessels Certificate contains a
provision opting out of the coverage of the Nevada Combination Provisions or
Section 203, respectively.
Appraisal Rights
Under the Nevada Statute, a stockholder is entitled to dissent from
and, upon perfection of the stockholder's appraisal rights, to obtain the fair
value of his or her shares in the event of certain corporation actions,
including certain mergers and share exchanges, and any corporate action taken
pursuant to a vote of the stockholders to the extent that the corporation's
articles of incorporation, bylaws or a resolution of the board of directors
provides that voting or nonvoting stockholders are entitled to dissent and
obtain payment for their shares. See "The Merger -- The Merger Agreement --
Appraisal Rights" and "Appraisal Rights."
Under the DGCL, a stockholder of a constituent corporation in certain
mergers or consolidations may, under varying circumstances, be entitled to
appraisal rights pursuant to which such stockholder shall be entitled to an
appraisal of the fair value of his shares of stock. Appraisal rights are not
available (a) with respect to the shares or depository receipts which are either
listed on a national securities exchange, designated as a national market system
security on an interdealer quotation system by the National Association of
Securities Dealers, Inc. (the "NASD") or are held of record by more than 2,000
holders if such stockholders receive only share or depository receipts of the
surviving corporation or shares or depository receipts of any other corporation
which are either listed on a national securities exchange, designated as a
national market system security on an interdealer quotation system by the NASD
or held of record by more than 2,000 holders, plus cash in lieu of fractional
shares, or (b) to stockholders of a corporation surviving a merger if no vote of
the stockholders of the surviving corporation is required to approve the merger.
116
<PAGE>
Dividends and Stock Repurchase and Redemption
The Nevada Statute provides that a corporation may, unless otherwise
restricted by its articles of incorporation, authorize and make distributions to
its stockholders. No distributions may be made if, after giving it effect: (i)
the corporation would not be able to repay its debts as they become due or (ii)
the corporation's total assets would be less than the sum of its total
liabilities plus the amount needed to satisfy preferential rights upon
dissolution of stockholders whose preferential rights are superior to those
receiving the distribution if, at the time of the distribution, the corporation
is to be dissolved.
The DGCL permits a corporation to declare and pay dividends out of
statutory surplus or, if there is no surplus, out of net profits for the fiscal
year in which the dividend is declared and/or for the preceding fiscal year as
long as the amount of capital of the corporation following the declaration and
payment of the dividend is not less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets. In addition, the DGCL generally
provides that a corporation may redeem or repurchase its shares only if such
redemption or repurchase would not impair the capital of the corporation. The
ability of a Delaware corporation to pay dividends on, or to make repurchases or
redemptions of, its shares is dependent on the financial status of the
corporation standing alone and not on a consolidated basis.
Dissolution
The Nevada Statute provides that voluntary dissolution occurs upon the
recommendation by the board of directors to the stockholders of the corporation
and the affirmative vote of the holders of a majority of the stockholders
entitled to vote thereon.
Under the DGCL, voluntary dissolution of a corporation requires the
adoption of a resolution by a majority of the board of directors and the
affirmative vote of a majority of the outstanding shares entitled to vote
thereon, together with a majority vote of the outstanding shares of each class
or series entitled to vote as a class. Alternatively, the DGCL permits the
voluntary dissolution of a corporation without the approval of the board of
directors pursuant to the written consent of all stockholders.
THE FOREGOING DOES NOT PURPORT TO BE A COMPLETE DESCRIPTION OF THE
DIFFERENCES BETWEEN THE NEVADA AND DELAWARE CORPORATE LAWS. SUCH DIFFERENCES CAN
BE DETERMINED BY FULL REFERENCE TO THE NEVADA STATUTE AND THE DGCL, THE COMMON
LAW UNDER EACH OF SUCH JURISDICTIONS, THE ARTICLES OF INCORPORATION AND THE
BY-LAWS OF THE COMPANY AND THE CERTIFICATE OF INCORPORATION AND BY-LAWS OF
VESSELS.
117
<PAGE>
LEGAL MATTERS
Certain legal matters related to the shares of the Abraxas Common Stock
offered hereby are being passed upon for Abraxas by Cox & Smith Incorporated,
San Antonio, Texas. Certain legal matters in connection with the Merger will be
passed upon by Cox & Smith Incorporated, San Antonio, Texas and by King &
Spalding, Houston, Texas.
EXPERTS
The consolidated financial statements of Abraxas Petroleum Corporation
as of December 31, 1996 and 1995 and for each of the three years in the period
ended December 31, 1996 and 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 included in the Proxy Statement of Abraxas Petroleum
Corporation which is referred to and made a part of the 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 reports 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 the Proxy Statement of Abraxas Petroleum
Corporation which is referred to and made a part of the 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 of CGGS Canadian Gas Gathering Systems, Inc.
as of October 31, 1996 and 1995 and for the years ended October 31, 1996, 1995
and 1994 have been included herein and in the Registration Statement in reliance
upon the report of KPMG, Chartered Accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of Vessels Energy, Inc and
subsidiaries for the years then ended included in the Proxy Statement of Abraxas
Petroleum Corporation which is referred to and made a part of the Prospectus and
the Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report dated April 9, 1997 with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said report.
The consolidated statements of operations, cash flows and stockholders
equity of Vessels Energy, Inc. and subsidiaries for the year ended December 31,
1994 included in this Prospectus have been so included in reliance on the
reports of Price Waterhouse LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
The historical reserve information prepared by DeGolyer and MacNaughton
and Netherland, Sewell & Associates included in this Proxy Statement-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.
STOCKHOLDERS' PROPOSALS
If the Merger is consummated, it is presently anticipated that Abraxas
will hold its annual meeting of stockholders on or about May 22, 1998.
Stockholder proposals intended to be presented at that meeting must be submitted
in accordance with the notice requirements set forth in the Company's By-Laws
for consideration by the Company for possible inclusion in the proxy material
for that meeting.
118
<PAGE>
GLOSSARY OF TERMS
Unless otherwise indicated in this Prospectus, natural gas volumes are
stated at the legal pressure base of the State or area in which the reserves are
located at 60 degrees Fahrenheit. Natural gas equivalents are determined using
the ratio of six Mcf of natural gas to one barrel of crude oil, condensate or
NGLs.
The following definitions shall apply to the technical terms used in
this Prospectus.
"Bbl" means barrel or barrels.
"Bblpd" means barrels per day.
"Bcf" means billion cubic feet.
"BOE" means barrel of crude oil equivalent.
"BOPD" means barrel of crude oil per day.
"C$" means Canadian dollars.
"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.
"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.
119
<PAGE>
"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.
120
<PAGE>
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Abraxas Petroleum Corporation and Subsidiaries
Report of Independent Auditors .............................................F-2
Consolidated Balance Sheets at December 31, 1995 and 1996 and
September 30, 1997 (Unaudited) ..........................................F-3
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995,and 1996 and for the nine months
ended September 30, 1996 and 1997 (Unaudited) ...........................F-5
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1994, 1995, and 1996 and for the nine months
ended September 30, 1997 (Unaudited).....................................F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995,and 1996 and for the nine months
ended September 30, 1996 and 1997 (Unaudited)............................F-9
Notes to Consolidated Financial Statements .................................F-11
CGGS Canadian Gas Gathering Systems Inc.
Auditors' Report to the Directors ..........................................F-39
Balance Sheets at October 31, 1995 and 1996 ................................F-40
Statements of Earnings (Loss) and Deficit for the years ended
October 31, 1994,1995, and 1996 .........................................F-41
Statements of Changes in Financial Position for the years ended
October 31, 1994, 1995, and 1996 ........................................F-42
Notes to Financial Statements ..............................................F-43
Enserch Exploration, Inc.'s Wamsutter Area Package
Independent Auditors' Report ...............................................F-50
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-51
Notes to Statements of Revenues and Direct Operating Expenses ..............F-52
Certain Overriding Royalty Interests in the Portilla Field Acquired by
Abraxas Petroleum Corporation
Report of Independent Auditors .............................................F-54
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-55
Notes to Statements of Combined Oil and Gas Revenues and
Direct Operating Expenses ...............................................F-56
Vessels Energy, Inc.
Report of Independent Public Accountants ...................................F-60
Report of Independent Accountants ..........................................F-61
Consolidated Balance Sheets as of December 31, 1995 and 1996
and September 30, 1997 (Unaudited) ......................................F-62
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995, and 1996 and for the nine months
ended September 30, 1996 and 1997 (Unaudited) ...........................F-64
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995, and 1996 and for the nine months ended
September 30, 1996 and 1997 (Unaudited) .................................F-65
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1994,1995, and 1996, and for the nine months ended
September 30, 1997 (Unaudited) ..........................................F-67
Notes to Consolidated Financial Statements .................................F-68
<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, 1995 and 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996. 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, 1995 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
San Antonio, Texas
March 21, 1997
F-2
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
-------------------- September 30
1995 1996 1997
--------- -------- ------------
(In thousands) (Unaudited)
<S> <C> <C> <C>
Current assets:
Cash ........................................... $ 4,250 $ 8,290 $ 7,559
Accounts receivable, less allowance for
doubtful accounts:
Joint owners ............................... 1,335 1,601 2,067
Oil and gas production sales ............... 2,946 11,400 8,164
Affiliates, officers, and shareholders ..... 53 94 --
Other ...................................... 60 1,289 749
-------- -------- ----------
4,394 14,384 10,980
Equipment inventory ............................ 80 451 430
Other current assets ........................... 125 187 205
-------- -------- ----------
Total current assets ......................... 8,849 23,312 19,174
Property and equipment ............................ 104,997 310,043 346,459
Less accumulated depreciation, depletion, and
amortization ................................... 29,919 38,653 58,250
-------- -------- ----------
Net property and equipment based on the full
cost method of accounting for oil and gas
properties of which $-0- and $37,268 at
December 31, 1995 and 1996, respectively, were
excluded from amortization ................... 75,078 271,390 288,209
Deferred financing fees, net of accumulated
amortization of $289 and $280 at December 31,
1995 and 1996, respectively .................... 354 9,335 8,432
Restricted cash ................................... 134 90 90
Marketable securities ............................. 326 -- --
Other assets ...................................... 326 715 1,277
======== ======== ==========
Total assets ................................... $ 85,067 $304,842 $ 317,182
======== ======== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31
--------------------------- September 30
1995 1996 1997
------------ ------------ ------------
(In thousands) (Unaudited)
<S> <C> <C> <C>
Current liabilities:
Accounts payable ............................. $ 3,929 $ 9,960 $ 14,246
Oil and gas production payable ............... 1,787 2,378 2,410
Accrued interest ............................. 363 3,206 10,392
Income taxes payable ......................... -- 145 145
Other accrued expenses ....................... 46 1,132 1,638
Dividends payable on preferred stock ......... 91 -- --
Payable to affiliates ........................ -- 58 --
----------- ----------- -----------
Total current liabilities .................. 6,216 16,879 28,831
Long-term debt:
Senior notes ................................. -- 215,000 215,000
Financing agreements ......................... 41,557 -- --
Other ........................................ 44 32 2,330
----------- ----------- -----------
41,601 215,032 217,330
Other long-term obligations ..................... -- 87 243
Deferred income taxes ........................... 187 32,928 32,024
Minority interest in foreign subsidiary ......... -- 2,157 4,380
Future site restoration ......................... -- 2,103 2,248
Commitments and contingencies
Shareholders' equity:
Preferred stock 8%, authorized ............. 1,000,000
shares; issued and outstanding 45,741 shares
at December 31, 1995 and 1996 and $-0- at
September 30, 1997 ......................... -- -- --
Common stock, par value $.01 per share -
authorized 50,000,000 shares; issued
5,799,762, 5,806,812, and 6,324,730 shares
at December 31, 1995 and 1996 and
September 30, 1997, respectively ........... 58 58 63
Additional paid-in capital ................... 50,914 50,926 51,119
Unrealized holding loss on securities ........ (244) -- --
Accumulated deficit .......................... (13,664) (12,517) (15,298)
Treasury stock, at cost, 2,571, 74,711, and
53,023 shares at December 31, 1995 and 1996
and September 30, 1997, respectively ....... (1) (405) (281)
Foreign currency translation adjustment ...... -- (2,406) (3,477)
----------- ----------- -----------
Total shareholders' equity ................. 37,063 35,656 32,126
----------- ----------- -----------
Total liabilities and shareholders' equity . $ 85,067 $ 304,842 $ 317,182
=========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended
Year Ended December 31 September 30
-------------------------------- --------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(Unaudited)
(In thousands except shares and per share data)
<S> <C> <C> <C> <C> <C>
Revenue:
Oil and gas production revenues .. $ 11,114 $ 13,660 $ 25,749 $ 11,275 $ 46,920
Gas processing revenues .......... -- -- 600 -- 2,793
Rig revenues ..................... 161 108 139 106 250
Other ............................ 74 49 165 17 728
-------- -------- -------- -------- --------
11,349 13,817 26,653 11,398 50,691
Operating costs and expenses:
Lease operating and production ... 3,693 4,333 5,858 3,295 10,604
taxes
Gas processing costs ............. -- -- 262 -- 1,191
Depreciation, depletion, and
amortization ................... 3,790 5,434 9,605 4,145 19,780
Rig operations ................... 133 125 169 113 214
General and administrative ....... 810 1,042 1,933 1,250 3,119
-------- -------- -------- -------- --------
8,426 10,934 17,827 8,803 34,908
-------- -------- -------- -------- --------
Operating income .................... 2,923 2,883 8,826 2,595 15,783
Other (income) expense:
Interest income .................. (16) (34) (254) (155) (438)
Amortization of deferred financing 400 214 280 192 933
fees
Interest expense ................. 2,359 3,911 6,241 2,142 18,757
Loss on marketable securities .... -- -- 235 235 --
Other expense .................... 67 -- 138 -- 115
-------- -------- -------- -------- --------
2,810 4,091 6,640 2,414 19,367
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before taxes and ...... 113 (1,208) 2,186 181 (3,584)
extraordinary items
Income tax expense (benefit):
Current .......................... -- -- 176 -- 156
Deferred ......................... -- -- -- -- (1,227)
Minority interest in income of
consolidated foreign subsidiary .. -- -- 70 58 85
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before extraordinary
items .......................... 113 (1,208) 1,940 123 (2,598)
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
Nine Months Ended
Year Ended December 31 September 30
-------------------------------- --------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(Unaudited)
(In thousands except shares and per share data)
<S> <C> <C> <C> <C> <C>
Discontinued operations:
Loss from operations of
discontinued coal properties ... $ (348) $ -- $ -- $ -- $ --
Loss on disposal of discontinued
coal properties ................ (988) -- -- -- --
--------- --------- --------- --------- ---------
Loss from discontinued operations ... (1,336) -- -- -- --
--------- --------- --------- --------- ---------
Income (loss) before extraordinary .. (1,223) (1,208) 1,940 123 (2,598)
items
Extraordinary item:
Debt extinguishment costs ........ (1,172) -- (427) 369 --
-------- -------- -------- -------- ---------
Net income (loss) ................... (2,395) (1,208) 1,513 (246) (2,598)
Less dividend requirement on
cumulative preferred stock ....... (183) (366) (366) (274) (183)
--------- --------- --------- --------- ---------
Net income (loss) applicable to
common stock ..................... $ (2,578) $ (1,574) $ 1,147 $ (520) $ (2,781)
========= ========= ========= ========= =========
Earnings per common and common
equivalent share:
Income (loss) from continuing
operations ................... $ (.02) $ (.34) $ .23 $ (.03) $ (.47)
Discontinued operations ........ (.31) -- -- -- --
Extraordinary items ............ (.27) -- (.06) (.06) --
--------- --------- --------- --------- ---------
Net income (loss) per share ...... $ (.60) $ (.34) $ .17 $ (.09) $ (.47)
========= ========= ========= ========= =========
Weighted average shares outstanding . 4,309,878 4,635,412 6,794,442 5,804,145 5,920,135
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-6
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands except share amounts)
Preferred Stock Common Stock Treasury Stock
----------------------- ------------------ ---------------------
Shares Amount Shares Amount Shares Amount
----------- --------- --------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 . -- $ -- 4,202,449 $ 42 -- $ --
Issuance of common stock
for compensation ...... -- -- 10,033 -- -- --
Issuance of preferred
stock for acquisition . 45,741 4,573 -- -- -- --
Options and warrants .... -- -- 249,408 3 -- --
exercised
Changes in unrealized
holding loss on ....... -- -- -- -- -- --
securities
Dividend on preferred ... -- -- -- -- -- --
stock
Net loss for the year ... -- -- -- -- -- --
----------- --------- ---------- ------- ------- ----------
Balance at December 31, 1994 45,741 4,573 4,461,890 45 -- --
Issuance of common stock
for compensation ...... -- -- 7,872 -- -- --
Issuance of common stock -- -- 1,330,000 13 -- --
Treasury stock .......... -- -- -- -- 2,571 (1)
purchased, net
Changes in preferred
stock par value ....... -- (4,573) -- -- -- --
Dividend on preferred ... -- -- -- -- -- --
stock
Net loss for the year ..... -- -- -- -- -- --
----------- --------- ---------- ------- ------- ----------
Balance at December 31, 1995 45,741 -- 5,799,762 58 2,571 (1)
Issuance of common stock
for compensation ...... -- -- 5,050 -- (2,500) 1
Expenses paid related to
private placement ..... -- -- -- -- -- --
offering
Options exercised ....... -- -- 2,000 -- -- --
Treasury stock purchased -- -- -- -- 74,640 (405)
Dividend on preferred ... -- -- -- -- -- --
stock
Foreign currency
translation adjustment -- -- -- -- -- --
Changes in unrealized
holding loss on ....... -- -- -- -- -- --
securities
Net income for the year . -- -- -- -- -- --
F-7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands except share amounts)
Additional Unrealized Foreign
Paid-In Holding Loss Accumulated Currency
Capital on Securities Deficit Translation Total
----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 . $ 34,614 $ -- $ (9,513) $ -- $ 25,143
Issuance of common stock
for compensation ...... 107 -- -- -- 107
Issuance of preferred
stock for acquisition . -- -- -- -- 4,573
Options and warrants .... 1,496 -- -- -- 1,499
exercised
Changes in unrealized
holding loss on ....... -- (244) -- -- (244)
securities
Dividend on preferred ... -- -- (183) -- (183)
stock
Net loss for the year ... -- -- (2,394) -- (2,394)
----------- ------------- ----------- ----------- -------------
Balance at December 31, 1994 36,217 (244) (12,090) -- 28,501
Issuance of common stock
for compensation ...... 74 -- -- -- 74
Issuance of common stock 10,050 -- -- -- 10,063
Treasury stock .......... -- -- -- -- (1)
purchased, net
Changes in preferred
stock par value ....... 4,573 -- -- -- --
Dividend on preferred ... -- -- (366) -- (366)
stock
Net loss for the year ... -- -- (1,208) -- (1,208)
----------- ------------- ----------- ----------- -------------
Balance at December 31, 1995 50,914 (244) (13,664) -- 37,063
Issuance of common stock
for compensation ...... 41 -- -- -- 42
Expenses paid related to
private placement ..... (42) -- -- -- (42)
offering
Options exercised ....... 13 -- -- -- 13
Treasury stock purchased -- -- -- -- (405)
Dividend on preferred ... -- -- (366) -- (366)
stock
Foreign currency
translation adjustment -- -- -- (2,406) (2,406)
Changes in unrealized
holding loss on ....... -- 244 -- -- 244
securities
Net income for the year . -- -- 1,513 -- 1,513
----------- ------------- ----------- ----------- -------------
</TABLE>
See accompanying notes
F-7a
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands except share amounts)
Preferred Stock Common Stock Treasury Stock
----------------------- ---------------------- -------------------
Shares Amount Shares Amount Shares Amount
----------- ----------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 45,741 $ -- 5,806,812 $ 58 74,711 $ (405)
Issuance of common stock
for compensation ...... -- -- 7,735 -- (21,688) 124
(Unaudited)
Options exercised ....... -- -- 2,000 -- -- --
(Unaudited)
Dividend on preferred
stock (Unaudited) ..... -- -- -- -- -- --
Conversion of preferred
stock (Unaudited) ..... (45,741) -- 508,183 5 -- --
Foreign currency
translation adjustment -- -- -- -- -- --
(Unaudited)
Net loss for the period . -- -- -- -- -- --
(Unaudited)
----------- ------------- ----------- ---------- -------- -------
Balance at September 30,
1997 (Unaudited) ........ -- $ -- 6,324,730 $ 63 53,023 $ (281)
----------- ------------- ----------- ---------- -------- -------
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands except share amounts)
Additional Unrealized Foreign
Paid-In Holding Loss Accumulated Currency
Capital on Securities Deficit Translation Total
----------- ------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 50,926 $ -- $ (12,517) $ (2,406) $ 35,656
Issuance of common stock
for compensation ...... 186 -- -- -- 310
(Unaudited)
Options exercised ....... 11 -- -- -- 11
(Unaudited)
Dividend on preferred
stock (Unaudited) ..... -- -- (183) -- (183)
Conversion of preferred
stock (Unaudited) ..... (4) -- -- -- 1
Foreign currency
translation adjustment -- -- -- (1,071) (1,071)
(Unaudited)
Net loss for the period . -- -- (2,598) -- (2,598)
(Unaudited)
----------- ------------- ----------- ----------- ---------
Balance at September 30,
1997 (Unaudited) ........ $ 51,119 $ -- $ (15,298) $ (3,477) $ 32,126
=========== ============= =========== =========== =========
</TABLE>
See accompanying notes.
F-8a
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
Year Ended December 31 September 30
--------------------------------- -----------------------
1994 1995 1996 1996 1997
---------- ---------- --------- ---------- ----------
(In thousands) (Unaudited)
<S> <C> <C> <C> <C> <C>
Operating Activities
Net income (loss) ................... $ (2,395) $ (1,208) $ 1,513 $ (246) $ (2,598)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Minority interest in income of
foreign subsidiary ........... -- -- 70 58 85
Loss on disposal of discontinued
operations ................... 987 -- -- -- --
Depreciation, depletion, and
amortization ................. 3,790 5,434 9,605 4,145 19,780
Amortization of deferred
financing fees ............... 467 214 280 561 933
Issuance of common stock for
compensation ................. 107 74 42 -- 310
Decrease in deferred tax asset . -- -- -- -- (1,227)
Loss on marketable securities .. -- -- 235 -- --
Net loss from debt ............. 1,172 -- 427 -- --
restructurings
Changes in operating assets
and liabilities:
Accounts receivable ........ (814) (807) (6,013) 103 3,404
Equipment inventory ........ (9) (29) (82) (62) 21
Other assets ............... (74) 2 (133) (14) (18)
Accounts payable, accrued
expenses, and dividends
payable .................. 1,232 (79) 7,009 713 11,920
Oil and gas production
payable .................. (62) 919 591 (373) 32
--------- --------- --------- --------- ---------
Net cash provided by operating
activities ....................... 4,401 4,520 13,544 4,885 32,642
Investing Activities
Capital expenditures, including
purchases and development of
properties ....................... (36,444) (12,330) (87,793) (55,489) (44,604)
Payment for purchase of CGGS,
net of cash acquired ............. -- -- (85,362) -- --
Proceeds from sale of oil and gas
properties and equipment inventory 70 2,556 242 16,794 8,978
Purchase of interest in real estate
partnership ...................... -- (311) -- (2,425) --
Proceeds from sale of marketable
securities ....................... -- -- 335 -- --
Sale of common stock in Castle
Minerals ......................... 371 -- -- -- --
--------- --------- --------- --------- ---------
Net cash used in investing
activities ....................... (36,003) (10,085) (172,578) (41,120) (35,626)
</TABLE>
F-9
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine Months Ended
Year Ended December 31 September 30
--------------------------------- -----------------------
1994 1995 1996 1996 1997
---------- ---------- --------- ---------- ----------
(In thousands) (Unaudited)
<S> <C> <C> <C> <C> <C>
Financing Activities
Preferred stock dividends ........... $ (91) $ (366) $ (366) $ (274) $ (182)
Issuance of common stock, net of
expenses ......................... 1,499 10,063 (29) 30 11
Purchase of treasury stock, net ..... -- (1) (405) (372) --
Proceeds from long-term borrowings .. 40,906 5,950 305,400 90,400 2,298
Payments on long-term borrowings .... (12,659) (5,646) (131,969) (46,957) --
Deferred financing fees ............. (451) (186) (9,688) (779) (30)
Other ............................... -- -- 87 (113) 156
--------- --------- --------- --------- ---------
Net cash provided by financing
activities ....................... 29,204 9,814 163,030 41,935 2,253
--------- --------- --------- --------- ---------
Increase (decrease) in cash ......... (2,398) 4,249 3,996 5,700 (731)
Cash at beginning of year ........... 2,533 135 4,384 4,384 8,380
--------- --------- --------- --------- ---------
Cash at end of year, including
restricted cash .................. $ 135 $ 4,384 $ 8,380 $ 10,084 $ 7,649
========= ========= ========= ========= =========
Supplemental Disclosures
Supplemental disclosures of cash
flow information:
Interest paid .................. $ 2,150 $ 3,884 $ 3,863 $ 2,142 $ 12,594
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Supplemental schedule of noncash
investing and financing
activities:
During 1996, the Company purchased all of the capital stock of CGGS
Canadian Gas Gathering Systems, Inc. for $85,362,000, net of cash
acquired. In conjunction with the acquisition, liabilities assumed were
as follows (in thousands):
<S> <C>
Fair value of assets acquired .......................................................... $ 123,970
Cash paid for the capital stock ....................................................... (85,362)
---------
Liabilities assumed .................................................................... $ 38,608
=========
</TABLE>
During 1994, the Company issued $4,574,000 of preferred stock in exchange
for oil and gas producing properties.
See accompanying notes.
F-10
<PAGE>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994, 1995, and 1996
(Information as to September 30, 1997 and for the
nine months ended September 30, 1996 and 1997 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 acquisition of and the exploration,
development, and production of crude oil and natural gas primarily along the
Texas Gulf Coast, in the Permian Basin of west Texas, in southwestern Wyoming
and in western Canada, and in the gathering and processing of natural gas
primarily in western Canada. The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
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, 1997 and the results of operations and cash flows
for the nine months ended September 30, 1996 and 1997. The results for the nine
months ended September 30, 1997 are not necessarily indicative of the results to
be expected for the full year. Information as of September 30, 1997 and for the
nine months ended September 30, 1996 and 1997, as well as disclosures of events
occurring after March 1997 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.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to credit
risk consist principally of trade receivables, interest rate and crude oil and
natural gas price swap agreements. Accounts receivable are generally from
companies with significant oil and gas marketing activities. The Company
performs ongoing credit evaluations and, generally, requires no collateral from
its customers. For further information regarding the Company's swap
arrangements, see Notes 6 and 16.
F-11
<PAGE>
Equipment Inventory
Equipment inventory consists of casing, tubing, and compressing
equipment and is carried at the lower of cost or market.
Oil and Gas Properties
The Company follows the full cost method of accounting for crude oil
and natural gas properties. Under this method, all costs associated with
acquisition of properties and successful as well as unsuccessful exploration and
development activities are capitalized. The Company does not capitalize internal
costs. Depreciation, depletion, and amortization (DD&A) of capitalized crude oil
and natural gas properties and estimated future development costs are based on
the unit-of-production method. Net capitalized costs of crude oil and natural
gas properties are limited to the lower of unamortized cost or the cost ceiling,
defined as the sum of the present value of estimated unescalated future net
revenues from proved reserves discounted at 10 percent, plus the cost of
properties not being amortized, if any, plus the lower of cost or estimated fair
value of unproved properties included in the costs being amortized, if any, less
related income taxes. No gain or loss is recognized upon sale or disposition of
crude oil and natural gas properties, except in unusual circumstances.
Unevaluated properties not currently being amortized included in oil
and gas properties were $-0- and $37,268,000 at December 31, 1995 and 1996,
respectively. The properties represented by these costs were undergoing
exploration activities or are properties on which the Company intends to
commence activities in the future. The Company believes that the unevaluated
properties at December 31, 1996 will be substantially evaluated in six to
thirty-six months and it will begin to amortize these costs at such time.
Other Property and Equipment
Other property and equipment are recorded on the basis of cost.
Depreciation of gas gathering and processing facilities and other property and
equipment is provided over the estimated useful lives using the straight-line
method. Major renewals and betterments are recorded as additions to the property
and equipment accounts. Repairs that do not improve or extend the useful lives
of assets are expensed.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock (see Note 8).
Foreign Currency Translation
The functional currency for the Company's Canadian operations is the
Canadian dollar. The Company translates the functional currency into U.S.
dollars based on the current exchange rate at the end of the period for the
balance sheet and a weighted average rate for the period on the statement of
operations. Translation adjustments are reflected as Cumulative Foreign Exchange
Translation Adjustment in Shareholders' Equity.
F-12
<PAGE>
Fair Value of Financial Instruments
The Company includes fair value information in the notes to
consolidated financial statements when the fair value of its financial
instruments is different from the book value. The Company assumes the book value
of those financial instruments that are classified as current approximates fair
value because of the short maturity of these instruments. For noncurrent
financial instruments, the Company uses quoted market prices or, to the extent
that there are no available quoted market prices, market prices for similar
instruments.
Restoration, Removal and Environmental Liabilities
The estimated costs of restoration and removal of major processing
facilities are accrued on a straight-line basis over the life of the property.
The estimated future costs for known environmental remediation requirements are
accrued when it is probable that a liability has been incurred and the amount of
remediation costs can be reasonably estimated. These amounts are the
undiscounted, future estimated costs under existing regulatory requirements and
using existing technology.
Revenue Recognition
The Company recognizes crude oil and natural gas revenue from its
interest in producing wells as crude oil and natural gas is sold from those
wells. Revenue from the processing and gathering of natural gas is recognized in
the period the service is performed.
Deferred Financing Fees
Deferred financing fees are being amortized on a level yield basis over
the term of the related debt.
Federal Income Taxes
The Company records income taxes 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 and common equivalent shares outstanding during the
period. The weighted average number of common and common equivalent 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 1994 and 1995 have been reclassified for
comparative purposes.
F-13
<PAGE>
2. Acquisitions and Divestitures
Wyoming Properties Acquisition
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 $45,122,000 to
reflect adjustments 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 and transaction costs. The acquisition was accounted
for as a purchase and the purchase price was allocated to crude oil and natural
gas properties based on the fair values of the properties acquired. The
transaction was financed through borrowings under the Company's bridge facility
referred to in Note 6. Revenues and expenses from the Wyoming Properties have
been included in the consolidated financial statements since September 30, 1996.
CGGS Acquisition
On November 14, 1996, the Company, through its wholly owned subsidiary,
Canadian Abraxas Petroleum Limited (Canadian Abraxas), purchased 100% of the
outstanding capital stock of CGGS Canadian Gas Gathering Systems Inc. (CGGS) for
approximately $85,500,000, net of the CGGS cash acquired and including
transaction costs. CGGS owns producing oil and gas properties in western Canada
and adjacent gas gathering and processing facilities as well as undeveloped
leasehold properties. Immediately after the purchase, CGGS was merged with and
into Canadian Abraxas. The acquisition was accounted for as a purchase and the
purchase price was allocated to the assets and liabilities based on estimated
fair values. The transaction was financed by a portion of the proceeds from the
offering of $215,000,000 of Notes referred to in Note 6. Revenues and expenses
from Canadian Abraxas have been included in the consolidated financial
statements since November 14, 1996.
Grey Wolf Acquisition
In January 1996, the Company made a $3,000,000 investment in Grey Wolf
Exploration Ltd. (Grey Wolf), a privately held Canadian corporation, which in
turn invested in newly issued shares of Cascade Oil and Gas Ltd. (Cascade), an
Alberta, Canada 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. The acquisition was accounted for as a purchase and
the purchase price was allocated to the assets and liabilities based on the fair
values. Revenues and expenses have been included in the consolidated financial
statements since January 1996. Certain officers and directors of the Company own
approximately 6% of the common stock of Grey Wolf and serve as directors of Grey
Wolf.
Portilla and Happy Fields Acquisition
In March 1996, the Company sold all of its interest in its Portilla and
Happy Fields to an unrelated purchaser (Purchaser or Limited Partner).
Simultaneously with this sale, the Limited Partner also acquired the 50%
overriding royalty interest in the Portilla Field owned by the Commingled
Pension Trust Fund Petroleum II, the trustee of which is Morgan Guaranty Trust
Company of New York (Pension Fund). In connection with the purchase of both the
Company's interest in the Portilla and Happy Fields and the Pension Fund's
interest in the Portilla Field (together, the Portilla and Happy Properties),
the Limited Partner obtained a loan (Bank Loan) secured by the Properties and
contributed the Properties to Portilla-1996, L.P., a Texas limited partnership
(Partnership). A subsidiary of the Company, Portilla-Happy Corporation
(Portilla-Happy), was the general partner of the Partnership. The aggregate
purchase price received by the Company was $17,600,000, of which $2,000,000 was
used to purchase a minority interest in the Partnership.
F-14
<PAGE>
On November 14, 1996, the Company closed an agreement with the Limited
Partner and certain noteholders (Noteholders) of the Partnership, pursuant to
which the Company obtained the Limited Partner's interest in the Partnership and
the Noteholders' notes in the aggregate principal amount of $5,920,000 (Notes),
resulting in the Company's owning, on a consolidated basis, all of the equity
interests in the Partnership. The aggregate consideration paid to the Limited
Partner and the Noteholders was $6,961,000. The Company also paid off the Bank
Loan which had an outstanding principal balance of approximately $20,051,000,
and assumed a crude oil and natural gas price swap agreement (see Note 16).
As a result of obtaining the Limited Partner's interest in the
Partnership, the Company reacquired those interests in the Portilla and Happy
Fields which it previously owned, as well as the interest in the Portilla Field
previously owned by the Pension Fund. The Company has included in its balance
sheet the amount previously removed from oil and gas properties in connection
with the sale of its interest in the Portilla and Happy Fields during the
quarter ended March 31, 1996, as well as the amount of the purchase price paid
for the Pension Fund's interest in the Portilla Field, and all development
drilling expenditures incurred on the properties, less the amount of DD&A
related to the properties from the formation of the Partnership through the
closing of the transaction. The purchase was financed by a portion of the
proceeds from the offering of the Notes referred to in Note 6. The Company
recorded its share of the net loss of the Partnership from March 1996 to
November 1996 of $513,000. The Company also assumed and wrote off the remaining
deferred financing fees and organization costs of the Partnership. Gross
revenues and expenses from both the Company's original interest in the Portilla
and Happy Fields as well as the interest in the Portilla Field previously owned
by the Pension Fund have been included in the consolidated financial statements
since November 14, 1996.
East White Point and Stedman Island Fields Acquisition
In November 1996, the Company obtained a release of the 50% overriding
royalty interest in the East White Point Field in San Patricia County, Texas and
the Stedman Island Field in Nueces County, Texas from the Pension Fund for
$9,271,000 before adjustment for accrual of net revenue to closing. The
acquisition was accounted for as a purchase and the purchase price was allocated
to crude oil and natural gas properties based on the fair values of the
properties acquired. The transaction was financed through proceeds of the sale
of the Notes referred to in Note 6. Revenues and expenses from these properties
have been included in the consolidated financial statements since November 1,
1996. The Company recorded the net purchase price of approximately $9,271,000 to
its oil and gas properties.
Miscellaneous Working Interests
During 1996, the Company also acquired additional working interests in
certain producing crude oil and natural gas properties in which the Company had
existing working interest ownership. The net purchase price amounted to
approximately $1,221,000. Revenue and expenses have been included in the
consolidated financial statements from the date of purchase.
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.
F-15
<PAGE>
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.
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 $5,174,000 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 stated value 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.
The condensed pro forma financial information for the periods presented
below summarizes on an unaudited pro forma basis approximate results of the
Company's consolidated operations for the years ended December 31, 1994, 1995
and 1996 assuming the acquisitions of the Wyoming Properties, CGGS, Grey Wolf,
the Portilla and Happy Properties, and the East White Point and Stedman Island
Fields occurred at January 1, 1995; and the acquisition of the West Texas
Properties and Overriding Royalty Interest occurred at January 1, 1994. 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.
<TABLE>
<CAPTION>
December 31
----------------------------------------------------
1994 1995 1996
------------------ ----------------- ---------------
(In thousands except per share data)
(Unaudited)
<S> <C> <C> <C>
Revenues .................................. $ 13,972 $ 46,132 $ 60,077
================= ================= ===============
Income (loss) before discontinued
operations and extraordinary items ...... $ (186) $ (16,430) $ (6,665)
================= ================= ===============
Net income (loss) ......................... $ (2,693) $ 16,430 $ (7,092)
================= ================= ===============
Income (loss) per common share:
Before discontinued operations and
extraordinary items ................... $ (.13) $ (3.54) $ (.98)
Net income (loss) ....................... $ (.71) $ (3.54) $ (1.04)
</TABLE>
Divestiture
In July 1995, the Company sold its C.S. Dean Unit for approximately
$2,550,000.
F-16
<PAGE>
3. 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 securities had an original cost of $570,000. In October 1996, the
Company sold its investment in marketable securities, realizing a loss of
$235,000, which was recognized in the statement of operations for the year ended
December 31, 1996.
4. Property and Equipment
The major components of property and equipment, at cost, are as
follows:
Estimated
Useful Life 1995 1996
------------- --------- --------
Years (In thousands)
Land, buildings, and improvements .. 15 $ 177 $ 269
Crude oil and natural gas properties -- 104,127 268,358
Natural gas processing plants ...... 18 -- 40,100
Equipment and other ................ 7 693 1,316
-------- --------
$104,997 $310,043
======== ========
5. Related Party Transactions
Accounts receivable from affiliates, officers, and shareholders
represent amounts receivable relating to joint interest billings on properties
which the Company operates and advances made to officers.
In connection with a note payable to the Company's President, principal
and interest payments amounted to $333,000 and $355,000 in the years ended
December 31, 1994 and 1995, respectively. The note was fully paid in 1995.
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 $81,000 and
$101,000 for use of the plane during 1995 and 1996, respectively.
The Company's President and certain directors of the Company 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 $3,000,000
(approximately CDN$4.1 million or CDN$.20 per share) in cash. The Company's
President and certain directors, as well as the two principal officers of Grey
Wolf, currently own 13.8% of the issued and outstanding capital stock of Grey
Wolf. In addition, the Company's President owns options to purchase up to
450,000 shares of Grey Wolf's capital stock at an exercise price of CDN$.10 per
share.
F-17
<PAGE>
In January 1996, Grey Wolf purchased newly issued shares of Cascade
representing 66 2/3% of Cascade's capital stock. Certain of the Company's
directors as well as the two principal officers of Grey Wolf own options to
purchase in the aggregate up to 2,600,000 shares of capital stock of Cascade at
an exercise price of CDN$.20 per share, and the Company's President 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.
6. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31 September 30
------------------- -------------
1995 1996 1997
------------------- -------------
(In thousands) (Unaudited)
<S> <C> <C> <C>
11.5% Senior Notes due 2004 (see below) ............. $ -- $215,000 $215,000
Credit facility due to Bankers Trust Company, ING
Capital and Union Bank of California (see below) . -- -- --
Revolving lines of credit due under the First Union
credit agreement (see below) ...................... 35,557 -- --
Term notes due under the First Union credit
agreement ......................................... 6,000 -- --
(see below)
Other ............................................... 44 32 2,330
-------- -------- --------
41,601 215,032 217,330
Less current maturities ............................. -- -- --
-------- -------- --------
$ 41,601 $215,032 $217,330
======== ======== ========
</TABLE>
On November 14, 1996, the Company and Canadian Abraxas completed the
sale of $215,000,000 aggregate principal amount of Senior Notes due November 1,
2004 (Notes). Interest at 11.5% is payable semi-annually in arrears on May 1 and
November 1 of each year, commencing on May 1, 1997. The Notes are general
unsecured obligations of the Company and Canadian Abraxas and rank pari passu in
right of payment to all future subordinated indebtedness of the Company and
Canadian Abraxas. The Notes are, however, effectively subordinated in right of
payment to all existing and future secured indebtedness to the extent of the
value of the assets securing such indebtedness. The Company and Canadian Abraxas
are joint and several obligors on the Notes. The Notes are redeemable, in whole
or in part, at the option of the Company and Canadian Abraxas on or after
November 1, 2000, at the redemption price of 105.75% through October 31, 2001,
102.87% through October 31, 2002 and 100.00% thereafter plus accrued interest.
In addition, any time on or prior to November 1, 1999, the Company and Canadian
Abraxas may redeem up to 35% of the aggregate principal amount of the Notes
originally issued with the cash proceeds of one or more equity offerings at a
redemption price of 111.5% of the aggregate principal amount of the Notes to be
redeemed plus accrued interest, provided, however, that after giving effect to
such redemption, at least $139,750,000 aggregate principal amount of Notes
remains outstanding. The Notes were issued under the terms of an Indenture dated
November 14, 1996 that contains, among others, certain covenants which generally
limit the ability of the Company to incur additional indebtedness other than
specific indebtedness permitted under the Indenture, including the Credit
Facility discussed below, provided however, if no event of default is
continuing, the Company may incur indebtedness if after giving pro forma effect
to the incurrence of such debt both the Company's consolidated earnings before
interest, taxes, depletion and amortization (EBITDA) coverage ratio would be
greater than 2.25 to 1.0 if prior to November 1, 1997, and at least equal to 2.5
to 1.0 thereafter and the Company's adjusted consolidated net tangible assets as
defined are greater than 150% of the aggregate consolidated indebtedness of the
Company. The Indenture also contains other covenants affecting the Company's
ability to pay dividends on its common stock, sell assets and incur liens.
F-18
<PAGE>
On September 30, 1996, the Company entered into a credit facility with
Bankers Trust Company (BTCo) and ING Capital (together the Lenders), providing a
bridge facility in the total amount of $90,000,000 and borrowed $85,000,000
which was used to repay all amounts due under the First Union credit agreement
and to finance the purchase of the Wyoming Properties.
On November 14, 1996, the Company repaid all amounts outstanding under
the bridge facility with proceeds from the offering of $215,000,000 of Notes
described above and entered into an amended and restated credit agreement
(Credit Facility) with the Lenders and Union Bank of California. The Credit
Facility provides for a revolving line of credit with an initial availability of
$20,000,000, subject to a borrowing base condition. No amounts were outstanding
on December 31, 1996.
On October 14, 1997, the Company amended its Credit Facility to provide
for a revolving line of credit with an availability of $40,000,000, subject to a
borrowing base condition. No amounts were outstanding on September 30, 1997.
Commitments available under the Credit Facility are subject to
borrowing base redeterminations to be performed semi-annually and, at the option
of each of the Company and the Lenders, one additional time per year. Amounts
due under the Credit Facility will be secured by the Company's oil and gas
properties and plants. Any outstanding principal balance in excess of the
borrowing base will be due and payable in three equal monthly payments after a
borrowing base redetermination. The borrowing base will be determined in the
agent's sole discretion, subject to the approval of the Lenders, based on the
value of the Company's reserves as set forth in the reserve report of the
Company's independent petroleum engineers, with consideration given to other
assets and liabilities.
The Credit Facility has an initial revolving term of two years and a
reducing period of three years from the end of the initial two-year period. The
commitment under the Credit Facility will be reduced during such reducing period
by eleven equal quarterly reductions. Quarterly reductions will equal 8.2% per
quarter with the remainder due at the end of the three-year reducing period.
The applicable interest rate charged on the outstanding balance of the
Credit Facility is based on a facility usage grid. If the borrowings under the
Credit Facility represent an amount less than or equal to 33.3% of the available
borrowing base, then the applicable interest rate charged on the outstanding
balance will be either (a) an adjusted rate of the London Inter-Bank Offered
Rate ("LIBOR") plus 1.25% or (b) the prime rate of the agent (which is based on
the agent's published prime rate) plus 0.50%. If the borrowings under the Credit
Facility represent an amount greater than or equal to 33.3% but less than 66.7%
of the available borrowing base, then the applicable interest rate on the
outstanding principal will be either (a) LIBOR plus 1.75% or (b) the prime rate
of the agent plus 0.50%. If the borrowings under the Credit Facility represent
an amount greater than or equal to 66.7% of the available borrowing base, then
the applicable interest rate on the outstanding principal will be either (a)
LIBOR plus 2.00% or (b) the prime rate of the agent plus 0.50%. LIBOR elections
can be made for periods of one, three or six months.
The Credit Facility contains a number of covenants that, among other
things, restrict the ability of the Company to (i) incur certain indebtedness or
guarantee obligations, (ii) prepay other indebtedness including the Notes, (iii)
make investments, loans or advances, (iv) create certain liens, (v) make certain
payments, dividends and distributions, (vi) merge with or sell assets to another
person or liquidate, (vii) sell or discount receivables, (viii) engage in
certain intercompany transactions and transactions with affiliates, (ix) change
its business, (x) experience a change of control and (xi) make amendments to its
charter, by-laws and other debt instruments. In addition, under the Credit
Facility the Company is required to comply with specified financial ratios and
tests, including minimum debt service coverage ratios, maximum funded debt to
EBITDA tests, minimum net worth tests and minimum working capital tests. The
Company is obligated to pay the Lenders on a quarterly basis a commitment fee of
0.50% per annum on the average unused portion of the commitment in effect from
time to time. The Credit Facility contains customary events of default,
including nonpayment of principal, interest or fees, violation of covenants,
inaccuracy of representations or warranties in any material respect, cross
default and cross acceleration to certain other indebtedness, bankruptcy,
material judgments and liabilities and change of control.
F-19
<PAGE>
As part of the bridge facility, the Company entered into an interest
rate swap agreement (the Swap) covering the period from September 18, 1996 to
August 18, 1998. The Swap effectively changes the interest rate on $25,000,000
of floating rate debt to a fixed rate of 6.15% per annum for that time period.
Net payments due under this agreement are included as adjustments to interest
expense. At December 31, 1996, the fair value of this Swap, as determined by
BTCo was approximately $200,000 and has been recorded as interest expense at
December 31, 1996. The Company is exposed to credit loss in the event of
nonperformance by the counterparty.
The amount of such exposure is generally the unrealized gains in such agreement.
In June 1994, the Company entered into a credit agreement with First
Union and secured advances adequate to extinguish the total debt and accrued
interest owed to the Company's previous lenders. The prepayment resulted in the
Company recording an extraordinary debt extinguishment charge of $1,172,000,
representing the reduction of the deferred financing fees related to the prior
debt. At December 31, 1995, the Company's borrowings under the credit agreement
were $41,557,000. The borrowings were composed of advances of $12,657,000 and
$22,900,000 under the revolving lines of credit which were due June 30, 1997,
and $6,000,000 under the term notes which were also due June 30, 1997. The
interest rate for the revolving credit lines was, 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 was, 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
$12,657,000 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 provided for
borrowing based principally on the Company's crude oil and natural gas reserve
base, which was $44,000,000 at December 31, 1995 and such borrowings were
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. As discussed above, in September 1996, the Company
entered into a new credit facility and extinguished the total debt and accrued
interest owed to First Union. The prepayment resulted in the Company recording
an extraordinary debt extinguishment charge of $427,000 representing the
reduction of the deferred financing fees related to the debt.
The Company's principal source of funds to meet debt service and
capital requirements is net cash flow provided by operating activities, which is
sensitive to the prices the Company receives for its crude oil and natural gas.
The Company has recently entered into hedge agreements to reduce its exposure to
price risk in the spot market for natural gas. However, a substantial portion of
the Company's production will remain subject to such price risk. Additionally,
significant capital expenditures are required for drilling and development, and
other equipment additions. The Company believes that cash provided by operating
activities and other financing sources, including, if necessary, the sale of
certain assets and additional long-term debt, will provide adequate liquidity
for the Company's operations, including its capital expenditure program, for the
next twelve months. No assurance, however, can be given that the Company's cash
flow from operating activities will be sufficient to meet planned capital
expenditures and debt service in the future. Should the Company be unable to
generate sufficient cash flow from operating activities to meet its obligations
and make planned capital expenditures, the Company could be forced to reduce
such expenditures or sell assets in order to meet its obligations.
During 1996, the Company capitalized $465,000 of interest expense.
The fair value of the Notes approximates their carrying value as of
December 31, 1996. The Company has approximately $60,000 of standby letters of
credit and a $30,000 performance bond open at December 31, 1996. Approximately
$90,000 of cash is restricted and in escrow related to the letters of credit and
bond.
F-20
<PAGE>
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 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 $10,063,000. 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 1995, would have been $(.19) for the year ended December 31, 1995. The
supplemental earnings per share assumes that interest expense would have been
reduced by $456,000 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 508,183 shares of
the Company's common stock. Preferred stock dividends during 1995 and 1996
amounted to $366,000. 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.
Effective July 1, 1997, the holders of the Company's preferred stock
converted all of such shares into 508,183 shares of the Company's common stock.
Contingent Value Rights (CVR)
The CVRs were issued under the CVR Agreement between the Company, the
purchasers, and First Union, as rights agents. The CVR Agreement provides that,
subject to adjustment as described below, the Company shall issue for each CVR
on the Extended Maturity Date (November 17, 1997), a number of shares of common
stock, if any, equal to (a) the Target Price ($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 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.
F-21
<PAGE>
If the median of the average prices of the common stock for the three
20-trading day periods immediately preceding the Extended Maturity Date, 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 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 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, 1996, an aggregate of 1,013,060 shares 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 account 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 account.
On June 20, 1997, the CVRs expired with no issuance of additional
shares under the CVR Agreement.
Treasury Stock
During the year ended December 31, 1996, the Company purchased 74,640
shares of its common stock at a cost of $405,000, which are being held as
treasury stock.
8. Stock Option Plans and Warrants
Stock Options
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 Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
The Company's various stock option plans have authorized the grant of
options to management and directors personnel for up to approximately 795,000
shares of the Company's common stock. All options granted have ten-year terms
and vest and become fully exercisable over four years of continued service at
25% on each anniversary date.
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1995 and 1996, respectively: risk-free interest rates of 6.25%
and 6.25%; dividend yields of -0-% and -0-%; volatility factors of the expected
market price of the Company's common stock of .383 and .383; and a
weighted-average expected life of the option of six years.
F-22
<PAGE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for earnings per share
information):
1995 1996
------------- ------------
(In thousands)
Pro forma net income (loss) ............. $ (1,652) $ 884
Pro forma earnings per share:
Primary ............................... $ (.36) $ .13
Because Statement 123 is applicable only to options granted subsequent
to December 31, 1994, its pro forma effect will not be fully reflected until
1997.
A summary of the Company's stock option activity, and related
information for the years ended December 31 follows:
<TABLE>
<CAPTION>
1994 1995 1996
----------------------------- ----------------------------- -----------------------------
Weighted-Average Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price Options Exercise Price(1)
(000s) (000s) (000s)
---------- ------------------ ---------- ------------------ --------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of
year .................. 133 $ 6.62 103 $ 7.93 219 $ 6.71 (1)
Granted .................. 27 10.45 158 9.50 358 6.58
Exercised ................ (38) 4.64 - - (2) 6.75
Forfeited ................ (19) 8.91 (42) 9.86 (24) 9.21
---------- ---------- ---------
Outstanding-end of year .. 103 $ 7.93 219 $ 8.69 551 $ 6.63
========== ========== =========
Exercisable at end of year 28 $ 7.43 53 $ 8.06 93 $ 6.65
========== ========== =========
Weighted-average fair
value of options
granted during the year $ 2.85 $ 3.46
</TABLE>
Exercise prices for options outstanding as of December 31, 1996 ranged
from $5.00 to $7.50. The weighted-average remaining contractual life of those
options is 8.6 years.
(1) In March 1996, the Company amended the exercise price to $6.75 per
share on all previously issued options with an exercise price greater than $6.75
per share.
During the nine months ended September 30, 1997, the Company granted
285,000 options at a weighted-average exercise price of $11.25 and 2,000 options
were exercised at a weighted-average exercise price of $6.00.
F-23
<PAGE>
Stock Awards
In addition to stock options granted under the plans described above,
the Long-Term Incentive Plan also provides for the right to receive compensation
in cash, awards of common stock, or a combination thereof. In 1995 and 1996, the
Company made direct awards of common stock of 4,800 shares and 1,000 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 1995 and 1996, the Company made direct awards of common stock of
3,072 shares and 4,050 shares, respectively.
During 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. These options are included in the above table.
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 and
1996, no warrants were exercised by EEP or EECIP.
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, 1996, the Company has approximately 6,600,000 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.
F-24
<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
---------------------
1995 1996
-------- ---------
(In thousands)
Deferred tax liabilities:
Full cost pool, including intangible
drilling costs .................................. $ 661 $ 34,298
State taxes ....................................... 187 187
Other ............................................. 101 61
-------- --------
Total deferred tax liabilities ...................... 949 34,546
Deferred tax assets:
Depletion ......................................... 242 431
Net operating losses .............................. 6,163 6,831
Other ............................................. 13 12
-------- --------
Total deferred tax assets ........................... 6,418 7,274
Valuation allowance for deferred tax assets ......... (5,656) (5,656)
-------- --------
Net deferred tax assets ............................. 762 1,618
-------- --------
Net deferred tax liabilities ........................ $ 187 $ 32,928
======== ========
Significant components of the provision for income taxes are as
follows:
Current Deferred
--------- ---------
Federal ........................................ $ - $ -
State .......................................... - -
Foreign ........................................ 176 -
--------- ---------
$ 176 $ -
========= =========
At December 31, 1996, the Company had, subject to the limitations
discussed below, $20,094,000 of net operating loss carryforwards for U.S. tax
purposes, of which it is estimated a maximum of $17,562,000 may be utilized
before it expires. These loss carryforwards will expire from 2002 through 2010
if not utilized. At December 31, 1996, the Company had approximately $830,000 of
net operating loss carryforwards for Canadian tax purposes which expire in 2003.
As a result of the acquisition of certain partnership interests and
crude oil and natural gas properties in 1990 and 1991, an ownership change under
Section 382 of the Internal Revenue Code of 1986, as amended (Section 382),
occurred in December 1991. Accordingly, it is expected that the use of the U.S.
net operating loss carryforwards generated prior to December 31, 1991 of
$4,909,000 will be limited to approximately $235,000 per year.
During 1992, the Company acquired 100% of the common stock of an
unrelated corporation. The use of net operating loss carryforwards of $1,121,000
acquired in the acquisition are limited to approximately $115,000 per year.
F-25
<PAGE>
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
(including those subject to the 1991 and 1992 ownership changes discussed above)
of $8,224,000 will be limited to approximately $1,034,000 per year, subject to
the lower limitations described above. Of the $8,224,000 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 $5,692,000. 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 $5,656,000 and $5,657,000 for deferred tax assets at
December 31, 1995 and 1996, respectively.
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense is:
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------------------
1994 1995 1996
--------------------- --------------------- ---------------------
(In thousands)
<S> <C> <C> <C>
Tax (expense) benefit at U.S.
statutory rates (34%) .......... $ (38) $ 411 $ (743)
(Increase) decrease in deferred
tax asset valuation allowance .. 31 (174) (1)
Higher effective rate of foreign
operations ..................... - - (49)
Percentage depletion ............. - - 189
Other ............................ 7 (237) 428
--------------------- --------------------- ---------------------
$ - $ - $ (176)
===================== ===================== =====================
</TABLE>
10. Commitments and Contingencies
Operating Leases
During 1995, the Company entered into a noncancelable lease for new
primary office space which, as amended, provides for payments of $15,700 per
month through January 1998, $13,700 per month through March 2000, and $19,000
per month through March 2006, at which time the lease expires.
During the years ended December 31, 1994, 1995, and 1996, the Company
incurred rent expense of approximately $108,000, $103,000, and $179,000,
respectively. Future minimum rental payments are as follows at December 31,
1996:
1997 ............................................. $ 300,000
1998 ............................................. 300,000
1999 ............................................. 300,000
2000 ............................................. 300,000
2001 ............................................. 340,000
Thereafter ....................................... 970,000
Aggregate future minimum rentals to be received under noncancelable
subleases as of December 31, 1996 amount to approximately $57,000.
F-26
<PAGE>
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, 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.
11. 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. The Company recorded a loss on these
transactions in 1994 of $988,000. The revenues from coal sales for the years
ended 1994 and 1995 were $104,310 and $-0-, respectively.
12. Quarterly Results of Operations (Unaudited)
Selected results of operations for each of the fiscal quarters during
the years ended December 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
---------------- ----------------- ---------------- ----------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Year Ended December 31, 1995
Net revenue .................... $ 3,237 $ 3,402 $ 3,289 $ 3,889
Operating income ............... 763 931 647 542
Net (loss) ..................... (225) (83) (375) (525)
Loss per common share .......... (.07) (.04) (.10) (.13)
Year Ended December 31, 1996
Net revenue .................... 4,477 3,305 3,616 15,255
Operating income ............... 1,486 365 744 6,231
Income (loss) before
extraordinary item ........... 599 (240) (236) 1,817
Net income (loss) .............. 599 (240) (605) 1,759
Earnings (loss) per common
share before extraordinary
item ......................... .08 (.06) (.06) .25
Earnings (loss) per common and
common equivalent share ...... .08 (.06) (.12) .24
</TABLE>
During the fourth quarter of 1996, the Company completed several
acquisitions as described in Note 2 which affected net revenues, gross profit
and net income.
Certain previously reported financial information has been reclassified
to conform with the current presentation.
F-27
<PAGE>
13. Benefit Plans
The Company has a defined contribution plan (401(k)) covering all
eligible employees of the Company. No contributions were made by the Company
during 1994 or 1995. During 1996, the Company contributed 2,500 shares of its
common stock to the Plan and recorded the fair value of $12,500 as compensation
expense. The employee contribution limitations are determined by formulas which
limit the upper one-third of the plan members from contributing amounts that
would cause the plan to be top-heavy. The overall contribution is limited to the
lesser of 20% of the employee's annual compensation or $9,240.
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.
During 1995 and 1996, the Company incurred no bonus expense.
14. Summary Financial Information of Canadian Abraxas Petroleum Ltd.
The following is summary financial information at December 31, 1996 and
September 30, 1997 (Unaudited) and for the year and the nine months then ended
of Canadian Abraxas, a wholly owned subsidiary of the Company. Canadian Abraxas
is jointly and severally liable for the entire balance of the Notes
($215,000,000), of which $84,612,000 was utilized by Canadian Abraxas in
connection with the acquisition of CGGS. The Company has not presented separate
financial statements and other disclosures concerning Canadian Abraxas because
management has determined that such information is not material to the holders
of the Notes.
December 31, September 30,
1996 1997
-------------------------------
(In thousands)
BALANCE SHEET
Assets
Total current assets ................ $ 6,174 $ 9,034
Oil and gas properties .............. 115,671 97,556
Other assets ........................ 3,302 3,998
-------------------------------
$ 125,147 $ 110,588
===============================
Liabilities and Shareholder's Equity
Total current liabilities .......... $ 3,624 $ 5,474
11.5% Senior Notes due 2004 ........ 84,612 74,682
Other liabilities .................. 34,797 33,523
Shareholder's equity ............... 2,114 (3,091)
===============================
$ 125,147 $ 110,588
===============================
Nine Months
Year Ended Ended
December 31, September 30,
1996 1997
---------------------------------
STATEMENTS OF OPERATIONS
Revenues ........................ $ 3,972 $ 13,382
Operating costs and expenses .... (2,292) (11,544)
Interest expense ................ (1,331) (6,999)
Other income (expense) .......... 23 (242)
Income tax (expense) benefit..... (175) 1,289
==================================
Net income (loss) ............ $ 197 $ (4,114)
==================================
F-28
<PAGE>
15. Business Segments
The Company conducts its operations through two industry segments, the
exploration for and the acquisition, development and production of crude oil and
natural gas (E&P) and the processing of natural gas (Processing). The E&P
segment acquires and explores for, develops, produces and markets crude oil,
condensate natural gas liquids and natural gas. The Processing segment processes
natural gas owned by third parties. The Company's significant E&P operations are
located in the Texas Gulf Coast, the Permian Basin of west Texas, southwestern
Wyoming and western Canada. The Processing segment engages in 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 the custom processing of natural gas for
third parties. Segment income excludes interest income, interest expense and
unallocated general corporate expenses. Identifiable assets are those assets
used in the operations of the segment. Corporate assets consist primarily of
deferred financing fees and other property and equipment. The Company's revenues
are derived primarily from the sale of crude oil, condensate, natural gas
liquids and natural gas to marketers and refiners and from processing fees from
the custom processing of natural gas. As a general policy, collateral is not
required for receivables; however, the credit of the Company's customers is
regularly assessed. The Company is not aware of any significant credit risk
relating to its customers and has not experienced significant credit losses
associated with such receivables.
In 1996 seven customers accounted for approximately 66% of oil and
natural gas production revenues and three customers accounted for approximately
54% of gas processing revenues. In 1995 and 1994 one customer accounted for
approximately 20% and 35% of oil and natural gas production revenues,
respectively.
Business segment information about the Company's 1996 operations in
different industries is as follows:
<TABLE>
<CAPTION>
E&P Processing Total
----------------- ---------------- ----------------
(In thousands)
<S> <C> <C> <C>
Revenues ..................................... $ 26,053 $ 600 $ 26,653
================= ================ ================
Operating profit ............................. $ 8,737 $ 19 $ 8,756
================= ================
General corporate expenses ................... (119)
Interest expense and amortization of deferred
financing fees ............................ (6,521)
----------------
Income from continuing operations before
income taxes ............................ $ 2,116
================
Identifiable assets .......................... $ 253,707 $ 40,700 $ 294,407
================= ================
Corporate assets ............................. 10,435
----------------
Total assets .............................. $ 304,842
================
</TABLE>
Depreciation and depletion for E&P and Processing was approximately
$9,143,000 and $291,000, respectively. Capital expenditures for E&P and
Processing were $145,600,000 and $27,300,000, respectively.
During 1994 and 1995 the Company's operations were entirely in the E&P
segment.
F-29
<PAGE>
Business segment information about the Company's 1996 operations in
different geographic areas is as follows:
<TABLE>
<CAPTION>
U.S. Canada Total
------------------ ------------------ -------------------
(In thousands)
<S> <C> <C> <C>
Revenues ................................... $ 21,999 $ 4,654 $ 26,653
Operating profit ........................... $ 7,062 $ 1,694 $ 8,756
================== ==================
General corporate expenses ................. (119)
Interest expense and amortization of
deferred financing fees ................. (6,521)
===================
Income from continuing operations before
income taxes .......................... $ 2,116
===================
Identifiable assets at December 31, 1996 ... $ 168,141 $ 126,266 $ 294,407
================== ==================
Corporate assets ........................... 10,435
-------------------
Total assets ............................ $ 304,842
===================
</TABLE>
During 1994 and 1995 the Company's operations were entirely in the
United States.
16. Commodity Swap Agreements
The Company enters into commodity swap agreements (Hedge Agreements) to
reduce its exposure to price risk in the spot market for crude oil and natural
gas. Pursuant to the Hedge Agreements, either the Company or the counterparty
thereto is required to make payment to the other at the end of each month.
During the period from March 1996 through November 1996, payments were exchanged
equal to the product of 5,000 MMBtu (million Btu's) of natural gas per day and
the difference between a specified fixed price and a variable price for natural
gas based on the arithmetic average of the last three trading days' settlement
price quoted for natural gas contracts on the New York Mercantile Exchange
(NYMEX). This Hedge Agreement provided for the Company to make payments to the
counterparty to the extent that the market price exceeds the fixed price of
$1.747 per MMBtu (thousand Btu's) and for the counterparty to make payments to
the Company to the extent the market price was less than $1.747 per MMBtu. A
loss of $511,000 was incurred during the period of hedged production.
In November 1996, the Company assumed Hedge Agreements extending
through October 2001 with a counterparty involving the following notional
quantities and fixed prices:
<TABLE>
<CAPTION>
Crude Oil Natural Gas
-------------------------------------- --------------------------------------
Notional Quantity Notional Quantity
per Month Fixed per Month (MMBtu) Fixed
(barrels) Price Price
(barrel) (MMBtu)
------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
1996 20,060 $ 17.53 87,406 $ 1.925
1997 15,810 $ 17.20 53,712 $ 1.797
1998 13,175 $ 17.20 36,601 $ 1.793
1999 11,050 $ 17.47 24,489 $ 1.820
2000 9,180 $ 17.78 18,794 $ 1.872
2001 8,160 $ 18.08 14,850 $ 1.902
</TABLE>
F-30
<PAGE>
These Hedge Agreements provide for the Company to make payments to the
counterparty to the extent the market prices determined based on the price for
west Texas intermediate light sweet crude oil on the NYMEX for crude oil and the
Inside FERC, Tennessee Gas Pipeline Co.; Texas (Zone O) price for natural gas
exceeds the above fixed prices and for the counterparty to make payments to the
Company to the extent the market prices are less than the above fixed prices.
The Company accounts for the related gains or losses (a loss of $453,000 in
1996) in crude oil and natural gas revenue in the period of the hedged
production. The average notional quantity of crude oil and natural gas under the
Hedge Agreements each month for 1997 is equal to approximately 19% and .5%,
respectively, of the Company's expected monthly production for 1997 based on the
Company's January 1, 1997 reserve reports. At December 31, 1996, the estimated
fair market value of the Hedge Agreements is a loss of $2,460,000.
In January 1997, the Company effectively collared its crude oil prices
between $19.00 and $25.60 per barrel on 1,000 barrels per day from February 1997
through December 1997.
17. Subsequent Events
On January 31, 1997 the Company sold its interest in its crude oil and
natural gas property, plant, and equipment in the Hoole area in Alberta, Canada
for approximately $9,300,000.
Events (Unaudited) Subsequent to Date of Report of Independent Auditors
On October 15, 1997, Canadian Abraxas and Cascade completed the
acquisition of the Canadian assets of Pacalta Resources Ltd. for C$21.75 million
in cash and four million Cascade Special Warrants. The initial ownership of the
assets acquired is 92% by Canadian Abraxas and 8% by Cascade. Cascade has the
opportunity to acquire the Canadian ownership upon arranging satisfactory
financing in 1998.
On November 12, 1997, the Company entered into an agreement to purchase
100% of the outstanding capital stock of Vessels Energy, Inc. (Vessels) in
exchange for common stock of the Company. Under the terms of the agreement, the
Company will initially issue approximately 562,070 shares of common stock in
exchange for all of the capital stock of Vessels and is obligated to issue
additional shares of its common stock under an agreed to Projected Provisional
Payment. The Projected Provisional Payment is based upon future earnings before
interest, taxes, and depreciation, depletion, and amortization produced from
certain non-proved developed producing and non-producing properties of Vessels'
during the period from February 1, 1998 to January 31, 1999. The Company
anticipates issuing to the Vessels stockholders and depositing approximately
767,657 shares of its Common Stock in a Provisional Payment Escrow account which
will entitle the Vessels stockholders to voting rights and other rights of
ownership including receipt of dividends. Upon final determination of the
Provisional Payment, the shares of the Company's Common Stock will be released
from the Provisional Payment Escrow and recorded at the current market value at
the time of the Provisional Payment is determined and such additional Common
Stock are released. To the extent the Projected Provisional Payment would
require the issuance of shares in excess of those escrowed, such shares will be
issued by the Company.
Additionally, at closing the Company and Vessels will enter into an
Escrow Agreement pursuant to which an aggregate of 472,222 shares of the
Company's common stock will be deposited into a separate escrow account to
secure certain reimbursement obligations of the stockholders of Vessels to the
Company relating primarily to certain potential environmental issues as well as
to breach of certain representations and warranties set forth in the Merger
Agreement with respect to the shares deposited in the Provisional Payment Escrow
and liabilities, if any, arising under a natural gas supply contract (Supply
Contract) between Vessels and a third party.
The escrow shares include 388,889 shares which will be collateral for
claims related to the Supply Contract (Supply Contract Escrow Shares). These
shares will not be deposited into the escrow account if the Supply Contract is
terminated (as defined in the Escrow Agreement) prior to closing. If the Supply
Contract is not terminated prior to closing, however, these Supply Contract
Escrow Shares will remain in escrow and be subject to any claims by the Company
F-31
<PAGE>
for damages related to the Supply Contract. The Supply Contract Escrow Shares,
and any escrow cash payment (as defined), will be released to Vessels
stockholders 15 days after the termination of the Supply Contract, provided a
sufficient number of shares will remain in escrow as collateral for any pending
or unresolved claims related to the Supply Contract until such claims are
resolved.
The Supply Contract obligates Vessels to supply a third party with gas
volumes sufficient to cover the annual contract quantity obligations
(approximately 1,537,000 Mmbtus). Ninety-five percent of the annual contract
quantity will be delivered to the third party at prices of $1.85, $1.70, and
$1.65 per Mmbtu in 1997, 1998 and 1999, respectively, and at escalated prices,
as defined, in years 2000-2008. Five percent of the annual contract quantity
will be delivered to the third party at prices of $2.16 per Mmbtu in 1997-1998
and at escalated prices as defined, for years 2000-2008.
18. Supplemental Oil and Gas Disclosures (Unaudited)
The accompanying table presents information concerning the Company's
crude oil and natural gas producing activities as required by Financial
Accounting Standards 69, "Disclosures about Oil and Gas Producing Activities."
Capitalized costs relating to oil and gas producing activities are as follows:
December 31
----------------------
1995 1996
--------- ---------
(In thousands)
Proved crude oil and natural gas properties $ 104,127 $ 231,090
Unproved properties ....................... -- 37,268
--------- ---------
Total ................................... 104,127 268,358
Accumulated depreciation, depletion, and
amortization, and valuation allowances .. (29,651) (38,368)
--------- ---------
Net capitalized costs ................. $ 74,476 $ 229,990
========= =========
F-32
<PAGE>
Costs incurred in oil and gas property acquisitions, exploration and
development activities are as follows:
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------------------------------------------------------------------
1994 1995 1996
------------------------------ ------------------------------ ------------------------------
Total U.S. Canada Total U.S. Canada Total U.S. Canada
-------- -------- -------- -------- -------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Property acquisition costs:
Proved .................. $ 33,597 $ 33,597 $ -- $ 719 $ 719 $ -- $ 87,005 $ 37,609 $ 49,396
Unproved ................ 5 5 -- -- -- -- 37,268 8,230 29,038
-------- -------- -------- -------- -------- -------- -------- -------- --------
$ 33,602 $ 33,602 $ -- $ 719 $ 719 $ -- $124,273 $ 45,839 $ 78,434
======== ======== ======== ======== ======== ======== ======== ======== ========
Property development and
exploration costs ....... $ 7,151 $ 7,151 $ -- $ 11,398 $ 11,398 $ -- $ 18,133 $ 18,115 $ 18
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The results of operations for oil and gas producing activities are as
follows:
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------------------------------------------------------------------------
1994 1995 1996
-------------------------------- -------------------------------- --------------------------------
Total U.S. Canada Total U.S. Canada Total U.S. Canada
-------- -------- -------- -------- -------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ................. $ 11,114 $ 11,114 $ -- $ 13,660 $ 13,660 $ -- $ 25,749 $ 21,758 $ 3,991
Production costs ......... (3,693) (3,693) -- (4,333) (4,333) -- (5,858) (5,193) (665)
Depreciation,
depletion, and ......... (3,777) (3,777) -- (5,313) (5,313) -- (9,103) (7,695) (1,408)
amortization
General and .............. (202) (202) -- (261) (261) -- (483) (401) (82)
administrative
Income taxes ............. -- -- -- -- -- -- (148) -- (148)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Results of operations from
oil and gas producing
activities (excluding
corporate overhead and . $ 3,442 $ 3,442 $ -- $ 3,753 $ 3,753 $ -- $ 10,157 $ 8,469 $ 1,688
interest costs)
======== ======== ======== ======== ======== ======== ======== ======== ========
Depletion rate per
barrel of oil ..........
equivalent $ 4.35 $ 4.35 $ -- $ 4.67 $ 4.67 $ -- $ 5.12 $ 5.10 $ 5.29
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
F-33
<PAGE>
Estimated Quantities of Proved Oil and Gas Reserves
The following table presents the Company's estimate of its net proved
crude oil and natural gas reserves as of December 31, 1994, 1995, and 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.
<TABLE>
<CAPTION>
Total United States Canada
--------------------- ---------------------- ----------------------
Liquid Natural Liquid Natural Liquid Natural
Hydrocarbons Gas Hydrocarbons Gas Hydrocarbons Gas
------------- ------- ------------ -------- ------------ --------
(Barrels) (Mcf) (Barrels) (Mcf) (Barrels) (Mcf)
------------- ------- ----------- -------- ------------ --------
(In thousands)
Proved developed and undeveloped reserves:
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 ........... 4,086 16,591 4,086 16,591 -- --
Revisions of previous estimates ...... 854 5,034 854 5,034 -- --
Extensions and discoveries ........... 2,268 15,062 2,268 15,062 -- --
Purchase of minerals in place ........ 2,417 33,288 2,417 33,288 -- --
Production ........................... (469) (2,393) (469) (2,393) -- --
Sale of minerals in place ............ -- (3) -- (3) -- --
-------- -------- -------- -------- -------- --------
Balance at December 31, 1994 ........... 9,156 67,579 9,156 67,579 -- --
Revisions of previous estimates ...... (1,328) (18,941) (1,328) (18,941) -- --
Extensions and discoveries ........... 1,335 6,819 1,335 6,819 -- --
Purchase of minerals in place ........ 214 2,889 214 2,889 -- --
Production ........................... (544) (3,553) (544) (3,553) -- --
Sale of minerals in place ............ (566) (224) (566) (224) -- --
-------- -------- -------- -------- -------- --------
Balance at December 31, 1995 ........... 8,267 54,569 8,267 54,569 -- --
Revisions of previous estimates ...... 680 (2,561) 680 (2,561) -- --
Extensions and discoveries ........... 1,752 10,194 1,746 10,060 6 134
Purchase of minerals in place ........ 8,062 121,408 6,694 65,135 1,368 56,273
Production ........................... (724) (6,350) (670) (5,042) (54) (1,308)
Sale of minerals in place ............ (2) -- (2) -- -- --
-------- -------- -------- -------- -------- --------
Balance at December 31, 1996 ........... 18,035 177,260 16,715 122,161 1,320 55,099
======== ======== ======== ======== ======== ========
</TABLE>
(1) Includes 120,400 barrels of crude oil reserves owned by Cascade of which
57,600 barrels are applicable to the minority interest's share of these
reserves.
F-34
<PAGE>
Estimated Quantities of Proved Oil and Gas Reserves (continued)
<TABLE>
<CAPTION>
Total United States Canada
---------------------- ------------ --------------------------------
Liquid Natural Liquid Natural Liquid Natural
Hydrocarbons Gas Hydrocarbons Gas Hydrocarbons Gas
(Barrels) (Mcf) (Barrels) (Mcf) (Barrels) (Mcf)
------------- -------- ------------ -------- ------------ ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Proved developed reserves:
December 31, 1994 ...... 5,701 48,973 5,701 48,973 -- --
============ ======= ============ ======= ============ =======
December 31, 1995 ...... 6,000 44,026 6,000 44,026 -- --
============ ======= ============ ======= ============ =======
December 31, 1996 ...... 14,961 157,660 13,641 103,639 1,320 54,021
============ ======= ============ ======= ============ =======
</TABLE>
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 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.
F-35
<PAGE>
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil
and Gas Reserves
The following disclosures concerning the standardized measure of future
cash flows from proved crude oil and natural gas reserves are presented in
accordance with Statement of Financial Accounting Standards No. 69. The
standardized measure does not purport to represent the fair market value of the
Company's proved crude oil and natural gas reserves. An estimate of fair market
value would also take into account, among other factors, the recovery of
reserves not classified as proved, anticipated future changes in prices and
costs, and a discount factor more representative of the time value of money and
the risks inherent in reserve estimates.
Under the standardized measure, future cash inflows were estimated by
applying period-end prices at December 31, 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.
F-36
<PAGE>
Set forth below is the Standardized Measure relating to proved oil and
gas reserves for:
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------------------------------------------------------------------------
1994 1995 1996
-------------------------------- ------------------------------- ---------------------------------
Total U.S. Canada Total U.S. Canada Total U.S. Canada
--------- --------- -------- --------- --------- ------- ----------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Future cash inflows ......... $ 238,028 $ 238,028 $ -- $ 243,969 $ 243,969 $ -- $ 1,009,420 $ 824,776 $ 184,644
Future production and
development costs ......... (84,552) (84,552) -- (79,910) (79,910) -- (251,749) (201,498) (50,251)
Future income tax expense ... (26,542) (26,542) -- (28,015) (28,015) -- (207,834) (157,508) (50,326)
--------- --------- -------- --------- --------- ------- ----------- --------- ---------
Future net cash flows ....... 126,934 126,934 -- 136,044 136,044 -- 549,837 465,770 84,067
Discount .................... (49,241) (49,241) -- (48,884) (48,884) -- (220,016) (193,221) (26,795)
--------- --------- -------- --------- --------- ------- ----------- --------- ---------
Standardized Measure of
discounted future net cash
relating to proved reserves $ 77,693 $ 77,693 $ -- $ 87,160 $ 87,160 $ -- $ 329,821 $ 272,549 $ 57,272
========= ========= ======== ========= ========= ======= =========== ========= =========
</TABLE>
F-37
<PAGE>
Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves
The following is an analysis of the changes in the Standardized
Measure:
Year Ended December 31
------------------------------------
1994 1995 1996
--------- --------- ---------
(In thousands)
Standardized Measure, beginning
of year ............................... $ 32,929 $ 77,693 $ 87,160
Sales and transfers of oil and gas
produced, net of production costs ..... (7,421) (9,351) (19,887)
Net changes in prices and development and
production costs from prior year ...... 2,450 22,560 65,917
Extensions, discoveries, and improved
recovery, less related costs .......... 13,509 13,475 30,699
Purchases of minerals in place .......... 29,163 3,867 244,930
Sales of minerals in place .............. (2) (3,355) (24)
Revision of previous quantity estimates . 7,346 (24,937) 2,257
Change in future income tax expense ..... 5,804 382 (87,393)
Other ................................... (9,377) (943) (2,554)
Accretion of discount ................... 3,292 7,769 8,716
--------- --------- ---------
Standardized Measure, end of year ..... $ 77,693 $ 87,160 $ 329,821
========= ========= =========
F-38
<PAGE>
AUDITORS' REPORT TO THE DIRECTORS
To the Board of Directors of
Canadian Abraxas Petroleum Ltd.
We have audited the balance sheets of CGGS Canadian Gas Gathering
Systems Inc. as at October 31, 1995 and 1996 and the statements of earnings
(loss) and deficit and changes in financial position for the years ended October
31, 1994, 1995 and 1996. 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 1996 and the results of its operations and the changes in its financial
position for the years ended October 31, 1994, 1995 and 1996 in accordance with
generally accepted accounting principles.
KPMG
Chartered Accountants
Calgary, Canada
December 16,1997
F-39
<PAGE>
<TABLE>
<CAPTION>
CGGS CANADIAN GAS GATHERING SYSTEMS INC.
BALANCE SHEETS
(In Canadian Dollars)
ASSETS
October 31
---------------------------------------------
1995 1996
--------------------- ---------------------
<S> <C> <C>
Current assets:
Cash and short-term deposits ....................... $ 1,274,000 $ 10,050,000
Accounts receivable ................................ 12,850,000 13,540,000
--------------------- ---------------------
14,124,000 23,590,000
Capital assets (note 3) ............................... 128,095,000 123,857,000
Deferred financing costs (note 4) ..................... 1,482,000 1,336,000
Deferred foreign exchange loss ........................ 7,882,000 6,858,000
--------------------- ---------------------
Total assets ....................................... $ 151,583,000 $ 155,641,000
===================== =====================
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
October 31
----------------------------------------------
1995 1996
---------------------- ---------------------
<S> <C> <C>
Current liabilities:
Debenture interest payable to shareholders ......... $ 1,344,000 $ 1,342,000
Accounts payable ................................... 4,335,000 7,201,000
---------------------- ---------------------
Total current liabilities ........................ 5,679,000 8,543,000
Long-term shareholders' debt (note 5) ................. 113,070,000 113,179,000
Provision for future site restoration ................. 3,015,000 4,148,000
---------------------- ---------------------
121,764,000 125,870,000
Shareholders' equity:
Share capital (note 6) ............................. 34,213,000 34,213,000
Deficit ............................................ (4,394,000) (4,442,000)
---------------------- ---------------------
Total shareholders' equity 29,819,000 29,771,000
Commitments (note 10)
---------------------- ---------------------
Total liabilities and shareholders' equity ....... $ 151,583,000 $ 155,641,000
====================== =====================
</TABLE>
See accompanying notes to financial statements.
F-40
<PAGE>
<TABLE>
<CAPTION>
CGGS CANADIAN GAS GATHERING SYSTEMS INC.
STATEMENTS OF EARNINGS (LOSS) AND DEFICIT
(In Canadian Dollars)
Year Ended October 31
----------------------------------------------------------
1994 1995 1996
------------------ ------------------- -------------------
<S> <C> <C> <C>
Revenues:
Processing ......................................... $ 30,408,000 $ 33,100,000 $ 36,954,000
Production ......................................... 35,855,000 22,408,000 26,791,000
Royalties, net ..................................... (6,787,000) (3,366,000) (3,975,000)
Other income ....................................... 1,028,000 996,000 690,000
------------------ ------------------- -------------------
60,504,000 53,138,000 60,460,000
Expenses:
Processing ......................................... 15,621,000 14,763,000 19,207,000
Production ......................................... 4,866,000 5,689,000 5,308,000
Administration (note 7) ............................ 3,960,000 4,507,000 4,117,000
Interest on long-term shareholders' debt ........... 15,998,000 16,227,000 16,172,000
Depletion and depreciation ......................... 14,361,000 13,754,000 14,092,000
Amortization of deferred financing costs ........... 146,000 146,000 146,000
Foreign exchange loss .............................. 772,000 795,000 1,134,000
------------------ ------------------- -------------------
55,724,000 55,881,000 60,176,000
------------------ ------------------- -------------------
Earnings (loss) before taxes .......................... 4,780,000 (2,743,000) 284,000
Large corporation tax ................................. 274,000 308,000 332,000
------------------ ------------------- -------------------
Net earnings (loss) ................................... 4,506,000 (3,051,000) (48,000)
Deficit - beginning of year ........................... (5,849,000) (1,343,000) (4,394,000)
------------------ ------------------- -------------------
Deficit - end of year ................................. $ (1,343,000) $ (4,394,000) $ (4,442,000)
================== =================== ===================
</TABLE>
See accompanying notes to financial statements.
F-41
<PAGE>
<TABLE>
<CAPTION>
CGGS CANADIAN GAS GATHERING SYSTEMS INC.
STATEMENTS OF CHANGES IN FINANCIAL POSITION
(In Canadian Dollars)
Year Ended October 31
----------------------------------------------------------
1994 1995 1996
------------------ ------------------- -------------------
<S> <C> <C> <C>
Operating Activities:
Net earnings (loss) ................................ $ 4,506,000 $ (3,051,000) $ (48,000)
Depletion and depreciation ......................... 14,361,000 13,754,000 14,092,000
Amortization of deferred financing costs ........... 146,000 146,000 146,000
Foreign exchange loss .............................. 772,000 795,000 1,134,000
Decrease (increase) in non-cash working capital items (5,443,000) (7,004,000) 2,176,000
------------------ ------------------- -------------------
14,342,000 4,640,000 17,500,000
Financing Activities:
Issuance of share capital .......................... 583,000 - -
Increase in long-term shareholders' debt ........... 1,726,000 - -
------------------ ------------------- -------------------
2,309,000 - -
Investing Activities:
Expenditures on capital assets ..................... (15,024,000) (11,638,000) (8,722,000)
Increase in non-cash working capital ............. (3,771,000) (54,000) (2,000)
------------------ ------------------- -------------------
(18,795,000) (11,692,000) (8,724,000)
Increase (decrease) in cash and short-term deposits ... (2,144,000) (7,052,000) 8,776,000
Cash and Short-Term Deposits:
Beginning of year ................................ 10,470,000 8,326,000 1,274,000
------------------ ------------------- -------------------
End of year ...................................... $ 8,326,000 $ 1,274,000 $ 10,050,000
================== =================== ===================
</TABLE>
See accompanying notes to financial statements.
F-42
<PAGE>
CGGS CANADIAN GAS GATHERING SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
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.
F-43
<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-44
<PAGE>
CGGS CANADIAN GAS GATHERING SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. Capital Assets
October 31
---------------------------------
1995 1996
------------- -------------
Oil and Gas Properties:
Cost ................................ $ 43,361,000 $ 44,963,000
Accumulated depletion ............... (24,540,000) (28,197,000)
------------- -------------
18,821,000 16,766,000
------------- -------------
Tangible Production Equipment:
Cost ................................ 9,402,000 10,239,000
Accumulated depreciation ............ (4,450,000) (5,283,000)
------------- -------------
4,952,000 4,956,000
------------- -------------
Processing Facilities:
Cost ................................ 127,696,000 133,979,000
Accumulated depreciation ............ (23,374,000) (31,844,000)
------------- -------------
104,322,000 102,135,000
------------- -------------
$ 128,095,000 $ 123,857,000
============= =============
A provision for future site restoration of $1,132,347 (1995 - $779,000,
1994 - $740,000) was expensed during 1996.
4. Deferred Financing Costs
October 31
---------------------------------
1995 1996
------------- -------------
Deferred financing costs ............... $ 2,187,000 $ 2,187,000
Accumulated amortization ............... (705,000) (851,000)
=========== ===========
$ 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.
F-45
<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
<TABLE>
<CAPTION>
Class A Class B
------------------------- -------------------------
<S> <C> <C> <C> <C>
Inception to October 31, 1993 2,770,599 $33,619,000 923,530 $ 11,000
Issued during 1994 .......... 43,139 583,000 14,380 --
----------- ----------- ----------- -----------
Balance at October 31, 1994,
1995 and 1996 ............ 2,813,738 $34,202,000 937,910 $ 11,000
=========== =========== =========== ===========
</TABLE>
7. Administration
Pursuant to the administration and management agreements, the following
expenses have been recorded:
Year Ended October 31
----------------------------------------
1994 1995 1996
----------- ----------- -----------
Management fees ............ $ 2,384,000 $ 2,613,000 $ 2,531,000
Administration fees ........ 1,959,000 1,628,000 1,632,000
----------- ----------- -----------
4,343,000 4,241,000 4,163,000
Directors' fees and expenses 63,000 311,000 113,000
General corporate expenses . 550,000 400,000 299,000
----------- ----------- -----------
4,956,000 4,952,000 4,575,000
Recoveries ................. (996,000) (445,000) (458,000)
----------- ----------- -----------
$ 3,960,000 $ 4,507,000 $ 4,117,000
=========== =========== ===========
F-46
<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 has 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, 1995 $3,485,000 $ 485,000 $ 271,000
Year ended October 31, 1996 3,363,000 513,000 287,000
F-47
<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, 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 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 being
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.
F-48
<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>
Year Ended October 31
-------------------------------------------------------------
1994 1995 1996
------------------ ------------------- -------------------
<S> <C> <C> <C>
Net earnings (loss) as reported .......... $ 4,506,000 $ (3,051,000) $ (48,000)
Foreign currency translation ............. (1,829,000) 1,893,000 1,024,000
================== =================== ===================
Net earnings (loss) in accordance with
U.S. GAAP ............................. $ 2,677,000 $ (1,158,000) $ 976,000
================== =================== ===================
</TABLE>
<TABLE>
<CAPTION>
Increase
As Reported (Decrease) U.S. GAAP
------------------ ------------------- -------------------
<S> <C> <C> <C>
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 .............................. (4,442,000) 6,859,000 (11,301,000)
</TABLE>
13. Changes in Non-cash Working Capital Components
<TABLE>
<CAPTION>
Year Ended October 31
-------------------------------------------------------------
1994 1995 1996
------------------ ------------------- -------------------
<S> <C> <C> <C>
Decrease (increase) in non-cash working
capital
Operating:
Accounts receivable $ (562,000) $ (1,231,000) $ (690,000)
Accounts payable (4,881,000) (5,773,000) 2,866,000
------------------ ------------------- -------------------
$ (5,443,000) $ (7,004,000) $ 2,176,000
================== =================== ===================
Investing:
Accounts payable $ - $ - $ -
Debenture interest payable to shareholders (3,771,000) (54,000) (2,000)
================== =================== ===================
$ (3,771,000) $ (54,000) $ (2,000)
================== =================== ===================
</TABLE>
F-49
<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
F-50
<PAGE>
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)
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
======= ======= ======= ======= =======
The accompanying notes are an integral part of these statements.
F-51
<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
================ ================
F-52
<PAGE>
ENSERCH EXPLORATION, INC.'S WAMSUTTER AREA PACKAGE
NOTES TO STATEMENTS OF REVENUES AND
DIRECT OPERATING EXPENSES (CONTINUED)
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.
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
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)
========== ========== ==========
</TABLE>
F-53
<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 the 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,
and 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
F-54
<PAGE>
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)
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
========== ========== ========== ==========
See accompanying notes.
F-55
<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 statements 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.
F-56
<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.
F-57
<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.
F-58
<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>
F-59
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Vessels Energy, Inc.:
We have audited the accompanying consolidated balance sheets of Vessels Energy,
Inc. (a Delaware corporation), and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our 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 financial position of Vessels Energy, Inc. and
subsidiaries as of December 31, 1996 and 1995 and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Denver, Colorado,
April 9, 1997.
F-60
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of Vessels Energy, Inc.:
In our opinion, the accompanying consolidated statements of operations, cash
flows and stockholders' equity present fairly, in all material respects, the
results of operations and cash flows of Vessels Energy, Inc. (successor to
Vessels Oil & Gas Company) and its subsidiaries for the year ended December 31,
1994, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Denver, Colorado
March 27, 1995
F-61
<PAGE>
<TABLE>
<CAPTION>
VESSELS ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
December 31, September 30,
------------------- -------------
1995 1996 1997
-------- -------- ------------
(Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents ............................... $ -- $ -- $ 991
Accounts receivable, less allowance for
doubtful accounts of $346, $338 and $266 at
December 31, 1995 and 1996 and
September 30, 1997, respectively:
Joint owners ........................................ 2,099 238 248
Oil and gas production sales ........................ 880 1,094 472
Gas gathering, processing and marketing ............. 5,352 9,004 2,692
Prepaid expenses and other .............................. 1,117 1,411 1,111
-------- -------- --------
Total current assets .................................. 9,448 11,747 5,514
Property and equipment ..................................... 119,060 157,853 56,997
Less accumulated depreciation, depletion and
amortization ............................................ 40,240 49,485 15,207
-------- -------- --------
Net property and equipment based on the
successful efforts method of accounting for oil
and gas properties .................................. 78,820 108,368 41,790
Deferred financing fees, net of accumulated amortization
of $183, $383 and $1,192 at December 31, 1995 and 1996,
and September 30, 1997, respectively ..................... 870 478 425
Other assets ............................................... 467 402 356
-------- -------- --------
Total assets ............................................... $ 89,605 $120,995 $ 48,085
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-62
<PAGE>
<TABLE>
<CAPTION>
VESSELS ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, September 30,
--------------------- -------------
1995 1996 1997
--------- --------- ------------
(Unaudited)
<S> <C> <C> <C>
Current liabilities:
Accounts payable and other accrued liabilities .... $ 10,687 $ 14,561 $ 6,248
Oil and gas production payable .................... 1,140 1,435 436
Accrued interest .................................. 235 1,068 --
Income taxes payable .............................. 267 6 6
Capital leases, current portion ................... 402 377 65
Short-term notes payable .......................... -- 7,000 --
--------- --------- ---------
Total current liabilities ....................... 12,731 24,447 6,755
Long-term debt ....................................... 30,750 55,051 --
Other long-term obligations .......................... 2,742 2,167 6,065
Deferred income taxes ................................ 822 -- --
Capital leases, long-term portion .................... 1,584 1,231 272
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.10 per share -
authorized 50,000 shares; no shares issued ...... -- -- --
Common stock, par value $.10 per share - authorized
500,000 shares; issued and outstanding 34,136
shares at December 31, 1995 and 1996 and
September 30, 1997 .............................. 3 3 3
Additional paid-in capital ........................ 43,501 43,501 43,501
Stockholder note receivable ....................... (153) -- --
Accumulated deficit ............................... (2,375) (5,405) (8,511)
--------- --------- ---------
Total stockholders' equity ........................... 40,976 38,099 34,993
--------- --------- ---------
Total liabilities and stockholders' equity ........... $ 89,605 $ 120,995 $ 48,085
========= ========= =========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
</TABLE>
F-63
<PAGE>
<TABLE>
<CAPTION>
VESSELS ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Nine Months Ended September
Year Ended December 31, 30,
--------------------------------------------- ------------------------------
1994 1995 1996 1996 1997
-------------- -------------- -------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Oil and gas production revenues .......... $ 8,463 $ 13,804 $ 14,811 $ 9,951 $ 7,060
Gas gathering, processing and marketing
revenues ............................... 37,706 39,355 38,439 25,680 14,722
Other .................................... 260 500 171 29 773
-------------- -------------- -------------- -------------- --------------
46,429 53,659 53,421 35,660 22,555
Operating costs and expenses:
Lease operating and production taxes ..... 4,051 4,556 4,813 3,456 2,201
Gas gathering, processing and marketing
costs .................................. 31,620 34,034 33,365 21,708 12,929
Depreciation, depletion and amortization
(includes impairments of $2,600 and
$337 in 1995 and 1996, respectively) ... 6,146 11,358 9,754 6,733 5,737
Exploration expense ...................... 223 272 1,713 300 914
General and administrative ............... 3,095 3,399 3,238 2,413 2,223
-------------- -------------- -------------- -------------- --------------
45,135 53,619 52,883 34,610 24,004
-------------- -------------- -------------- -------------- --------------
Operating income (loss) ..................... 1,294 40 538 1,050 (1,449)
-------------- -------------- -------------- -------------- --------------
Other expense:
Amortization of deferred financing fee ... 13 183 917 147 92
Interest expense ......................... 5,321 2,388 3,473 2,387 1,503
Recapitalization expense ................. - 1,344 - - -
-------------- -------------- -------------- -------------- --------------
5,334 3,915 4,390 2,534 1,595
Loss before taxes and extraordinary item .... (4,040) (3,875) (3,852) (1,484) (3,044)
Deferred income tax benefit (provision) ..... 1,537 1,579 822 690 (62)
-------------- -------------- -------------- -------------- --------------
Loss before extraordinary item .............. (2,503) (2,296) (3,030) (794) (3,106)
Extraordinary item:
Debt extinguishment costs ................ 1,503 - - - -
-------------- -------------- -------------- -------------- --------------
Net loss .................................... $ (4,006) $ (2,296) $ (3,030) $ (794) $ (3,106)
============== ============== ============== ============== ==============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-64
<PAGE>
<TABLE>
<CAPTION>
VESSELS ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
Year Ended December 31, September 30,
---------------------------------------------
1994 1995 1996 1996 1997
-------------- --------------- -------------- ------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net loss .................................. $ (4,006) $ (2,296) $ (3,030) $ (794) $ (3,106)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation, depletion, amortization . 6,146 11,358 9,754 6,733 5,737
(Gain) loss on sale of oil and gas - - - 6 (593)
properties ..........................
Amortization of deferred financing 473 183 917 147 102
fees and other ......................
Net loss from debt restructurings ..... 2,358 - - - -
Changes in operating assets and
liabilities:
Accounts receivable ............. 290 (1,573) (2,005) 1,028 6,924
Prepaid expenses and other ...... (83) 619 (294) (143) 300
Accounts payable and accrued (6,449) 3,462 4,741 599 (10,380)
liabilities ...................
Deferred tax liability .......... (2,391) (1,222) (822) (689) -
Other non-current liabilities ... (477) 1,408 (575) (277) 3,896
-------------- --------------- -------------- -------------- --------------
Net cash provided by (used in)
operating activities ........... (4,139) 11,939 8,686 6,610 2,880
Investing Activities:
Additions to oil and gas properties ....... (16,789) (19,486) (21,330) (14,817) (14,456)
Proceeds from dispositions of oil and gas - - - - 77,996
properties ..............................
Additions to other property and equipment . (6,861) (6,230) (17,982) (15,116) (2,069)
Decrease in restricted cash ............... 2,142 - - - -
-------------- --------------- -------------- -------------- --------------
Net cash provided by (used in)
investing activities ........... (21,508) (25,716) (39,312) (29,933) 61,471
Financing Activities:
Preferred stock dividends ................. (170) - - - -
Common stock dividends .................... (80) - - - -
Issuance of common stock, net of expenses . 38,451 153 - - -
Purchase and retirement of preferred stock (3,300) (137) - - -
Collection of stockholder note receivable . - - 153 - -
Proceeds from long-term borrowings and 35,806 13,875 43,150 26,200 8,207
capital leases ..........................
Payments on long-term borrowings and (45,385) (5,517) (12,227) (2,404) (71,529)
capital leases ..........................
Deferred financing fees ................... (1,049) (128) (450) (473) (38)
-------------- --------------- -------------- -------------- --------------
Net cash provided by (used in)
financing activities ........... 24,273 8,246 30,626 23,323 (63,360)
-------------- --------------- -------------- -------------- --------------
Increase (decrease) in cash .................. (1,374) (5,531) - - 991
Cash at beginning of period .................. 6,905 5,531 - - -
-------------- --------------- -------------- -------------- --------------
Cash at end of period ........................ $ 5,531 $ - $ - $ - $ 991
============== =============== ============== ============== ==============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-65
<PAGE>
<TABLE>
<CAPTION>
VESSELS ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
Nine Months Ended
Year Ended December 31, September 30,
---------------------------------------------
1994 1995 1996 1996 1997
-------------- -------------- --------------- -------------- --------------
(Unaudited)
Supplemental disclosures
Supplemental disclosures of cash flow
information
<S> <C> <C> <C> <C> <C>
Interest paid $ 4,833 $ 2,191 $ 2,638 $ 2,469 $ 2,571
============== ============== =============== ============== ==============
Supplemental schedule of noncash
investing and financing activities
Issuance of stock for note $ - $ 153 $ - $ - $ -
============== ============== =============== ============== ==============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-66
<PAGE>
<TABLE>
<CAPTION>
VESSELS ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Preferred Stock Common Stock Stockholder Additional
------------------ ----------------- Note Paid-In Accumulated
Shares Amount Shares Amount Receivable Capital Deficit Total
-------- --------- -------- -------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 ................... 2 $ -- 11 $ 1 $ -- $ 7,668 $ 4,693 $ 12,362
Dividend on preferred stock ............... -- -- -- -- -- -- (170) (170)
Dividend on common stock .................. -- -- -- -- -- -- (80) (80)
Purchase and retirement of preferred ..... (2) -- -- -- -- (2,784) (516) (3,300)
stock
Issuance of common stock .................. -- -- 23 2 -- 38,449 -- 38,451
Net loss .................................. -- -- -- -- -- -- (4,006) (4,006)
-------- --------- ------- ------ -------- -------- -------- --------
Balance at December 31, 1994 ................. -- -- 34 3 -- 43,333 (79) 43,257
Issuance of common stock for cash and
note .................................... -- -- -- -- -- 306 -- 306
Costs of issuing common stock and
purchasing and retiring preferred stock
in excess of costs estimated at
December 31, 1994 ....................... -- -- -- -- (153) (138) -- (291)
Net loss .................................. -- -- -- -- -- -- (2,296) (2,296)
-------- --------- ------- ------ -------- -------- -------- --------
Balance at December 31, 1995 ................. -- -- 34 3 (153) 43,501 (2,375) 40,976
Collection of stockholder note receivable . -- -- -- -- 153 -- -- 153
Net loss .................................. -- -- -- -- -- -- (3,030) (3,030)
-------- --------- ------- ------ -------- -------- -------- --------
Balance at December 31, 1996 ................. -- -- 34 3 -- 43,501 (5,405) 38,099
Net loss (unaudited) ...................... -- -- -- -- -- -- (3,106) (3,106)
-------- --------- ------- ------ -------- -------- -------- --------
Balance at September 30, 1997 (unaudited) .... -- $ -- 34 $ 3 $ -- $ 43,501 $ (8,511) $ 34,993
======== ========= ======= ====== ======== ======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-67
<PAGE>
VESSELS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the nine month periods ended
September 30, 1997 and 1996 is unaudited)
1. Organization and Significant Accounting Policies
Nature of Operations
Vessels Energy, Inc. ("Vessels"), a Delaware corporation, was
incorporated in December 1995 to succeed the business of Vessels Oil & Gas
Company ("VOG"), and is principally engaged in the exploration, development and
production of crude oil and natural gas and the gathering, processing and
marketing of natural gas and natural gas liquids.
Vessels' activities are primarily concentrated in the Wattenberg
Field in the Denver-Julesberg Basin ("D-J Basin") of Colorado (see Note 12).
Vessels also has operations in the Piceance Basin of Colorado and in the
Washakie and Wind River Basins of Wyoming.
Interim Results (Unaudited)
The accompanying balance sheet as of September 30, 1997, the
statements of operations and cash flows for the nine months ended September 30,
1996 and 1997, and the statement of stockholders' equity for the nine months
ended September 30, 1997 are unaudited. In the opinion of management these
interim statements have been prepared on the same basis as the audited financial
statements and include all adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation of the financial position as of
September 30, 1997 and the results of operations and cash flows for the nine
months ended September 30, 1996 and 1997. The results for the nine months ended
September 30, 1997 are not necessarily indicative of results that may be
expected for the full year.
Principles of Consolidation
The consolidated financial statements include the accounts of
Vessels and its wholly owned subsidiaries. All significant intercompany balances
and transactions are eliminated in consolidation.
Cash and Cash Equivalents
All of Vessels' cash investments are of a highly liquid nature
with original maturities of three months or less and are therefore considered to
be cash equivalents. The carrying amount of these cash investments approximates
fair value because of their short-term maturities.
F-68
<PAGE>
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
the disclosures 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.
Concentration of Credit Risk
Vessels' accounts receivable are due primarily from individuals or
companies within the oil and gas industry whose operations are in the Rocky
Mountain region of the United States. Vessels performs credit evaluations on its
customers and, when appropriate, obtains letters of credit or prepayments to
minimize exposure to credit risk. Vessels' cash and cash equivalents are
maintained primarily at a single bank in Denver, Colorado. These concentrations
of credit risk have not had a material effect on the results of operations for
Vessels.
Oil and Gas Properties
Vessels follows the successful efforts method of accounting for
its oil and gas exploration, development and production activities. Under this
method, acquisition costs, development costs and successful exploration costs
are capitalized. Exploratory dry hole costs, lease rentals and geological and
geophysical costs are expensed as incurred. Undeveloped leaseholds are charged
to expense when impaired, based on a property-by-property assessment. Impairment
of capitalized costs is recorded when the net book value of proved properties
exceeds the undiscounted future net revenues from such properties on a
field-by-field basis. Depreciation, depletion and amortization of producing
properties and related equipment is provided using the units of production
method. On a field-by-field basis, estimated quantities of proved developed
reserves are used to amortize drilling and development costs, and total proved
reserves are used to amortize leasehold costs.
Other Property and Equipment
Property and equipment is recorded at cost and consists of natural
gas gathering and processing facilities, vehicles, office furniture and
equipment. Depreciation is provided for using the straight-line method over
estimated useful lives ranging from three to thirty years. Impairment of
capitalized costs is recorded when the net book value of gathering and
processing facilities exceeds the undiscounted future net revenues from such
facilities. Useful lives of Vessels' gathering and processing facilities are
determined based on the estimated lives of the reserves serviced by the
facilities.
Repair and maintenance costs are charged to expense. Costs of
renewals or betterments are capitalized.
F-69
<PAGE>
Capitalized Leases
A portion of Vessels' compression equipment, gathering systems and
office equipment was acquired through leases with various financing entities.
Vessels has capitalized those material lease transactions that meet the criteria
of Statement of Financial Accounting Standards No. 13, as amended, by recording
an asset and related obligation under the capital lease. The cost of the asset
recorded and the related liability is based upon the lesser of the fair market
value of the asset or the present value of future minimum lease payments.
Interest expense is recognized on capitalized lease obligations based either on
the interest rate implicit in the lease or Vessels' incremental borrowing rate.
Impairment of Long-Lived Assets
In 1996 Vessels adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121, which established
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill, requires a review for impairment whenever
circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review for recoverability, Vessels estimates
future cash flows (undiscounted and without interest charges) expected to result
from use of an asset and its eventual disposition. Impairment is only recognized
if the carrying amount of an asset is greater than the expected future net cash
flows. The amount of the impairment is based on the fair value of the asset.
Under SFAS 121, each field or facility is individually evaluated for impairment.
Adoption of the provisions of SFAS 121 in 1996 resulted in an impairment of
approximately $337,000, which has been reflected in the accompanying Statements
of Operations.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at fair
value. Vessels has chosen to continue to account for stock-based compensation
using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations.
Deferred Financing Fees
Deferred financing fees are amortized over the term of the related
loan on a straight-line basis as a component of interest expense. Unamortized
deferred financing fees associated with prior loan agreements that are
refinanced before maturity are written off and presented as a component of
interest expense in the Statements of Operations. During 1994, 1995 and 1996,
Vessels amortized $13,000, $183,000 and $200,000, respectively, of deferred
financing fees. Also, during 1996, Vessels wrote off $717,000 of deferred
financing fees in connection with the refinancing of its Bank Credit Facility
(see Note 3).
F-70
<PAGE>
Federal Income Taxes
Vessels recognizes income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 requires the asset and liability approach to accounting for income taxes.
The deferred tax liabilities or assets represent taxes payable or refundable in
future years, as measured by the provisions of enacted tax laws, or as a result
of temporary differences between the bases of assets and liabilities for
financial reporting and tax reporting purposes. Such differences relate mainly
to depreciable and depletable properties and intangible drilling costs.
Reclassifications
Certain balances from 1994 and 1995 have been reclassified for
comparative purposes.
Goodwill
At December 31, 1994, goodwill was being amortized over forty
years using the straight-line method. At December 31, 1995, Vessels determined
that the remaining balance of goodwill had no future value, and the remaining
balance was amortized to expense.
Capitalized Interest
Interest costs of $96,000, $124,000 and $50,261 were capitalized
to construction projects during 1994, 1995 and 1996, respectively.
Gas Balancing
Vessels enters into gas balancing arrangements for the difference
between sales of natural gas and its proportionate share of production. Vessels
follows the sales method to account for gas imbalances and records revenue based
on sales, regardless of its proportionate share of the related production, as
long as the estimated recoverable reserves are sufficient to allow the undersold
party, be it Vessels or other interest owners, to recover their pro-rata share
from future production. At December 31, 1995 and 1996, Vessels' gas balancing
position was insignificant in relation to its remaining natural gas reserves.
2. Property and Equipment
The major components of property and equipment, at cost, are as
follows:
December 31,
--------------------
1995 1996
--------- --------
(in thousands)
Oil and gas producing properties ......... $ 79,483 $100,468
Undeveloped leaseholds ................... 1,832 1,658
Gas gathering and processing facilities .. 33,230 50,424
Other property and equipment ............. 4,515 5,303
-------- --------
$119,060 $157,853
======== ========
F-71
<PAGE>
3. Long-Term Debt
In July 1996, Vessels entered into a $75,000,000 revolving credit
facility with a commercial bank syndicate, which replaced Vessels' previous
credit facility. Borrowings available under the credit facility are limited to
semiannual borrowing base determination amounts. The borrowing base on the
revolving credit facility as of December 31, 1996 was $64,000,000. Borrowings
under the agreement bear interest, at Vessels' option, either at prime or at
LIBOR plus 1.25% - 1.65% based on the total amount of debt outstanding under the
facility. On December 31, 1996, the weighted average interest rate was 7.27%.
Interest is paid quarterly, and principal payments are scheduled to begin on
July 1, 1999, and are due in equal quarterly installments through May 31, 2003.
The credit agreement, which is secured by virtually all of the Company's assets,
contains typical covenants that restrict distributions, additional borrowings
and exploration expenditures, and require the maintenance of certain financial
ratios. At December 31, 1996, Vessels' current ratio was below the minimum
required by the credit agreement. Vessels received a waiver for this covenant
violation from the holder of the note, and anticipates being in compliance with
all loan covenants at March 31, 1997. Vessels anticipates repaying the
outstanding balance under the credit facility in full upon completion of the D-J
Basin Sale (see Note 12).
The following is a schedule of maturities of Vessels' borrowings
pursuant to its revolving credit facility (amounts in thousands):
Year Ending December 31,
1999................. $ 6,881
2000................. 13,763
2001................. 13,763
2002................. 13,763
2003................. 6,881
-------
Total................ $55,051
=======
Based on borrowing rates available for bank loans with similar
collateral, the fair value of the borrowings under Vessels' revolving credit
facility at December 31, 1996 is estimated to be the carrying value of
$55,051,000.
On October 2, 1996, Vessels entered into a $7,000,000 short-term
note payable with a commercial bank syndicate. This note, as amended, bears
interest at the rate of LIBOR plus 1.875%, and matures on April 30, 1997.
F-72
<PAGE>
4. Capital Lease Obligations
The following is a schedule of the property leased under capital
leases as of December 31, 1996, by major class of property (amounts in
thousands):
Class of property:
Compression equipment ................... $ 1,500
Gathering systems ....................... 365
Office equipment ........................ 242
-----------
Subtotal ............................ 2,107
Less: Accumulated depreciation ........... (624)
-----------
Total ............................... $ 1,483
===========
The following is a schedule, by years, of future minimum lease
payments under capital leases together with the present value of the net minimum
lease payments as of December 31, 1996 (amounts in thousands):
Year Ending December 31,
1997 ..................................... $ 515
1998 ..................................... 465
1999 ..................................... 444
2000 ..................................... 311
2001 and thereafter ...................... 214
-------------
Total ...................................... 1,949
Less: Executory costs ..................... (10)
-------------
Net minimum lease payments ................. 1,939
Less: Interest ............................ (331)
-------------
Present value of net minimum lease payments $ 1,608
=============
5. Other Non-Current Liabilities
The major components of other non-current liabilities are as
follows:
December 31,
1995 1996
------------- -------------
(in thousands)
Taxes withheld on production .... $ 1,809 $ 1,533
Other ........................... 933 634
------------- -------------
Total ......................... $ 2,742 $ 2,167
============= =============
F-73
<PAGE>
6. Stock Option Plan and Warrants
Stock Option Plan
Vessels has a stock option plan (the "Plan") under which a total
of 3,804 shares of common stock may be issued upon exercise of options under the
Plan. As of December 31, 1996, a total of 2,408 nonqualified stock options had
been granted and were outstanding at option prices ranging from $1,300 to $1,800
per share. Substantially all of the options granted vest at 20% per year if
Vessels meets certain financial targets or time and service as defined in the
Plan agreements.
The following summarizes stock option activity for 1995 and 1996.
Vessels accounts for the Plan in accordance with APB Opinion No. 25, under which
no compensation expense has been recognized. Had compensation cost for these
plans been determined consistent with SFAS 123, Vessels' net loss would not have
increased by a material amount.
A summary of the status of Vessels' stock option plan at December
31, 1995 and 1996 and changes during the periods then ended is presented in the
table and narrative below:
<TABLE>
<CAPTION>
1995 1996
---------------------------------- --------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Fixed Options Shares Price Shares Price
- --------------------------------------------- -------------- ------------------- -------------- -----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year ......... - - 2,208 $ 1,801
Granted .................................. 2,758 $ 1,801 1,504 $ 1,650
Exercised ................................ - - - -
Forfeited ................................ (550) $ 1,801 (1,304) $ 1,740
-------------- --------------
Outstanding at end of year ............... 2,208 $ 1,801 2,408 $ 1,740
============== ==============
Exercisable at end of year ............... - 94
============== ==============
</TABLE>
The following table summarizes information about the stock options
outstanding as of December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- ----------------------------------------
Weighted- Shares
Average Weighted- Exercisable Weighted-
Remaining Average At Average
Range of Shares Contractual Exercise December 31, Exercise
Exercise Prices Outstanding Life Price 1996 Price
- ---------------------- ----------------- ------------------- ------------------- -------------------- -------------------
<S> <C> <C> <C> <C> <C>
$1,300 293 6.2 years $1,300 94 $1,300
$1,800 2,115 8.25 years $1,800 - -
----------------- --------------------
$1,300 to $1,800 2,408 7.9 years $1,740 94 $1,300
================= ====================
</TABLE>
F-74
<PAGE>
Warrants
Vessels has outstanding common stock purchase warrants pursuant to
agreements which entitle the holder to purchase one share of Vessels' common
stock for each warrant held and which contain certain anti-dilution provisions.
As a result of stock issued in 1994, the exercise price and the number of
warrants outstanding changed. No new warrants were issued in 1995 or 1996, and
no warrants were exercised in 1995 or 1996. As of December 31, 1995 and 1996,
there were a total of 266 warrants outstanding: 50 warrants at an exercise price
of $1,350 and 50 warrants at an exercise price of $2,126, both expiring on
December 30, 2000; and, 166 warrants at an exercise price of $2,349, expiring on
December 12, 2004.
7. Income Taxes
The following is a schedule of the components of the income tax
benefit:
Year Ended
December 31,
------------------------
1994 1995 1996
------ ------ ------
(in thousands)
Deferred taxes:
Federal ............................ $1,335 $1,367 $ 720
State .............................. 202 212 102
------ ------ ------
$1,537 $1,579 $ 822
====== ====== ======
The following schedule shows the amounts and classifications of
the Vessels' deferred tax assets and liabilities:
December 31,
--------------------
1995 1996
-------- --------
(in thousands)
Gross deferred tax assets:
Loss carryforwards ................ $ 6,413 $ 15,185
Minimum tax credit carryforwards... 25 25
Depletion carryforwards ........... 133 172
Other ............................. 92 91
Valuation allowance ............... -- (717)
-------- --------
6,663 14,756
-------- --------
Gross deferred tax liabilities:
Oil and gas properties ............ (3,621) (9,721)
Property and equipment ............ (4,482) (5,530)
Other ............................. 618 495
-------- --------
(7,485) (14,756)
-------- --------
Net deferred income tax liability.... $ (822) $ --
======== ========
F-75
<PAGE>
The differences between the statutory federal income tax rate and
the Vessels' effective tax rate are summarized as follows:
Year Ended
December 31,
---------------------------
1994 1995 1996
------- ------- -------
(in thousands)
Gross deferred tax assets:
Computed benefit at statutory
federal rate .............. $ 1,374 $ 1,318 $ 1,310
State income taxes, net of
federal benefit ........... 133 128 126
Other ....................... 30 133 103
Valuation Allowance ......... -- -- (717)
------- ------- -------
Total income tax benefit .... $ 1,537 $ 1,579 $ 822
======= ======= =======
At December 31, 1996, Vessels had a net operating loss
carryforward of $40,711,447, of which the utilization of $15,796,625 is limited
to an approximate annual amount of $1,547,000 due to a change in ownership
occurring as a result of the 1994 stock issuance. Vessels also has an
alternative minimum tax credit carryforward of $25,000 and a statutory depletion
carryforward of $461,000 at December 31, 1996.
Vessels' net operating loss carryforward, if not previously
utilized, expires at various dates beginning in 2007 (subject to certain
limitations), except for statutory depletion and alternative minimum tax credit
carryforwards which do not expire.
8. Commitments and Contingencies
Operating Leases
Vessels leases certain equipment and office facilities under
non-cancelable operating leases. Future minimum rental commitments at December
31, 1996 are as follows (amounts in thousands):
Year Ending December 31,
1997 ............................................. $ 457
1998 ............................................. 248
1999 ............................................. 4
2000 ............................................. -
------------------
$ 709
==================
Rental expense for the years ended December 31, 1994, 1995 and
1996 was $439,000, $427,000 and $481,000, respectively.
F-76
<PAGE>
Sales Agreements
In 1991 and 1992, Vessels entered into sales agreements with two
separate companies to supply natural gas to their respective cogeneration
facilities located in the front range of Colorado. The agreements require that
Vessels supply a combined annual contract quantity of gas ranging from 2,706,000
to 3,144,000 Mmbtus for a period of 15 years beginning January 1, 1994. Under
the agreements, each of the purchasers is required to take or pay for 80% of the
annual contract quantity. Vessels has dedicated a substantial portion of its
proved reserves in the D-J Basin to these agreements. The 1996 weighted average
price for these two agreements was $2.22 per Mmbtu and escalates at 3% annually.
Contingencies
The Environmental Protection Agency has issued administrative
orders to certain parties who were former customers of Weld County Water
Disposal, Inc. ("WCWDI") related to their disposal of waste at facilities owned
by WCWDI (matter of Weld County Waste Disposal, Inc., EPA Dockets No. RCRA
7003VIII 95-02, 95-03 and 95-04). Those parties have threatened to assert claims
against Vessels, who was also a customer of WCWDI, under a right of contribution
theory but have not filed a complaint. Vessels is unable to assess (a) whether
any claims regarding this matter will be asserted, (b) whether any claims, if
asserted, would be successful, or (c) if any claims are successfully asserted,
the magnitude and amount of the claims.
Vessels is presently engaged in voluntary settlement discussions
with the owner, operator and two other companies regarding Vessels'
participation in the cleanup of the WCWDI Oil Field Waste Disposal Facility near
Ft. Lupton, Colorado in lieu of litigation over the potential claims between
Vessels and such other companies. Vessels has recorded an accrual of $300,000
related to this issue and management believes its financial statements
adequately reflect the impact of a potential settlement.
Vessels is also involved in various other litigation and
administrative proceedings arising in the normal course of business. In the
opinion of management, any liabilities that may result from these claims will
not, individually or in the aggregate, have a material adverse effect on
Vessels' financial position or results of operations.
9. Employee Benefit Plans
Pension and Profit Sharing
Vessels has a 401(k) pension and profit sharing plan which covers
all full-time employees who have more than six months of service and allows
participants to contribute up to 17% of their salary to the plan. Vessels is
obligated to contribute 35% of each participant's contribution, up to a maximum
employee contribution of 6%, as a matching contribution. Amounts contributed to
the plan by employees are 100% vested when contributed while Vessels' matching
contributions are subject to a 20% per year vesting schedule starting in the
third year of participation. Any forfeitures in the plan reduce Vessels'
matching contribution obligation. Vessels made matching contributions to the
plan totaling $61,000 for each of the years ended December 31, 1994, 1995 and
1996.
F-77
<PAGE>
10. Commodity Swap Agreements
Vessels periodically enters into futures contracts, swap
agreements or option agreements in order to hedge its exposure to price
fluctuations on the purchase or sale of crude oil, natural gas or natural gas
liquids. Gains or losses attributable to such contracts and agreements that
hedge specific future deliveries or purchases are deferred and recognized in
income when the corresponding physical sale or purchase is recorded.
Under the swap agreements, Vessels receives or makes payments to a
counterparty based on the differential between a fixed and floating price. Under
option agreements, Vessels will receive payments from the counterparty if the
floating price is less than a floor price and will make payments to the
counterparty if the floating price is greater than the ceiling price. At
December 31, 1996, Vessels had open swap and option agreements to hedge future
deliveries as follows:
Crude Oil (Mbbls) Natural Gas
(Mmbtus)
------------------- ------------------
Year Ending December 31,
1997 ................. 214 2,390
1998 ................. 156 2,280
------------------- ------------------
370 4,670
=================== ==================
Cash flows from hedging activities are classified as operating
activities in the Statements of Cash Flows. Vessels realized a gain of $88,000,
and losses of $264,000 and $3,257,000 on its hedging activities in 1994, 1995
and 1996, respectively. The fair market value of the open swap and option
agreements at December 31, 1996, using commodity prices in effect at December
31, 1996, was a loss of approximately $15,840,000.
Vessels is exposed to credit loss in the event of nonperformance
by counterparties on these swap or option agreements but does not anticipate
nonperformance by such counterparties. The amount of such exposure is generally
equal to the amount of Vessels' unrealized gains, if any, in such swap or collar
agreements.
11. Significant Customers
During 1994, 1995 and 1996, sales to an unrelated customer
accounted for approximately 20%, 14% and 6% of total revenue, respectively. It
is not expected that the loss of this customer would cause a material adverse
impact on operations since alternative markets for Vessels' products are
available.
F-78
<PAGE>
12. Subsequent Events
D-J Basin Sale
Effective February 28, 1997, Vessels executed a Purchase and Sale
Agreement whereby the Company sold its DJ Basin assets to North American
Resources Company for approximately $80,000,000. The sale will include all
leases and reserves, as well as all production, transportation, and processing
equipment owned by Vessels in the D-J Basin.
Merger
On November 12, 1997, Vessels entered into a Merger Agreement with
Abraxas Petroleum Corporation ("Abraxas") whereby the Company will exchange
shares of its common stock for shares of Abraxas Common Stock. The Merger is
expected to close on February 15, 1998 and be effective February 15, 1998.
Monetization
In February 1997, Vessels entered into an agreement with a third
party (the "Third Party") to monetize (the "Monetization") its interest in a
long-term gas sales agreement (the "Sales Agreements" - see Note 8) for
approximately $6 million. Under terms of the Sales Agreements, Vessels had
dedicated certain reserves in the D-J Basin to satisfy delivery obligations
under the Sales Agreements. In conjunction with the Monetization, Vessels
obtained a release of dedicated D-J Basin reserves from the original purchaser.
As part of the Monetization, Vessels assigned its interest in the
Sales Agreements to the Third Party and agreed to supply the Third Party with
gas volumes sufficient to cover the "Annual Contract Quantity" obligations
(approximately 1,537,000 Mmbtus) under the Sales Agreements. Ninety-five percent
of the Annual Contract Quantity will be delivered to the Third Party at prices
of $1.85, $1.70 and $1.65 per Mmbtu in 1997, 1998 and 1999, respectively, and at
escalated prices, as defined, in years 2000 - 2008. Five percent of the Annual
Contract Quantity will be delivered to the Third Party at prices of $2.16 per
Mmbtu in 1997 - 1999 and at escalated prices, as defined, for years 2000 - 2008.
Management believes that Vessels has sufficient remaining reserves after the
sale of its D-J Basin assets to meet its delivery obligations to the third party
and anticipated meeting its delivery obligation to the third party through the
production of such reserves. However, from time to time, Vessels may also make
purchases of gas on the open market at market prices to meet its delivery
obligations to the third party.
13. Supplemental Oil and Gas Disclosures (Unaudited)
Vessels' oil and gas operations are conducted solely in the United
States. The following information is presented in accordance with Statement of
Financial Accounting Standards No. 69, "Disclosure about Oil and Gas Producing
Activities" ("SFAS 69").
F-79
<PAGE>
Oil and Gas Related Costs and Operating Results
The following tables set forth capitalized costs, costs incurred
and operating results for oil and gas producing activities for the periods
presented:
December 31,
1995 1996
--------- ---------
(in thousands)
Capitalized Costs:
Proved oil and gas properties ..... $ 79,483 $ 100,468
Unproved properties ............... 1,832 1,658
--------- ---------
Total ........................... 81,315 102,126
Accumulated depletion, depreciation
and amortization ................ (33,038) (40,311)
--------- ---------
Net capitalized costs ......... $ 48,277 $ 61,815
========= =========
Year Ended December 31,
---------------------------
1994 1995 1996
------- ------- -------
(in thousands)
Costs Incurred:
Property acquisition costs:
Proved .................. $ 4,567 $ 1,340 $ 1,352
Unproved ................ 1,147 1,182 1,550
------- ------- -------
$ 5,714 $ 2,552 $ 2,902
======= ======= =======
Exploration costs ......... $ 225 $ 272 $ 1,713
Development costs ......... 11,075 16,078 18,428
------- ------- -------
$11,300 $16,350 $20,141
======= ======= =======
Year Ended December 31,
--------------------------------
1994 1995 1996
-------- -------- --------
(in thousands)
Operating Results:
Revenues ............................... $ 8,463 $ 13,804 $ 14,811
Production costs ....................... (4,051) (4,556) (4,813)
Depletion, depreciation and amortization
(4,934) (7,880) (7,577)
Exploration expense .................... (223) (272) (1,713)
-------- -------- --------
(745) 1,096 708
Income tax (provision) benefit ......... 255 (373) (234)
-------- -------- --------
$ (490) $ 723 $ 474
======== ======== ========
F-80
<PAGE>
Oil and Gas Reserves (Unaudited)
The following estimates of proved oil and gas reserve quantities
have been calculated pursuant to the Securities and Exchange Commission's
("SEC") definition of proved reserves. Estimated proved oil and gas reserve
quantities at December 31, 1994, 1995 and 1996 were prepared by Netherland,
Sewell & Associates, Inc., independent petroleum engineers.
Proved oil and gas reserves are the estimated quantities of crude
oil, natural gas and natural gas liquids that geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved
developed reserves are reserves that can be expected to be recovered through
existing wells with existing equipment and operating methods.
The following schedule summarizes the changes in Vessels' total
proved oil and gas reserves for the years ended December 31, 1994, 1995 and
1996:
Natural Crude
Gas Oil
(Mmcf) (Mbbls)
--------- --------
Total Proved Reserves:
Estimated quantity, December 31, 1993 ... 45,206 2,418
Revisions of previous estimates ......... 14,674 1,818
Purchases of reserves in place .......... 8,398 708
Production .............................. (4,162) (203)
--------- ---------
Estimated quantity, December 31, 1994 ... 64,116 4,741
Revisions of previous estimates ......... (2,199) (1,319)
Purchases of reserves in place .......... 609 73
Sales of reserves in place ............. (1,475) (91)
Production .............................. (5,664) (279)
Extensions and discoveries .............. 2,394 243
--------- --------
Estimated quantity, December 31, 1995 ... 57,781 3,368
Revisions of previous estimates ......... 15,370 1,363
Purchases of reserves in place .......... 4,699 18
Sales of reserves in place .............. (302) (5)
Production .............................. (5,922) (299)
Extensions and discoveries .............. 24,828 338
--------- --------
Estimated quantity, December 31, 1996 ... 96,454 4,783
========= ========
Estimated quantity after D-J Basin Sale
(see Note 12), December 31, 1996 ...... 44,296 1,596
========= ========
Proved Developed Reserves:
December 31, 1995 ..................... 40,458 1,726
========= ========
December 31, 1996 ..................... 54,222 2,024
========= ========
Remaining Proved Developed Reserves
after D-J Basin Sale (see
Note 12), December 31, 1996 .......... 19,069 954
========= ========
F-81
<PAGE>
Standardized Measure
Estimated discounted future net cash flows and changes therein
were determined in accordance with SFAS 69. Future cash inflows are computed by
applying year-end prices, unless a different price is otherwise specified by a
contractual agreement, to Vessels' estimated quantities of proved reserves.
Future cash outflows related to development and production costs are computed by
estimating the expenditures to be incurred in developing and producing the
proved oil and gas reserves at the end of the year, based on year-end costs and
assuming continuation of existing economic conditions. A discount rate of 10
percent per year is used to reflect the timing of the future net cash flows.
Future income taxes were determined by applying the statutory income tax rate to
the difference between the future pre-tax cash flows related to proved reserves
and deductions for the tax basis in proved properties, including the utilization
of net operating loss, depletion and other carryforwards.
Reserve estimates are subject to numerous uncertainties inherent
in estimating quantities of proved reserves and in the projection of future
rates of production and the timing of development expenditures. The accuracy of
such estimates is a function of the quality of available data and of engineering
and geological interpretation and judgment. Results of subsequent drilling,
testing and production may cause either upward or downward revisions of previous
estimates. Further, the volumes considered to be commercially recoverable
fluctuate with changes in prices and operating costs. Because of the
aforementioned factors, reserve estimates are generally less precise than other
financial statement disclosures.
Discounted future cash flow estimates are not intended to
represent an estimate of the fair market value of Vessels' proved oil and gas
reserves. An estimate of fair market value would take into account, among other
things, the recovery of reserves in excess of proved reserves, 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.
The following table presents Vessels' standardized measure of
discounted future net cash flows related to Vessels' proved oil and gas reserves
as of December 31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1994 1995 1996
------------------ ------------------ -------------------
(in thousands)
<S> <C> <C> <C>
Future cash inflows ...................... $ 189,755 $ 170,147 $ 419,075
Future production costs .................. (55,011) (43,966) (100,770)
Future development costs ................. (44,025) (26,429) (61,450)
Future income tax expense ................ (19,972) (22,222) (73,663)
------------------ ------------------ -------------------
Future net cash flows .................... 70,747 77,530 183,192
10% annual discount for estimated timing of
cash flows ............................. (37,528) (34,247) (84,645)
------------------ ------------------ -------------------
Standardized measure of discounted future
net cash flows ......................... $ 33,219 $ 43,283 $ 98,547
================== ================== ===================
</TABLE>
F-82
<PAGE>
The following are principal sources of changes in the standardized
measure of discounted future net cash flows for oil and gas properties for the
years ended December 31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1994 1995 1996
------------------ ------------------- -------------------
(in thousands)
<S> <C> <C> <C>
Standardized measure, beginning of year ......... $ 22,251 $ 33,219 $ 43,283
Sales and transfers of oil and gas produced,
net of production costs ........................ (4,411) (9,248) (9,998)
Net changes in prices and production costs ....... 4,248 5,606 45,863
Extensions and discoveries, net of future production
and development costs .......................... - 3,845 17,720
Purchases of reserves in place ................... 10,554 824 1,321
Sales of reserves in place ....................... - (959) (180)
Changes in estimated future development
costs .......................................... (29,948) 7,398 (24,245)
Development costs incurred during the year which
reduced future development costs ............... 11,075 9,644 4,133
Revisions of previous quantity estimates ......... 19,463 (7,765) 35,751
Accretion of discount ............................ 3,161 4,247 5,306
Net change in income taxes ....................... 398 (527) (25,881)
Changes in rates of production and other ......... (3,572) (3,001) 5,474
------------------ ------------------- -------------------
Standardized measures, end of year ............... $ 33,219 $ 43,283 $ 98,547
================== =================== ===================
</TABLE>
F-83
<PAGE>
AGREEMENT AND PLAN OF MERGER
Dated as of November 12, 1997
By and Among
ABRAXAS PETROLEUM CORPORATION
VEI ACQUISITION CORP.
and
VESSELS ENERGY, INC.
ANNEX 1
<PAGE>
ANNEX I
TABLE OF CONTENTS
Page
RECITALS............................................................ 1
ARTICLE I. THE MERGER............................... 1
Section 1.01 The Merger............................... 1
Section 1.02 Filing of Certificate of Merger and
Related Certificates..................... 2
Section 1.03 Effect of Merger......................... 2
Section 1.04 Merger Consideration..................... 3
Section 1.05 Payment for Shares in the Merger......... 9
Section 1.06 Fractional Shares........................ 10
Section 1.07 Dissenting Shares........................ 10
Section 1.08 Transfer of Shares After the
Effective Time........................... 11
Section 1.09 Escrow Agreements........................ 11
Section 1.10 Voting Agreements........................ 11
Section 1.11 Registration Rights Agreements........... 11
Section 1.12 Board Letter............................. 11
Section 1.13 Calculations............................. 11
ARTICLE II. STOCKHOLDER APPROVAL..................... 12
Section 2.01 Stockholder Meetings..................... 12
Section 2.02 Proxy Statement-Prospectus;
Registration Statement................... 13
Section 2.03 Subsequent Event......................... 14
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF
THE COMPANY.............................. 15
Section 3.01 Existence and Good Standing ............. 15
Section 3.02 Capital Stock............................ 15
Section 3.03 Corporate Authority...................... 15
Section 3.04 Subsidiaries and Investments............. 16
Section 3.05 Financial Statements and No
Material Changes......................... 16
Section 3.06 Books and Records........................ 17
Section 3.07 Title to Properties; Encumbrances........ 17
Section 3.08 Real Property............................ 18
Section 3.09 Oil and Gas Reserve Report............... 18
Section 3.10 Title to Interests....................... 18
Section 3.11 Compliance with Leases and Laws.......... 19
Section 3.12 Sale of Production....................... 22
Section 3.13 Status of Wells.......................... 22
Section 3.14 Tax Partnerships......................... 23
Section 3.15 Equipment................................ 23
Section 3.16 Material Contracts....................... 23
Section 3.17 Restrictive Documents.................... 24
Section 3.18 Litigation............................... 24
Section 3.19 Taxes.................................... 25
i
ANNEX I
<PAGE>
Section 3.20 Insurance................................ 25
Section 3.21 Intellectual Properties.................. 25
Section 3.22 Compliance With Laws..................... 26
Section 3.23 Accounts Receivable...................... 26
Section 3.24 Employment Relations..................... 26
Section 3.25 Employee Benefit Programs................ 27
Section 3.26 Interests in Clients, Suppliers, Etc..... 30
Section 3.27 Bank Accounts and Powers of Attorney..... 30
Section 3.28 No Changes Prior to Closing Date......... 30
Section 3.29 Broker's or Finder's Fees................ 31
Section 3.30 Copies of Documents...................... 31
Section 3.31 Environmental Matters.................... 31
Section 3.32 No False or Misleading Statements........ 33
Section 3.33 Disclosure............................... 34
Section 3.34 Disclaimer of Representations and
Warranties of the Company................ 34
ARTICLE IV. REPRESENTATIONS OF ABRAXAS AND SUB.................. 34
Section 4.01 Existence and Good Standing of Abraxas... 34
Section 4.02 Existence and Good Standing of Sub....... 35
Section 4.03 Existence and Good Standing of
Canadian Abraxas......................... 35
Section 4.04 Corporate Authority...................... 35
Section 4.05 Broker's or Finder's Fees................ 36
Section 4.06 Capital Stock............................ 36
Section 4.07 Books and Records........................ 36
Section 4.08 Litigation............................... 36
Section 4.09 Taxes.................................... 37
Section 4.10 Copies of Documents...................... 37
Section 4.11 Reports with the Securities and
Exchange Commission...................... 37
Section 4.12 Restrictive Documents.................... 38
Section 4.13 Title to Properties; Encumbrances........ 38
Section 4.14 Oil and Gas Reserve Report............... 39
Section 4.15 Title to Interests....................... 39
Section 4.16 No False or Misleading Statements........ 40
Section 4.17 Disclosure............................... 40
Section 4.18 Disclaimer of Representations and
Warranties of Abraxas and Sub............ 40
ARTICLE V. COVENANTS........................................... 41
Section 5.01 Conduct of Business of the Company
and Abraxas.............................. 41
Section 5.02 Exclusive Dealing........................ 42
Section 5.03 Review of the Company and Abraxas........ 42
Section 5.04 Regulatory and Other Filings
and Approvals............................ 43
Section 5.05 Best Efforts............................. 43
Section 5.06 Affiliate Agreements..................... 43
Section 5.07 Public Announcements..................... 44
Section 5.08 Tax-Free Reorganization.................. 44
Section 5.09 Nasdaq Quotation......................... 44
Section 5.10 Issuance of Securities................... 44
Section 5.11 Benefit Plans and Related Matters........ 44
ii
ANNEX I
<PAGE>
Section 5.12 Indemnification; Directors' and Officers'
Insurance................................ 45
Section 5.13 New Execution Officers and Directors..... 47
ARTICLE VI. CONDITIONS TO ABRAXAS' OBLIGATIONS.................. 47
Section 6.01 Opinion of Company Counsel............... 48
Section 6.02 Good Standing and Tax Certificates....... 48
Section 6.03 No Material Adverse Change............... 48
Section 6.04 Truth of Representations and
Warranties............................... 48
Section 6.05 Performance of Agreements................ 49
Section 6.06 No Litigation Threatened................. 49
Section 6.07 Governmental Approvals................... 49
Section 6.08 Intra-Company Debt....................... 49
Section 6.09 Proceedings.............................. 49
Section 6.10 Escrow Agreements........................ 49
Section 6.11 Stockholder Approval..................... 49
Section 6.12 Effectiveness of S-4 Registration
Statement................................ 49
Section 6.13 Affiliate Agreements..................... 50
Section 6.14 Dissenters' Rights....................... 50
Section 6.15 Options and Warrants....................... 50
Section 6.16 Vessels Stockholder Agreement............ 50
Section 6.17 Bank of Montreal......................... 50
ARTICLE VII. CONDITIONS TO COMPANY'S OBLIGATIONS................. 50
Section 7.01 Opinion of Purchaser's Counsel........... 50
Section 7.02 Truth of Representations
and Warranties........................... 50
Section 7.03 Governmental Approvals................... 51
Section 7.04 Escrow Agreements........................ 51
Section 7.05 Registration Rights Agreements........... 51
Section 7.06 Letter Agreement......................... 51
Section 7.07 No Material Adverse Change............... 51
Section 7.08 No Litigation Threatened................. 51
Section 7.09 Good Standing and Tax Certificates....... 51
Section 7.10 Performance of Agreements................ 52
Section 7.11 Proceedings.............................. 52
Section 7.12 Effectiveness of S-4 Registration
Statement................................ 52
Section 7.13 Stockholder Approval..................... 52
Section 7.14 Opinion of Company's Counsel............. 52
Section 7.15 Director Approval........................ 53
Section 7.16 Nasdaq Listing........................... 53
Section 7.17 Waivers and Consents...................... 53
ARTICLE VIII. SURVIVAL OF REPRESENTATIONS; RECOVERY............... 53
Section 8.01 Survival of Representations.............. 53
Section 8.02 Claims................................... 53
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<PAGE>
ARTICLE IX. CLOSING 54
Section 9.01 Deliveries at the Closing................ 54
Section 9.02 Time and Place........................... 54
ARTICLE X. MISCELLANEOUS....................................... 54
Section 10.01 Knowledge................................ 54
Section 10.02 Expenses................................. 54
Section 10.03 Governing Law............................ 54
Section 10.04 "Person" Defined......................... 54
Section 10.05 Captions................................. 55
Section 10.06 Publicity................................ 55
Section 10.07 Notices.................................. 55
Section 10.08 Parties in Interest...................... 56
Section 10.09 Counterparts............................. 56
Section 10.10 Entire Agreement......................... 56
Section 10.11 Amendments............................... 56
Section 10.12 Severability............................. 56
Section 10.13 Third Party Beneficiaries................ 56
Section 10.14 Termination of Agreement................. 57
Section 10.15 Procedure for Termination................ 57
Section 10.16 Fees..................................... 58
Section 10.17 Schedules................................ 59
Section 10.18 Conspicuous Disclaimers.................. 59
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ANNEX I
<PAGE>
EXHIBITS
EXHIBIT A Certificate of Merger
EXHIBIT B Certificate of Incorporation
EXHIBIT C Bylaws
EXHIBIT D Escrow Agreements
EXHIBIT E Voting Agreements
EXHIBIT F Registration Rights Agreements
EXHIBIT G Letter Agreement
EXHIBIT H Opinion of King & Spalding
EXHIBIT I Opinion of Cox & Smith Incorporated
SCHEDULES
Schedule 1.04Book and Contingent Liabilities; Hedges;
Employee Severance Costs; Tangible Assets
Schedule 1.04(e)Development Plan
Schedule 3.02Capital Stock
Schedule 3.04Subsidiaries and Investments
Schedule 3.06Books and Records
Schedule 3.07Title to Properties; Encumbrances
Schedule 3.08Real Property
Schedule 3.10Title to Interests
Schedule 3.11Compliance with Leases and Laws
Schedule 3.12Sale of Production
Schedule 3.13Status of Wells
Schedule 3.16Material Contracts
Schedule 3.17Restrictive Documents
Schedule 3.18Litigation
Schedule 3.20Insurance
Schedule 3.21Intellectual Property
Schedule 3.23Accounts Receivable
Schedule 3.24Employment Relations
Schedule 3.25List of Plans
Schedule 3.26Interests in Clients, Suppliers, Etc.
Schedule 3.27Bank Accounts and Powers of Attorney
Schedule 3.28No Changes Prior to Closing
Schedule 3.29Broker's or Finder's Fees
Schedule 3.31Environmental Matters
Schedule 4.06Capital Stock
Schedule 4.07Books and Records
Schedule 4.08Litigation
Schedule 4.12Restrictive Documents
Schedule 4.13Title to Properties; Encumbrances
Schedule 4.15Title to Interests
Schedule 5.10Issuance of Securities
v
ANNEX I
<PAGE>
ANNEX I
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER ("Agreement") dated as of November
12, 1997 by and among Abraxas Petroleum Corporation, a Nevada corporation
("Abraxas" or "Purchaser"), VEI Acquisition Corp., a Delaware corporation
("Sub"), and Vessels Energy, Inc., a Delaware corporation ("Vessels" or the
"Company").
W I T N E S S E T H:
WHEREAS, (i) Sub is a corporation organized and existing under the laws
of the State of Delaware and is a wholly-owned subsidiary of Abraxas, (ii)
Abraxas is a corporation organized and existing under the laws of the State of
Nevada, and (iii) the Company is a corporation organized and existing under the
laws of the State of Delaware;
WHEREAS, the Board of Directors of Abraxas, Sub and the Company deem it
advisable and in the best interests of their stockholders that the Company
become a subsidiary of Abraxas pursuant to the Merger (as defined in Section
1.01) hereinafter provided for, and desire to make certain representations,
warranties and agreements in connection with such Merger; and
WHEREAS, for federal income tax purposes, it is intended that the
Merger shall qualify as a tax-free reorganization within the meaning of the
Internal Revenue Code of 1986, as amended;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements, provisions and covenants contained in this Agreement, the parties
hereby agree as follows:
ARTICLE I
THE MERGER
Section 1.01 The Merger.
(a) Abraxas has caused Sub to execute and deliver, and the Company has
executed and delivered and agrees, subject to the terms and conditions of this
Agreement, to submit to its stockholders for adoption and approval as required
under the Delaware General Corporation Law (the "Delaware Statute"), this
Agreement, in accordance with Article II hereof, providing for the merger of Sub
with and into the Company (the "Merger") and the conversion of outstanding
shares of the Common Stock, par value $0.10 per share, of the Company (the
"Stock" or "Shares") as set forth herein. The Company shall be the surviving
corporation (the "Surviving Corporation") in the Merger and shall become a
wholly-owned subsidiary of Abraxas. From and after the Effective Time (as
defined in Section 1.02), the identity and separate existence of Sub shall
cease, and the Company shall succeed, without other transfer, to all the rights,
properties, assets, debts and liabilities of Sub.
ANNEX I
<PAGE>
(b) Abraxas shall reserve sufficient shares of the Common Stock, par
value $.01 per share, of Abraxas ("Abraxas Common Stock") prior to the Merger to
permit the delivery of shares of Abraxas Common Stock to the existing
stockholders of the Company following the Merger. Each of Abraxas and the
Company shall use its best efforts to cause the Merger to be consummated in
accordance with the terms of this Agreement. Subject to the terms and conditions
of this Agreement, Abraxas shall execute a formal written consent under Section
228 of the Delaware Statute, as the sole stockholder of Sub, adopting and
approving this Agreement and authorizing the execution, delivery and performance
thereof by Sub.
Section 1.02 Filing of Certificate of Merger and Related Certificates.
Immediately after all conditions to this Agreement have been satisfied or
waived, Vessels shall file a certificate of merger pertaining to the Merger in
substantially the form of Exhibit A hereto (the "Certificate of Merger"), or
such other documents necessary to effect the Merger in accordance with the
Delaware Statute, and the Merger shall become effective substantially
simultaneously in accordance with the terms of this Agreement (such time and
date are referred to herein as the "Effective Time").
Section 1.03 Effect of Merger. The parties agree to the following
provisions with respect to the Merger:
(a) Name of Surviving Corporation. The name of the Company, as the
surviving corporation in the Merger, from and after the Effective Time shall be
"Vessels Energy, Inc.", until changed or amended in accordance with applicable
law; and
(b) Charter Documents. The Certificate of Incorporation and By-laws of
Vessels attached hereto as Exhibits B and C, respectively, as in effect
immediately prior to the Effective Time, shall be the Certificate of
Incorporation and By-laws of the Company, as the surviving corporation in the
Merger, until changed or amended in accordance with the provisions of applicable
law.
(c) Officers and Directors of Surviving Corporation. The officers and
directors of Sub immediately prior to the Effective Time will be the officers
and directors of the Surviving Corporation.
Section 1.04 Merger Consideration. The manner of converting or
cancelling shares of capital stock of the Company and Sub in the Merger shall be
as follows:
(a) At the Effective Time, subject to Sections 1.06 and 1.07, each
Share issued and outstanding immediately prior to the Effective Time shall, by
virtue of the Merger and without any action on the part of the holder thereof,
be converted into (x) that number of validly issued, fully paid and
nonassessable shares of Abraxas Common Stock equal to (i) the Purchase Price (as
defined below) plus the Projected Provisional Payment (as defined below) divided
by (ii) the number of Shares issued and outstanding at the Effective Time and
(y) the right to receive Additional Provisional Payment Shares (as hereinafter
2
ANNEX I
<PAGE>
defined), if any, and the Contingent Cash Payment (as defined in the Escrow
Agreement (as hereinafter defined)), if any, each such right payable in
accordance with the terms of Section 1.04 (b) and the Escrow Agreement,
respectively. Of the shares of Abraxas Common Stock issued pursuant to the
Projected Provisional Payment, 25% shall be immediately issued and 75% shall be
deposited into an escrow account established at American Stock Transfer & Trust
Company (the "Provisional Payment Escrow") pursuant to the Provisional Payment
Escrow Agreement (as defined below). The shares of Abraxas Common Stock into
which each Share shall be converted at the Effective Time and on the Provisional
Payment Date (as hereinafter defined), the Contingent Cash Payment and
consideration in lieu of fractional shares of Abraxas Common Stock as provided
by Section 1.06 shall hereinafter be referred to as the "Merger Consideration."
In the event that the PV-10 (as defined below) set forth in the Adjusted Reserve
Report (as defined below) is greater than 110% or less than 90% of the PV-10 set
forth in the Reserve Report (as defined below), then Abraxas and Vessels shall
promptly jointly engage Ryder Scott Petroleum Engineers, which shall
independently calculate the PV-10 (the "Independent Calculation"). The results
of the Independent Calculation shall be averaged with the closer of the PV-10
calculated by Netherland, Sewall & Associates ("NSA") in the Reserve Report and
by DeGolyer & MacNaughton ("D&M") in the Adjusted Reserve Report and the
resulting average PV-10 (the "Average PV-10") shall be utilized in the
calculation of the Purchase Price.
(b) Subject to Section 1.06, on April 30, 1999 (the "Provisional
Payment Date"), each Share issued and outstanding immediately prior to the
Effective Time shall, by virtue of the Merger and without any action on the part
of the holder thereof, be entitled to receive pursuant to the Provisional
Payment Escrow Agreement a number of validly issued, fully paid and
nonassessable shares of Abraxas Common Stock equal to (x) the Provisional
Payment (as defined below) divided by (y) the number of Shares issued and
outstanding at the Effective Time minus (z) the number of shares of Abraxas
Common Stock issued at the Effective Time with respect to each such Share in
consideration of the Projected Provisional Payment. The shares of Abraxas Common
Stock to be issued pursuant to the Provisional Payment shall be issued and
released to the Vessels Stockholders from the shares deposited into the
Provisional Payment Escrow in consideration of the Projected Provisional Payment
and, if such number of shares is insufficient, from newly-issued, fully paid and
nonassessable shares of Abraxas Common Stock ("Additional Provisional Payment
Shares"). If the Projected Provisional Payment exceeds the Provisional Payment,
then shares of Abraxas Common Stock deposited into the Provisional Payment
Escrow shall be returned to Abraxas to the extent of the difference between the
Projected Provisional Payment and the Provisional Payment. For purposes of
calculating the Additional Provisional Payment Shares and the extent, if any, to
which the Projected Provisional Payment exceeds the Provisional Payment, the
Average Price shall be subject to adjustment if at any time between the
Effective Time and the Provisional Payment Date, (i) Abraxas shall subdivide (by
reclassification, by the issuance of a common stock dividend or otherwise) the
outstanding shares of Abraxas Common Stock, in which case the Average Price
shall be appropriately reduced or (ii) Abraxas shall combine (by
reclassification or otherwise) the outstanding number of shares of Abraxas
3
ANNEX I
<PAGE>
Common Stock into a lesser number, in which case the Average Price shall be
appropriately increased.
(c) At the Effective Time, all Shares to be converted into Abraxas
Common Stock pursuant to paragraph (a) of this Section 1.04 shall, by virtue of
the Merger and without any action on the part of the holders thereof, cease to
be outstanding, be cancelled and retired and cease to exist, and each holder of
a certificate representing any such Shares ("Vessels Stock Certificates") shall
thereafter cease to have any rights with respect to such Shares, except the
right to receive for each of the Shares, upon the surrender of such Vessels
Stock Certificate in accordance with Section 1.05, the Merger Consideration and
the amount of dividends or other distributions with a record date after the
Effective Time.
(d) At the Effective Time, each share of Common Stock, par value $.01
per share, of Sub issued and outstanding immediately prior to the Effective Time
shall automatically become an equal number of Shares.
(e) For purposes of this Agreement, the following capitalized terms
shall have the meanings set forth below:
(i) Adjusted Reserve Report. The reserve report effective as of
August 31, 1997 prepared by D&M and performed on Vessels using
the same principles used in preparing the Reserve Report.
(ii) Average Price. $18.00 per share.
(iii) Defensible Title. Defensible Title shall mean title which is good
and defensible under oil and gas industry standards, being free
of major defects and encumbrances (other than Permitted
Encumbrances), the enforcement or assertion of which are not
barred by limitations and reasonably free of title defects,
which, in the aggregate would result in a material diminution in
the value which a willing buyer, experienced in oil and gas
industry land title practices, would otherwise pay for
acquisition of such property.
(iv) Development Plan. The plan attached hereto as Schedule
1.04(e)(iv).
(v) EBITDX: Earnings before interest, taxes, depreciation, depletion
and amortization.
(vi) Material Adverse Effect. A material adverse effect on the
business, results of operation or financial condition of Vessels
and the Subsidiaries (as hereinafter defined) or Abraxas and its
subsidiaries, as the case may be, taken as a whole, but not
including effects that are applicable to Vessels and the
Subsidiaries or Abraxas and its subsidiaries, as the case may be,
resulting from market conditions generally in the oil and gas
industry.
4
ANNEX I
<PAGE>
(vii) NARCO Agreements. That certain Purchase and Sale Agreement dated
February 28, 1997 (the "NARCO Upstream Agreement") between
Vessels Oil & Gas Company and North American Resources Company
and that certain Purchase and Sale Agreement dated February 28,
1997 (the "NARCO Downstream Agreement") by and between Vessels
Hydrocarbons, Inc. and North American Resources Company.
(viii)Non-PDP/PDNP EBITDX. The EBITDX (or projected EBITDX for the
wells deemed to be productive as Total Undrilled Locations at a
rate equal to the average of the first month's EBITDX for the
wells in the Proved Undeveloped Reserves in the Reserve Report
(or as determined by the average as described in the Projected
Provisional Payment)) plus any allocated fixed facility operating
expenses utilized in determining EBITDX and plus any allocated
general, selling and administration expenses utilized in
determining EBITDX for the period from February 1, 1998 to
January 31, 1999, produced or deemed to be produced from the
Vessels' non-PDP/PDNP properties which are drilled in fulfillment
of the Development Plan or constituted Total Undrilled Locations
in the Development Plan (each as defined in the Development
Plan).
(ix) Permitted Encumbrances. "Permitted Encumbrances" shall mean (i)
royalties, overriding royalties, reversionary interests and
similar burdens if the cumulative effect of such burdens does not
and will not reduce the net revenue interest with respect to a
well or property below the net revenue interest set forth in
connection with the description of such well or increase the
working interest with respect to such well or property above the
working interest set forth in connection with the description of
such well; (ii) the terms and conditions of all leases,
servitudes, production sales contracts, division orders,
contracts for sale, purchase, exchange, refining or processing of
hydrocarbons, unitization and pooling designations, declarations,
orders and agreements, operating agreements, agreements of
development, area of mutual interest agreements, farmout
agreements, gas balancing or deferred production agreements,
processing agreements, plant agreements, pipeline, gathering and
transportation agreements, injection, repressuring and recycling
agreements, salt water or other disposal agreements, seismic or
geophysical permits or agreements, and other agreements
including, without limitation, the terms and conditions of any
and all contracts and agreements covering production sales
contracts and all other material contracts, to the extent that
such contracts and agreements do not and will not reduce the net
revenue interest of any well or property included in the
Interests (as hereinafter defined) below the net revenue interest
set forth in connection with the description of such well or
increase the working interest with respect to such well or
property above the working interest set forth in connection with
5
ANNEX I
<PAGE>
the description of such well without a proportionate increase in
the net revenue interest with respect to such well or property;
(iii) easements, rights of way, servitudes, permits, surface
leases and other rights with respect to surface obligations,
pipelines, grazing, canals, ditches, reservoirs, or the like,
conditions, covenants or other restrictions, and easements of
streets, alleys, highways, pipelines, telephone lines, power
lines, railways and other easements and rights of way on, over or
in respect of any of the Interests, in the case of Vessels, or
the Abraxas Interests, in the case of Abraxas, so long as they
are not such that would have a Material Adverse Effect; (iv) any
preferential purchase rights, required third party consents to
assignment and similar agreements and obligations applicable to
the transactions contemplated hereby with respect to which prior
to the Effective Time (A) waivers or consents have been obtained
from the appropriate person, or (B) the applicable period of time
for asserting such rights has expired without any exercise of
such rights; (v) liens for taxes or assessments not yet
delinquent or being protested in good faith by appropriate action
brought in the normal course; (vi) materialmen's, mechanic's,
repairman's, employee's, contractor's, operator's, and other
similar liens or charges arising in the ordinary course of
business (A) if they have not been filed pursuant to law, (B) if
filed, they have not yet become due and payable or payment is
being withheld as provided by law or (C) if their validity is
being contested in good faith in the ordinary course of business
by appropriate action; (vii) approvals that are ministerial in
nature and are customarily obtained from governmental authorities
after the Effective Time in connection with transactions of the
same nature as are contemplated hereby; (viii) conventional
rights of reassignment arising in respect of abandonment,
cessation of production or expiration of leases; (ix) all rights
reserved to or vested in any governmental authority to control or
regulate any of the Interests, in the case of Vessels, or the
Abraxas Interests, in the case of Abraxas, in any manner, and all
applicable laws, rules and orders of governmental authorities;
and (x) any other liens, charges, encumbrances, contracts,
agreements, instruments, obligations, defects or irregularities
of any kind whatsoever that would not have a Material Adverse
Effect.
(x) PV-10. The present value discounted at 10% of the future net
revenue from the proved developed (proved developed producing
("PDP") and proved developed non-producing ("PDNP")) reserves of
Vessels as determined by the Reserve Report.
(xi) Projected Provisional Payment. The amount of the Provisional
Payment as determined at the Effective Time based upon the
Non-PDP/PDNP EBITDX set forth in the Reserve Report; provided,
however, that in the event that the Average PV-10 is utilized in
the calculation of the Purchase Price, then the average of the
Non-PDP/PDNP EBITDX of that set forth in the Independent
6
ANNEX I
<PAGE>
Calculation and the closer of that set forth in the Reserve
Report and the Adjusted Reserve Report shall be utilized in the
calculation of the Projected Provisional Payment.
(xii) Provisional Payment. The number of shares of Abraxas Common Stock
equal to a fraction, the numerator of which is the product of (x)
Non-PDP/PDNP EBITDX times (y) VEI Sharing Percentage times (z)
5.33 minus the amount payable by Abraxas on behalf of the Company
on the Provisional Payment Date to the firm identified on
Schedule 3.29 and the denominator of which is the Average Price.
(xiii)Purchase Price. The number of shares of Abraxas Common Stock
equal to a fraction, the numerator of which is the PV-10 or the
Average PV-10, as the case may be,
Plus the amount of Vessels' Working Capital at August 31, 1997;
Minus all long term liabilities (book and contingent liabilities
set forth on Schedule 1.04 (the "Liabilities")) at August 31,
1997 except the provision for prepaid production revenues and
excluding deferred taxes;
Adjusted for the present value (at a 10% discount rate) at August
31, 1997 of the hedges identified on Schedule 1.04 at the prices
utilized in the Reserve Report (the "Hedges Present Value");
Minus the actual cost incurred by Vessels, if any, pursuant to
clause (ii) of the first sentence of Section 1(e) of the Escrow
Agreement;
Plus the cash received by Vessels prior to the Effective Time
from the sale of the assets listed on Schedule 1.04(xiii);
Minus all employee severance costs as set forth on Schedule 1.04
actually paid to employees of Vessels;
Minus all third party expenses payable by Vessels pursuant to the
transactions contemplated by this Agreement as set forth on
Schedule 1.04;
Minus Vessels' actual costs (the "Drilling Costs") for drilling
and completing the Wells that are identified in the Reserve
Report as proved developed producing which had not been completed
on August 31, 1997 (the "Uncompleted Wells");
and the denominator of which is the Average Price.
7
ANNEX I
<PAGE>
(xiv) Reserve Report. The reserve report effective as of August 31,
1997, performed on Vessels and prepared by NSA which is in form
and substance satisfactory to Abraxas and D&M which includes,
among other things, the following: (a) up to date production
information on all wells, including new wells drilled in 1997,
(b) lease operating expenses derived from historic operating
expenses, reviewed by and agreed upon by Abraxas prior to
execution of this Agreement, (c) capital costs derived from
current industry cost structures, reviewed by and agreed upon by
Abraxas prior to execution of this Agreement, (d) all gathering,
processing, and transportation expenses, (e) current strip
pricing with appropriate differentials, and (f) proved
undeveloped reserves.
(xv) VEI Sharing Percentage. The VEI Sharing Percentage shall be 80%.
The Abraxas Sharing Percentage is 20%.
(xvi) Working Capital. Current assets minus current liabilities as
determined in accordance with generally accepted accounting
principles consistently applied but excluding (i) the book value
of any assets set forth on Schedule 1.04(xiii) which have not
been sold prior to the Effective Time and (ii) the provision for
prepaid production revenues.
Section 1.05 Payment for Shares in the Merger. The manner of making
payment for Shares in the Merger shall be as follows:
(a) At the Effective Time and on the Provisional Payment Date, subject
to Sections 1.08 and 1.09, Purchaser shall deposit with American Stock Transfer
& Trust Company (the "Exchange Agent"), for the benefit of the holders of
Shares, the aggregate Merger Consideration due on such dates (the certificates
representing shares of Abraxas Common Stock comprising such Merger Consideration
(the "Purchaser Certificates")).
(b) Subject to Sections 1.08 and 1.09, promptly after the Effective
Time and on the Provisional Payment Date, the Exchange Agent shall, pursuant to
irrevocable instructions, distribute to each holder of Shares, upon surrender to
the Exchange Agent of one or more Vessels Stock Certificates for cancellation,
the Merger Consideration for each Share represented thereby, in accordance with
the provisions of Section 1.04. If payment is to be made to a person other than
the person in whose name the Vessels Stock Certificate surrendered is
registered, it shall be a condition of payment that the Vessels Stock
Certificate so surrendered shall be properly endorsed, with signatures
guaranteed, or otherwise in proper form for transfer and that the person
requesting such payment shall pay any transfer or other taxes required by reason
of the payment to a person other than the registered holder of the Vessels Stock
Certificate surrendered, or such person shall establish to the satisfaction of
Purchaser that such tax has been paid or is not applicable. Notwithstanding the
foregoing, neither the Exchange Agent nor any party hereto shall be liable to a
holder of Shares for any cash, shares of Abraxas Common Stock or dividends
thereon delivered to a public official pursuant to applicable escheat law. Until
8
ANNEX I
<PAGE>
surrendered in accordance with the provisions of Section 1.05, each Vessels
Stock Certificate representing Shares shall represent, for all purposes, only
the right to receive the Merger Consideration.
(c) No dividends or other distributions that are declared after the
Effective Time on shares of Abraxas Common Stock and payable to the holders of
record after the Effective Time will be paid to persons entitled by reason of
the Merger to receive shares of Abraxas Common Stock until such persons
surrender their Vessels Stock Certificates. Upon such surrender, there shall be
paid to the person in whose name the shares of Abraxas Common Stock are issued
any dividends or other distributions having a record date after the Effective
Time and payable with respect to such shares of Abraxas Common Stock between the
Effective Time and the time of such surrender. After such surrender there shall
be paid to the person in whose name the shares of Abraxas Common Stock are
issued any dividends or other distributions on such shares of Abraxas Common
Stock which shall have a record date after the Effective Time and prior to such
surrender and a payment date after such surrender and such payment shall be made
on such payment date. In no event shall the persons entitled to receive such
dividends or other distributions be entitled to receive interest on such
dividends or other distributions. The Exchange Agent shall not be entitled to
vote or exercise any rights or ownership with respect to the shares of Abraxas
Common Stock held by it from time to time hereunder, except that it shall
receive and hold all dividends or other distributions paid or distributed with
respect to such shares of Abraxas Common Stock for the account of the persons
entitled thereto.
Section 1.06 Fractional Shares. No fractional shares of Abraxas Common
Stock shall be issued in the Merger. In lieu of any such fractional shares, each
holder of Shares who would otherwise have been entitled to a fraction of a share
of Abraxas Common Stock upon surrender of Vessels Stock Certificates for
exchange pursuant to this Article I will receive the next highest whole number
of a share of Abraxas Common Stock if the fraction is greater than or equal to
.50 and the next lowest whole number of a share of Abraxas Common Stock if the
fraction is less than .50.
Section 1.07 Dissenting Shares. Notwithstanding anything in this
Agreement to the contrary, in the event that appraisal rights are available in
connection with the Merger pursuant to Section 262 of the Delaware Statute,
Shares that are issued and outstanding immediately prior to the Effective Time
and that are held by stockholders of the Company who did not vote in favor of
the Merger and who comply with all of the relevant provisions of Section 262 of
the Delaware Statute (the "Appraisal Shares") shall not be converted into or be
exchangeable for the right to receive the Merger Consideration, unless and until
such holders shall have failed to perfect or shall have effectively withdrawn or
lost such right, and such holder's Shares shall thereupon be deemed to have been
converted into and to have become exchangeable for the right to receive, as of
the Effective Time, the Merger Consideration without any interest thereon. The
Company shall give Abraxas (i) prompt notice of any written demands for
appraisal of Shares received by the Company and (ii) the opportunity to direct
all negotiations and proceedings with respect to any such demands. The Company
shall not, without the prior written consent of Abraxas, voluntarily make any
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payment with respect to, or settle or offer to settle, any such demands.
Section 1.08 Transfer of Shares After the Effective Time. No transfers
of Shares shall be made on the stock transfer books of the Company after the
close of business on the day prior to the date of the Effective Time.
Section 1.09 Escrow Agreements. At or prior to the Effective Time,
Abraxas shall deposit into escrow certificates representing 472,222 shares of
Abraxas Common Stock, or 83,333 shares of Abraxas Common Stock in the event of
the Termination (as defined in the Escrow Agreement) of the Enron Contract (as
hereinafter defined) prior to the Effective Time (the "Escrow Shares"). The
Escrow Shares shall be held pursuant to the provisions of an escrow agreement
(the "Escrow Agreement") in substantially the form of Exhibit D-1 attached
hereto except as modified to delete the Enron Contract provisions in the event
of such Termination. The shares of Abraxas Common Stock deposited pursuant to
the Provisional Payment Escrow shall be held pursuant to the Provisional Payment
Escrow Agreement in substantially the form of Exhibit D-2 hereto (the
"Provisional Payment Escrow Agreement").
Section 1.10 Voting Agreements. Concurrently with the execution and
delivery of this Agreement and as a condition to Vessels' willingness to enter
into this Agreement, Robert L. G. Watson will enter into a Voting Agreement in
substantially the form of Exhibit E-1 attached hereto (the "Watson Voting
Agreement") and the executive officers and directors of Abraxas will enter into
a Voting Agreement in substantially the form of Exhibit E-2 attached hereto
(together with the Watson Voting Agreement, the "Voting Agreements").
Section 1.11 Registration Rights Agreements. At the Closing, Abraxas
and the stockholders of Vessels named therein shall execute and deliver a
Registration Rights Agreements in substantially the forms of Exhibit F-1 and F-2
attached hereto (the "Registration Rights Agreements").
Section 1.12 Board Letter. At the Closing, Abraxas, Robert F. Semmens
and VOG Holdings, LLC shall execute and deliver the Letter Agreement in
substantially the form of Exhibit G attached hereto (the "Letter Agreement").
Section 1.13 Calculations. (a) Simultaneously with the execution and
delivery of this Agreement, the Company shall deliver calculations of Working
Capital at August 31, 1997 and Abraxas and Sub, at their expense, shall conduct
such investigations as they deem necessary to verify the accuracy of such
calculations (collectively, the "Working Capital Calculation"). No later than
December 1, 1997, Abraxas and Sub shall furnish a statement setting forth any
adjustments to the Working Capital Calculation. In the event that Abraxas and
Sub, on the one hand, and Vessels, on the other, do not agree on the amount of
the Working Capital Calculation at August 31, 1997, within 15 days of delivery
of such statement, Abraxas and Vessels shall jointly engage KPMG Peat Marwick,
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Denver, Colorado (the "Independent Accountant"), to review the Working Capital
Calculation. The determination of the Working Capital Calculation by the
Independent Accountant, which shall be completed within 15 days of such
engagement, shall be utilized in the determination of Working Capital for
purposes of calculating the Purchase Price. Simultaneously with the execution
and delivery of this Agreement, Vessels shall prepare and deliver a calculation
of the Drilling Costs and Abraxas and Sub, at their expense, shall conduct
within 15 days such investigations as they deem necessary to verify the accuracy
of the calculation of the Drilling Costs. In the event that Abraxas and Sub, on
the one hand, and Vessels, on the other, do not agree on the amount of any of
the Drilling Costs at August 31, 1997, within 15 days of delivery of the
calculation by Vessels, Abraxas and Vessels shall jointly engage the Independent
Accountant to review the Drilling Costs which are in dispute. The determination
of the Drilling Costs by the Independent Accountant shall be utilized in the
determination of the Drilling Costs for purposes of calculating the Purchase
Price.
(b) At least 30 days prior to the Provisional Payment Date, Abraxas
shall prepare and deliver a calculation of Non-PDP/PDNP EBITDX (the "PP
Calculation") to the Representative (as defined in the Escrow Agreement), on
behalf of the Vessels Stockholders, and the Representative at its expense, shall
conduct such investigations as it deems necessary to verify the accuracy of the
PP Calculation. No later than 15 days after receipt of the PP Calculation, the
Representative shall furnish a statement setting forth any adjustments to the PP
Calculation. In the event that Abraxas and the Representative do not agree on
the amount of the PP Calculation, no later than April 20, 1999, Abraxas and the
Representative shall jointly engage the Independent Accountant to review the
calculation, which shall be completed within 10 days of such engagement. The
determination of the Independent Accountant of the PP Calculation shall be
binding. The Vessels Stockholders' share of the costs and expenses of the
Independent Accountant shall be deducted from the Provisional Payment pro rata.
ARTICLE II
STOCKHOLDER APPROVAL
Section 2.01 Stockholder Meetings. This Agreement shall be submitted
for adoption and approval to the stockholders of the Company and, if required by
law or the rules and regulations of the Nasdaq National Market (without reliance
on the 19.9% alternative referenced in the letter from the Nasdaq National
Market to counsel to Abraxas dated November 4, 1997 (the "19.9% Alternative")),
the stockholders of Abraxas, at meetings to be duly held for that purpose by the
Company (the "Vessels Meeting") and Abraxas (the "Abraxas Meeting"). Abraxas and
the Company shall coordinate and cooperate with respect to the timing of such
meetings and shall endeavor to hold such meetings on the same day and as soon as
practicable after the S-4 Registration Statement (as defined in Section 2.02) is
declared effective; provided, however, that in the event that the approval of
this Agreement by the stockholders of Abraxas is not required by law or the
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rules and regulations of the Nasdaq National Market (without reliance on the
19.9% Alternative), Vessels shall hold such meeting as promptly as practicable
after it has been determined that the approval of the stockholders of Abraxas is
not so required. Subject to the fiduciary duties of the directors of the Company
and Abraxas under applicable law, the Boards of Directors of the Company and of
Abraxas shall recommend that their respective stockholders approve this
Agreement and the transactions contemplated hereby and such recommendations
shall be contained in the Proxy Statement-Prospectus (as defined in Section
2.02), if any. The stockholder vote required for such approval, if any, shall be
no greater than that required by the applicable requirements of the Delaware
Statute and Title 7, Chapter 78 of the Nevada Revised Statutes (the "Nevada
Statute") and the applicable requirements of the Certificate of Incorporation of
the Company and the Articles of Incorporation of Abraxas as in effect on the
date hereof.
Section 2.02 Proxy Statement-Prospectus; Registration Statement. In
connection with any solicitations of approval of the principal terms of this
Agreement and the Merger by Abraxas' stockholders, if such approval is required
by law or the rules and regulations of the Nasdaq National Market (without
reliance on the 19.9% Alternative), Abraxas and the Company shall prepare, and
Abraxas shall mail to its stockholders, proxy solicitation materials, including
a proxy statement of Abraxas and appropriate related forms of proxies with
respect to the Abraxas Meeting. Such proxy statement, if any, shall also
constitute a prospectus of Abraxas with respect to the shares of Abraxas Common
Stock to be issued in the Merger (such proxy statement and prospectus are
hereinafter referred to as the "Proxy Statement-Prospectus") which, if such
approval of the stockholders of Abraxas is required by law or the rules and
regulations of the Nasdaq National Market (without reliance on the 19.9%
Alternative), will be filed by Abraxas with the Securities and Exchange
Commission (the "Commission") as part of a registration statement on Form S-4
(the "S-4 Registration Statement") for the purpose of registering the shares of
Abraxas Common Stock to be received in the Merger by the stockholders of Vessels
under the Securities Act of 1933, as amended (the "Securities Act")). Abraxas
shall notify the Company promptly of the receipt of any comments of the staff of
the Commission (the "Staff"), and of any request by the Staff for amendments or
supplements to the S-4 Registration Statement, the Proxy Statement-Prospectus or
for additional information and Abraxas and the Company shall use their best
efforts to promptly respond to and satisfy any comments of the Staff and any
request by the Staff for amendments or supplements. Abraxas and the Company
shall cooperate to promptly file the S-4 Registration Statement and shall use
their reasonable efforts to have the S-4 Registration Statement declared
effective by the Commission; provided, however, that Abraxas may withdraw the
S-4 Registration Statement prior to its being declared effective upon the
occurrence of any of the events described in Section 2.03. Abraxas and the
Company agree to correct promptly any such information provided by either of
them that shall have become false or misleading in any material respect and to
take all steps necessary to file with the Commission and have declared effective
or cleared by the Commission any amendment or supplement to the S-4 Registration
Statement and the Proxy Statement-Prospectus so as to correct the same and to
cause the Proxy Statement-Prospectus as so corrected to be disseminated to the
Company's stockholders and the stockholders of Abraxas to the extent required by
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applicable law. The S-4 Registration Statement and the Proxy
Statement-Prospectus shall comply as to form in all material respects with the
provisions of the Securities Act and other applicable law.
Section 2.03. Subsequent Event. If the Independent Calculation is
necessary hereunder and the resulting Merger Consideration would permit Abraxas
to consummate the transactions contemplated by this Agreement without approval
of the stockholders of Abraxas in compliance with the rules of the Nasdaq
National Market (without reliance on the 19.9% Alternative), the parties hereto
agree to waive the condition to Closing of the approval of this Agreement by the
stockholders of Abraxas and to withdraw the S-4 Registration Statement and to
waive compliance by Abraxas with Section 2.02 hereof. If Abraxas consummates an
offering of a sufficient number of shares of Abraxas Common Stock prior to the
Closing and prior to mailing of the Proxy Statement-Prospectus to the
stockholders of Abraxas that would permit Abraxas to consummate the transactions
in this Agreement without approval of the stockholders of Abraxas in compliance
with the rules of the Nasdaq National Market (without reliance on the 19.9%
Alternative), the parties hereto agree, at the request of either Abraxas or
Vessels, to waive the condition to Closing of the approval of this Agreement by
the stockholders of Abraxas and to withdraw the S-4 Registration Statement and
to waive compliance by Abraxas with Section 2.02 hereof. In the event that (i)
Abraxas consummates an offering of a sufficient number of shares of Abraxas
Common Stock prior to the Closing and after the mailing of the Proxy
Statement-Prospectus to the stockholders of Abraxas that would permit Abraxas to
consummate the transactions in this Agreement without approval of the
stockholders of Abraxas in compliance with the rules of the Nasdaq National
Market (without reliance on the 19.9% Alternative) or (ii) Vessels otherwise
confirms with an opinion of counsel reasonably satisfactory to Abraxas that
stockholders' approval is not required to consummate the transaction, the
parties hereto agree, at the request of Vessels, to waive the condition to
Closing of the approval of this Agreement by the stockholders of Abraxas and to
withdraw the S-4 Registration Statement and to waive compliance by Abraxas with
Section 2.02 hereof.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
The Company represents, warrants and agrees as follows:
Section 3.01 Existence and Good Standing. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware. The Company has the corporate power to own its properties and
to carry on its business as now being conducted. The Company is duly qualified
to do business and is in good standing in each jurisdiction in which its
ownership or leasing of properties or the conduct of its business requires such
qualification, except for jurisdictions in which the failure to be so qualified
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or to be in good standing would not, individually or in the aggregate, have a
Material Adverse Effect.
Section 3.02 Capital Stock. The Company has an authorized
capitalization consisting of 500,000 shares of common stock, par value $.10 per
share, of which 34,136.24 shares are issued and outstanding and no shares are
held in the Company's treasury and 50,000 shares of preferred stock, par value
$.10 per share, of which none are outstanding. All such outstanding shares have
been duly authorized and validly issued and are fully paid and nonassessable.
Except as set forth in Schedule 3.02, there are no outstanding options,
warrants, rights, calls, commitments, conversion rights, rights of exchange,
plans or other agreements of any character providing for the purchase, issuance
or sale of any shares of the Stock, other than as contemplated by this
Agreement. Each of the stockholders of Vessels listed on Schedule 3.02 (each a
"Vessels Stockholder" and collectively, the "Vessels Stockholders") is the
beneficial and record holder of the number of Shares set forth opposite his
name, free and clear, to the best of the Company's knowledge after due and
diligent inquiry, of all liens, claims, encumbrances, security interests,
pledges or other adverse claims of any kind or character. Except as set forth on
Schedule 3.02, none of the Vessels Stockholders is a party to any voting
agreement, voting trust or similar agreement or arrangement relating to the
Shares.
Section 3.03 Corporate Authority. The Company has the requisite
corporate power and authority to enter into this Agreement and the other
agreements contemplated by this Agreement (the "Related Agreements") to which
the Company is a party. The execution and delivery of this Agreement and the
Related Agreements to which the Company is a party and the consummation of the
transactions contemplated hereby and thereby have been duly and validly
authorized by the Board of Directors of the Company and, except for the approval
of the Vessels Stockholders, no other corporate proceedings on the part of the
Company are necessary to authorize this Agreement, the Related Agreements and
the transactions contemplated hereby and thereby. This Agreement is and the
Related Agreements to which the Company is a party will be, duly and validly
executed and delivered by the Company and, assuming the due authorization,
execution and delivery hereof and thereof by the other parties hereto and
thereto, this Agreement constitutes, and the Related Agreements to which the
Company is a party will constitute, valid and binding agreements of the Company
enforceable against the Company in accordance with their respective terms,
subject to approval of the Vessels Stockholders, and subject to applicable
bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium or other
similar laws affecting the rights of creditors generally (the "Enforceability
Exception").
Section 3.04 Subsidiaries and Investments. Schedule 3.04 hereto sets
forth a list of each subsidiary of the Company and its state of incorporation
(the "Subsidiaries"). Each of the Subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of the state of its
incorporation and has the corporate power and authority to own its properties
and to carry on its business as now being conducted. Each of the Subsidiaries is
duly qualified to do business and is in good standing in each jurisdiction in
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which its ownership or leasing of properties or the conduct of its business
requires such qualification, except where the failure to be so qualified or in
good standing would not, individually or in the aggregate, have a Material
Adverse Effect. Except as set forth on Schedule 3.04, the Company does not own,
directly or indirectly, any capital stock or other equity or ownership or
proprietary interest in any other corporation, partnership, association, trust,
joint venture or other entity.
Section 3.05 Financial Statements and No Material Changes. The Company
has heretofore furnished Abraxas with the audited consolidated balance sheets of
the Company at December 31, 1994, December 31, 1995 and December 31, 1996 and
the related consolidated statements of income, stockholders' equity and cash
flow for the years then ended, all certified by Price Waterhouse LLP or Arthur
Andersen & Company whose unqualified reports thereon are included therewith and
the unaudited consolidated balance sheet of the Company at August 31, 1997 and
the related unaudited consolidated statements of income, stockholders' equity
and cash flow for the eight-month period then ended (cumulatively, the
"Financial Statements"). The consolidated balance sheet of the Company as at
December 31, 1996 is hereinafter referred to as the "Balance Sheet". Except as
set forth on Schedule 3.05, the Financial Statements, including the footnotes
thereto, have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods indicated. The balance
sheets included in the Financial Statements fairly present the financial
condition of the Company and the Subsidiaries at the respective dates thereof
and, except as indicated therein, reflect all claims against and all debts and
liabilities of the Company and the Subsidiaries, fixed or contingent, as at the
respective dates thereof, and the related statements of income, stockholders'
equity and cash flow fairly present the results of the operations of the Company
and the Subsidiaries and the changes in their financial position for the periods
indicated. Except as set forth on Schedule 3.05 and except for the transactions
contemplated by the NARCO Agreements, since December 31, 1996 (the "Balance
Sheet Date"), there has been (a) no change in the assets or liabilities, or in
the business or condition, financial or otherwise, or in the results of
operations, of the Company and the Subsidiaries which has had a Material Adverse
Effect, other than changes in the oil and gas industry generally and in the
ordinary course of business consistent with past practice, and, other than the
transactions contemplated by this Agreement, to the Company's knowledge, no fact
or condition exists or is contemplated or threatened which might cause such a
change in the future. For purposes of this Agreement, a transaction or a series
of related transactions involving a sum of money less than $80,000 shall be
deemed to have occurred in the ordinary course of business.
Section 3.06 Books and Records. The minute books of the Company and the
Subsidiaries, as previously made available to Abraxas and its representatives,
contain accurate and complete summaries of all meetings of and corporate actions
or written consents by the stockholders and Board of Directors of the Company
and the Subsidiaries. Except as set forth in Schedule 3.06, the Company and the
Subsidiaries do not have any of their records, systems, controls, data or
information recorded, stored, maintained, operated or otherwise wholly or partly
dependent upon or held by any means (including any electronic, mechanical or
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photographic process, whether computerized or not and all means of access
thereto and therefrom) which are not under the exclusive ownership and direct
control of the Company and the Subsidiaries.
Section 3.07 Title to Other Properties; Encumbrances. Except (i) as set
forth in Schedule 3.07, (ii) for the real property included in the Interests or
(iii) as reflected in the Financial Statements, and except for properties and
assets which have been sold or otherwise disposed of in the ordinary course of
business or pursuant to the NARCO Agreements since the Balance Sheet Date, the
Company and the Subsidiaries have good, valid and marketable title free and
clear of all liens, pledges, encumbrances and adverse claims created by, through
or under the Company and the Subsidiaries but not otherwise other than Permitted
Encumbrances, to (a) all of their material properties and assets (real and
personal, tangible and intangible), including, without limitation, all the
properties and assets reflected in the Balance Sheet, except as indicated in the
notes thereto, and (b) all the properties and assets purchased by the Company
and the Subsidiaries since the Balance Sheet Date.
Section 3.08 Real Property. The Company and the Subsidiaries do not own
or lease any interests in real property other than the Leases (as hereinafter
defined) set forth in Schedule 3.10 and the real property and leases set forth
in Schedule 3.08.
Section 3.09 Oil and Gas Reserve Report. The Company has made available
to the Purchaser the Reserve Report dated as of August 31, 1997 prepared by NSA.
The Company has provided no materially false or misleading information to and
has not withheld any material information from NSA, with respect to the
preparation of the Reserve Report. The Company is not aware of any facts or
circumstances that should reasonably cause the Company to conclude that any of
the information that was supplied by the Company to NSA in connection with their
preparation of the Reserve Report is not currently correct in all material
respects except for the production of oil, gas and other hydrocarbons in the
ordinary course of business, the acquisition and disposition of interests in oil
and gas properties described on Schedule 3.10 and decreases in oil and gas
prices generally in the United States.
Section 3.10 Title to Interests. (a) Schedule 3.10 identifies (i) each
oil well and gas well in which the Company and the Subsidiaries own an interest
described in the Reserve Report (exclusive of proved undeveloped properties),
vested or contingent, and which is producing or capable of producing
hydrocarbons in commercial quantities (individually a "Well" and collectively
the "Wells"), (ii) the Company's and the Subsidiaries' net revenue interest and
leasehold cost bearing interest (i.e., working interest) in each Well, (iii)
each oil, gas, and mineral lease in which the Company and the Subsidiaries own
any interest and the type of interest owned by the Company and the Subsidiaries
(individually and collectively, the "Leases"), (iv) all lands in which the
Company and the Subsidiaries own a fee simple or term mineral or royalty
interest which is not entitled to share in the production of hydrocarbons from
the Wells or the proceeds of sale of the production of hydrocarbons from the
Wells (the "Non-Producing Mineral Fee Interests"), and (v) the Company's and the
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Subsidiaries' interest in and to the Non-Producing Mineral Fee Interests by
virtue of such ownership. The lands described in Schedules 3.10 are individually
and collectively called the "Land." The Wells, the Leases, and the Land,
together with all of the Company's right, title and interest in (i) all
contracts, agreements, leases, licenses, permits, authorizations, easements, and
orders (individually and collectively called the "Vessels Agreements") in any
way relating to the Wells, the Leases and/or the Land, the operations conducted
or to be conducted pursuant thereto or thereon, or the production, treatment,
sale or disposal of hydrocarbons or water produced therefrom or attributable
thereto, (ii) all personal property, fixtures (including, without limitation,
pipe, plants and pipelines), equipment (including, without limitation,
compressors, parts, rods, tubular goods and supplies) and improvements located
at, under or on the Wells, the Leases and/or the Land, or used or obtained in
connection therewith or with the operation or maintenance of the Wells or other
facilities thereon or with the production, treatment, sale or disposal of
hydrocarbons or water produced therefrom or attributable thereto, and (iii) all
other rights and interests in, to or under or derived from the Wells, the
Leases, the Vessels Agreements, and/or the Land (including, without limitation,
all mineral and royalty interests, and all overriding royalty interests and all
other interests in or payable out of or measured by production, and all surface
interests, for a term or in fee), or in any way relating thereto, are referred
to herein as the "Interests."
(b) With respect to each Well, the Company's and the Subsidiaries'
interests in the Leases and the Land are such that, after giving effect to
existing spacing orders, operating agreements, unit agreements, communitization
agreements and orders, unitization orders and pooling designations and orders,
subject to the limitations described in Schedule 3.10 and Permitted
Encumbrances, and after taking into account all royalty interests, overriding
royalty interests, net profits interests, production payments and other burdens
on production attributable to third parties, (i) the Company and the
Subsidiaries are entitled, during the respective terms of the Leases covering
such Well, to a share (expressed as a decimal) of all oil, gas and other
minerals produced from such Well which is not less than the "net revenue
interest" set forth in connection with the description of such Well, free and
clear of all liens, claims, mortgages, deeds of trust, assignments of
production, and security interests, other than those described in Schedule 3.07
and those that would not render title less than Defensible, (ii) the Company and
the Subsidiaries own an undivided interest (expressed as a decimal) equal to the
"working interest" set forth in connection with the description of such Well in
and to all property and rights incident thereto, including all rights in, to and
under all agreements, leases, permits, easements, licenses and orders in any way
relating thereto, and in and to all wells, personal property, fixtures and
improvements thereon, appurtenant thereto or used or obtained in connection
therewith or with the production or treatment or sale or disposal of
hydrocarbons or water produced therefrom or attributable thereto, and (iii) the
Company and the Subsidiaries are obligated, during the entire extended terms of
the Leases to which production from such Well is attributable, for a share of
the costs relating to the exploration, development, and operation of such Well
which is no greater than the "working interest" set forth in connection with the
description of such Well.
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Section 3.11 Compliance with Leases and Laws. Except as set forth in
Schedule 3.11:
(a) Each Lease is in full force and effect and all rentals, royalties,
shut-in well payments, bonuses and other payments due or payable from or by the
Company and the Subsidiaries under the NARCO Leases (as hereinafter defined)
prior to April 8, 1997 and the Leases and applicable laws, rules and
regulations, have been properly and timely paid, except where the failure to pay
properly and timely would not have a Material Adverse Effect, and all conditions
necessary to keep the Leases in full force and effect as of the date hereof and
as of the Effective Time have been or shall be fully performed, including all
payments or obligations due from or by third parties except where the failure to
satisfy such conditions would not have a Material Adverse Effect and subject to
the Enforceability Exception;
(b) The Company and the Subsidiaries are entitled to receive (and are
currently receiving with respect to producing oil, gas and/or mineral leases)
without present suspense or presently required indemnity against asserted or
known defects or disputes regarding the Company's and the Subsidiaries'
ownership, from each pipeline purchaser or other purchaser of production, or
from the person receiving payments from any such purchasers, the proceeds
attributable to the net revenue interest in production from each of the Leases,
as set forth in Schedule 3.10 except where the failure to receive such proceeds
would not have a Material Adverse Effect;
(c) All Wells operated by the Company and the Subsidiaries have been
drilled, completed and bottomed within the boundaries of each of the respective
Leases or within the limits otherwise permitted by contract and by law, and no
such well is subject to material penalties or restrictions on allowables because
of any overproduction (legal or illegal) which would prevent the assignment of a
full allowable to each such well by the state or local governmental agency
having jurisdiction. No Well is subject to any "take or pay" or similar
obligation by which a purchaser of production has made payment to the Company
and the Subsidiaries for oil, gas or mineral production yet to be delivered, or
by which any party is entitled to take or receive production from the Leases
without thereafter paying full value therefor;
(d) The Company and the Subsidiaries have complied with all Applicable
Laws (as defined below) relating to the production of or from the Interests, the
conduct of drilling and production operations with respect to the Interests and
the regulation thereof, except where the failure to comply would not have a
Material Adverse Effect;
(e) The Company and the Subsidiaries have not received notice of
violation or probable violation of any Applicable Law relating to or directly or
indirectly affecting the Interests or the NARCO Interests (as hereinafter
defined), nor are there any such violations, other than such notices or
violations which would not have a Material Adverse Effect;
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(f) There have been no demands for cancellation or termination of any
of the Interests or for any claimed breach of any Interest due to the failure of
the Company, the Subsidiaries or any third party to produce or conduct drilling
or other operations thereon, nor have there been any suits, enforcement
proceedings or other actions filed, threatened or anticipated by the Company and
the Subsidiaries which might have a Material Adverse Effect;
(g) The Company and the Subsidiaries hold all licenses, franchises,
permits, easements, certificates, consents, rights and privileges ("Permits")
necessary to the operation of the Interests, and to the best of the Company's
knowledge, each third party operator of any of the Interests holds all Permits
necessary to the operation of the Interests except for such Permits the lack of
which would not have a Material Adverse Effect;
(h) Except for current invoices not yet due the individual amount of
which is less than $80,000, all invoices, statements, bills and accounts of and
to the Company and the Subsidiaries for labor, services, materials or supplies
furnished to or for the Interests have been paid in full in the ordinary course
of business consistent with past practices and the Company and the Subsidiaries
are current in payment of all joint interest billings for operations or other
contracts pertaining to the operation of the Interests;
(i) All production from the NARCO Wells (as hereinafter defined) prior
to April 8, 1997 and the Wells operated by the Company has been properly
accounted for and all proceeds attributable thereto have been properly paid in
the ordinary course of business consistent with past practices;
(j) No production or sale of oil, gas and other hydrocarbons heretofore
produced or sold from or attributable to the NARCO Interests prior to April 8,
1997 or the Interests has been in excess of any allowable quantity or price or
in violation of any other rule or regulation affecting the sale of hydrocarbons
as established by the applicable regulatory authorities except where such excess
or violation would not have a Material Adverse Effect; and
(k) No gas produced is subject to the price control jurisdiction of the
Federal Energy Regulatory Commission ("FERC") under the Natural Gas Policy Act.
For purposes of this Agreement, (i) the term "NARCO Interests", shall mean the
interests described in Section 2.1(a) through (f) of the NARCO Upstream
Agreement, (ii) the term "NARCO Leases" shall mean the oil, gas and other
mineral leasehold interests or mineral interests described in Exhibit A-2
attached to the NARCO Upstream Agreement and (iii) the term "NARCO Wells" shall
mean the oil and gas wells described in Exhibit A-1 attached to the NARCO
Upstream Agreement. The "NARCO Properties" shall mean the NARCO Interests, the
NARCO Leases and the NARCO Wells. The Company has provided to Abraxas a true,
correct and complete copy of the NARCO Agreements and all exhibits and schedules
thereto.
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Section 3.12 Sale of Production. Except as set forth in Schedule 3.12,
the Company and the Subsidiaries have no production from any Well which is
subject to balancing rights of third parties or is subject to balancing duties
under governmental requirements, and no third party has production from any Well
which is subject to the balancing rights of the Company or the Subsidiaries and
except as would not have a Material Adverse Effect. Except as disclosed on
Schedule 3.12, the Company and the Subsidiaries have not collected any proceeds
from the sale of hydrocarbons produced from the NARCO Interests or the Interests
which are subject to refund. Except as set forth in Schedule 3.12, proceeds from
the sale of oil, gas and natural gas liquids from the Wells are being received
by the Company and the Subsidiaries in a materially timely manner and based upon
the net revenue interest described at Schedule 3.10 for each such Well and in
accordance with the terms of the applicable purchase agreement governing such
sale, and are not being held in suspense for any reason except in the ordinary
course of business consistent with past practices. The Company and the
Subsidiaries have described in Schedule 3.12 and made available to Abraxas for
examination all contracts and agreements (other than routine division orders and
contracts and agreements terminable by the Company and the Subsidiaries upon
less than sixty (60) days' notice) pursuant to which hydrocarbons produced from
the Interests are sold, transported, processed or otherwise disposed of or
marketed. Except as disclosed in Schedule 3.12, no person has any call upon,
right of first refusal, preferential right or option to purchase or similar
rights with respect to the Interests or to the production therefrom except at
prevailing market prices. Except as disclosed in Schedule 3.12, price
renegotiation procedures have not been commenced under FERC Order No. 451 which
involve or which hereafter may affect any gas produced from the Interests.
Except as disclosed in Schedule 3.12, no offer of credits under FERC Order No.
500 has been made which would entitle any purchaser of gas produced from the
Interests to credit transported volumes against such purchaser's take-or-pay
obligations under any contract for the sale of gas produced from the Interests.
Section 3.13 Status of Wells. Except as disclosed on Schedule 3.13, all
Wells set forth in the Reserve Report, excluding proved undeveloped properties,
are producing or operationally capable of producing hydrocarbons (based upon
prevailing economic conditions) without the necessity of recompletion or
material reworking operations. Except as disclosed in Schedule 3.13, the Company
and the Subsidiaries have no obligations existing for the plugging or
abandonment (including obligations for restoration of the surface) of any oil
and/or gas well, salt water disposal well or other well located at the Interests
or the NARCO Interests other than the general obligation to plug and abandon
wells.
Section 3.14 Tax Partnerships. No item of the Interests is treated for
income tax purposes by the Company and the Subsidiaries as being owned by a
partnership.
Section 3.15 Equipment. To the best of the Company's knowledge, that
portion of the Interests consisting of personal property, facilities, and
fixtures including, without limitation, all equipment and assets used in
connection with the operation of the Interests, is in good condition and repair,
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ordinary wear and tear excepted, and is adequate for the proper operation of the
Interests, except for such repairs and additions necessary for the proper
operation of the Interests and which individually or in the aggregate would not
result in a Material Adverse Effect.
Section 3.16 Material Contracts. Schedule 3.16 heretofore sets forth a
complete list of all of the following agreements, documents and instruments to
which either the Company or any of the Subsidiaries is a party or by which
either the Company or any of the Subsidiaries is bound that is of a type that
would be required to be included as an exhibit to a Form S-1 registration
statement pursuant to the rules and regulations of the Commission if such
registration statement were filed by the Company (the "Vessels Material
Contracts"): (a) all agreements, contracts and commitments relating to the
employment of any person by the Company or any of the Subsidiaries and all
bonus, deferred compensation, pension, profit sharing, stock option, employee
stock purchase, retirement and other employee benefit plans; (b) all agreements,
indentures and other instruments which contain restrictions with respect to
payment of dividends or any other distribution in respect of its capital stock;
(c) all agreements, contracts and commitments relating to capital expenditures;
(d) all agreements, contracts, instruments and commitments relating to the
borrowing of money by the Company or any of the Subsidiaries; (e) all loans,
advances to, and investments in, any other Person (as hereinafter defined), and
all agreements, contracts or commitments relating to the making of any such
loan, advance or investment; (f) all guarantees and other contingent liabilities
with respect to any indebtedness or obligation of any other Person (other than
the endorsement of negotiable instruments for collection in the ordinary course
of business); (g) all management services, consulting and any other similar type
contracts; (h) all leases of personal property; (i) all agreements, contracts
and commitments limiting the freedom of the Company or any of the Subsidiaries
to engage in any line of business or to compete with any other Person; (j) all
agreements, contracts and commitments not entered into in the ordinary course of
business which involve $50,000 or more in the aggregate; (k) all agreements,
contracts and commitments entered into in the ordinary course of business which
involve $100,000 or more in the aggregate; and (l) all agreements, contracts and
commitments, the breach or termination of which might reasonably be expected to
have a Material Adverse Effect. Each contract, agreement and instrument set
forth in Schedule 3.16 is in full force and effect and there exists no default
or event of default or event, occurrence, condition or act (including the
purchase of the Stock hereunder) by the Company or the Subsidiaries and, to the
knowledge of the Company, any party to such contract, agreement or instrument
other than the Company or the Subsidiaries which, with the giving of notice, the
lapse of time or the happening of any other event or condition, would become a
default or event of default thereunder, except for such defaults or events as to
which requisite waivers or consents have been obtained or which would not
reasonably be expected to have a Material Adverse Effect. Neither the Company
nor any of the Subsidiaries has violated any of the terms or conditions of any
contract or agreement set forth in Schedule 3.16 in any material respect, except
for such violations as to which requisite waivers or consents have been
obtained, and, to the knowledge of the Company, all of the covenants to be
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performed by any other party thereto have been fully performed. Contracts made
in the ordinary course of business involving less than $100,000 shall not be
deemed material for purposes of this Section 3.16. Except as set forth on
Schedule 3.16, all of the contracts, agreements, leases and other instruments
set forth on Schedule 3.16 are freely assignable and have not been amended or
materially modified.
Section 3.17 Restrictive Documents. Except as set forth in Schedule
3.17, the Company and the Subsidiaries are not subject to, or a party to, any
charter, by-law, mortgage, lien, lease, license, permit, agreement, contract,
instrument, law, rule, ordinance, regulation, order, judgment or decree, or any
other restriction of any kind or character, which would prevent consummation of
the transactions contemplated by this Agreement, compliance by the Company with
the terms, conditions and provisions hereof or, to the Company's knowledge, the
continued operation of the Company's and the Subsidiaries' businesses after the
date hereof on substantially the same basis as heretofore operated or which
would restrict the ability of the Company or the Subsidiaries to acquire any
property or conduct business in any area except as would not have a Material
Adverse Effect. Other than in connection or compliance with the provisions of
the Delaware Statute, the Securities Act, the securities, takeover or blue sky
laws of the various states and other than as set forth on Schedule 3.17 hereto,
no authorization, consent or approval of, or filing with, any governmental body
or authority, and no authorization, consent or approval of any third party, is
necessary for the consummation by the Company of the transactions contemplated
by this Agreement and the Related Agreements.
Section 3.18 Litigation. Except as set forth in Schedule 3.18, there is
no action, suit, proceeding at law or in equity by any person or entity, or any
arbitration or any administrative or other proceeding by or before (or any
investigation by) any governmental or other instrumentality or agency, pending,
or, to the best knowledge of the Company, threatened, against or affecting the
Company or any of the Subsidiaries or their respective properties or rights
which could reasonably be expected to have a Material Adverse Effect and to the
best of the Company's knowledge, there is not a valid basis for any such action,
proceeding or investigation. The Company and the Subsidiaries are not subject to
any judgment, order or decree entered in any lawsuit or proceeding which could
reasonably be expected to have a Material Adverse Effect.
Section 3.19 Taxes. The Company and the Subsidiaries have filed or
caused to be filed, within the times and in the manner prescribed by law, all
federal, state, local, tribal, severance, ad valorem and foreign tax returns and
tax reports which are required to be filed by, or with respect to, the Company
and the Subsidiaries. Such returns and reports reflect accurately all liability
for taxes of the Company and the Subsidiaries for the periods covered thereby.
All federal, state, local, tribal, severance, ad valorem and foreign income,
profits, franchise, sales, use, occupancy, excise and other taxes and
assessments (including interest and penalties) payable by, or due from, the
Company and the Subsidiaries prior to Closing have been fully paid or adequately
disclosed and fully provided for in the books and records and financial
statements of the Company except as provided in clause (v) of the definition of
Permitted Encumbrances. The Company has no knowledge of any examination of any
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ANNEX I
<PAGE>
tax return of the Company and the Subsidiaries that is currently in progress.
There are no outstanding agreements or waivers extending the statutory period of
limitation applicable to any tax return of the Company and the Subsidiaries.
Section 3.20 Insurance. Schedule 3.20 hereto sets forth a complete list
of insurance policies which the Company and the Subsidiaries maintain with
respect to their respective businesses, properties or employees (other than
insurance owned or held by operators for those properties where a party other
than the Company or one of its Subsidiaries is the operator). Such policies are
in full force and effect and include all policies required in connection with
the operation of the business of the Company and the Subsidiaries as currently
conducted by Applicable Law, the Environmental Laws (as hereinafter defined) and
all contracts and agreements related to the Company and the Subsidiaries. Since
December 31, 1996, there has not been any material adverse change in the
Company's and the Subsidiaries relationship with their insurers or in the
premiums payable pursuant to such policies.
Section 3.21 Intellectual Properties. Other than rights the Company
claims in the corporate names set forth on Schedule 3.21, the Company and the
Subsidiaries do not have any patents, patent rights, licenses, trademarks,
trademark rights, trade names, trade name rights, service marks, service mark
rights, copyrights or similar rights, nor require any such rights in connection
with the conduct of their business. To the knowledge of the Company, the Company
and the Subsidiaries are not infringing, or otherwise acting adversely to, the
right of any Person under or in respect to, any patent, license, trademark,
trade name, service mark, copyright or similar intangible right.
Section 3.22 Compliance With Laws. The Company and the Subsidiaries
have complied with all applicable Federal, state, local and tribal laws, rules,
regulations, statutes, ordinances and orders ("Applicable Laws") including,
without limitation, Applicable Laws relating to securities, properties,
manufacturing processes, sales practices, employment practices, terms and
conditions of employment, wages and hours, safety, occupational safety, health,
product safety and civil rights, the non-compliance with which would have a
Material Adverse Effect. The Company has no knowledge of any facts, claims,
investigations or similar matters which constitute a default or violation under
any Applicable Laws which would have a Material Adverse Effect. For purposes of
this Agreement, the term Applicable Laws shall not include Environmental Laws.
Neither the Company nor any of the Subsidiaries is charged or, to the knowledge
of the Company, threatened with or under investigation with respect to any
violation of any Applicable Laws.
Section 3.23 Accounts Receivable. The Company has heretofore delivered
to Abraxas a list of its accounts receivable, showing the amounts due and an
aging analysis thereof. Except as set forth on Schedule 3.23, the amount of all
accounts receivable, unbilled invoices and other debts due or recorded in the
respective records and books of account of the Company and the Subsidiaries as
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ANNEX I
<PAGE>
being due to the Company and the Subsidiaries as at August 31, 1997 (less the
amount of any provision or reserve therefor made in the Balance Sheet) are
expected to be good and collectible in full in the ordinary course of business
and in any event not later than 60 days after the Closing Date; and none of such
accounts receivable or other debts is subject to any counterclaim or set-off
except to the extent of any such provision or reserve.
Section 3.24 Employment Relations. Since January 1, 1992, the Company
and the Subsidiaries have not (i) been a party to a collective bargaining
agreement, (ii) had any organization certified as a bargaining agent on behalf
of all or any portion of the Company's or the Subsidiaries' employees, (iii)
received a demand for recognition from any union or other organization, (iv) to
the knowledge of the Company and the Subsidiaries, had any attempt made to
organize any of the Company's or the Subsidiaries' employees, (v) encountered
any labor union organizing activity, or (vi) encountered any actual or
threatened employee strikes, work stoppages, jurisdictional disputes,
slow-downs, or lock-outs. Schedule 3.24 hereto sets forth a list of all
agreements and understandings, whether written or oral, between the Company and
the Subsidiaries and any of their officers or employees that contain a
non-competition and confidentiality agreement and/or covenant or any other terms
of employment. Except as set forth on Schedule 3.24 hereto, the Company and the
Subsidiaries do not have any pending grievances, unfair labor practice charges,
Equal Employment Opportunity Commission charges, state or local fair employment
practice charges, Department of Labor investigations, wage and hour claims or
disputes, or any other labor law related charges or investigations relating to
the Company.
Section 3.25 Employee Benefit Programs.
(a) Schedule 3.25 hereto sets forth a list of every Employee Program
(as hereinafter defined) maintained (as hereinafter defined) by the Company or
any Affiliate at any time during the five-year period ending on the date hereof.
(b) Except as set forth in Schedule 3.25 hereto, each Employee Program
which has been maintained by the Company or any Affiliate and which has at any
time been intended to qualify under Section 401(a) or 501(c)(9) of the Internal
Revenue Code of 1986, as amended (the "Code"), has received a favorable
determination or approval letter from the Internal Revenue Service ("IRS")
regarding its qualification under such section and has, in fact, been qualified
under the applicable section of the Code from the effective date of such
Employee Program through and including the Closing (or, if earlier, the date
that all of such Employee Program's assets were distributed). No event or
omission has occurred which would cause any such Employee Program to lose its
qualification under the applicable Code section.
(c) Except as set forth in Schedule 3.25 hereto, there has not been any
failure in any material respect by the Company or an Affiliate to comply with
any laws applicable with respect to the Employee Programs that have been
maintained by the Company or any Affiliate. Each Employee Program maintained by
the Company or any Affiliate has complied in all material respects, both in form
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ANNEX I
<PAGE>
and operation, with the provisions and requirements of the Code, ERISA, and all
other applicable law. With respect to any Employee Program now or heretofore
maintained by the Company or any Affiliate, there has occurred no "prohibited
transaction," as defined in Section 406 of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or Section 4975 of the Code, or
breach of any duty under ERISA or other applicable law (including, without
limitation, any health care continuation requirements or any other tax law
requirements, or conditions to favorable tax treatment, applicable to such
plan), which could result, directly or indirectly (including without limitation
through any obligation of indemnification or contribution), in any taxes,
penalties or other liability to the Company or any Affiliate. Except as set
forth in Schedule 3.25 hereto, no litigation, claim, arbitration, governmental
administrative proceeding or investigation or other proceeding (other than those
relating to routine claims for benefits) is pending or threatened with respect
to any Employee Program maintained by the Company or an Affiliate.
(d) Neither the Company nor any Affiliate has incurred any liability
under Title IV of ERISA which will not be paid in full prior to Closing. Except
as set forth in Schedule 3.25 hereto, there has been no "accumulated funding
deficiency" (whether or not waived) with respect to any Employee Program ever
maintained by the Company or any Affiliate and subject to Code Section 412 or
ERISA Section 302. With respect to any Employee Program maintained by the
Company or any Affiliate and subject to Title IV of ERISA, there has been no
(nor will there be any as a result of the transaction contemplated by this
Agreement) (i) "reportable event," within the meaning of ERISA Section 4043, or
the regulations thereunder (for which the notice requirement is not waived under
29 C.F.R. Part 2615) and (ii) event or condition which presents a material risk
of plan termination or any other event that may cause the Company or any
Affiliate to incur liability or have a lien imposed on its assets under Title IV
of ERISA. Except as set forth in Schedule 3.25 hereto, all payments and/or
contributions required to have been made (under the provisions of any agreements
or other governing documents or applicable law) with respect to all Employee
Programs ever maintained by the Company or any Affiliate, for all periods prior
to Closing, either have been made or have been accrued (and all such unpaid but
accrued amounts are described on Schedule 3.25 hereto). Except as described in
Schedule 3.25 hereto, no Employee Program maintained by the Company or any
Affiliate within the five years preceding the date hereof and subject to Title
IV of ERISA (other than a Multiemployer Plan as hereinafter defined) has any
"unfunded benefit liabilities" within the meaning of ERISA Section 4001(a)(18),
as of the Closing Date. Except as set forth in Schedule 3.25 hereto, none of the
Employee Programs maintained by the Company or any Affiliate within the five
years preceding the date hereof has ever provided health care or any other
non-pension benefits to any employees after their employment was terminated
(other than as required by Part 6 of Subtitle B of Title I of ERISA or any other
health benefits law) or has ever promised to provide such post-termination
benefits. Except as set forth on Schedule 3.25 hereto, there are no promised
increases in benefits (whether expressed, implied, oral or written) under any
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ANNEX I
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Employee Program maintained by the Company or any Affiliate, nor are there any
obligations, commitments or understandings to continue any such Employee Program
(whether expressed, implied, oral or written), except pursuant to the terms
thereof or as required by Section 4980B of the Code.
(e) With respect to each Employee Program maintained by the Company or
any Affiliate within the five years preceding the date hereof, complete and
correct copies of the following documents (if applicable to such Employee
Program) have previously been delivered or made available to Abraxas: (i) all
documents embodying or governing such Employee Program, and any funding medium
for the Employee Program (including, without limitation, trust agreements) as
they may have been amended through the date hereof; (ii) the most recent IRS
determination or approval letter with respect to such Employee Program under
Code Section 401 or 501(c)(9), and any applications for determination or
approval subsequently filed with the IRS; (iii) the three most recently filed
IRS Forms 5500, with all applicable schedules and accountants' opinions attached
thereto; (iv) the current summary plan description for such Employee Program (or
other descriptions of such Employee Program provided to employees) and any
material modifications to prior versions thereof; (v) any insurance or annuity
policy (including any fiduciary liability insurance policy) related to such
Employee Program; (vi) any documents evidencing any loan to an Employee Program
that is a leveraged employee stock ownership plan; (vii) with respect to any
Multiemployer Plan, any participation or adoption agreement relating to any such
participation in or contributions under such plan by the Company or any
Affiliate; and (vii) the three most recent summary annual reports provided to
participants.
(f) Except as set forth in Schedule 3.25 hereto, each Employee Program
maintained by the Company or any Affiliate as of the date hereof is subject to
termination by the Board of Directors of the Company or any Affiliate, as the
case may be, without any further liability or obligation on the part of the
Company or any Affiliate to make further contributions to any trust maintained
under any such Employee Program following such termination.
(g) For purposes of this Section 3.25:
(i) "Employee Program" means (A) all employee benefit plans
within the meaning of ERISA Section 3(3), including, but not limited to,
multiple employer welfare arrangements (within the meaning of ERISA Section
3(40)), plans to which more than one unaffiliated employer contributes and
employee benefit plans (such as foreign or excess benefit plans) which are not
subject to ERISA; and (B) all stock option plans, bonus or incentive award
plans, severance pay policies or agreements, parachute payment arrangements,
deferred compensation agreements, supplemental income arrangements, vacation
plans, and all other employee benefit plans, agreements and arrangements not
described in (A) above. In the case of an Employee Program funded through an
organization described in Code Section 501(c)(9), each reference to such
Employee Program shall include a reference to such organization;
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ANNEX I
<PAGE>
(ii) an entity "maintains" an Employee Program if such entity
sponsors, contributes to, or provides (or has promised to provide) benefits
under such Employee Program, or has any obligation (by agreement or under
applicable law) to contribute to or provide benefits under such Employee
Program, or if such Employee Program provides benefits to or otherwise covers
employees of such entity (or their spouses, dependents, or beneficiaries);
(iii) An entity is an "Affiliate" of the Company for purposes
of this Section 3.25 if it is considered a single employer with the Company
under ERISA Section 4001(b) or part of the same "controlled group" as the
Company for purposes of ERISA Section 302(d)(8)(C); and
(iv) "Multiemployer Plan" means a (pension or non-pension)
employee benefit plan to which more than one employer contributes and which is
maintained pursuant to one or more collective bargaining agreements.
(h) The Company has complied with the Consolidated Omnibus Budget
Reconciliation Act of 1984, as amended ("COBRA").
(i) Except as set forth in Schedule 3.25, neither the execution and
delivery of this Agreement nor the consummation of the transactions contemplated
hereby will (i) result in any payment to be made by the Company or any Affiliate
(including, without limitation, severance, unemployment compensation, golden
parachute (as defined in Section 280G of the Code), or otherwise) becoming due
to any employee, director or consultant, or (ii) increase any benefits otherwise
payable under any Employee Program.
(j) Schedule 1.04 sets forth a true, correct and complete list of all
employee severance costs payable by the Company at the Closing.
Section 3.26 Interests in Clients, Suppliers, Etc. Except as set forth
in Schedule 3.26, the Company, the Subsidiaries and, to the knowledge of the
Company and the Subsidiaries, their officers and directors do not possess,
directly or indirectly, any financial interest in, or is a director, officer or
employee of, any corporation, firm, association or business organization which
is a client, supplier, customer, lessor, lessee, or competitor of the Company or
the Subsidiaries. Ownership of securities of a company whose securities are
registered under the Securities Exchange Act of 1934, as amended (the "1934
Act") not in excess of 5% of any class of such securities shall not be deemed to
be a financial interest for purposes of this Section 3.26. Except as described
in the notes to the Financial Statements which have been certified by Arthur
Andersen & Company or Price Waterhouse LLP, there are no related party
transactions which would otherwise be required to be described.
Section 3.27 Bank Accounts and Powers of Attorney. Schedule 3.27 hereto
sets forth an accurate and complete list showing (a) the name and address of
each bank in which the Company and the Subsidiaries have an account or safe
deposit box, the number of any such account or any such box and the names of all
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ANNEX I
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persons authorized to draw thereon or to have access thereto and (b) the names
of all persons, if any, holding powers of attorney from the Company and the
Subsidiaries and a summary statement of the terms thereof.
Section 3.28 No Changes Prior to Closing Date. Except as set forth on
Schedule 3.28, during the period from the Balance Sheet Date to the date hereof,
except as expressly contemplated hereby and by the NARCO Agreements, the Company
and the Subsidiaries have not (a) declared or paid any dividend or made any
distribution on any shares of its capital stock, or redeemed, purchased or
otherwise acquired any shares of its capital stock or any option, warrant or
other right to purchase or acquire any such shares, (b) made any bonus or profit
sharing distribution or payment of any kind, (c) written off as uncollectible
any notes or accounts receivable, except write-offs in the ordinary course of
business charged to applicable reserves, none of which individually or in the
aggregate is material to the Company and the Subsidiaries, (d) granted any
increase in the rate of wages, salaries, bonuses or other remuneration of any
executive employee or other employees, except in the ordinary course of
business, (e) cancelled or waived any claims or rights of substantial value, (f)
made any change in any method of accounting or auditing practice, or (g) agreed,
whether or not in writing, to do any of the foregoing, except to the extent any
such action would not have a Material Adverse Effect.
Section 3.29 Broker's or Finder's Fees. Except as set forth on Schedule
3.29, no agent, broker, person or firm acting on behalf of the Company is, or
will be, entitled to any commission or broker's or finder's fees from any of the
parties hereto, or from any person controlling, controlled by or under common
control of such parties, with respect to the transactions contemplated herein.
Section 3.30 Copies of Documents. The Company has caused to be made
available for inspection and copying by Abraxas and its advisers, true, complete
and correct copies of all documents referred to in this Article III or in any
schedule furnished by the Company to Abraxas.
Section 3.31 Environmental Matters. To the best knowledge of the
Company and the Subsidiaries,
(a) Except as set forth in Schedule 3.31 hereto, (i) neither the
Company nor any of the Subsidiaries has ever generated, transported, used,
stored, treated, disposed of or managed any Hazardous Waste (as hereinafter
defined), except in the normal course of business and in compliance with all
applicable Environmental Laws; (ii) any Hazardous Material (as hereinafter
defined) spilled, released, or disposed of at any site presently or formerly
owned, operated, leased or used by the Company or any of the Subsidiaries has
been addressed in a manner that complied with all applicable Environmental Laws
and no future soil or groundwater remediation that would have a Material Adverse
Effect will be required of the Company and the Subsidiaries due to past spills,
releases, or disposal; (iii) no Hazardous Material has ever been transported
from any site presently or formerly owned, operated, leased or used by the
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ANNEX I
<PAGE>
Company or any of the Subsidiaries for treatment, storage or disposal at any
other place), except in the normal course of business and in compliance with all
applicable Environmental Laws; (iv) neither the Company nor any of the
Subsidiaries presently owns, operates, leases or uses, and has not previously
owned, operated, leased or used any site on which underground storage tanks are
or were located and (v) no lien has ever been imposed by any governmental agency
on any property, facility, machinery or equipment owned, operated, leased or
used by the Company or any of the Subsidiaries in connection with the presence
of any Hazardous Material.
(b) Except as set forth on Schedule 3.31 hereto: (i) neither the
Company nor any of the Subsidiaries has violated, and as its business is
currently being conducted does not violate, any applicable law, ordinance,
rules, prohibition or regulation, including common law prohibitions regarding
creation or maintenance of hazardous or nuisance conditions, relating to (1)
air, water or noise pollution, (2) discharge of process water, waste water, or
other solid wastes into public sewage systems, or into the environment either at
discreet outfalls or from non-point sources, (3) the health, safety or
environmental conditions on, beneath, or about any of the properties used,
owned, or leased by the Company or any of the Subsidiaries, or (4) the business
of the Company or any of the Subsidiaries; and (ii) the Company and/or the
Subsidiaries have timely filed all required reports, obtained all required
approvals and permits relating to its property and business, including the
storage or disposal of substances used or generated in its business, and
generated and maintained all required data, documentation and records under any
applicable Environmental Laws (as hereinafter defined).
(c) Except as set forth in Schedule 3.31 hereto, (i) neither the
Company nor any of the Subsidiaries has any material liability under, and has
not violated, any Environmental Law; (ii) each of the Company and the
Subsidiaries, any property owned, operated, leased or used by the Company or any
of the Subsidiaries and any facilities and operations thereon are presently in
compliance with all applicable Environmental Laws; (iii) neither the Company nor
any of the Subsidiaries has entered into or been subject to any judgment,
consent decree, compliance order or administrative order with respect to any
environmental or health and safety matter or received any request for
information, notice, demand letter, administrative inquiry or formal or informal
complaint or claim with respect to any environmental or health and safety matter
or the enforcement of any Environmental Law; and (iv) the Company has no reason
to believe that any of the items enumerated in clause (iii) of this paragraph
will be forthcoming.
(d) Except as set forth in Schedule 3.31 hereto, no site owned,
operated, leased or used by the Company or any of the Subsidiaries contains any
material amount of asbestos or asbestos-containing material, any material amount
of polychlorinated biphenyls ("PCBs") or equipment containing PCBs or any urea
formaldehyde foam insulation.
(e) Neither the Company nor any of the Subsidiaries are aware of any
Critical Habitat for endangered or threatened species or wetlands on any
property owned, occupied or used by the Company or any of the Subsidiaries.
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ANNEX I
<PAGE>
(f) Neither the Company nor any of the Subsidiaries have received
notice of, and neither the Company nor any of the Subsidiaries are aware of any
condition or event relating to the Company's or any of the Subsidiaries'
business or property which by the passage of time, to Seller's knowledge, would
result in the violation of any Environmental Laws or would require remedial
action by the Company or any of the Subsidiaries, except as described in
Schedule 3.31 hereto.
(g) The Company has made available to Abraxas or its representatives
originals or copies of all documents, records and information available to the
Company concerning any environmental or health and safety matter relevant to the
Company or any of the Subsidiaries, whether generated by the Company or any of
the Subsidiaries, including, without limitation, environmental risk assessments,
site assessments, documentation regarding off-site disposal of Hazardous
Materials, spill control plans, and reports, correspondence, permits, licenses,
approvals, consents and other authorizations related to environmental or health
and safety matters issued by any governmental agency.
(h) For purposes of this Section 3.31, (i) "Hazardous Material" shall
mean and include any reportable quantities of any hazardous waste, hazardous
material, hazardous substance, petroleum product, oil, toxic substance,
pollutant or contaminant, as defined or regulated under any Environmental Law;
(ii) "Hazardous Waste" shall mean and include any hazardous waste as defined or
regulated under any Environmental Law and (iii) "Environmental Law" shall mean
any applicable environmental or health and safety-related law, regulation, rule,
ordinance, order, injunction, decree, consent decree, judgment or administrative
directive or by-law at the federal, state or local level, existing as of the
date hereof or previously enforced and relating to: (a) pollution or prevention
of pollution (including emissions of dust, heat, noise or odor) into or onto
ground, subsurface water, groundwater or the ambient air; (b) protection of
human health and safety and of the environment; (c) the generation, manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of any Hazardous Material; or (d) maintenance of water or air quality.
Section 3.32 No False or Misleading Statements. The information
provided and to be provided by the Company specifically for use in the S-4
Registration Statement shall not, with respect to the information supplied by
the Company in the case of the S-4 Registration Statement on the date the S-4
Registration Statement becomes effective and, in the case of the Proxy
Statement-Prospectus, on the date upon which the Proxy Statement-Prospectus is
mailed to the stockholders of Abraxas or on the date upon which approval of the
Merger by the stockholders of Abraxas is obtained, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
Section 3.33 Disclosure. None of this Agreement, the Financial
Statements (including the footnotes thereto), or any Schedule, Exhibit or
certificate delivered in accordance with the terms hereof or any document or
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statement in writing which has been supplied by or on behalf of the Company, or
by any of the Company's directors or officers, in connection with the
transactions contemplated hereby, contains any untrue statement of a material
fact or omits any statement of a material fact necessary in order to make the
statements contained herein or therein not misleading.
Section 3.34 DISCLAIMER OF REPRESENTATIONS AND WARRANTIES OF THE
COMPANY. THE REPRESENTATIONS AND WARRANTIES OF THE COMPANY CONTAINED IN THIS
AGREEMENT ARE EXCLUSIVE AND IN LIEU OF ALL OTHER REPRESENTATIONS AND WARRANTIES,
EXPRESS OR IMPLIED, AND THE COMPANY HEREBY DISCLAIMS ALL OTHER REPRESENTATIONS
AND WARRANTIES, EXPRESS, IMPLIED, OR STATUTORY, INCLUDING WITHOUT LIMITATION (i)
ANY EXPRESS OR IMPLIED WARRANTY OF MERCHANTABILITY, (ii) ANY EXPRESS OR IMPLIED
WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, (iii) ANY EXPRESS OR IMPLIED
WARRANTY AS TO CONDITION, OR (iv) ANY EXPRESS OR IMPLIED WARRANTY OF CONFORMITY
TO MODELS OR SAMPLES OF MATERIALS AND MAKES NO REPRESENTATIONS AS TO QUALITY OR
QUANTITY OF HYDROCARBON RESERVES (IF ANY) ATTRIBUTABLE TO THE INTERESTS OR THE
ABILITY OF THE INTERESTS TO PRODUCE HYDROCARBONS.
ARTICLE IV
REPRESENTATIONS OF ABRAXAS AND SUB
Abraxas and Sub represent, warrant and agree as follows:
Section 4.01 Existence and Good Standing of Abraxas. Abraxas is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Nevada. Abraxas has the corporate power and authority to own its
properties and to carry on its business as now being conducted. Abraxas is duly
qualified to do business and is in good standing in each jurisdiction in which
its ownership or leasing of its properties or the conduct of its business
requires such qualification, except for jurisdictions in which the failure to be
so qualified or to be in good standing would not, individually or in the
aggregate, have a material adverse effect on the business, results of operations
or financial condition of Abraxas.
Section 4.02 Existence and Good Standing of Sub. Sub is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware. Sub has the corporate power and authority to own its
properties and to carry on its business as now being conducted. Sub is duly
qualified to do business and is in good standing in each jurisdictions in which
its ownership or leasing of its properties or the conduct of its business
requires such qualification, except for jurisdictions in which the failure to be
so qualified or to be in good standing would not, individually or in the
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aggregate, have a material adverse effect on the business, results of operations
or financial condition of Sub.
Section 4.03 Existence and Good Standing of Canadian Abraxas. Canadian
Abraxas Petroleum Limited ("Canadian Abraxas") is a corporation duly organized,
validly existing and in good standing under the laws of the Province of Alberta.
Canadian Abraxas has the corporate power and authority to own its properties and
to carry on its business as now being conducted. Canadian Abraxas is duly
qualified to do business and is in good standing in each jurisdiction in which
its ownership or leasing of its properties or the conduct of its business
requires such qualification, except for jurisdictions in which the failure to be
so qualified or to be in good standing would not, individually or in the
aggregate, have a material adverse effect on the business, results of operations
or financial condition of Canadian Abraxas.
Section 4.04 Corporate Authority. Abraxas and Sub have the requisite
corporate power and authority to enter into this Agreement and the Related
Agreements to which Abraxas and Sub are a party. The execution and delivery of
this Agreement and the Related Agreements to which Abraxas and Sub are a party
and the consummation of the transactions contemplated hereby and thereby have
been duly and validly authorized by the Boards of Directors of Abraxas and Sub
and, other than the approval of the Abraxas stockholders, if required by law or
the rules and regulations of the Nasdaq National Market (without reliance on the
19.9% Alternative), no other corporate proceedings on the part of Abraxas are
necessary to authorize this Agreement and the transactions contemplated hereby
and thereby. This Agreement is and the Related Agreements to which Abraxas and
Sub are a party will be, duly and validly executed and delivered by Abraxas and
Sub and, assuming the due authorization, execution and delivery hereof and
thereof by the other parties hereto and thereto, this Agreement constitutes, and
the Related Agreements to which Abraxas and Sub are a party will constitute,
valid and binding agreements of Abraxas and Sub enforceable against Abraxas and
Sub in accordance with their respective terms, subject to the approval of the
stockholders of Abraxas and the Enforceability Exception.
Section 4.05 Broker's or Finder's Fees. No agent, broker, person or
firm acting on behalf of Abraxas or Sub is, or will be, entitled to any
commission or broker's or finder's fees from any of the parties hereto, or from
any person controlling, controlled by or under common control with any of the
parties hereto, in connection with any of the transactions contemplated herein.
Section 4.06 Capital Stock. Abraxas has an authorized capitalization
consisting of 50,000,000 shares of common stock, par value $.01 per share, of
which 6,279,146 shares are issued and outstanding and 53,023 shares are held in
Abraxas' treasury, 1,000,000 shares of Preferred Stock, par value $100 per
share, of which none are outstanding. Sub has an authorized capitalization
consisting of 1,000 shares of common stock, par value $.01 per share, of which
1,000 shares are issued and outstanding. All of such outstanding shares have
been duly authorized and validly issued and are fully paid and nonassessable.
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Except as set forth in Schedule 4.06, there are no outstanding options,
warrants, rights, calls, commitments, conversion rights, rights of exchange,
plans or other agreements of any character providing for the purchase, issuance
or sale of any shares of Abraxas Common Stock or shares of the Common Stock of
Sub, other than as contemplated by this Agreement. Sub has no subsidiaries.
Section 4.07 Books and Records. The minute books of Abraxas, as
previously made available to the Company and its representatives, contain
accurate and complete summaries of all meetings of and corporate actions or
written consents by the stockholders and Board of Directors of Abraxas. Except
as set forth in Schedule 4.07, Abraxas does not have any of its records,
systems, controls, data or information recorded, stored, maintained, operated or
otherwise wholly or partly dependent upon or held by any means (including any
electronic, mechanical or photographic process, whether computerized or not and
all means of access thereto and therefrom) which are not under the exclusive
ownership and direct control of Abraxas.
Section 4.08 Litigation. Except as set forth in Schedule 4.08, there is
no action, suit, proceeding at law or in equity by any person or entity, or any
arbitration or any administrative or other proceeding by or before (or any
investigation by) any governmental or other instrumentality or agency, pending,
or, to the best knowledge of Abraxas or Sub, threatened, against or affecting
Abraxas, Sub or Canadian Abraxas, or any of their properties or rights which
could reasonably be expected to have a Material Adverse Effect; and Abraxas and
Sub do not know of any valid basis for any such action, proceeding or
investigation. Abraxas, Sub and Canadian Abraxas are not subject to any
judgment, order or decree entered in any lawsuit or proceeding which could
reasonably be expected to have a Material Adverse Effect.
Section 4.09 Taxes. Abraxas, Sub and Canadian Abraxas have filed or
caused to be filed, within the times and in the manner prescribed by law, all
federal, state, provincial, local, tribal, severance, ad valorem and foreign tax
returns and tax reports which are required to be filed by, or with respect to,
Abraxas, Sub and Canadian Abraxas. Such returns and reports reflect accurately
all liability for taxes of Abraxas, Sub and Canadian Abraxas for the periods
covered thereby. All federal, state, local, tribal, severance, ad valorem and
foreign income, profits, franchise, sales, use, occupancy, excise and other
taxes and assessments (including interest and penalties) payable by, or due
from, Abraxas, Sub or Canadian Abraxas prior to Closing have been fully paid or
adequately disclosed and fully provided for in the books and financial
statements of Abraxas except as provided in clause (v) of the definition of
Permitted Encumbrances. Abraxas and Sub have no knowledge of any examination of
any tax return of Abraxas, Sub or Canadian Abraxas that is currently in
progress. There are no outstanding agreements or waivers extending the statutory
period of limitation applicable to any tax return of Abraxas, Sub or Canadian
Abraxas.
Section 4.10 Copies of Documents. Abraxas has caused to be made
available for inspection and copying by the Company and its advisers, true,
complete and correct copies of all documents referred to in this Article IV or
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in any schedule furnished by Abraxas to the Company or reasonably requested in
writing by the Company.
Section 4.11 Reports with the Securities and Exchange Commission. All
registration statements, reports, proxy statements and other materials
(collectively, "SEC Reports") required to be filed by Abraxas with the
Commission since January 1, 1991 were filed within the applicable required time
periods (or any extensions related thereto), complied in all respects with the
applicable requirements of the Securities Act and the 1934 Act and the
applicable rules and regulations of the Commission promulgated thereunder, and
at the time filed did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements made therein, in light of the circumstances under which they were
made, not misleading. Abraxas has furnished the Company with complete and
accurate copies of its quarterly report on Form 10-Q for the fiscal quarter
ended June 30, 1997, and all other reports or documents required to be filed by
Abraxas pursuant to Section 13(a) or 15(d) of the 1934 Act since the filing of
the most recent quarterly report on Form 10-Q. The consolidated balance sheets
and the related statements of income, stockholders' equity and cash flow
(including the related notes thereto) of Abraxas included in the SEC Reports
complied as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the Commission with
respect thereto and have been prepared in accordance with generally accepted
accounting principles applied on a basis consistent with prior periods (except
as otherwise noted therein). The balance sheets included in the SEC Reports
present fairly the consolidated financial position of Abraxas and its
consolidated subsidiaries as of their respective dates, and, except as indicated
therein, reflect all claims against and all debts and liabilities of Abraxas and
its consolidated subsidiaries, fixed or contingent, as at the respective dates
thereof, and the related statements of income, stockholders' equity and cash
flow fairly present the results of its operations and its cash flow for the
periods presented therein (subject, in the case of the unaudited interim
financial statements, to normal year-end adjustments). Since December 31, 1996,
there has been no material adverse change in the assets or liabilities, or in
the business or condition, financial or otherwise, or in the results of
operations of Abraxas and its consolidated subsidiaries taken as a whole other
than changes in the oil and gas industry generally and changes in the ordinary
course of business consistent with past practice and, other than the
transactions contemplated by this Agreement, to the knowledge of Abraxas, no
fact or condition exists or is contemplated or threatened which might cause such
a change in the future.
Section 4.12 Restrictive Documents. Except as set forth in Schedule
4.12, Abraxas and Sub are not subject to, or a party to, any charter, by-law,
mortgage, lien, lease, license, permit, agreement, contract, instrument, law,
rule, ordinance, regulation, order, judgment or decree, or any other restriction
of any kind or character, which would prevent consummation of the transactions
contemplated by this Agreement, compliance by Abraxas and Sub with the terms,
conditions and provisions hereof or, to the knowledge of Abraxas and Sub, the
continued operation of Abraxas' and Sub's businesses after the date hereof on
substantially the same basis as heretofore operated or which would restrict the
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ability of Abraxas or Sub to acquire any property or conduct business in any
area except as would not have a Material Adverse Effect. Other than in
connection or compliance with the provisions of the Securities Act, and the
securities, takeover or blue sky laws of the various states, except as set forth
in Schedule 4.12, no authorization, consent or approval of, or filing with, any
governmental body or authority, and no authorization, consent or approval of any
third party, is necessary for the consummation by Abraxas of the transactions
contemplated by this Agreement, the Merger Agreement and the Related Agreements.
Section 4.13 Title to Properties; Encumbrances. Except (i) as set forth
in Schedule 4.13, (ii) for the real property included in the Abraxas Wells (as
hereinafter defined) or (iii) as reflected in the SEC Reports, and except for
properties and assets which have been sold or otherwise disposed of in the
ordinary course of business since December 31, 1996, Abraxas has good, valid and
marketable title free and clear of all liens, pledges, encumbrances and adverse
claims created by, through or under Abraxas and its subsidiaries but not
otherwise other than Permitted Encumbrances, to (a) all of its material
properties and assets (real and personal, tangible and intangible), including,
without limitation, all the properties and assets reflected in the balance sheet
of Abraxas dated December 31, 1996, except as indicated in the notes thereto,
and (b) all the properties and assets purchased by Abraxas since December 31,
1996.
Section 4.14 Oil and Gas Reserve Report. Abraxas has made available to
the Company Abraxas' Reserve Report dated as of January 1, 1997 (the "Abraxas
Reserve Report") prepared by D&M. Abraxas provided no materially false or
misleading information to and did not withhold any material information from
D&M, with respect to the preparation of the Abraxas Reserve Report. Abraxas is
not aware of any facts or circumstances that should reasonably cause Abraxas to
conclude that any of the information that was supplied by Abraxas to D&M in
connection with their preparation of the Abraxas Reserve Report is not currently
correct in all material respects except for the production of oil, gas and other
hydrocarbons in the ordinary course of business, the acquisition and disposition
of interests in oil and gas properties and decreases in oil and gas prices
generally in the United States and Canada.
Section 4.15 Title to Interests. (a) Schedule 4.15 identifies each oil
well and gas well described in the Abraxas Reserve Report in which Abraxas and
Canadian Abraxas own an interest, vested or contingent, and which is producing
or capable of producing hydrocarbons in commercial quantities (individually, an
"Abraxas Well" and, collectively, the "Abraxas Wells") and (ii) Abraxas' and
Canadian Abraxas' net revenue interest and leasehold cost bearing interest
(i.e., working interest) in each Abraxas Well.
(b) With respect to each Abraxas Well, Abraxas' and Canadian Abraxas'
interests therein are such that, after giving effect to existing spacing orders,
operating agreements, unit agreements, communitization agreements and orders,
unitization orders and pooling designations and orders, subject to the
limitations described in Schedule 4.15 and Permitted Encumbrances, and after
taking into account all royalty interests, overriding royalty interests, net
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profits interests, production payments and other burdens on production
attributable to third parties, (i) Abraxas and Canadian Abraxas are entitled,
during the respective terms of the oil and gas leases covering such Abraxas Well
(the "Abraxas Leases" and, together with the Abraxas Wells, the "Abraxas
Interests"), to a share (expressed as a decimal) of all oil, gas and other
minerals produced from such Abraxas Well which is not less than the "net revenue
interest" set forth in connection with the description of such Abraxas Well,
free and clear of all liens, claims, mortgages, deeds of trust, assignments of
production, and security interests, other than those described in Schedule 4.15
and those that would not render title less than Defensible, (ii) Abraxas and
Canadian Abraxas own an undivided interest (expressed as a decimal) equal to the
"working interest" set forth in connection with the description of such Abraxas
Well in and to all property and rights incident thereto, including all rights
in, to and under all agreements, leases, permits, easements, licenses and orders
in any way relating thereto, and in and to all wells, personal property,
fixtures and improvements thereon, appurtenant thereto or used or obtained in
connection therewith or with the production or treatment or sale or disposal of
hydrocarbons or water produced therefrom or attributable thereto, and (iii)
Abraxas and Canadian Abraxas are obligated, during the entire extended terms of
the Abraxas Leases to which production from such Abraxas Well is attributable,
for a share of the costs relating to the exploration, development, and operation
of such Abraxas Well which is no greater than the "working interest" set forth
in connection with the description of such Abraxas Well.
Section 4.16 No False or Misleading Statements. The information
provided and to be provided by Abraxas specifically for use in the S-4
Registration Statement shall not, with respect to the information supplied by
Abraxas in the case of the S-4 Registration Statement on the date the S-4
Registration Statement becomes effective and, in the case of the Proxy
Statement-Prospectus, on the date upon which the Proxy Statement-Prospectus is
mailed to the stockholders of Abraxas or on the date upon which approval of the
Merger by the stockholders of Abraxas is obtained, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
Section 4.17 Disclosure. None of this Agreement, the Financial
Statements (including the footnotes thereto), the SEC Reports or any Schedule,
Exhibit or certificate delivered in accordance with the terms hereof or any
document or statement in writing which has been supplied by or on behalf of
Abraxas, or by any of Abraxas' directors or officers, in connection with the
transactions contemplated hereby, contains any untrue statement of a material
fact or omits any statement of a material fact necessary in order to make the
statements contained herein or therein not misleading.
Section 4.18 DISCLAIMER OF REPRESENTATIONS AND WARRANTIES OF ABRAXAS
AND SUB. THE REPRESENTATIONS AND WARRANTIES OF ABRAXAS AND SUB CONTAINED IN THIS
AGREEMENT ARE EXCLUSIVE AND IN LIEU OF ALL OTHER REPRESENTATIONS AND WARRANTIES,
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EXPRESS OR IMPLIED, AND ABRAXAS AND SUB HEREBY DISCLAIM ALL OTHER
REPRESENTATIONS AND WARRANTIES, EXPRESS, IMPLIED, OR STATUTORY, INCLUDING
WITHOUT LIMITATION (i) ANY EXPRESS OR IMPLIED WARRANTY OF MERCHANTABILITY, (ii)
ANY EXPRESS OR IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, (iii) ANY
EXPRESS OR IMPLIED WARRANTY AS TO CONDITION, OR (iv) ANY EXPRESS OR IMPLIED
WARRANTY OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS AND MAKES NO
REPRESENTATIONS AS TO QUALITY OR QUANTITY OF HYDROCARBON RESERVES (IF ANY)
ATTRIBUTABLE TO THE ABRAXAS INTERESTS OR THE ABILITY OF THE INTERESTS TO PRODUCE
HYDROCARBONS.
ARTICLE V
COVENANTS
Section 5.01 Conduct of Business of the Company and Abraxas. During the
period from the date of this Agreement to the Effective Time, or the dates, if
any, on which this Agreement is earlier terminated pursuant to Section 10.14
hereof, each of Abraxas and the Company shall conduct its respective operations
only according to its ordinary and usual course of business and use reasonable
best efforts to preserve intact its respective business organization, keep
available the services of its respective officers and employees and maintain
satisfactory relationships with licensors, suppliers, distributors, lessees,
clients and others having business relationships with it. Notwithstanding the
immediately preceding sentence, pending the Effective Time and except as may be
first approved by Abraxas or the Company, as the case may be, or as is otherwise
permitted or required by this Agreement, each of Abraxas, Sub and the Company
will (a) cause its Certificate of Incorporation and By-Laws to be maintained in
their form on the date of this Agreement; (b) refrain from making any bonus,
pension, retirement or insurance payment or arrangement to or with any persons
except those that may have already been accrued and from increasing any benefits
payable under any Employee Program; (c) refrain from entering into any contract
or commitment except contracts in the ordinary course of business; (d) refrain
from making any change affecting any bank, safe deposit or power of attorney
arrangements; and (e) refrain from declaring, setting aside, paying or
distributing any dividends or distribution with respect to its capital stock or
engage in any similar recapitalization. During the period from the date of this
Agreement to the Effective Date, each of Abraxas, Sub and the Company shall
confer on a regular and frequent basis to report material operational matters
and to report the general status of ongoing operations. Each of Abraxas, Sub and
the Company shall notify the other of any unexpected emergency or other change
in the normal course of its business or in the operation of its properties and
of any governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), adjudicatory proceedings, budget
meetings or submissions involving any material property of Abraxas, Sub or the
Company, and to keep each other fully informed of such events and permit each
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other's respective representatives prompt access to all materials prepared in
connection therewith. Notwithstanding anything to the contrary set forth in this
Section 5.01, Vessels may cause the Termination (as defined in the Escrow
Agreement) of the Enron Contract prior to Closing or in lieu thereof may enter
into an agreement (the "Enron Administration Agreement") with an agent (the
"Enron Agent") relating to the administration of that certain Gas Sales and
Purchase Contract dated February 1, 1997 (the "Enron Contract") by and between
Enron Capital and Trade Resources Corp. and Vessels Hydrocarbons, Inc. The Enron
Administration Agreement shall be in form and substance reasonably satisfactory
to Abraxas, shall provide that the Representative may replace the Enron Agent
with a successor agent reasonably satisfactory to Abraxas and shall provide that
the Enron Agent shall (i) arrange for the gas supply to supply the obligations
of the Enron Contract, (ii) receive all nominations under the Enron Contract,
(iii) manage and utilize the Transportation Agreements (as defined in the Escrow
Agreement), (iv) arrange for the purchase and sale of gas at the various points
accessible by the Transportation Agreements and (v) take such other actions as
are reasonably necessary to administer the Enron Contract, which Vessels will
perform as a reasonably prudent operator.
Section 5.02 Exclusive Dealing. During the period from the date of this
Agreement to the Effective Time, the Company shall not take any action to,
directly or indirectly, encourage, initiate or engage in discussions or
negotiations with, or provide any information to, any Person, other than
Abraxas, concerning any purchase of the Stock or any merger or sale of all or
substantially all of the assets of the Company and the Subsidiaries or similar
transaction involving the Company and any of the Subsidiaries.
Section 5.03 Review of the Company and Abraxas. (a) Each of Abraxas and
the Company may, prior to the Closing Date, through their respective
representatives, review the properties, books and records of the Company and
Abraxas and their respective financial and legal condition as they deem
necessary or advisable to familiarize themselves with such properties and other
matters; such review shall not, however, affect the representations and
warranties made by the Company, Abraxas and Sub hereunder.
(b) Each of Abraxas and the Company shall permit each other and their
respective representatives to have, after the date of execution hereof, full
access to the premises and to all the books and records of the Company, Abraxas
and Sub and to cause the officers of the Company, Abraxas and Sub to furnish
each other with such financial and operating data and other information with
respect to the business and properties of Abraxas, Sub and the Company as they
shall from time to time reasonably request. In the event of termination of this
Agreement, each of Abraxas and the Company shall keep confidential any material
information obtained from the other concerning the properties, operations and
business (unless readily ascertainable from public or published information or
trade sources) until the same ceases to be material (or becomes so
ascertainable) and shall return to each other all copies of any schedules,
statements, documents or other written information obtained in connection
therewith. Abraxas, Sub and the Company shall deliver or cause to be delivered
on the Closing Date, and at such other times and places as shall be reasonably
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agreed upon, such additional instruments as the Company, Abraxas and Sub may
reasonably request for the purpose of carrying out this Agreement.
Section 5.04 Regulatory and Other Filings and Approvals. Each of
Abraxas, Sub and the Company shall duly make all regulatory filings required to
be made by each in respect of this Agreement or the transactions contemplated
hereby. Abraxas, Sub and the Company shall use all reasonable efforts to obtain
all regulatory approvals necessary to carry out the transactions contemplated by
this Agreement.
Section 5.05 Best Efforts. Subject to the fiduciary duties of the
directors of Abraxas, Sub and the Company under applicable law as advised by
counsel, each of Abraxas, Sub and the Company agrees to use its best efforts
promptly to take, or cause to be taken, all actions and to do, or cause to be
done, all things necessary, proper or advisable to consummate and to make
effective the transactions contemplated by this Agreement and the Related
Agreements, including the satisfaction of all conditions thereto, and shall use
their best efforts to obtain all waivers, permits, consents and approvals and to
effect all registrations, filings and notices with or to third parties or
governmental or public bodies or authorities that are, in the opinion of
Abraxas, Sub and the Company, necessary or desirable in connection with the
transactions contemplated by this Agreement and the Related Agreements,
including, without limitation, filings and approvals to the extent required
under the Delaware Statute, the Nevada Statute, the securities, takeover or blue
sky laws of the various states, the Securities Act, the regulatory laws of
various states in which Abraxas, Sub and the Company conduct business, and
consents and waivers required under any material contracts, agreements, leases,
licenses or other documents to which Abraxas, Sub or the Company is a party. If
at any time after the Effective Time any further action is necessary or
desirable to carry out the purposes of this Agreement and the Related
Agreements, the proper officers or directors of Abraxas, Sub and the Company
shall take such action.
Section 5.06 Affiliate Agreements. The Company shall, prior to the
Effective Date, cause to be delivered to Abraxas a list, reviewed by its counsel
and reasonably satisfactory to Abraxas, identifying all persons who are, in its
opinion, at the time of the meeting of the Company's stockholders to be held in
accordance with Article II, "affiliates" of the Company for purposes of Rule 145
under the Securities Act. The Company shall furnish such information and
documents as Abraxas may reasonably request for the purpose of reviewing such
list. The Company shall use its best efforts to cause each person who is
identified as an "affiliate" in the list furnished pursuant to this Section 5.06
to execute a written agreement on or prior to the Effective Date, in a form
satisfactory to the other (an "Affiliate Agreement"), that such person shall not
offer or sell or otherwise dispose of any of the shares of Abraxas Common Stock
issued to such person pursuant to the Merger in violation of the Securities Act
or the rules and regulations promulgated by the Commission thereunder.
Section 5.07 Public Announcements. Abraxas and the Company shall
consult each other before issuing any press release or other public announcement
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regarding the Merger, and shall not issue any such press release or other public
announcement without the consent of the other unless required by law, as advised
by counsel, or by obligations pursuant to any listing agreement with any
national securities exchange.
Section 5.08 Tax-Free Reorganization. Abraxas and the Company shall
each use its best efforts to cause the Merger to be treated as a reorganization
within the meaning of Section 368(a) of the Code.
Section 5.09 Nasdaq Quotation. Abraxas shall use its best efforts to
cause the shares of Abraxas Common Stock to be issued in the Merger to be
approved for quotation on the Nasdaq National Market, subject to official notice
of issuance, prior to the Effective Time.
Section 5.10 Issuance of Securities. Except as set forth on Schedule
5.10, without the prior written consent of the Company, Abraxas shall not issue
or agree to issue any shares of capital stock (except upon the exercise of
outstanding rights, options or warrants to purchase common stock in exchange for
full payment), bonds or other corporate securities at a price less than the
Average Price during the period between the date hereof and the Effective Time.
Section 5.11 Benefit Plans and Related Matters.
(a) Abraxas shall take such actions as are necessary to fulfill the
Company's severance obligations to its employees as set forth on Schedule 3.25
and to make available to former employees of the Company continued employee
benefits after the Effective Time as required by COBRA. Abraxas shall maintain
health benefit and other welfare plan coverage for former employees of the
Company for six months after the Effective Time under the health benefit and
each other welfare plan maintained by the Company immediately before the
Effective Time. Abraxas shall maintain the Vessels Oil and Gas Company Employee
Savings Plan (the "Vessels 401(k) Plan") for six months after the Effective
Time, at which time the Vessels 401(k) Plan shall be merged into the Abraxas
401(k) Profit Sharing Plan. The former employees of the Company shall continue
to participate in the Vessels 401(k) Plan for six months following the Effective
Time.
(b) Other than as set forth in Sections 5.11(a) and (c) and subject to
the provisions of Abraxas' policies and programs, any employee of the Company
retained by Abraxas or its affiliates after the Effective Time (each, a
"Transferred Employee") shall be eligible to participate or eligible for accrual
of benefits, vesting and contributions or accruals to be made or credited
following the Effective Time under each of Abraxas' employee benefit plans,
programs or arrangements available to all or substantially all of Abraxas'
employees, subject to the terms upon which such plans allow new participation by
Abraxas' employees. Each Transferred Employee shall be credited with the
time-in-service that the employee accrued with the Company or its Subsidiaries.
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(c) Except as expressly provided in this Section 5.11, Abraxas has no
obligation to (i) make any contributions or accruals with respect to any period
preceding the Effective Time, (ii) offer Transferred Employees the same or
comparable employee plans or benefits as those offered by the Company, or (iii)
assume any liability of the Company with respect to the Company's employee
benefit plans or severance policy, accrued vacation or sick leave for the
Company's employees, or the Company's employment of the Transferred Employees
prior to the Effective Time. This Agreement is not intended to create and does
not create any contractual or legal rights in or enforceable by any employee of
the Company or upon any party other than the Company and Abraxas. Any oral or
written communications to the employees of the Company concerning the subject
matter of this Section 5.11 shall be approved in advance by the Company and
Abraxas.
Section 5.12 Indemnification; Directors' and Officers' Insurance.
(a) From and after the Effective Time, Abraxas agrees that it will
indemnify and hold harmless each present and former director and/or officer of
the Company (the "Indemnified Parties"), that is made a party or threatened to
be made a party to any threatened, pending or completed, action, suit,
proceeding or claim, whether civil, criminal, administrative or investigative,
by reason of the fact that he or she was a director or officer of the Company or
any of the Subsidiaries prior to the Effective Time and arising out of actions
or omissions of the Indemnified Party in any such capacity occurring at or prior
to the Effective Time (a "Claim") against any costs or expenses (including
reasonable attorneys' fees), judgments, fines, amounts paid in settlement
pursuant to Section 5.12(b), losses, claims, damages or liabilities
(collectively, "Costs") reasonably incurred in connection with any Claim,
whether asserted or claimed prior to, at or after the Effective Time, to the
fullest extent that the Company would have been permitted under applicable law
and the Company's Certificate of Incorporation and By-laws in effect as of the
Closing Date. Abraxas shall also advance expenses (including reasonable
attorneys' fees), as reasonably incurred by the Indemnified Party to the fullest
extent permitted under applicable law provided such Indemnified Party provides
an undertaking to repay such advances if it is ultimately determined that such
Indemnified Party is not entitled to indemnification.
(b) Any Indemnified Party wishing to claim indemnification under
paragraph (a) of this Section 5.12 upon learning of any such Claim, shall
promptly notify Abraxas thereof, but the failure to so notify shall not relieve
Abraxas of any liability it may have to such Indemnified Party if such failure
does not materially prejudice Abraxas. In the event of any such claim, action,
suit, proceeding or investigation (whether arising before or after the Effective
Time), (i) Abraxas shall have the right to assume the defense thereof and
Abraxas shall not be liable to such Indemnified Parties for any legal expenses
of other counsel or any other expenses subsequently incurred by such Indemnified
Parties in connection with the defense thereof, except that if Abraxas elects
not to assume such defense or counsel or the Indemnified Parties advise and
Abraxas' counsel concurs that there are issues which raise conflicts of interest
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between Abraxas and the Indemnified Parties, in either such case the Indemnified
Parties may retain counsel satisfactory to them, and Abraxas shall pay all
reasonable fees and expenses of such counsel for the Indemnified Parties
promptly as statements therefor are received; provided, however, that Abraxas
shall be obligated pursuant to this paragraph (b) to pay for only one firm or
counsel for all Indemnified Parties in any jurisdiction unless the use of one
counsel for such Indemnified Parties would present such counsel with a conflict
of interest, (ii) the Indemnified Parties will cooperate in the defense of any
such matter and (iii) Abraxas shall not be liable for any amounts paid in
settlement effected without its prior written consent, which consent will not be
unreasonably withheld; and provided, further, however, that Abraxas shall not
have any obligation hereunder to any Indemnified Party when and if a court of
competent jurisdiction shall ultimately determine, and such determination shall
have become final and non-appealable, that the indemnification of such
Indemnified Party in a manner contemplated hereby is prohibited by applicable
law. If such indemnity is not available with respect to any Indemnified Party,
then Abraxas and the Indemnified Party shall contribute to the amount payable in
such proportion as is appropriate to reflect relative faults and benefits, with
any aspect of "fault" otherwise allocable to the Company being allocated to
Abraxas.
(c) If a Claim under this Section 5.12 is not paid in full by Abraxas
within thirty days after a written request therefor has been received by
Abraxas, the Indemnified Party may at any time thereafter bring suit against
Abraxas to recover the unpaid amount of the Claim and, if successful in whole or
in part, the Indemnified Party shall be entitled to be paid also the expense of
prosecuting such Claims.
(d) Neither the failure of Abraxas (including its Board of Directors,
independent legal counsel or stockholders) to have made a determination prior to
the commencement of such suit that indemnification of the Indemnified Party is
proper in the circumstances because he or she has met the applicable standard of
conduct, nor an actual determination by Abraxas (including its Board of
Directors, independent legal counsel, or stockholders) that the Indemnified
Party has not met such applicable standard of conduct, shall be a defense to the
suit or create a presumption that the Indemnified Party has not met the
applicable standard of conduct.
(e) For a period of six (6) years after the Effective Time, Abraxas
shall maintain the Company's existing directors and officers liability insurance
or equivalent liability insurance ("D&O Insurance"), which will provide coverage
for the Indemnified Parties so long as the annual premium therefor is not in
excess of 150% of the last annual premium paid by the Company prior to the date
hereof (the "Current Premium"). If Abraxas determines that it is unable to
maintain the existing or equivalent D&O Insurance that includes coverage for the
Indemnified parties for a premium not in excess of 150% of the Current Premium,
but maintains D&O Insurance for persons who are directors and officers of
Abraxas, then, for the six-year period after the Effective Time, Abraxas will
provide D&O Insurance for the Indemnified Parties on the same basis as Abraxas
maintains D&O Insurance for persons who are then directors and officers of
Abraxas. If the existing D&O Insurance expires, is terminated or canceled during
the six-year period after the Effective Time and Abraxas does not then maintain
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D&O Insurance for persons who are directors and officers of Abraxas, Abraxas
will use its reasonable efforts to obtain D&O Insurance for such period
providing at least $1,000,000 of coverage for those persons who are Indemnified
Parties.
(f) In lieu of the insurance arrangement referred to in clause (e) of
this Section 5.12, Abraxas may, on or before the Closing, enter into alternative
insurance arrangements, provided that such arrangements are approved by each of
the individuals who are independent directors and officers of the Company at any
time from the date of this Agreement through the Effective Time.
Section 5.13 New Executive Officers and Directors. In the event that
Abraxas elects executive officers and directors who are not parties to the
Voting Agreements, Abraxas shall cause such executive officers and directors to
execute and deliver a Voting Agreement in substantially the form of Exhibit E-2
attached hereto.
ARTICLE VI
CONDITIONS TO ABRAXAS' OBLIGATIONS
All obligations of Abraxas to be discharged under this Agreement at the
Closing are subject to the fulfillment, prior to or at the Closing, of each of
the following conditions, unless waived pursuant to Section 2.03 or in writing
by Abraxas prior to or at the Closing:
Section 6.01 Opinion of Company Counsel. The Company shall have
furnished Abraxas with a favorable opinion, dated the Closing Date, of King &
Spalding in form and substance reasonably satisfactory to Abraxas and its
counsel, to the effect set forth in Exhibit H hereto which opinion may rely, to
the extent reasonably agreed upon by Abraxas and its counsel, upon an opinion of
the general counsel of the Company.
Section 6.02 Good Standing and Tax Certificates. The Company shall have
delivered to Abraxas (a) copies of the charter, including all amendments
thereto, certified by the Secretary of State or other appropriate official of
the jurisdiction of incorporation of the Company and each of the Subsidiaries;
(b) certificates from the Secretary of State or other appropriate official of
the jurisdiction of incorporation to the effect that the Company and the
Subsidiaries are in good standing or subsisting in such jurisdiction and listing
all charter documents of the Company and the Subsidiaries on file; (c) a
certificate from the Secretary of State or other appropriate official in each
State in which the Company and the Subsidiaries are qualified to do business to
the effect that the Company and the Subsidiaries are in good standing in such
state; and (d) certificates as to the tax status of the Company and the
Subsidiaries in their respective jurisdictions of incorporation and each state
in which the Company and the Subsidiaries are qualified to do business.
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ANNEX I
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Section 6.03 No Material Adverse Change. Prior to the Closing Date,
there shall have been no material adverse change in the assets or liabilities,
the business or condition, financial or otherwise, the results of operations, or
prospects of the Company and the Subsidiaries taken as a whole that would or
would be reasonably likely to have a Material Adverse Effect other than such
change that affects Abraxas and the Company in a substantially similar manner
and the Company shall have delivered to Abraxas a certificate, dated the Closing
Date, to such effect. A change resulting from a change in the prices of oil and
gas, stock market conditions, general economic conditions or oil and gas
industry conditions will not be deemed to be a material adverse change pursuant
to this Section 6.03.
Section 6.04 Truth of Representations and Warranties. The
representations and warranties of the Company contained in this Agreement or in
any Schedule delivered pursuant hereto shall be materially true and correct
(except for such representations and warranties which are qualified by
"material" or "Material Adverse Effect" which shall be true and correct) on and
as of the Closing Date with the same effect as though such representations and
warranties had been made on and as of such date except as expressly contemplated
herein or in the Schedules delivered pursuant to this Agreement, and the Company
shall have delivered to Abraxas on the Closing Date a certificate, dated the
Closing Date, to such effect.
Section 6.05 Performance of Agreements. Each and all of the agreements
of the Company to be performed on or before the Closing Date pursuant to the
terms hereof shall have been duly performed in all material respects, and the
Company shall have delivered to Abraxas a certificate, dated the Closing Date,
to such effect.
Section 6.06 No Litigation Threatened. No action or proceedings shall
have been instituted or, to the best knowledge of the Company, threatened before
a court or other government body or by any public authority to restrain or
prohibit any of the transactions contemplated hereby, and the Company shall have
delivered to Abraxas a certificate, dated the Closing Date, to such effect.
Section 6.07 Governmental Approvals. Other than approvals referred to
in Section 6.12, all governmental and other consents and approvals, if any,
necessary to permit the consummation of the transactions contemplated by this
Agreement shall have been received. No governmental action or proceeding shall
have been commenced or threatened seeking any injunction, restraining order or
other order which seeks to prohibit, restrain, invalidate or set aside the
effectuation of the Merger.
Section 6.08 Intra-Company Debt. All indebtedness of the directors,
officers and employees of the Company and the Subsidiaries to the Company and
the Subsidiaries shall have been repaid in full.
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ANNEX I
<PAGE>
Section 6.09 Proceedings. All proceedings to be taken by the Company in
connection with the transactions contemplated by this Agreement and all
documents incident thereto shall be reasonably satisfactory in form and
substance to Abraxas and its counsel and Abraxas shall have received copies of
all such documents and other evidences as it or its counsel may reasonably
request in order to establish the consummation of such transactions and the
taking of all proceedings in connection therewith.
Section 6.10 Escrow Agreements. The Company shall have executed and
delivered the Escrow Agreement and the Provisional Payment Escrow Agreement.
Section 6.11 Stockholder Approval. This Agreement shall have been duly
approved by the Vessels Stockholders in accordance with applicable law.
Section 6.12 Effectiveness of S-4 Registration Statement. Subject to
Section 2.03 of this Agreement, the S-4 Registration Statement shall have become
effective and no stop order suspending the effectiveness thereof shall be in
effect and no proceedings for such purpose shall be pending or threatened before
the Commission.
Section 6.13 Affiliate Agreements. Abraxas shall have obtained from
each Person who is identified in the list referred to in Section 5.06 as a
Person who may be deemed to be an "affiliate" of the Company for purposes of
Rule 145 under the Securities Act, an Affiliate Agreement substantially in the
form previously provided to the Company with respect to the shares of Abraxas
Common Stock to be received by such Person in the Merger.
Section 6.14 Dissenters' Rights. The number of holders of shares of the
Stock exercising appraisal rights under the Delaware Statute shall not exceed 5%
of the shares of the Stock issued and outstanding as of the date of this
Agreement.
Section 6.15 Options and Warrants. All options to purchase the Shares
shall have been terminated and all Warrants to purchase the Shares other than
those held by Associated Energy Managers, Inc. ("AEM") and Chase Manhattan
Investment Holdings, Inc. ("Chase") shall have been terminated.
Section 6.16 Vessels Stockholder Agreement. The Vessels Oil and Gas
Company Amended and Restated Stockholders Agreement shall have been terminated.
Section 6.17 Bank of Montreal. That certain Short-Term Credit Agreement
dated October 2, 1996 by and between the Company and Bank of Montreal (the
"Bank") shall have been terminated with funds provided by Abraxas and the Bank
shall have released any liens, encumbrances and security interests it may have
on the assets of the Company and the Subsidiaries.
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ANNEX I
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ARTICLE VII
CONDITIONS TO THE COMPANY'S OBLIGATIONS
All obligations of the Company to be discharged under this Agreement at
the Closing are subject to the fulfillment, prior to or at the Closing, of each
of the following conditions, unless waived pursuant to Section 2.03 or in
writing by the Company prior to or at the Closing:
Section 7.01 Opinion of Purchaser's Counsel. Abraxas and Sub shall have
furnished the Company with a favorable opinion, dated the Closing Date, of Cox &
Smith Incorporated in form and substance reasonably satisfactory to the Company
and its counsel to the effect set forth in Exhibit I hereto.
Section 7.02 Truth of Representations and Warranties. The
representations and warranties of Abraxas and Sub contained in this Agreement or
in any Schedule delivered pursuant hereto shall be materially true and correct
(except for such representations and warranties which are qualified by
"material" or "Material Adverse Effect" which shall be true and correct) on and
as of the Closing Date with the same effect as though such representations and
warranties had been made on and as of such date; and Abraxas and Sub shall have
delivered to the Company on the Closing Date a certificate, dated the Closing
Date, to such effect.
Section 7.03 Governmental Approvals. All governmental and all other
consents and approvals, if any, necessary to permit the consummation of the
transactions contemplated by this Agreement shall have been received. No
governmental action or proceeding shall have been commenced or threatened
seeking any injunction, restraining order or other order which seeks to
prohibit, restrain, invalidate or set aside the effectuation of the Merger.
Section 7.04 Escrow Agreements. Abraxas shall have executed and
delivered the Escrow Agreement and the Provisional Payment Escrow Agreement.
Section 7.05 Registration Rights Agreements. Abraxas shall have
executed and delivered the Registration Rights Agreements.
Section 7.06 Letter Agreement. Abraxas shall have executed and
delivered the Letter Agreement.
Section 7.07 No Material Adverse Change. Prior to the Closing Date,
there shall have been no material adverse change in the assets or liabilities,
the business or condition, financial or otherwise, the results of operations, or
prospects of Abraxas on a consolidated basis that would or would be reasonably
likely to have a Material Adverse Effect other than such change that affects
Abraxas and the Company in a substantially similar manner and Abraxas shall have
delivered to the Company a certificate, dated the Closing Date, to such effect.
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A change resulting from a change in the prices of oil and gas, stock market
conditions, general economic conditions or oil and gas industry conditions will
not be deemed to be a material adverse change pursuant to this Section 7.07.
Section 7.08 No Litigation Threatened. No action or proceedings shall
have been instituted or, to the best knowledge of Abraxas, threatened before a
court or other government body or by any public authority to restrain or
prohibit any of the transactions contemplated hereby, and Abraxas and Sub shall
have delivered to the Company a certificate, dated the Closing Date, to such
effect.
Section 7.09 Good Standing and Tax Certificates. Abraxas, Sub and
Canadian Abraxas shall have delivered to the Company (a) copies of the charter,
including all amendments thereto, certified by the Secretary of State or other
appropriate official of the jurisdiction of incorporation of Abraxas, Sub and
Canadian Abraxas; (b) certificates from the Secretary of State or other
appropriate official of the jurisdiction of incorporation to the effect that
Abraxas, Sub and Canadian Abraxas are in good standing or subsisting in such
jurisdiction and listing all charter documents of Abraxas, Sub and Canadian
Abraxas on file; (c) a certificate from the Secretary of State or other
appropriate official in each state in which Abraxas and Sub are qualified to do
business to the effect that Abraxas and Sub are in good standing in such state;
and (d) certificates as to the tax status of Abraxas, Sub and Canadian Abraxas
in their respective jurisdictions of incorporation and each state in which
Abraxas, Sub and Canadian Abraxas are qualified to do business.
Section 7.10 Performance of Agreements. Each and all of the agreements
of Abraxas and its officers and directors and Sub to be performed on or before
the Closing Date pursuant to the terms hereof or the Agreements shall have been
duly performed in all material respects, and Abraxas and Sub shall have
delivered to the Company a certificate, dated the Closing Date, to such effect.
Section 7.11 Proceedings. All proceedings to be taken by Abraxas or Sub
in connection with the transactions contemplated by this Agreement and all
documents incident thereto shall be reasonably satisfactory in form and
substance to the Company and its counsel and the Company shall have received
copies of all such documents and other evidences as it or its counsel may
reasonably request in order to establish the consummation of such transactions
and the taking of all proceedings in connection therewith.
Section 7.12 Effectiveness of S-4 Registration Statement. Subject to
Section 2.03 of this Agreement, the S-4 Registration Statement shall have become
effective and no stop order suspending the effectiveness thereof shall be in
effect and no proceedings for such purpose shall be pending or threatened before
the Commission.
Section 7.13 Stockholder Approval. If required by law or the rules and
regulations of the Nasdaq National Market (without reliance on the 19.9%
Alternative), this Agreement shall have been duly approved by the stockholders
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of Abraxas in accordance with applicable law.
Section 7.14 Opinion of Company's Counsel. The Company shall have
received a favorable opinion dated the Closing Date of King & Spalding in form
and substance reasonably satisfactory to the Company that the Merger will be
treated as a tax-free reorganization pursuant to Section 368(a) of the Code as
supported by customary certificates required to be delivered by the parties
hereto.
Section 7.15 Director Approval. The Board of Directors of Abraxas and
Sub shall have recommended and voted in favor of adoption and approval of this
Agreement.
Section 7.16 NASDAQ Listing. The Abraxas Shares to be issued at the
Effective Time and on the Provisional Payment Date shall have been approved for
listing on the Nasdaq National Market subject to official notice of issuance.
Section 7.17 Waivers and Consents. Abraxas shall have obtained waivers
and consents under the Amended and Restated Credit Agreement with Bankers Trust
to permit consummation of the transactions contemplated by this Agreement.
ARTICLE VIII
SURVIVAL OF REPRESENTATIONS; RECOVERY
Section 8.01 Survival of Representations. Except as otherwise provided
in the Escrow Agreement, the representations, warranties, covenants and
agreements of the Company, Abraxas and Sub set forth in this Agreement shall not
survive the Merger contemplated hereby and shall expire at the Effective Time;
provided, however, that the covenants of Abraxas set forth in Sections 1.04,
1.05, 1.13(b), 2.02, 5.01 5.05, 5.08, 5.09, 5.11, 5.12, 5.13 and Schedule
1.04(e)(iv) shall survive the Merger contemplated hereby. In the absence of
fraud, Abraxas, the Company and Sub covenant and agree never to institute,
directly or indirectly, any action or proceeding against the Vessels
Stockholders based upon or arising out of or in any manner related to, the
breach of a representation, warranty, covenant or agreement contained in this
Agreement except as set forth in the Escrow Agreement.
Section 8.02 Claims. Abraxas' sole and exclusive remedy shall be to
recover from the Escrow Shares any damages, losses, costs, liabilities and
expenses suffered or paid, directly or indirectly, through application of the
assets of Abraxas, any of its subsidiaries, the Company, or its Subsidiaries, as
a result of any and all claims, demands, suits, causes of action, proceedings,
judgments and liabilities, including reasonable counsel fees incurred in
litigation or otherwise, assessed, incurred or sustained by or against Abraxas,
any of its subsidiaries, the Company or the Subsidiaries but only pursuant to
and in accordance with the terms of the Escrow Agreement.
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ARTICLE IX
CLOSING
Section 9.01 Deliveries at the Closing. Immediately following the
satisfaction of the conditions set forth in Articles VI and VII hereof, the
Company and Sub shall cause a Certificate of Merger to be filed in accordance
with the provisions of the Delaware Statute, and shall take any and all other
lawful actions and do any and all other lawful things necessary to cause the
Merger to become effective.
Section 9.02 Time and Place. The consummation of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Cox & Smith Incorporated, 112 East Pecan Street, Suite 1800, San Antonio,
Texas 78205, as soon as reasonably practicable after such time as the conditions
set forth in Articles VI and VII shall have been satisfied or waived, or at such
other place or at such other time as may be mutually agreed upon by Abraxas and
the Company.
ARTICLE X
MISCELLANEOUS
Section 10.01 Knowledge. Where any representation or warranty contained
in this Agreement is expressly qualified by reference to the knowledge,
information and/or belief of the Company, Sub or Abraxas, each of the Company,
Sub or Abraxas confirms that he or it, as the case may be, has made due and
diligent inquiry as to the matters that are the subject of such representations
and warranties.
Section 10.02 Expenses. The parties hereto shall pay all of their own
expenses relating to the transactions contemplated by this Agreement, including,
without limitation, the fees and expenses of their respective counsel and
financial advisers and engineers. Abraxas and Vessels shall split the fees and
expenses, if any, related to the engagement of Ryder Scott Petroleum Engineers
pursuant to Section 1.04(a).
Section 10.03 Governing Law. The interpretation and construction of
this Agreement, and all matters relating hereto, shall be governed by the laws
of the State of Delaware without regard to the principles or conflicts of law
applicable thereto.
Section 10.04 "Person" Defined. "Person" shall mean and include an
individual, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization and a government or other department or agency
thereof.
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Section 10.05 Captions. The Article and Section captions used herein
are for reference purposes only, and shall not in any way affect the meaning or
interpretation of this Agreement. All references in this Agreement to an Article
or Section, when used without further attribution, shall refer to Articles or
Sections of this Agreement.
Section 10.06 Publicity. Except as otherwise required by law and the
rules and regulations of the Nasdaq National Market, none of the parties hereto
shall issue any press release or make any other public statement, in each case
relating to or connected with or arising out of this Agreement or the matters
contained herein, without obtaining the prior approval of Abraxas and the
Company to the contents and the manner of presentation and publication thereof.
Section 10.07 Notices. Any notice or other communications required or
permitted hereunder shall be sufficiently given if delivered in person or sent
by overnight courier or by registered or certified mail, postage prepaid,
addressed as follows or by facsimile transmission to the number set forth below:
If to the Company:
Vessels Energy, Inc.
1050 Seventeenth Street, Suite 2000
Denver, Colorado 90285
Attention: W. Michael Neumann, Jr.
Facsimile: (303) 825-2532
With a copy to:
King & Spalding
1100 Louisiana, Suite 3300
Houston, TX 77002-5219
Attention: Christine LaFollette
Facsimile: (713) 751-3290
If to Abraxas or Sub:
Abraxas Petroleum Corporation
500 North Loop 1604 East
Suite 100
San Antonio, Texas 78232
Attention: Robert L. G. Watson
Facsimile: (210) 490-8816
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ANNEX I
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With a copy to:
Cox & Smith Incorporated
112 East Pecan Street, Suite 1800
San Antonio, Texas 78205
Attention: Steven R. Jacobs
Facsimile: (210) 226-8395
or such other address as shall be furnished in writing by any such party, and
such notice or communication shall be deemed to have been given as of the date
so delivered or mailed.
Section 10.08 Parties in Interest. This Agreement may not be
transferred, assigned, pledged or hypothecated by any party hereto, other than
by operation of law. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective heirs, executors,
administrators, successors and assigns and shall be for the benefit of the
Vessels Stockholders and Indemnified Parties.
Section 10.09 Counterparts. This Agreement may be executed in two or
more counterparts, all of which taken together shall constitute one instrument.
Section 10.10 Entire Agreement. This Agreement, including the other
documents referred to herein which form a part hereof, contains the entire
understanding of the parties hereto with respect to the subject matter contained
herein and therein and supersedes all prior agreements and understandings
between the parties with respect to such subject matter. All exhibits and
schedules referred to herein and attached hereto are incorporated herein by
reference.
Section 10.11 Amendments. This Agreement may not be changed orally, but
only by an agreement in writing signed by Abraxas, Sub and the Company.
Section 10.12 Severability. In case any provision in this Agreement
shall be held invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions hereof will not in any way be
affected or impaired thereby.
Section 10.13 Third Party Beneficiaries. Each party hereto intends that
this Agreement shall not benefit or create any right or cause of action in or on
behalf of any person other than the parties hereto, the Vessels Stockholders and
Indemnified Parties.
Section 10.14 Termination of Agreement. Notwithstanding anything
contained in this Agreement to the contrary, this Agreement may be terminated
and abandoned only in the following manner:
(a) by the mutual written consent of the Board of Directors of Abraxas
and the Company at any time prior to the Closing; or
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ANNEX I
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(b) by Abraxas, Sub or the Company if the Closing shall not have
occurred on or before February 28, 1998; provided, however, that the right to
terminate this Agreement under this Section 10.14(b) shall not be available to
any party whose failure to fulfill any obligation, covenant or condition under
this Agreement has been the cause of, or resulted in, the failure of the Closing
to occur on or before such date; or
(c) by Abraxas, Sub or the Company, at any time prior to the Closing,
if any court of competent jurisdiction in the United States or other United
States governmental body shall have issued an order, decree or ruling or taken
any other action restraining, enjoining or otherwise prohibiting the
consummation of the transactions contemplated by this Agreement and such order,
decree, ruling or other action shall have become final and nonappealable; or
(d) By Abraxas or Sub if any condition set forth in Article VI could
not be satisfied on or prior to February 28, 1998, unless such failure shall
have been caused by or resulted from the failure of Abraxas or Sub to perform in
any material respect any material covenant or agreement of either of them set
forth in this Agreement or the material breach by Abraxas or Sub of any material
representation or warranty of either of them set forth in this Agreement; or
(e) By the Company if any condition set forth in Article VII could not
be satisfied on or prior to February 28, 1998, unless such failure shall have
been caused by or resulted from the failure of the Company to perform in any
material respect any material covenant or agreement of it contained in this
Agreement or the material breach by the Company of any material representation
or warranty of it contained in this Agreement; or
(f) By Abraxas, Sub or the Company if the stockholders of the Company
or Abraxas do not approve the Merger at the Meetings; or
(g) By the Company if the executive officers and directors of Abraxas
shall have breached the Voting Agreements.
Section 10.15 Procedure for Termination. In the event of the
termination of this Agreement and abandonment of the transactions contemplated
hereby by any or all of the parties pursuant to Section 10.15 hereof, written
notice thereof shall forthwith be given to the other party specifying the
provision hereof pursuant to which such termination is made and this Agreement
and the transactions contemplated by this Agreement shall be abandoned and, all
obligations except for the provisions of the third sentence of Section 5.03 and
Sections 5.07 and 10.16, this Agreement and the Voting Agreements shall
forthwith become void and have no effect, without any liability on the part of
any party or its respective directors, officers, employees, agents, consultants
or stockholders. If this Agreement is terminated as provided herein:
(a) Each party shall redeliver or destroy all documents, work papers
and other materials of the other party relating to the transactions contemplated
hereby, whether so obtained before or after the execution of this Agreement, to
52
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<PAGE>
the party furnishing the same; and
(b) All information received by any party hereto with respect to the
business of the other party (other than information which is a matter of public
knowledge or which has heretofore been or is hereafter published in any
publication for public distribution or filed as public information with any
governmental authority) shall not at any time be used for the advantage of, or
disclosed to third parties by, such party to the detriment of the party
furnishing such information.
Section 10.16 Fees.
(a) In recognition of the significant expenditure of executive time and
resources incurred by Abraxas and Sub in connection with the negotiation of this
Agreement and investigation of the transactions contemplated hereby, and in
light of the difficulty in calculating the value of such executive time and
resources, upon the termination of this Agreement by Abraxas or Sub pursuant to
Section 10.14(d), the Company shall pay to Abraxas $1,500,000; provided,
however, the Company shall not be obligated to pay the fee required to be paid
pursuant to this Section 10.16(a) if Abraxas and Sub terminate this Agreement on
account of any of the conditions set forth in Sections 6.01 (but only to the
extent the opinion cannot substantively legally be given), 6.12 and 6.14 not
having been satisfied or if Abraxas and Sub terminate this Agreement on account
of the failure to receive, pursuant to Section 6.07, approvals for which Abraxas
has responsibility, approvals typically received after consummation of a
transaction similar to the Merger or approvals the failure of which to be
obtained would not have a Material Adverse Effect; provided further, that the
Company shall not be obligated to pay the fee required to be paid pursuant to
this Section 10.16(a) if (i) Abraxas and Sub shall not have satisfied all
conditions precedent to the Closing set forth in Article VII as of the date of
termination, other than the conditions set forth in Sections 7.01 (but only to
the extent the opinion cannot substantively legally be given) and 7.13, (ii) the
executive officers and directors of Abraxas shall not have satisfied their
obligations under the Voting Agreements or (iii) Abraxas shall have taken any
action intended or reasonably calculated to prevent the Closing.
(b) In recognition of the significant expenditure of executive time and
resources incurred by the Company in connection with the negotiation of this
Agreement and investigation of the transactions contemplated hereby, and in
light of the difficulty in calculating the value of such executive time and
resources, if this Agreement is terminated by the Company pursuant to Section
10.14(e) or (g) Abraxas shall pay to the Company $1,500,000; provided, however
Abraxas shall not be obligated to pay such sum to the Company if the Company
terminates this Agreement on account of any of the conditions set forth in
Sections 7.01 (but only to the extent the opinion cannot substantively legally
be given) and 7.13 not having been satisfied or if Vessels terminates this
Agreement on account of the failure to receive, pursuant to Section 7.03,
approvals for which Vessels has responsibility, approvals typically received
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ANNEX I
<PAGE>
after consummation of a transaction similar to the Merger or approvals the
failure of which to be obtained would not have a material adverse effect on the
business, results of operations, or condition, financial or otherwise, of
Abraxas; provided further, that Abraxas shall not be obligated to pay the fee
required to be paid pursuant to this Section 10.16(b) if (i) Vessels shall not
have satisfied all conditions precedent to the Closing set forth in Article VI
as of the date of termination, other than the conditions set forth in Sections
6.01 (but only to the extent the opinion cannot substantively legally be given),
6.12 and 6.14 or (ii) Vessels shall have taken any action intended or reasonably
calculated to prevent the Closing.
(c) Payment of the fee referred to in this Section 10.16 shall be made
not later than two business days after termination of this Agreement by wire
transfer of immediately available funds to an account designated by the party
entitled to receive payment.
Section 10.17 Schedules. The disclosure made in any Schedule with
respect to any representation and warranty shall be deemed to be made with
respect to any other representation and warranty which requires the same or
similar disclosure to the extent that the subject matter of such disclosure to
one representation and warranty applies to another representation and warranty.
Section 10.18 CONSPICUOUS DISCLAIMERS. THE PARTIES AGREE THAT TO THE
EXTENT REQUIRED TO BE OPERATIVE, THE DISCLAIMERS OF CERTAIN WARRANTIES AND OTHER
MATTERS CONTAINED IN THIS AGREEMENT ARE "CONSPICUOUS" DISCLAIMERS FOR THE
PURPOSES OF ANY APPLICABLE LAW, RULE OR ORDER.
54
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IN WITNESS WHEREOF, Abraxas, Sub, and the Company have executed this
Agreement to be effective as of the day and year first above written.
ABRAXAS PETROLEUM CORPORATION
By: /s/ Chris E. Williford
Chris E. Williford
Executive Vice President,
Chief Financial Officer and Treasurer
VEI ACQUISITION CORP.
By: /s/ Chris E. Williford
Chris E. Williford, Vice President
VESSELS ENERGY, INC.
By: /s/ W. Michael Neumann, Jr.
W. Michael Neumann, Jr., President
55
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DEFINED TERMS
"AEM" shall have the meaning set forth in Section 6.15.
"Abraxas" or "Purchaser" shall have the meaning set forth in the
Introduction.
"Abraxas Common Stock" shall have the meaning set forth in Section
1.01(b).
"Abraxas Interests" shall have the meaning set forth in Section
4.15(b).
"Abraxas Leases" shall have the meaning set forth in Section 4.15(b).
"Abraxas Meeting" shall have the meaning set forth in Section 2.01.
"Abraxas Reserve Report" shall have the meaning set forth in Section
4.14.
"Abraxas Well" or "Abraxas Wells" shall have the meaning set forth in
Section 4.15(a).
"1934 Act" shall have the meaning set forth in Section 3.26.
"Affiliate Agreement" shall have the meaning set forth in Section 5.06.
"Agreement" shall have the meaning set forth in the Introduction.
"Applicable Laws" shall have the meaning set forth in Section 3.22.
"Appraisal Shares" shall have the meaning set forth in Section 1.07.
"Average PV-10" shall have the meaning set forth in Section 1.04(a).
"Balance Sheet Date" shall have the meaning set forth in Section 3.05.
"Bank" shall have the meaning set forth in Section 6.17.
"COBRA" shall have the meaning set forth in Section 3.25(h).
"Canadian Abraxas" shall have the meaning set forth in Section 4.03.
"Certificate of Merger" shall have the meaning set forth in Section
1.02.
"Chase" shall have the meaning set forth in Section 6.15.
"Claim" shall have the meaning set forth in Section 5.12(a).
56
ANNEX I
<PAGE>
"Closing" shall have the meaning set forth in Section 9.02.
"Code" shall have the meaning set forth in Section 3.25(b).
"Commission" shall have the meaning set forth in Section 2.02.
"Costs" shall have the meaning set forth in Section 5.12(a).
"Current Premium" shall have the meaning set forth in Section 5.12(e).
"D&M" shall have the meaning set forth in Section 1.04(a).
"D&O Insurance" shall have the meaning set forth in Section 5.12(e).
"Delaware Statute" shall have the meaning set forth in Section 1.01(a).
"Drilling Costs" shall have the meaning set forth in Section 1.04(e).
"ERISA" shall have the meaning set forth in Section 3.25(c).
"Effective Time" shall have the meaning set forth in Section 1.02.
"Enforceability Exception" shall have the meaning set forth in Section
3.03.
"Enron Agent" shall have the meaning set forth in Section 5.10.
"Enron Contract" shall have the meaning set forth in Section 1.04(e).
"Escrow Agreement" shall have the meaning set forth in Section 1.09.
"Escrow Shares" shall have the meaning set forth in Section 1.09.
"Exchange Agent" shall have the meaning set forth in Section 1.05(a).
"FERC" shall have the meaning set forth in Section 3.11.
"Financial Statements" shall have the meaning set forth in Section
3.05.
"Hedges Present Value" shall have the meaning set forth in Section
1.04(e).
"Indemnified Parties" shall have the meaning set forth in Section
5.12(a).
"Independent Accountant" shall have the meaning set forth in Section
1.13.
"Independent Calculation" shall have the meaning set forth in Section
1.04(a).
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ANNEX I
<PAGE>
"IRS" shall have the meaning set forth in Section 3.25(b).
"Land" shall have the meaning set forth in Section 3.10.
"Leases" shall have the meaning set forth in Section 3.10.
"Letter Agreement" shall have the meaning set forth in Section 1.12.
"Liabilities" shall have the meaning set forth in Section 1.04(e).
"Merger" shall have the meaning set forth in Section 1.01(a).
"NARCO Downstream Agreements" shall have the meaning set forth in
Section 1.04(e).
"NARCO Interests" shall have the meaning set forth in Section 3.11.
"NARCO Leases" shall have the meaning set forth in Section 3.11.
"NARCO Properties" shall have the meaning set forth in Section 3.11.
"NARCO Upstream Agreements shall have the meaning set forth in Section
1.04(e).
"NARCO Wells" shall have the meaning set forth in Section 3.11.
"NSA" shall have the meaning set forth in Section 1.04(a).
"Nevada Statute" shall have the meaning set forth in Section 2.01.
"Non-Producing Mineral Fee Interests" shall have the meaning set forth
in Section 3.10.
"PCBs" shall have the meaning set forth in Section 3.31(d).
"PDNP" shall have the meaning set forth in Section 1.04(e).
"PDP" shall have the meaning set forth in Section 1.04(e).
"Permits" shall have the meaning set forth in Section 3.11.
"Permitted Encumbrances" shall have the meaning set forth in Section
1.04(e).
"Provisional Payment Date" shall have the meaning set forth in Section
1.04(b).
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ANNEX I
<PAGE>
"Purchaser Certificates" shall have the meaning set forth in Section
1.05(a).
"Registration Rights Agreements" shall have the meaning set forth in
Section 1.11.
"Related Agreements" shall have the meaning set forth in Section 3.03.
"S-4 Registration Statement" shall have the meaning set forth in
Section 2.02.
"SEC Reports" shall have the meaning set forth in Section 4.11.
"Securities Act" shall have the meaning set forth in Section 2.02.
"Staff" shall have the meaning set forth in Section 2.02.
"Stock" or "Shares" shall have the meaning set forth in Section
1.01(a).
"Sub" shall have the meaning set forth in the Introduction.
"Subsidiaries" shall have the meaning set forth in Section 3.04.
"Transferred Employee" shall have the meaning set forth in Section
5.11(b).
"Uncompleted Wells" shall have the meaning set forth in Section
1.04(e).
"Vessels" or "Company" shall have the meaning set forth in the
Introduction.
"Vessels Agreements" shall have the meaning set forth in Section 3.10.
"Vessels Material Contracts" shall have the meaning set forth in
Section 3.16.
"Vessels Meeting" shall have the meaning set forth in Section 2.01.
"Vessels Stock Certificates" shall have the meaning set forth in
Section 1.04(c).
"Vessels Stockholder" or "Vessels Stockholders" shall have the meaning
set forth in Section 3.02.
"Voting Agreement" shall have the meaning set forth in Section 1.10.
"Watson Voting Agreement" shall have the meaning set forth in Section
1.10.
"Well" or "Wells" shall have the meaning set forth in Section 3.10.
"Working Capital Contribution" shall have the meaning set forth in
Section 1.13.
59
ANNEX I
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SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
ss. 262. Appraisal Rights
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to ss.228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" means a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to ss.251 (other than a merger effected pursuant to ss.251 of
this title, ss.252, ss.254, ss.257, ss.258, ss.263 or ss.264 of this title:
(1) Provided, however, that no appraisal rights under this
section shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or consolidation,
were either (i) listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. or (ii) held of record by more
than 2,000 holders; and further provided that no appraisal rights shall be
available for any shares of stock of the constituent corporation surviving a
merger if the merger did not require for its approval the vote of the
stockholders of the surviving corporation as provided in subsection (f) of
ss.251 of this title.
(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights under this section shall be available for the shares of any
class or series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation pursuant to
ss.ss.251, 252, 254, 257, 258, 263 and 264 of this title to accept for such
stock anything except:
a. Shares of stock of the corporation surviving or
resulting from such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or
depository receipts in respect thereof, which shares of stock or depository
receipts at the effective date of the merger or consolidation will be either
listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. any combination of the shares of stock, depository
receipts and cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
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ANNEX II
<PAGE>
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under ss.253 of this title is not owned
by the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to the
meeting, shall notify each of its stockholders who was such on the record date
for such meeting with respect to shares for which appraisal rights are available
pursuant to subsections (b) or (c) hereof that appraisal rights are available
for any or all of the shares of the constituent corporations, and shall include
in such notice a copy of this section. Each stockholder electing to demand the
appraisal of his shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of his
shares. Such demand will be sufficient if it reasonably informs the corporation
of the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to take
such action must do so by a separate written demand as herein provided. Within
10 days after the effective date of such merger or consolidation, the surviving
or resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in favor of
or consented to the merger or consolidation of the date that the merger or
consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to
ss.228 or ss.253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of stock of such
constituent corporation who are entitled to appraisal rights of the approval of
the merger or consolidation and that appraisal rights are available for any or
all shares of such class or series of stock of such constituent corporation, and
shall include in such notice a copy of this section; provided that, if the
notice is given on or after the effective date of the merger or consolidation,
such notice shall be given by the surviving or resulting corporation to all such
holders of any class or series of stock of a constituent corporation that are
entitled to appraisal rights. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days after the date of
mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identify of the
stockholder and that the stockholder intends thereby to demand the appraisal of
such holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the merger
or consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or within 10
days after such effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first notice, such second
notice need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either notice that
such notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent corporation may
fix, in advance, a record date that shall be not more than 10 days prior to the
date the notice is given; provided that, if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be such
2
ANNEX II
<PAGE>
effective date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day next
preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
3
ANNEX II
<PAGE>
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
4
ANNEX II
<PAGE>
FORM OF PROXY
ABRAXAS PETROLEUM CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF ABRAXAS
PETROLEUM CORPORATION FOR USE AT THE SPECIAL MEETING OF STOCKHOLDERS TO BE HELD
ON FEBRUARY 13, 1998.
The undersigned holder of shares of common stock of Abraxas Petroleum
Corporation ("Abraxas") hereby appoints Robert L. G. Watson, Chris E. Williford
and Stephen T. Wendel, and each of them, as proxies of the undersigned, with
full power of substitution and resubstitution, to represent and vote as set
forth herein all of the shares of common stock of Abraxas held of record by the
undersigned on January 6, 1998 at the Abraxas Special Meeting of Stockholders to
be held on Friday, February 13, 1998, at 9:00 a.m., Central Standard Time, at
500 North Loop 1604 East, Suite 100, San Antonio, Texas 78232, and at any and
all postponements and adjournments thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS INDICATED, THIS
PROXY WILL BE VOTED "FOR" THE PROPOSAL TO APPROVE THE MERGER OF A SUBSIDIARY OF
ABRAXAS WITH AND INTO VESSELS ENERGY, INC. (THE "MERGER") AND THE ISSUANCE OF UP
TO 1,900,000 SHARES OF COMMON STOCK OF ABRAXAS, IN CONNECTION WITH THE MERGER.
(Continued, and to be dated and signed, on the other side)
<PAGE>
THE DIRECTORS OF ABRAXAS RECOMMEND A VOTE "FOR" THE APPROVAL OF THE
MERGER AND THE ISSUANCE OF UP TO 1,900,000 SHARES OF COMMON STOCK OF ABRAXAS.
Proposal to approve the merger of a subsidiary of Abraxas with and into
Vessels Energy, Inc. (the "Merger") and the issuance of up to 1,900,000 shares
of Common Stock of Abraxas in connection with the Merger.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
This proxy should be dated, signed by the stockholder as his or her
name appears below, and returned promptly in the enclosed envelope. Joint owners
should each sign personally, and trustees and others signing in a representative
capacity should indicate the capacity in which they sign.
Dated: _______________, 1998.
Signature of Stockholder
Signature of Stockholder
PLEASE MARK, SIGN, AND PROMPTLY RETURN THIS PROXY CARD IN THE ENVELOPE PROVIDED.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Abraxas' Articles of Incorporation contain a provision that eliminates
the personal monetary liability of directors and officers to Abraxas and its
stockholders for a breach of fiduciary duties to the extent currently allowed
under the Nevada General Corporation Law (the "Nevada Statute"). 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. Abraxas
currently has a directors' and officers' liability insurance policy in effect
providing $3.0 million in coverage and an additional $1.0 million in coverage
for certain employment related claims.
Abraxas has entered into indemnity agreements with each of its
directors and officers. These agreements provide for indemnification to the
extent permitted by the Nevada Statute.
Item 21. Exhibits and Financial Statement Schedules.
*2.1 Agreement and Plan of Merger, dated as of November 12, 1997 by and among
Abraxas, VEI Acquisition Corp. and Vessels Energy, Inc. (included as Annex I to
the Proxy Statement-Prospectus forming a part of this Registration Statement).
**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).
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**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).
**4.1 Specimen Common Stock Certificate of Abraxas. (Filed as Exhibit 4.1 to the
S-4 Registration Statement).
**4.2 Specimen Preferred Stock Certificate of Abraxas. (Filed as Exhibit 4.2 to
the Company's Annual Report on Form 10-K filed on March 31, 1995).
**4.3 Rights Agreement dated as of December 6, 1994 between Abraxas and First
Union National Bank of North Carolina ("FUNB"). (Filed as Exhibit 4.1 to the
Company's Registration Statement on Form 8-A filed on December 6, 1994).
**4.4 Amendment to Rights Agreement dated as of July 14, 1997 by and between
Abraxas and American Stock Transfer & Trust Company (Filed as Exhibit 1 to
Amendment No. 1 to the Company's Registration Statement on Form 8-A filed on
August 20, 1997).
**4.5 Indenture dated 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).
**4.6 Form of Note. (Filed as Exhibit 4.7 to the Company's Registration
Statement on Form S-4 Registration Statement No. 333-18673).
*5.1 Opinion of Cox & Smith Incorporated.
*8.1 Tax Opinion of King & Spalding.
+**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).
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+**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, Endowment Energy Partners, L.P. ("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, ING (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).
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+**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 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).
**10.28 Management Agreement dated November 14, 1996 by and between Canadian
Abraxas and Cascade Oil & Gas Ltd. (Filed as Exhibit 10.36 to the Company's
Registration Statement on Form S-4 Registration No. 333-18673).
*10.29 First Amendment to Amended and Restated Credit Agreement dated as of
October 14, 1997 by and among Bankers Trust Company, ING (U.S.) Capital
Corporation and the Lenders named therein.
*10.30 Vessels Oil & Gas Company Common Stock Purchase Warrant Agreement dated
as of September 12, 1994 between Vessels Oil & Gas Company and The Chase
Manhattan Bank, N.A.
*10.31 Vessels Oil & Gas Company Common Stock Purchase Warrant dated December
16, 1993 by and between Vessels Oil & Gas Company and Associated Energy
Managers, Inc.
*10.32 Vessels Oil & Gas Company Common Stock Purchase Warrant dated December
16, 1993 by and between Vessels Oil & Gas Company and Associated Energy
Managers, Inc.
**11.1 Statement Regarding Computation of Per Share Earnings (Filed as Exhibit
11.1 to the Company's Quarterly Report on Form 10-Q filed November 14, 1997).
*21.1 Subsidiaries of Abraxas.
*23.1 Consent of Ernst & Young LLP.
*23.2 Consent of DeGolyer and MacNaughton.
*23.3 Consent of Netherland Sewell and Associates.
*23.4 Consent of King & Spalding (included in Exhibit 8.2).
*23.5 Consent of Cox & Smith Incorporated (included in Exhibit 5.1).
*23.6 Consent of Deloitte & Touche LLP.
*23.7 Consent of KPMG.
*23.8 Consent of Arthur Andersen LLP.
*23.9 Consent of Price Waterhouse LLP.
*23.10 Consent of Robert F. Semmens, nominee for directors.
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<PAGE>
*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.
*24.7 Power of Attorney of Richard M. Riggs
*27.1 Financial Data Schedule.
* Filed herewith.
** Incorporated by reference to the filing indicated.
+ Management Compensatory Plan or Agreement.
Item 22. Undertakings
A. The undersigned registrant 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. 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.
C. The undersigned registrant 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.
D. The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
E. The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (D) immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Act and is used in connection with
II-5
<PAGE>
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
F. The undersigned registrant 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 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
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.
G. The undersigned registrant hereby undertakes to deliver or cause to
be delivered with the prospectus, to each person to whom the prospectus is sent
or given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the undersigned
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San
Antonio, Texas, on January 9, 1998.
ABRAXAS PETROLEUM CORPORATION
By: /s/ Robert L. G. Watson
Robert L. G. Watson, Chairman of the Board,
Chief Executive Officer and President
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<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
Signature Name and Title Date
/s/ Robert L. G. Watson Chairman of the Board, January 9, 1998
- ---------------------------- President, Chief Executive
Robert L.G. Watson Officer (Principal Executive Officer)
and Director
/s/ Chris E. Williford Executive Vice President, January 9, 1998
- ---------------------------- Treasurer, Chief Financial
Chris E. Williford Officer and Director (Principal
Financial and Accounting Officer)
* Director January 9, 1998
- ----------------------------
Franklin Burke
* Director January 9, 1998
- ----------------------------
Harold D. Carter
* Director January 9, 1998
- ----------------------------
Robert D. Gershen
* Director January 9, 1998
- ----------------------------
Richard M. Kleberg, III
* Director January 9, 1998
- ----------------------------
James C. Phelps
* Director January 9, 1998
- ----------------------------
Paul A. Powell, Jr.
* Director January 9, 1998
- ----------------------------
Richard M. Riggs
By: /s/ Chris E. Williford
Chris E. Williford
Attorney-in-fact
II-8
<PAGE>
EXHIBIT INDEX
Exhibit Index Description
5.1 Opinion of Cox & Smith Incorporated.
8.1 Tax Opinion of King & Spalding.
10.29 First Amendment to Amended and Restated Credit Agreement dated
as of October 14, 1997 by and among Bankers Trust Company, ING
(U.S.) Capital Corporation and the Lenders named therein.
10.30 Vessels Oil & Gas Company Common Stock Purchase Warrant
Agreement dated as of September 12, 1994 between Vessels Oil &
Gas Company and The Chase Manhattan Bank, N.A.
10.31 Vessels Oil & Gas Company Common Stock Purchase Warrant dated
December 16, 1993 by and between Vessels Oil & Gas Company and
Associated Energy Managers, Inc.
10.32 Vessels Oil & Gas Company Common Stock Purchase Warrant dated
December 16, 1993 by and between Vessels Oil & Gas Company and
Associated Energy Managers, Inc.
21.1 Subsidiaries of Abraxas.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of DeGolyer and MacNaughton.
23.3 Consent of Netherland Sewall and Associates.
23.4 Consent of King & Spalding (included in Exhibit 8.2).
23.5 Consent of Cox & Smith Incorporated (included in Exhibit 5.1).
23.6 Consent of Deloitte & Touche LLP.
23.7 Consent of KPMG.
23.8 Consent of Arthur Andersen LLP.
23.9 Consent of Price Waterhouse LLP.
23.10 Consent of Robert F. Semmens, nominee for directors.
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.
<PAGE>
24.4 Power of Attorney of Richard M. Kleberg, III.
24.5 Power of Attorney of James C. Phelps.
24.6 Power of Attorney of Paul A. Powell, Jr.
24.7 Power of Attorney of Richard M. Riggs.
27.1 Financial Data Schedule.
<PAGE>
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]
January 9, 1998
Abraxas Petroleum Corporation
500 North Loop 1604 East
Suite 100
San Antonio, Texas 78232
Re: Registration of up to 1,900,000 Shares
of Common Stock, par value $.01 per
share, of Abraxas Petroleum Corporation
Gentlemen:
We have acted as counsel to Abraxas Petroleum Corporation, a Nevada
corporation ("Abraxas"), in connection with the issuance of up to 1,900,000
shares (the "Shares") of common stock, par value $.01 per share, of Abraxas in
connection with the transactions contemplated by the Agreement and Plan of
Merger, dated as of November 12, 1997 (the "Merger Agreement"), by and among
Abraxas, VEI Acquisition Corp. and Vessels Energy, Inc.
We have examined such documents, records and matters of law as we have
deemed necessary for purposes of this opinion. Based on such examination and on
the assumptions set forth below, we are of the opinion that, when the
Registration Statement on Form S-4 (the "Registration Statement") filed by
Abraxas to effect registration of the Shares under the Securities Act of 1933,
as amended, has been declared effective by the Securities and Exchange
Commission and the Shares have been issued and delivered in accordance with the
terms and provisions of the Merger Agreement as contemplated by the Registration
Statement, the Shares will be duly authorized, validly issued, fully paid, and
nonassessable.
In rendering this opinion, we have (i) assumed and have not
independently verified (a) that each agreement, document, or instrument pursuant
to which any of the Shares are to be issued will at the time of such issuance
have been duly authorized, executed, and delivered by the parties thereto and
will constitute a valid, binding, and enforceable obligation of such parties,
(b) that all signatures on all certificates and other documents examined by us
are genuine, and that, where any such signature purports to have been made in a
<PAGE>
corporate, governmental or other capacity, the person who affixed such signature
to such certificate or other document had authority to do so, and (c) the
authenticity of all documents submitted to us as originals and the conformity to
original documents of all documents submitted to us as copies, (ii) as to
certain factual matters, relied upon certificates of public officials and
Abraxas and its officers and upon the representations and warranties set forth
in the Merger Agreement and have not independently checked or verified the
accuracy of the factual statements contained therein, and (iii) assumed that the
parties to the Merger Agreement will comply with the provisions thereof.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to us under the caption "Legal
Matters" in the Proxy Statement-Prospectus constituting a part of the
Registration Statement. In giving this consent, however, we do not hereby admit
that we are within the category of persons whose consent is required under
Section 7 of the Securities Act of 1933, as amended, and the rules and
regulations of the Securities and Exchange Commission thereunder.
Yours very truly,
COX & SMITH INCORPORATED
By: /s/ Steven R. Jacobs
Steven R. Jacobs
For the Firm
SRJ/lrk/0188281.01
<PAGE>
EXHIBIT 8.1
January 9, 1998
Vessels Energy, Inc.
1050 Seventeenth Street, Suite 2000
Denver, Colorado 90285
Re: Certain Federal Income Tax Consequences of Merger of VEI
Acquisition Corp., a Wholly Owned Subsidiary of Abraxas
Petroleum Corporation, with and into Vessels Energy, Inc.
Ladies and Gentlemen:
We have acted as counsel to Vessels Energy, Inc., a Delaware
corporation ("Vessels"), in connection with the proposed merger (the "Merger")
of VEI Acquisition Corp., a Delaware corporation ("Sub") and a wholly owned
subsidiary of Abraxas Petroleum Corporation, a Nevada corporation ("Abraxas"),
with and into Vessels pursuant to the Agreement and Plan of Merger dated as of
November 12, 1997 (the "Merger Agreement"). You have requested our opinion
regarding certain of the federal income tax consequences of the Merger.
We understand that our opinion will be referred to in the Proxy
Statement-Prospectus of Abraxas (the "Proxy Statement/Prospectus") that forms
part of the Registration Statement on Form S-4 filed with the Securities and
Exchange Commission in connection with the Merger. We hereby consent to such use
of our opinion.
INFORMATION RELIED ON
In rendering the opinions expressed herein, we have examined such
documents as we have deemed appropriate, including the Merger Agreement and the
Proxy Statement-Prospectus. Unless specified, capitalized terms used herein
shall have the meanings assigned to them in the Merger Agreement. All references
herein to the Code are to the United States Internal Revenue Code of 1986, as
amended.
In our examination of documents, we have assumed, with your consent,
that all documents submitted to us as photocopies or telecopies faithfully
reproduce the originals thereof, that such originals are authentic, that all
such documents have been or will be duly executed to the extent required, and
<PAGE>
that all statements of fact set forth in such documents are accurate. In
addition, we have obtained such additional information and representations as we
have deemed relevant and necessary through consultation with various
representatives of Abraxas and Vessels, including certificates from officers of
Abraxas and Vessels and certain stockholders of Vessels (the "Certificates")
verifying certain relevant facts that have been represented to us. We have
assumed, with your consent, that the statements contained in the Certificates
are true and correct on the date hereof and will be true and correct at the time
of the Merger, and that any representation made in any of the documents referred
to herein "to the best of the knowledge and belief" (or with similar
qualification) of any person or party is true and correct without such
qualification. We have not attempted independently to verify such
representations.
OPINIONS
Based upon the foregoing, it is our opinion that:
(1) the Merger will constitute a "reorganization" within the
meaning of Section 368(a) of the Code;
(2) no gain or loss will be recognized by the Vessels
stockholders upon the exchange in the Merger of their Vessels Common
Stock for Abraxas Common Stock;
(3) the aggregate tax basis of the Abraxas Common Stock
received in the Merger by each Vessels stockholder will be the same as
the aggregate tax basis of the Vessels Common Stock exchanged for such
Abraxas Common Stock; and
(4) the holding period of the Abraxas Common Stock received
in the Merger by each Vessels stockholder will include the holding
period of such stockholder in the Vessels Common Stock exchanged for
such Abraxas Common Stock, provided that the Vessels Common Stock is
held as a capital asset at the Effective Time.
The foregoing opinions are limited to the tax matters specifically
covered thereby, and we have not been asked to address herein, nor have we
addressed herein, any other tax consequences of the Merger, such as the tax
consequences of the Escrow, the Contingent Cash Payment, and the Provisional
Payment.
The opinions expressed herein are based upon existing statutory,
regulatory, and judicial authority, any of which may be changed at any time with
retroactive effect. In addition, our opinions are based solely on the documents
that we have examined, the additional information that we have obtained, and the
facts set out in the Certificates that we have assumed, with your consent, to be
true and correct. Our opinions cannot be relied upon if any of the facts
contained in such documents or in any such additional information is, or later
becomes, inaccurate, or if any of the facts set out in the Certificates is, or
<PAGE>
later becomes, inaccurate.
Our opinions are limited to the United Stated federal income tax
matters specifically covered thereby, and we have not been asked to address, nor
have we addressed, any other tax consequences that may result from the Merger or
any other transaction (including any transaction undertaken in connection with
the Merger). We express no opinion regarding the tax consequences of the Merger
to stockholders who are subject to special tax rules, such as stockholders, if
any, who received their shares upon the exercise of employee stock options or
otherwise as compensation, and stockholders that are insurance companies,
securities dealers, financial institutions or foreign persons.
This opinion is being delivered to you solely in connection with the
Merger Agreement. It may not be relied upon for any other purpose or by any
other person or entity, and may not be made available to any other person or
entity without our prior written consent.
Very truly yours,
KING & SPALDING
[January 8, 1998 (7:08pm)] [2-629033-1]
<PAGE>
EXHIBIT 10.29
FIRST AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
This First Amendment to Amended and Restated Credit Agreement
(this "Amendment") dated as of October 14, 1997 is among ABRAXAS PETROLEUM
CORPORATION, a Nevada corporation (the "Borrower"), the banks named on the
signature pages hereto (together with their respective successors and assigns in
such capacity, the "Banks"), BANKERS TRUST COMPANY, as agent for the Banks
(together with its successors and assigns in such capacity, the "Agent") and ING
(U.S.) CAPITAL CORPORATION, as co-agent for the Banks (together with its
successors and assigns in such capacity, the "Co-Agent").
PRELIMINARY STATEMENT
A. The Borrower and the Bank Group have entered into that
certain Amended and Restated Credit Agreement dated as of November 14, 1996 (the
"Credit Agreement").
B. The Borrower and the Bank Group desire to amend the Credit
Agreement as set forth herein.
NOW THEREFORE, in consideration of the foregoing and the
mutual agreements set forth herein, the parties agree as follows:
Section 1. Definitions. Unless otherwise defined in this
Amendment, each capitalized term used in this Amendment has the meaning assigned
to such term in the Credit Agreement.
Section 2. Amendments. The Credit Agreement is hereby amended
as follows:
a. The second sentence of Section 2.04(a) of the Credit Agreement is
hereby amended in its entirety to read as follows:
"During the period from and after October 14, 1997 until the
Borrowing Base is redetermined in accordance with this Section, the
amount of the Borrowing Base shall be $40,000,000."
b. Section 5.01(i) of the Credit Agreement is hereby amended
and restated in its entirety to read as follows:
"(i) On or before April 30, 1997, an environmental report
prepared by an independent environmental firm approved by the Agent
covering the real property owned by the Borrower and its Subsidiaries
<PAGE>
(other than the real property owned by the Guarantor) in form, scope
and substance reasonably satisfactory to the Agent."
c. Section 5.10(d) of the Credit Agreement is hereby amended and
restated in its entirety to read as follows:
"(d) As soon as available and in any event within 30 days
after the end of each calendar quarter commencing with September 30,
1997, the Borrower shall provide the Bank Group production reports for
the Borrower's Oil and Gas Properties and gas throughput reports for
the Guarantor's gas plants, in each case, certified by an officer of
the Borrower, which reports shall include quantities or volume of
production or gas throughput which have accrued to the Borrower's or
the Guarantors accounts (as applicable) during each month in such
quarter, and such other information with respect thereto as the Agent
may reasonably request."
d. Section 6.01(h) of the Credit Agreement is hereby amended and
restated in its entirety to read as follows:
"(h) Indebtedness of the Guarantor to the Borrower in an
amount not to exceed $16,000,000 in principal, plus accrued interest
thereon, so long as (i) the proceeds of such Indebtedness are used by
the Guarantor to acquire approximately an undivided 92% interest in the
Pacalta Properties, and (ii) such Indebtedness shall be due and payable
by the Guarantor upon the earlier of (A) the sale by the Guarantor of
its interest in the Pacalta Properties or (B) the occurrence of an
Event of Default under this Agreement."
e. Section 6.07 of the Credit Agreement is hereby amended and restated
in its entirety to read as follows:
"Section 6.07. Sales of Assets. The Borrower will not, and
will not permit any of its Subsidiaries to, sell, transfer, assign,
farm-out, lease or otherwise transfer or dispose of any assets other
than (a) sales of Hydrocarbon production in the ordinary course of
business and sales of obsolete or worn-out equipment in the ordinary
course of business, (b) sales or transfers of assets by any of the
Borrower's wholly-owned Subsidiaries to the Borrower or any such other
wholly-owned Subsidiary, (c) sale of the Gaelic Resources Stock, (d)
any other sale of assets sold at fair market value, so long as the
aggregate Net Proceeds for all such sales made under this subclause (d)
during any calendar year does not exceed $2,000,000, and (e) sale by
the Guarantor to Cascade Oil & Gas Ltd. of the Guarantor's interest in
the Pacalta Properties for an amount not less than the amount the
Guarantor paid for its interest in the Pacalta Properties. Upon written
request of the Borrower and provided no Event of Default shall exist,
the Agent shall release the Lien in favor of the Agent covering assets
sold by the Borrower or the Guarantor, to the extent (and only to the
extent) the sale of such assets was permitted under subclause (d) or
(e) of the preceding sentence."
<PAGE>
f. Section 6.09(c) of the Credit Agreement is hereby amended and
restated in its entirety to read as follows:
"(c) Capital Expenditures by the Borrower to develop its
Proved Reserves, Capital Expenditures by any Subsidiary to develop its
Proved Reserves, Capital Expenditures by the Guarantor to acquire
approximately an undivided 92% interest in the Pacalta Properties, and
additional Capital Expenditures by the Borrower and its Subsidiaries in
an amount not to exceed $12,500,000 in the aggregate during any
six-month period commencing on any October 1 or April 1, as the case
may be;".
g. Section 6.09(g) of the Credit Agreement is hereby amended and
restated in its entirety to read as follows:
"(g) payments by the Borrower or any Subsidiary on account of
Indebtedness permitted under Section 6.01 and advances or loans by the
Borrower or any Wholly Owned Subsidiary to the Borrower or its
Subsidiaries (as applicable) to the extent such advance or loan
constitutes Indebtedness permitted under Sections 6.01(f), 6.01(g) or
6.01(h)."
h. The following defined term is hereby added to Annex A of the Credit
Agreement to read as follows:
"Pacalta Properties" means the Oil and Gas Properties and
other related Property described as "Assets" in that certain Agreement
of Purchase and Sale, dated September 24, 1997, between Pacalta
Resources Ltd., an Alberta, Canada corporation, as Vendor, and Cascade
Oil & Gas Ltd. and the Guarantor, as Purchaser."
Section 3. Ratification. The Borrower hereby ratifies and
confirms all of the Obligations under the Credit Agreement (as amended hereby)
and the other Loan Documents and the Liens created under the Security Documents.
All references in the Loan Documents to the "Credit Agreement" shall mean the
Credit Agreement as amended hereby and as the same may be amended, supplemented,
restated or otherwise modified and in effect from time to time in the future.
Section 4. Effectiveness. The effectiveness of this Amendment
is subject to the condition precedent that the Agent shall have received all of
the following, each in form and substance reasonably satisfactory to the Bank
Group and in such number of counterparts as may be reasonably requested by the
Agent:
a. this Amendment executed by the Borrower and each member of
the Bank Group;
<PAGE>
b. a supplement to the Existing Mortgage covering the Oil and
Gas Properties in the East White Point and Stedman Island fields acquired by the
Borrower from Morgan Guaranty Trust Company of New York, as Trustee, on November
1, 1996;
c. an amendment to the Guaranty executed by the Guarantor in
the form attached hereto as Exhibit A;
d. a true and correct copy of the promissory note executed by
the Guarantor that evidences the loan from the Borrower to the Guarantor to
finance the Guarantor's acquisition of approximately an undivided 92% interest
in the Pacalta Properties.
e. the payment to the Agent and the Banks of all fees
described in that certain Fee Letter among the Borrower and the Agent dated of
even date herewith; and
f. a certificate of the secretary or an assistant secretary of
the Borrower certifying, inter alia, (i) true and correct copies of resolutions
adopted by the Board of Directors of the Borrower (A) authorizing the execution,
delivery and performance by the Borrower of this Amendment and the other Loan
Documents referred to herein to which it is a party, (B) approving the forms of
this Amendment and the other Loan Documents referred to herein to which it is a
party, and (C) authorizing officers of the Borrower to execute and deliver this
Amendment and the other Loan Documents referred to herein to which it is or will
be a party, (ii) true and correct copies of the articles of incorporation and
bylaws (or other similar charter documents) of the Borrower and (iii) the
incumbency and specimen signatures of the officers of the Borrower executing any
documents on behalf of it.
Section 5. Representations and Warranties. The Borrower hereby
represents and warrants to the Bank Group that (a) the execution, delivery and
performance of this Amendment and the other Loan Documents referred to herein to
which it is a party have been duly authorized by all requisite corporate action
on the part of the Borrower, (b) each of the Credit Agreement (as amended
hereby) and the other Loan Documents to which it is a party constitutes a valid
and legally binding agreement enforceable against the Borrower in accordance
with its terms except, as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer or other similar
laws relating to or affecting the enforcement of creditors' rights generally and
by general principles of equity, (c) the representations and warranties by the
Borrower contained in the Credit Agreement as amended hereby and in the other
Loan Documents are true and correct on and as of the date hereof in all material
respects as though made as of the date hereof, (d) no Default or Event of
Default exists under the Credit Agreement (as amended hereby) or any of the
other Loan Documents.
Section 6. Choice of Law. This Amendment shall be governed by,
and construed in accordance with, the laws of the State of New York.
Section 7. Final Agreement. THE CREDIT AGREEMENT (AS AMENDED
HEREBY) AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
<PAGE>
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO ORAL AGREEMENTS BETWEEN
THE PARTIES.
Section 8. Counterparts. This Amendment may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed shall be deemed to be an original, and all of
which taken together shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed by its officers thereunto duly authorized as of the
date first above written.
ABRAXAS PETROLEUM CORPORATION
By:
Chris E. Williford
Executive Vice President
BANKERS TRUST COMPANY,
as Agent and Bank
By:
Name:
Title:
ING (U.S.) CAPITAL CORPORATION,
as Co-Agent and Bank
By:
Name:
Title:
<PAGE>
UNION BANK OF CALIFORNIA, N.A.,
By:
Name:
Title:
By:
Name:
Title:
The foregoing First Amendment to Amended and Restated Credit
Agreement is hereby acknowledged and agreed to effective as of this 14th day of
October, 1997.
CANADIAN ABRAXAS PETROLEUM
LIMITED
By:
Name:
Title:
<PAGE>
EXHIBIT 10.30
VESSELS OIL & GAS COMPANY
COMMON STOCK PURCHASE WARRANT AGREEMENT
THIS COMMON STOCK PURCHASE WARRANT AGREEMENT (the "Warrant Agreement")
dated as of September 12, 1994, between Vessels Oil & Gas Company, a Colorado
corporation and The Chase Manhattan Bank, N.A. ("Chase" and, together with any
permitted transferee of Warrants or Warrant Stock, the "Holders(s)").
WHEREAS, Chase and the Company have entered into that certain Credit
Agreement dated September 12, 1994 providing for a $5.0 million unsecured note
(the "Facility"); and
WHEREAS, the Company proposes to issue to Chase as additional
consideration for Chase's making of loans pursuant to the Facility, common stock
purchase warrants to purchase shares of the Company's Common Stock, par value
$.10 per share (the "Common Stock"), each Warrant initially entitling the holder
thereof to purchase one share of Common Stock.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein and in the Facility and for other good and valuable
consideration, the parties hereto agree as follows:
Article 1
Definitions
For all purposes of this Warrant Agreement, unless the context
otherwise requires, the following terms having the following meanings:
1.1 "Company" means Vessels Oil & Gas Company, a corporation organized
and existing under the laws of the State of Colorado, and any successor
corporation.
1.2 "Exercise Price" shall have the meaning ascribed to that term in
Section 2.2.
1.3 "Expiration Date" means September 12, 2004 or, if such day is not a
business day, the first business day thereafter, or such other date as may be
established in accordance with Section 9.2 of this Warrant.
1.4 "Fair Market Value" in reference to the Common Stock means, in the
event such stock is traded on a national securities exchange or in the
over-the-counter market as reported by the National Association of Securities
<PAGE>
Dealers Automated Quotation System (stock being so traded or reported being
referred to herein as "Publicly Traded"), the average of the daily market prices
of such stock on the ten (10) trading days immediately preceding the date as of
which such value is to be determined. The market price for each such trading day
shall be the average of the closing prices on such day of the Common Stock on
all domestic exchanges on which the Common Stock is then listed, or, if there
shall have been no sales on any such exchange on such day, the average of the
highest bid and lowest asked prices on all such exchanges at the end of such
day, or, if the Common Stock shall not be so listed, the average of the
representative bid and asked prices quoted in the NASDAQ System as of 3:30 P.M.,
New York time, on such day, or if the Common Stock shall not be quoted in the
NASDAQ System, the average of the high and low bid and asked prices on such day
in the domestic over-the-counter market as reported by the National Quotation
Bureau, Incorporated, or any similar successor organization. If at any time the
Common Stock is not listed on any domestic exchange or quoted in the NASDAQ
System or the domestic over-the-counter market, the "Fair Market Value" shall be
deemed to be the highest of (i) the book value thereof, as determined by any
firm of independent public accountants of recognized standing selected by the
Board of Directors of the Company (which may be the Company's regular
independent accountants), as at the last day of any month ending within 60 days
preceding the date as of which the determination is to be made or (ii) the fair
value thereof, which shall be reasonably determined by the Board of Directors of
the Company or a committee thereof as of a date which is within 15 days of the
date as of which the determination is to be made. If the Company sells shares of
Common Stock pursuant to a firm-commitment underwritten public distribution,
Fair Market Value shall be the actual price per share at which shares are first
offered to the public upon the registration statement becoming effective. As
applicable to Warrants, Fair Market Value shall mean the Fair Market Value of
the Common Stock subject to such Warrants minus the Exercise Price of such
Warrants.
1.5 "Governmental Authority" shall include the country, the state,
county, city and political subdivisions in which any Person or such Person's
property is located or which exercises valid jurisdiction over any such Person
or such Person's property, and any court, agency, department, commission, board,
bureau or instrumentality of any of them including monetary authorities which
exercises valid jurisdiction over any such Person or such Person's property.
Unless otherwise specified, all references to Governmental Authority herein
shall mean a Governmental Authority having jurisdiction over, where applicable,
the Company, its subsidiaries and their properties or the Holders.
1.6 "Governmental Requirement" shall mean any law, statute, code,
ordinance, order, determination, rule, regulation, judgment, decree, injunction,
franchise, permit, certificate, license, authorization or other directive or
requirement (whether or not having the force of law), including, without
limitation, energy regulations and occupational, safety and health standards or
controls, of any Governmental Authority.
1.7 "Material Adverse Effect" shall mean any material and adverse
effect on (i) the assets, liabilities, financial condition, business,
operations, affairs or circumstances of the Company and its subsidiaries taken
<PAGE>
as a whole or (ii) the ability of the Company and its subsidiaries taken as a
whole to carry out their business as at the date hereof (or as proposed as of
the date hereof to be conducted) or of the Company to meet its obligations under
this Warrant Agreement.
1.8 "1933 Act" means the Securities Act of 1933, as amended.
1.9 "Person" means any natural person, sole proprietorship, general
partnership, limited partnership, joint venture, trust, unincorporated
organization, association, corporation, institution, private or governmental
entity, or party.
1.10 "Publicly Traded" has the meaning ascribed to such term in Section
1.4.
1.11 "Subscription Notice" means a written notice to the Company of
Holder's election to exercise its right under the Warrants to purchase Common
Stock, in substantially the form of Exhibit B attached hereto.
1.12 "Warrants" means the Warrants issued under this Warrant Agreement
and any Warrants issued in substitution for such Warrants in each case in
substantially the form of Exhibit A hereto.
1.13 "Warrant Stock" means the shares of Common Stock or other
securities to be acquired upon the exercise of the Warrants.
Article 2
Form, Issuance and Exercise of Warrant
2.1 Issuance of Warrants; Form of Warrant. The Company will issue and
deliver the Warrants, pursuant to the instructions of Chase, to Chase Manhattan
Capital Corporation, an affiliate of Chase, on the Closing Date referred to in
the Facility upon delivery by such entity of an investment letter reasonably
satisfactory to the Company. The number of Warrants to be issued and delivered
shall be 130. The text of each Warrant shall be substantially as set forth in
Exhibit A attached hereto. The Warrants shall be executed on behalf of the
Company by the signature of the present or any future Chairman of the Board,
President, Vice President or Treasurer of the Company, under its corporate seal,
affixed or in facsimile, attested by the signature of the present or future
Secretary or an Assistant Secretary of the Company. A Warrant bearing the
signature of individuals who were at any time the proper officers of the Company
shall bind the Company notwithstanding that such individuals or any of them
shall have ceased to hold such offices prior to the delivery of such Warrant or
did not hold such offices on the date of this Warrant Agreement. Warrants shall
be dated as of the date of execution thereof by the Company either upon initial
issuance or upon division, exchange, substitution or transfer. The number of
shares of Common Stock purchasable and the Exercise Price payable therefor, are
subject to adjustment as hereinafter set forth.
<PAGE>
2.2 Terms of Warrants. (a) Each Warrant entitles the Holder thereof to
purchase one share of Common Stock at any time from September 12, 1994 until
5:00 P.M., New York time, on the Expiration Date at a purchase price equal to
$3,000.00 per share, as adjusted in accordance with the terms of this Warrant
Agreement (the "Exercise Price"). The Exercise Price and the number of shares
issuable upon exercise of Warrants are subject to adjustment upon the occurrence
of certain events pursuant to the provisions of Section 2.2(b) and Section 4 of
this Warrant Agreement.
(b) In the event that the Company elects to extend the maturity date of
the amounts outstanding under the Facility to February 10, 1995 pursuant to
Section 2.05 of the Facility or in the event the Company fails to make such
election and fails to pay all of the principal of and interest on the Loan (as
defined in the Facility) when due, whether at stated maturity or as a result of
acceleration, the number of shares of Warrant Stock thereafter purchasable upon
the exercise of each Warrant shall be determined by multiplying the number of
shares of Warrant Stock theretofore purchasable upon the exercise of each
Warrant by 3.85 and the Exercise Price shall be determined by multiplying the
Exercise Price then in effect by 0.467. In the event that the Company elects to
extend the maturity date of the amounts outstanding under the Facility to March
10, 1995 pursuant to Section 2.05 of the Facility or in the event the Company
fails to make such election and fails to pay all of the principal of and
interest on the Loan (as defined in the Facility) when due, whether at stated
maturity or as a result of acceleration, the number of shares of Warrant Stock
thereafter purchasable upon the exercise of each Warrant shall be determined by
multiplying the number of shares of Warrant Stock theretofore purchasable upon
the exercise of each Warrant by 1.30 and the Exercise Price shall be determined
by multiplying the Exercise Price then in effect by 0.714.
2.3 Exercise. Warrants may be exercised in whole or in part. In the
event of a partial exercise, the Company shall execute and deliver to the Holder
(or to such other Person as shall be designated in the Subscription Notice) a
new Warrant covering the unexercised portion of the Warrant Stock.
2.4 Procedure. Subject to the provision of this Warrant Agreement, each
Holder shall have the right to purchase from the Company (and the Company shall
issue and sell to such Holder) the number of fully paid and nonassessable shares
of Common Stock specified in such Warrants as adjusted in accordance with the
terms of this Warrant Agreement, upon delivery to the Company at its principal
office of:
(a) a written notice, in substantially the form of the
Subscription Notice, of the Holder's election to exercise the
Warrant;
(b) a check payable to the Company in the amount of the Exercise
Price; and
(c) the Warrant.
<PAGE>
At the option of the Holder, the Exercise Price may be paid by surrender to the
Company of indebtedness owed by the Company pursuant to the Facility (in which
case the Company will accept such specified unpaid principal amount in full
payment, as if such payment had been made in cash); provided, however, that each
Holder may exercise the Warrants without a cash payment as provided in Section
2.9. The Company shall as promptly as practicable, and in any event within 10
days after receipt of such notice, execute and deliver or cause to be executed
and delivered one or more certificates representing the aggregate number of
shares of Warrant Stock to which the Holder is entitled, and, if the Warrant is
exercised in part, a new Warrant as set forth in Section 2.3.
2.5 Name and Effective Date. The stock certificate(s) so delivered
shall be issued in the name of the Holder or such other name or names as shall
be designated in the notice specified in Section 2.4. Such stock certificate(s)
shall be deemed to have been issued and such Holder or any other Person so
designated to be named therein shall be deemed for all purposes to have become a
Holder of record of such shares as of the date the Company actually receives the
notice specified in Section 2.4.
2.6 Expenses. The Company shall pay all expenses, taxes, and other
charges payable in connection with the preparation, issue, and delivery of stock
certificate(s) representing Warrant Stock, except that, in case such stock
certificate(s) shall be registered in a name or names other than the name of the
Holder, stock transfer taxes that are payable upon the issuance of such stock
certificate(s) shall be paid by the Holder.
2.7 Legal Requirements. The Warrant Stock issued upon the exercise of
the Warrants shall be validly issued, fully paid, and nonassessable.
2.8 Fractional Shares. The Company shall not be required to issue
fractional Warrant Stock on the exercise of Warrants. If more than one Warrant
shall be presented for exercise in full at the same time by the same Holder, the
number of full shares of Warrant Stock which shall be issuable upon the exercise
thereof shall be computed on the basis of the aggregate number of shares of
Warrant Stock purchasable on exercise of the Warrants so presented. If any
fraction of a share of Warrant Stock would, except for the provisions of this
Section 2.8, be issuable on the exercise of any Warrant (or specified portion,
thereof), then (a) if the fraction of a share of Warrant Stock which would be
issuable is .50 or less of a share then the number of shares of Warrant Stock
issuable shall be rounded down to the next lower whole share and (b) if the
fraction of a share of Warrant Stock which would be issuable is greater than .50
of a share then the number of shares of Warrant Stock issuable shall be rounded
up to the next higher whole share.
2.9 Cashless Exercise. Notwithstanding any provision of this Warrant
Agreement to the contrary, the Company agrees that, in addition to the Holder's
rights under this Warrant Agreement, the Holder may, upon any full or partial
exercise of the Warrants, at its election, pay the aggregate Exercise Price
applicable to such exercise by delivering Warrants to the Company and receiving
from the Company in return therefor the number of shares of Common Stock having
a Fair Market Value on the date of exercise equal to the Fair Market Value of
<PAGE>
the Warrant as established by the last sentence of Section 1.4.
2.10 Lock Up Agreement. If reasonably requested by the underwriter
managing an initial public distribution of the Company's Common Stock, the
Holder shall execute the suggested agreement providing for a period of time (the
"Lock Up Period") immediately following the effective date of the Company's
registration statement (which Lock Up Period shall not exceed the Lock Up Period
requested of other significant holders of the Company's Common Stock) during
which period the Holder will not sell its Warrant Stock into the public markets.
The Holder's undertaking in this regard will not extend to Warrant Stock
included in the registration statement, whether pursuant to Section 9 hereof or
otherwise, and shall lapse if the aggregate holdings of Holder shall fail to
represent at least 5% of the Company's outstanding Common Stock.
Article 3
Exchange and Transfer
3.1 Registration. The Warrants shall be numbered and shall be
registered on the books of the Company (the "Warrant Register") as they are
issued. The Warrants shall be registered initially in such names and such
denominations as Chase has specified to the Company.
3.2 Exchange of Warrant Certificates. Subject to any restriction upon
transfer set forth in this Warrant Agreement and in the Warrants, each Warrant
certificate may be exchanged at the option of the Holder thereof for another
certificate or certificates of different denominations entitling the Holder
thereof to purchase upon surrender to the Company a like aggregate number of
shares of Warrant Stock as the certificate or certificates surrendered then
entitle such Holder to purchase. Any Holder desiring to exchange a Warrant
certificate or certificates shall make such request in writing delivered to the
Company, and shall surrender, properly endorsed, the certificate or certificates
to be so exchanged. Thereupon, the Company shall execute and deliver to the
person entitled thereto a new Warrant certificate or certificates, as the case
may be, as so requested; provided, however, that the Company shall not be
required to execute and deliver a new Warrant certificate or recognize as valid
any transfer which results in there being more than twenty record holders of
Warrants issued under this Warrant Agreement. Any Warrant issued upon exchange,
transfer or partial exercise of the Warrants shall be the valid obligation of
the Company, evidencing the same generic rights and entitled to the same generic
benefits under this Warrant Agreement as the Warrants surrendered for such
exchange, transfer or exercise.
3.3 Permitted Transferees. The Warrants may not be transferred except
in accordance with the limitations specified in Section 3.4 and provided that
any transferee of Warrants shall take such Warrants subject to the restrictions
on transfer contained in this Warrant Agreement and the Warrants. Transfer of
the Warrants is subject to the Company's right to repurchase the Warrant Stock
<PAGE>
as specified in Section 7.1 herein ("Right of First Refusal"). Record ownership
of Warrants may not be transferred if as a result of such purported transfer the
Warrants would be held of record by more than twenty Persons.
3.4 Securities Laws. Neither the Warrants nor the Warrant Stock shall
be transferable unless:
(a) either a registration statement under the 1933 Act is in
effect covering the Warrants or the Warrant Stock, as the case may be,
or the Company has received an opinion from Company counsel to the
effect that such registration is not required, or the Holder has
furnished to the Company an opinion of Holder's counsel, which counsel
shall be reasonably satisfactory to the Company, to the effect that
such registration is not required; and
(b) the transfer complies with any applicable state securities
laws.
In the event Holder seeks an opinion as to transfer without registration from
Holder's counsel, the Company shall provide such factual information to Holder's
counsel as Holder's counsel may reasonably request for the purpose of rendering
such opinion and such counsel may rely on the accuracy and completeness of such
information in rendering such opinion.
Upon issuance, every certificate representing Warrants or the Warrant
Stock will bear a legend describing the restrictions on transfer set forth in
this Section 3.4.
3.5 Procedure. The Holder may transfer the Warrants on the books of the
Company by surrendering to the Company:
(a) the Warrant;
(b) a written assignment of the Warrant, in substantially the
form of the Assignment attached as Exhibit C hereto, naming the
assignee duly executed by the Holder; and
(c) funds sufficient to pay any stock transfer taxes payable
upon the making of such transfer.
The Company shall thereupon execute and deliver a new Warrant in the name of the
assignee specified in such instrument of assignment, and if the Warrant is
transferred in part, the Company shall also execute and deliver in the name of
the Holder a new warrant covering the untransferred portion of the Warrant. Upon
issuance of the new Warrant or Warrants, the Warrant surrendered for transfer
shall be cancelled by the Company.
<PAGE>
3.6 Expenses. The Holder shall pay all transfer taxes payable and fees
of its counsel for legal opinions required by Section 3.4 in connection with the
issue and delivery of any new Warrant under this Article 3.
Article 4
Adjustments to Exercise Price
and
Number of Shares of Warrant Stock
4.1 Stock Splits, Stock Dividends and Reverse Stock Splits. If at any
time while the Warrants remain outstanding the Company shall (i) pay a dividend
in shares of Common Stock or make a distribution of Common Stock, or (ii)
subdivide (by reclassification, by the issuance of a Common Stock dividend on
Common Stock, or otherwise) its outstanding shares of Common Stock into a
greater number, the number of shares of Common Stock that may be purchased upon
exercise of the Warrants shall be increased proportionately as of the effective
date of such action. The effective date of a stock dividend shall be the date on
which the dividend is declared. All other adjustments made pursuant to this
Section 4.1 shall become effective immediately after the effective date of such
event retroactive to the record date, if any, for such event. Issuance of a
Common Stock dividend shall be treated as a subdivision of the whole number of
shares of Common Stock outstanding immediately before the record date for such
dividend into a number of shares equal to such whole number of shares so
outstanding plus the number of shares issued as a stock dividend. If at any time
while the Warrants remain outstanding the Company shall combine (by
reclassification or otherwise) its outstanding number of shares of Common Stock
into a lesser number, the number of shares of Common Stock that may be purchased
hereunder shall be reduced proportionately and the Exercise Price per share of
Common Stock shall be increased proportionately as of the effective date of such
action.
4.2 Dividends Other than in Common Stock or Cash: Other Distributions.
If at any time while the Warrants remain outstanding the Company shall declare
or make for the benefit generally of holders of its Common Stock any dividend or
distribution upon its Common Stock other than ordinary cash dividends or
distributions to which Section 4.1 or 4.3 apply (whether payable in stock of any
class or classes other than its Common Stock or payable in evidences of
indebtedness or assets or in rights, options, or warrants or convertible or
exchangeable securities), then in each case the number of shares of Common Stock
that may be purchased upon exercise of the Warrants shall be determined by
multiplying the number of shares of Common Stock theretofore comprising the
Warrant Stock by a fraction, the numerator of which shall be the Fair Market
Value per share of the Common Stock determined in accordance with Section 1.4 as
of the record date for such dividend or distribution and the denominator of
which shall be the Fair Market Value per share, as so determined, less the fair
value as of such date, as reasonably determined in good faith by the Board of
Directors of the Company, of the portion of such dividend or distribution
applicable to one share of Common Stock. Such adjustment shall be made whenever
<PAGE>
any such distribution is made, and shall become effective on the date of
distribution retroactive to the record date for the determination of
shareholders entitled to receive the distribution. No adjustment in the number
of shares of Warrant Stock purchasable upon the exercise of each Warrant need be
made under this Section 4.2 if the Company issues or distributes to each Holder
that portion of such dividend or distribution which each Holder would have been
entitled to receive had the Warrants been exercised prior to the happening of
such event or the record date with respect thereto.
4.3 Issuance of Options, Warrants or Rights. If at any time while the
Warrants remain outstanding the Company shall grant generally to holders of its
Common Stock any rights, options or warrants (referred to in this Section 4.3 as
"Rights") entitling them to purchase shares of Common Stock at a price per share
which is lower at the date of issuance than the greater of (a) the Exercise
Price and (b) the Fair Market Value of the Common Stock on such date determined
in accordance with Section 1.4 (the "Greater Price"), the number of shares of
Common Stock that may be purchased upon exercise of the Warrants shall be
determined by multiplying the number of shares of Common Stock theretofore
purchasable upon exercise of each Warrant by a fraction, the numerator of which
shall be the number of shares of Common Stock outstanding on such issuance date
plus the number of shares offered pursuant to the Rights and of which the
denominator shall be the number of shares of Common Stock outstanding on such
issuance date plus the number of shares which the aggregate offering price of
the total number of shares of Common Stock offered pursuant to the Rights would
purchase at the Greater Price. Such adjustment shall be made whenever such
rights, options or warrants are issued and shall become effective retroactively
after the record date for the determination of shareholders entitled to receive
such rights, options or warrants.
On the expiration or termination of any of the Rights, the number of
shares of Common Stock then purchasable upon the exercise of each Warrant and
the exercise price then in effect shall be subject to readjustment and the
number of shares of Common Stock subject to the Warrants shall forthwith be
decreased and the exercise price under the Warrants shall forthwith be increased
to that which would have been in effect at the time of such expiration or
termination had such Rights, to the extent outstanding immediately prior to such
expiration or termination, never been issued.
4.4 Other Issuances of Common Stock. In case the Company shall while
the Warrants remain outstanding sell and issue shares of Common Stock (other
than pursuant to rights, options, warrants, or convertible securities initially
issued before the date of this Warrant Agreement) or rights, options, warrants
or convertible securities containing the right to subscribe for or purchase
shares of Common Stock (excluding shares, rights, options, warrants or
convertible securities issued in any of the transactions described in Section
4.1, 4.2 or 4.3 above) at a price per share of Common Stock (determined, in the
case of such rights, options or warrants, by dividing (w) the total of the
consideration received or receivable by the Company (determined as provided
below) in consideration of the sale and issuance of such rights, options,
warrants or convertible securities, by (x) the total number of shares of Common
Stock covered by such rights, options, warrants or convertible securities) lower
<PAGE>
than the Greater Price in effect immediately prior to such sale and issuance,
then the number of shares of Warrant Stock thereafter purchasable upon the
exercise of the Warrants shall be determined by multiplying the number of shares
of Warrant Stock theretofore purchasable upon exercise by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding on
the date of issuance of such shares, rights, options, warrants or convertible
securities plus the number of additional shares of Common Stock sold or subject
to issuance pursuant to such rights, options, warrants or convertible
securities, and of which the denominator shall be the number of shares of Common
Stock outstanding on the date of issuance of such shares, rights, options,
warrants or convertible securities plus the number of shares of Common Stock
which the aggregate consideration received or receivable (determined as provided
below) for such sale or issuance would purchase at the Greater Price; provided,
however, that the adjustment, if any, to be made hereunder as a result of the
issuance of Common Stock for up to $32.0 million on or before March 30, 1995,
shall be based upon an issuance price of $2,600.00 per share in the event the
actual issuance price per share is less than such amount, and provided, further
that no adjustment shall be made hereunder as a result of the grant of options
or rights to acquire, or the issuance of Common Stock, which in the aggregate
does not exceed 10% the Company's outstanding Common Stock and which are granted
or issued at a price not less than 50% of the then current Fair Market Value to
employees or directors of the Company pursuant to any benefit plan of the
Company upon the authorization of a committee of the Board of Directors meeting
the independence requirements set forth in rule 16b-3 of the rules and
regulations promulgated by the Securities and Exchange Commission pursuant to
the Securities Exchange Act of 1934, as amended. Such adjustment shall be made
successively whenever such an issuance is made. For the purposes of such
adjustments, the consideration received or receivable by the Company for rights,
options, warrants or convertible securities shall be deemed to be the
consideration received by the Company for such rights, options, warrants or
convertible securities, plus the consideration or premiums stated in such
rights, options, warrants or convertible securities to be paid for the shares of
Common Stock covered thereby. In case the Company shall sell and issue shares of
Common Stock, or rights, options, warrants or convertible securities containing
the right to subscribe for or purchase shares of Common Stock, for a
consideration consisting, in whole or in part, of property other than cash or
its equivalent, then in determining the "price per share of Common Stock" and
the "consideration received or receivable by the Company" for purposes of this
Section 4.4, the Board of Directors shall determine, in its good faith
discretion, the fair value of said property, and such determination, if made in
good faith, shall be binding upon all Holders.
4.5 Reorganization and Reclassification. In case of any capital
reorganization or any reclassification of the capital stock of the Company while
the Warrants remain outstanding, the Holder of the Warrants shall thereafter be
entitled to purchase pursuant to the Warrants (in lieu of the kind and number of
shares of Common Stock comprising Warrant Stock that such Holder would have been
entitled to purchase or acquire immediately before such reorganization or
reclassification) the kind and number of shares of stock of any class or classes
or other securities or property for or into which such shares of Common Stock
<PAGE>
would have been exchanged, converted, or reclassified if the Warrant Stock had
been purchased immediately before such reorganization or reclassification. In
case of any such reorganization or reclassification, appropriate provision (as
determined by resolutions of the Board of Directors of the Company) shall be
made with respect to the rights and interest thereafter of the Holder of the
Warrants, to the end that all the provisions of this Warrant Agreement
(including adjustment provisions) shall thereafter be applicable, as nearly as
reasonably practicable, in relation to such stock or other securities or
property.
4.6 Statement of Adjustment of Warrant Stock. Whenever the number or
kind of shares comprising Warrant Stock or the Exercise Price is adjusted, the
Company shall promptly give written notice and a certificate of a firm of
independent public accountants selected by the Board of Directors (which may be
the Company's regular independent accountants) to each Holder of record of the
outstanding Warrants, stating that such an adjustment has been effected and
setting forth the number and kind of shares purchasable and the amount of the
then-current Exercise Price, and stating in reasonable detail the facts
requiring such adjustment and the calculation of such adjustment.
4.7 Adjustment Procedures.
(a) Whenever the number of shares of Warrant Stock purchasable
upon the exercise of each Warrant is adjusted pursuant to this Article
4, as herein provided, the Exercise Price payable upon the exercise of
each Warrant shall be adjusted by multiplying such Exercise Price
immediately prior to such adjustment by a fraction, of which the
numerator shall be the number of shares of Warrant Stock purchasable
upon the exercise of such Warrant immediately prior to such adjustment,
and of which the denominator shall be the number of shares of Warrant
Stock purchasable immediately thereafter. If any event or condition
occurs as to which other provisions of this Section 4 are not strictly
applicable or if strictly applicable would not fairly protect the
exercise or purchase rights of the Warrants in accordance with the
essential intent and principles of such provisions, or which might
materially and adversely affect the exercise or purchase rights of the
Holders under any provision of the Warrants, then the Company shall
make an adjustment in the application of such provisions, in accordance
with such essential intent and principles, so as to protect such
exercise and purchase rights as aforesaid, and any adjustment necessary
with respect to the Exercise Price and the number of shares of Warrant
Stock purchasable hereunder so as to preserve without dilution the
rights of the holders of Warrants.
(b) For the purpose of this Article 4, the terms "shares of
Common Stock" shall mean (i) the class of stock designated as the
Common Stock of the Company at the date of this Warrant Agreement, or
(ii) any other class of stock resulting from successive changes or
reclassifications of such shares consisting solely of changes in par
value, or from par value to no par value, or from no par value to par
value. In the event that at any time, as a result of an adjustment made
<PAGE>
pursuant to Section 4.1 above, the Warrant Holders shall become
entitled to purchase any securities of the Company other than shares of
Common Stock, thereafter the number of such other securities so
purchasable upon exercise of each Warrant and the Exercise Price of
such securities shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Warrant Stock. The number of shares of
Common Stock outstanding at any given time shall not include shares
owned or held by or for the account of the Company, and the disposition
of any such shares shall be considered an issue or sale of Common Stock
for the purposes of this Article 4.
(c) No adjustment in the number of shares of Warrant Stock
purchasable under the Warrants shall be required unless such adjustment
would require an increase or decrease of at least three-fourths of one
percent (.75%) in the number of shares of Warrant Stock purchasable
upon the exercise of each Warrant; provided, however, that any
adjustments which by reason of this paragraph (c) are not required to
be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations shall be made to the nearest
one-thousandth of a share.
4.8 Voluntary Adjustment by the Company. The Company may, at its
option, at any time during the term of the Warrants, reduce the then current
Exercise Price to any amount determined appropriate by the Board of Directors of
the Company.
Article 5
Covenants of the Company
The Company covenants and agrees that:
5.1 At all times, the Company will reserve and set apart and have, free
from preemptive rights, a sufficient number of shares of authorized by unissued
Common Stock or other securities, if applicable, to enable it at any time to
fulfill all its obligations hereunder.
5.2 Before taking any action that would cause an adjustment reducing
the Exercise Price per share below the then par value of the shares of Warrant
Stock issuable upon exercise of the Warrant, the Company will take any corporate
action that may be necessary in order that the Company may validly and legally
issue fully paid and nonassessable shares of such Warrant Stock at such adjusted
price.
5.3 In case the Company proposes:
<PAGE>
(a) to pay any dividend, payable in securities (of any class
or classes) upon its Common Stock or to make any distribution (other
than ordinary cash dividends) to the holders of its Common Stock; or
(b) to subdivide as a whole (by reclassification, by the
issuance of a stock dividend on Common Stock, or otherwise) the number
of shares of Common Stock then outstanding into a greater number of
shares of Common Stock, with or without par value; or
(c) to grant to or offer to the holders of its Common Stock
generally any rights or options; or
(d) to effect any capital reorganization or reclassification
of capital stock of the Company; or
(e) to consolidate with, or merge into, any other corporation
or business or transfer its property as an entirety or substantially as
an entirety; or
(f) to effect the liquidation, dissolution, or winding up of
the Company; or
(g) to make any other fundamental change in respect of which
the Holder of this Warrant would have been entitled to vote, pursuant
to the corporation law of Colorado, if the Warrant had been previously
exercised;
then the Company shall cause notice of any such intended action to be given to
the Holder of record of the Warrant (i) not less than thirty (30) days before
the date on which the transfer books of the Company shall close or a record be
taken for such stock dividend, distribution, granting of securities, rights or
options, or for determining rights to vote in respect of any fundamental change,
including any capital reorganization, reclassification, consolidation, merger,
transfer, liquidation, dissolution, winding up, or other fundamental change, and
(ii) in the case of any such capital reorganization, reclassification,
consolidation, merger, transfer, liquidation, dissolution, winding up, or other
fundamental change not less than thirty (30) days before the same shall be
effective.
5.4 The Company covenants that if any share of Common Stock required to
be reserved for purposes of exercise or conversion of Warrants issued hereunder
that requires, under any applicable governing rule or regulation of any national
securities exchange, registration with or approval of any governmental
authority, or listing on any such national securities exchange or quotation
service, before such shares may be issued upon exercise, the Company will use
its best efforts to cause such shares to be duly registered, approved or listed
on the relevant national securities exchange or quotation service, as the case
may be.
<PAGE>
5.5 The Company will pay all documentary stamp taxes, if any,
attributable to the initial issuance of Warrant Stock upon the exercise of
Warrants and any securities issued pursuant to Section 4 hereof; provided,
however, that the Company shall not be required to pay any tax or taxes which
may be payable in respect of any transfer involved in the issue or delivery of
any Warrants or certificates for Warrant Stock and any securities issued
pursuant to Section 4 hereof in a name other than that of the Holder of such
Warrants.
5.6 In case any of the Warrants shall be mutilated, lost, stolen or
destroyed, the Company shall, on such reasonable terms as to indemnity or
otherwise as it may in its discretion impose, issue and deliver in exchange and
substitution for and upon cancellation of the mutilated Warrant, or in lieu of
and in substitution for the Warrant lost, stolen or destroyed, a new Warrant of
like tenor and representing an equivalent right or interest.
Article 6
Not Stockholders; Limitation of Liability
No provision of this Warrant Agreement or in any of the Warrants shall
be construed as conferring upon the Holder the right to vote or to consent or to
receive dividends or to receive dividends or to receive notice as a stockholder
in respect of meetings of stockholders for the election of directors of the
Company or any other matter whatsoever as stockholders of the Company. In the
absence of affirmative action by the Holder hereof to purchase shares of Common
Stock, no provision hereof shall give rise to any liability of such Holder for
the purchase price or as a stockholder of the Company, whether such liability is
asserted by the Company or by creditors of the Company.
Article 7
Repurchase of Warrant
7.1 Right of First Refusal. In the event the Holder demands that all or
any part of the Warrant Stock be registered pursuant to Section 9.2 herein, the
Company shall have the right to repurchase the Warrant for cash at its Fair
Market Value as of the date of the demand. In the event the Holder determines to
transfer all or any portion of the Warrants pursuant to a bona fide offer to
purchase (other than to an affiliate of such Holder), the Company shall have the
right to repurchase the Warrants at the price of such bona fide offer. The
Company must deliver written notice to the Holder of its election not repurchase
the Warrant within 20 business days after receipt of a request by the Holder for
registration or receipt of notice by the Holder of its intent to accept a bona
fide offer, and such notification to the Holder must be accompanied by a
nonrefundable cash earnest money deposit to Holder of the lesser of One Hundred
Thousand Dollars ($100,000) or the purchase price of the Warrants under this
Section 7.1. The Company shall deliver the balance of the purchase price to the
Holder within the earlier of the proposed closing date in the bona fide offer,
if any and 60 days after delivery of its deposit. This right of first refusal
<PAGE>
shall not apply to any transfer to an "affiliate" (as defined in Rule 405 under
the 1933 Act) of the Holder.
7.2 Mandatory Repurchase.
(a) If the Company receives proceeds from any sale of its
Properties (as defined in the Facility) except for sales of
Hydrocarbons (as defined in the Facility) in the ordinary course of
business while any amounts remain outstanding under the Facility
representing 85% or less of its total net assets (based upon the amount
received for the Properties and otherwise based upon the good faith
determination of the Board of Directors of the Company), the Company
shall, at the option of the Holders, repurchase at their Fair Market
Value on a date no more than 35 business days after the date of such
sale such percentage of the Warrants as shall be equal to the
percentage of its Properties sold, all in accordance with a notice of
repurchase mailed to each Holder on the earliest practicable date
following (but in no event later than the 10th business day following)
the Company's receipt of such proceeds which shall provide that
electing Holders may return their Warrants within 20 business days if
they elect to have the Company repurchase such Warrants; provided,
however, that the Company shall not be required to offer to repurchase
any Warrants until its sales of Properties equal or exceed $10 million
in the aggregate. Any partial repurchase of the Warrants pursuant to
this Section 7.2(a) shall be made pro rata among the Holders based upon
all those Warrants returned for repurchase.
(b) The Company shall, on the earliest practicable date
following (but in no event more than 10 business days following) the
Company's receipt of proceeds from any sale of Properties (except for
sales of Hydrocarbons in the ordinary course of business) while any
amounts remain outstanding under the Facility that results in the
Company having sold in the aggregate since the date of this Warrant
Agreement in one or more transactions more than 85% or its total net
assets (based upon the amount received for the assets sold and
otherwise based upon the good faith determination of the Board of
Directors of the Company), repurchase all of the Warrants at their Fair
Market Value on the date of such sale.
Article 8
Mergers
So long as this Warrant Agreement remains in effect, the Company will
not merge or consolidate with or into any other corporation unless the successor
corporation (if not the Company), shall expressly assume, by operation of law or
by supplemental agreement executed and delivered to the Holders, the due and
punctual performance and observance of each and every covenant and condition of
this Warrant Agreement and the Warrants to be performed and observed by the
Company.
<PAGE>
Article 9
Registration Rights
9.1 Piggyback Registration Rights. If, at any time on or before the
expiration of the Warrants, the Company proposes to file a registration
statement for the public sale of any of its equity securities under the 1933
Act, other than a registration statement provided for in Section 9.2 hereof, the
Company shall in each case, not later than thirty (30) days prior to the initial
filing of the registration statement, deliver written notice of its intent to
file such registration statement to the Holders, setting forth the minimum and
maximum proposed offering price, commissions, and discounts in connection with
the offering, and other relevant information. The Holders shall be entitled to
include in such registration statement such number of Registrable Securities (as
defined in Section 9.2) as they shall request within twenty (20) days after
receipt of notice of the Company's intent to file a registration statement. The
Company shall permit, or shall cause the managing underwriter of a proposed
offering to permit, the holders of Registrable Securities requested to be
included in the registration to include such securities in the proposed offering
on the same terms and conditions as applicable to any similar securities of the
Company, if any, included therein for the account of any person other than the
Company and the holders of Warrants and/or Warrant Stock. If such registration
is to involve an underwritten public offering in which the obligation of the
underwriters is to take all of the securities to be sold if any are to be taken
and the underwriters determine that marketing factors require limitation of the
number of shares to be underwritten, or that the price would be adversely
affected by the addition of such shares, then the number of Registrable
Securities sought to be included pursuant hereto shall be reduced to the extent
necessary to eliminate such adverse effect. The Company shall continuously
maintain in effect any registration statement with respect to which the
Registrable Securities have been requested to be included (and are so included)
for lesser of (i) 180 days after the effectiveness of such registration
statement or (ii) the consummation of the distribution by the Holders of the
Registrable Securities ("Piggy-back Termination Date"); provided, however, that
if at the Piggy-back Termination Date the Registrable Securities are covered by
a registration statement which is, or is required to remain, in effect beyond
the Piggy-back Termination Date, the Company shall maintain in effect the
registration statement as it relates to the Registrable Securities for so long
as such registration statement remains or is required to remain in effect for
any of such other securities. If officers or directors of the Company or persons
holding five percent (5%) or more of any class of equity securities of the
Company request inclusion in such underwriting, the Company may offer to such
officers or directors that such other securities be included in the
underwriting, provided, however, that if the underwriters determines that
marketing factors require limitation of the number of shares to be underwritten,
or that the price would be adversely affected by the addition of the securities
proposed to be added, the securities of the Company held by the officers and
directors and other security holders of the Company and the Registrable
Securities shall be excluded from such registration and underwriting on a
pro-rata basis to the extent necessary to eliminate such adverse effect. Nothing
<PAGE>
in this Section 9.1 shall be construed as giving the Holders any right to
restrain, enjoin, or otherwise delay registration.
9.2 Demand Registration Rights. The Company covenants and agrees with
Chase and any subsequent holders of the Warrants and/or Warrant Stock that
within 60 days after receipt of a written request from Holders, the Company
shall file a registration statement (and use its best efforts to cause such
registration statement to become effective under the 1933 Act) provided that in
the opinion of the Company's counsel, no events preclude such registration with
respect to the offering and sale or other disposition of such of the Warrants
and/or Warrant Stock (including any securities received by the Holders pursuant
to Section 4 hereof) (all such securities, the "Registrable Securities") as the
Holders shall elect which amount shall constitute at least 50% of the
Registrable Securities, provided, however, that the Company shall not be
required to comply with such demand until after it has first become subject to
periodic reporting requirements under the regulations of the Securities and
Exchange Commission (the "Commission"). The Company shall use its best efforts
continuously to maintain the effectiveness of such registration statement for
the lesser of (i) 180 days after the effective date of the registration
statement or (ii) the consummation of the distribution by the holders of the
Registrable Securities covered by such registration statement (the "Termination
Date"); provided, however, that if at the Termination Date, the offered
securities are covered by a registration statement which also covers other
securities and which is required to remain in effect beyond the Termination
Date, the Company shall maintain in effect such registration statement as it
relates to the Registrable Securities for so long as such registration statement
(or any subsequent registration statement) remains or is required to remain in
effect for any of such other securities. The Company shall not be required to
comply with more than two requests for registration pursuant to this Section
9.2. If the Holders intend to distribute the Registrable Securities covered by
their request by means of an underwriting, they shall so advise the Company as a
part of their request made pursuant to this Section 9.2. The Company shall
(together with Holders who propose to distribute their securities through such
underwriting) enter into an underwriting agreement in customary form with a
representative of the underwriter or underwriters selected for such underwriting
by a majority in interest of the Holders.
If a registration requested pursuant to this Section 9.2 is to involve
an underwritten public offering in which the obligation of the underwriters is
to take all of the shares to be sold if any are to be taken, the Company and
other holders of securities of the Company may include securities in such
registration only with the consent of the Holders.
In the event that the Holder demands registration pursuant to this
Section 9.2 within the six months immediately prior to expiration of the
Warrants, and the Company, through no fault of the Holder, is unable to provide
such registration, the expiration date of this Warrant shall be extended until
the thirtieth (30th) day after a registration statement is declared effective.
<PAGE>
9.3 Filing Obligations of the Company. In connection with any
registration of Registrable Securities effected under Sections 9.1 or 9.2, the
Company shall:
(a) prepare and file the registration statement and such
amendments and supplements to the registration statement and the
prospectus or offering circular used in connection therewith as may be
necessary to keep the registration statement effective for the required
period and to comply with the provisions of the 1933 Act and the rules
and regulations thereunder with respect to the disposition of all
Registrable Securities covered by the registration statement for the
period required to effect the distribution thereof;
(b) furnish to the Holder such number of copies of any
prospectus or offering circular, including a preliminary prospectus,
and of a full registration statement and exhibits in conformity with
the requirements of the 1933 Act and rules and regulations thereunder,
as the Holder may reasonably request in order to facilitate the
disposition of such securities;
(c) use its best efforts to register or qualify the
Registrable Securities covered by the registration statement under the
securities or blue sky laws of such jurisdictions as the Holder may
reasonably request, and accomplish any and all other acts and things
which may be necessary or advisable to permit sale in such
jurisdictions of such Registrable Securities; provided, however, that
the Company shall not be required to register as a dealer or to qualify
as a foreign corporation in any such jurisdictions or to escrow any
shares of its capital stock; and provided, further that the Company
shall not be obligated to register or qualify the Registrable
Securities for sale in any particular state in which the Company would
be required to execute a general consent to service of process in
effecting such registration or qualification.
(d) enter into indemnity and contribution agreements, each in
customary form, with each underwriter, if any, and each holder of
Registrable Securities included in such registration statement; and, if
requested, enter into an underwriting agreement containing customary
representations, warranties, covenants, allocation of expenses, and
customary closing conditions including, but not limited to, opinions of
counsel, accountants' cold comfort letters and petroleum engineers'
reports, with any underwriter who participates in the offering of
Registrable Securities;
(e) list the Warrant Stock on each securities exchange on
which the Common Stock is listed.
9.4 Expenses. All expenses incurred by the Company in connection with
any registration of Registrable Securities effected under Sections 9.1 or 9.2,
including, without limitation, all registration or filing fees, fees and
expenses of complying with state securities and blue sky laws, printing
expenses, fees and expenses of the Company's counsel and accountants shall be
<PAGE>
paid by the Company; provided, however, that all underwriting discounts and
selling commissions applicable to the Registrable Securities shall not be borne
by the Company but shall be borne by the Holder.
9.5 Indemnification.
(a) By the Company. In connection with the filing of any
registration statements and sales of Registrable Securities thereunder,
the Company shall indemnify and hold harmless the Holders of Warrants,
any underwriter, the directors, officers, employees and agents of the
Holders and each underwriter and each Person, if any, who controls the
Holder or the underwriter within the meaning of the 1933 Act, against
losses, claims, damages or liabilities, joint or several (or actions in
respect thereto) ("Losses"), insofar as such Losses arise out of or are
based upon any untrue statement or alleged untrue statement of any
material fact contained in any registration statement under which
Warrant Stock was registered under the 1933 Act, any preliminary
prospectus or final prospectus contained therein, or any amendment or
supplement thereto, or any report filed by the Company with the
Securities and Exchange Commission (the "Disclosure Documents"), or
arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will
reimburse any such Holder, underwriter, or controlling Person for any
legal or any other expenses reasonably incurred in connection with
investigating or defending any such claims, excluding any amounts paid
in settlement of litigation, commenced or threatened, if such
settlement is effected without the prior written consent of the
Company; provided, however, that the Company shall not be liable in any
such case to the extent that any such Losses arise out of or are based
upon any untrue statement, alleged untrue statement or omission or
alleged omission made in such Disclosure Document in reliance upon and
in conformity with information furnished to the Company in writing by
or on behalf of the Holder specifically for inclusion therein.
(b) By the Holder. In connection with the filing of any
registration statement and sales of Registrable Securities thereunder,
the Holder shall indemnify the Company, each of its directors, each of
its officers who signed such registration statement, and each other
Person, if any, who controls the Company within the meaning of the 1933
Act, against any Losses to which the Company, any of its directors,
officers, or controlling Persons may become subject under the 1933 Act
or otherwise, insofar as such Losses arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact
contained in any of the Disclosure Documents or arise out of or are
based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse the Company, and any of its
directors, officers, or controlling Persons for any legal or any other
expenses reasonably incurred in connection with investigating or
defending any such claims, excluding any amounts paid in settlement of
<PAGE>
litigation, commenced or threatened, if such settlement is effected
without the prior written consent of the Holder, provided, however,
that such indemnification or reimbursement shall be payable in any such
case only to the extent that such statement or alleged statement or
omission or alleged omission is made in reliance on information
furnished to the Company in writing by or on behalf of the Holder
specifically for inclusion therein. Notwithstanding the provisions of
this Section 9.5(b), no Holder shall be liable in or required to
contribute an amount exceeding the product of the sales price per share
(net of any commissions or underwriting discounts) and the number of
shares or Warrants sold by such Holder.
9.6 Restrictions on Public Sale by the Company. To the extent not
inconsistent with applicable law, the Company agrees (i) not to effect any
public sale or distribution of any securities similar to the Registrable
Securities or any securities convertible into or exchangeable or exercisable for
such securities (or any option or other right for such securities), for any
securities that may be issued to the Holders pursuant Section 4 hereof, during
the 15-day period prior to, and during the 60-day period beginning on the
effective date of any registration statement under which the Registrable
Securities are registered in accordance with Section 9.2 (other than as part of
such registration).
9.7 Rule 144. With a view to making available to Holders the benefits
of certain rules of the Commission that may permit the sale of Registrable
Securities to the public without registration, the Company hereby covenants and
agrees after it first becomes subject to the periodic reporting requirements
under the rules and regulations of the Commission to use its best efforts to:
(i) file in a timely manner all reports and other documents required to be filed
by it under the 1933 Act and the Securities Exchange Act of 1934 and the rules
and regulations adopted by the Commission thereunder necessary to permit sales
under Rule 144 under the 1933 Act, and the Company will take such further action
(not requiring the expenditure of any out-of-pocket costs or the taking of any
action not ordinarily taken by public companies to facilitate sales) to the
extent required from time to time to enable Holders to sell Registrable
Securities (whether or not any such securities have been the subject of a demand
or piggy-back request under Article 9 hereof) without registration under the
1933 Act within the limitation of the exemptions provided by (a) Rule 144 under
the 1933 Act, as such Rule may be amended from time to time, or (b) any similar
rule or regulation hereafter adopted by the Commission and (ii) promptly furnish
each Holder a copy of all such reports and documents. Upon the request of a
Holder, the Company will deliver to such Holder a written statement as to
whether it has complied with such requirements.
9.8 Other Registration Rights. The Company hereby agrees that it shall
not issue any additional registration rights with respect to shares of its
Common Stock, warrants to purchase its Common Stock or securities convertible
into its Common Stock, which are inconsistent with the provisions of this
Warrant Agreement.
<PAGE>
Article 10
Representations, Warranties and Covenants of the Company
The Company hereby represents, warrants and covenants as follows:
10.1 Existence. Each of the Company and each of its subsidiaries: (a)
is a corporation duly organized, legally existing and in good standing under the
laws of the jurisdiction of its incorporation; (b) has all requisite corporate
power, and has all material governmental licenses, authorizations, consents and
approvals necessary to own its assets and carry on its business as now being or
as proposed to be conducted; and (c) is qualified to do business in all
jurisdictions in which the nature of the business conducted by it makes such
qualification necessary and where failure so to qualify would have a Material
Adverse Effect.
10.2 Power and Authority. The Company has all necessary corporate power
and authority to execute, deliver and perform its obligations under the Warrant
Agreement and the Warrants; and the execution, delivery and performance by the
Company of the Warrant Agreement and the Warrants have been duly authorized by
all necessary corporate action on its part; and the Warrant Agreement and the
Warrants constitute the legal, valid and binding obligations of the Company
enforceable in accordance with their terms, except (i) that such enforcement may
be subject to bankruptcy, insolvency, moratorium or similar laws affecting
creditors' rights, and (ii) that the remedy of specific performance and
injunctive and other forms of equitable relief are subject to certain equitable
defenses and to the discretion of the court before which any proceedings
therefor may be brought.
10.3 Reservation, Issuance and Delivery of Common Stock. There have
been reserved for issuance, and the Company shall at all times keep reserved,
out of the authorized and unissued shares of Common Stock, a number of shares
sufficient to provide for the exercise of the rights of purchase represented by
the Warrants, and such shares, when issued upon receipt of payment therefor in
accordance with the terms of the Warrants and of this Warrant Agreement, will be
legally and validly issued, fully paid and non-assessable and will be free of
any preemptive rights of shareholders or any restrictions; provided, however,
that unless the Holders shall have exercised their registration rights in
Section 9 hereof, such shares will not be registered under the Securities Act of
1933, as amended or any state's securities act.
10.4 Execution and Delivery. Neither the execution and delivery of the
Warrant Agreement and the Warrants nor compliance with the terms and provisions
hereof will conflict with our result in a breach of, or require any consent
which has not been obtained as of the date hereof, the charter or by-laws of the
Company or any of its subsidiaries, or any Governmental Requirement or any
agreement or instrument to which the Company or any of its subsidiaries is a
party or by which it is bound or to which it or its properties are subject, or
constitute a default under any such agreement or instrument, or result in the
<PAGE>
creation or imposition of any lien upon any of the revenues or assets of the
Company or any of its subsidiaries pursuant to the terms of any such agreement
or instrument other than the liens created pursuant to the terms of the
Facility. No authorizations, approvals or consents of, and no filings or
registrations with, any Governmental Authority are necessary for the execution,
delivery or performance by the Company of the Warrant Agreement or the Warrants
or for the validity or enforceability thereof.
10.5 Litigation. Except as disclosed to Chase in Schedule 7.03 to the
Facility, there is no litigation, legal, administrative or arbitral proceeding,
investigation or other action of any nature pending or, to the knowledge of the
Company threatened against or affecting the Company or any of its subsidiaries
which involves the possibility of any judgment or liability against the Company
or any of its subsidiaries not fully covered by insurance (except for normal
deductibles), and which would have a Material Adverse Effect.
10.6 Compliance with Laws, Rules, Regulations and Orders. Neither the
Company nor any of its subsidiaries has violated any Governmental Requirement or
failed to obtain any license, permit, franchise or other governmental
authorization necessary for the ownership of any of its properties or the
conduct of its business, which violation or failure would have (in the event
such violation or failure were asserted by any Person through appropriate
action) a Material Adverse Effect.
10.7 No Material Misstatements. No written information, statement,
exhibit, certificate, document or report furnished to the Holder in connection
with the negotiation of this Warrant Agreement contained any material
misstatement of fact or omitted to state a material fact or any fact necessary
to make the statement contained therein not materially misleading in the light
of the circumstances in which made and with respect to the Company and its
subsidiaries taken as a whole. There is no fact peculiar to the Company or its
subsidiaries which has a Material Adverse Effect or in the future is reasonably
likely to have (so far as the Company can now foresee) a Material Adverse Effect
and which has not been set forth in this Warrant Agreement, the Facility or the
other documents, certificates and statements furnished to the Holder by or on
behalf of the Company or its subsidiaries prior to the date hereof in connection
with the transactions contemplated hereby and thereby.
Article 11
Miscellaneous
11.1 Governing Law. THIS WARRANT AGREEMENT AND THE WARRANTS (INCLUDING,
BUT NOT LIMITED TO, THE VALIDITY AND ENFORCEABILITY HEREOF) SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, OTHER
THAN THE CONFLICT OF LAWS RULES THEREOF.
<PAGE>
11.2 Notices. Any notice or other communication required or permitted
to be given or delivered pursuant to this Warrant shall be in writing and shall
be deemed given if delivered personally or by facsimile transmission (if receipt
is confirmed by the facsimile operator of the recipient), or delivered by
overnight courier service or mailed by registered or certified mail (return
receipt requested), postage prepaid, to the parties at the following addresses
(or at such other address in the United States of America for a party as shall
be specified by like notice; provided that notices of change of address shall be
effective only upon receipt thereof):
(i) to the Holder as follows:
The Chase Manhattan Bank, N.A.
1 Chase Manhattan Plaza
New York, New York 10005
Attn: Richard F. Betz
Facsimile No.: (212) 552-1687
Vinson & Elkins L.L.P.
1001 Fannin Street
Houston, Texas 77002-6067
Attn: Larry G. Barbour
Facsimile No.: (713) 758-2346
(ii) to the Company as follows:
Vessels Oil & Gas Company
1050 Seventeenth St., Suite 2000
Denver, Colorado 80265
Attn: Nicholas Aretakis/Richard Hartfield
Facsimile No.: (303) 825-2532
11.3 Severability. If any provision of this Warrant Agreement shall be
held invalid, illegal or unenforceable in any respect such invalidity,
illegality or unenforceability shall not affect any other provision of this
Warrant Agreement.
11.4 Headings. The headings in this Warrant Agreement are for reference
purposes only and are not intended to affect the interpretation of any provision
of this Warrant Agreement.
11.5 Amendment. This Warrant Agreement cannot be amended or modified
except by a written agreement. Any amendment of this Warrant Agreement may be
effected with the consent of at least a majority of the total then outstanding
Warrants; provided that, any amendment which shall have the effect of materially
adversely affecting the interests of any Holder shall not be effective with
respect to such Holder if such Holder shall not have consented thereto.
<PAGE>
11.6 Assignment. This Warrant Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective heirs, personal
representatives, successors and assigns except that no party may assign or
transfer its rights or obligations under this Agreement to the extent explicitly
prohibited herein.
11.7 Right to Inspection. The Company will permit the Holders upon
prior notice to the Company, during normal business hours, to inspect those
properties, books and records reasonably related to their interests as Holders,
and will promptly respond to and discuss with such Holders inquiries regarding
the management, business and affairs of the Company; provided, however, that
these inspection rights exist only for Holders of at least 33% of the then
outstanding Warrants and; provided, further, that each Holder who receives
confidential information from the Company agrees that it will maintain the
confidentiality of such information except to the extent it is required by law
to disclose such confidential information.
11.8 Survival of Representations, Warranties and Covenants. All
representations and warranties of the Company and all covenants and agreements
made herein shall survive the execution and delivery of this Warrant Agreement
and the Warrants and shall remain in force and effect until the Expiration Date.
11.9 Entire Agreement. This Warrant Agreement, together with its
attachments, contains the entire understanding among the parties hereto with
respect to the subject matter hereof and supercedes all prior and
contemporaneous agreements and understandings, inducements or conditions,
express or implied, oral or written, except as herein contained.
IN WITNESS WHEREOF, the parties hereto have caused this Warrant
Agreement to be signed by their appropriate officers thereunto duly authorized.
Dated: September 12, 1994
VESSELS OIL & GAS COMPANY
By: /s/ T. J. Vessels
T.J. Vessels, President
CHASE MANHATTAN BANK, N.A.
By:
Name:
Title:
<PAGE>
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE SHARES OF COMMON STOCK OR
OTHER SECURITIES ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD
EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT, OR (ii) AN
APPLICABLE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933. ANY
SALE PURSUANT TO CLAUSE (ii) OF THE PRECEDING SENTENCE MUST BE ACCOMPANIED BY AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT
SUCH EXEMPTION FROM REGISTRATION IS AVAILABLE IN CONNECTION WITH SUCH SALE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS AND COMMON STOCK UNDERLYING SUCH
WARRANTS REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO CERTAIN RIGHTS OF FIRST
REFUSAL AND RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO
HEREIN.
No. UD-01 130 Warrants
VOID AFTER 5:00 P.M. NEW YORK TIME
ON SEPTEMBER 12, 2004
VESSELS OIL & GAS COMPANY
WARRANT CERTIFICATE
THIS CERTIFIES THAT for value received CHASE MANHATTAN CAPITAL
CORPORATION, the registered holder hereof or registered assigns (the "Holder"),
is the owner of the number of Warrants set forth above, each of which entitles
the owner thereof to purchase at any time from 9:00 A.M., New York time, on
September 12, 1994, until 5:00 P.M., New York time, on September 12, 2004, one
fully paid and nonassessable share of the Common Stock (subject to adjustment),
par value $.10 per share (the "Common Stock"), of Vessels Oil & Gas Company, a
Colorado corporation (the "Company"), at the purchase price of $3,000 per share,
subject to adjustment as described in the Warrant Agreement referred to below
(the "Exercise Price"). The Holder may pay the Exercise Price in cash, or by
certified or official bank check or by reduction of the outstanding principal
amount under the Facility, or make a net exercise for Warrant Stock as described
in the Warrant Agreement.
This Warrant Certificate is subject to, and entitled to the benefits
of, all of the terms, provisions and conditions of an agreement dated September
12, 1994 (the "Warrant Agreement") between the Company and The Chase Manhattan
Bank, N.A., which Warrant Agreement is hereby incorporated herein by reference
and made a part hereof and to which Warrant Agreement reference is hereby made
for a full description of the rights, limitations of rights, obligations, duties
and immunities hereunder of the Company and the Holders of the Warrant
Certificates. Copies of the Warrant Agreement are on file at the principal
office of the Company.
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The Holder hereof may be treated by the Company and all other persons
dealing with this Warrant Certificate as the absolute owner hereof for any
purpose and as the person entitled to exercise the rights represented hereby, or
to the transfer hereof on the books of the Company, any notice to the contrary
notwithstanding, and until such transfer on such books, the Company may treat
the Holder hereof as the owner for all purposes.
This Warrant Certificate, with or without other Warrant Certificates,
upon surrender at the principal office of the Company, may be exchanged for
another Warrant Certificate or Warrant Certificates of like tenor and date
evidencing Warrants entitling the Holder to purchase a like aggregate number of
shares of Common Stock as the Warrants evidenced by the Warrant Certificate or
Warrant Certificates surrendered entitled to such Holder to purchase. If this
Warrant Certificate shall be exercised in part, the Holder shall be entitled to
receive upon surrender hereof, another Warrant Certificate or Warrant
Certificates for the number of whole Warrants not exercised.
No fractional shares of Common Stock will be issued upon the exercise
of any Warrant or Warrants evidenced hereby, but in lieu thereof a cash payment
will be made, as provided in the Warrant Agreement.
Neither the Warrants nor the Warrant Certificate entitles any Warrant
Holder hereof to any of the rights of a shareholder of the Company.
This Warrant shall be deemed to be a contract made under and shall be
construed in accordance with and governed by the laws of the State of New York,
without giving effect to principles of conflicts of law.
IN WITNESS WHEREOF, Vessels Oil & Gas Company has caused the signature
of its Vice President and Secretary to be printed hereon and its corporate seal
to be printed hereon.
VESSELS OIL & GAS COMPANY
By:
Name:
Title:
Attest:
- -------------------------
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<PAGE>
EXHIBIT 10.31
No. of Shares: Fifty (50)
VESSELS OIL & GAS COMPANY
COMMON STOCK PURCHASE WARRANT
THIS WARRANT AND THE SHARES PURCHASABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD,
TRANSFERRED OR ASSIGNED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH ACT COVERING SUCH SECURITIES OR THE COMPANY RECEIVES AN OPINION OF
COUNSEL FOR THE HOLDER OF THESE SECURITIES (REASONABLY SATISFACTORY TO THE
COMPANY AND ITS COUNSEL), OR AN OPINION OF THE COMPANY'S COUNSEL STATING THAT
SUCH SALE, TRANSFER, OR ASSIGNMENT IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.
FOR VALUE RECEIVED, Associated Energy Managers, Inc., a Delaware
corporation (the "Holder"), is entitled to purchase from Vessels Oil & Gas
Company, a Colorado corporation (the "Company"), subject to the terms and
conditions herein set forth, at any time before 5:00 p.m. Fairfield, Connecticut
time on December 30, 2000, or, if such day is not a business day, the first
business day thereafter (the "Expiration Date") or such other date as may be
established in accordance with the terms of this Warrant, Fifty (50) of the
shares of duly authorized, validly issued, fully paid and nonassessable Common
Stock of the Company, par value ten cents ($0.10) per share (the "Warrant
Stock"), subject to adjustment of the number or kind of shares constituting
Warrant Stock as hereinafter provided. The Holder is entitled to purchase the
Warrant Stock for One Thousand Three Hundred Fifty Dollars ($1,350) per share,
subject to adjustment as hereinafter provided (the "Exercise Price"), and is
entitled also to exercise the other appurtenant rights, powers, and privileges
hereinafter set forth.
Article 1 Definitions.
For all purposes of this Warrant, unless the context otherwise
requires, the following terms have the following meanings:
1.1 "Common Stock" means the Company's authorized common stock, par
value ten cents ($0.10) per share. "Common Stock Equivalent" has the meaning
ascribed to that term in Section 4.5(a).
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1.2 "Company" means Vessels Oil & Gas Company, a corporation organized
and existing under the laws of the State of Colorado, and any successor
corporation.
1.3 "Exercise Price" means the exercise price for the Warrant Stock
established in accordance with Article 4.
1.4 "Existing Stock" shall have the meaning ascribed to that term in
Section 4.4 hereof.
1.5 "Expiration Date" means December 30, 2000, or, if such day is not a
business day, the first business day thereafter, or such other date as may be
established in accordance with the terms of this Warrant.
1.6 "Fair Market Value" in reference to the Common Stock means, in the
event such stock is traded on a national securities exchange or in the over the
counter market as reported by the National Association of Securities Dealers
Automated Quotation System (stock being so traded or reported being referred to
herein as "Publicly Traded"), the average closing bid price of such stock on the
ten (10) trading days immediately preceding the date as of which such value is
to be determined, and in the event the Common Stock is not so traded or
reported, the value of such stock shall be determined on the fair market value
of the Company either on (i) a going-concern basis, or (ii) a liquidation basis,
whichever is higher, both values to be determined by an appraiser mutually
acceptable to the Holder and the Company, the determination of such appraiser to
be final in the absence of fraud or bad faith. If the Company has registered
shares of Common Stock for an underwritten public distribution, Fair Market
Value shall be the actual price per share at which shares are first offered upon
the registration statement becoming effective or, if the event in question
occurs upon the eve of the effective date, the suggested price per share. In the
event the Common Stock is not Publicly Traded, Fair Market Value in reference to
a share of the Common Stock shall mean the Fair Market Value of the Company (as
defined in the previous sentence) allocable to the issued Common Stock divided
by the number of shares of Common Stock that would have been outstanding had (i)
this Warrant and that certain warrant to AEM dated December 16, 1993, providing
for the purchase of 50 shares at an initial Exercise Price of $3,000, (ii) all
options to purchase Common Stock, and (iii) all securities convertible into
Common Stock at a price per share no greater than Fair Market Value, been
exercised or converted on the date as of which such value is to be determined
(with appropriate adjustment by appraisal to reflect the proceeds of the assumed
exercise or conversion of outstanding securities). As applicable to Warrants,
Fair Market Value shall mean the Fair Market Value of the Common Stock subject
to such Warrants minus the Exercise Price of such Warrants established in
accordance with Article 4.
1.7 "Holder" means Associated Energy Managers, Inc., a Delaware
corporation, and its successors or assigns as holder of this Warrant.
1.8 "1933 Act" means the Securities Act of 1933, as amended.
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1.9 "Person" means any natural person, sole proprietorship, general
partnership, limited partnership, joint venture, trust, unincorporated
organization, association, corporation, institution, private or governmental
entity, or party.
1.10 "Publicly Traded" has the meaning ascribed in Section 1.6.
1.11 "Subscription Notice" means a written notice to the Company of
Holder's election to exercise its right under the Warrant to purchase Common
Stock, in substantially the form of Exhibit A attached hereto.
1.12 "Warrant" means this Warrant and any Warrants issued on or in
substitution for this Warrant.
1.13 "Warrant Stock" means the shares of Common Stock or other
securities to be acquired upon the exercise of the Warrant.
Article 2 Exercise of Warrant.
2.1 Partial Exercise. This Warrant may be exercised in whole or in
part. In the event of a partial exercise, the Company shall execute and deliver
to the Holder (or to such other Person as shall be designated in the
Subscription Notice) a new Warrant covering the unexercised portion of the
Warrant Stock.
2.2 Procedure. To exercise this Warrant, the Holder shall deliver to
the Company at its principal office:
(a) a written notice, in substantially the form of the Subscription
Notice, of the Holder's election to exercise this Warrant;
(b) a check payable to the Company in the amount of the Exercise Price;
and
(c) this Warrant.
The Company shall as promptly as practicable, and in any event within twenty
(20) days after receipt of such notice, execute and deliver or cause to be
executed and delivered one or more certificates representing the aggregate
number of shares of Warrant Stock to which the Holder is entitled and, if this
Warrant is exercised in part, a new Warrant as set forth in Section 2.1.
2.3 Name and Effective Date. The stock certificate(s) so delivered
shall be issued in the name of the Holder or such other name as shall be
designated in the notice specified in Section 2.2. Such certificate(s) shall be
deemed to have been issued and such Holder or any other Person so designated to
3
<PAGE>
be named therein shall be deemed for all purposes to have become a Holder of
record of such shares as of the date the Company actually receives the notice
specified in Section 2.2.
2.4 Expenses. The Company shall pay all expenses, taxes, and other
charges payable in connection with the preparation, issue, and delivery of such
stock certificate(s), except that, in case such stock certificate(s) shall be
registered in a name or names other than the name of the Holder of this Warrant,
stock transfer taxes that are payable upon the issuance of such stock
certificate(s) shall be paid by the Holder hereof.
2.5 Legal Requirements. The Warrant Stock issued upon the exercise of
this Warrant shall be validly issued, fully paid, and nonassessable.
2.6 No Fractional Shares. The Company shall not issue a stock
certificate representing any fraction of a share upon partial exercise by a
Holder of such Holder's rights hereunder.
2.7 Cashless Exercise. Notwithstanding Section 2.2 of this Warrant or
any other provision of this Warrant to the contrary, the Company agrees that, in
addition to the Holder's rights under this Warrant, the Holder may, upon any
full or partial exercise of this Warrant, at its election, pay the aggregate
Exercise Price applicable to such exercise by delivering the Warrant to the
Company and receiving from the Company in return therefor the number of shares
of Common Stock having a Fair Market Value on the date of exercise equal to the
Fair Market Value of the Warrant as established by the last sentence of Section
1.6.
2.8 Lock Up Agreement. If reasonably requested by the underwriter
managing an initial public distribution of the Company's Common Stock, the
Holder shall execute the suggested agreement providing for a period of time (the
"Lock Up Period") immediately following the effective date of the Company's
registration statement (which Lock Up Period shall not exceed the Lock Up Period
requested of other significant holders of the Company's Common Stock) during
which period the Holder will not sell its Warrant Stock into the public markets.
The Holder's undertaking in this regard will not extend to Warrant Stock
included in the registration statement, whether pursuant to Section 9 hereof or
otherwise, and shall lapse if the aggregate holdings of Endowment Energy
Partners, L.P., Endowment Energy Partners II, Limited Partnership, and Holder
shall fail to represent at least 5% of the Company's outstanding Common Stock.
Article 3 Transfer.
3.1 Permitted Transferees. This Warrant shall be freely transferable,
in whole or in part, subject to the limitations specified in Section 3.2 herein,
and subject also to the Company's right to repurchase the Warrant Stock as
specified in Section 7.1 herein ("Right of First Refusal"), if the Company's
Stock is Publicly Traded. If the Company's Stock is not Publicly Traded, this
Warrant shall be transferable, in whole or in part (subject to the limitations
specified in Section 3.2 herein, and subject also to the Company's right to
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<PAGE>
repurchase the Warrant Stock as specified in Section 7.1 herein), only to an
Affiliate (as that term is defined in Rule 405 under the 1933 Act) of Holder.
Pursuant to Sections 2.1 and 2.3 above, Holder may only designate as a recipient
of the Warrant Stock Holder or a Person to whom Holder could transfer the
Warrant under this Section 3.1.
3.2 Securities Laws. Neither this Warrant nor the Warrant Stock shall
be transferable unless:
(a) either a registration statement under the 1933 Act is in effect
covering the Warrant or the Warrant Stock, as the case may be, or the Company
has received an opinion from Company counsel to the effect that such
registration is not required, or the Holder has furnished to the Company an
opinion of Holder's counsel, which counsel shall be reasonably satisfactory to
the Company, to the effect that such registration is not required; and
(b) the transfer complies with any applicable state securities laws.
In the event Holder seeks an opinion as to transfer without registration from
Holder's counsel, the Company shall provide such factual information to Holder's
counsel as Holder's counsel may reasonably request for the purpose of rendering
such opinion and such counsel may rely on the accuracy and completeness of such
information in rendering such opinion.
Upon issuance, the Warrant Stock will bear a legend describing the
restrictions on transfer set forth in this Section 3.2.
3.3 Procedure. The Holder may transfer this Warrant on the books of the
Company by surrendering to the Company:
(a) this Warrant;
(b) a written assignment of this Warrant, in substantially the form of
the Assignment attached as Exhibit B hereto, naming the assignee duly executed
by the Holder; and
(c) funds sufficient to pay any stock transfer taxes payable upon the
making of such transfer.
The Company shall thereupon execute and deliver a new Warrant in the name of the
assignee specified in such instrument of assignment, and if this Warrant is
transferred in part, the Company shall also execute and deliver in the name of
the Holder a new warrant covering the untransferred portion of the Warrant. Upon
issuance of the new Warrant or Warrants, the Warrant surrendered for transfer
shall be cancelled by the Company.
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3.4 Expenses. The Holder shall pay all expenses, taxes (other than
transfer taxes), and other charges payable in connection with the preparation,
issue, and delivery of any new Warrant under this Article 3.
Article 4 Exercise Price and Adjustments.
4.1 Initial Exercise Price. The Initial Exercise Price for the Warrant
Stock shall be One Thousand Three Hundred Fifty Dollars ($1,350) per share.
4.2 Stock Splits, Stock Dividends and Reverse Stock Splits. If at any
time the Company shall subdivide (by reclassification, by the issuance of a
Common Stock dividend on Common Stock, or otherwise) its outstanding shares of
Common Stock into a greater number, the number of shares of Common Stock that
may be purchased hereunder shall be increased proportionately and the Exercise
Price per share of Common Stock shall be decreased proportionately as of the
effective date of such action. The effective date of a stock dividend shall be
the date on which the dividend is declared. Issuance of a Common Stock dividend
shall be treated as a subdivision of the whole number of shares of Common Stock
outstanding immediately before the record date for such dividend into a number
of shares equal to such whole number of shares so outstanding plus the number of
shares issued as a stock dividend. If at any time the Company shall combine (by
reclassification or otherwise) its outstanding number of shares of Common Stock
into a lesser number, the number of shares of Common Stock that may be purchased
hereunder shall be reduced proportionately and the Exercise Price per share of
Common Stock shall be increased proportionately as of the effective date of such
action.
4.3 Dividends Other than in Common Stock or Cash; Other Distributions.
If at any time while this Warrant is outstanding the Company shall declare or
make for the benefit of all holders of its Common Stock any dividend or
distribution upon its Common Stock other than ordinary cash dividends, or
distributions to which Section 4.2 or 4.4 apply (whether payable in stock of any
class or classes other than its Common Stock or payable in evidences of
indebtedness or assets or in rights, options, or warrants or convertible or
exchangeable securities), then in each such case the number of shares of Common
Stock that may be purchased hereunder shall be determined by multiplying the
number of shares of Common Stock theretofore comprising the Warrant Stock by a
fraction, the numerator of which shall be the Fair Market Value per share of the
Common Stock determined in accordance with Section 1.6 as of the record date for
such dividend or distribution and the denominator of which shall be the Fair
Market Value per share, as so determined, less the fair value as of such date,
as reasonably determined by the Board of Directors of the Company, of the
portion of such dividend or distribution applicable to one share of Common
Stock. Such adjustment shall be made whenever any such distribution is made, and
shall become effective on the date of distribution retroactive to the record
date for the determination of shareholders entitled to receive the distribution.
In the event the Company determines that the adjustment provided for above is
unduly difficult or expensive to effect because of difficulties of valuation,
the Company may, at its option and as an alternative to the adjustment,
distribute and place in escrow for the Holder that portion of such dividend or
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<PAGE>
distribution which the Holder would have received had it exercised this Warrant
before the declaration of the dividend or the making of the distribution. Upon
exercise of this Warrant, the Holder shall receive its portion of the dividend,
distribution, or rights.
4.4 Issuance on Common Stock Options, Warrants or Rights. If at any
time while this Warrant is outstanding the Company shall grant to all holders of
its Common Stock any rights, options or warrants (referred to in this Section
4.4 as "Rights") entitling them to purchase shares of Common Stock at a price
per share which is lower at the record date for such issuance than the Fair
Market Value of the Common Stock on such date determined in accordance with
Section 1.6, the number of Shares of Common Stock that may be purchased
hereunder shall be determined by multiplying the number of Shares of Common
Stock theretofore purchasable upon exercise of each Warrant by a fraction of
which the numerator shall be the number of shares of Common Stock outstanding or
subject to issuance at prices at or below the Fair Market Value of the Common
Stock on such record date (the "Existing Stock") plus the number of shares
offered pursuant to the Rights and of which the denominator shall be the number
of shares of Existing Stock plus the number of shares which the aggregate
offering price of the total number of shares of Common Stock offered pursuant to
the Rights would purchase at the then current Fair Market Value per share of
Common Stock. Such adjustment shall be made whenever such rights, options or
warrants are issued and shall become effective retroactively immediately after
the record date for the determination of shareholders entitled to receive such
rights, options or warrants. In the event the Company determines that the
adjustment provided for above in this Section is unduly difficult or expensive
to effect because of difficulties of valuation, the Company may, at its option
and as an alternative to the adjustment, grant and convey to the Holder such
Rights which the Holder would have received had it exercised this Warrant before
issuance of the Rights.
On the expiration or termination of any of the Rights, the number of
shares of Common Stock then purchasable upon the exercise of each Warrant and
the exercise price then in effect shall be subject to readjustment and the
number of shares of Common Stock subject to the Warrants shall forthwith the
decreased and the exercise price under the Warrants shall forthwith be increased
to that which would have been in effect at the time of such expiration or
termination had such Rights, to the extent outstanding immediately prior to such
expiration or termination, never been issued.
4.5 Anti-dilution Adjustment in Exercise Price. (a) In case the Company
shall at any time after the date of this Warrant issue for consideration any
shares of Common Stock, or any securities or other rights convertible into
Common Stock or entitled to receive Common Stock, or any other equity securities
entitled to participate with the Common Stock in the earnings or the assets of
the Company (but not any equity security entitled to a fixed preference in such
earnings or assets rather than a participation therein) (such other securities
or rights herein called "Common Stock Equivalents"), for a price per share less
than the Exercise Price in effect immediately preceding the issuance of such
additional Common Stock or Common Stock Equivalents, the Exercise Price in
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effect immediately prior to the issuance of such additional shares or Common
Stock Equivalents shall forthwith be reduced to a price determined by dividing:
(i) An amount equal to the sum of (x) the total number of shares of
Common Stock deemed to be outstanding immediately prior to such issuance
multiplied by the Exercise Price in effect immediately prior to such issuance,
(y) the total number of additional shares of Common Stock so multiplied by the
price per share, if any, for which such shares are sold, and (z) the aggregate
amount paid for the Common Stock Equivalents so sold plus the aggregate amount
subsequently required to be paid under the terms of such Common Stock
Equivalents to acquire additional shares of Common Stock
by:
(ii) The total number of shares of Common Stock deemed to be
outstanding immediately after the issuance of such additional shares of Common
Stock or Common Stock Equivalents.
(b) For purposes of clauses (i) and (ii) of Subsection 4.5(a), the
total number of shares of Common Stock deemed to be outstanding shall include
that number of shares of Common Stock actually outstanding plus that number of
shares of Common Stock then issuable under this Warrant plus that number of
shares of Common Stock then issuable pursuant to terms of the Common Stock
Equivalents at a price per share, computed pursuant to Subsection 4.5(d), that
is less than the Exercise Price.
(c) For purposes of this Section 4.5, the price per share for which
additional shares of Common Stock and Common Stock Equivalents are issued or
sold shall, to the extent such price consists of cash, be computed on the basis
of the amount of cash received by the Company (and in the case of Common Stock
Equivalents, such amount plus the amount of cash required to be paid to acquire
additional shares of Common Stock), after deduction of any expenses payable by
the Company and any underwriting or similar commissions, compensations or
concessions paid or allowed by the Company in connection with such issue or
sale. To the extent that the consideration for such additional shares and Common
Stock Equivalents is property or services other than cash, the amount thereof
shall be the value received by or required to be paid to the Company as fixed in
good faith by the Board of Directors of the Company.
(d) The Exercise Price shall never be increased pursuant to this
Section 4.5 except as provided in this Subsection 4.5(d) or Section 4.6 below.
Upon the expiration unexercised of the entitlement to receive shares of Common
Stock under any Common Stock Equivalents the sale of which resulted in an
adjustment to the Exercise Price under this Section 4.5, then the Exercise Price
shall thereupon be increased by the amount that the sale of such Common Stock
Equivalent caused the Exercise Price to be decreased (subject to any applicable
adjustment hereunder) and thereafter adjustments will be made to the Exercise
Price in accordance with this Section 4.5.
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(e) This Section 4.5 shall not apply to the Company's preferred stock
issued to Endowment Energy Partners, L.P. ("EEP") and to Endowment Energy
Partners II, Limited Partnership ("EEP II"), pursuant to (i) that certain
Amended and Restated Financing Agreement, dated May 16, 1993, as amended by that
certain First Amendment to Amended and Restated Financing Agreement, dated
December 16, 1993, by and between the Company and Vessels Gas Processing, Inc.
("VGP"), as borrower, and EEP, as lender, and (ii) that certain Financing
Agreement, dated December 16, 1993, by and between the Company and VGP, as
borrower, and Endowment Energy Co-Investment Partnership, as lender, of which
EEP and EEP II are general partners.
4.6 Exercise in Connection with an Initial Public Offering.
Notwithstanding anything to the contrary contained herein, the Holder agrees
that it shall, upon written request of the Company, exercise the Warrant
(whether pursuant to Section 2.2 or Section 2.7) in whole not later than the
business day prior to the day on which a registration statement relating to the
initial public offering of securities of the Company is declared effective by
the Securities and Exchange Commission; provided, however, that the obligation
to exercise the Warrant pursuant to this paragraph 4.6 shall be contingent on
the Company's entering into a Registration Rights Agreement substantially in the
form of Exhibit A attached hereto prior to Holder's exercise thereof.
4.7 Reorganization and Reclassification. In case of any capital
reorganization or any reclassification of the capital stock of the Company while
the Warrant remains outstanding, the Holder of the Warrant shall thereafter be
entitled to purchase pursuant to the Warrant (in lieu of the kind and number of
shares of Common Stock comprising Warrant Stock that such Holder would have been
entitled to purchase or acquire immediately before such reorganization or
reclassification) the kind and number of shares of stock of any class or classes
or other securities or property for or into which such shares of Common Stock
would have been exchanged, converted, or reclassified if the Warrant Stock had
been purchased immediately before such reorganization or reclassification. In
case of any such reorganization or reclassification, appropriate provision (as
determined by resolution of the Board of Directors of the Company) shall be made
with respect to the rights and interest thereafter of the Holder of the Warrant,
to the end that all the provisions of the Warrant (including adjustment
provisions) shall thereafter be applicable, as nearly as reasonably practicable,
in relation to such stock or other securities or property.
4.8 Statement of Adjustment of Warrant Stock. Whenever the number or
kind of shares comprising Warrant Stock or the Exercise Price is adjusted
pursuant to this Article 4, the Company shall promptly give notice to the Holder
of record of the outstanding Warrant, stating that such an adjustment has been
effected and setting forth the number and kind of shares purchasable and the
amount of the then-current Exercise Price, and stating in reasonable detail the
facts requiring such adjustment and the calculation of such adjustment.
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4.9 No Other Adjustments. No adjustments in the number or kind or price
of shares constituting Warrant Stock shall be made except as provided in this
Article 4.
Article 5 Covenants of the Company.
The Company covenants and agrees that:
5.1 At all times, the Company will reserve and set apart and have, free
from preemptive rights, a sufficient number of shares of authorized but unissued
Common Stock or other securities, if applicable, to enable it at any time to
fulfill all its obligations hereunder.
5.2 Before taking any action that would cause an adjustment reducing
the Exercise Price per share below the then par value of the shares of Warrant
Stock issuable upon exercise of the Warrant, the Company will take any corporate
action that may be necessary in order that the Company may validly and legally
issue fully paid and nonassessable shares of such Warrant Stock at such adjusted
price.
5.3 In case the Company proposes:
(a) to pay any dividend, payable in stock (of any class or classes) or
in convertible securities, upon its Common Stock or to make any distribution
(other than ordinary cash dividends) to the holders of its Common Stock; or
(b) to subdivide as a whole (by reclassification, by the issuance of a
stock dividend on Common Stock, or otherwise) the number of shares of Common
Stock then outstanding into a greater number of shares of Common Stock, with or
without par value; or
(c) to grant to the holders of its Common Stock generally any rights or
options; or
(d) to effect any capital reorganization or reclassification of capital
stock of the Company; or
(e) to consolidate with, or merge into, any other corporation or
business or transfer its property as an entirety or substantially as an
entirety; or
(f) to effect the liquidation, dissolution, or winding up of the
Company; or
(g) to make any other fundamental change in respect of which the Holder
of this Warrant would have been entitled to vote, pursuant to the corporation
law of Colorado, if the Warrant had been previously exercised; then the Company
shall cause notice of any such intended action to be given to the Holder of
record of the Warrant (i) not less than thirty (30) days before the date on
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which the transfer books of the Company shall close or a record be taken for
such stock dividend, distribution, granting of rights or options, or for
determining rights to vote in respect of any fundamental change, including any
capital reorganization, reclassification, consolidation, merger, transfer,
liquidation, dissolution, winding up, or any other fundamental change, and (ii)
in the case of any such capital reorganization, reclassification, consolidation,
merger, transfer, liquidation, dissolution, winding up, or other fundamental
change not less than thirty (30) days before the same shall be effective.
Article 6 Not Stockholders; Limitation of Liability.
6.1 No provision of this Warrant shall be construed as conferring upon
the Holder hereof the right to vote or to consent or to receive dividends or to
receive notice as a stockholder in respect of meetings of stockholders for the
election of directors of the Company or any other matter whatsoever as
stockholders of the Company. In the absence of affirmative action by the Holder
hereof to purchase shares of Common Stock, no provision hereof shall give rise
to any liability of such Holder for the purchase price or as a stockholder of
the Company, whether such liability is asserted by the Company or by creditors
of the Company.
Article 7 Repurchase of Warrant.
7.1 Right of First Refusal. In the event the Holder demands that the
Warrant Stock be registered pursuant to Section 9.2 herein, the Company shall
have the right to repurchase the Warrant for cash at its Fair Market Value as of
the date of the demand. In the event the Holder determines to transfer this
Warrant pursuant to a bona fide offer to purchase the Warrant, the Company shall
have the right to repurchase the Warrant at the price of such bona fide offer.
The Company must deliver written notice to the Holder of its election to
repurchase the Warrant within seventy-five (75) days after receipt of a request
by the Holder for registration or receipt of notice by the Holder of its intent
to accept a bona fide offer, and such notification to the Holder must be
accompanied by a nonrefundable cash deposit of the lesser of One Hundred
Thousand Dollars ($100,000) or the purchase price of the Warrant under this
Section 7.1. The Company shall deliver the balance of the purchase price to the
Holder within sixty (60) days after delivery of its deposit. This right of first
refusal shall not apply to any transfer to an "affiliate" (as defined in Rule
405 under the 1933 Act) of the Holder.
Article 8 Certain Mergers; Liquidations.
8.1 Continuation of Warrant. Except as provided in Section 8.2, in the
event that the Company proposes to consolidate with, or merge into, any other
corporation or business or to transfer its property as an entirety or
substantially as an entirety, or to effect the liquidation, dissolution, or
winding up of the Company, then after the Company causes notice of such proposed
action to be given to the Holder of record as provided in Section 5.3, the
Holder shall be entitled, on or before the effective date of such merger,
consolidation, transfer, liquidation, dissolution, or winding up, to require the
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Company of the successor or purchasing entity, as the case may be, to (a)
execute with the Holder an agreement providing that the Holder shall have the
right thereafter and throughout the then-remaining term of the Warrant, upon
payment of the exercise price per Warrant Share in effect immediately prior to
such action to purchase with respect to each share of Warrant Stock issuable
upon exercise of this Warrant the kind and amount of shares of stock and other
securities, property (including cash) or any combination thereof which the
Holder would have owned or have been entitled to receive after the happening of
such consolidation, merger, sale, or conveyance had this Warrant been exercised
with respect to such share of the Warrant Stock immediately prior to such action
and (b) make effective provision in its Articles of Incorporation or otherwise,
if necessary, in order to effect such agreement. Such agreement shall provide
for adjustments which shall be as nearly equivalent as practicable to the
adjustments in Article 4 of this Warrant. The provisions of this Section 8.1
shall similarly apply to successive consolidations, mergers, sales, or
conveyances.
8.2 Exception. Section 8.1 shall not apply to a consolidation or merger
with a company in which the Company is the surviving entity.
Article 9 Registration Rights.
9.1 Piggyback Registration Rights. If, at any time on or before the
expiration of the Warrant, the Company proposes to file a registration statement
for the public sale of any of its Common Stock or Common Stock Equivalent under
the Securities Act of 1933, other than a registration statement provided for in
Section 9.2 hereof, the Company shall, not later than thirty (30) days prior to
the initial filing of the registration statement, deliver notice of its intent
to file such registration statement to the Holder, setting forth the minimum and
maximum proposed offering price, commissions, and discounts in connection with
the offering, and other relevant information. Within twenty (20) days after the
receipt of notice of the Company's intent to file a registration statement, the
Holder shall be entitled to request that the Warrant Stock be included in such
registration statement, and the Company will use its best efforts to cause such
Warrant Stock to be included in the offering covered by such registration
statement. The Holder may transfer the Warrant to an underwriter or broker for
exercise by such underwriter or broker in connection with a distribution of the
Warrant Stock. If officers or directors of the Company or persons holding five
percent (5%) or more of any class of equity securities of the Company request
inclusion in such underwriting, the Company may offer to such officers or
directors that such other securities be included in the underwriting, provided,
however, that if the underwriter determines that marketing factors require
limitation of the number of shares to be underwritten, or that the price would
be adversely affected by the addition of the securities proposed to be added by
the officers or directors or security holders, the securities of the Company
held by the officers and directors and security holders of the Company and the
Warrant Stock shall be excluded from such registration and underwriting on a
pro-rata basis to the extent necessary to eliminate such adverse effect. Nothing
in this Section 9.1 shall be construed as giving the Holder any right to
restrain, enjoin, or otherwise delay registration.
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9.2 Demand Registration Rights. The Holder shall be entitled to request
that the Warrant Stock be registered under the Securities Act of 1933 if the
Company is already subject to periodic reporting requirements under the
regulations of the United States Securities and Exchange Commission. As soon as
practicable after receipt by the Company of a written request for registration,
the Company shall obtain an underwriter satisfactory to the Holder and shall
file, and use its best efforts to cause to become effective, an appropriate
registration statement under the 1933 Act covering the Warrant Stock, provided
that in the opinion of the Company's counsel, no events preclude such
registration.
If a registration requested pursuant to this Section 9.2 is to involve
an underwritten public offering in which the obligation of the underwriters is
to take all of the shares to be sold if any are to be taken, the Company and
other holders of securities of the Company may include securities in such
registration only if the managing underwriter of such public offering concludes
that such inclusion will not adversely affect the successful marketing or the
price of the Warrant Stock to be included in such public offering.
In the event that the Holder demands registration pursuant to this
Section 9.2 within the six months immediately prior to expiration of the
Warrant, and the Company, through no fault of the Holder, is unable to provide
such registration, the expiration date of this Warrant shall be extended until
the thirtieth (30th) day after a registration statement for the Warrant Stock is
declared effective.
The Holder's right to demand registration pursuant to this Section 9.2
may be exercised only one time prior to expiration of the Warrant; provided,
however, that the right shall not be deemed exhausted unless the registration
statement covering so much of the Warrant Stock as the Holder and its assigns
wish to sell pursuant to the registration statement becomes effective.
9.3 Filing Obligations of the Company. In connection with any
registration of Warrant Stock effected under Sections 9.1 or 9.2, the Company
shall:
(a) prepare and file the registration statement and such amendments and
supplements to the registration statement and the prospectus or offering
circular used in connection therewith as may be necessary to keep the
registration statement effective for a period of ninety (90) days and to comply
with the provisions of the 1933 Act and the rules and regulations thereunder
with respect to the disposition of all Warrant Stock covered by the registration
statement for the period required to effect the distribution thereof, but in no
event shall the Company be required to do so for a period of more than ninety
(90) days following the effective date of such registration statement;
(b) furnish to the Holder such number of copies of any prospectus or
offering circular, including a preliminary prospectus, and of a full
registration statement and exhibits in conformity with the requirements of the
1933 Act and rules and regulations thereunder, as the Holder may reasonably
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request in order to facilitate the disposition of such securities;
(c) use its best efforts to register or qualify the Warrant Stock
covered by the registration statement under the securities or blue sky laws of
such jurisdictions as the Holder may reasonably request, and accomplish any and
all other acts and things which may be necessary or advisable to permit sale in
such jurisdictions of such Warrant Stock; provided, however, that the Company
shall not be required to register as a dealer or to qualify as a foreign
corporation in any such jurisdictions or to escrow any shares of its capital
stock.
9.4 Expenses. All expenses incurred by the Company in connection with
any registration of Warrant Stock effected under Sections 9.1 or 9.2, including,
without limitation, all registration or filing fees, fees and expenses of
complying with state securities and blue sky laws, printing expenses, fees and
expenses of the Company's counsel and accountants and fees shall be paid by the
Company; provided, however, that all underwriting discounts and selling
commission applicable to the Warrant Stock shall not be borne by the Company but
shall be borne by the Holder.
9.5 Indemnification.
(a) By the Company. In connection with the filing of any registration
statements and sales of Warrant Stock thereunder, the Company shall indemnify
and hold harmless the Holder of this Warrant, any underwriter, and each other
Person, if any, who controls the Holder or the underwriter within the meaning of
the 1933 Act, against losses, claims, damages or liabilities, joint or several
(or actions in respect thereto) ("Losses"), to which any such Holder,
underwriter, or controlling Person may become subject under the 1933 Act or
otherwise, insofar as such Losses arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in any
registration statement under which Warrant Stock was registered under the 1933
Act, any preliminary prospectus, offering circular or final prospectus contained
therein, or any amendment or supplement thereto, or any report filed by the
Company with the Securities and Exchange Commission (the "Disclosure
Documents"), or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, and will reimburse any such Holder,
underwriter, or controlling Person for any legal or any other expenses
reasonably incurred in connection with investigating or defending any such
claims, excluding any amounts paid in settlement of litigation, commenced or
threatened, if such settlement is effected without the prior written consent of
the Company; provided, however, that the Company shall not be liable in any such
case to the extent that any such Losses arise out of or are based upon any
untrue statement, alleged untrue statement or omission or alleged omission made
in such Disclosure Document in reliance upon and in conformity with information
furnished to the Company in writing by or on behalf of the Holder of this
Warrant for use specifically in connection with the preparation of such
Disclosure Document.
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(b) By the Holder. In connection with the filing of any registration
statement and sales of Warrant Stock thereunder, the Holder shall indemnify the
Company, each of its directors, each of its officers who signed such
registration statement, and each other Person, if any, who controls the Company
within the meaning of the 1933 Act, against any Losses to which the Company any
of its directors, officers, or controlling Persons may become subject under the
1933 Act or otherwise, insofar as such Losses arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any of the Disclosure Documents or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and will
reimburse the Company, and any of its directors, officers, or controlling
Persons for any legal or any other expenses reasonably incurred in connection
with investigating or defending any such claims, excluding any amounts paid in
settlement of litigation, commenced or threatened, if such settlement is
effected without the prior written consent of the Holder; provided, however,
that such indemnification or reimbursement shall be payable in any such case
only to the extent that such statement or alleged statement or omission or
alleged omission is made in reliance on information furnished to the Company in
writing by or on behalf of the Holder for use specifically in connection with
the preparation of such Disclosure Document.
9.6 Assignability. The rights of the Holder under this Article 9,
except the right to request piggyback registration or demand registration, may
be assigned by Holder to the full extent that the Warrant may be assigned,
subject to assumption by the assignee of the corresponding obligations
hereunder.
Article 10 Miscellaneous.
10.1 Governing Law. The rights of the parties arising under this
Warrant shall be construed and enforced under the laws of the State of Colorado
without giving effect to the doctrine of conflict of laws.
10.2 Notices. Any notice or other communication required or permitted
to be given or delivered pursuant to this Warrant shall be in writing and shall
be deemed given if delivered personally or by facsimile transmission (if receipt
is confirmed by the facsimile operator of the recipient), or delivered by
overnight courier service or mailed by registered or certified mail (return
receipt requested), postage prepaid, to the parties at the following addresses
(or at such other address in the United States of America for a party as shall
be specified by like notice; provided that notices of change of address shall be
effective only upon receipt thereof):
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(i) to the Holder as follows:
Associated Energy Managers
1200 Converse Street, Suite 201
Longmeadow, MA 01106
Attn: Robert Gershen
Facsimile No.: (413) 567-7926
Wilmer, Cutler & Pickering
2445 M Street, N.W.
Washington, D.C. 20037
Attn: Russell J. Bruemmer
Facsimile No.: (202) 663-6363
(ii) to the Company as follows:
Vessels Oil & Gas Company
1050 Seventeenth St., Suite 2000
Denver, Colorado 80265
Attn: Nicholas Aretakis/Richard Hartfield
Facsimile No.: (303) 825-2532
10.3 Severability. If any provision of this Warrant shall be held
invalid, such invalidity shall not affect any other provision of the Warrant
that can be given effect without the invalid provision, and to this end, the
provisions hereof are separable.
10.4 Headings. The headings in this Warrant are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Warrant.
10.5 Amendment. This Warrant cannot be amended or modified except by a
written agreement executed by the Company and the Holder.
10.6 Assignment. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, personal
representatives, successors and assigns except that no party may assign or
transfer its rights or obligations under this Agreement to the extent explicitly
prohibited herein.
10.7 Entire Agreement. This Agreement, together with its attachments,
contains the entire understanding among the parties hereto with respect to the
subject matter hereof and supersedes all prior and contemporaneous agreements
and understandings, inducements or conditions, express or implied, oral or
written, except as herein contained.
10.8 Registration of Warrant. This Warrant and any subsequent Warrant
executed and delivered by the Company pursuant to a transfer by the Holder in
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accordance with Article 3 shall be registered by the Company in a Warrant
Register as they are issued.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in
its name by its President or Vice President thereunto duly authorized.
Dated: December 16, 1993
VESSELS OIL & GAS COMPANY
By: /s/ T. J. Vessels
Name: T. J. Vessels
Title: President
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EXHIBIT 10.32
No. of Shares: Fifty (50)
VESSELS OIL & GAS COMPANY
COMMON STOCK PURCHASE WARRANT
THIS WARRANT AND THE SHARES PURCHASABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD,
TRANSFERRED OR ASSIGNED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH ACT COVERING SUCH SECURITIES OR THE COMPANY RECEIVES AN OPINION OF
COUNSEL FOR THE HOLDER OF THESE SECURITIES (REASONABLY SATISFACTORY TO THE
COMPANY AND ITS COUNSEL), OR AN OPINION OF THE COMPANY'S COUNSEL, STATING THAT
SUCH SALE, TRANSFER, OR ASSIGNMENT IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT OF ANY APPLICABLE STATE SECURITIES
LAWS.
FOR VALUE RECEIVED, Associated Energy Managers, Inc., a Delaware
corporation (the "Holder"), is entitled to purchase from Vessels Oil & Gas
Company, a Colorado corporation (the "Company"), subject to the terms and
conditions herein set forth, at any time before 5:00 p.m. Fairfield, Connecticut
time on December 30, 2000, or, if such day is not a business day, the first
business day thereafter (the "Expiration Date") or such other date as may be
established in accordance with the terms of this Warrant, Fifty (50) of the
shares of duly authorized, validly issued, fully paid and nonassessable Common
Stock of the Company, par value ten cents ($0.10) per share (the "Warrant
Stock"), subject to adjustment of the number or kind of shares constituting
Warrant Stock as hereinafter provided. The Holder is entitled to purchase the
Warrant Stock for Three Thousand Dollars ($3,000) per share, subject to
adjustment as hereinafter provided (the "Exercise Price"), and is entitled also
to exercise the other appurtenant rights, powers, and privileges hereinafter set
forth.
ARTICLE 1
DEFINITIONS
For all purposes of this Warrant, unless the context otherwise
requires, the following terms have the following meanings:
1.1 "Common Stock" means the Company's authorized common stock, par
value ten cents ($0.10) per share. "Common Stock Equivalent" has the meaning
ascribed to that term is Section 4.5(a).
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1.2 "Company" means Vessels Oil & Gas Company, a corporation organized
and existing under the laws of the State of Colorado, and any successor
corporation.
1.3 "Exercisable Price" means the exercise price for the Warrant Stock
established in accordance with Article 4.
1.4 "Existing Stock" shall have the meaning ascribed to that term in
Section 4.4 hereof.
1.5 "Expiration Date" means December 30, 2000, or, if such day is not a
business day, the first business day thereafter, or such other date as may be
established in accordance with the terms of this Warrant.
1.6 "Fair Market Value" in reference to the Common Stock means, in the
event such stock is traded on a national securities exchange or in the over the
counter market as reported by the National Association of Securities Dealers
Automated Quotation System (stock being so traded or reported being referred to
herein as "Publicly Traded"), the average closing bid price of such stock on the
ten (10) trading days immediately preceding the date as of which such value is
to be determined, and in the event the Common Stock is not so traded or
reported, the value of such stock shall be determined on the fair market value
of the Company either on (i) a going-concern basis, or (ii) a liquidation basis,
whichever is higher, both values to be determined by an appraiser mutually
acceptable to the Holder and the Company, the determination of such appraiser to
be final in the absence of fraud or bad faith. If the Company has registered
shares of Common Stock for an underwritten public distribution, Fair Market
Value shall be the actual price per share at which shares are first offered upon
the registration statement becoming effective or, if the event in question
occurs upon the eve of the effective date, the suggested price per share. In the
event the Common Stock is not Publicly Traded, Fair Market Value in reference to
a share of the Common Stock shall mean the Fair Market Value of the Company (as
defined in the previous sentence) allocable to the issued Common Stock divided b
the number of shares of Common Stock that would have been outstanding had (i)
this Warrant and that certain Warrant to AEM dated December 16, 1993, providing
for the purchase of 50 shares at an initial Exercise Price of $1,350, (ii) all
options to purchase Common Stock, and (iii) all securities convertible into
Common Stock at a price per share no greater than Fair Market Value, been
exercised or converted on the date as of which such value is to be determined
with appropriate adjustment by appraisal to reflect the proceeds of the assumed
exercise or conversion of outstanding securities). As applicable to Warrants,
Fair Market Value shall mean the Fair Market Value of the Common Stock subject
to such Warrants minus the Exercise Price of such Warrants established in
accordance with Article 4.
1.7 "Holder" means Associated Energy Managers, Inc., a Delaware
corporation, and its successors or assigns as holder of this Warrant.
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1.8 "1933 Act" means the Securities Act of 1933, as amended.
1.9 "Person" means any natural person, sole proprietorship, general
partnership, limited partnership, joint venture, trust, unincorporated
organization, association, corporation, institution, private or government
entity, or party.
1.10 "Publicly Traded" has the meaning ascribed in Section 1.6.
1.11 "Subscription Notice" means a written notice to the Company of
Holder's election to exercise its right under the Warrant to purchase Common
Stock, in substantially the form of Exhibit A attached hereto.
1.12 "Warrant" means this Warrant and any Warrants issued on or in
substitution for this Warrant.
1.13 "Warrant Stock" means the shares of Common Stock or other
securities to be acquired upon the exercise of the Warrant.
ARTICLE 2
EXERCISE OF WARRANT
2.1 Partial Exercise. This Warrant may be exercised in whole or in
part. In the event of a partial exercise, the Company shall execute and deliver
to the Holder (or to such other Person as shall be designated in the
Subscription Notice) a new Warrant covering the unexercised portion of the
Warrant Stock.
2.2. Procedure. To exercise this Warrant, the Holder shall deliver to
the Company at its principal office:
(a) a written notice, in substantially the form of the
Subscription Notice, of the Holder's election to
exercise this Warrant;
(b) a check payable to the Company in the amount of the
Exercise Price; and
(c) this Warrant.
The Company shall as promptly as practicable, and in any event within twenty
(20) days after receipt of such notice, execute and deliver or cause to be
executed and delivered one or more certificates representing the aggregate
number of shares of Warrant Stock to which the Holder is entitled and, if this
Warrant is exercised in part, a new Warrant as set forth in Section 2.1.
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2.3 Name and Effective Date. The stock certificate(s) so delivered
shall be issued in the name of the Holder or such other name as shall be
designated in the notice specified n Section 2.2. Such certificate(s) shall be
deemed to have been issued and such Holder or any other Person so designated to
be named therein shall be deemed for all purposes to have become a Holder of
record of such shares as of the date the Company actually receives the notice
specified in Section 2.2.
2.4 Expenses. The Company shall pay all expenses, taxes, and other
charges payable in connection with the preparation, issue, and delivery of such
stock certificate(s), except that, in case such stock certificate(s) shall be
registered in a name or names other than the name of the Holder of this Warrant,
stock transfer taxes that are payable upon the issuance of such stock
certificate(s) shall be paid by the Holder hereof.
2.5 Legal Requirements. The Warrant Stock issued upon the exercise of
this Warrant shall be validly issued, fully paid, and nonassessable.
2.6 No Fractional Shares. The Company shall not issue a stock
certificate representing any fraction of a share upon partial exercise by a
Holder of such Holder's rights hereunder.
2.7 Cashless Exercise. Notwithstanding Section 2.2 of this Warrant or
any other provision of this Warrant to the contrary, the Company agrees that, in
addition to the Holder's rights under this warrant, the Holder may, upon any
full or partial exercise of this warrant, at its election, pay the aggregate
Exercise Price applicable to such exercise by delivering the Warrant to the
Company and receiving from the Company in return therefor the number of shares
of Common Stock having a Fair Market Value on the date of exercise equal to the
Fair Market Value of the Warrant as established by the last sentence of Section
1.6.
2.8 Lock Up Agreement. If reasonably requested by the underwriter
managing an initial public distribution of the Company's Common Stock, the
Holder shall execute the suggested agreement providing for a period of time (the
"Lock Up Period") immediately following the effective date of the Company's
registration statement (which Lock Up Period shall not exceed the Lock Up Period
requested of other significant holders of the Company's Common Stock) during
which period the Holder will not sell its Warrant Stock into the public markets.
The Holder's undertaking in this regard will not extend to Warrant Stock
included in the registration statement, whether pursuant to Section 9 hereof or
otherwise, and shall lapse if the aggregate holdings of Endowment Energy
Partners, L.P., Endowment Energy Partners, II, Limited Partnership, and Holder
shall fail to represent at least 5% of the Company's outstanding Common Stock.
ARTICLE 3
TRANSFER
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3.1 Permitted Transferees. This Warrant shall be freely transferable,
in whole or in part, subject to the limitations specified in Section 3.2 herein,
and subject also to the Company's right to repurchase the Warrant Stock as
specified in Section 7.1 herein ("Right of First Refusal"), if the Company's
Stock is Publicly Traded. If the Company's Stock is not Publicly Traded, this
Warrant shall be transferable, in whole or in part (subject to the limitations
specified in Section 3.2 herein, and subject also to the Company's right to
repurchase the Warrant Stock as specified in Section 7.1 herein), only to an
Affiliate (as that term is defined in Rule 405 under the 1933 Act) of Holder.
Pursuant to Sections 2.1 and 2.3 above, Holder may only designate as a recipient
of the Warrant Stock Holder or a Person to whom Holder could transfer the
Warrant under this Section 3.1.
3.2 Securities Laws. Neither this Warrant nor the Warrant Stock shall
be transferable unless:
(a) either a registration statement under the 1933 Act is in effect
covering the Warrant or the Warrant Stock, as the case may be, or the Company
has received an opinion from Company counsel to the effect that such
registration is not required, or the Holder has furnished to the Company an
opinion of Holder's counsel, which counsel shall be reasonably satisfactory to
the Company, to the effect that such registration is not required; and
(b) the transfer complies with any applicable state securities laws.
In the event Holder seeks an opinion as to transfer without registration from
Holder's counsel, the Company shall provide such factual information to Holder's
counsel as Holder's counsel may reasonably request for the purpose of rendering
such opinion and such counsel may rely on the accuracy and completeness of such
information in rendering such opinion.
Upon issuance, the Warrant Stock will bear a legend describing the
restrictions on transfer set forth in this Section 3.2.
3.3 Procedure. The Holder may transfer this Warrant on the books of the
Company by surrendering to the Company:
(a) this Warrant;
(b) a written assignment of this Warrant, in
substantially the form of the Assignment attached as
Exhibit B hereto, naming the assignee duly executed
by the Holder; and
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(c) funds sufficient to pay any stock transfer taxes
payable upon the making of such transfer.
The Company shall thereupon execute and deliver a new Warrant to the name of the
assignee specified in such instrument of assignment, and if this Warrant is
transferred in part, the Company shall also execute and deliver in the name of
the Holder a new warrant covering the untransferred portion of this Warrant.
Upon issuance of the new Warrant or Warrants, the Warrant surrendered for
transfer shall be cancelled by the Company.
3.4 Expenses. The Holder shall pay all expenses, taxes (other than
transfer taxes), and other charges payable in connection with the preparation,
issue, and delivery of any new Warrant under this Article 3.
ARTICLE 4
EXERCISE PRICE AND ADJUSTMENTS
4.1 Initial Exercise Price. The Initial Exercise Price for the Warrant
Stock shall be Three Thousand Dollars ($3,000) per share.
4.2 Stock Splits, Stock Dividends and Reverse Stock Splits. If at any
time the Company shall subdivide (by reclassification, by the issuance of a
Common Stock dividend on Common Stock, or otherwise) its outstanding shares of
Common Stock into a greater number, the number of shares of Common Stock that
may be purchased hereunder shall be increased proportionately and the Exercise
Price per share of Common Stock shall be decreased proportionately as of the
effective date of such action. The effective date of a stock dividend shall be
the date on which the dividend is declared. Issuance of a Common Stock dividend
shall be treated as a subdivision of the whole number of shares of Common Stock
outstanding immediately before the record date for such dividend into a number
of shares equal to such whole number of shares so outstanding plus the number of
shares issued as a stock dividend. If at any time the Company shall combine (by
reclassification or otherwise) its outstanding number of shares of Common Stock
into lesser number, the number of shares of Common Stock that may be purchased
hereunder shall be reduced proportionately and the Exercise Price per share of
Common Stock shall be increased proportionately as of the effective date of such
action.
4.3 Dividends Other than in Common Stock or Cash; Other Distributions.
If at any time while this Warrant is outstanding the Company shall declare or
make for the benefit of all holders of its Common Stock any dividend or
distribution upon its Common Stock other than ordinary cash dividends, or
distributions to which Section 4.2 or 4.4 apply (whether payable in stock of any
class or classes other than its Common Stock or payable in evidences of
indebtedness or assets or in rights, options, or warrants or convertible or
exchangeable securities), then in each such case the number of shares of Common
Stock that may be purchased hereunder shall be determined by multiplying the
number of shares of Common Stock theretofore comprising the Warrant Stock by a
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fraction, the numerator of which shall be the Fair Market Value per share of the
Common Stock determined in accordance with Section 1.6 as of the record date for
such dividend or distribution and the denominator of which shall be the Fair
Market Value per share, as so determined, less the fair value as of such date,
as reasonably determined by the Board of Directors of the Company, of the
portion of such dividend or distribution applicable to one share of Common
Stock. Such adjustment shall be made whenever any such distribution is made, and
shall become effective on the date of distribution retroactive to the record
date for the determination of shareholders entitled to receive the distribution.
In the event the Company determines that the adjustment provided for above is
unduly difficult or expensive to effect because of difficulties off valuation,
the Company may, at its option and as an alternative to the adjustment,
distribute and place in escrow for the Holder that portion of such dividend or
distribution which the Holder would have received had it exercised this Warrant
before the declaration of the dividend or the making of the distribution. Upon
exercise of this Warrant, the Holder shall receive its portion of the dividend,
distribution, or rights.
4.4 Issuance on Common Stock of Options, Warrants or Rights. If at any
time while this Warrant is outstanding the Company shall grant to all holders of
its Common Stock any rights, options or warrants (referred to in this Section
4.4 as "Rights") entitling them to purchase shares of Common Stock at a price
per share which is lower at the record date for such issuance than the Fair
Market Value of the Common Stock on such date determined in accordance with
Section 1.6, the number of Shares of Common Stock that may be purchased
hereunder shall be determined by multiplying the number of Shares of Common
Stock theretofore purchasable upon exercise of each Warrant by a fraction of
which the numerator shall be the number of shares of Common Stock outstanding or
subject to issuance at prices at or below the Fair Market Value of the Common
Stock on such record date (the "Existing Stock") plus the number of shares
offered pursuant to the Rights and of which the denominator shall be the number
of shares of Existing Stock plus the number of shares which the aggregate
offering price of the total number of shares of Common Stock offered pursuant to
the Rights would purchase at the then current Fair Market Value per share of
Common Stock. Such adjustment shall be made whenever such rights, options or
warrants are issued and shall become effective retroactively immediately after
the record date for the determination of shareholders entitled to receive such
rights options or warrants. In the event the Company determines that the
adjustment provided for above in this Section is unduly difficult or expensive
to effect because of difficulties of valuation, the Company may, at its option
and as an alternative to the adjustment, grant and convey to the Holder such
Rights which the Holder would have received had it exercised this Warrant before
issuance of the Rights.
On the expiration or termination of any of the Rights, the number of
shares of Common Stock then purchasable upon the exercise of each Warrant and
the exercise price then in effect shall be subject to readjustment and the
number of shares of Common Stock subject to the Warrants shall forthwith be
decreased and the exercise price under the Warrants shall forthwith be increased
to that which would have been in effect at the time of such expiration or
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termination had such Rights, to the extent outstanding immediately prior to such
expiration or termination, never been issued.
4.5 Anti-dilution Adjustment in Exercise Price.
(a) In case the Company shall at any time after the date of the date of
this Warrant issue for consideration any shares of Common Stock, or any
securities or other rights convertible into Common Stock or entitled to receive
Common Stock, or any other equity securities entitled to participate with the
Common Stock in the earnings or the assets of the Company (but not any equity
security entitled to a fixed preference in such earnings or assets rather than a
participation therein) (such other securities or rights herein called "Common
Stock Equivalents"), for a price per share less than the Exercise Price in
effect immediately preceding the issuance of such additional Common Stock or
Common Stock Equivalents, the Exercise Price in effect immediately prior to the
issuance of such additional shares or Common Stock Equivalents shall forthwith
be reduced to a price determined by dividing:
(i) an amount equal to the sum of (x) the total number of
shares of Common Stock deemed to be outstanding immediately prior to such
issuance multiplied by the Exercise Price in effect immediately prior to such
issuance, (y) the total number of additional shares of Common Stock so
multiplied by the price per share, if any, for which such shares are sold, and
(z) the aggregate amount paid for the Common Stock Equivalents so sold plus the
aggregate amount subsequent required to be paid under the terms of such Common
Stock Equivalents to acquire additional shares of Common Stock
by:
(ii) The total number of shares of Common Stock deemed to be
outstanding immediately after the issuance of such additional shares of Common
Stock or Common Stock Equivalents.
(b) For purposes of clauses (i) and (ii) of Subsection 4.5(a), the
total number of shares of Common Stock deemed to be outstanding shall include
that number of shares of Common Stock actually outstanding plus that number of
shares of Common Stock then issuable pursuant to terms of the Common Stock
Equivalents at a price per share, computed pursuant to Subsection 4.5(d), that
is less than the Exercise Price.
(c) For purposes of this Subsection 4.5, the price per share for which
additional shares of Common Stock and Common Stock Equivalents are issued or
sold shall, to the extent such price consists of cash, be computed on the basis
of the amount of cash received by the Company (and in the case of Common Stock
Equivalents, such amount plus the amount of cash required to be paid to acquire
additional shares of Common Stock), after deduction of any expenses payable by
the Company and any underwriting or similar commissions, compensations or
concessions paid or allowed by the Company in connection with such issue or
sale. To the extent that the consideration for such additional shares and Common
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Stock Equivalents is property or services other than cash, the amount thereof
shall be the value received by or required to be paid to the Company as fixed in
good faith by the Board of Directors of the Company.
(d) The Exercise Price shall never be increased pursuant to this
Section 4.5 except as provided in this Subsection 4.5(d) or Section 4.6 below.
Upon the expiration unexercised of the entitlement to receive shares of Common
Stock under any Common Stock Equivalents the sale of which resulted in an
adjustment to the Exercise Price under this Section 4.5, then the Exercise Price
shall thereupon be increased by the amount that the sale of such Common Stock
Equivalent caused the Exercise Price to be decreased (subject to any applicable
adjustment hereunder) and thereafter adjustments will be made to the Exercise
Price in accordance with this Section 4.5.
(e) This Section 4.5 shall not apply to the Company's preferred stock
issued to Endowment Energy Partners, L.P. ("EEP") and to Endowment Energy
Partners II, Limited Partnership ("EEP II"), pursuant to (i) that certain
Amended and Restated Financing Agreement, dated May 16, 1993, as amended by that
certain First Amendment to Amended and Restated Financing Agreement, dated
December 16, 1993, by and between the Company and Vessels Gas Processing, Inc.
("VGP"), as borrower, and EEP, as lender, and (ii) that certain Financing
Agreement, dated December 16, 1993, by and between the Company and VGP, as
borrower, and Endowment Energy Co-Investment Partnership, as lender, of which
EEP and EEP II are general partners.
4.6 Exercise in Connection with an Initial Public Offering.
Notwithstanding anything in the contrary contained herein, the Holder agrees
that it shall, upon written request of the Company, exercise the Warrant
(whether pursuant to Section 2.2 or Section 2.7) in whole not later than the
business day prior to the day on which a registration statement relating to the
initial public offering of securities of the Company is declared effective by
the Securities and Exchange Commission; provided, however, that the obligation
to exercise the Warrant pursuant to this paragraph 4.6 shall be contingent on
the Company's entering into a Registration Rights Agreement substantially in the
form of Exhibit A attached hereto prior to Holder's exercise thereof.
4.7 Reorganization and Reclassification. In case of any
capital reorganization or any reclassification of the capital stock of the
Company while the Warrant remains outstanding, the Holder of the Warrant shall
thereafter be entitled to purchase pursuant to the Warrant (in lieu of the kind
and number of shares of Common Stock comprising Warrant Stock that such Holder
would have been entitled to purchase or acquire immediately before such
reorganization or reclassification) the kind and number of shares of stock of
any class or classes or other securities or property for or into which such
shares of Common Stock would have been exchanged, converted, or reclassified if
the Warrant Stock had been purchased immediately before such reorganization or
reclassification. In case of any such reorganization or reclassification,
appropriate provision (as determined by resolution of the Board of Directors of
the Company) shall be made with respect to the rights and interest thereafter of
the Holder of the Warrant, to the end that all the provisions of the Warranty
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(including adjustment provisions) shall thereafter be applicable, as nearly as
reasonably practicable, in relation to such stock or other securities or
property.
4.8 Statement of Adjustment of Warrant Stock. Whenever the
number or kind or shares comprising Warrant Stock or the Exercise Price is
adjusted pursuant to this Article 4, the Company shall promptly give notice to
the Holder of record of the outstanding Warrant, stating that such an adjustment
has been effected and setting forth the number and kind of shares purchasable
and the amount of the then-current Exercise Price, and stating in reasonable
detail the facts requiring such adjustment and the calculation of such
adjustment.
4.9. No other Adjustments. No adjustments in the number or
kind or price of shares constituting Warrant Stock shall be made except as
provided in this Article 4.
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ARTICLE 5
COVENANTS OF THE COMPANY
The Company covenants and agrees that:
5.1 At all times, the Company will reserve and set apart and
have, free from preemptive rights, a sufficient number of shares of authorized
but unissued Common Stock or other securities, if applicable, to enable it at
any time to fulfill all its obligations hereunder.
5.2 Before taking any action that would cause an adjustment
reducing the Exercise Price per share below the then par value of the shares of
Warrant Stock issuable upon exercise of the Warrant, the Company will take any
corporate action that may be necessary in order that the Company may validly and
legally issue fully paid and nonassessble shares of such Warrant Stock at such
adjusted price.
5.3 In case the Company proposes:
(a) to pay any dividend, payable in stock (of any class or
classes) or in convertible securities, upon its Common Stock or to make any
distribution (other than ordinary cash dividends) to the holders of its Common
Stock; or
(b) to subdivide as a whole (by reclassification, by the
issuance of a stock dividend on Common Stock, or otherwise) the number of shares
of Common Stock then outstanding into a greater number of shares of Common
Stock, with or without par value; or
(c) to grant to the holders of its Common Stock generally any
rights or options; or
(d) to effect any capital reorganization or reclassification
of capital stock of the Company or
(e) to consolidate with, or merge into, any other corporation
or business or transfer its property as an entity or substantially as an
entirety; or
(f) to effect the liquidation, dissolution, or winding up of
the Company; or
(g) to make any other fundamental change in respect of which
the Holder of this Warrant would have been entitled to vote, pursuant to the
corporation law of Colorado, if the Warrant had been previously exercised; then
the Company shall cause notice of any such intended action to be given to the
Holder of record of the Warrant (i) not less than thirty (30) days before the
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date on which the transfer books of the Company shall close or a record be taken
for such stock dividend, distribution, granting of rights or options, or for
determining rights to vote in respect of any fundamental change, including any
capital reorganization, reclassification, consolidation, merger, transfer,
liquidation, dissolution, winding up, or any other fundamental change, and (ii)
in the case of any such capital reorganization, reclassification, consolidation,
merger, transfer, liquidation, dissolution, winding up, or other fundamental
change not less than thirty (30) days before the same shall be effective.
ARTICLE 6
NOT STOCKHOLDERS; LIMITATION OF LIABILITY
6.1 No provision of this Warranty shall be construed as
conferring upon the Holder hereof the right to vote or to consent or to receive
dividends or to receive notice as a stockholder in respect of meetings of
stockholders for the election of directors of the Company or any other matter
whatsoever as stockholders of the Company. In the absence of affirmative action
by the Holder hereof to purchase shares of Common Stock, no provision hereof
shall give rise to any liability of such Holder for the purchase price or as a
stockholder of the Company, whether such liability is asserted by the Company or
by creditors of the Company.
ARTICLE 7
REPURCHASE OF WARRANT
7.1 Right of First Refusal. In the event the Holder demands
that the Warrant Stock be registered pursuant to Section 9.2 herein, the Company
shall have the right to repurchase the Warrant for cash at its Fair Market Value
as of the date of the demand. In the event the Holder determines to transfer
this Warrant pursuant to a bona fide offer to purchase the Warrant, the Company
shall have the right to repurchase the Warrant at the price of such bona fide
offer. The Company must deliver written notice to the Holder of its election to
repurchase the Warrant within seventy-five (75) days after receipt of a request
by the Holder for registration or receipt of notice by the Holder of its intent
to accept a bona fide offer, and such notification to the Holder must be
accompanied by a nonrefundable cash deposit of the lesser of One Hundred
Thousand Dollars ($100,00) or the purchase price of the Warrant under this
Section 7.1. The Company shall deliver the balance of the purchase price to the
Holder within sixty (60) days after delivery of its deposit. This right of first
refusal shall not apply to any transfer to an "affiliate" (as defined in Rule
405 under the 1933 Act) of the Holder.
ARTICLE 8
CERTAIN MERGERS; LIQUIDATIONS
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8.1 Continuation of Warrant. Except as provided in Section
8.2, in the event that the Company proposes to consolidate with, or merge into,
any other corporation or business or to transfer its property as an entirety or
substantially as an entirety, or to effect the liquidation, dissolution, or
winding up of the Company, then after the Company causes notice of such proposed
action to be given to the Holder of record as provided in Section 5.3, the
Holder shall be entitled, on or before the effective date of such merger,
consolidation, transfer, liquidation, dissolution, or winding up, to require the
Company of the successor or purchasing entity, as the case may be, to (a)
execute with the Holder an agreement providing that the Holder shall have the
right thereafter and throughout the then-remaining term of the Warrant, upon
payment of the exercise price per Warrant Share in effect immediately prior to
such action to purchase with respect to each share of Warrant Stock issuable
upon exercise of this Warrant the kind and amount of shares of stock and other
securities, property (including cash) or any combination thereof which the
Holder would have owned or have been entitled to receive after the happening of
such consolidation, merger, sale, or conveyance had this Warrant been exercised
with respect to such share of the Warrant Stock immediately prior to such action
and (b) make effective provision in its Articles of Incorporation or otherwise,
if necessary, in order to effect such agreement. Such agreement shall provide
for adjustments which shall be as nearly equivalent as practicable to the
adjustments in Article 4 of this Warrant. The provisions of this Section 8.1
shall similarly apply to successive consolidations, mergers, sales, or
conveyances.
8.2 Exception. Section 8.1 shall not apply to a consolidation
or merger with a company in which the Company is the surviving entity.
ARTICLE 9
REGISTRATION RIGHTS
9.1 Piggyback Registration Rights. If, at any time on or
before the expiration of the Warrant, the Company proposes to file a
registration statement for the public sale of any of its Common Stock Equivalent
under the Securities Act of 1933, other than a registration statement provided
for in Section 9.2 hereof, the Company shall, not later than thirty (30) days
prior to the initial filing of the registration statement, deliver notice of its
intent to file such registration statement to the Holder, setting forth the
minimum and maximum proposed offering price, commissions, and discounts in
connection with the offering, and other relevant information. Within twenty (20)
days after receipt of notice of the Company's intent to file a registration
statement, the Holder shall be entitled to request that the Warrant Stock be
included in such registration statement, and the Company will use its best
efforts to cause such Warrant Stock to be included in the offering covered by
such registration statement. The Holder may transfer the Warrant to an
underwriter or broker for exercise by such underwrite or broker in connection
with a distribution of the Warrant Stock. If officers or directors of the
Company or persons holding five percent (5%) or more of any class of equity
securities of the Company request inclusion in such underwriting, the Company
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may offer to such officers or directors that such other securities be included
in the underwriting, provided, however, that if the underwriter determines that
marketing factors require limitation of the number of shares to be underwritten,
or that the price would be adversely affected by the addition of the securities
proposed to be added by the officers or directors or security holders, the
securities of the Company held by the officers and directors and security
holders of the Company and the Warrant Stock shall be excluded from such
registration and underwriting on a pro-rata basis to the extent necessary to
eliminate such adverse effect. Nothing in this Section 9.1 shall be construed as
giving the Holder any right to restrain, enjoin, or otherwise delay
registration.
9.2 Demand Registration Rights. The Holder shall be entitled to request
that the Warrant Stock be registered under the Securities Act of 1933 if the
Company is already subject to periodic reporting requirements under the
regulations of the United States Securities and Exchange Commission. As soon as
practicable after receipt by the Company of a written request for registration,
the Company shall obtain an underwriter satisfactory to the Holder and shall
file, and use its best efforts to cause to become effective, an appropriate
registration statement under the 1933 Act covering the Warrant Stock, provided
that in the opinion of the Company's counsel, no events preclude such
registration.
If a registration requested pursuant to this Section 9.2 is to involve
an underwritten public offering in which the obligation of the underwriters is
to take all of the shares to be sold if any are to be taken, the Company and
other holders of securities of the Company may include securities in such
registration only if the managing underwriter of such public offering concludes
that such inclusion will not adversely affect the successful marketing or the
price of the Warrant Stock to be included in such public offering.
In the event that the Holder demands registration pursuant to this
Section 9.2 within the six months immediately prior to the expiration of the
Warrant, and the Company, through no fault of the Holder, is unable to provide
such registration, the expiration date of this Warrant shall be extended until
the thirtieth (30th) day after a registration statement for the Warrant Stock is
declared effective.
The Holder's right to demand registration pursuant to this Section 9.2
may be exercised only one time prior to expiration of the Warrant; provided,
however, that the right shall not be deemed exhausted unless the registration
statement covering so much of the Warrant Stock as the Holder and its assigns
wish to sell pursuant to the registration statement becomes effective.
9.3 Filing Obligations of the Company. In connection with any
registration of Warrant Stock effected under Sections 9.1 or 9.2, the Company
shall:
(a) prepare and file the registration statement and such
amendments and supplements to the registration statement and the prospectus or
offering circular used in connection therewith as may be necessary to keep the
registration statement effective for a period of ninety (90) days and to comply
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with the provisions of the 1933 Act and the rules and regulations thereunder
with respect to the disposition of all Warrant Stock covered by the registration
statement for the period required to effect the distribution thereof, but in no
event shall the Company be required to do so for a period of more than ninety
(90) days following the effective date of such registration statement;
(b) furnish to the Holder such number of copies of any
prospectus or offering circular, including a preliminary prospectus, and of a
full registration statement and exhibits in conformity with the requirements of
the 1933 Act and rules and regulations thereunder, as the Holder may reasonably
request in order to facilitate the disposition of such securities;
(c) use its best efforts to register or qualify the Warrant
Stock covered by the registration statement under the securities or blue sky
laws of such jurisdictions as the Holder may reasonably request, and accomplish
any and all other acts and things which may be necessary or advisable to permit
sale in such jurisdictions of such Warrant Stock; provided, however, that the
Company shall not be required to register as a dealer or to qualify as a foreign
corporation in any such jurisdictions or to escrow any shares of its capital
stock.
9.4 Expenses. All expenses incurred by the Company in connection with
any registration of Warrant Stock effected under Sections 9.1 or 9.2, including,
without limitation, all registration or filing fees, fees and expenses of
complying with state securities and blue sky laws, printing expenses, fees and
expenses of the Company's counsel and accountants and fees shall be paid by the
Company; provided, however, that all underwriting discounts and selling
commission applicable to the Warrant Stock shall not be borne by the Company but
shall be borne by the Holder.
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9.5 Indemnification.
(a) By the Company. In connection with the filing of any
registration statements and sales of Warrant Stock thereunder, the Company shall
indemnify and hold harmless the Holder of this Warrant, any underwriter, and
each other Person, if any, who controls the Holder or the underwriter within the
meaning of the 1933 Act, against losses, claims, damages or liabilities, joint
or several (or actions in respect thereto) ("Losses"), to which any such Holder,
underwriter, or controlling Person may become subject under the 1933 Act or
otherwise, insofar as such Losses arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in any
registration statement under which Warrant Stock was registered under the 1933
Act, any preliminary prospectus, offering circular or final prospectus contained
therein, or any amendment or supplement thereto, or any report filed by the
Company with the Securities and Exchange Commission (the "Disclosure
Documents"), or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, and will reimburse any such Holder,
underwriter, or controlling Person for any legal or any other expenses
reasonably incurred in connection with investigating or defending any such
claims, excluding any amounts paid in settlement of litigation, commenced or
threatened, if such settlement is effected without the prior written consent of
the Company; provided, however, that the Company shall not be liable in any such
case to the extent that any such Losses arise out of or are based upon any
untrue statement, alleged untrue statement or omission or alleged omission made
in such Disclosure Document in reliance upon and in conformity with information
furnished to the Company in writing by or on behalf of the Holder of this
Warrant for use specifically in connection with the preparation of such
Disclosure Document.
(b) By the Holder. In connection with the filing of any
registration statement and sales of Warrant Stock thereunder, the Holder shall
indemnify the Company, each of its directors, each of its officers who signed
such registration statement, and each other Person, if any, who controls the
Company within the meaning of the 1933 Act, against any Losses to which the
Company, any of its directors, or controlling Persons may become subject under
the 1933 Act or otherwise, insofar as such Losses arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact contained
in any of the Disclosure Documents or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
will reimburse the Company, and any of its directors, officers, or controlling
Persons for any legal or any other expenses reasonably incurred in connection
with investigating or defending any such claims, excluding any amounts paid in
settlement of litigation, commenced or threatened, if such settlement is
effected without the prior written consent of the Holder; provided, however,
that such indemnification or reimbursement shall be payable in any such case
only to the extent that such statement or alleged statement or omission or
alleged omission is made in reliance on information furnished to the Company in
writing by or on behalf of the Holder for use specifically in connection with
16
<PAGE>
the preparation of such Disclosure Document.
9.6 Assignability. The rights of the Holder under this Article 9,
except the right to request piggyback registration or demand registration, may
be assigned by Holder to the full extent that the Warrant may be assigned,
subject to assumption by the assignee of the corresponding obligations
hereunder.
ARTICLE 10
MISCELLANEOUS
10.1 Governing Law. The rights of the parties arising under this
Warrant shall be construed and enforced under the laws of the State of Colorado
without giving effect to the doctrine of conflict of laws.
10.2 Notices. Any notice or other communication required or permitted
to be given or delivered pursuant to this Warrant shall be in writing and shall
be deemed given if delivered personally or by facsimile transmission (if receipt
is confirmed by the facsimile operator of the recipient), or delivered by
overnight courier service or mailed by registered or certified mail (return
receipt requested), postage prepaid, to the parties at the following addresses
(or at such other address in the United States of America for a party as shall
be specified by like notice; provided that notices of change of address shall be
effective only upon receipt thereof):
(i) to the Holder as follows:
Associated Energy Managers
1200 Converse Street, Suite 201
Longmeadow, MA 01106
Attn: Robert Gershen
Facsimile No.: (413) 567-7926
Wilmer, Cutler & Pickering
2445 M St. N.W.
Washington, D.C. 20037
Attn: Russell J. Bruemmer
Facsimile No.: (202) 663-6363
(ii) to the Company as follows:
Vessels Oil & Gas Company
1050 Seventeenth St., Suite 2000
Denver, Colorado 80265
17
<PAGE>
Attn: Nicholas Aretakis/Richard Hartfield
Facsimile No.: (303) 825-2532
10.3 Severability. If any provision of this Warrant shall be held
invalid, such invalidity shall not affect any other provision of the Warrant
that can be given effect without the invalid provision, and to this end, the
provisions hereof are separable.
10.4 Headings. The headings in this Warrant are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Warrant.
10.5 Amendment. This Warrant cannot be amended or modified except by a
written agreement executed by the Company and the Holder.
10.6 Assignment. This Agreement shall be binding upon an inure to the
benefit of the parties hereto and their respective heirs, personal
representatives, successors and assigns except that no party may assign or
transfer its rights or obligations under this Agreement to the extent explicitly
prohibited herein.
10.7 Entire Agreement. This Agreement, together with its attachments,
contains the entire understanding among the parties hereto with respect to the
subject matter hereof and supercedes all prior and contemporaneous agreements
and understandings, inducements or conditions, express or implied, oral or
written, except as herein contained.
10.8 Registration of Warrant. This Warrant and any subsequent Warrant
executed and delivered by the Company pursuant to a transfer by the Holder in
accordance with Article 3 shall be registered by the Company in a Warrant
Register as they are issued.
18
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in
its name by its President or a Vice President thereunto duly authorized.
Dated: December 16, 1993
VESSELS OIL & GAS COMPANY
By:
Name:
Its:
19
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF ABRAXAS
Abraxas Petroleum Corporation
a Nevada corporation ("Abraxas")
Canadian Abraxas Petroleum Limited,
a Canada corporation and wholly-
owned subsidiary of Abraxas
VEI Acquisition Corp.
a Delaware corporation and
wholly-owned subsidiary of
Abraxas
Cascade Oil & Gas Ltd., an Alberta corporation ("Cascade") Abraxas owns
approximately 46% of the capital stock of Cascade
Western Associated Energy Corporation
a Texas corporation and wholly-
owned subsidiary of Abraxas
1
<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 reports dated March 21, 1997 and August 30, 1996, included in the
Proxy Statement of Abraxas Petroleum Corporation that is made a part of the
Registration Statement (Form S-4) and Prospectus of Abraxas Petroleum
Corporation for the registration of 1,900,000 shares of its common stock.
/s/ ERNST & YOUNG LLP
San Antonio, Texas
January 9, 1998
<PAGE>
EXHIBIT 23.2
January 9, 1998
Abraxas Petroleum Corporation
500 North Loop 1604 East, Suite 100
San Antonio, Texas 78232
Gentlemen:
In connection with the Registration Statement on Form S-4 (the
Registration Statement), to be filed with the Securities and Exchange Commission
on or about January 8, 1998, by Abraxas Petroleum Corporation (the Company),
DeGolyer and MacNaughton (the firm) hereby consents to the incorporation in said
Registration Statement of the references to the firm in the section "Reserves
Information" and in the section "Experts" that are part of the Registration
Statement. Additionally, we hereby consent to the use by reference of
information contained in our appraisal reports for estimates, as of December 31,
1994, December 31, 1995, and December 31, 1996.
Very truly yours,
/s/ DeGOLYER and MacNAUGHTON
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
We consent to the use in the Registration Statement on Form S-4 of
Abraxas Petroleum Corporation of our name, and the statements with respect to
us, as appearing under the headings "Summary," "The Merger," "Business of
Vessels" and "Experts" in the Proxy Statement-Prospectus.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ Frederic D. Sewell
Name: Frederic D. Sewell
Title: President
Dallas, Texas
January 9, 1998
<PAGE>
EXHIBIT 23.6
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement on Form S-4 of Abraxas
Petroleum Corporation of our report on Enserch 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 heading
"Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
Dallas, Texas
January 7, 1998
<PAGE>
EXHIBIT 23.7
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
To the Board of Directors
Canadian Abraxas Petroleum Limited
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 Registration Statement.
/s/ KPMG
Chartered Accountants
Calgary, Canada
January 9, 1998
<PAGE>
EXHIBIT 23.8
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated April 7, 1997 and to all references to our Firm included in or made a part
of this Registration Statement.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado
January 9, 1998
<PAGE>
EXHIBIT 23.9
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration statement on Form S-4 of Abraxas Petroleum Corporation of our
report dated March 27, 1995 relating to the financial statements of Vessels
Energy, Inc. (successor to Vessels Oil & Gas Company), which appears in such
Prospectus. We also consent to the reference to us under the heading "Experts"
in such Prospectus.
/s/ PRICE WATERHOUSE LLP
Denver, Colorado
January 9, 1998
<PAGE>
EXHIBIT 23.10
CONSENT
In connection with the merger (the "Merger") of a wholly-owned
subsidiary of Abraxas Petroleum Corporation (the "Company") with and into
Vessels Energy, Inc., and the filing of a Registration Statement on Form S-4
with the Securities and Exchange Commission (the "Registration Statement"), the
undersigned consents to be named in the Company's Registration Statement as a
person who will be appointed as a director upon consummation of the Merger. The
undersigned further consents to serve as a director of the Company, if
appointed, and to the filing of this consent as an exhibit to the Registration
Statement.
Dated: January 9, 1998
/s/ Robert F. Semmens
Robert F. Semmens
<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 any or all amendments (including
post-effective amendments) thereto and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Dated: January 9, 1998.
/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 any or all amendments (including
post-effective amendments) thereto and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Dated: January 9, 1998.
/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 any or all amendments (including
post-effective amendments) thereto and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Dated: January 9, 1998.
/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 any or all amendments (including
post-effective amendments) thereto and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Dated: January 9, 1998.
/s/ Richard M. Kleberg, III
Richard M. Kleberg, III
<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 any or all amendments (including
post-effective amendments) thereto and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Dated: January 9, 1998.
/s/ James C. Phelps
James C. Phelps
<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 any or all amendments (including
post-effective amendments) thereto and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Dated: January 9, 1998.
/s/ Paul A. Powell, Jr.
Paul A. Powell, Jr.
<PAGE>
EXHIBIT 24.7
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 any or all amendments (including
post-effective amendments) thereto and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Dated: January 9, 1998.
/s/ Richard M. Riggs
Richard M. Riggs
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